The Kyoto Mechanisms in Action

The Kyoto Protocol's flexibility mechanisms link countries that have a shared interest in creating projects to reduce greenhouse gas emissions—harnessing industrial countries' interest in investing in lower-cost efficiency projects overseas and pairing that with developing countries' interest in receiving financing and cleaner technologies. International carbon finance flows to developing countries could climb as high as $100 billion a year in coming decades, according to U.N. estimates, roughly equivalent to total spending on foreign aid in 2006.25

Investments in project-based transactions funded through the Clean Development Mechanism and Joint Implementation have grown rapidly since the protocol's flexibility mechanisms became operational. Since 2002, CDM credits worth 920 million tons of CO2 equivalent have been generated—equal to one fifth of the EU's total emissions in 2004. In 2006 alone, CDM projects led to certified emissions reductions (CERs) of 475 million tons of carbon dioxide equivalent, with a total value of more than $4 billion. Joint Implementation projects have gotten off to a slower start. Nonetheless, 16 million tons of CO2 equivalent were transacted through JI

in 2006, worth $141 million.26

Since the creation of CDM credits began in 2002, China has registered 118 projects, accounting for the highest share of expected CERs (75.4 million, 45 percent of the global total). While India has registered the most projects (282), these projects are expected to generate 27.8 million CERs (about 17 percent of the global total). China's domination of the CDM market is expected to continue: adding up all the CDM projects that are in the process of being verified and registered, it is expected that by 2012 China will generate almost 53 percent of all CERs and India will be home to 16 percent. (See Figure 7-2.)27

By contrast, Latin America as a whole has only registered 290 CDM projects worth 33.6 million CERs, and sub-Saharan Africa has issued 13 projects worth 3.8 million CERs (just 2.3 percent of the global total). Though there are 33 sub-Saharan African CDM projects now in the pipeline, they are expected to account for about the same low percentage of the global total by 2012.28

Despite Africa's opportunities to gain outside investment for sustainable development through the Kyoto mechanisms, the continent has thus far received an abysmally low share of CDM investment. To counteract this worrying trend, six U.N. agencies have formed the Nairobi Framework, an initiative aimed at improving CDM implementation in Africa by building the capacity of countries in the region to develop and implement projects.29 The largest volume share of CDM projects to date involves "fugitive emissions"—that is, those that trap and dispose of fuel emissions, halocarbons, and sulfur hexafluoride. Projects that destroy the greenhouse gas HFC-23 (a potent byproduct created during the manufacturing of a class of refrigerant gases known as HCFCs) have generated the largest share of CDM credits to date, accounting

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Figure 7-2. Distribution of CDM Credits Expected 2002-12, for All Projects in Pipeline

Figure 7-2. Distribution of CDM Credits Expected 2002-12, for All Projects in Pipeline

for 50 percent of all issued credits.30

There are significant concerns about these projects, however, including that the lure of earning CDM credits has created a perverse incentive for countries to produce more HCFCs than they would otherwise, despite the fact that HCFCs are both an ozone-depleting substance and a greenhouse gas. An added problem is the high price of buying these credits relative to directly subsidizing needed technology. By one estimate, installing the equipment needed to eliminate HFC-23 emissions at the 17 remaining refrigerator plants producing HFC-23 in developing countries would cost only $142 million— $6.5 billion less than purchasing CDM credits generated by capturing the HFC-23.31

In any event, a decline in new HFC-23 projects in 2007 suggests that these opportunities have largely been exploited. A shift is under way toward other projects, including energy efficiency, hydroelectric, and methane capture from landfills. (See Figure 7-3 and Table 7-2.)32

In 2001, the parties to the Kyoto Proto col agreed that countries could work toward their emissions targets by encouraging carbon sequestration in vegetation and soil through forest management, cropland management, grazing land management, and revegetation. Now the CDM is beginning to approve projects from the sector known as LULUCF, for land use, land use change, and forestry. This sector includes projects started since 1990 that focus on afforestation (planting new trees) or reforestation (planting replacement trees).33

Despite their potentially important role in stabilizing the climate, forestry and land use projects have been tightly restricted under CDM rules. As of September 2007 one project was registered—a reforestation project in China's Pearl River Basin. (Eleven other forestry projects, in seven countries, were being evaluated.) The World Bank is seeking to expand forestry and agriculture project funding through its BioCarbon Fund and its new Forest Carbon Partnership Facility, with the aim of helping countries gain credits by protecting existing forests—a concept known as "avoided deforestation." Although countries cannot yet generate credits through this approach, it is likely that avoided deforestation will be included under the CDM in the future.34

