Clean Development Mechanism CDM /Carbon Credits

Introduction

Studies on climate change have underscored two points. First that atmospheric commons, namely the Earth’s carbon absorbing capacity, is finite and depletable and that growth of GHG emissions, even at their present level pose a threat to humankind.

Secondly, it has been established that per capita GHG emission is strongly correlated with economic prosperity. Further, it is recognized that without increase in GHG emissions or access to appropriate alternative technology options, developing countries would not be able to pursue their socio-economic goals. Kyoto Protocol is a global cooperative attempt to address both these issues.

Kyoto Protocol
In December 1997, the Third Conference of Parties (COP) to the United Nations Framework Convention on Climate Change (UNFCCC) adopted the Kyoto Protocol. The protocol requires developed countries (listed in Annex 1 of the protocol) to limit their Greenhouse Gas (GHG) emissions to individual targets, resulting in on an average 5.2% reduction in the GHG emission from their 1990 emission levels, in the commitment period 2008-12. The protocol for the first time in the evolving climate change regime, provided for legally binding emission commitments by annex 1 parties. The protocol covers six main Greenhouse gases CO2, CH4, N2O, Hydroflorocarbons, Perflorocarbons and Sulphur Hexafluoride. The protocol provided three Co-Operative Implementation Mechanisms (CIMs) to enhance flexibility and to facilitate development of cost effective means of achieving the targets. These mechanisms are Joint Implementation and Emission Trading, both of which are co-operative mechanisms applicable to Developed Countries (Annex 1 countries) only. Clean Development Mechanism (CDMs) provides for co-operation between Annex 1 countries and non annex 1 (developing) countries. 

Clean Development Mechanisms (CDMs)
CDMs are of particular interest to developing countries, as it provides for investment in projects in developing countries for their sustainable development, while generating GHG abatements that may be transferred to the annex 1 countries towards meeting their targets under Kyoto Protocol. CDMs address, latter of the two realizations discussed at introduction above, pertaining to providing alternative technological options and incentives to developing countries, to pursue their socio-economic goals but with lesser climate change impacts.

The operational mechanism of CDMs involves an investment by a legal entity from an Annex 1 country in a project in Non Annex 1 country, which results in emission reductions. The investment decision would include an agreement between the two parties and their respective countries on the dispensation and transfer of the emission reductions resulting from the project. These emission reductions have to be certified by an appropriate authority (the CDM Executive Board, provided for under the protocol) and then these certified Emission reductions (CERs, commonly known as carbon credits) can be used to meet Annex 1 commitments under Kyoto Protocol.

A project activity will be eligible for consideration as a CDM project if it is aligned with the national needs and priorities and contributes to the sustainable development of the host country. Further, the projects must fulfill the following criteria.
a) Voluntary participation by each party involved i.e it is not driven by any regulatory compliance requirement;
b) Real measurable and long-term benefits related to mitigation of climate change effects.
c) Reduction of emissions that are additional to any that would occur in the absence of the project activity in question i.e. the Sponsor would not have undertaken the project in a business as usual scenario and that in undertaking the project, the sponsor has overcome barriers that may be related to investment, common practice/prevalence or technology or other barriers.
d) The activity must ensure access to environmentally sound technology needed by the developing country.

Broadly, projects that contribute to credible and sustained reduction in GHG emissions qualify as CDM projects. The following broad categories of projects have been recognized as CDM projects.
a) Renewable Energy Projects (Solar Power, Wind Power, Biomass based power,
small hydel etc);
b) Fuel substitution ( e.g. coal to oil to gas to hydrogen in Power Plants, Manufacturing Process Industries, automobiles etc);
c) Energy Efficiency improvement and waste heat utilization projects;
d) Other project activities that reduce anthropogenic emissions by sources;
e) Carbon sequestration projects (Forestry etc.);
f) Management of methane emissions from municipal landfills;
g) Management of methane emissions from agriculture and cattle manure management; and
h) Fuel shift from liquid fuel to CNG/LPG in the transport sector.

The manner of transfer of CERs will depend on the nature of agreement between the contracting parties. Some of the preferred modes adopted in various cases include:
a) Investment by an entity from one of the annex 1 country directly in a project, in lieu of the CERs that are expected to accrue therefrom.
b) The entity enters into agreement to purchase CERs from a developing country entity or access the open market, as and when they are required to meet certain commitments.
c) Many annex 1 governments are floating tenders for procurement of CERs
d) There are multilateral institutions like the World Bank and IFC, who have been engaged by annex 1 country governments and private sector corporations to purchase carbon credits (CERs) on their behalf. The World Bank group has nearly US$ 1.06 billion of such funds for buying CERs. Similarly, there are other funds set up by EBRD, JBIC and some governments.
e) Some of the MNCs and large corporates are themselves buying carbon credits.
f) CDM provides for banking of CERs, wherein the emission reductions prior to 2008 may be banked for use in the commitment period in 2008-12.

