Reforming the CDM in Cancun

The Clean Development Mechanism, the UN-administered carbon credit scheme set up under the Kyoto Protocol is once again in the spotlight at the COP in Cancun. The CDM has been hailed as a great success, perhaps unsurprisingly, by its own Executive Board (EB), having already delivered about 450 million tonnes of emission reduction credits to be used against compliance purposes, proving that the concept of flexible market mechanisms can deliver clean technology based emissions reductions in developing countries and reduce the cost of compliance in industrialised countries. However others point out that the vast majority of credits come from industrial gas destruction that has few if any side benefits to sustainable development, and, some argue, should have taken place anyway even without the CDM. Only last week the CDM EB meeting reported that accusations of fraudulent HFC credits were unfounded and that there was 'no evidence' that any projects had recived more credits than their due. They nevertheless withdrew the methodology concerned with immediate effect - meaning no new HFC projects until a revised stricter methodology is in place.

Meanwhile the EU announced it would no longer accept HFC credits after 2013. These developments may contibute towards a shift away from over-reliance on a few industrial gas facilities to reduce emissions, and the controversy over many millions of euros of European money going to just a few industrial gas facilities, mainly in China and southeast Asia.

This Tuesday the CDM Executive Board held a Q&A session that was dominated by criticism of the sustainable development benefits (or percieved lack of) for CDM projects. A group of waste pickers from countries as far afield as Brazil, South Africa and India accused CDM landfill gas flaring projects of destroying their livelihood. The waste pickers were passionate advocates for their cause.

Unfortunately for the waste pickers the EB has little power to stop projects on the grounds of negative social and environmental impacts. Essentially the Board's hands are tied by a political decision at Kyoto to leave the potentially controversial definition of sustainable development to the host countries. I wonder if the waste pickers would get as sympathetic a reception with their own governments as they did with the EB members here in Cancun?

Meanwhile, wider reform of the CDM is on the agenda of the COP negotiations. One difficult subject is the legal liability for any credits that are found to have been over-issued. In Marrakesh in 2001 the negotiating parties decided to assign this liability to the private auditing companies ('DOEs') that validate and verify CDM projects. However a recent proposal by the UNFCCC to put this theoretical liability into practice through a detailed procedure was met with widespread hostility by market players. The auditing companies complain that the scale and degree of liability being inposed on them, regardless of whether they acted negligently or acted properly, is unfair and unmanageable. They also point out that it creates a perverse incentive for project developers to defraud the auditors, since the developers keep any excess credits without suffering any penalties, whilst the auditors, who did not benefit financially from any excess credits, face huge financial penalties.

What the COP will decide on this complex and legally difficult area remains to be seen, but unless a secure way of ensuring the inegrity of credits is found, such as a fund into which all project developers pay in, the likelihood is that CDM will become much more challenging in the future. This is due to a likely increase in transaction costs to try and cover the enormous liabilities, and a reluctance of auditors to take on complex projects that are seen as more risky.

On other issues related to CDM, it looks like the appetite of the COP to further reform the mechanism may be somewhat diminished this year.

Clearly there are wider priorities, and the EU has already declared that its 'shopping list' of reforms that it would like to get out of Cancun is considerably smaller than the massive Wal-Mart sized shopping trolley it bagged in Copenhagen. Right now the focus of the negotiations on the CDM is likely to be on following up what was called for last year and either congratulating or berating the EB on the progress/lack of progress (depending on your point of view!). So don't expect massive changes, but watch the details such as DOE liability. These issues have to potential to derail the working of the mechanism in the future.

Jonathan Avis, ECM 2003-4