A two-track CDM: improved incentives for sustainable development and offset production

Abstract

The Clean Development Mechanism (CDM) has been criticized in the literature for encouraging a focus on offset production (OP) at the expense of achieving or encouraging sustainable development (SD). It is argued that one explanation for this is that there is no commonly agreed definition of SD and, moreover, the priority of CDM project developers is often to produce cost-effective OP. Many of the proposals to address these drawbacks are not politically feasible. It is argued that the CDM should be split into a two-track mechanism, with one track for offset production and the other for offset production with an emphasis on sustainable development benefits. This would enable the political deadlock to be broken, allow the inclusion of SD benefits in the price mechanism itself, and allow both SD and OP objectives to be simultaneously achieved.

Policy relevance

The CDM has been criticized for failing to achieve its sustainable development objective, for verification problems regarding the mitigation effects of projects’ emissions, for being complex and bureaucratic, and for the very limited participation by the least developed countries. Given the adoption of a second period of the Kyoto Protocol and the discussion of new market mechanisms in the context of negotiating a new global climate agreement to be adopted in 2015, it is time to explore the ways in which the CDM might be reformed. A two-track version of the CDM is proposed, with one track focused on credit (offset) production and the other track focused on sustainable development. This system could improve the incentive for achieving sustainable development, reduce the uncertainty regarding whether real emissions reductions have been achieved, and be attractive to both developing and industrialized countries.

Keywords:

• Clean Development Mechanism
• offset production
• sustainable development
• two-track

Acknowledgements

We gratefully acknowledge financial support from the Mistra Foundation's Climate Policy Research Program (Clipore) and from the FME Strategic Challenges in International Climate and Energy Policy (CICEP) (which is coordinated by CICERO). Three anonymous reviewers have contributed comments that are highly appreciated. The views expressed in this article are those of the individual authors and do not necessarily reflect those of their respective institutions.

Notes

Paragraph 2, Article 12 (UN, 1998), states that the purpose of the CDM is to ‘assist Parties not included in Annex I in achieving sustainable development and in contributing to the ultimate objective of the Convention, and to assist Parties included in Annex I in achieving compliance with their quantified emission limitation and reduction commitments’.

Paragraph 8 of Article 12 (UN, 1998) states that a fee is to be put on sales of certified CDM project activities, for the purpose of covering administrative expenses and assisting developing countries that are particularly vulnerable to climate change to cover their adaptation costs.

Both quantitative and qualitative limitations (such as the exclusion of CERs from nuclear, afforestation, reforestation, and large hydro projects) have been in effect.

Furthermore, CERs from the destruction of trifluoromethane (HFC-23) and nitrous oxide emissions from adipic acid production are prohibited. In the period 2008–2020, under the EU ETS, CERs can comprise up to 50% of the overall reduction below 2005 emissions levels.

In the wider development literature, such a technocentric, technological deterministic approach to development has been widely criticized. For a comprehensive and historical account, see Deb (2009).

There is large body of literature on technological change and transfer that insists that TT be defined as a process that must enhance the technological capacity (i.e. the ability to adopt, modify, and develop technology) of the host country. Two particularly interesting studies on TT in developing countries are described in Lall (1992, 1993).

See the rich literature on the determinants of the rate and success of TT (Cohen 2004; Cooper, 1973; Rosenberg & Frischtak, 1985; Salomon & Lebeau 1993).

Of course, there are other barriers, such as those induced by Intellectual Property Rights (IPR) provisions, that may not be adequately addressed by the CDM or national institutional measures.

A similar argument was offered by Dr Prodipto Ghosh (Member of the Expert Panel on CDM) in response to a question on the CDM's success during a side event hosted by The Energy and Resources Institute (TERI) and the University of Cape Town on 29 November 2012 during COP 18 in Doha. His argument, however, focused more on the small size of the CDM as compared to national economies and their requirements for SD transformation.

By January 2013, the CER price was very low, around EU€0.5 per ton of CO₂. The price of Gold Standard-based CERs, however, was much higher. See the My Climate website, available at http://ch.myclimate.org/en.html.

Sutter and Parreño (2007) use a framework developed by Sutter (2003), the MATA-CDM methodology, and ground their analysis in the conceptual conflict between the two CDM objectives.

Van der Gaast et al. (2009) provides an in-depth analysis of China and Kenya to illustrate the methods and factors that influence the local assessment of different technologies.

See the Gold Standard website (http://www.cdmgoldstandard.org/about-us/who-we-are), where it is stated that projects eligible for Gold Standard certification must ‘Adhere to the strictest standards on additionality’.

‘Common but differentiated responsibilities’ appears in Article 3.1 (on principles) of UN (1992).

See the questions and answers on the use of international credits in Phase III of the EU ETS, available at http://emissions-euets.com/attachments/201_q_a_20111114_en.pdf.

The UNFCCC secretariat, in collaboration with UNEP Risoe, is developing a SD tool (see UNFCCC, 2012a, 2012b). The voluntary tool is also undergoing an iterative process of selected peer review to ensure that the criteria (questions) and indicators (answers) are sufficient and robust.