NGO "ANOTHER WAY" (STICHTING BAKENS VERZET), NETHERLANDS, SUSTAINABLE INTEGRATED SELF-FINANCING DEVELOPMENT PROJECTS AND ADVANCED DEVELOPMENT TECHNOLOGIES

For a critical general analysis of carbon trading see : Kill, J. et al, Trading Carbon : How it Works and Why it is Controversial, FERN, www.fern.org, Moreton in Marsh and Brussels, August, 2010. ISBN 978-1-907707-10-4.

01. Introduction.

A "certified emission reduction" or "CER" is a unit representing one ton of carbon dioxide-equivalent (CO₂-e) sequestered or abated, using global warming potentials defined by 2/CP.3. CERs are issued to project participants in Clean Development Mechanism (CDM) projects under Article 12 of the Kyoto Protocol and the prescribed CDM modalities and procedures (3/CMP.1, Annex, paragraph 1(b)).The value of CERs varies sharply over time. Prices on 14^th November 2009 were about € 14 per tonne.

The main source for information on the Clean Development Mechanism (CDM) is the CDM website of the United Nations Framework Convention on Climate Change (UNFCCC). Many will find the Rulebook : Clean Development Mechanisms Rules, Practices and Procedures developed by Baker and McKenzie for the www.cdmrulebook.org website easier to navigate. The Baker and McKenzie rulebook includes an A-Z index of key words which is easy to consult. The www.cdmrulebook.org site is not, however, complete. For instance, it says what a Designated Operational Entity (DOE) is, but does not provide a list of approved DOEs. The list of DOEs can instead be found at the UNFCCC site. There are currently 48 of them. Most of them are based in industrialised countries, though there are some in “emerging” countries too. Designated Operational Entities (DOEs) intermediate between the people proposing a project and the CDM Executive Board which approves it. They evaluate and validate initial project applications and carry out periodic inspection and certification activities ensuring on-going compliance with the CDM conditions. Most of these DOEs are large international institutions which in practice may complicate or facilitate procedures. Project proponents depend on their decisions. Furthermore, if the issuing organ (in the case of CDM projects, the Executive Board) makes an arbitrary decision either with regard to registration or to issuance of certificates, applicants have no remedy. In December 2010 there was still no CDM appellate body to handle appeals against the decisions of the CDM Executive Board. A preliminary discussion on this issue took place during the UNFCCC meeting in Cancun (Mexico), December 2010. (See also Newell P., et al, Pursuing Clean Energy Equitably, United Nations Development Programme (UNDP) Human Development Reports Research Paper 2011/03., New York, 2011, Section 2.5 (Distribution of carbon market finance) pp. 26-33 and Section 3.2 (Carbon market institutions) pp. 40-44.)

Click here to see a diagram of the basic CDM structures, with explanations. The CDM Executive Board has 20 members. 10 of them are nominated by the members of the Kyoto Protocol, 1 by each of the 5 regional United Nations groupings, 2 by annex 1 members (industrialised countries), 2 by non annex 1 members (other and developing countries) and 1 by small island developing states. The present chairman is Jamaican. The present deputy-chairman is English.

Recently introduced Programmes of Activities (PoA) appear to offer greater potential for CDM financing of integrated development projects in developing countries. A programme of activities defines parameters for CDM activities to be included in the programme. It is a sort of convention. Once registered by the CDM Executive Board, the PoA applies to activities brought under it from time to time without the need for project by project applications. For more information refer to : Beaurain F., Schmidt-Traub G, Developing CDM Programmes of Activities : A Guidebook, South Pole Carbon Asset Management Ltd, Zurich, 2010.

