How to attribute market leakage to CDM projects

Abstract

Economic studies suggest that market leakage rates of greenhouse gas abatement can reach the two-digit percentage range. Although the Marrakesh Accords require Clean Development Mechanism (CDM) projects to account for leakage, most projects neglect market leakage. Insufficient leakage accounting is facilitated by a lack of applicable methods regarding the quantification and attribution of project-related leakage effects. This article proposes a method for attributing CDM-related market leakage effects to individual projects. To this purpose, alternative attribution methods are analysed. We find that project-specific approaches fail to take account of market leakage effects. Consequently, we propose to estimate aggregate market leakage effects and attribute them proportionally to individual projects. We suggest that predetermined commodity-specific leakage factors are applied by project developers to any emission reductions that are associated with a project's leakage-relevant demand or supply changes. This approach is conservative, equitable, incentive-compatible and applicable at manageable costs.     

The potential of the CDM to deliver pro-poor benefits

The potential of Clean Development Mechanism (CDM) projects to deliver pro-poor benefits at the community level is examined. Both regular CDM and premium add-on standard projects are evaluated, including the Gold Standard and Climate, Community and Biodiversity (CCB) Standard, through the use of seven poverty indicators. Some key characteristics associated with providing pro-poor benefits are also identified. Finally, the market potential of a revised or new premium add-on standard explicitly designed to deliver pro-poor benefits is assessed through the use of a survey. The results indicate that regular CDM projects are only moderately successful at delivering pro-poor benefits. Although the few projects registered that utilize the CCB Standard all performed well in delivering pro-poor benefits, those that used the Gold Standard performed only slightly better than regular CDM projects. Characteristics associated with providing pro-poor benefits include the use of add-on standards, a high level of stakeholder participation, and the development of projects by not-for-profit and government/intergovernmental organizations. The survey of carbon market participants indicated both an interest and desire for Certified Emission Reduction (CER) credits with pro-poor benefits attached and shows that the market potential for such a standard to be quite good.

Policy relevance

This analysis of the CDM goes beyond sustainable development to consider the potential of a project to deliver pro-poor benefits at the local community level. Specific characteristics associated with projects are identified that appear to deliver pro-poor benefits that may benefit future project design. Through this analysis and identifying these characteristics, actions may be taken to incorporate those into CDM project requirements or guidelines to advance the mechanism as a means to contribute to poverty alleviation.     

Statistical analysis of CDM capacity-building needs

Abstract

This article presents statistical analysis of a selection of data collected under a World Bank survey on Kyoto Protocol capacity-building needs in 16 potential clean development mechanism (CDM) host countries. It focuses on three interrelated issues: perceived barriers to the implementation of the CDM, expert judgment regarding the human, institutional and systemic capacity that must be built to overcome these barriers, and views on the most urgent steps that need to be taken to facilitate CDM implementation. The analysis reveals that in many countries there is a wide diversity of opinion across the group of respondents, which could be caused by a number of factors, including the inherent complexity of the Kyoto flexible mechanisms, limited understanding of their basic functioning and potential in the local context, and the differing needs and interests of stakeholder groups. Despite this, many statistically significant preferences can be identified at the national level. Among nations, two broad groups of countries emerge, which can be traced back to their overall level of capacity development. The statistical analysis presented in this article lends credibility to qualitative conclusions drawn from previous interpretations of the survey data and has implications for the design of capacity-building efforts. However, in evaluating capacity-building needs and the readiness of countries to engage in CDM deals, potential investors and providers of capacity-building services will need to consider not only the results of this type of opinionbased needs assessment, but also the practical experience gained through CDM transactions.     

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 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.     

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.     

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.     

Finding a path for REDD+ between ODA and the CDM

Abstract

Strategies to mitigate anthropogenic climate change recognize that carbon sequestration in the terrestrial biosphere can reduce the build-up of carbon dioxide in the Earth's atmosphere. However, climate mitigation policies do not generally incorporate the effects of these changes in the land surface on the surface albedo, the fluxes of sensible and latent heat to the atmosphere, and the distribution of energy within the climate system. Changes in these components of the surface energy budget can affect the local, regional, and global climate. Given the goal of mitigating climate change, it is important to consider all of the effects of changes in terrestrial vegetation and to work toward a better understanding of the full climate system. Acknowledging the importance of land surface change as a component of climate change makes it more challenging to create a system of credits and debits wherein emission or sequestration of carbon in the biosphere is equated with emission of carbon from fossil fuels. Recognition of the complexity of human-caused changes in climate does not, however, weaken the importance of actions that would seek to minimize our disturbance of the Earth's environmental system and that would reduce societal and ecological vulnerability to environmental change and variability.

© 2003 Elsevier Science Ltd. All rights reserved.     

