What’s Clean Development Mechanism?
The Clean Development Mechanism (CDM) is an incentive policy framework designed to reduce the amount of greenhouse gas emissions.
CDM is one of the flexible mechanisms defined in the Kyoto Protocol (IPCC, 2007).
The CDM allows emission-reduction projects in developing countries to earn certified emission reduction (CER) credits, each equivalent to one tonne of CO2. These CERs can be traded and sold, and used by industrialized countries to a meet a part of their emission reduction targets.
The goal of this mechanism is to stimulate sustainable development and emission reductions, while giving industrialized countries some flexibility in how they meet their emission reduction limitation targets. The theory is that such a framework is ideally suited to reducing carbon emissions that come from almost all forms of economic activity and mix into the atmosphere with global effect.
The CDM rewards emissions reductions, but does not penalize emission increases. It therefore comes close to being an emissions reduction subsidy. The CDM gained momentum in 2005 after the Kyoto Protocol took effect.
In practice, CDM allows industrialized countries to buy CERs and to invest in emission reductions where it is cheapest globally. The economic basis for including developing countries in efforts to reduce emissions is that emission cuts are thought to be less expensive in developing countries than developed countries. Thus, it is widely thought that there is greater potential for developing countries to reduce their emissions than developed countries.
Between 2001, which was the first year CDM projects could be registered, and 7 September 2012, the CDM issued 1 billion Certified Emission Reduction units. The one billion cumulative CERs reached by September 2012 comprised over 4500 projects. 60% of these CERs originated from projects in China. India, the Republic of Korea, and Brazil came next in order and were issued with 15%, 9% and 7% respectively of the total CERs.
However, the first stage of the Kyoto Protocol expired end of 2012 , and the CDM market has taken a nosedive since then. Carbon prices, including prices for CERs, collapsed from $20/tonne in August 2008 to below $5 in Sep 2012. And by October 2012, it had fallen to a new low of 1.36 euros/ton (about $1.5). In December 2012, the CER prices reached another record low of just 31 euro cents!
It is fairly obvious that it is difficult to maintain a healthy price for CERs without a clear mandate that compels emitter businesses to buy them.
A more recent scheme, based on similar concepts, was launched by the European Union, and called the EUs’ ETS (Emission Trading System). It has a price hovering around 7 euros/ton of CO2 emitted. This is still considered very low – a price of 30 Euros per certificate is what is considered as an attractive price to incentivise companies to cut down their emissions.
