How CDM can help you

Internationally, Emission Trading Schemes (ETSs) are in various stages of discussion and approval, almost always accompanied by spirited debate about the financial impacts on industry and society. In addition to a variety of local ETSs, the Clean Development Mechanism (CDM) allows developed nations to offset their own emissions by investing in reduction schemes in the developing world.

The CDM and local ETSs are instruments of the Kyoto Protocol of the United Nations Framework Convention on Climate Change (UNFCCC). With the first commitment period of the Kyoto Protocol expiring in 2012, the question arises as to what sort of successor protocol will be negotiated. Will the CDM exist in a form that both benefits and encourages businesses in developed countries to assist their developing neighbours?

SKM believes it will, although Professor Garnaut¹ makes the case that its role in a post-2012 global agreement on explicitly-allocated tradable emissions across all countries may have to be limited in order to achieve the depth and breadth of action that is now required from all major emitters. By creating a value for genuine, verifiable and tradeable emissions reductions, a revamped CDM could support truly sustainable clean development in developing countries. Most importantly, astute business operators who embrace CDM will be able to use this involvement to help them achieve their triple bottom line targets.

What opportunities are there?

A company with a “point of obligation” is likely to be an ETS participant. Where such a company has evaluated the greenhouse gas emissions profile of its base portfolio and established that it is likely to be ‘short’ in the market, it may make sense to investigate CDM opportunities as a means of offsetting or hedging this shortfall.  Involvement in CDM projects would also be seen as promoting corporate social responsibility.

Australasian firms are currently lagging behind Europe in terms of participating in the existing CDM market. New Zealand is not a participant in any of the 1000+ registered CDM projects, which compares poorly with the UK, currently listed as a party to 378 CDM projects. Having only just ratified the Kyoto Protocol very recently, Australia is only now able to get involved.

What does the future hold?

In December 2007, the signatories to the UNFCCC and the Kyoto Protocol met in Bali and agreed on a road map for post-Kyoto negotiations. The likely outcome is that developed countries will agree to further quantitative Greenhouse Gas (GHG) reduction goals, but only if developing nations will agree to take actions which are transparent (measurable, reportable and verifiable), but not necessarily involving quantitative goals or emissions trading. A post-2012 framework is likely to include:

• A concerted move towards sectoral and programmatic approaches for mitigation in order to reduce transaction costs and speed wider deployment of small scale mitigation strategies
• GHG emissions reductions and emission avoidance methodologies that are both controversial and not currently covered by the Kyoto Protocol, but that which allow a global annual GHG emissions peak to be achieved more quickly and at a lower value than would otherwise be the case, such as:
  • avoided deforestation in developing countries
  • geological sequestration of GHGs, and
• A broadened CDM, for the same reasons.

It is therefore very likely that post-2012 there will be a revised form of international trading in certified emissions reductions from clean and sustainable technologies - a “Son-of-CDM”. Issues with the longevity of emissions reductions under forestry, and of potential leakage from geo-sequestration, need to be addressed, but we should not lose sight of the ability of these technologies to assist in meeting near-term real global reductions in GHG emissions while we work on developing the cost-effectiveness of more permanent solutions.

The conundrum of additionality

Additionality is the stipulation that in order to earn carbon credits, a CDM project would not have taken place without the backing of the investor. Some NGOs argue that this can only be proven if the project is not profitable without the CDM revenue, but this narrow interpretation does not reflect the reality faced by most project developers who make investment decisions based on a broad range of criteria. The current CDM approach to testing additionality is to prove that a project is either not the most financially attractive alternative available or that it faces prohibitive barriers the CDM helps it overcome.  In the majority of cases it is becoming increasingly obvious that additionality is difficult to prove or disprove. 

Faced with soaring prices for fossil fuels, the time has already come in some developing countries where certain types of renewable energy may already be the most financially attractive alternative. Meeting the current CDM test for additionality in these circumstances may be difficult, despite the fact that they are highly desirable from a sustainability point of view.

For these reasons a Post-2012 CDM should provide a more objective test of additionality or do away with it altogether in favour of sustainability measurements for projects that ultimately contribute to lower global GHG emissions.

There is evidence that this is already occurring. Recently a new methodology for establishing the emissions reductions of refrigerators with improved energy efficiency over a benchmark energy efficiency has been recommended for approval by the Methodology Panel of the CDM² In this test “As long as the specific electricity consumption of refrigerators produced and sold in the host country by the manufacturer, involved in the project activity, is lower than the benchmark for specific electricity consumption during each year of the crediting period, the project activity is deemed additional. A separate assessment of additionality is therefore not required under this methodology”³.

Acting together

To avoid unacceptable climate change impacts, substantial reductions in annual global GHG emissions are likely to be required within this century. In order to stabilise atmospheric CO2 levels within a range that will be acceptable to humankind, taking into consideration the mitigation and adaptation measures which will be required, it is clear that a post-2012 an equitable international global abatement agreement is required in the very near future. The Kyoto Protocol in its current format is not this agreement since it does not equitably address the aspirations, obligations, responsibilities and capacities of all nations, and it does not adequately address emissions from all sectors.

By participating in the debate on the design and implementation of post-Kyoto ETSs and a revised CDM, countries and their corporate citizens have the opportunity to help address this consuming issue. For those that are early adopters, this represents one of the few instances where good business is also good global citizenship.

¹Garnaut, R. (2008). Garnaut Climate Change Review: Draft Report to the Commonwealth, State and Territory Governments of Australia. Published by the Commonwealth of Australia and posted here

²UNFCCC. (2008). Report of the Thirty-Second Meeting of the Methodologies Panel. Published here. (p. 1)

 ³UNFCCC. (2008). Draft baseline and monitoring methodology AM00XX. “Manufacturing of energy efficient domestic refrigerators”. Published

here. (p. 3.)

© Sinclair Knight Merz
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