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An analysis of the relationship between the additionality of CDM projects and their contribution to sustainable development

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Abstract

The Clean Development Mechanism (CDM) allows industrialised countries to use credits from greenhouse gas abatement projects in developing countries in order to fulfil their own emission reduction commitments. There has been mounting evidence that the CDM’s ability to fulfil its goals as stipulated by the Kyoto Protocol—contributing to the sustainable development of the host countries and delivering real, measurable and additional emission reductions—is less than satisfactory. In this article, an evaluation is made of CDM projects’ likelihood of being additional by assessing the impact Certified Emission Reductions have on the Internal Rate of Return of the individual projects. In addition, the projects’ sustainable development benefits are assessed by using a multi-criteria analysis. In a final step, the relationship between the projects’ additionality and sustainability contribution is assessed and a trade-off between these two CDM goals is established, revealing a potential inherent conflict in how the current mechanism works. The analysis is based on a systematic evaluation of 40 registered CDM projects in India.

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Notes

  1. For an overview on the research on CDM projects’ contribution to sustainability, see Olsen (2007).

  2. HFC-23 (trifluoromethane) is produced as a byproduct in the manufacturing process of HCFC-22, which is a gas used as a refrigerant. HFC-23 is one of the most harming greenhouse gases with a global warming potential that is 11,700 times that of carbon dioxide (CO2). HFC-23 projects capture and decompose HFC-23 that would otherwise be released to the atmosphere in the course of the HCFC-22 production.

  3. The Gold Standard was introduced by a group of NGOs and establishes additional criteria (especially related to sustainable development, but also for the determination of additionality) for the approval of CDM projects and sale of Certified Emission Reductions. Projects that are granted the Gold Standard status are rewarded for their efforts by an ability to obtain higher CER prices.

  4. Marrakesh Accords (Decision 17/COP 7).

  5. UNFCCC (2002): CMP.1 Art.43.

  6. Own calculation based on the CDM pipeline overview provided by UNEP Risoe: http://uneprisoe.org/.

  7. These PDDs, with related annexes and appendices, can be found on the homepage of the UNFCCC: see http://cdm.unfccc.int/Projects/projsearch.html.

  8. For an overview, see Olsen and Fenhann (2008).

  9. For a further discussion about weighting of the criteria, see Olsen and Fenhann (2008)

  10. For a discussion of the concept of ‘weak sustainability’, see Daly (1996). The application of ‘weak sustainability’, which is implied by an aggregate approach, is an established practice in the field (cf. Olsen and Fenhann 2008; Cosbey et al. 2006).

  11. The yield on investment required to make a project viable depends on many factors, including the country risk, the sector risk, the technology risk, etc. However, many PPDs arrive at financial benchmarks of around 10% for the weighted average cost of capital.

  12. Relevant stakeholders are defined as “(…) the public, including individuals, groups or communities affected or likely to be affected, by the proposed CDM project activity or actions leading to the implementation of such an activity” (UNFCCC 2008a, b: 28).

  13. Comments can always be given in the commenting period through the UNFCCC site, but here we evaluate only to what extent the project developers facilitate such participation.

  14. The data is based on a large sample survey on household consumer expenditure in 2004–2005 conducted by the National Sample Survey Organisation (NSSO) of the Ministry of Statistics and Programme Implementation.

  15. Certified Emission Reductions are so-called carbon credits, which place an economic value on the emission reductions achieved by CDM projects.

  16. A sensitivity analysis with higher and lower CER prices as well as shorter and longer crediting periods was conducted, which showed that the results hold against reasonable variations of CER prices and time scales for crediting.

  17. HFC-23 projects have no economic benefits other than CERs and, thus, an infinitely large CER impact, which causes the project to be proven likely additional. 30% is accorded to these projects in the study. This number is arbitrary, but was chosen, because it is larger than the values for the other projects. Thus, a graphical representation of the project type and a comparison with the other project types are enabled.

  18. We decided not to integrate the size of the IRR without income from CERs in the final analyses, although this figure can also be understood as an indicator for the likelihood that the project is additional. Applying two indicators for the probability of additionality could be confusing and using only one indicator—the change of IRR—seems more transparent. As it can not be said with complete certainty whether a project is additional or not and only the probability of such additionality can be assessed for both possible indicators, we used the change of IRR to be in line with studies that have evaluated this issue before (Michaelowa 2009; Sutter and Parreño 2007; Schneider 2007).

  19. For a more elaborate discussion of the results and the methodology please contact the authors for the unpublished extended project report.

  20. The PDDs are checked and validated by DOEs (Designated Operational Entities), which in theory should help avoid an exaggeratedly positive description of the sustainable development benefits of the project. However, the real independence of such companies has been called into question under the current CDM rules governing their behaviour. They act in a highly competitive market and are under unexpressed pressure to positively evaluate projects, as other project developers are inclined to choose validators that have not raised many critical issues on other projects in the past (Schneider 2007).

  21. The DOEs are organisations accredited by the Executive Board to validate proposed CDM projects as well as to verify emission reductions of registered CDM projects.

  22. According to Wara and Victor (2008), the information level required in order to establish defensible conclusions for CDM project approval is currently very high, as are the transaction costs involved in gathering the information. At the same time, the incentives for project developers to provide accurate information are weak.

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Authors and Affiliations

  1. Burgherrenstraße 7, 12101, Berlin, Germany

    Johannes Alexeew, Linda Bergset, Kristin Meyer, Juliane Petersen, Lambert Schneider & Charlotte Unger

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  1. Johannes Alexeew
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  2. Linda Bergset
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  3. Kristin Meyer
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  5. Lambert Schneider
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Correspondence to Linda Bergset.

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Alexeew, J., Bergset, L., Meyer, K. et al. An analysis of the relationship between the additionality of CDM projects and their contribution to sustainable development. Int Environ Agreements 10, 233–248 (2010). https://doi.org/10.1007/s10784-010-9121-y

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