The socialization potential of the CDM in EU–Vietnam climate relations

This article argues that the material incentives associated with climate policies such as the Clean Development Mechanism (CDM) may contribute to the socialization of emerging economies such as Vietnam in economic-oriented climate change norms. In current academic research, the CDM has both been extolled as a cost-effective and vilified as an environmentally inadequate instrument. Few studies so far, however, have looked into the CDM's potential contribution to socialization-related phenomena such as raising climate change awareness. This article aims to fill that gap by studying the CDM in EU–Vietnam relations in four periods, namely initiation (2001–2007), improvement (2008–2010), consolidation (2010–2012), and potential habit formation (2012 and beyond), with both the EU and Vietnam being important players in the market for CDM credits (Certified Emission Reductions or CERs). We argue that there is at least a strong potential for habit formation resulting from the CDM's material incentives, and that the underlying causal mechanism involves the emergence and activities of norm entrepreneurs and habit formation through a process of legal institutionalization.

Policy relevance

Normative transformation or change is increasingly attracting the attention of both climate policy makers and scholars alike, certainly in view of the failures of ‘standard’ economic or technological solutions to tackle climate change. There is a need, however, to apply insights from social theory to specific policies and cases. The policy relevance of this article lies here: does the CDM (a specific policy) affect climate concerns (norms) in Vietnam (a specific case)? And, if so, to what extent and why? Based on previous research regarding the Chinese case, it is expected that the CDM's material incentives result in a mild effect in Vietnam, probably less pronounced than in China in view of the latter's relative level of economic development, and the strength of its political and legal-institutional system and (human) capacity to develop CDM projects. This article's research findings point out that whether and how ‘deep’ these new shared ideas will succeed in becoming standards of appropriate behaviour in Vietnam might to some extent depend on whether the international community is able to offer a material incentive structure that fosters such a normative transformation.     

Governance and technology transfer in the Clean Development Mechanism in India

Despite significant technological advances in emerging economies, the further development of clean energy technologies in developing countries remains crucial to reducing the greenhouse gas emissions associated with economic development. In this paper we address two significant gaps in the growing body of literature that has assessed the role of the Clean Development Mechanism in promoting the transfer of clean technologies to developing countries. First, we present a qualitative analysis of the governance of the Clean Development Mechanism in India. This provides a basis for understanding the extent to which and the ways in which governance may impact upon the likelihood that projects promote technology transfer. Second, we provide a novel quantification of the level and nature of technology transfer that has occurred in Indian Clean Development Mechanism projects, based on insights from literature on technological capability building. We find that the Clean Development Mechanism in India has produced a negligible number of projects that promote technology transfer if technology transfer is understood as a process of learning about technology. Together these qualitative and quantitative analyses show how politics and governance have contributed to the current form of the Clean Development Mechanism market in India, in which processes of building indigenous technological capabilities have been neglected.     

Optimal liability apportionment in programmatic credit-based emissions trading

The inclusion of Programmes of Activities (PoAs) within the Clean Development Mechanism (CDM) has been limited by the fact that third-party project validators, who determine the eligibility of a CDM Project Activity (CPA), are currently held liable for any certificates that are erroneously issued. As such, validators must replace any credits issued for the relevant CPA. Moreover, the risk associated with the validation of small-scale CPAs is considerably higher than that associated with traditional CDM projects. Using a simple game-theory model to model the interactions between project validators and coordinators, it is shown that shifting liability for certificates that are erroneously included – from the former to the latter – is never optimal, does not provide a strong enough incentive to enforce first-best levels of due care in CPA selection and inclusion, and can induce overprovision in validation efforts. The main problem with such a simple proportionate liability regime is that an increase in incentives for one player automatically leads to a decrease in incentives for the other. Two additional instruments are also considered that would both rectify this problem and improve the environmental integrity of the CDM mechanism.     

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.     

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.     

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.     

Forest certification eligibility as a screen for CDM sinks projects

Abstract

Parties negotiating the Kyoto Protocol recently agreed that Clean Development Mechanism (CDM) investments can include carbon sequestration projects in developing countries. However, guidelines for achieving the socio-economic and environmental objectives of the CDM, and other concerns with sinks projects, have yet to be elaborated. Independently of the Kyoto process, international efforts have advanced to define and certify sustainably managed forests through processes, such as that of the Forest Stewardship Council (FSC). In this paper, the FSC-US principles and criteria for sustainable forest management are evaluated in light of current concerns for guiding afforestation and reforestation projects in the CDM. It is found that the FSC criteria would help to meet some of the objectives of the Kyoto Protocol, including provisions to reduce the risk of premature carbon loss, and features that could somewhat lessen leakage of emissions outside the project area. Existing FSC monitoring and verification procedures provide some, but insufficient, overlap with expected requirements for measuring carbon stock changes. FSC principles and criteria articulate stringent guidelines for meeting environmental and social goals that reflect years of negotiations between environmental, timber, human rights and labor interests.     

LULUCF-based CDM: too much ado for…a small carbon market

Abstract

The Bonn agreement reached in July at the sixth conference of the parties (COP) to the FCCC states “that for the first commitment period, the total of additions to and subtractions from the assigned amount of a party resulting from eligible LULUCF activities under Article 12 (i.e. CDM), shall not exceed 1% of base-year emissions of that party, times five”. The most probable size of this LULUCF-CDM market is analyzed in light of each Annex I party's actual and projected emissions and policies. Results show that the market size would be only about 110 Mt CO₂ eq. for 2000–2012, representing a maximum global market value of about US$ 876 million.     

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.     

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.