Quest in vain?

How can CDM resolve the conflict between developed and developing country interests?

By Axel Michaelowa
Published: Saturday 30 November 2002

-- Clean development mechanism (cdm) has a dual aim -- to achieve cost-effective greenhouse gas (ghg) mitigation for industrialised countries and to promote sustainable development in developing countries. Integrating these aims is not easy. Especially with the absence of the us, the increased availability of sinks and the steadily rising estimates of 'hot air' all lead to a buyers' market. Both modelling estimates and prices paid by the Prototype Carbon Fund (pcf) and the Dutch cerupt programme indicate a price range of us $3 to 5 per tonne (t) of carbon dioxide. This means that monetary benefits from cdm will be lower than expected. I feel that this message has not yet sunk in sufficiently.

The need to safeguard environmental integrity has led to an elaborate cdm project cycle. cdm estimates state that several hundreds of thousands of dollars are needed to complete the project cycle. Most of these transaction costs are independent of the project size. With private sector discount rates, this means that all projects yielding less than approximately 20,000 certified emission reductions (cers) per annum are not attractive to private sector investors. However, projects below this size contribute relatively more to sustainable development than larger ones, as they more closely address local needs and livelihoods. Thus, since Marrakech, the issue of helping small-scale cdm projects to overcome the cost barrier has increasingly been addressed.

Marrakech defines three types of small-scale cdm projects:

l renewable energy projects below 15 megawatts (mw) installed capacity

l energy efficiency improvements of less than 15 gigawatts per annum

l emitting less than 15,000 t of carbon dioxide per annum.

While number 15 has apparently caught the negotiators' attention, the thresholds widely differ on actual cers generated. A hydropower station of 14.99 mw running 8,000 hours per year will produce 108,000 cers. A wind power plant of the same size would probably run for about 2,700 hours full load. This would produce just 36,000 cers (if one uses a coal baseline of 850 gram carbon dioxide/kilowatt). An energy efficiency project at the threshold would generate only 13,500 cers, clearly unattractive at current prices.

The impacts of the threshold of the third category strongly depends on its exact definition. If it means that any project emitting less than 15,000 t carbon dioxide equivalent is eligible, a landfill gas methane project capturing 15,000 t of methane and converting them into carbon dioxide by flaring could generate up to 300,000 cers per annum. This is definitely not what the initiators of the small scale rules intended, especially as landfill gas projects are among the most attractive cdm options due to their low cost. Revisiting thresholds makes a lot of sense.

The most promising way to reduce transaction costs is to make a number of projects jointly do the project cycle steps. Unfortunately, the cdm Executive Board (eb) almost destroys this possibility. It has set clear criteria to avoid unbundling, i.e. the artificial splitting of a large project into fictitious small sub-projects. An easy option project developers can voluntarily choose is a long verification/certification interval. Host countries can reduce negotiations, search and approval costs by doing cdms unilaterally.

More contentious would be to exempt one or several steps of the project cycle. The eb has rightly not done so.

Baseline simplification has led to much debate, but influences a small share of transaction costs. eb choices stress on environmental integrity, while standardising only selected baseline parameters.

eb fees will crucially determine costs. It now suggests a tiered registration fee depending on project size, still prohibitive at us $5,000 for the smallest category. Better to waive the fee completely for projects up to 20,000 cers per annum and charge slightly higher for large projects. Such a cross-subsidisation would be a necessary condition for any small project.

Even if c p-8 amended the eb's suggestions, the cost gap of the smaller projects remains so high that private investors would still remain uninterested. The only real hope in this scenario is to focus on programmes that offer prices above the market level, such as the World Bank's new Community Development Carbon Fund or programmes coupled with development aid. Here, of course, the rule that official development assistance should not be 'diverted' has to be interpreted in a clear manner.

Axel Michaelowa is from the Hamburg Institute of International Economics

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