Article / 10 Nov, 2017
CDM Value Clear, Future Cloudy

UN Climate Change News, Bonn, Nov 10 - The value of the Clean Development Mechanism (CDM) seems clear — it is even inspiring innovative proposals for how it can help make green finance truly green — but the future of this Kyoto Protocol mechanism that has registered more than 8,000 climate and sustainable development projects in 111 developing countries remains uncertain.

“The CDM has shown its ability to incentivize investment in emission reduction and development projects,” said Frank Wolke, Chair of the CDM Executive Board at a side-event at the United Nations Climate Change Conference (COP23) in Bonn. “It’s timely that we consider the CDM now, while negotiators are looking for ways to reach the goals laid down in the Paris Climate Change Agreement.”

“If we are going to meet our goals under the Convention, we will need all the tools at our disposal. We need to ramp up global climate action — increase our ambition — and the CDM and especially its elements are a tried and tested tool that we can all use now to do that,” said Mr. Wolke.

The 120-seat meeting room was filled, with people standing at the back, an indication of continuing interest in the CDM. However, it was a small showing compared with crowds a few years past when the price paid for CDM certified emission reductions (CERs) was a magnet for project developers looking to harness wind power, distribute clean cookstoves or pursue a wide range of other projects that could earn CERs by reducing greenhouse gas emissions and supporting sustainable development.

The CDM gave countries and companies with an emission reduction commitment stemming from the Kyoto Protocol some flexibility in how they met their commitments, allowing them to use CERs to cover a part. The European Union Emissions Trading System, for example, was the largest demand source for CERs in the Protocol’s first five-year commitment period, which ended in 2012.

The CDM has spurred investment and renewable energy.
Click on the graphic to see the full CDM benefits flier.

Parties to the Protocol agreed to the “Doha amendment” to create a second commitment period to 2020, but have yet to ratify the amendment into force. What will happen after 2020 is an open question.

“The CDM has done so much, and it can do so much more,” Frank Wolke, CDM Executive Board Chair

Daniel Rosseto, Chief Executive Officer of Climate Mundial, has an idea, to use the CDM to ensure green bonds are truly green. The CDM has 215 emissions baseline and monitoring methodologies, well established rules and regulations, third-party oversight and 16 years of experience ensuring a tonne of emission reduction represents a true tonne.

The green bond market “has struggled now for 10 years to define what a green investment is without being able to do so in a way that can be universally accepted across all countries, markets and stakeholders,” said Mr. Rossetto. “There’s no global structure for green bonds.”

His concept, called the Paris Climate Bond, would use “current and future mechanisms” under the UN Framework Convention on Climate Change to “measure and enforce the mitigation impact of climate themed bonds at the project level, as well as trace the ownership, title and right to claim the resultant mitigation outcomes.”

The CDM Board does not speculate about what role the CDM will have — in whole or in part — in the ongoing international response to climate change, which is now focused on the Paris Climate Change Agreement.

The CDM has improved and/or protected natural resources
and led to the installation of 1 million efficient cookstoves.
Click on the graphic to see the full CDM benefits flier.

However, the Board is, at the encouragement of Parties, looking at other uses for the CDM, such as the kind of results-based financing and trading the Mr. Rossetto is proposing. The Board is also mindful of Parties’ advice that the new “sustainable development mechanism” called for under the Paris Agreement draw on what went before. Will the CDM continue evolving and improving? Will it get a new name and some tweaks and emerge as the new Paris mechanism? Or, will it be dismantled and its parts find purpose elsewhere? These are questions being debated by Parties at COP23.

In the meantime, projects and programmes continue to enter the CDM pipeline and seek registration — 72 in total were registered in 2017, up from 55 in 2016.

“This is nowhere near the number as in past years, when the price paid for CERs was high, but that is completely understandable,” said Mr. Wolke. “Were the price of certified emission reductions to rise again, then I think we could confidently expect the number of projects seeking registration to rise right along with the rising price.”
There are still buyers for CERs, but few, now that their role as a compliance instrument under the Kyoto Protocol is diminished. About 150 million CERs have been issued in 2017, up about 50 percent from 2016.

Norway buys CERs from “at-risk projects,” ones that without the revenue from CERs would shut down and increase emissions as a result, explained Peer Stiansen from Norway’s Ministry of Climate and Environment and who advises his country’s CER purchase programme.

The CDM has provided clean drinking water and has led to
the planting of more than 150 million tress. Click on the graphic
to see the full CDM benefits flier.

The Republic of Korea also has a need for CERs. Just as European companies could use CERs to cover a part of their emission reduction obligations under the EU ETS, companies in Korea can use CDM emission reductions to cover a part of their obligations under the Korea Emissions Trading System (KETS).

The KETS cancels CERs and issues a corresponding volume of units called Korean Offset Credits, explained Minyoung Kim from Korea’s Greenhouse Gas Inventory and Research Center. Companies can use the credits to cover 10 percent of their emission reduction obligation. In the second three-year phase of the KETS, beginning in 2018, companies will be allowed to source 5 percent of that 10 percent quota from CDM projects outside Korea.

In the meantime, Parties in Bonn are working on the Paris Agreement “rulebook,” including matters relating to Article 6 of the Agreement, which allows for “cooperation” on emissions mitigation and establishment of the sustainable development mechanism.

“Parties are starting to make their views public,” said Mr. Stiansen, a former Chair of the CDM Board. “We might see some clarity next year at COP24” as to what will happen to the CDM.

At very least, “not having the CDM name could be useful,” said Mr. Stiansen, reflecting on past criticisms from industry, which wanted more efficient, quicker regulatory processes for vetting their projects, and civil society groups seeking more assurance of environmental integrity — for example assurance that the incentive provided by the CDM in fact caused a given project to happen — and greater say for communities affected by projects.

“So, what do we have? We have a fully built, fully functioning mechanism. We have a tool that has a proven ability to drive climate action. It is a tool that, since its inception, has been continually improved in terms of robustness, efficiency and features,” said Mr. Wolke. “The CDM has done so much, and it can do so much more.”

In the panel photo, from left, Peer Stiansen, Frank Wolke, Niclas Svenningsen, Daniel Rosseto and Minyoung Kim.