Past as prologue: an innovation-diffusion approach to additionality

The ‘additionality’ criterion for the Clean Development Mechanism (CDM) (which is key to ensuring that CDM projects lead to real and additional emission reductions) has been a topic of much analysis and discussion. A number of different approaches, including those based on financial, barrier and market-penetration criteria, have been suggested as a test for additionality. A simple test for additionality is proposed that draws on the framework of the diffusion of innovations, especially the risk profile of adopters of new technologies or innovations. This approach has the potential to streamline the assessment for additionality, although it will require data on the rate of implementation of specific technologies or innovations.     

A CER discounting scheme could save climate change regime after 2012

We can generate a net global GHG emission reduction from developing countries (in an UNFCCC term, non-Annex 1 Parties) without imposing targets on them, if we discount CERs generated from CDM projects. The CER discounting scheme means that a part or all of CDM credits, i.e., CERs, made by developing countries through unilateral CDM projects will be retired rather than sold to developed countries to increase their emissions. It is not feasible to impose certain forms of target (whether sectoral or intensity targets) on non-Annex 1 whose emission trend is hard to predict and whose industrial structure is undergoing a rapid change.

Instead of imposing targets (a command and control approach), we should apply market instruments in generating a net global emission reduction from non-Annex 1. Since April 2005 when the first unilateral CDM was approved by the CDM Executive Board, CDM has been functioning as a market mechanism to provide incentives for developing countries to initiate their own emission reduction projects. As CDM is the only market mechanism engaging developing countries in the Kyoto Protocol, we should try to re-design CDM so that it can generate net global emission reductions by introducing the idea of discounting CERs. But in order to produce meaningful GHG emission reductions by discounting CERs, the project scope of CDM has to be expanded by relaxing project additionality criteria while maintaining strict technical additionality criteria. Agreeing on the CERs Discounting Scheme will have a better political chance than agreeing on imposing emission reduction targets on developing countries.     

Estimating the CDM market under the Marrakech Accords

Abstract

The agreement on implementation of the Kyoto Protocol achieved at COP7 in Marrakech has important implications for investment in greenhouse gas emission reduction projects in developing countries through the Clean Development Mechanism (CDM). The required actual emission reductions for participating Annex B countries overall will be relatively small, as the United States do not intend to ratify the protocol and significant amounts of carbon sequestered in domestic sinks can be credited. In addition, the potential supply of surplus emission permits (hot air) from Russia and other economies in transition may be as high as total demand in the first commitment period. Thus, even under restraint of hot air sellers, CDM demand will be limited, and a low demand, low price carbon market scenario appears likely.

The magnitude of the CDM will be influenced by a host of factors both on the demand and the supply-side. We analyse these using a quantitative model of the global carbon market, based on marginal abatement cost curves. Implementation and transaction costs, as well as baseline and additionality rules affect the CDM's share in the carbon market. Demand for the CDM is sensitive to changes in business-as-usual emissions growth in participating Annex B countries, and also to crediting for additional sinks. Permit supply from Russia and other economies in transition is possibly the most crucial factor in the carbon market.     

Linking the CDM with domestic carbon markets

Certified emission reductions (CERs) from Clean Development Mechanism (CDM) projects have traditionally served as an indirect link between cap and trade systems around the world. However, since 2010, import restrictions have increased. Reasons for import limitations include the supplementarity principle, genuine concerns about the environmental integrity of CERs and social benefits of CDM projects, pressure from domestic emissions mitigation industries, concerns about competition in the industries in which reductions take place, as well as the attempt to pressure advanced developing countries to accept national emissions commitments under a future international climate policy regime. It is shown that import limitations lead to a decrease in CER prices and a race to generate CERs as quickly as possible. Such effects are visible in the CDM market after the EU announced its import limitations. The exclusion of CERs from specific project types will distort the CDM supply curve and increase the CER price unless the marginal abatement costs of the excluded project type are above the CER world market price. Similarly, exclusion of CERs from specific host countries will increase the price. Substantial differences are found in CER access to national carbon markets around the world.Policy relevanceCDM regulators could try to improve access of CERs to cap and trade schemes through improvements to additionality testing, standardizing baseline and monitoring methodologies and stakeholder consultation. However, regulators should be aware that standardization is no panacea, and controversies may resurface if standardized additionality determination (e.g. through benchmarks or positive lists) are applied for a certain period and found to be problematic. However, domestic policy concerns such as an unwillingness to send money abroad to buy credits, an inability to control market prices, and competitiveness impacts cannot be resolved by CDM reforms. If, despite such reforms of the CDM, blatant protectionism continues, a challenge before the World Trade Organisation (WTO) could be launched to stop discrimination of service exports from specific countries.     

