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Unilateral CDM as a Stimulus for Broader Non-Annex I Party Participation in the Kyoto Protocol
The Cuyamapa hydroelectric project in Honduras and the Bagepalli afforestation program in India are two of the first CDM projects seeking validation with the CDM Executive Board without direct involvement of an Annex I Party. The prospects of these unilateral initiatives are promising, particularly because they may help overcome the barriers that have so far prevented the widespread implementation of small-scale CDM projects.
The roots of unilateral CDM can be traced back into the AIJ pilot phase. Costa Rica introduced Certifiable Tradeable Offsets (CTOs) for its forest management programme as a unilateral anticipation of an international crediting system. A national umbrella finance fund administered the projects. By selling only a part of all possible reductions as CTOs, the fund could bear the risks of project delay or failure. International investors could simply buy the CTOs and Costa Rica was able to realize projects according to its own economic necessities and political preferences. This particular system did highlight an important window of opportunity for unilateral action.
So far, CDM projects have generally been developed in a joint effort of an Annex I Party investor entity – a government agency, private enterprise, or multilateral fund – and a non-Annex I host country. Partners from both countries are actively involved in the entire CDM project cycle. An important disadvantage of how the CDM project cooperation presently develops is that the transaction cost related to the project design, including identification of the project, construction and approval of baseline and monitoring methodologies and validation, as well as to the actual project implementation generally require that a project (which does not fall within the small-scale CDM category) needs a considerable scale to be financially viable. When looking at a number of present tenders for CDM projects, e.g. Dutch Rabobank carbon procurement programme, German Kreditanstalt für Wiederaufbau KfW, and the Dutch CERUPT programme, it turns out that a CDM project must often at least deliver about one million tonnes CO2-eq. emission reduction before 2012 to have a chance of acceptance.
Against this backdrop, some studies (e.g. Baker & McKenzie, www.bakernet.com) expect that around 70% of all CDM money under the Kyoto Protocol will be spent in China and India. On the other hand, in countries where the majority of the CDM potential consists of projects with an abatement potential of (far) less than one million tonnes, transaction costs per CER may simply turn out too high to compete with large-scale CDM projects elsewhere. Many of these potential CDM hosts are among the least-developed countries.
One way for these countries to improve their competitiveness on the CDM market is by streamlining domestic project approval procedures and reduction of transaction costs in general. Unilateral CDM could play an important role in this respect. The key element of unilateral action is that the initiative for a CDM activity is with the host country. A special agency within or acting on behalf of the government identifies possible CDM project opportunities. Subsequently, a local entity designs the project, submits the baseline and monitoring methodologies applied to a validator. Once the project plan has been validated, the CERs can be sold to an international investor.
The large involvement of local experts from the host countries could largely reduce transaction costs related to project design. However, such unilateral CDM requires a strong training effort. Presently, there are a number of training programmes that are specifically focussed on streamlining CDM procedures in host countries and training local stakeholders (both government and private sector) to prepare and implement CDM projects. For examples of these programmes, see Box 1.
Prospects
The EU ETS takes off in January 2005 and a ‘Linking Directive’ facilitates the exchange of credits accruing from CDM and JI projects into European emissions allowances. A forward CER market may well develop and provide the necessary funds for unilateral CDM project development by non-Annex I countries. However optimistic this may sound, the opportunity clearly does not come without a challenge. The institutional requirements may be tougher to meet than for the bi- and multilateral variants as unilateral CDM will require developing countries to bear more responsibility over the entire CDM development cycle than in the case of bi- or multilateral CDM.
Nevertheless, creating credible, effective national operational entities that validate and verify projects at relatively low local fees and organizations that facilitate the bundling of small-scale projects in developing countries seems to be a sensible next step that will help to make unilateral CDM economically viable.
It needs to be emphasized that unilateral CDM is about independence, as opposed to isolation. Interaction with other Parties is of vital importance. Non-Annex I countries are invited to strengthen their ties with both Annex I and other non-Annex I countries. A shared learning experience will boost a broader, wider-ranging participation of non-Annex I Parties in the CDM. Clearly, as it applies to attracting any form of foreign investment, a balance must be struck between competition and cooperation.
Fortunately, unilateral CDM is not a rigid concept. The expertise of Annex I entities continues to play a role of significance in the development of non-Annex I countries’ CDM institutions and project portfolios. International cooperation programs such as the ones depicted in Box 1 can serve as vehicles for unilateral CDM.
Discussion Platform in JIQ Issue October 2004
Mr Donald Goldberg and Mr. Kevin Baumert on Action Targets
Mr Andreas Oberheitmann and Mr. Manuel Frondel on CDM in China
Discussion Platform in previous JIQ Issues
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