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Questions & Answers*
You will find several questions and answers that will hopefully cover your comment/enquiry. If not, please use the 'contact us' section and we will be happy to answer any query you may have. 1. What is the Climate Change Convention? The United Nations Framework Convention on Climate Change – UNFCCC was agreed at the United Nations Conference on Environment and Development (UNCED) in Rio de Janeiro, 1992. This agreement aims at the stabilization of greenhouse gases in the atmosphere, at a level that would prevent dangerous changes to the climate. So all countries have the commitment to address the climate change problem, but the countries are divided into two groups with different level of commitments: Annex I parties and non-Annex I parties. There are also Parties included in Annex II which were members of the OECD in 1992, of which there are currently 24, and have a special obligation to provide “new and additional financial resources” to developing countries to help them to tackle climate change.
2. What is the Kyoto Protocol? It is a Protocol to the UNFCCC adopted at the COP 3 in Kyoto, Japan in 1997. The Protocol sets binding commitments by 39 developed countries and economies in transition, listed in Annex B, to reduce their GHG emissions by an average of 5.2 per cent on 1990 levels (the first commitment period, 2008 - 2012).
3. What is the difference between Annex I and Annex B parties? The UNFCCC divides countries in two main groups: Annex I parties that include the industrialized countries and countries with “economies in transition” / EITs (the Russian Federation, the Baltic States and several other Central and Eastern European countries). All the others are called non-Annex I countries. The Kyoto Protocol strengthens the Convention by committing Annex I Parties to individual, legally binding targets to limit or reduce their GHG emissions. The individual targets for Annex I Parties are listed in the Kyoto Protocol’s Annex B. In practice, Annex I of the Convention and Annex B of the Kyoto Protocol are used almost interchangeably. However, strictly speaking, it is the Annex I countries which can invest in CDM projects and non-Annex I countries can host CDM projects.
4. What are the Kyoto mechanisms? Because mitigations costs would be high for Annex I parties, the Kyoto Protocol also establishes flexible mechanisms that can be used to achieve the objectives of the convention in a cost-effective and flexible way. These are Emissions Trading (ET), Joint Implementation (JI), and the Clean Development Mechanism (CDM).
5. What is the difference between CDM, JI and AIJ? The Clean Development Mechanism (CDM) and Joint Implementation (JI) differ with respect to the target nations. The CDM targets non-Annex I countries, while JI concerns only Annex I countries. A more important distinction arising from this issue is that CDM generates additional emissions reduction credits, as non-Annex I nations are not subject to emission caps, while JI only results in the exchange of allowances between two developed economies. In Activities Implemented Jointly (AIJ) no allowance banking is permitted, as AIJ represents a prototype or pilot phase of both CDM and JI. Consequently AIJ projects can be carried out either among industrialized countries or between Annex I and non- Annex I nations.
6. How does the CDM concept work? Annex I countries that have ratified the Kyoto Protocol can invest in projects that both reduce GHGs and contribute to sustainable development in non-Annex I countries. A CDM project provides certified emissions reductions (CERs) to Annex I countries, which they can use to meet their GHG reduction commitments under the Kyoto Protocol. Article 12 of the Kyoto Protocol sets out three goals for the CDM: i) To help mitigate climate change; ii) To assist Annex I countries attain their emission reduction commitments, and iii) To assist developing countries in achieving sustainable development.
7. What kind of GHGs are the targets for emission reductions? In addition to contribute towards sustainable development, CDM project candidates looking for approval under the CDM must lead to real, measurable reductions in greenhouse gas emissions, or lead to the measurable absorption (or “sequestration”) of GHGs in a developing country. The six GHGs and gas classes coming from varied sources of the economy are: carbon dioxide – CO2 (source: fossil fuel combustion; deforestation; agriculture); methane – CH4 (source: agriculture; land use change; biomass burning; landfills); nitrous oxide – N2O (source: fossil fuel combustion; industrial; agriculture); hydrofluorocarbons – HFCs (source: industrial/manufacturing); perfluorocarbons – PFCs (source: industrial/manufacturing); sulphur hexafluoride – SF6 (source: electricity transmission; manufacturing).