Voluntary standards are now being developed to help guide the LULUCF sector in the future and to maximize the benefits of forestry projects. The Climate, Community and Biodiversity Alliance (CCB) is a group of

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Figure 7-3. Sources of CDM Credits Expected 2002-12, for All Projects in Pipeline

Figure 7-3. Sources of CDM Credits Expected 2002-12, for All Projects in Pipeline

Afforestation and reforestation (0.3%)

Agriculture (2.0%)

Afforestation and reforestation (0.3%)

Agriculture (2.0%)

Source: UNEP

12 companies and nonprofit organizations that are working together to implement standards for carbon ventures. Projects must meet 15 standards—addressing land tenure, community impacts, and biodiversity impacts, among others—in order to be certified. They may earn additional points if they satisfy 8 other standards, on issues like capacity building, adapting to climate change, and native species use. Both CDM and voluntary market projects can earn CCB certification.35

With Joint Implementation projects, energy projects dominate the overall portfolio in both number and overall volume. Between 2003 and 2006, energy projects accounted for nearly two thirds of the volume of JI projects, with energy efficiency and projects switching from carbon-intensive fuels to renewable energy accounting for 28 percent of the total, biomass for 13 percent, wind energy for 12 percent, and hydroelectric projects for 8 percent. Projects financed through JI are predominately located in Eastern Europe, with Ukraine accounting for the largest volume between 2003 and 2006 (21

percent). Russia (19 percent) and Bulgaria (18 percent) are also home to many JI pro-jects.36

European buyers lead both the CDM and JI markets, with 86 percent market share. This reflects the fact that the European Union is party to the Kyoto Protocol and can use emissions credits purchased under the CDM and JI to meet its emissions reductions targets.37

Elaborate rules governing the CDM and Joint Implementation have been painstakingly negotiated among the parties to the Kyoto Protocol over the last several years to ensure that projects meet key quality-oriented criteria. For example, in order to be approved a project must be certified to be "additional"—in other words, that it would not have taken place if the CDM did not exist. A second requirement relates to a concept known as leakage: businesses and governments proposing CDM projects must show that they are not simply shifting activities from one place to another.38 Although these requirements were created with the best of intentions, they have led to some unanticipated problems. One difficulty has been that the transaction costs associated with the CDM are so high that only large projects can absorb them. It typically costs $50,000-250,000 to shepherd a project through the approval process—or on average some 14-22 percent of the projected revenue from the sale of the carbon credits. This is a particular obstacle for the world's poorest countries, such as those in Africa,

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Table 7-2. Selected Clean Development Mechanism and Joint Implementation Projects

Authorized

Participants

Other Parties

GHG Reductions

Description

(tons of CO2 equiv. per year)

Clean Development Mechanism

Reforestation for Guangxi watershed management in Pearl River Basin

China:

Xinghuan

Forestry

Development

Company

BioCarbon Fund, IBRD Italy Spain

25,795

First forestry project registered under CDM; 4,000 hectares of new forest will sequester carbon, conserve soil and water, and generate revenue for local farmers from sale of CDM credits.

BRT Bogotá, TransMilenio Phase II to IV

Colombia:

TransMilenio

S.A.

Netherlands: Corporación Andina de Fomento

246,563

First transportation project to be registered under CDM; a Bus Rapid Transit system will increase efficiency of public transportation.

Lawley Fuel Switch Project

South Africa: Corobrik

Netherlands: Statkraft Markets BV

19,159

Corobrik's Lawley brick factory located in Gauteng province of South Africa will switch from using coal to natural gas.

Osório Wind Power Plant Project

Brazil:Ventos do Sul Energia

Spain: Enerfin Enervento S.A.

148,325

The wind power complex, the largest in Latin America, will generate 150 megawatts, enough power to meet the needs of 650,000 residents.

where potentially eligible projects tend to be smaller in scale and thus less able to afford the high transaction costs. However, the World Bank and private brokers are working to aggregate smaller projects and reduce transaction costs. Africa also stands to benefit from the expected future inclusion of more LULUCF projects.39

The CDM has been criticized for lax oversight on its rules. For the first several years of operation, every project proposed was approved. Since then, there has been tighter scrutiny by the CDM Executive Board, and some projects have been rejected. In August 2007, for example, a large gas-capture project slated for Equatorial Guinea was turned down on the grounds that it was unclear that the project would not have happened anyway—meaning the project developers may have been trying to cash in on what was in fact business as usual.40

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