Perverse incentives under the CDM: an evaluation of HFC-23 destruction projects

The clean development mechanism (CDM) under the Kyoto Protocol allows industrialized countries to use credits from greenhouse gas (GHG) abatement projects in developing countries. A key requirement of the CDM is that the emission reductions be real, measurable and additional. This article uses data from registered projects to evaluate the extent to which these objectives are met by projects that reduce hydrofluorocarbon-23 (HFC-23) emissions in the production of hydrochlorofluorocarbon-22 (HCFC-22). The data show that HCFC-22 plants produced significantly less HFC-23 during periods when no emission credits could be claimed compared with periods when HFC-23 destruction could be credited under the CDM. Moreover, the total amount of HCFC-22 produced appears to be determined mainly by CDM rules. This suggests that the claimed emission reductions may partly not be real and that the CDM provides perverse incentives to generate more HFC-23. The accelerated phase-out of HCFCs under the Montreal Protocol on Substances that Deplete the Ozone Layer could worsen this situation. To address these issues an ambitious emission benchmark for the baseline HFC-23 emissions is proposed.     

Standardization of baseline and additionality determination under the CDM

Clean Development Mechanism (CDM) project developers have long complained about the complexities of project-specific baseline setting and the vagaries of additionality determination. In response to this, the CDM Executive Board took bold steps towards the standardization of CDM methodologies, culminating in the approval of guidelines for the establishment of performance standards in November 2011. The guidelines specify a performance standard stringency level for both baseline and additionality of 80% for several priority sectors and 90% for all other sectors. However, an analysis of 14 large-scale CDM methodologies that use performance standard approaches challenges this top-down approach to the performance standard design. An appropriate performance standard stringency level strongly depends on sector and technology characteristics. A single stringency level for baseline and additionality determination is appropriate only for greenfield projects, but not for retrofit ones. Overly simple, highly aggregated performance standards are unlikely to ensure high environmental integrity, and difficult questions regarding stringency and updating frequency will eventually have to be addressed on a rather disaggregated level. A careful balance between data requirements and the practicability of performance standards is essential because the heavy data requirements of the existing performance standard methodologies have been the key barrier to their actual implementation.

Policy relevance

CDM regulators have been pushed by many stakeholders to standardize baseline setting and eliminate project-specific additionality determination. At first glance, performance standards seem to provide the perfect solution for both tasks. However, a one-size-fits-all political decision – e.g. the average of the top 20% performers as enshrined in the Marrakech Accords – is inappropriate. Substantial disaggregation of performance standards is required both technologically and geographically in order to limit over- and under-crediting and close loopholes for non-additional projects. As a lack of reliable and complete data has been and will be a key bottleneck for the development of performance standards, international support for data collection will be indispensable, but costly, and time-consuming. Empirically driven, techno-economic assessments of performance standard stringency levels must be the central task of the future work on standardized methodologies, and should not be sidelined by perceived needs of policy makers to take bold decisions under time pressures.     

Waste energy recovery CDM projects in China: status,challenges and suggestions

The recovery potential for waste energy from major Chinese industries is significant. For example, the estimated waste energy recovery potential is 40 million tons of coal equivalent in the iron and steel industry, accounting for ～10% of the total energy use in the industry. A detailed overview is presented of existing waste energy recovery Clean Development Mechanism (CDM) projects in China. These projects have been developed predominantly in large enterprises and rarely in small or medium-sized companies. The chance of waste energy projects being reviewed or rejected by the Executive Board is slightly higher and delivery rates of certified emission reductions are generally lower than other types of CDM projects. Several major barriers that inhibit project development are identified, such as the lack of CDM awareness or development capacity among many small or medium enterprises, low internal rates of return of the projects, increasing review risk and long delays in the registration process, the varying quality of intermediary buyers, a lack of local Chinese Designated Operational Entities, and policy implementation inconsistency at different levels. Suggestions are put forward to address these problems and such critical issues as additionality are also discussed.     

Estimating the CDM market under the Marrakech Accords

The agreement on implementation of the Kyoto Protocol achieved at COP7 in Marrakech has important implications for investment in greenhouse gas emission reduction projects in developing countries through the Clean Development Mechanism (CDM). The required actual emission reductions for participating Annex B countries overall will be relatively small, as the United States do not intend to ratify the protocol and significant amounts of carbon sequestered in domestic sinks can be credited. In addition, the potential supply of surplus emission permits (hot air) from Russia and other economies in transition may be as high as total demand in the first commitment period. Thus, even under restraint of hot air sellers, CDM demand will be limited, and a low demand, low price carbon market scenario appears likely.The magnitude of the CDM will be influenced by a host of factors both on the demand and the supply-side. We analyse these using a quantitative model of the global carbon market, based on marginal abatement cost curves. Implementation and transaction costs, as well as baseline and additionality rules affect the CDM’s share in the carbon market. Demand for the CDM is sensitive to changes in business-as-usual emissions growth in participating Annex B countries, and also to crediting for additional sinks. Permit supply from Russia and other economies in transition is possibly the most crucial factor in the carbon market.     

