CDM AND ITS BUSINESS PROPOSITION

The main focus of the talk on Clean Development Mechanism by Professor Kamal Bansal was on CDM project process and trading of CERs and VERs. The discussion started with identifying the need for CDM projects and the adverse climate change experienced in the recent years due to emission of greenhouse gases.
CDM MECHANISM: The Clean Development Mechanism (CDM) is an arrangement under the Kyoto Protocol which allows industrialised countries with a greenhouse gas reduction commitment (called Annex 1 countries) to invest in projects that reduce greenhouse gas emissions in developing countries. This is a lower cost alternative to undertaking more expensive emission reduction projects in their own countries. It is therefore important that the project undertaken establishes that it would not have occurred without the additional incentive provided by emission reductions credits – otherwise there would be a net increase in global emissions. Emission reductions achieved with CDM projects are awarded credits called Certified Emission Reductions (CERs). These CERs can be traded and sold, and used by industrialized countries to a meet a part of their emission reduction targets under the Kyoto Protocol. The mechanism stimulates sustainable development and emission reductions, while giving industrialized countries some flexibility in how they meet their emission reduction limitation targets.
CDM is supervised under the guidance of the Conference of the Parties (COP/MOP) of the United Nations Framework Convention on Climate Change (UNFCCC). To help countries meet their emission targets, and to encourage the private sector and developing countries to contribute to emission reduction efforts, negotiators of the Protocol included three market-based mechanisms – Emissions Trading, the Clean Development Mechanism and Joint Implementation. Joint Implementation is same as CDM mechanism but the trading of CERs takes place between two developed or Annex 1 countries.
CDM Project Process: The projects must qualify through a rigorous and public registration and issuance process designed to ensure real, measurable and verifiable emission reductions that are additional to what would have occurred without the project. The mechanism is overseen by the CDM Executive Board, answerable ultimately to the countries that have ratified the Kyoto Protocol.In order to be considered for registration, a project must first be approved by the Designated National Authorities (DNA).
Stage 1: The Project Idea- The idea behind a CDM project is normally recorded in a so-called Project Idea Note (PIN) document. This contains the most important information concerning the project, together with a rough estimate of the possible emission reductions.
Stage 2: The Project Design Document (PDD) and the Consent of the Host Country- The PDD contains all information about the project and stipulates the anticipated volume of emission reductions over a certain time period. The focus point of the PDD is the selection of a suitable methodology to calculate the GHG savings The PDD, and thus the suggested CDM project, must be authorized through the responsible authorities in the developing country (Designated National Authority, DNA). Attention is focused on the contribution of the project to the sustainable development of the country.
Stage 3: Validation- In addition, the PDD must be checked by a United Nations accredited organization (Designated Operational Entity, DOE). The so-called "Validation" process of the project is usually carried out by certification institutions such as SGS, TUV, DNV.
Stage 4: Registration- Once given the green light after validation, the project developer then makes an application to register the intended project with the CDM Executive Board. This Executive Board has the last word, as it the executive organ of the United Nations in all CDM matters. Once the CDM Executive Board agrees, the project is officially registered and CERs can be generated.
Stage 5: Monitoring- It is far from over with the registration of the project under the CDM. After all, the PDD only depicts the intentional performance of a project toward emission reductions over a certain time (credit period). The project developer must prove whether this performance is actually generated over the credit period of the project.
Stage 6: Verification-Despite the monitoring reports, accredited organisations keep a close eye on project developers. This process is called Verification and is normally carried out on a yearly basis. After inspection, the independent Verifier goes on to make a statement concerning the integrity and accuracy of the information provided in the monitoring report.
Stage 7: Issuing of the CERs-Provided that the monitoring reports are approved without objection during the verification, the CDM Executive Board is allowed to issue the generated CERs. A CER is a certificate which is tradable in various emission trading systems, transferred between the accounts of seller and buyer in electronic form.
The projects which are considered as CDM project falls in any of the following three categories:
· afforestation and reforestation CDM project
· small scale CDM project
· large scale CDM project
These three projects have to follow different methodology to be categorized as a CDM project.
ADDITIONALITY CONCEPT: There was a lot of discussion on the concept of additionaliy in a CDM project. The concept of additionality was introduced in the Kyoto Protocol in Article 12.5, which states that „emission reductions resulting from each project activity shall be certified by DOEs on the basis of ... reductions in emissions that are additional to any that would occur in the absence of the certified project activity“.In order to know if a CDM project is additional you have to find out what the baseline is.The basic idea of additionality is that those project activities that would also occur without the CDM, i.e. that are business as usual, should not be certified under the CDM. This provision aims at ensuring the environmental integrity of the CDM, since certification of such activities and use of the CERs by Annex B countries would result in a global increase of emissions.
COMPLIANCE AND VOLUNTARY CARBON MARKET: The European Union Emissions Trading Scheme (EU ETS) is the largest multi-country, multi-sector emissions trading program in the world. Emissions trading aims to reduce pollution using a market-based approach of providing economic incentives to companies that reduce their emissions beyond their target. The compliance market serves buyers that must meet regulatory requirements, such as an obligation to surrender units through an emission trading scheme. The voluntary market serves buyers that are purchasing offsets either to meet voluntary greenhouse gas emission reduction or offset targets, or to enhance their reputation and standing with the general public, investors, customers and employees. Purchasing offsets allows businesses, governments, NGOs, and individuals to counteract the effects of their emissions.
TRADING OF CERs: The trading of CERs takes place through any of the following ways: spot trading, forwards trading or through advance payments in forward contract. The European Climate Exchange (ECX) manages the product development and marketing for ECX Carbon Financial Instruments (ECX CFIs), listed and admitted to trading on the ICE Futures electronic platform. The CER Emissions Index will be determined by a trade-weighted average of trades in ICE ECX CER futures Contracts during the trading day. Certified Emissions Reductions (CER) Index, which serve as benchmarks for participants seeking exposure to the European Union Emissions Trading Scheme and Kyoto Protocol Clean Development Mechanism (CDM), respectively.
Emissions Reduction Purchase Agreement(ERPA): A transaction that transfers carbon credits between two parties under the Kyoto Protocol. The buyer pays the seller cash in exchange for carbon credits, thereby allowing the purchaser to emit more carbon dioxide into the atmosphere. The standards for this agreements are outlined by the International Emissions Trading Association.
The talk on CDM was highly informative and gave us an insight into the working of CDM trading mechanism and the fundamentals of CDM project process.