Steps in CDM Process
Stage I: Project Design Document (PDD) and Monitoring Plan preparation
The Project Sponsor shall be required to develop a CDM Project Design Document (PDD) for the identified opportunities/candidate projects in the PDD format approved by CDM Executive Board. This would inter alia, address the requirements of the Kyoto Protocol and the CDM Executive Board’s (CDM-EB) procedures. The main tasks, in developing a PDD, would involve:
• Preparatory work – data collection, review of policies;
• General description of the project;
• Delineation of project boundary and identification of leakages;
• Assessment of various baseline methodologies and selection of the most appropriate one. This would also include a scan of approved projects or approved methodology to ascertain if there are approved methodologies which may be directly applied to this project;
• Development of a new baseline methodology, in the event none of the existing approved/proposed baseline methodologies are found appropriate for the project;
• Application of the selected/developed baseline methodology to the project;
• Demonstration of various additionalities for the project;
• Estimation of project GHG emissions and absorption/abatement/avoidance including direct/ indirect onsite/ offsite emissions;
• Assessment of various monitoring and verification (M&V) methodologies and selection of the most appropriate one. This would also include a scan of approved projects or approved methodologies to ascertain if there are approved methodologies which may be applied to this project;
• Development of a new M&V methodology, in the event none of the existing approved/proposed methodologies are found appropriate for the project.
• Estimation of potential streams of CERs.
• Environmental Impact Assessment for the project;
• Local stakeholder consultation;
• Sustainability assessment of the project;

Stage II: Host country approval
Project Sponsor is required to secure a Host Country Approval from the Designated National Authority (DNA) hosted at Ministry of Environment and Forests, GoI. This involves completion of a Project Information Note in the MoEF format and its submission together with the PDD to MoEF. The Project sponsor would be required to make a presentation to the DNA on an appointed date.

Stage III: Validation
Validation is the process of independent evaluation of a project activity by a designated operational entity against the requirements of the CDM on the basis of the project design document. The Project sponsor is required to appoint an independent third party for validation of the project. CDM-EB has approved certain entities e.g. DNV, TUV, SGS etc. as Designated Operating Entity (DOE) for undertaking validation. The Validation process also involves a Public Disclosure of the project for 30 days at the UNFCCC website. This is also organized by the validator.

Stage IV: Approval of Baseline Methodology by CDM –EB/Meth Panel
In the event a new baseline methodology is developed, the same shall be reviewed by the Methodology Panel of UNFCCC/CDM-EB and on its recommendation, approved by CDM – EB. A new baseline methodology should be submitted by the designated operational entity to the Executive Board for review, prior to a validation and submission
for registration of this project activity, with the draft project design document (CDMPDD), including a description of the project and identification of the project participants.

Stage V: Project Registration
Registration is the formal acceptance by the Executive Board of a validated project as a CDM project activity. Registration is the prerequisite for the verification, certification and issuance of CERs related to that project activity. A validated project is required to be
registered with CDM-EB of UNFCCC. This is usually the responsibility of the Designated Operating Entity. The Project sponsor is required to pay a registration fee.

Stage VI: Monitoring and verification
Verification is the periodic independent review and ex post determination by the designated operational entity of the monitored reductions in anthropogenic emissions by sources of greenhouse gases that have occurred as a result of a registered CDM project activity during the verification period. Certification is the written assurance by the designated operational entity that, during a specified time period, a project activity achieved the reductions in anthropogenic emissions by sources of greenhouse gases as verified.

On registration of the project, the Project sponsor is required to appoint one of the DOEs as a verifier. The verifier conducts an audit of the project activity after its commissioning
and its becoming operational, as per the approved monitoring and verification protocol (included in the PDD registered with CDM-EB), to estimate and certify the actual volume
of ERs generated on account of the project activity. The sponsor may appropriately select
a verification cycle i.e. Annual, Half Yearly, Quarterly etc.

Stage VII: Issuance of CERs
The certification report, submitted by the DOE to CDM-EB/Registrar, shall constitute a request for issuance to the Executive Board of CERs equal to the verified amount of reductions of anthropogenic emissions by sources of greenhouse gases. The monitoring and verification entity, after completing the process, submits its report to CDM EB, which constitutes a request for issuance of Certified Emission Reduction (CERs). The CERs are issued as per the allocation plan outlined to the CDM-EB at the time of Project
Registration.