Implementing CDM for the Indian dairy sector: prospects and issues

What is the potential for developing small-scale CDM projects in India to reduce enteric methane emissions from cattle and buffaloes? The issue of baseline setting for prospective CDM projects is a complex one in the Indian context. The baselines constructed on the basis of aggregate emission rates at the national level are unlikely to be precise as methane emission rates are influenced by the livestock and feed characteristics, which vary widely across regions in an agro-climatically diverse country like India. This calls for establishing a project specific baseline underpinned with regional methane emission rates. The various aspects of sustainable development that merit consideration in formulating a CDM project in the Indian dairy sector include; increasing the productivity of animals, increasing the net income of producers, decreasing the cost of milk production and the transfer of safe technologies. The projects in the sector would be able to meet the ‘additionality’ conditions of the CDM. However, there are a number of constraints in implementing the enteric methane mitigation strategies through a CDM project at the field level. The article discusses these technical, financial, socio-cultural and institutional barriers along with possible responses to these constraints.     

Technology transfer by CDM projects

Abstract

Technology development and transfer is an important feature of both the United Nations Framework Convention on Climate Change (UNFCCC) and its Kyoto Protocol. Although the Clean Development Mechanism (CDM) does not have an explicit technology transfer mandate, it may contribute to technology transfer by financing emission reduction projects using technologies currently not available in the host countries. This article analyses the claims about technology transfer made by CDM project participants in their project design documents. Roughly one-third of all CDM projects, accounting for almost two-thirds of the annual emission reductions, involve technology transfer. Technology transfer varies widely across project types and is more common for larger projects and projects with foreign participants. Equipment transfer is more common for larger projects, while smaller projects involve transfers of both equipment and knowledge or of knowledge alone. Technology transfer does not appear to be closely related to country size or per-capita GDP, but a host country can influence the extent of technology transfer involved in its CDM projects.     

Application of the Multiple Benchmark System (MBS) to selected case study projects

Abstract

Joint Implementation (JI) and the Clean Development Mechanism (CDM) have been established under the Kyoto Protocol as project-based instruments to mitigate greenhouse gases of the industrialized countries to the levels imposed by their Kyoto commitments. An unresolved issue associated with the implementation of these two flexibility mechanisms, concerns the choice of the appropriate baseline for calculating the emission reductions in JI or CDM projects. This article describes a computerized tool that constructs and compares different types of standardized baselines and benchmarks. The analysis focuses on the suitability of several different types of benchmarks for assessing the emission reductions of certain types of projects. The analysis is also expanded into a discussion of the extent to which benchmarks reduce the crediting of non-additional projects and limit the risk of missed additional investments. This tool has been applied to actual JI and CDM projects in the Russian Federation and Indonesia.     

Additionality revisited: guarding the integrity of market mechanisms under the Paris Agreement

ABSTRACT

The Paris Agreement requires mitigation contributions from all Parties. Therefore, the determination of additionality of activities under the market mechanisms of its Article 6 will need to be revisited. This paper provides recommendations on how to operationalize additionality under Article 6. We first review generic definitions of additionality and current approaches for testing of additionality before discussing under which conditions additionality testing of specific activities or policies is still necessary under the new context of the Paris Agreement, that is, in order to prevent increases of global emissions. We argue that the possibility of ‘hot air’ generation under nationally-determined contributions (NDCs) requires an independent check of the NDC’s ambition. If the NDC of the transferring country does contain ‘hot air’, or if the transferred emission reductions are not covered by the NDC, a dedicated additionality test should be required. While additionality tests of projects and programmes could continue to be done through investment analysis, for policy instruments new approaches are required. They should be differentiated according to type of policy instrument. For regulation, we suggest calculating the resulting pay-back period for technology users. If the regulation generates investments exceeding a payback period threshold, it could be deemed additional. Similarly, carbon pricing policies that generate a carbon price exceeding a threshold could qualify; for trading schemes an absence of over-allocation needs to be shown. The threshold should be differentiated according to country categories and rise over time.

