Do bilateral trade relationships influence the distribution of CDM projects?

The use of the Clean Development Mechanism (CDM) is increasingly widespread in developing countries. However, CDM projects are still far from being an effective development activity due to the uneven distribution of these projects in a few relatively well-off economies. One potential cause of this imbalance is analysed in terms of the trade relationships between developed and developing countries. By applying a gravity model to a panel dataset, well-established export flows from developed economies towards developing countries are shown to explain why a large proportion of CDM projects are unevenly geographically distributed. This kind of lock-in effect regarding the CDM between developed and developing countries could be avoided by both enhancing the institutional framework in developing countries that host CDM projects and reinforcing compulsory rules for CDM destinations in the least-developed economies.     

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

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.     

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.     

Technology transfer in the CDM: the role of host-country characteristics

Technology transfer is not an explicit objective of the Clean Development Mechanism (CDM). However, it constitutes a potential co-benefit by helping to improve living conditions in developing countries. Understanding the drivers and barriers of technology transfer in CDM projects is therefore essential to direct investment flows in host countries and enhance the current CDM framework. In this respect, the contribution of this article is twofold. First, it identifies stepping stones and stumbling blocks to technology transfer in the CDM. Higher applied tariff rates on environmental goods and services as well as burdensome administrative procedures to start a new business are found to be negatively associated with the likelihood of a technology transfer. The results are robust to the exclusion of large host countries such as China and India from the sample. Second, as an extension, the article analyses the correspondence of these supporting factors and barriers with the likelihood of a transfer of the different types of technology (equipment, knowledge, or both). The article concludes with policy recommendations for non-Annex I governments, and suggestions for improvements to the CDM to better assess technology transfer in offsetting projects.     

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.     

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.     

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.     

CDM: Is it a ‘win–win’ strategy for rural poverty alleviation in India?

India is perceived to be one of the most attractive Non-Annex I countries for CDM project development. There are more than 350 projects in the CDM pipeline, largely in the areas of renewable energy, energy efficiency in industries and fossil fuel switching. This paper examines the socio-economic component of sustainable development commitments of the CDM projects to see if they can make any impact on rural poverty in India, since the goal of poverty alleviation lies at the core of the country’s development priorities. The study concludes that CDM is not contributing to rural poverty alleviation to any notable extent. Nearly all the projects have a business orientation and are not directed to the development of rural poor. Even the renewable energy projects will have limited role in up-liftment of the masses below poverty line due to their weak resource base. For CDM to emerge as a “win–win” strategy for poverty alleviation projects should be aimed at the rural communities and designed to accelerate agricultural growth in the rainfed regions of the country.     

Assessing the additionality of CDM projects: practical experiences and lessons learned

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 evaluates how the additionality of CDM projects has been assessed in practice. The analysis is mainly based on a systematic evaluation of 93 registered CDM projects and comes to the conclusion that the current tools for demonstrating additionality are in need of substantial improvement. In particular, the application of the barrier analysis is highly subjective and difficult to validate in an objective and transparent manner. Key assumptions regarding additionality are often not substantiated with credible, documented evidence. In a considerable number of cases it is questionable whether the emission reductions are actually additional. Based on these findings, practical recommendations for improving the assessment of additionality are provided.     

Technology transfer in the CDM: an updated analysis

The prevalence of technology transfer (TT) for Clean Development Mechanism (CDM) projects is analysed, based on information in the project design documents (PDDs) of 3949 projects registered as of 31 March 2012. Responses to a follow-up survey indicate that the PDD statements that concern TT are reasonably accurate and at least 39% of the related projects are expected to involve it. Technology transfer is very heterogeneous across project types and is more common for larger projects. It also usually involves both knowledge and equipment and differs significantly by host country. Technology transfer has declined over time in China, India, and Brazil, the countries that host most of the CDM projects, but it has remained high for other host countries. A host country's existing capacity specific to the technology, the scope for economic deployment of the technology, and complementary policies to build capacity and promote TT, increase the frequency of TT by CDM projects. The technology used by CDM projects originates mostly from Germany, the US, Japan, Denmark, and China, with multiple suppliers of the technology for all project types.     

