It Would Never Have Happened Without CDM. (Honest)

By Liam Salter 1 June, 2010

Carbon expert, Liam Salter tells us why CDM’s rules for catching ‘non-additional’ projects are not working.

I was chatting with colleagues recently about a small Chinese hydropower project they had invested in.  Plans were proceeding well and the plant was due to start generating soon.  They had been approached on separate occasions by two well-known CDM project developers offering to ‘CDM-ise’ their project.  The CDM developers would prepare all the project documentation for a split in the carbon revenue stream with the hydro project owner.  From the owner’s perspective this was obviously a commercial no-brainer – little risk, almost no costs and a chance to earn a little extra revenue.  From the CDM perspective however this project ought to be illegal– the plant generates offsets allowing western companies to increase pollution, without changing anything on the ground in China.

The problem is that the CDM’s rules for catching ‘non-additional’ projects – or those that would have happened anyway – aren’t working, making it profitable for some CDM developers to trawl the market for projects at or close to completion and attempt a last gasp CDM retrofit.

Recently analysts have reached the conclusion that the number of non-additional projects could be substantial. Research by the Oeko Institute suggested that additionality was ‘unlikely or questionable’ for 20% of the credits issued through the CDM (this is not just a China problem).  Other critics have pointed to the Chinese wind sector noting that the industry originally took off with strong government support, without projects receiving carbon credits, yet by 2009 over 70% of Chinese wind farms were claiming carbon reductions.  In other words if additionality were to be held true then without the CDM, the Chinese wind industry would be about 30% of its current size. Most mainstream analyses of the Chinese wind market give scant attention to the role of carbon finance.

Hydropower is similar to wind – capital intensive, comparatively low carbon income relative to investment costs and with an even stronger pre-carbon finance track record – over 155GW of small and large hydro plant had been built by 2005 without a carbon credit in sight.

Project developers can get away with non-additionality because the rules laid out by the Executive Board (EB) do not mandate sufficiently detailed analysis and reporting on additionality issues.  The EB guidance also makes things tough for the validators – companies who have to assess the proposed CDM methodology against the EB guidance – because the rules do not require them to interrogate the project developers’ claims in sufficient depth.

Additionality is usually conducted by assessing the economic feasibility of the project with or without carbon credits or by presenting an argument that barriers exist preventing the project moving forwards which the CDM then helps remove.

However Oeko’s study indicates that many project developers are not providing sufficiently detailed data for additionality to be properly evaluated.  For example details on the assumptions behind financial data used to demonstrate economic non-viability without carbon finance are often not disclosed.  Barriers cited as preventing project development are often outlined in general terms without adequate substantiation – the Oeko study observed that 43% of sampled projects do not provide detailed evidence to justify claims that barriers are material to CDM project development.

On a technical level therefore the additionality assessment could be improved considerably by reviewing and revising the rules by which it is implemented and making reporting requirements more detailed and explicit, whilst providing validators with clearer instructions on how to assess this extra data.

In practice – although the market has been aware of the additionality problem for some time – neither the EB nor national governments have moved to address it.  The result is eroding confidence in the credibility of the CDM as a toll for driving genuine emissions reductions and new markets for clean technology.  With the European Union now considering discounting CDM credits before accepting them into the European Emissions Trading Scheme, and eligibility of CDM in a future US market unresolved, the CDM is politically increasingly vulnerable.

Its detractors however are not sufficiently acknowledging the upside of the CDM, which can be significant, although harder to spot.  For a start there are still many good projects that generate real carbon reductions. The CDM has also introduced China to the idea that cutting carbon can provide commercial benefits, building capacity in government as well as supporters in the private sector, academia and NGOs supporting the introduction of further measures to tackle the issue.

Because it involves a detailed understanding of the principles of carbon accounting, the CDM has also built skill sets and an entrepreneurial community that will be invaluable as China develops a deeper carbon management sector (our company frequently seeks people with CDM experience, when recruiting for our corporate carbon footprinting team).

Finally the CDM mandates levels of transparency and consultation that are considerably higher than many standard energy projects.  Through the carbon stream, it provides an opportunity to leverage western buyers to require extra qualifications from the projects they source from – for example the Gold Standard or World Commission on Dams certification.  Without the CDM many projects – and not least Chinese hydropower projects – will still happen, but will drop below the radar making tracking and demanding standards and accountability even harder to achieve.

The balance is difficult to ascertain and many commentators have specific axes to grind, which does not help holistic analysis.  If it continues unaddressed the additionality problem – because of its scale and the core-mission nature of the failure – could prove pivotal to the CDM’s political future.