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Unilateral CDM on the horizon
By Catrinus J. Jepma
Although it has been possible to accumulate CDM credits (CERs) for Kyoto Protocol compliance purposes since 2000, progress with the CDM has remained disappointingly slow thus far. The CDM EB only registered a fourth CDM project on 24 March 2005 and too many projects in the pipeline fail at an early stage of the project cycle. In earlier editorials, I put considerable blame for this little progress on the – in my view – unnecessary project additionality test and its stringent interpretation by the MethPanel, sanctioned by the CDM EB (see for instance JIQ, December 2002; June 2003). Meanwhile, this sort of criticism now appears to be shared widespread. COP-10 actually urged the CDM EB to improve its operational speed.
An important point with respect to speeding up is that the consolidated additionality tool adopted in October 2004 allows for a circumvention of the dubious ‘financial’ additionality test (basically meaning that those involved in a prospective CDM project should provide evidence of the project’s financial inferiority!) by a ‘barriers test’ (identify barriers which prevent the project from coming off ground and show that the CDM helps to overcome these). It is also important that professionals engaged in the CDM project cycle are gradually learning ‘how to get through Bonn.’
Nonetheless, the overall process is commonly regarded as lengthy and rather uninviting. Serious breakthroughs can probably only be achieved when more progress is made with standardisation of procedures, and using standardised emission coefficients would be acceptable. [By the way, in order not to make the mistakes of creating too cumbersome procedures again for JI, standardisation seems to be the major challenge for the emerging design of at least the slow track JI-procedure.]
But there is another obstacle to the CDM machinery: transaction costs. Much of the work to develop investment projects as CDM activities is done by relatively expensive consultants in the North (with daily rates in excess of €1,000 being more the rule rather than the exception). They either approach potential CER buyers, or are hired by them, and have ample incentive to add red to both the tape and the investors’ accounts. Accordingly, transaction costs can become substantial having a number of adverse effects. Firstly, it may scare off investors (particularly small investors) to even investigate whether their investment could get a CDM-status. Secondly, it induces potential buyers to become engaged in only those projects that yield significant amounts of CERs (e.g. at least 0.5 Mt of CO2-eq. before the end 2012), creating another bias in favour of large projects and resource-rich host countries. Thirdly, it can invite consultants to start ‘no-cure-no-pay’ practices, which may eventually lead to aggressive acquisition and undermine the credibility of their profession altogether.
What can be done to lower CDM transactions costs? One obvious route would be – as argued above – to streamline procedures by creating more accepted opportunities for standardisation. Another, complementary route would be to involve more consultants from the host countries, because their rates tend to be significantly lower than those of their colleagues in the North. Regarding this second possibility, there seems to be some good news on the horizon, namely: ‘unilateral CDM’. This means that CDM-projects can be initiated and developed without a pre-specified CER buyer and by actors from the relevant non-Annex I host country only. For example, a special public agency in the host country identifies potential CDM projects and host country private experts carry out the PDD and the preparing-for-validation-phase; contact with potential CER buyers is only sought somewhere between the moment of registration and the moment of issuing the CERs.
For some time, it was unclear whether unilateral CDM would be legally possible given that the Marrakech Accords require a written approval of voluntary participation from the DNA of each Party involved in a CDM project. The Accords do not specify whether an Annex I Party must be involved or not. This has induced researchers to come up with the idea of unilateral CDM project development with delayed Annex I Party involvement. At its 18th meeting, on 25 February 2005, the CDM EB supported this idea and “agreed that the registration of a project activity can take place without an Annex I Party being involved at the stage of registration” (see: http://cdm.unfccc.int). This basically implies that it has now become possible to set up CDM projects whereby:
- some, or even all equity (not to be mixed up with finance which can come from anywhere) comes from host country actors (e.g. note that China has equity rules for CDM participation);
- only the approval of the host country DNA is required prior to EB registration;
- CER buyers only become formally involved when the first CERs become available for sale (eventually, of course, the approval of the buying Annex I Party will be needed before CER issuing).
What could be the implications of the above CDM EB decision?
- First, it seems to open up a promising window of opportunities for ambitious businesses and consultants in developing countries to take initiatives to get the CDM machinery really going, without being dependent on procedural involvement by ‘competing’ experts in industrialised countries.
- Second, and related to the former, it may substantially reduce transaction costs because the experts from the developing countries are most likely not only much cheaper, but probably – by having grown up there, being a native speaker, etc. – also better informed about the situation in their home countries.
- Third, one can finally leave the issue if and to what extent ODA could be used to support setting up CDM-initiatives there where it belongs: to the discretion of the host country governments themselves.
- Fourth, it may redress the present biases in the system in favour of resource-rich host countries and large projects.
- Finally and perhaps most importantly, it may help non-Annex I Party country participants to get rid of a feeling of being patronised by foreign CDM consultants. This may create a powerful incentive to strengthen local capacity to deal with mitigation action.
All these implications may prevent feelings like the one voiced by Christiana Figueres: “[P]articipation in the CDM tends to be more of an opportunistic enterprise than a strategic effort. [….] [P]rojects tend to be isolated attempts at accessing the international GHG reduction market, and fall short of being an effort to decarbonize the national economy."
Catrinus J. Jepma
Chief editor
Previous Notes from the Editor
December 2004
October 2004
July 2004
March 2004
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