Unilateral CDM—can developing countries finance generation of greenhouse gas emission credits on their own?

Original Paper
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Abstract

The Clean Development Mechanism (CDM) was originally seen as an instrument with a bi- or multilateral character where an entity or fund from an industrialised country invests in a project in a developing country. The sluggish implementation of incentives for industrialised country companies to embark on CDM projects and low carbon prices led to a preference for just buying Certified Emission Reductions (CERs) instead of investing in projects. Thus a third option has gained prominence—the unilateral option where the project development is planned and financed within the developing country. We propose that a project should be called “pure unilateral” if it involves no foreign direct investment (FDI), only has the approval of the Designated National Authority (DNA) of the host country and sells its CERs after certification directly to an industrialised country. Unilateral projects can become attractive if the host country risk premium for foreign investors is high despite a high human, institutional and infrastructural capacity and domestic capital availability. Moreover, transaction costs can be reduced compared to foreign investments that have to overcome bureaucratic hurdles. On the other hand, technology transfer is likely to be lower, capacity building has to be undertaken by the host country and all risks have to be carried by host country entities. The potential to carry out unilateral CDM projects strongly varies among host countries. Whereas several countries from Asia and Latin America can design and implement projects autonomously, most of the Sub-Saharan countries rely on foreign support. International donors of capacity building grants should increasingly address those countries that are not presently focused on by foreign investors and support them in the design of local projects.

Keywords

Clean Development Mechanism Unilateral Institutions Project participants Financing Risk premium 

List of abbreviations

AAUs

Assigned Amount Units

CDM

Clean Development Mechanism

CERs

Certified Emission Reductions

COP

Conference of the Parties

DNA

Designated National Authority

DOE

Designated Operational Entity

ERPA

Emission Reduction Purchase Agreement

ERUs

Emission Reduction Units

PDD

Project Design Document

UNFCCC

UN Framework Convention on Climate Change

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Notes

Acknowledgement

We would like to thank the Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) for financing this paper through the Climate Protection Programme (CaPP).

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Copyright information

© Springer Science+Business Media B.V. 2006

Authors and Affiliations

  1. 1.Zurich UniversityGockhausenSwitzerland

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