Climate Finance: Regulatory and Funding Strategies for Climate Change and Global Development

Chapter 6 Expectations and Reality of the Clean Development Mechanism: A Climate Finance Instrument between Accusation and Aspirations

Climate Finance 67 Chapter 6 Expectations and Reality of the Clean Development Mechanism A Climate Finance Instrument between Accusation and Aspirations Charlotte Streck Director, Climate Focus Key Points • The CDM has, by many accounts, met its objective in terms of the funds it has leveraged from the private sector to achieve mitigation in developing countries, the capacity it has built, and the awareness it has raised, not to mention the lessons it has provided. • Despite these successes, the CDM has been roundly criticized from many fronts in terms of its governance practices, environmental integrity , and contribution to sustainable development. • The CDM has too much experience and future potential to justify abandoning it in the post-2012 climate framework. Much needed reform , focusing on improving the environmental and administrative credentials of the scheme and an expansion of its scope and scale, will transform the CDM into a truly useful tool for sustainable development and climate policy. Introduction Born in the last hour of the Kyoto Protocol negotiations with modest expectations , the Clean Development Mechanism (CDM) offers a story of 68 Charlotte Streck unprecedented success. By June 2009, the CDM Executive Board (EB) registered more than 1,500 projects that are expected to create 1.6 billion tons of greenhouse gas (GHG) emission reductions by 2013. The CDM has attracted the interest of the private sector in industrialized and developing countries alike and built a global carbon market. The CDM initiated a paradigm shift in support of developing country action under multilateral environmental treaties. In its design, negotiators relied heavily on experience from the Global Environment Facility (GEF) and the Multilateral Fund for the implementation of the Montreal Protocol. They modeled the EB after the Multilateral Fund’s Executive Committee, and introduced the concept of additionality, closely related to the incremental cost principle of the Multilateral Fund and the GEF. At the behest of the US, negotiators however introduced two innovations in the CDM’s design, making its operational character fundamentally different from those of the GEF and the Multilateral Fund: (i) investment was linked to tradable emission certificates; and (ii) private entities authorized by State Parties were invited to participate. By involving markets and private actors, the Kyoto Protocol leveraged significant financial resources for low-carbon investment in developing countries. In 2007 and 2008 alone, the CDM mobilized USD 15 billion in primary transactions in Certified Emissions Reductions credits (CERs). In comparison, the GEF —the single biggest environmental trust fund and financial mechanism for four international environmental conventions—received USD 3.13 billion in August 2006 from 32 donor governments for its operations between 2006 and 2010. Despite these impressive figures, the CDM has not elicited the happiness or pride that one would expect. Instead, it stands in a withering crossfire of criticism. Some complain it funds business-as-usual projects, failing to create real emission reductions. Others assail its governance practices, or claim that its projects are too small to incentivize the more substantive emission reductions needed to shift economies toward a lowcarbon development path. It is simultaneously too small and too ambitious , and it targets the wrong emission reductions or does not deliver them at all. The extent of its success may have contributed to these troubles. The EB and independent verifiers cannot cope with the volume of technically detailed work generated by the flood of projects, and industrialized countries fear that more offsets are produced than their emission trading schemes can absorb, lowering their domestic GHG abatement efforts. Expectations and Reality of the Clean Development Mechanism 69 With less than six months before United Nations Framework Convention on Climate Change (UNFCCC) negotiators convene in Copenhagen to decide on a future climate framework, it is time to evaluate which of the criticisms are valid and which are expressions of general discontent with the Kyoto Protocol or the concept of offsetting. In this brief paper, I assess whether the CDM has met the objectives in Article 12 of the Kyoto Protocol and compare its performance with the expectations about the role of the mechanism and what it can deliver. I conclude with a short proposal of the mechanism’s role in a post-2012 climate framework, and I present a reform agenda to achieve it. Evaluation of Performance The CDM’s purpose according to Article 12.2 of the Kyoto Protocol is twofold: • To assist Parties not included in Annex I to achieve sustainable development and contribute to...