The Clean Development Mechanism: Opportunity or Loophole?

Article by Stuart Parkinson, SGR, from SGR Newsletter, no 20 (spring 2000), p7-9

The Clean Development Mechanism (CDM) was one of the international policy instruments agreed as part of the Kyoto Protocol in 1997 to aid in the net reduction of global greenhouse gas emissions. It is one of a group of ‘flexibility mechanisms’ introduced in order to help reduce the cost of emissions reduction measures. It is these flexibility mechanisms, and the CDM in particular, that are the most controversial aspects of the Kyoto Protocol.

Proponents argue that only through the use of these mechanisms can the cost of greenhouse gas (GHG) abatement be brought down to levels acceptable to society. Further, they argue, flexibility mechanisms can be used to facilitate the transfer of environmentally friendly technology to poorer countries. Opponents argue that they allow industrialised countries to maintain high (and unsustainable) levels of emissions at home, and that technology transfer will simply follow the exploitative routes of global trade. Further, they argue that the complexities of the various mechanisms will lead to loopholes, meaning that reductions in GHG emissions will not, in fact, be ‘real’. It is these issues with which this article will deal.


First of all, however, I should give some definitions. Under the Kyoto Protocol, there are three flexibility mechanisms. The first is International Emissions Trading (IET, Article 17). This is where fractions of each country’s emissions target can be bought and sold. Economic theory dictates that countries with high costs of emissions abatement will save money by buying extra ‘credits’ from countries with low costs. Since only industrialised countries (including former Eastern Bloc countries) have emissions targets under the Kyoto Protocol, only they can take part in IET. The final two mechanisms also follow this rationale of economic efficiency. Joint Implementation (JI, Article 6) is where ‘donor’ countries can fund individual projects which lead to emissions abatement in ‘host’ countries in return for credits. The CDM (Article 12) is very similar except for two differences:

  • JI can take place only between industrialised countries (ie where both have targets), whereas the CDM takes place between industrialised and developing countries; and
  • the CDM must contribute towards sustainable development in the host developing country.


It is useful to briefly look at the historical development of the CDM and the other flexibility mechanisms in order to appreciate why they were included.

The roots of these instruments lie in the wording of UN Framework Convention on Climate Change agreed at the Earth Summit in 1992. Article 3.3 states that ‘policies and measures to deal with climate change should… ensure global benefits at the lowest possible cost.’ Hence, cost-efficiency was agreed as a criterion for action.

The next critical point came when the ‘Berlin Mandate’ was agreed in 1995. This committed industrialised countries to taking on emissions targets first. The justification was on the grounds of equity: that climate change is mainly due to the historical actions of industrialised countries and, since they are richer, they should act first. The Berlin Mandate also started an ‘Activities Implemented Jointly’ (AIJ) pilot phase, which was the pre-cursor to JI and the CDM.

As the negotiations progressed towards Kyoto, the USA argued that cost-efficiency combined with emissions targets for industrialised nations meant that measures such as IET and JI had to be included. Further, their Senate called for ‘meaningful participation by developing countries’ over fears of negative economic effects. This meant that a mechanism which allowed for action in developing countries (what eventually became the CDM) was a condition of US agreement. In return, the US agreed to have a ‘demanding’ target (7% cut from 1990 levels).

Despite the reservations of many developing countries and outright opposition from most environmental groups, the USA got their way and these measures were included in the Kyoto Protocol.


But that is not the end of the story. The details of exactly how the mechanisms would work was not agreed at Kyoto. These details were left for a later date. And it is in agreeing these details that many of the problems of the CDM need to be addressed.

The main criticisms that I look at in this article are:

  • emissions reduction from CDM projects will not be real, since they will be measured against unmeasurable and arbitrary ‘baselines’;
  • the trade priorities of the ‘donor’ (industrialised) countries will dominate the needs of the ‘host’ (developing) countries;
  • the criterion that CDM projects should ‘contribute to sustainable development’ will be fudged;
  • inclusion of ‘sink’ projects (eg forestry) in the CDM will undermine efforts to reduce emissions;
  • unethical projects (eg nuclear power) will be funded;
  • provisions for ‘early crediting’ of CDM projects will ‘relax’ emissions targets.

