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.     

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.     

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.     

Market penetration metrics: tools for additionality assessment?

Abstract

Project-based emission reduction or ‘offset’ programs are being implemented widely, from the CDM (Clean Development Mechanism) to corporate voluntary efforts and municipal and state-level activities. Additionality assessment remains a central and persistent challenge in all programs. Concerns have been raised with methods currently used, such as investment analysis, barrier analysis, and performance thresholds. They have been variously critiqued for high costs, resistance to standardization, weak environmental integrity, and susceptibility to gaming. Technology penetration rates provide another means to infer additionality, and could be a potentially useful complement to other methods. The notion is that emerging technologies with low but increasing penetration rates typically require some type of support, as might be provided through offsets markets, to compete effectively in the marketplace. For penetration rate analysis to provide a useful tool for additionality assessment, several fundamental questions need to be addressed. What do penetration rates represent and how can they be measured? How can additionality evaluation utilize penetration rates? For which sectors and project types are the use of penetration rates most promising? This article shows that penetration tests have a mixture of pluses and minuses, with greater relevance in certain market niches and regions. Reasonable ranges for penetration thresholds are discussed, along with partial crediting approaches to reduce ‘knife-edge’ effects.     

Forestry Projects under the Clean Development Mechanism?

Afforestation is considered an important option for mitigation of greenhousegas emissions. Recently, plantation projects have been suggested for inclusionunder the Clean Development Mechanism. While considered a cheap option,significant uncertainties make it difficult to determine the (net) carbonbenefits and profitability of forestry projects. The current uncertaintiesabout the regulatory framework of the CDM and the environmental and economicperformance of plantation forestry could create uncertainties with respect tothe additionality of such projects and thus their acceptance under themechanism.Six plantation forestry projects that were proposed in Brazil have been usedas cases to study sources of uncertainty for carbon benefits and economics forsuch projects. These cases vary widely in terms of productivity and productsdelivered. A quantitative model for calculating greenhouse gas balances andfinancial benefits and costs, taking a broad range of variables into account,was developed. Data from the developers of the proposed projects was used asmain source material. Subsequently, scenario's were evaluated, containingdifferent and realistic options for baseline vegetation, carbon creditingsystems and CDM modalities, fluctuations in product prices, discount rates andcarbon prices.The real cost of combined carbon sequestration and substitution for the caseprojects was below $3 per ton of carbon avoided, when based exclusivelyon data supplied by project developers. However, potential variations incarbon impact and costs based on scenario options were very large. Differentbaseline vegetation or adopting a different discount rate cause carbon creditsto vary by as much as an order of magnitude. Different carbon crediting systemsor fluctuations in (commodity) product prices cause variations up to200% in carbon credits and NPV. This makes the additionality of suchprojects difficult to determine. Five of the six case projects seem uneligiblefor development under the CDM. A critical attitude towards the use ofplantation projects under the CDM seems justified.     

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.     

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.     

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.     

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.     

Tenders: an option for developing countries to support renewable energies under the CDM

Abstract

Renewable energy sources are generally considered as an important tool on the way towards sustainable development. However, if developing countries want to actively promote renewable energies, they may need to face the problem that current legislation conflicts with the clean development mechanism (CDM) rules, and especially with the additionality concept. Thus, CDM projects may become impossible to implement. This article presents an approach to overcoming these potential difficulties. One solution lies in offering a tender specifically for RE-CDM-projects.     

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.     

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.     

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.

     

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.     

Clean development mechanism: leverage for development?

The objective of this paper is to show that the investments through the clean development mechanism (CDM) can exert a leverage effect to (i) make attractive to developing countries non-binding commitments and the adoption of national policies and measures; this comes as a guarantee of non-conditionally of the mechanism to strictly environmental concerns and (ii) create a flow of additional investments and technological transfer from Annex B countries to non-Annex B countries.The Indian power sector has been chosen as an example of a sector where institutional barriers, market imperfections, and tariff distortions create a great space for Pareto improvements and leave an important potential for no-regret measures: technological transfer, air conditioned systems, transport infrastructures and removal of subsidies on consumption.This paper presents a micro-economic formalisation on (i) the evolution of profitability of current emitting technologies used in the power sector under the adoption of national policies and measures and (ii) the impact on renewable energy technologies competitiveness of emission credits in the context of CDM. This formalisation has been developed to enable quantitative simulation. A first exercise using the Markal model (used in 77 countries) on the electric sector in India enabled us to simulate the leverage effect of emission credits on additional incomes taken as a proxy for development.     

Clean development mechanism: leverage for development?

Abstract

The objective of this paper is to show that the investments through the clean development mechanism (CDM) can exert a leverage effect to (i) make attractive to developing countries non-binding commitments and the adoption of national policies and measures; this comes as a guarantee of non-conditionally of the mechanism to strictly environmental concerns and (ii) create a flow of additional investments and technological transfer from Annex B countries to non-Annex B countries.

The Indian power sector has been chosen as an example of a sector where institutional barriers, market imperfections, and tariff distortions create a great space for Pareto improvements and leave an important potential for no-regret measures: technological transfer, air conditioned systems, transport infrastructures and removal of subsidies on consumption.

This paper presents a micro-economic formalisation on (i) the evolution of profitability of current emitting technologies used in the power sector under the adoption of national policies and measures and (ii) the impact on renewable energy technologies competitiveness of emission credits in the context of CDM. This formalisation has been developed to enable quantitative simulation. A first exercise using the Markal model (used in 77 countries) on the electric sector in India enabled us to simulate the leverage effect of emission credits on additional incomes taken as a proxy for development.     

Factors driving international technology transfer: empirical insights from a CDM project survey

This study empirically explores factors driving international technology transfer via Clean Development Mechanism (CDM) projects by explicitly considering factors that have been identified in the literature on international technology transfer as being relevant for transfer success. These factors include technological characteristics, such as the novelty and complexity of a technology, as well as the use of different transfer channels. Employing data from an original survey of CDM project participants, the econometric analysis also distinguishes between knowledge and equipment transfer. The findings suggest that more complex technologies and the use of export as a transfer channel are both associated with a higher degree of technology transfer. Projects involving two- to five-year-old technologies seem more likely to involve technology transfer than both younger and older technologies. Energy supply and efficiency projects are correlated with a higher degree of technology transfer than non-energy projects. Unlike previous studies, technology transfer was not related to project size, to the length of time a country has hosted CDM projects, or to the host country's absorptive capacity. The findings for knowledge and equipment transfer are similar, but not identical.

Policy relevance

CDM projects are often seen as a vehicle for the transfer of climate technologies from industrialized to developing countries. Technology transfer is an important element of the new and emerging market mechanisms and frameworks under the United Nations Framework Convention on Climate Change, such as the Technology Mechanism, Nationally Appropriate Mitigation Actions, or Intended Nationally Determined Contributions. Thus, a clearer understanding of the factors driving technology transfer may help policy makers in their design of such mechanisms. For the CDM, this may be achieved by including more stringent technology transfer requirements in countries’ CDM project approval processes. Based on our findings, such policies should focus particularly on energy supply and efficiency technologies. Likewise, it may be beneficial for host countries to condition project approval on the novelty and complexity of technologies and adjust these provisions over time. Since such technological characteristics are not captured systematically by project design documents, using a survey-based evaluation opens up new opportunities for a more holistic and targeted evaluation of technology transfer in CDM projects.     

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.     

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

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.     

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.