AN ASSESSMENT OF SUCCESS OF CLEAN DEVELOPMENT MECHANISM OF KYOTO PROTOCOL IN CLIMATE CHANGE MITIGATION AND SUSTAINABLE DEVELOPMENT

42 AN ASSESSMENT OF SUCCESS OF CLEAN DEVELOPMENT MECHANISM OF KYOTO PROTOCOL IN CLIMATE CHANGE MITIGATION AND SUSTAINABLE DEVELOPMENT ABSTRACT ANIL GUPTA* *Additional General Manager, Head of Hydro Mechanical Engineering Design Department, SJVN Limited (Schedule A, Mini Ratna CPSU of GOI), Shimla-171009, Himachal Pradesh, India. Kyoto Protocol is considered to be the most far reaching agreement on environment and sustainable development ever adopted. Clean Development Mechanism (CDM) is the only mechanism of Kyoto Protocol where developing counties can participate and join in mitigation of climate change. The CDM allows industrialized countries to invest in clean projects in developing countries and gain carbon credits, which they can use to offset its own emission reduction targets. For developing countries the CDM provides an opportunity to achieve sustained development and additional revenue to improve the viability of the projects. The present paper seeks to take stock of the success of CDM in meeting its objectives. Beside, assessment of global carbon finance market through transaction of Carbon Credits from CDM projects, the paper also presents the detailed account of region and technology wise distribution of CDM projects. The study reveals that CDM has provided an important catalyst for development finance while simultaneously supporting greenhouse gases mitigation and sustainable development. This mechanism has not only supported basic development needs of developing countries but has also contributed to technology transfer in big way. KEYWORDS: Certified Emission Reductions, Clean Development Mechanism (CDM) of Kyoto Protocol, Global Carbon Finance Market, Global Warming. 1.0 INTRODUCTION CARBON FINANCE Kyoto Protocol regime has made Carbon a tradable commodity and one ton of Carbon dioxide reduced through a project when certified by a designated authority becomes a tradable Emission Reduction (ER) or a Carbon Credit. This has created a new globally traded commodity i.e. Certified Emission Reductions (CERs) expressed in tons of Carbon dioxide equivalent. This commodity generally known as Carbon Credits has a market value similar to other commodities like wheat or oil and it can also be traded across borders on the market. The revenue realized by sale of Carbon Credits is generally termed as Carbon Finance. GLOBAL WARMING Scientists worldwide accepts that climate change or global warming is manmade phenomenon due to industrial growth because of increase in greenhouse gases concentration, accordingly there is a necessity for reduction in greenhouse gases emission to save the world from this

43 menace of Global Warming, the main characteristics of which are increase in average global temperature; changes in cloud cover and precipitation particularly over land; melting of ice caps, glaciers and reduced snow cover; and increases in ocean temperatures. UNFCCC Recognizing the fact that global warming is a complicated problem involving the entire world tangled up with different issues such as poverty, economic development and population growth, 189 countries, knowing well that tackling the issue of global warming shall not be an easy task but at the same time ignoring the issue will be disastrous, joined an International Treaty having general goals and rules for confronting climate change. This international treaty is the United Nations Framework Convention on Climate Change (UNFCCC), commonly referred as Convention. UNFCCC is an international legal framework adopted in June, 1992 at the Rio Earth Summit to address issue of climate change. The objective of formation of UNFCCC was to begin considering, what can be done to reduce global warming. The UNFCCC entered into force on March 21, 1994 and enjoys near universal membership of 192 countries who have ratified it. KYOTO PROTOCOL Even after the adoption of the UNFCCC in 1992 the greenhouse gases emissions levels continued to rise around the world. It became increasingly evident that only a firm and binding commitment by developed countries to reduce emissions could send a signal strong enough to convince businesses, communities and individuals to act on Climate Change. Accordingly, member countries of the UNFCCC began negotiations on a Protocol i.e an international agreement linked to the existing treaty. After two and a half years of intense negotiations, the Kyoto Protocol was adopted at the third Conference of the Parties to the UNFCCC in Kyoto, Japan on December 11, 1997. The Protocol divides the World in two groups i.e. Annex-I Parties, the industrialized countries who have historically contributed the most to climate change, and non-annex-i Parties, primarily the developing countries. The Kyoto Protocol took a considerable period in becoming politically acceptable by the countries targeted for committed emission reductions and it came in to force only on February 16, 2005 after ratification by most of the countries of the world. As on date, the Kyoto Protocol stands ratified / accepted / approved by 192 countries including all Annex 1 countries except USA who has still not ratified the Protocol. The Protocol set legally binding numerical targets for the reduction of greenhouse gas (GHG) emissions on industrialized countries (Annex-I parties). Each country has been assigned individual emission limitations or reduction commitments, so as to reduce the total GHG emission by at least 5% below the 1990 level during the commitment period from 2008 to 2012. MECHANISMS OF KYOTO PROTOCOL The effect on the global environment is the same irrespective of whether the GHG emission reduction is achieved in Annex I countries or non Annex I countries. Therefore, the countries

