From Kyoto to Paris—Transitioning the Clean Development Mechanism

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• Publisher: Asian Development Bank
• Year: 2021
• Print ISBN: 9789292690960
• eBook ISBN: 9789292690977
• Topic: Biological Sciences
• Subtopic: Global Warming & Climate Change
• Index: Biological Sciences

This publication provides insights on deliberations regarding the Clean Development Mechanism (CDM) transition and implications for Asia and the Pacific. With the Article 6 Rulebook expected to be finalized at the 26th Conference of Parties in Glasgow, the Asian Development Bank hopes this publication can increase knowledge and understanding of the CDM transition along with its relevance to economies in the region. It is also intended to help stakeholders from Asia and the Pacific become better prepared to contribute to the finalization of the Article 6 Rulebook and move toward operationalizing Article 6 of the Paris Agreement.

1. Background

Objective

International carbon markets under the Kyoto Protocol, particularly the Clean Development Mechanism (CDM), have played a key role for greenhouse gas mitigation in Asian Development Bank (ADB) members. With the negotiations of the rulebook for international carbon markets under Article 6 of the Paris Agreement entering a critical phase at the 26th Conference of the Parties (COP26) in Glasgow in November 2021, the question of how CDM activities and/or methodologies and/or other infrastructure as well as Certified Emission Reductions (CERs) can be made available for use under the mechanism specified under Article 6.4. This “CDM transition” is of high relevance for developing countries which have been hosting CDM activities. More broadly, operationalizing a CDM transition will require decisions on a wide range of issues at both the international and national levels, including the adaptation of CDM methodologies to be consistent with the modalities of Article 6, eligibility requirements defining which CDM activities and CERs can be transitioned, decisions required by host countries, and the development of procedures for re-registering de-registered CDM activities.¹

The aim of this study is to further the understanding of policy makers, Article 6 negotiators, and the owners of CDM activities (i.e., projects and Programs of Activities [POAs]) in ADB’s developing member countries (DMCs) of key issues being negotiated regarding the CDM transition and their relevance to the Asia and Pacific region. It analyzes the CDM portfolios of ADB’s DMCs and the regional implications of the CDM transition options being negotiated for transitioning existing CDM activities (projects and POAs) to Article 6.4 and CERs for use in complying with Nationally Determined Contributions (NDCs) under the Paris Agreement. A case study of Nepal is used to illustrate these issues through concrete examples.

The publication discusses criteria that may regulate the volume or type of CDM activities and CERs that may be allowed to transition. It should be noted that ADB does not have a position on how many or which types of CDM activities and CERs should be eligible for transition, nor does it have views or preferences regarding possible transition scenarios or regarding criteria for transition eligibility to be decided jointly by the Parties.

The Clean Development Mechanism

The CDM is one of three flexible mechanisms established in 1997 under the Kyoto Protocol.² It came into operation through a prompt start in 2001 under detailed rules defined in the Marrakech Accords, allowing a pipeline of activities to be created in advance of the first commitment period of the Kyoto Protocol between 2008 and 2012. The Kyoto Protocol entered into force on 16 February 2005, enabling the detailed CDM rules to be formalized. The rules were adopted at the Conference of the Parties serving as the meeting of the Parties to the Kyoto Protocol (CMP1)/COP11 in Montreal later that year.

The CDM was created to enable activities that result in emission reductions in developing countries to generate emission credits (CERs) to be sold to industrialized countries for partially meeting emission reduction targets under the Kyoto Protocol. The CDM was designed with the aim to help host countries achieve sustainable development and reduce emissions, while giving industrialized countries some flexibility in how they meet their emission targets.³ By 2021, the CDM had resulted in around 7,848 registered projects as well as around 355 Programs of Activities (POAs) and had issued over 2 billion CERs.⁴

ADB’s DMCs have a considerable breadth of experience with the CDM: 82% of all registered CDM activities are hosted in the region.⁵ However, the experience is not evenly distributed among ADB’s DMCs. Some DMCs are host to several thousand CDM activities while others have hosted none or very few. In a previous ADB report, the involvement of DMCs in the CDM was grouped as shown in Table 1, which looks at countries that have specifically mentioned carbon markets in their NDCs.⁶

Table 1: Experience with Project-Based Mechanisms among Developing Member Countries Expressly Interested in Carbon Markets