Key policy insights

• Without additionality testing, market mechanisms under the Paris Agreements might lead to an international diffusion of ‘hot air’. To avoid this, an independent assessment of NDC ambition is in order. Otherwise, activities under the mechanisms need to undergo specific additionality tests.

• Additionality testing of projects and programmes should build on the experience developed under the Kyoto Protocol mechanisms.

• Bold approaches are needed for assessing additionality of policies. To avoid cumbersome assessment of all activities triggered by such policies, highly aggregated approaches are suggested, ranging from payback period thresholds for technologies mandated by regulation to minimum price levels triggered by carbon pricing policies. Over time, the stringency of threshold values should increase.

     

Additionality reconsidered: lax criteria may not benefit developing countries

Abstract

International negotiation on the additionality issue of the CDM (Clean Development Mechanism) seems to be proceeding without sufficient information or understanding. Especially apparent is a lack of recognition that the non-additional CERs (certified emission reductions) generated by relaxing the additionality criteria may lead to economic losses for developing countries. This article quantitatively reconfirms the effects of non-additional CERs on the international community, while clarifying that the generation of non-additional CERs in excess of a certain number will eventually lead to negative consequences for developing countries, even if these countries were able to acquire all the non-additional CERs. Furthermore, the Discussion section demonstrates that future system design would significantly affect the benefits of developing countries as well as the overall environmental integrity of the Kyoto mechanisms.     

Selecting and assessing sustainable CDM projects using multi-criteria methods

Even though sustainable development has been broadly debated, the clean development mechanism (CDM) still lacks sophisticated multi-criteria decision methods for identifying, selecting and assessing CDM project activities from this perspective. Bearing in mind the huge number of CDM projects that are beginning to accumulate as the carbon market gains momentum, and the importance for non-Annex I Parties to keep focused on the sustainability objective, this article aims at developing a tool for prioritizing—within a given group, and once a specific list of sustainable development criteria is agreed upon and given—proposed CDM projects from this sustainable development point of view. We reached the following conclusions: (1) it is important to make a conscious choice of an appropriate way to normalize the sustainability performance data of CDM projects; (2) it is important to make a conscious choice of how to aggregate across multiple attributes; (3) in contrast with conventional multi-criteria assessments, which elicit preferences from a stakeholder panel, preference optimization infers from CDM projects' performance data an optimal set of weights that proponents would choose in order to win a competitive selection process. Such preference optimization methods (a) yield sensible results, simulating a range of decision circumstances, (b) avoid conflict and convey impartiality in situations where competing project proponents are likely to clash over objectionable weightings, (c) avoid cognitive overload when the number of CDM projects and/or indicators is overwhelmingly large, and (d) circumvent time-consuming and costly interviews and surveys.

From a policy perspective, the multi-criteria assessment described here can be a powerful tool for prioritizing CDM projects (1) when there is a limited amount of grant funding to certain CDM project candidates, and (2) when the decisionmaking process incorporates the CDM objective of promoting sustainable development, in addition to the objective of helping developed countries to meet part of their reduction obligations as specified in Annex I of the Protocol.     

Future restrictions for sinks in the CDM How about a cap on supply?

Abstract

The first commitment period of the Kyoto Protocol is expected to result in only a small role for the Clean Development Mechanism (CDM), including afforestation and reforestation projects. Wide ranging concerns regarding sinks in the CDM have been reflected in the Marrakech Accords capping the total amount of emission offsets from sinks projects to be used by Annex I countries. Decisions about the second commitment period and beyond are likely to be of far greater importance for these projects.

This paper contributes to the discussion on how caps on sinks under the CDM could be used to obtain overall improved outcomes for developing countries. We examine two distinctive ways in which quantitative caps on sinks in the CDM can be implemented: one, restricting the use of sinks CERs to meet targets, as under the Marrakech Accords (a cap on demand); and two, restricting supply of sink CERs using a quota system. We argue in favour of a supply side cap, if Parties are to preserve the idea of limiting sinks in the CDM. Limiting the supply of credits could lead to better financial outcomes for developing countries as a whole, make higher-cost projects viable which may have better sustainability impacts, and provide an alternative to deal with equity concerns between developing countries.     

