Clean Development Mechanism

Every little bit helps

Replacing old refrigerators or light bulbs with new ones, distributing low-carbon cooking stoves, composting household waste – it all contributes to mitigating the impact of climate change. And it contributes to reducing poverty in developing countries. In 2007, the Clean Development Mechanism (CDM) of the UN Framework Convention on Climate Change (UNFCCC) started to issue carbon certificates for projects of this kind, creating new opportunities for businesses in emissions trading. Unfortunately, the procedures are still too bureaucratic and cumbersome. They require further development.

By Nicola Ursina Blum, Christina Gradl and Anna Santa Cruz

In Brazil, the food producer Sadia works with more than 3500 small-scale swine farmers in its value chain to avoid methane emissions from waste. New biodigesters turn the pork farm waste into biofertiliser, fish food and a renewable source of energy. Achievements like this are certified by the CDM. The proceeds from the sale of the carbon credits cover Sadia’s administrative expenses and provide additional income to the farmers.

The CDM was established as part of the UNFCCC Kyoto Protocol. It is meant to allow companies from rich nations to meet some of their own reduction obligations by investing in emission-reducing projects in the developing world. The idea is to transfer up-to-date technology to developing countries and to improve the standards of life there at the same time.

The CDM has been criticised, how­ever, because at first its operations were mostly limited to certifying large-scale projects, which reduce lots of emissions, but do not do much in terms of improving peoples daily lives. The vast majority of CDM projects, moreover, has so far been implemented in newly industrialising countries, not in least developed countries (LDCs). Of the 3,245 CDM projects registered in June 2011, 72.4 % were taking place in China, India or Brazil. Only one per cent of classical CDM projects are being implemented in LDCs.

To enable smaller emission reductions to qualify for carbon credit certificates, the CDM introduced the so called Programme of Activities (PoA). The PoA makes it possible to bundle small schemes. That is what Sadia did in Brazil. Its venture is one of 92 registered PoA projects, 11 % of which are based in LDCs.

In principle, even the smallest measures can now be certified in a relevant way thanks to the PoA. The first PoA project ever registered, CUIDEMOS, is a good example. It distributed 30 million energy-­efficient light bulbs to Mexican households. As a result, CO2 emissions were reduced by 7.5 million tonnes – and the households benefit from a long-lasting alternative to obsolete technology. They also benefit from lower electricity bills of course.

Opportunities for least developed countries

The PoA offers people in developing countries – and especially in LDCs – a wide range of opportunities to participate in emissions trading. For example, small entrepreneurs can offer low carbon products at attractive prices because the proceeds from PoA certificates help them to cover their own costs. Consumers, on the other hand, benefit from “green” innovations such as solar-charged lamps or improved cooking stoves. Farmers can generate additional income by employing emission-reducing methods, while producing their own energy resources and fertilisers at the same time.

The PoA takes account of the LDCs’ economic situation. Funding for big projects is typically hard to get in LDCs. On the other hand, lots of small and dispersed projects can reach large numbers of people. Daniel Farchy of C-Quest Capital, a US company that specialises in climate projects, says that LDCs have a large number of households that can profit from PoA schemes, though they do not have the kind of major industrial installations that the CDM basically targeted in the past.

In theory, PoA projects can even be bundled across national borders. A PoA project could thus run in a country with solid CDM experience such as India or Brazil and simultaneously in a neighbouring country without such experience. That way, knowledge transfer and exchange of experience could act as an engine for development in LDCs.

Critics object that the proceeds from carbon certificates go to the company that manages a PoA project. Whether – and to what extent – grassroots actors get a share of the profit cannot be precisely verified in most cases so far. However, projects like CUIDEMOS or the Sadia biowaste scheme have published details on their operations and the advantages for local participants. At present, however, it would be too expensive to distribute carbon revenues directly to ground-level actors.

The PoA faces more and greater challenges. One of the first requirements for registering a PoA programme is an accepted methodology of calculating the emission reductions. At present, there is no such methodologies for many sectors that are of particular relevance in LDCs, such as agriculture, transport or construction. Developing new methodologies to calculate emissions is expensive, and there is no guarantee that a new solution will actually be accepted. This is an area where development agencies, which have a long history of relevant work, should become active.

Another huge challenge is simplifying the highly complex and expensive bureaucracy that, in itself, makes PoA projects risky and costly. Ole Meier-Hahn, the co-founder of the German consultancy Bridge Builders, says the high upfront investment costs for PoA projects stand in the way of involving financially weaker actors. To reduce carbon emissions through a multitude of small-scale measures takes a long time, and there is no revenue at first. Substantial CDM incomes simply cannot be generated fast. For most practical pur­poses, this means that economically weak actors are excluded. De-bureaucratising the PoA process would help – and so would smart financing models, as some development banks already offer.

At present, the bureaucratic procedures tend to exceed the capacities of local actors, and that is particularly true of LDCs. In most of them, even the national government lacks the necessary institutions and expertise. In the private sector, moreover, there are far too few proficient service-providers that might maintain technical equipment required and carry out inspections.

Things do not have to be this way, says Felicity Creighton Spors, a CDM consultant for the World Bank. In her view, Uganda has a great coordination and management unit which is locally managed and based on local ideas. South-South exchange should contribute to transferring successful models to other countries. Especially China, India and Brazil should share their vast CDM experience.

It is a special challenge to monitor PoA projects. Where classical CDM projects only require the inspection of a single facility, a PoA scheme can involve a million cook stoves in private households. On top of that, the use of energy-efficient household appliances is almost impossible to verify. The amount of time needed for spot-checking alone would be enormous, especially in rural areas. Automatic monitoring devices and mobile data transmission would help – but they come at a price. In the medium term, private sector companies should provide monitoring and inspection services at the local level. In this field too, development agencies could make a difference.

Sensible steps

To encourage actors to address the challenges listed so far, coherent incentive systems and simpler standards procedures would certainly help. The UNFCCC should reward programmes that promise particularly good results for poor people. Otherwise, the PoA is unlikely to live up to its full poverty-reducing potential. The UNFCCC’s existing Gold Standard would be a suitable vehicle for such a reward system. It is awarded to CDM projects with special environmental or social merit, thus facilitating additional revenue. However, such programmes should earn distinctions in early phases of design and registration – not only once they are up and running and selling carbon certificates.

Simpler standards would similarly mitigate disproportionately high monitoring costs. At present, separate emission reduction reports are required for every single energy-efficient light bulb and every single refrigerator. If one used standardised average reduction values per item, things would be much easier. Carbon certificates could be issued when items are sold, so start-up funding would become less of a challenge.

The PoA offers important opportunities for climate protection and development. The course is set for people in poverty to get a share of emissions-trading profits. But the mechanism is still young and it certainly needs fine-tuning.

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