Click here to see how this might work on a sub-continental scale in developing countries. In the example, a sub-regional authority is the “owner” of the Programme of Activities which forms an integrated part of its development policy and that of the individual countries the authority represents. The programme is run by a consortium of leading NGOs represented throughout the sub-region. This consortium is responsible for the operation of the programme and for the sale of CER emission certificates. On behalf of the project owner it collects CER emission funds and distributes them either to the sub-regional authority itself in repayment of the initial project funding or to the cooperatives responsible for the on-going management of the structures created in each individual integrated development project area. Its activities are controlled and audited by a DOE (Designated Operating Entity) which acts on behalf of the Clean Development Mechanisms (CDM) Executive Board (EB).

02. Limitations of Clean Development Mechanism (CDM) applications under the Kyoto Protocol.

Clean Development Mechanism (CDM) projects are used to replace or improve on current energy consumption. If there is no current energy consumption in a given project area it cannot be replaced or reduced. Some industrialised countries (these countries are listed in Annex I to the United Nations Framework Convention on Climate Change (UNFCCC)) currently use up to 50 times more energy per inhabitant than poor countries. In principle, the more the energy used, the greater the opportunities for using it more efficiently. The CDM mechanism applies to projects in so-called “host” countries which are the ones not listed in Annex I. Emerging economies such as Brazil, China, India and Mexico are also host countries. They use less energy per head of population than the industrialised countries but much more, especially in areas of relatively high industrialisation, than the least developed countries, where very little energy is used. There is for the time being no practical limit to the amount of energy savings possible from the introduction of energy savings and more ecological energy resources in the larger emerging economies. So most of the CDM projects which have been approved so far are in those countries. In contrast, the introduction of energy efficiency measures in least developed countries is covered under the Kyoto Protocol only for the replacement of, for example, a few kerosene lamps and batteries and the introduction of more efficient means of cooking. This means the entire CDM mechanism is biased to the advantage of a few larger emerging economies, though it is unlikely this will ever be openly admitted.

“If absorptive capacity [of developing countries in respect of technology transfer] is low then it is difficult to adopt (and adapt, develop, design) new technological hardware; and to create the skills, knowledge, organisational changes, and institutional arrangements and linkages necessary to facilitate its sustainability. ” (Byrne R. et al, Energy Pathways in Low-Carbon Development: From Technology Transfer to Socio-Technical Transformation, STEPS Working Paper 46, Brighton: STEPS Centre, 2011 ISBN 978-1-78118-000-6, p.23). The authors continue : “……the CDM takes a very narrow framing of the transfer of technology, and as a result has no system that encourages or fosters technological capability building and self reinforcing low-carbon development processes. Consequently, any low-carbon development that does occur is more the result of good fortune than of framing or strategy. ” (p. 25). “….certain conceptions of low carbon development, which are less oriented around the needs of indigenous firms and households in developing countries, are sustained by the dominant hardware financing policy approach.” (p. 26).

“….green investment is almost entirely dependent on subsidies, protectionism and debt-financing.” (Quilligan, J.B. , Interest Rates and Climate change : Realigning our Incentives through the Power of the Commons, Kosmos, Vol. X, Number 1, Fall/winter 2010, p. 31, Kosmos Associates, Lenox, 2010.)

“… green economics will lead to a net transfer of wealth from debtors to entrepreneurs, investors and bankers.” (Quilligan, J.B. above, p. 27)

“The global commons are not being exploited merely because nature’s services are underpriced in the market, but because they are being propertized, commodified, susidized and subjected to interest-bearing debt. The carbon price simply perpetuates the myth that property rights and debt-based financing can solve our environmental and social problems, even while the interest-generating structure of the market system undermines its own resource base and is ultimately unsustainable.” (Quilligan, J.B. , above, p. 27)

“So, in terms of green financing, it is not only the carbon price that is problematic : the financial and monetary mechanism of interest compounding through time will not support a self-renewing atmosphere. Conversely, the carbon bubble is also a banking bubble : state capitalism will not sustain its monetary reserve value by continually multiplying the debt of a planet whose biological, chemical and physical resources are constantly being withdrawn. The compulsion for endless economic growth is smothering this planet. By continually inflating financial assets through the expansion of private and public debt and the relentless conversion of our commons into money, we are borrowing time from the biosphere – and time is literally running out.” (Quilligan J.B., above, p. 30)