Post-2012 CDM multi-criteria analysis of industries in six Asian countries: Iranian case study

The prospects of the Clean Development Mechanism (CDM) and for carbon income, up to and beyond 2012, in the industrial sectors of Iran and five other Asian countries are investigated. The attractiveness and suitability of each host country, the status of their industrial sectors (based on four post-2012 scenarios), and the post-2012 potential of the CDM (or similar carbon projects) in these sectors are all examined. A multi-criteria analysis of Iran, Saudi Arabia, the UAE, Qatar, China, and India, based on seven sets of criteria (institutional, regulatory, economic, political, social, CDM experience, and energy production/consumption), is conducted, and the post-2012 potential carbon incomes of each country – based on CO₂e emissions of industrial processes – are calculated. Finally, the Iranian industrial sector and the impact of deregulation of energy prices are examined. The post-2012 potential savings in the Iranian industrial sector are calculated based on energy savings, carbon income, and environmental savings. The results indicate that there is strong demand for investment and new technology in this sector to combat several-fold energy price increases. Moreover, high-priced carbon credits could play a meaningful role in post-2012 energy policies in this sector.

Policy relevance

This research is the first study to quantify the carbon market potentials in the industrial sectors of the selected Organization of the Petroleum Exporting Countries (OPEC) members. The Kyoto Protocol is considered by most OPEC countries to be a mixed bag of threats and opportunities and they have shown ambivalence towards it, mainly due to the threat a reduction of fossil fuel consumption poses to their economies. On the other hand, energy efficiency is a desirable goal for their industrial sectors. Iran, as an OPEC member country with vast energy resources, has mostly ignored the CDM during the first commitment period of the Kyoto Protocol and has performed poorly on CDM implementation. However, the current deregulation of energy prices in Iran, with profound cuts in energy subsidies, would definitely alter the perspective of its industrial decision makers on the post-2012 carbon potentials.     

Learning from CDM SD tool experience for Article 6.4 of the Paris Agreement

The Paris Agreement (PA) emphasizes the intrinsic relationship between climate change and sustainable development (SD) and welcomes the 2030 agenda for the global Sustainable Development Goals (SDGs). Yet, there is a lack of assessment approaches to ensure that climate and development goals are achieved in an integrated fashion and trade-offs avoided. Article 6.4 of the PA introduces a new Sustainable Mitigation Mechanism (SMM) with the dual aim to contribute to the mitigation of greenhouse gas emissions and foster SD. The Kyoto Protocol’s Clean Development Mechanism (CDM) has a similar objective and in 2014, the CDM SD tool was launched by the Executive Board of the CDM to highlight the SD benefits of CDM activities. This article analyses the usefulness of the CDM SD tool for stakeholders and compares the SD tool’s SD reporting requirements against other flexible mechanisms and multilateral standards to provide recommendations for improvement. A key conclusion is that the Paris Agreement’s SMM has a stronger political mandate than the CDM to measure that SD impacts are ‘real, measurable and long-term’. Recommendations for an improved CDM SD tool are a relevant starting point to develop rules, modalities, and procedures for SD assessment in Article 6.4 as well as for other cooperative mitigation approaches.

POLICY RELEVANCE

Research findings are relevant for developing the rulebook of modalities and procedures for Article 6.4 of the Paris Agreement, which introduces a new mechanism for mitigation of greenhouse gas emissions and sustainable development. Lessons learnt from the CDM SD tool and recommendations for enhanced SD assessment are discussed in context of Article 6 cooperative approaches, and make a timely contribution to inform negotiations on the rulebook agreed by the Conference of the Parties serving as the Meeting of the Parties to the Paris Agreement.     

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.     

CDM and international technology transfer: empirical evidence on wind power

This article examines the effect of the Kyoto Protocol's Clean Development Mechanism (CDM) on the international transfer of wind power technologies. The analysis is conducted using patent data from over 100 countries during the period 1988–2008. It is found that transfers from Annex I countries to non-Annex I countries are significantly affected by the contemporaneous establishment of projects under the CDM. However, when taking into account the cumulative effect of CDM projects, the effect is negative. Finally, the effect of domestic absorptive capacity in the host country is positive and significant. Because involvement with the CDM may increase the latter, this is an important area for further research.     

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.     

Experiences of host communities with carbon market projects: towards multi-level climate justice

The literature on equity and justice in climate change mitigation has largely focused on North–South relations and equity between states. However, some initiatives (e.g. the Clean Development Mechanism (CDM), the Reducing Emissions from Deforestation and Forest Degradation programme (REDD), and voluntary carbon markets (VCMs)) are already establishing multi-level governance structures that involve communities from developing countries in global mitigation efforts. This poses new equity and justice dilemmas: how the burdens and benefits of mitigation are shared across various levels and how host communities are positioned in multi-level governance structures. A review of the existing literature is used to distill a framework for distinguishing between four axes of climate justice from the perspective of communities. Empirical evidence from African and Asian carbon market projects is used to assess the distributive and procedural justice implications for host communities. The evidence suggests that host communities often benefit little from carbon market projects and find it difficult to protect their interests. Capacity building, attention to local power relations, supervision of business practices, promotion of projects with primarily development aims and an active involvement of non-state actors as bridges between local communities and the national/international levels could potentially contribute towards addressing some of the key justice concerns.Policy relevance International negotiations on the institutional frameworks that are envisaged to govern carbon markets are proceeding at a rather slow pace. As a consequence, host countries and private-sector actors are making their own arrangements to safeguard the interests of local communities. While several standards have emerged to guide carbon market activity on the ground, distributive as well as procedural justice concerns nevertheless remain salient. Four empirical case studies across Asia and Africa show that within the multi-scale and multi-actor carbon market governance, local-level actors often lack sufficient agency to advance their claims and protect their interests. This evidence suggests that ameliorating policy reforms are needed to enhance the positioning of local communities. Doing so is important to ensure future acceptability of carbon market activity in potential host communities as well as for ensuring their broader legitimacy.     