44 have been given an option to meet their targets through one of the following three mechanisms provided under Kyoto Protocol:- - Joint Implementation (JI) - International Emissions Trading (IET) - Clean Development Mechanism (CDM) Out of three mechanisms of Kyoto Protocol, CDM is the only mechanism where developing countries can participate and join in mitigating the climate change. Through CDM, the developed countries can implement GHG mitigation projects in developing countries at reduced costs. 2.0 OBJECTIVES OF THE STUDY 1. To study and understand the Clean Development Mechanism (CDM), eligibility criteria for a project to be considered for registration as CDM project, rigorous process of registration including the various authorities involved. 2. To study the status of the projects registered as CDM projects with UNFCCC since inception to end December, 2010. 3. To analyse the region wise distribution of the CDM registered projects. 4. To analyse the sector or technology wise distribution of CDM registered projects. 5. To find out the volume of Certified Emission Reductions (CERs) generated worldwide by the CDM registered projects and corresponding value of Global Carbon Finance Market through transactions of CERs. 3.0 CLEAN DEVELOPMENT MECHANISM (CDM) This is one of the mechanism outlined in Kyoto Protocol for mitigation of climate change whereby Annex-I countries may buy the emission reductions arising out of the implementation of projects located in non Annex-I countries to meet their emission reduction targets. CDM mechanism allows generation of carbon credits from projects within non Annex I countries i.e. developing countries. Since such projects in developing countries cost less than domestic measures, industrialized countries get an opportunity to reduce GHG emissions more costeffectively. On the other hand, developing countries get the benefit of additional financial resources as well as state-of-art latest technology. CDM ELIGIBILITY For a project to be considered for registration as CDM Project, following eligibility criteria needs to be fulfilled: - The Project contributes to the sustainable development of the host country.

45 - The project results in real, measurable and long term benefits in terms of climate change mitigation. - The reduction in the emissions must be additional to any that would have occurred without the project, meaning thereby that the project should not be business as usual but needs to be an additional project. Proving additionality is most critical and challenging eligibility criteria. In fact environmental integrity is essential for overall climate change mitigation i.e. to ensure that the project is really beneficial for the environment and actually results in the reduction of emissions. Under CDM the environmental integrity is preserved through the concept of additionality. The CDM Executive Board issues the tools for the determination and assessment of additionality and these are termed as additionality tools. These tools require project entities to explain how and why the project is additional and therefore the same is not business as usual or a base line scenario. STEPS INVOLVED IN A CDM PROJECT A project has to undergo rigorous process documentation and approval as specified under the CDM modalities and procedures. A typical CDM project involves following steps from inception to issuance of CERs: I). II). III). PROJECT IDENTIFICATION: This involves identification of a green project by the host i.e. project entity and the investor i.e. party from Annex-I country. This also includes description of the project and initial estimation of the emission reductions from the project. PREPARATION OF PROJECT DESIGN DOCUMENT (PDD): PDD provides all the technical documentation of the project including its location, financial projection ascertaining technical and economic viability of the project. This also includes a more precise estimation of the emission reductions from the project. PDD also describes in detail through various additionality tools that the project is eligible and additional. VALIDATION OF PDD BY DESIGNATED OPERATIONAL ENTITY (DOE): Validation is the process of independent evaluation of a project activity on the basis of the PDD by a third party UN accredited auditor known as Designated Operational Entity (DOE), against the various requirements of CDM particularly the eligibility as well as additionality. IV). HOST COUNTRY APPROVAL: This involves clearance from the host country government through its Designated National Authority (DNA) for this purpose. Host country government refers to the government of the country in which project is being implemented. V). REGISTRATION BY THE CDM EXECUTIVE BOARD: Registration is the formal acceptance by the CDM Executive Board of a validated project as a CDM project activity. This step is a pre-requisite for the verification, certification and issuance of the CERs from that project activity.