8. What is a CDM project baseline? The baseline for a CDM project is the scenario used to show the trend of anthropogenic GHG emissions that would occur in the absence of the proposed CDM project. The baseline basically shows what would be the future GHG emissions without the CDM project intervention. Each CDM project has to develop its own baseline. Once a baseline methodology has been approved by the Executive Board, other projects can use it too. For small-scale projects, guidance is provided on standard baselines.
9. What is additionality in CDM projects? GHG emissions from a CDM project activity must be reduced below those that would have occurred in the absence of the project. It must be shown that the project would not have been implemented without the CDM. Without this “additionality” requirement, there is no guarantee that CDM projects will create incremental GHG emissions reductions equivalent to those that would have been made in Annex I countries, or play a role in the ultimate objective of stabilizing atmospheric GHG concentrations.
10. Why is additionality important? CERs generated by CDM projects that are used by Annex 1 countries to meet their Kyoto targets allow emissions in these countries to rise. Therefore if CERs are awarded to activities that would happen without the CDM project, i.e. for reductions that would occur anyway, Annex 1 emissions are allowed to rise without a corresponding cut elsewhere, thereby raising global emissions. The only winners are the buyers of cheap credits, because host countries do not receive new investment and climate change is not being mitigated.
11. What is the project boundary? The project boundary defines the area within which emissions reductions or sequestration occurs. Emissions reductions must occur on the project site or “upstream” from the project. For example, in projects that reduce electricity consumption through efficiency or fuel substitution in a region where power is produced from fossil fuels, the emissions reductions occur upstream at the power plant.
12. What is “Leakage”? Leakage refers to any GHG emissions that occur outside of the project boundary, as a result of the project.
13. Who can implement CDM projects? CDM projects can be implemented through non-profit, public and private partnerships, including the participation of local communities and groups where the projects take place. However since the CDM is a market-based mechanism it was designed precisely with the private sector in mind, and it is within this sector that emissions cuts will be made and traded. The private sector is also the recipient of increasing investment flows that can be coupled with CDM projects.
14. Why is the CDM important for developing countries? CDM projects assist developing countries to achieve sustainable development. Industrialized countries have developed domestic policies to comply with the Kyoto Protocol. This has led to a growing demand for carbon credits. Developing countries may supply such carbon credits. While many factors influence the size and stability of the global market, facts indicate that this market would move billions of dollars a year, increasing foreign investment capital flow in developing countries. In this context, the CDM projects offer many opportunities for various actors: Actor Reason for participation Developing country Promote sustainable development through investment Developed country Meet Kyoto Protocol commitments at low costs Non-governmental organizations Promote environment and development Corporations Offset emissions; investment opportunity Niche company Commercial opportunity; diffuse technology Industry associations New opportunities for members Brokers Commercial opportunity Development banks Promote sustainable development; create new markets Institutional investors Portfolio diversification; socially responsible investing Source: Baumert et al. 2000.
15. What are the requirements to participate in the CDM projects? Participation in a CDM activity is possible only if participating countries are parties to the Kyoto Protocol. Countries also need to designate a National Authority for the CDM in order to participate, which should be situated so that it can effectively coordinate the agencies responsible for setting sustainability policies, environmental and investment regulations, and the organizations involved in CDM project development. In this context, developing countries need to define the sustainable development criteria. The success of CDM projects in developing countries will depend on the institutional and policy environment in which they operate. Additional to the above two conditions, Annex I countries must have a system for tracking greenhouse gas emissions and sinks and a registry; submitted a GHG inventory, and be in compliance with its target. See paragraphs 28-34 of the Marrakech Accords.
