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The Clean Development Mechanism

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Under the Kyoto Protocol, most developed countries have agreed to limit or reduce their emissions of greenhouse gases. To help reach these goals, there are a number of market-based mechanisms based on carbon trading. Among these mechanisms, and key to the MDG Carbon Facility, are Clean Development Mechanism (CDM) and Joint Implementation (JI) projects, which permit project-based carbon trading between countries and organizations.

Renewable energy projects, such as wind energy, are an example of a CDM project that reduces or avoids the emissions of greenhouse gases in developing countries.

The basis for the CDM and JI mechanisms is that greenhouse gases’ impact on global climate change does not depend on their source. Reducing a tonne of carbon dioxide emissions in Africa has the same beneficial impact on the climate as reducing a tonne in Europe. Therefore, CDM offers developing countries the opportunity to use their comparative advantage in emissions reduction: their cost to reduce emissions is generally lower than that of developed countries.

A CDM project reduces or avoids the emission of greenhouse gases in a developing country. Examples of such projects include:

Renewable energy, such as wind, hydroelectric or solar;

Biomass residues, such as utilizing bagasse for electricity generation in a sugar factory;

Energy efficiency measures, such as the introduction of compact fluorescent light bulbs or more efficient cookstoves; and

Waste management practices, such as capturing methane emissions from wastewater treatment plants.

Project proponents, who may be private-sector companies, public-sector bodies, utilities or non-governmental organizations, can initiate these projects.

For every tonne of greenhouse gas reduced by an emission reduction project, it is awarded a carbon credit, or Certified Emission Reduction (CER). CERs can be sold, creating a hard currency revenue stream. The size of this revenue stream varies, but can be anywhere from tens of thousands to tens of millions of US dollars per year.

The CER revenue stream adds to a project’s other revenue streams. For example, electricity sales are the primary revenue stream of a hydro-power project. By adding to these revenue streams, a CDM project enhances the economics of ‘clean’ projects and provides an incentive for similar projects.

The CDM project cycle

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The CDM has been designed to incorporate a rigorous project cycle. To develop a CDM project, the following regulatory steps occur in the project cycle:

Design of the CDM project and preparation of necessary project documentation, including the Project Design Document;

Obtain approval from the host country’s Designated National Authority;

Receive validation by the Designated Operational Entity (DOE) and registration of that project with the CDM Executive Board;

Establish monitoring of the project’s emission reductions;

Complete verification and certification of the project’s emission reductions by the DOE;

Receive CERs by the CDM Executive Board.

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	CDM PROJECT ACTIVITY CYCLE
	Design	Project Proponent (PP)
	Validation/registration	Designated Operational Entity (DOE)
	Validation/registration	Executive Board (EB)
	Monitoring	Project Proponent (PP)
	Verification/certification	Designated Operational Entity (DOE)
	Issuance	Executive Board (EB)
	Issuance	Certified Emission Reduction (CER)

The CDM project cycle is further detailed at the Web site of the United Nations Framework Convention on Climate Change. VISIT UNFCCC >

How MDG Carbon Facility services support emission reduction projects is detailed in FACILITY SERVICES >

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CALCULATING EMISSION REDUCTIONS

Determining emission reductions under the CDM

The CDM is a project-based system where carbon credits (CERs) are issued according to the difference between the 'baseline' amount and the CDM-reduced amount — the amount of greenhouse gas emissions the project has reduced relative to the amount that would have occurred had the CDM project not been implemented.

The baseline is defined as “the scenario that reasonably represents the anthropogenic emissions by sources of greenhouse gases that would occur in the absence of the proposed project activity” . The formula for determining the number of CERs generated by the project is:

CERs = Baseline emissions – (Project Emissions + Leakage)

The baseline is, of course, hypothetical — a best guess of what the future would have looked like without the CDM project. To ensure that CERs claimed by a project represent real emission reductions, baseline calculations are conservative and transparent — the project proponent must make all assumptions and formulae explicit in the Project Design Document.

The number of CERs a project generates depends on the nature of the project and the gases involved. Because different greenhouse gases have different effects on the climate, emission reductions of a CDM project are converted into 'carbon dioxide equivalence' (CO2e).

To convert greenhouse gas reductions into CO2e, multiply the tonnes of gas reduced by the 100-year Global Warming Potential (GWP) for the gas. For example, methane has a GWP of 21 — meaning that a project that reduces 100 tonnes of methane can claim 2,100 CERs. TOP >