46 VI). VII). VERIFICATION AND MONITORING OF EMISSION REDUCTIONS DURING IMPLEMENTATION STAGE: Verification is the periodic independent review and expost determination by the UN accredited DOE of the CERs as monitored and reported by the project entity during the given verification period. CERTIFICATION AND ISSUANCE OF EMISSION REDUCTIONS I.E. CERS: Certification is the written assurance by the DOE that, during a specified time period, a project activity have achieved generation of CERs as verified. The CDM Executive Board thereafter reviews and approves this certification and subsequently issues CERs. 4.0 STATUS OF PROJECTS REGISTERED AS CDM PROJECTS Immediately after coming into force the first project was registered by the CDM Executive Board of UNFCCC on March 08, 2005. This project was for emission reductions by thermal oxidation of HFC-23 located at Gujarat State for expected per annum emission reductions of 30,00,000 with India as host country. The Annex I parties associated with the project were Switzerland, United Kingdom of Great Britain and Northern Ireland. The process of registration was quite slow during the first year i.e. 2005 and only 70 projects have been registered as CDM projects up to December 31, 2005. As on December 31, 2010, a total of 2703 projects have been registered as CDM projects worldwide with expected average annual CERs of 419,622,727. The number of projects registered during the year 2005 to 2010 ending on December each year is given hereunder in Table-1: TABLE-1 Sr. No. Year Number of Projects 1 2005 70 2 2006 406 3 2007 426 4 2008 430 5 2009 684 6 2010 687

47 Total 2703 5.0 THE REGION WISE DISTRIBUTION OF THE CDM REGISTERED PROJECTS For analyzing the geographical distribution of CDM Projects registered worldwide, the projects have been grouped in six regions of world as per classification used by various multi lateral financial institutions like World Bank Group. The region wise distribution of CDM registered projects is given hereunder in Table-2: TABLE-2 Sr. No. Region Number of Projects % of Total 1 Africa 39 1.44 2 East Asia and the Pacific 1479 54.73 3 Europe and Central Asia 20 0.74 4 Latin America and the Caribbean 496 18.34 5 Middle East and North Africa 49 1.81 6 South Asia 620 22.94 Total 2703 100 East Asia and the Pacific Region which includes countries like China, Indonesia, Malaysia, Philippines, Republic of Korea and Thailand etc. accounts for 54.73% share of the total registered CDM Projects, followed by South Asia Region having a share of 22.94%. In this Region out of total 620 projects registered, 598 belong to India. Latin America and the Caribbean Region accounts for 18.34% of the registered projects and the countries having significant share in this region are Brazil, Mexico, Chile and Argentina. The numbers of projects registered in Least Developed Countries (LDCs) are almost negligible