1. Emissions Reduction will not be ‘real’

In order to calculate the number of credits to award a project under the CDM (or JI), an estimation of the ‘baseline’ of the project must be made. This is a projection of the emissions ‘if the project had not been carried out’. Obviously this can never be measured, and so the environmental lobby has argued that such reductions are speculative. They further point out that there is an incentive to ‘talk up’ the baseline for both the donor country (who would get more credits from a high emissions baseline) and the host country (who would attract more investment if large numbers of credits are available from their CDM projects). Many economists, on the other hand, argue that by the use of techno-economic models such emissions can be estimated with reasonable accuracy. So who is right?

To date, there has been little research to estimate the uncertainty in baselines for the CDM. The main exception is work undertaken by myself and colleagues co-ordinated at the University of Surrey (Begg et al, 1999). We estimated that the uncertainty associated with the total emissions reduction (over the technical lifetime) from projects in the energy sector is at least +/-45% and often more: an order of magnitude higher than that from measurement alone. Further, we concluded that use of techno-economic models could not significantly improve on this due to high uncertainty in the data and assumptions on which such models are based. For example, these models depend on accurate projections of economic growth rate, fuel prices, technology costs: which are all very uncertain. Further, they assume that markets are working efficiently, something that is highly questionable in developing countries.

So are the environmentalists right? Well, not entirely. There are a number of measures that can be taken to deal with or reduce the uncertainty.

Obviously it is easier to estimate what the CDM project will displace one year after it begins operation than after twenty years. The uncertainty grows with time, leading to the high uncertainty over the 20-25y technical lifetime of the average energy supply project. Hence, the most important measure is to only issue credits for a fraction of the projects’ technical lifetime. Hence the project should have a ‘limited crediting lifetime’.

The second measure is the standardisation of baselines for particular project types, countries etc. Such standardisation would prevent project partners ‘talking up’ the baselines in their favour. It could be carried out by having independent researchers assessing a pilot project of a given type/ country (eg solar pv in Kenya) and then estimating a conservative baseline based on an estimate of the range of reasonable baselines in that case. The baseline would then be used for all projects in that category.

If certain CDM projects are particularly uncertain, eg forestry, then ‘partial crediting’ could be used. This involves only issuing credits for a fraction of the emissions reduction calculated.

2. The CDM will maintain the trade dominance of industrialised countries

It has been argued that flexibility mechanisms will allow greater flexibility for industrialised countries but less flexibility for developing nations. And it is easy to see that, if it is left to the industrialised world to implement CDM projects, it is likely that this will happen.

The obvious conclusion is that it is developing countries that should control how the CDM works for them. Since it is a condition of the CDM that all projects should be approved by the host country, some control already exists. However, it need not stop there. Host countries could be pro-active by specifying which types of projects they would like to see donors propose. Or they could conduct an assessment of their current development projects, identify which contribute towards GHG emissions abatement and seek funding for an expansion of those programmes. For example, Kenya has a successful development programme supplying fuel-efficient wood burning stoves to the poor. Not only could this be expanded through funding from the CDM, but it could be modified to provide greater benefits. For example, if the project involved sustainable forestry, not only would the emissions reduction be higher, but there would be other benefits such as the prevention of soil erosion.

And this is not just idealistic theory. Costa Rica has been applying these ideas in practice. During the AIJ pilot phase, it has obtained funding for a series of renewable energy projects (mainly wind) that contribute to its drive to phase out fossil fuels. Moreover, it has attracted funding for forestry protection projects to help expand its national parks. It has been very careful to ensure projects are in its national interest, and often has undertaken the projects itself using the overseas funding.

