Clean Development Mechanism - An Important Tool to Reduce GHG Emissions
October 26, 2008
The main benefits from the project-based Kyoto mechanisms include the potential reduction in cost of meeting the Kyoto Protocol targets for developed countries and support to the host countries objectives regarding sustainable development. Under this mechanism, countries which have set themselves an emission reduction target under the Kyoto Protocol can contribute to the financing of projects in developing countries which do not have a reduction target. The project should reduce the emission of greenhouse gases by contributing to the sustainable development of the host country. The achieved emission reductions can be used by the industrialized country to meet its reduction target. There are two basic types of CDM projects:
- Renewable energy projects which promote a transition from carbon-intensive to less carbon intensive fuels, and
- Projects which enhance the efficiency of energy systems.
Figure 1: Country-wise distribution of CDM emission reductions, as per Kyoto Protocol
In order to calculate the amount of carbon emission reductions for these projects, it is necessary to compare emissions with those in a baseline scenario representing the situation that would have occurred in absence of the project activity. For example, the baseline scenario for a biomass project could be a coal-fired power plant. The certified emission reductions would then be calculated as the difference in emissions between the baseline (gas-fired power plant) and the project (biomass-based electricity). The sectors and source categories of GHG emissions listed in the Kyoto Protocol includes energy, waste, industrial processes and agriculture.
The mechanism allows emission-reduction projects in developing countries to earn CER credits, each equivalent to one tons of carbon dioxide. The mechanism stimulates sustainable development and emission reductions, while giving industrialized countries some flexibility in how they meet their emission reduction limitation targets. For example, a company in India switches from natural gas to biomass for power generation. The CDM Executive Board certifies that by doing this the company has reduced carbon dioxide emissions by 400,000 tons per year which is equivalent to as many CER credits. Under the Kyoto Protocol, the United Kingdom has to reduce its green house gas emissions by 1 million tons of carbon dioxide each year. If it purchases 400,000 credits from the Indian company, this target reduces to 600,000 tons per year making the goal easier to achieve.
There are several options for the investor to achieve the return of CDM investments:
- Sale of CER credits to other companies or governments in international markets
- Use of CER credits for offsetting emissions of own operations outside the CDM host country that are regulated by climate policies.
- Saving of CER credits for future use.
CDM Project Process – A Summary
1. Outline of the Project
An industrialized country which wants to get credits from a CDM project should obtain the consent of the developing country hosting the project regarding the sustainability of the project. Then, using methodologies approved by the CDM Executive Board, the applicant (the industrialized country) should establish a baseline estimating the future emissions in absence of the registered project. The case is then validated by a third party agency, called a Designated Operational Entity (DOE), to ensure the project results in real, measurable, and long-term emission reductions. The Executive Board then decides on approval of the project. If a project is registered and implemented, the Board issues CER credits to project participants based on the monitored difference between the baseline and the actual emissions, verified by the DOE.
According to the Kyoto Protocol, a CDM project is additional if "anthropogenic emissions of greenhouse gases by sources are reduced below those that would have occurred in the absence of the registered CDM project activity." To avoid giving credits to projects that would have happened anyway, rules have been specified to ensure the project reduces emissions more than would have occurred in the absence of the project. This implies that GHG emission reduction achieved by a project must be sufficiently additional, compared to an estimation of GHG emission in the absence of the project. A large amount of GHGs are emitted directly and indirectly through urban activities. Since there will be significant population growth and increases of energy consumption per capita in urban areas of developing countries, GHG emission will increase. CDM projects are expected to promote the reduction of such GHG emission.
A baseline for a CDM project gives the greenhouse gases emissions that would have occurred in the absence of the proposed CDM project activity. The baseline may be estimated through reference to emissions from similar activities and technologies in the same country or other countries, or to actual emissions prior to project implementation.
Figure 2: A schematic of the CDM Project Mechanism
There can be three approaches to establishing baselines:
- Existing actual or historical emissions, as applicable
- Emission from a technology that represents an economically attractive course of action, taking into account barriers to investment
- Average emissions of similar project activities undertaken in the previous five years, in similar social, economic, environmental and technological circumstances, and whose performance is among the top 20 per cent of their category. At present, each project put forwards its own baseline, depending on the location of its operation, laws applicable to it and other factors. Projects, however, can borrow methodologies from other projects to develop a baseline.
Any proposed CDM project has to use an approved baseline and monitoring methodology to be validated, approved and registered. Baseline Methodology will set steps to determine the baseline within certain applicability conditions whilst monitoring methodology will set specific steps to determine monitoring parameters, quality assurance and equipment to be used, in order to obtain data to calculate the emission reductions.
Conclusion The majority of the CDM projects till date have focused on individual unit technology such as:
- Increase in efficiency of existing steel plants, thermal power plants or oil refineries,
- Replacement of coal with natural gas for power generation,
- Introduction and promotion of renewable energy for power generation and industrial heating.