Technology transfer in the clean development mechanism: Insights from wind power

International technology transfer is a key element in efforts to ensure low carbon growth in developing countries. A growing body of literature has sought to assess the extent of technology transfer in the clean development mechanism (CDM). In this paper we use the case of wind power CDM to expand the focus to how technology transfer occurs. We seek insights from the technology and CDM literatures to develop a framework with multiple technology transfer mechanisms. We then show empirically that technology transfer in CDM wind projects occurs through a greater variety of mechanism than is commonly assumed. The evidence suggests that the strengthening of host country capabilities changes the nature of technology transfer. The cases of China and India indicate that diversity in transfer mechanisms is an effect of the pre-existing industrial and technological capabilities. We show that CDM projects in China and India tend to utilise transfer mechanisms opened up prior to and independent of CDM projects, not the other way around. Our findings suggest that research and policy should pay more careful attention to the relationship between international low carbon technology transfer mechanisms and local technological capabilities.     

Technology transfer in the Clean Development Mechanism

Technology transfer is often mentioned as an ancillary benefit of the Kyoto Protocol's Clean Development Mechanism (CDM), but this claim has hardly been researched or substantiated. The question of technology transfer is important, both for developing countries in need for new technology and knowledge and for industrialized countries, as it provides export potential for climate-friendly technologies. To determine what technology transfer means, whether it is occurring through the CDM, and what the value of the associated capital flows is, this article examines technology transfer in the 63 CDM projects that were registered up until 1 January 2006. Technology hardware originates from outside the host country in almost 50% of the evaluated projects, particularly in non-CO₂ greenhouse gas projects, wind energy projects, and a substantial share of the hydropower projects. Bioenergy and projects in the agricultural sector mainly use local technology. The investment value associated with the CDM projects that transferred technology is estimated to be around €470 million, with about €390 million coming from the EU. As the non-CO₂ greenhouse gas projects had very low capital costs, the investment value was highest in the more capital-intensive wind energy and hydropower projects. We also found substantial soft technology transfer, but uncertainties for this finding are greater.     

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.     

Determinants of technology transfer through the CDM: a within-country analysis for China

Technology transfer (TT) is not mandatory for Clean Development Mechanism (CDM) projects, yet proponents of CDM argue that TT in CDM can bring new technologies to developing countries and thus not only reduce emissions but also foster development. We review the quantitative literature on determinants of TT in CDM and estimate determinants for CDM projects in China. China is by far the largest host country of CDM projects and it is therefore crucial to understand the factors that drive TT there. To gain better interpretation, we focus on heterogeneity within a single country and results can thus be linked to specific policies of the country. Our probit estimations confirm previous international cross-country studies, indicating that larger projects and more advanced technologies are more likely to involve TT. In addition, we find evidence that agglomeration effects are more pronounced at the province level rather than larger regions. We also find a positive effect of foreign direct investment (FDI) on TT, and academic research and development (R&D) is complementary to TT.

Policy relevance

Technology transfer (TT) is a goal of Chinese CDM legislation, but it is not a prerequisite for project approval. Our estimations show the project specific, technological and region-specific features that encourage more TT among CDM projects. Some variables analysed such as R&D spending and FDI (both are found to have positive effects on TT) can be, to some extent, influenced by the policy-makers. Moreover, we find some evidence for the presence of negative agglomeration effects on the provincial level: the likelihood of TT is decreasing in the number of previous projects operating in the same technology and province. This finding needs to be interpreted with great caution. It may suggest the existence of a learning externality, which could serve as a justification for policy intervention. Any policy intervention requires however careful analysis of potential positive or negative externalities resulting from the agglomeration of CDM projects and a comparison of possible benefits with the costs of TT.     

