The Clean Development Mechanism (CDM) is one of the three flexibility mechanisms outlined in the Kyoto Protocol.
A CDM project is an investment or activity in a developing country that reduces emissions of the six Greenhouse gases – CO2, CH4, N2O, HFCs, PFCs and SF6 – through energy efficiency, the generation of renewable energy or other measures. The emission reductions (carbon credits) resulting from CDM projects are called CERs (Certified Emission Reductions) and may be sold to a government or company in the industrialised world to help meet their Kyoto compliance targets. A key condition for the issuance of CERs is “additionality”, meaning that the emissions reductions generated by a project would not have occurred in absence of the project and are therefore not “business as usual”. The project must also enhance sustainable development. The development of a CDM project is strictly regulated and monitored by the CDM Executive Board of the UN to ensure that the emissions reductions are of a high standard.
Key milestones of the CDM process
All CDM projects must follow a methodology that has been approved by the CDM Executive Board (EB) of the UN. Methodologies have already been approved for a number of project types and can be applied to all projects that fall under the applicability criteria outlined in the methodology. If a suitable methodology has not been approved, a new methodology must be developed and submitted to the EB.
Project Design Document (PDD)
The PDD forms the basis for approval of a CDM project. This document outlines the application of the methodology to the project, illustrating why and how the project reduces emissions and presenting a plan for annual monitoring of emissions reductions.
Host Country Approval
A precondition for registration of a CDM project is approval from the host country. This is provided by a Designated National Authority (DNA) and ensures that a project contributes to sustainable development in that country.
Validation and Verification
The completed PDD must be validated by an UN appointed auditor called a Designated Operational Entity (DOE). Validation ensures the methodology has been applied correctly and that the project results in a real reduction in emissions. Verification is the annual audit of a project by a DOE, and determines the quantity of carbon credits allocated to the project.
Registration and Issuance
Once a project has received a successful validation report and host country approval, it can be submitted to the CDM EB for registration. A registered CDM project is able to generate emissions reductions. Each year, the verification report from a DOE is submitted and subsequently the relevant quantity of CERs or carbon credits are issued by the EB.
The CDM offers exciting opportunities for both companies in the industrialising world who can use this mechanism to finance clean projects as well as corporate or governmental buyers of carbon credits in the industrialised world.