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CDMbarkation
By Catrinus J. Jepma
Before, at, and after the Montreal COP/MOP, many sources have acknowledged that the CDM is gaining momentum, and that it is not the big Kyoto Protocol (KP) disappointment, as some commentators, including myself, had feared. If that impression were true, that would be good news for the KP since the CDM bridges Annex I and non-Annex I Parties.
To what extent is such optimism justified? Let’s look at the facts and figures. In doing that, I’m obliged to – among others – the OECD/IEA1, and the UNEP Risø Centre in Denmark (see Figure 1 for the source), which monthly updates the CDM pipeline (first issued on 15 October 2004). Such data is very helpful in addressing a number of key questions:
a how many CDM-projects have now (=December 2005) been registered; how many CERs do they represent, and what are the projects’ main characteristics?
b how many CDM-projects are likely to be registered within – say – about a year?
c does the difference between a and b give rise to optimism?
ad a) Keeping in mind that the ‘CDM machinery’ became fully operational during 2002-2003, the 57 officially registered projects thus far, representing over 125 m cumulative CERs up to 2012, is rather low. Remember that under the KP the Annex I Parties will have to mitigate around 3000 Mt of CO2-eq. Assuming that the intended cost-effectiveness of trading would require that about 1/3 of that would need to be covered through the CDM, a portfolio of CDM projects would be required that can mitigate about 1000 Mt of CO2-eq. (corresponding with about 1 billion CERs).
Given that the calculated average annual emission reduction of all projects in the CDM pipeline is about 0.2 Mt CO2-eq., and assuming that CDM-projects will on average start in 2006/7 (and thus have on average about 6 years to accumulate CERs), the average CDM project will mitigate about 1.2 Mt CO2-eq. up to 2012. In other words, if we want the CDM to make such a decisive contribution to the KP success, about 800 CDM projects will have to become operational during the next 1 or 2 years. The likely contribution of the portfolio of now already registered projects (assuming that issuance occurs as foreseen in the PDDs) covers about 12% of the desired level of 1 billion CERs. The present number is thus modest when compared to that target.
ad b) Can we expect the massive breakthrough of the CDM during 2006/7? Let’s – for a change – focus on the good news:
at Montreal one of the often mentioned bottlenecks of the CDM process – the slow EB approval procedure – may have been substantially alleviated, since decisions have been made to increase efficiency, speed up EB decision making, and generate sufficient additional financial support for that.
at Montreal it was also decided to install (by April 2007) the International Transaction Log, which will facilitate the trading link between CDM/JI credits and EU ETS allowances. This is likely to a.o. raise interest in CERs and the CDM in general from the industries capped under the EU ETS.
According to the 22/12/05 Risø data, the present CDM ‘pipeline’ (only projects under validation) contains 513 projects, which together could – if approved - mitigate about 755 Mt CO2-eq., corresponding with about 25% of the required Annex I mitigation effort. Taking the OECD/IEA definition of project pipeline (Risø definition + any other project at PDD stage and/or that have been approved by the host country DNA), the list of projects and associated credits becomes even larger with over 700 CDM projects and more than a billion credits; if eventually registered, they would indeed cover about 1/3 of the required Annex I mitigation effort.
There is clear evidence that the number of projects entering the pipeline - irrespective of the definition - is now increasing rapidly (possibly supported by the COP/MOP decision to extend the 31-12-05 deadline for retroactive credits). So, the already impressive pipeline is likely to grow further.
ad c) The answer to the question whether or not we are on the verge of a CDM project breakthrough, obviously depends on whether the large number of CDM projects in the pipeline will quickly become operational.
Here doubts could arise.
if the procedure has been slow and tough thus far, why would that change, even if the EB would have more resources and better streamlined procedures?
why is it that so many CDM projects seem under development, while at the same time so few have been submitted for registration? Could the answer be that a large number of host countries has been rather slow in issuing Letters of Approval or are there other serious obstacles, e.g. emerging during the validation process?
could continued slow progress in the CDM approval procedure during 2006/7 discourage new CDM initiatives altogether, because - in the absence of clarity about the post-Kyoto regime – there is simply too little crediting time left to make CDM investments attractive?
The final answer – as it seems – has to come from the EB, in particular with respect to how much decision capacity it is prepared to leave with the current 12 Designated Operational Entities (DOEs) (including the ‘big three’, DNV, TÜV-SÜD and SGS, together responsible for about 85% of all CDM validations). The good news is that all projects currently in the pipeline use approved methodologies! This basically means that if the EB or any stakeholder of the project have no objections against the formal registration of the CDM projects submitted - this was no important obstacle in the past - registration will automatically follow after the review period (eight weeks after the date of receipt by the EB). Much therefore depends on how liberal the EB is prepared to be. Hopefully its recently expanded capacity will not act as an invitation to redo the work of the validators and make overly detailed assessments of each and every individual project plan submitted.
The other good news is that over the past two years, the number of days between an average CDM submission for registration and the end of the public comment period, has come down from about 450 to about 150 days (see Figure 1).
Therefore, it seems crucial for the true progress and success of the CDM that the EB concentrates on its true role, i.e. not to check each individual project, but rather to provide guidance on overall design principles, and focus on such issues as: do accepted methodologies cover all potential sector project activities; where can additionality checks be combined with baseline assessments; to what extent can methodologies be further standardised; etc.
If this is how the process will develop, the CDM’s future all of a sudden seems rather bright. If the present pipeline would completely develop into registered CDM projects by 2006/07, the CDM could already cover about a quarter to a third of the Annex I Parties’ commitments! Let that be our wish for the New Year.
Catrinus J. Jepma
Chief editor
1 Ellis, J. and E. Levina (2005). The Developing CDM Market, Paris: OECD/IEA, November 2005.
http://www.oecd.org/dataoecd/62/38/35798536.pdf
Previous Notes from the Editor
October 2005
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