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.     

CDM and national policy: Synergy or conflict? Evidence from the wind power sector in China

This study assesses the effectiveness of a mix of policy instruments including the Clean Development Mechanism (CDM) and the Feed-in Tariff (FIT) to induce wind technology diffusion in China. Relying on a panel dataset consisting of information from 1207 CDM wind projects in thirty provinces over the period 2004–2011, the empirical analysis indicates that: first, wind energy deployment responds primarily to those counterfactual emissions which would have occurred in the absence of the wind projects; second, the dynamic efficiency of the FIT subsidy shows a potential incompatibility with the CDM incentive; third, the leverage of the CDM on wind investment is supported by the industry and technology policy package, which explains in large part the decrease in the FIT subsidy. Given these findings, suggestions are made regarding the design of a future carbon offset scheme and its link with mitigation action in developing countries.     

Implications of Country-Level Decisions on the Specification of Crown Cover in the Definition of Forests for Land Area Eligible for Afforestation and Reforestation Activities in the CDM

Within the Kyoto Protocol, countries have significant latitude to define a forest. The most important parameter affecting area designated as forest is the minimum crown density which can be set between 10 and 30 percent. The choice will have implications for the amount of land available in a country for afforestation and reforestation (A/R) activities within the Clean Development Mechanism (CDM). In this paper, we used GIS analysis to look at four case studies from countries involved in the EU-funded ENCOFOR project: Bolivia, Ecuador, Uganda and Kenya. We also looked at the effects of other factors that would exclude land from eligibility for A/R projects. A low threshold of 10 percent crown cover resulted in exclusion of 70 to 90 percent of the land area of all countries except Kenya, which differed from the other countries by its large dryland areas. Much less area was excluded when higher thresholds were used. The spatial analyses showed not only the effects of the choice of the crown cover criterion, but also where the land was available for CDM activities within each country at different thresholds. This is the first time that the effect of the crown cover element of the Kyoto forest definition on land availability and distribution for CDM A/R activities has been quantified. While there are a number of reasons to choose different thresholds, this analysis suggests that countries that are considering using CDM finance for rural development might want to select the higher minimum threshold for crown cover in order to maximize their participation and flexibility.     

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.     

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.     

Experts talk the future Reflections on the Bonn Seminar of Governmental Experts, 16–17 May 2005: a view from Europe

Abstract

This article provides a first-cut estimate of the potential impacts of the clean development mechanism (CDM) on electricity generation and carbon emissions in the power sector of non-Annex 1 countries. We construct four illustrative CDM regimes that represent a range of approaches under consideration within the climate community. We examine the impact of these CDM regimes on investments in new generation, under illustrative carbon trading prices of US$ 10 and 100/t C. In the cases that are most conducive to CDM activity, roughly 94% of new generation investments remains identical to the without-CDM situation, with only 6% shifting from higher to lower carbon intensity technologies.We estimate that the CDM would bolster renewable energy generation by as little as 15% at US$ 10/t C, or as much as 300% at US$ 100/t C.

A striking finding comes from our examination of the potential magnitude of the “free-rider” problem, i.e. crediting of activities that will occur even in the absence of the CDM. The CDM is intended to be globally carbon-neutral—a project reduces emissions in the host country but generates credits that increase emissions in the investor country. However, to the extent that unwarranted credits are awarded to non-additional projects, the CDM would increase global carbon emissions above the without-CDM emissions level. Under two of the CDM regimes considered, cumulative free-riders credits total 250–600 MtC through the end of the first budget period in 2012. This represents 10–23% of the likely OECD emissions reduction requirement during the first budget period. Since such a magnitude of free-rider credits from non-additional CDM projects could threaten the environmental integrity of the Kyoto protocol, it is imperative that policy makers devise CDM rules that encourage legitimate projects, while effectively screening out non-additional activities.