Reconciling the design of CDM with inborn paradox of additionality concept

Additionality of greenhouse gas emission reduction achieved through projects in developing countries has been a matter of heated debate for quite some time. Michael Grubb succintly summarized the inborn paradox of the additionality concept. It reads: “the most ‘cost-effective’ projects may be the least ‘additional’ and strict project additionality would give perverse policy incentives”. The authors begin with elaborating this notion. The dilemma for policy makers is that, despite the paradox, Kyoto regime desperately needs flexibility to reconcile its ambitious target with difficulties in implementing domestic policies and measures. The solution to it is to give a certain degree of discretionary elements to each party in designing criteria for clean development mechanism (CDM) projects. Such institutional design works because parties do not behave like an economic man but do have propensity to faithfully comply in a tightly woven international interdependence structure as the experience of past multilateral international agreements suggest. Transparency and responsibility will be a prerequisite for such an institutional design to be effective and attain public support. In contrast, a catch-all institutional design that depends heavily on bureaucratic and technological elements will be plagued by Grubb’s paradox and fail eventually. Elaborated methodologies for additionality determination will increase importance in the long run and universal rules may be available in future. But we have to begin with learning how the flexibility of Kyoto regime works by doing.     

Does the CDM discourage emission reduction targets in advanced developing countries?

Under the Kyoto Protocol, developing countries can voluntarily participate in climate change mitigation through the Clean Development Mechanism (CDM), in which industrialized countries, in order to meet their mitigation commitments, can buy emission reduction credits from projects in developing countries. Before its implementation, developing-country experts opposed the CDM, arguing that it would sell-off their countries’ cheapest emission reduction options and force them to invest in more expensive measures to meet their future reduction targets. This ‘low-hanging fruit’ argument is analysed empirically by comparing marginal abatement cost curves. Emissions abatement costs and potentials for CDM projects are estimated for different technologies in eight countries, using capital budgeting tools and information from project documentation. It is found that the CDM is not yet capturing a large portion of the identified abatement potential in most countries. Although the costs of most emissions reduction opportunities grasped are below the average credit price, there are still plenty of available low-cost opportunities. Mexico and Argentina appear to use the CDM predominantly for harvesting the low-hanging fruit, whereas in the other countries more expensive projects are accessing the CDM. This evidence at first sight challenges the low-hanging fruit claim, but needs to be understood in the light of the barriers for the adoption of low-cost abatement options.     

Performance of renewable energy technologies under the CDM

While many different greenhouse gas (GHG) mitigation technologies can be implemented under the Clean Development Mechanism (CDM), renewable energy technologies (RETs), in particular, are often viewed as one of the key solutions for achieving the CDM's goals: host-country sustainable development and cost-efficient emissions reductions. However, the viability of emission reduction projects like RETs is technology- and country-specific. To improve the CDM with respect to the diffusion of RETs, it is crucial to understand the factors that ultimately drive or hinder investments in these technologies. This study develops a methodology based on project-level, regional and global variables that can systematically assess the financial and environmental performance of CDM projects in different country contexts. We quantitatively show how six RETs (PV, wind, hydro, biomass, sewage, landfill) are impacted differently by the CDM and how this impact depends on regional conditions. While sewage and landfill are strongly affected independently of their location; wind, hydro and biomass projects experience small to medium impacts through the carbon price, and strongly depend on regional conditions. PV depends more on regional conditions than on the carbon price but is always unprofitable. Furthermore, we determine the carbon prices necessary to push these six RETs to profitability under various regional conditions. Based on these results, we derive policy recommendations to advance the interplay between international and domestic climate policy to further incentivize GHG emission reductions from RETs.     

Transaction costs of the Kyoto Mechanisms

Transaction costs will reduce the attractiveness of the Kyoto Mechanisms compared to domestic abatement options. Especially the project-based mechanisms Clean Development Mechanism (CDM) and Joint Implementation (JI) are likely to entail considerable costs of baseline development, verification and certification. The Activities Implemented Jointly (AIJ) pilot phase and the Prototype Carbon Fund (PCF) programme give indications about the level of these costs. Under current estimates of world market prices for greenhouse gas emission permits, projects with annual emission reductions of less than 50,000 t CO₂ equivalent are unlikely to be viable; for micro projects transaction costs can reach several hundred € per t CO₂ equivalent. Thus, the Marrakech Accord rule to have special rules for small scale CDM projects makes sense, even if the thresholds chosen advantage certain project types; projects below 1000 t CO₂ equivalent per year should get further exemptions. An alternative solution with no risk for the environmental credibility of the projects would be to subsidise baseline setting and charge lower, subsidised fees for small projects for the different steps of the CDM/second track JI project cycle.     

Should the use of standardized baselines in the CDM be mandatory?

There has been considerable debate on the merits of standardized baselines (SBLs) in the clean development mechanism (CDM), and how such baselines could reduce transaction costs for CDM projects. It has not been considered whether the voluntary versus mandatory use of SBLs by CDM project developers can affect the environmental integrity of the CDM. An example is given in which SBLs are applied to a homogeneous output industry in order to illustrate how the voluntary use of SBLs could lead – even with relatively stringent benchmarks – to over-crediting of emission reduction credits.