The use of the Kyoto protocol as a potential source for the funding of integrated development projects was foreseen in the Model for Integrated Development from the moment the Protocol came into force. Lip service to the possibility of financing small-scale CO2 savings projects in the least developed countries under the Kyoto protocol was finally raised at official level after several years of operation of the Protocol. Basic indications for official small-scale methodologies for cook-stove emissions reductions were, for instance, introduced at the end of 2009. The first commitment period of the Protocol is to expire in 2012 and the preparation of project submissions and their approval usually takes two years. The extension to coverage of small-scale projects such as cook-stoves projects benefiting the world’s poor came so late that the use of the Protocol for this purpose before the close of the commitment period will probably be limited. Methods of application still had to be “developed”. Monitoring was made so complex as to be virtually impossible to carry out at all. The compliance costs and costs of monitoring were set so high in proportion to the value of the CO2 savings that the number of applications to the CDM executive board would in any case be extremely limited. The complexity of bundling small scale projects within the framework of single CDM applications procedures appears to be such that the only players to profit from the initiative are the international consultants paid to propose rules for them. As for Programmes of Activity (PoA), “As of November 2010, after EB meeting 57, a total of 54 PoAs were under validation and 5 were registered.” (Beaurain and Schmidt-Traub, op.cit., p. 17).

Another problem with the CDM system is that it is business- rather than development-oriented. With the exception of sectors 14 and 15 in the following list, it is not clear how projects for the improvement of the quality of life of the poor in developing countries are intended to fit into the system. The industrial bias built into most of the 15 designated sectors speaks for itself :

01. Energy industries.

02. Energy distribution.

03. Energy demand.

04. Manufacturing industries.

05. Chemical industries.

06. Construction.

07. Transport.

08. Mining/mineral production.

09. Metal production.

10. Fugitive emissions from fuels (solid, oil, and gas).

11. Fugitive emissions from production and consumption of halocarbons and sulphur hexafluoride.

12. Solvent use.

13. Waste handling and disposal.

14. Afforestation and reforestation.

15. Agriculture.

The CDM system is also fraud-sensitive :

“[Europol states that] Carbon credit carousel fraud in the EU ETS resulted in losses of about 5 billion Euros in 2008-2009 and is estimated to account for 90% of carbon trading volume in some countries.” (Silverstein D., A method to finance a global climate fund with a harmonized carbon tax”, Munich University, MPRA paper 27121, 03 December, 2010). The ETS system is not directly linked to the CDM mechanism, but the use and abuse of CDM funding has been the subject of similar criticism.

One theoretical advantage for projects in the least developed countries (LDCs) (according to their status on the date of the publication of the request for issuance) is that LDCs were exempted from the payment of registration and adaptation fees at the third meeting of the Conference of the Parties (COP) (2/CMP.3, page 13, par. 31) . Many of those countries have not been involved in CDM projects under the Kyoto Protocol at all. Other compliance and monitoring costs are still, however, payable.

02 Approval of projects by the Designated National Authority (DNA).

Each duly prepared CDM project has to receive a letter of approval from a Designated National Authority (DNA) confirming that the project activity contributes to the sustainable development of the host country concerned. The DNA for any given country can be found at the list of designated national authorities at the website of the United Nations Framework Convention on Climate Change. Note that on 9^th November 2010, 130 of the 151 non-annex 1 countries that have ratified the Kyoto Protocol had less than 10 CDM applications. Of these, 50 countries had 1-9 projects, 53 countries with a DNA office had had no applications, and 27 countries had no DNA office at all. This may indicate a lack of local expertise and understanding of the complex CDM structures. It may also reflect a belief that the CDM structures were set up more in the interests of the industrialised countries than in those of the poor countries, that there was “little in them” for the world’s poor. This report may give developing countries hope that ways of effectively applying the CDM structure to their benefit can be found.