48 in comparison to CDM projects registered in other parts of the world. Only 26 projects (0.96%) have been registered in 14 LDCs. The least developed countries are the poorest developing countries of the world defined by the United Nations based on the dimensions of the state of the development of the country namely, its income level, its stock of human assets and its economic vulnerability and there are 49 LDCs in total. 6.0 THE TECHNOLOGY OR SECTOR WISE DISTRIBUTION OF CDM REGISTERED PROJECTS Activities under the Kyoto Mechanisms have largely focused, at least initially, on the simplest projects with lowest abatement costs and largest volume potential to bring through the CDM system. Renewable energy projects e.g. Hydro, Wind, and Bio-Mass are the most popular types of projects in the CDM. To date, the Energy Industries (Renewable/Non Renewable sources) sector has attracted the largest number of CDM projects with percentage of registration as 64.72%. Waste management and Manufacturing Industries Sectors are the other most popular sectors with percentage of registration as 15.67 and 4.74 respectively. Analysis of distribution of registered projects activities by sectoral scopes indicates that the sectors which are not reaching their full potential include energy demand; chemical industries; transport; mining / mineral production; metal production; fugitive emissions from production and consumption of halocarbons; and forestry i.e. afforestation and reforestation. Further, not even a single project has been registered in three sectors i.e. energy distribution, construction and solvent use. The details of Technology or Sector wise distribution of the CDM registered projects are given hereunder in Table-3: TABLE-3 Sr. No. Sectoral Scope Number of Projects % of Total 1 Energy Industries (renewable / nonrenewable sources) 2077 64.72 2 Energy Distribution 0 0.00 3 Energy Demand 35 1.09 4 5 6 Manufacturing Industries Chemical Industries Construction 7 Transport 8 Mining/Mineral Production 9 Metal Production 10 Fugitive Emissions from Fuels (solid, oil and gas) 11 Fugitive Emissions from Production and Consumption of Halocarbons and 152 4.74 68 2.12 0 0.00 4 0.12 37 1.15 8 0.25 152 4.74 24 0.75

49 Sulphur Hexafluonde 12 Solvent Use 0 0.00 13 Waste Handling and Disposal 503 15.67 14 Afforestation and Reforestation 18 0.56 15 Agriculture 131 4.08 Total 3209 100 Note: The total number of registered projects have been shown as 3209 as against 2703 actually registered because of the fact that some of the projects can be linked to more than one technology type or sector. 7.0 THE VOLUME AND VALUE OF GLOBAL CARBON FINANCE MARKET FROM CDM The value of the Global Carbon Finance Market from project based transaction of primary and secondary CERs generated from CDM projects have increased from US$ 2634 million in the year 2005 to US$ 19800 million in the year 2010. The volume and the value of the market for Carbon Finance through CDM during 2005 to 2010 is given hereunder in the Table-4: TABLE-4 VOLUME AND VALUE OF GLOBAL CARBON FINANCE MARKET FROM CDM Sr. No. Year Volume of CERs transacted (million tco 2 e) Value (in million USD) 1 2005 351 2634 2 2006 475 5257 3 2007 791 12877 4 2008 1461 32796 5 2009 1266 20221 6 2010 1214 19800