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.     

Time to market in the CDM: variation over project characteristics and time

Not only is the carbon market inundated with Certified Emissions Reductions (CERs) issued by successful projects, it is also littered with failed projects, that is, projects that either fail to be registered under the Clean Development Mechanism (CDM) or projects that have been successfully registered but fail to issue CERs. By relying on a novel application of survival analysis in the context of the CDM, this article shows that half of all projects that start the Global Stakeholder Process fail to issue CERs, while the other half have a median time to market of four years. Furthermore, it is shown that some of the best projects, in terms of being additional, are those that are least likely to make it to market, whereas some of the worst projects, in terms of not being additional, are the ones that are most likely to make it to market. This presents a fundamental challenge for the CDM and future offset schemes that rely on the same design as the CDM. In contrast with previous studies, it is shown that, when project characteristics are controlled for, not all durations measured along the CDM project cycle have increased over time.

Policy relevance

This article develops a novel method for analysing durations measured along the CDM project cycle that avoids the biases of previous studies, and corrects for some misconceptions of what the delays faced by CDM projects are and how these delays have changed over time. Developing an understanding of the delays is important in order not to draw the wrong lessons from the CDM experience. As the leading example of an offset scheme, both in terms of geographical scope and sectoral coverage, and some would say institutional complexity, the CDM serves as a benchmark and reference for all future offset schemes, among others, for the New Market Mechanisms (NMMs) and the Chinese domestic offset programme. While the NMMs are still very much in development, China has announced that it will rely on the methodologies and procedures developed under the CDM for generating offsets for their regional carbon trading schemes.     

Certified emissions reductions and CDM limits: revenue and distributional aspects

The EU allows those installations that are subject to emissions trading to use a limited volume of certified emissions reductions (CERs), generated through the Clean Development Mechanism (CDM), to cover their own GHG emissions. These CERs can be used in addition to the EU allowances (EUAs), which were primarily allocated free to installations in Phase II of the EU Emissions Trading Scheme (EU ETS) from 2008 to 2012. For the year 2008, the CER limits, which are differentiated by EU Member State, created substantial arbitrage rents (due to the CER-EUA spread) of approximately EU€250 million. Different options for the allocation of this rent are discussed and it is found that, according to economic theory, making the right to use CERs tradable or the regulator pre-committing to buying CERs at the level of the relevant limit reduces the inefficiencies connected to the current regulation. Furthermore, auctioning these CER usage rights shifts the rents created through the CER-EUA spread to the Member State itself. The improved design and implementation of CDM limits justifies EU policy makers intervening to correct previously competition-distorting choices.     

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.     

Will the Clean Development Mechanism be effectively implemented in China?

The on-going process of setting up a national system for identification, approval and implementation of CDM-projects in China illustrates the changes in the Chinese attitude towards the CDM after COP7. This is a very important process, and the outcome could strongly influence investors’ willingness to invest in Chinese CDM-projects. The massive interest and capacity building by international assistance organisations, bilateral and multilateral donors, for preparing the implementation of the CDM will provide China with information and experience. Nevertheless, potential factors that may negatively influence efficient implementation of CDM-projects are: the domestic implementation system is not yet finalised and may impact on China’s ability to compete for CDM-projects; the priorities of the Chinese authorities may not match those of foreign investors; the main expertise regarding CDM is found in a few ministries and research institutes in Beijing, and there is a need to increase capacity for CDM among local project developers and authorities; most research carried out concerned technical issues, and there is a need to include economists and market experts in order to increase understanding of the market.     

The future of the CDM: same same,but differentiated?

Policy-makers and scientists have raised concerns about the functioning of the Clean Development Mechanism (CDM), in particular regarding its low contribution to sustainable development, unbalanced regional and sectoral distribution of projects, and its limited contribution to global emission reductions. Differentiation between countries or project types has been proposed as a possible way forward to address these problems. An overview is provided of the different ways in which CDM differentiation could be implemented. The implications for the actors involved in the CDM are analysed, along with a quantitative assessment of the impacts on the carbon market, using bottom-up marginal abatement cost curves. The discounting of CDM credits, quota systems, or differentiated eligibility of countries could help to address several of the concerns raised. Preferential treatment may also make a limited contribution to achieving the aims of CDM differentiation by increasing opportunities for under-represented host countries. The impact on the carbon market appears to be limited for most options.