16. What sectors may qualify for CDM projects? According to the Kyoto Protocol, investments in various sectors of non-Annex I countries may qualify for CDM credits Sector Source Category Energy Fuel combustion: energy industries; manufacturing industries and construction; transport; other sectors. Fugitive emissions from fuels: solid fuels; oil and natural gas; other Industrial processes Mineral products; chemical industry; metal production; other production; production and consumption of halocarbons and sulphur hexaflouride; other Solvent and other product use Agriculture enteric fermentation; manure management; rice cultivation; agricultural soils; prescribed burning of savannas; filed burning of agricultural residues; other Waste Solid waste disposal on land; wastewater handling; waste Incineration; other Land-use, land-use change, and forestry Afforestation; reforestation; avoided deforestation for thermal energy in small-scale projects Source: Kyoto Protocol, Annex A.
17. Who will administer CDM projects internationally and domestically? Internationally, the Conference of the Parties serving as the meeting of the Parties to the Kyoto Protocol (COP/MOP) shall have authority over and provide guidance to the CDM. The COP/MOP is autonomous from COP, and the Meeting of Parties establishes the CDM Executive Board at the international level. The first meeting of the COP/MOP will take place after the Kyoto Protocol enters into force. Domestically, Parties participating in the CDM establish the CDM Designated National Authority for approving CDM projects. Furthermore, a Designated Operational Entity – DOE, which is either a domestic legal entity or an international organization accredited and designated, on a provisional basis until confirmed by the COP/MOP. The Executive Board (EB) has two key functions: to validate and subsequently to request registration of a proposed CDM project activity, which will be considered valid after 8 weeks if no request for review was made; and, to verify emission reduction of a registered CDM project activity, certifying as appropriate and requesting the Board to issue Certified Emission Reductions accordingly.
18. What are carbon dioxide equivalents (CO2-eq)? CO2-eq provides a universal standard of measurement against which the impacts of releasing (or avoiding the release of) different greenhouse gases can be evaluated. Every greenhouse gas has a Global Warming Potential (GWP), a measurement of the impact that particular gas has on “radiative forcing”, i.e., the additional heat/energy that is retained in the Earth’s ecosystem through the addition of this gas to the atmosphere. The GWP of a given gas describes its effect on climate change relative to a similar amount of carbon dioxide and is divided into a three-part “time horizon” of twenty, one hundred, and five hundred years. As the base unit, carbon dioxide numeric is 1.0 across each time horizon. This allows the greenhouse gases regulated under the Kyoto Protocol to be converted to the common unit of CO2-eq.
19. Can CDM Credits be traded? CERs earned from CDM projects may be exchanged with other corporations or national governments. A company that has earned CERs may also choose to bank them so they can be traded in post Kyoto commitments. This is a useful strategy if the company does not require the credits in the current period and anticipates an increase in their market value.
20. How will the global CDM market develop? The future of the global market will depend largely on the demand for CDM projects from companies and countries in the north. Without the USA participating in the Kyoto CDM market (although it may set up a parallel market on its own) the demand is likely to be substantially constrained, reducing capital available for the development of these projects. Furthermore, developing countries that are looking to the CDM market to promote both inward investments and sustainable development projects, will judge the market not just by how many CDM projects it is able to generate but also by how many countries have been able to benefit. If only a few developing countries benefit, then it may be difficult for the rest of the developing countries to agree to further extensions of the CDM concept in future commitment periods.
21. How Much Are CERs Worth? The international market for CERs and other Kyoto credit units has yet to be established. However, trading monitored by carbon brokers (e.g. CO2e.com) report current price of emissions reduction credits in existing carbon markets between US$3/t CO2 and US$5/t CO2. The expected market price of CERs, which might be generated from a CDM project, would dictate the project developer decision in soliciting carbon financing through the CDM or not. It will also dictate the CER purchaser determination to provide carbon financing or not. For example, it would not be worthwhile to invest in a CDM project at a cost of US$20/t CO2 if credits can be purchased on the market for less than US$10/t, or emissions can be reduced domestically for US$15/t.