50 8.0 LATEST UPDATES OF CDM STATISTICS A total of 1107 new projects have been registered as CDM projects by CDM Executive Board during the year 2011. Accordingly, as on December 31, 2011, a total of 3810 projects stand registered worldwide under CDM with expected average annual emission reductions of 544, 672, 311. However, to carryout analysis like geographical and technology wise distribution as well as the volume and value of Global Carbon Finance Market from CERs through CDM, the sufficient data is not available presently and is expected by September October, 2012. 9.0 CONCLUSION The value of the global carbon finance market through sale of CERs under Clean Development Mechanisms of Kyoto Protocol have increased from US$ 2634 million in the year 2005 to US$ 32.79 billion in the year 2008. After the boom in 2008, trading volume including secondary CERs declined in 2009, remaining just around 1.26 billion tons. The heavy decline in the prices of primary and secondary CERs caused overall market value to drop more than 39% to US$ 20.22 billion. Further, during the year 2010 the market for CERs from Clean Development Mechanism of Kyoto Protocol decreased a little to US $ 19.80 billion because of decreased volume of CERs transacted. The global economic down turn, regulatory delays and absence of clear policy and regulatory signals beyond 2012 have negatively impacted the CDM market of CERs. The economic down turn caused industrial output and emissions of the industrialized countries to fall in 2009, considerably easing the compliance needs which lead to decreased demand for CERs. On the supply side, origination activities also declined in 2009 as the financial institutions and private investors deleveraged and redirected their position away from risky investments towards safer investments because of financial crisis all around, leading to a major reduction in the capital inflow to developing countries. The complexities and changing nature of regulations at UNFCCC for CDM, inefficiencies in the regulatory chain and capacity bottlenecks caused delays in registration and have negatively impacted the projects. It now takes over three years for the average CDM project to make its way through the regulatory process and issue its first CER. The study also reveals that Carbon finance is facing an uncertain future. Only one year has remained before the end of the first commitment period of the Kyoto Protocol, and the future shape of the international community s commitment against climate change is still unclear affecting investment decisions and slowing the growth of market mechanisms. Carbon market proponents are fast at work ensuring that the Kyoto Protocol s emissions offsetting systems survive longer than the treaty itself. Government of UNFCCC parties are well aware that if they fail to either renew or replace the 1997 global warming agreement by Dec. 31, 2012, a huge part of the global emissions trading regime will be disrupted. World Bank on the other hand is actually leading the effort to guarantee the CDM s survival. It recently announced new funds allocated for post-2012 carbon credit purchases, which are made available to member countries and companies facing reduction requirements. The World Bank has explicitly told the projects it supports that funding will be available to purchase credits well

51 into the post - 2012 period even if the Kyoto Protocol dies and despite the fact that there may be no buyers then. The Bank s Carbon Finance Unit made news when it announced from Washington, D.C., during February, 2011 that it had allocated $147 million to Tranche-2 of its Umbrella Carbon Facility, a fund for purchases of CERs from project backed by the World Bank. These funds have been earmarked specifically for CERs generated from 2013 to 2018. In nutshell it can be concluded that the Kyoto Protocol s CDM has developed overtime into a massive success, much bigger than expected at the time it was conceived. Over 2700 projects have been registered and an equivalent number or more are still in the pipeline. The CDM is successful in enabling the initial flow of capital into abatement projects around the world, and in creating a new mechanism that has led to actual generation of emission reduction credits. In addition to its contribution in meeting greenhouse gases commitments cost effectively, the CDM has generated other noteworthy benefits like raising the climate change awareness worldwide which led to building capacity in developing countries to use carbon finance to support greenhouse gases reductions. The challenge facing the CDM is now related to scaling up the system, post-2012 uncertainty and regulatory continuity. Multitude of delays in registration and in issuance of CERs needs to be addressed. REFERENCES 1. UNFCCC (1998), Text of Kyoto Protocol to UNFCCC, United Nations Framework Convention on Climate Change, Bonn Germany, 1998 <http://unfccc.int/resource/docs/convkp/kpeng.pdf> 2. UNFCCC (2006), Modalities and Procedures for a clean development mechanism as defined in Article 12 of Kyoto Protocol of Report of the Conference of the Parties serving as the meeting of the parties to the Kyoto Protocol on its first session, held at Montreal from 28 November to 10 December 2005, March 30,2006 <http.//cdm.unfccc.int/reference/copmop/ 08a01.pdf.page-6to20> 3. UNFCCC (2008), Kyoto Protocol Reference Manual, November 2008 <http://unfccc.int/resource/docs/publications/08-unfccc_kp_manual.pdf.> 4. World Bank (2008), Climate Change: Guide to the Kyoto Protocol Project Mechanisms, Volume B Second Edition 5. World Bank (2007), State and Trends of the Carbon Market 2007 6. World Bank (2009), State and Trends of the Carbon Market 2009 7. World Bank (2011), State and Trends of the Carbon Market 2011

52 8. CDM-Statistics link of UNFCCC website http://cdm.unfccc.int/statistics/index.html 9. CDM-Advanced search link of UNFCCC website http://cdm.unfccc.int/projects/projsearch.html