3. Contributing to Sustainable Development?

Since ‘sustainable development’ is a widely used but ill-defined term, the insistence that CDM projects should contribute to it could simply be dismissed as ‘greenwash’. However, here lies an opportunity to ensure that CDM projects really do offer an alternative to conventional development.

Through the use of simple ‘sustainability indicators’, developed for each project type, thorough assessment of CDM projects could be carried out. And if host country officials, local community and environmental groups were involved, both in the development of the indicators and their application, projects would truly be positive for local people and the environment.

Clearly, it is important that such assessment is not so bureaucratic or time-consuming that it kills off good projects, but at same time is not reduced to a rubber-stamping exercise.

4. Sink projects will undermine emissions reduction

One of the loudest arguments from the environmental lobby has been that ‘sink projects’ such as forestry should not be included, either in national inventories of GHG activities or as CDM projects (see Forestry article, p11). The main rationale has been that industrialised countries will fund such projects instead of moving towards a lifestyle that is less dependent of fossil fuel combustion.

While there is a lot of truth in such statements, there is also the issue that large-scale deforestation in developing countries is a huge problem, not only in terms of CO2 emissions, but also in terms of biodiversity loss and soil erosion etc. A major reason for such loss is the lack of value placed on standing forests compared with the value of the land if it is used, eg, for timber or beef production. Whilst the underlying problem here is the uncontrolled globalisation of the economy, by allowing the CDM to fund forestry projects, protection could be provided much quicker than through negotiations at the World Trade Organisation (although this avenue must not be neglected). And given the rate of destruction, this speed is essential.

But, of course, emissions reduction must not be neglected. Hence, limits should be placed on the degree to which sink projects could contribute to emissions targets, so that technological innovation and lifestyle changes in industrialised countries will still occur.

5. Unethical projects will be funded

Of course, there exist projects which, although they may contribute to reductions of GHG emissions, would not be considered acceptable on other grounds. A particular example is nuclear power. Whether it is fears over the proliferation of nuclear weapons, concerns about reactor safety, or safe disposal of waste, it is clear that nuclear power is not acceptable for the CDM. And if the criterion of ‘contributing to sustainable development’ is properly applied, such projects would not be approved.

However, the USA has been pressing for no restrictions on project types under the CDM, and speculation is rife that one of the reasons why their Senate refused to ratify the recent Test Ban treaty is so that they could sell nuclear power through the CDM.

6. Early crediting will relax emissions targets

One little discussed issue concerning the CDM is the loophole of ‘early crediting’. Under Article 12.10 of the Kyoto Protocol, CDM projects will qualify for credits from 2000. The justification for this is that incentives must be provided for action before the target period (2008-2012). However, this leads to the situation where extra emissions reduction action is rewarded, but inaction is not penalised. Analysis of this situation leads to the conclusion that the emissions targets in the Kyoto Protocol will be ‘relaxed’. One estimate for the USA (Parkinson et al, 1999) puts the relaxation at 2%, ie from the stated target of -7% to   -5%. Partial crediting is a way of dealing with this problem.


It is clear that the Clean Development Mechanism has the potential both to undermine GHG emissions reduction efforts or enhance them. Which it does will depend on the operating details and many of these are due to be worked out at the next round of climate negotiations in The Hague in November 2000. It is essential that proper safeguards, like those detailed above, are put in place. Crucial in this is input from natural and social scientists, particularly in areas such as verifying contribution to sustainable development and baseline determination. Much of the discussion on the CDM thus far has been dominated by economic arguments, and it is important that other areas are not sidelined. If they are, the CDM will do little either to reduce GHG emissions or contribute to sustainable development.


Begg K., Jackson T., Parkinson S. (1999) Accounting and Accreditation of AIJ. Final report to European Commission DG XII
Parkinson S., Begg K., Jackson T. (1999) Does early crediting compromise the Kyoto Protocol? Energy Policy 27, p431-432

Dr Stuart Parkinson, SGR & Centre for Environmental Strategy, University of Surrey, UK.

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