22. Can CDM secure project funding partly (e.g. incremental cost) or on full basis? The CDM contribution will strictly depend on the expected results in terms of emission reductions (expected CERs subject to verification and certification). One can assume CDM contribution being within 5 and 20% of the total investments. But we can imagine higher contributions if a project has higher performance in terms of emission reductions
23. What are the generic disbursement modalities of the CER allocation? Generically, the CDM market should follow the same rules as any other market based goods: the donor purchases the CERs that are supposed to be available immediately. The payment is made accordingly. The most obvious modality is to make disbursements at the end of the year, after emission reductions are certified. For the time being, the CDM market is not yet in place, and is determined by a few institutional pilot initiatives (PCF, CERUPT, etc.). These initiatives include some flexible modalities aimed at encouraging the project implementation (e.g. possibility to get advance instalment to support investment).
24. Will companies based in countries that have not ratified the Kyoto Protocol be allowed to trade in carbon credits to meet their domestic targets? According to Section 33 of the Marrakech Accords private or public entities in countries that are not parties to the Kyoto Protocol will not be allowed to be involved in CDM projects. Such entities must be authorised by their country. There is still a lot of debate, however, if the Marrakech Accords leaves room for such private or public entities to engage in trading of carbon credits accruing from CDM projects.
25. What is the Gold Standard? The Gold Standard is an independent best practice benchmark for CDM (Clean Development Mechanism) and JI (Joint Implementation) greenhouse gas offset projects. It provides project developers with a tool to ensure that the CDM and JI deliver credible projects with real environmental benefits and, in so doing, confidence to host countries and the public that projects represent new and additional investments in sustainable energy services. It sets out a code of best practice on many issues in the PDD and incorporates a small number of extra screens necessary to deliver real contributions to sustainable development in host countries plus long-term benefits to the climate. Projects are restricted to investments in renewable energy and end-use energy efficiency and must demonstrate clear additionality, use of conservative baselines and significant contribution to sustainable development on the basis of open and transparent stakeholder consultation.
26. Are there any risks involved in CDM projects? CDM projects are essentially similar to other conventional project investments. The major difference between conventional projects and CDM projects is that with CDM projects there are conditions of GHG emission reduction and sustainable development. As such investments risks are basically the same one would face in other project investments. However, the additional risk in CDM projects would be elements that may result in absence of GHG emission reduction, and hence non-issuance of CERs.
27. Who will be responsible for monitoring GHG emission reductions of a CDM project? Monitoring will be the responsibility of the project developers. Before the project can be registered with the Executive Board, a monitoring plan must be drawn up. The project developers will have the responsibility of ensuring that their project result in the reduction of GHG emission and monitoring this according to the plan. The monitoring results will be verified by a Designated Operational Entity (similar to an audit for GHG emissions).
28. Will there be any penalty for failure to meet the sustainable development criteria? It is not stipulated anywhere that CER will not be issued due to failure to meet sustainable development criteria. It will therefore be up to the host country to ensure that elements of sustainable development in the project documents are well documented and clear at the very beginning of the project. If there are serious concerns, these could be raised with the designated operational entity (para. 62.g), but project developers merely have to “address the concerns”.
29. How can a host country define whether a CDM project will be conducive to sustainable development? Each country defines its own criteria for sustainable development. The host country can check for Sustainable Development using a matrix developed in accordance with their development requirements and priorities.
30. What is the procedure for issuing a certificate and by whom? For the certificates to be issued, a request must be submitted to the EB by the DOE which verifies the monitored reductions in emissions. The DOE will produce a verification report and then certify the amount of CERs generated by the CDM project. The EB issues the CERs to the project partners within 15 days after the date of receipt of the request for issuance. Certification is a written assurance by the DOE that, during a specified time period, a project activity achieved the reductions in anthropogenic emissions by sources of GHGs as verified. The DOE shall inform the project participants, Parties involved and the EB of its certification decision in writing immediately upon completion of the certification process and make the certification report publicly available. The certification report shall constitute a request to the EB for issuance of CERs equal to the verified amount of reductions of anthropogenic emissions of GHGs. Unless a project participant or three Executive Board members request a review within 15 days, the Executive Board will instruct the CDM registry to issue the CERs. The CDM Registry being developed by the UNFCCC Secretariat will keep track of all issuances of CERs. When the EB has issued the CERs they are placed in a pending account in the CDM Registry. From here the CERs will move to the Party’s legal entity’s account according to a split specified in the request from project participant.
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