CDM—nothing more than an illusion

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: The Clean Development Mechanism (CDM) is one of the three carbon trading mechanisms available under the Kyoto Protocol.

CDM was hailed as a win-win situation with promises of technology transfer, FDI flows and money through carbon trading. In turn, all that was required to be done in keeping with the principle of ‘common but differentiated responsibilities’ was to take affirmative action in deploying technologies that were either carbon neutral or released less quantity of greenhouse gases than the business-as-usual scenario, termed climate change technologies.

The additional cost burden associated with the deployment of such technologies was to be more than offset by the promises already alluded to.

However, CDM activity has not picked up as the initial euphoria has faded away with hard facts gradually coming to the surface.

With the US failing to ratify the Kyoto Protocol, the carbon demand has shrunk by about 48% and now exists mainly in the European Union and Japan. This reduced demand gets further constricted through EU and Japan’s respective positions in regard to emission reduction commitments being effected mainly through domestic action. This has led to low certified emission reduction (CER) price.

On top of that, some countries have demonstrated their desire to purchase CERs on behalf of their domestic industry, thus practising some form of cartelisation. Such moves on the part of these countries appear to be against the very sprit of the Kyoto Protocol that recognises CDM as a market related instrument.

Further, the supply side is sought to be regulated through a rigorous procedure laid down by the CDM Executive Board. In addition, a significant portion of CER revenue is required to be spent on transaction costs that include validation, review and registration of projects. Therefore, net gains from a CDM project activity in terms of CER money are not significant and not even equivalent to 1-2 percentage points of the CDM project cost, whereas the need to make such projects competitive is atleast 20-fold.