Clean Development Mechanism (CDM)

The Clean Development Mechanism (CDM) was established under Article 12 of the Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC) and is designed to provide an incentive for developed countries to transfer greenhouse emission reduction technologies into developing counties. The CDM allows Annex 1 Parties (developed countries and economies in transition) to earn certified emission reduction credits (CERs), or "carbon credits" for investment in emission reduction projects in non-Annex 1 Parties (developing countries). CERs generated from CDM project activities can then be used by Annex 1 parties to offset their national emission reduction commitments under Annex B of the Kyoto Protocol, and similarly by private companies seeking to meet emission reduction obligations.

The CDM enables Annex 1 Parties to minimise the cost of complying with their greenhouse gas emission reduction targets, while affording private corporations and investors the opportunity to earn money from the sale and trade of CERs on secondary markets. In effect, the CDM will assist developing countries to achieve sustainable development and reduce their greenhouse gas emissions by encouraging CDM project activities that contribute in real, measurable and long term ways to mitigate climate change.

To be eligible to qualify as a CDM project activity and receive certification of emission reductions, a project activity must satisfy the following criteria:

• The project activity must be undertaken by an Annex 1 Party in a developing country;
• The participation of both Parties must be voluntary and approved by each Party;
• The project activity must be of a type that results in emission reductions and contributes to the goal of sustainable development by producing real, measurable and long-term benefits related to the mitigation of climate change; and
• The emission reductions must be additional to any emission reductions that would occur in the absence of the certified project activity.

Example

An example of a CDM Project would be building a solar or hydro power station in a developing country (eg: China or India) with technology and know-how from an Annex 1 country (eg: U.K. or Germany) rather than adopting a lower cost coal power station. The reduction emissions attributed to this decision are credited towards the Annex 1 country's/company's emission reduction commitment. An example of the kind of investment that would lead to mutual benefits under the CDM is an investment in the energy efficiency of a subsidiary based in a developing country (e.g.: Brazil) by a parent company based in a developed country (e.g.: UK). If the project were CDM certified the parent would be able to take credit for the relatively low cost emissions achieved by its subsidiary

CDM within the Kyoto Framework

With the recent entry into force of the Kyoto Protocol, the CDM provides even greater security compared to other emission-reducing projects owing to:

• The existence of the legal frameworks for CDM under the Kyoto Protocol;
• The ability to bank CDM emissions reductions since 1 January 2000 (unlike all other emissions reductions sourced from other projects), therefore giving it a prompt start; and
• Institutional support from many Protocol countries including the Netherlands and also from institutional players such as the World Bank under its Prototype Carbon Fund and the United States under its Activities Implemented Jointly (AIJ) program.

It has always been intended that CDM projects will be undertaken within a clear administrative framework. This has been developed with the establishment of the CDM Executive Board at its centre. The Board, which is accountable to Parties, must ensure the integrity of the implementation of the CDM, while responding to the needs of the business community in all sectors of the world economy. It is the formal approver of all projects that are undertaken, a verifier of emission reductions and a certifier of emission reductions as CERs.

Moreover, at the COP-6.5 negotiations in Bonn, the Parties agreed to facilitate a prompt start for establishing the CDM. Specific focus will be given to developing procedures for small-scale CDM project activities, including:

• Renewable energy project activities with a maximum output capacity equivalent of up to 15 megawatts (or an appropriate equivalent);
• Energy efficiency improvement project activities which reduce energy consumption on the supply and/or demand side, by up to the equivalent of 15 GWh per use; or
• Other project activities that both reduce anthropogenic emissions by sources and directly emit less than 15 kilotonnes of CO₂ equivalent annually.

The objective of this fast track mechanism is to enable small-scale projects to be pursued without the need for going through the rigorous approval and assessment processes, which is required of larger scale projects.

In addition, the Parties agreed that where CDM projects are undertaken a "tax" amounting to a share of proceeds of 2% of the certified emission reductions issued for a CDM's product activity will be taken to assist developing country parties that are particularly vulnerable to the adverse effects of climate change.