Experience with Project-Based Mechanisms	Clean Development Mechanism only	Clean Development Mechanism and Joint Crediting Mechanism
Limited (<10 activities)	Armenia, Bhutan, Fiji, Nepal	Bangladesh, Mongolia
Moderate (10–100 activities)	Pakistan	Cambodia, Lao People’s Democratic Republic
Advanced (>100 activities)	India, People’s Republic of China	Indonesia, Thailand, Viet Nam

Source: B. Amarjargal et al. 2020. Achieving Nationally Determined Contributions through Market Mechanisms in Asia and the Pacific. Manila: ADB

Table 1 illustrates the variation in levels of involvement among DMCs that have hosted CDM activities. Two countries have the most experience as hosts to CDM activities: the People’s Republic of China accounts for 58.4% of all activities registered in ADB’s DMCs and India hosts 25.7%. Viet Nam (4%) and Indonesia (2.3%) have also hosted many CDM activities, and Malaysia and Thailand have each hosted 2.2%. ADB’s DMCs also host over 150 POAs containing about 700 component project activities (CPAs). Many DMCs have none.

Box 1: The Clean Development Mechanism in a Nutshell

The basic principle underlying the Clean Development Mechanism (CDM) is a baseline-and-crediting approach. A baseline (i.e., “business-as-usual”) emissions level is compared with the emissions level after the implementation of a mitigation activity, and the difference gives rise to emissions credits. A necessary condition is the existence of baseline and monitoring methodologies that are differentiated according to activity types. Methodologies can be submitted by anyone and, once approved by the mechanism regulator (the CDM Executive Board [CDM EB]), can be used by anyone.

The CDM EB must formally register activities before they can generate Certified Emission Reductions (CERs). Preconditions for registration are approval by the host country and a “validation” of consistency of the activity with the CDM rules by an accredited auditor or Designated Operational Entity (DOE). As emissions reductions must be real, measurable, and verifiable as well as “additional,” here, it is checked that the activity is “additional,” i.e., different from business as usual and not commercially attractive without the revenue from CER sales.

CERs are issued ex post by the CDM Executive Board after emissions reductions have been independently verified by DOEs.

Source: UNFCCC. The Clean Development Mechanism. https://unfccc.int/process-and-meetings/the-kyoto-protocol/mechanisms-under-the-kyoto-protocol/the-clean-development-mechanism.

Reforming or Replacing the Clean Development Mechanism Under the Paris Agreement

Given that there already is a baseline-and-crediting mechanism operating under the auspices of the United Nations Framework Convention on Climate Change (UNFCCC)—the CDM—why cannot it continue to operate and be used under the Paris Agreement? Can it simply be adjusted to the new climate regime? The technical answer is that the CDM belongs formally to the Kyoto Protocol and has no formal space or supporting provisions in the Paris Agreement framework. While the decision to adopt the Paris Agreement states that the new mechanisms should build on the experiences of the Kyoto Mechanisms,⁷ it does not speak of the CDM specifically.

A more elaborate answer is that the development of the Paris Agreement and the international carbon market to be used thereunder is a result of a decade of negotiations, involving proposals for new UNFCCC market mechanisms and the development of market mechanisms outside the UNFCCC. Although the CDM was a success in terms of the quantities of registered activities and emission reductions it achieved, the mechanism has generated criticism since its inception, which has triggered both reform attempts and proposals for mechanisms designed differently.⁸ The provisions in Article 6.4 include elements that some of the Parties have wanted to see in a new mechanism, for instance, a clear reference to an overall mitigation in global emissions.

2. Article 6 of the Paris Agreement

The Paris Agreement differs significantly from the Kyoto Protocol in ways that have important implications for the design of the framework for market-based mechanisms. The Paris Agreement has a less centralized compliance regime than Kyoto that is built primarily on transparent reporting as the means for assessing progress against its objectives. Another key difference is that under the Kyoto Protocol, developing countries participated in the international carbon market as hosts for CDM activities without having mitigation targets on their own. Under the Paris Agreement, developing countries also have mitigation targets through their NDCs, and can participate in international carbon markets as sellers or buyers of internationally transferred mitigation outcomes (ITMOs).

Article 6 contains two carbon market routes.⁹ Article 6.2 involves limited international oversight and covers cooperative approaches that lead to a transfer of ITMOs. Article 6.2 provides an accounting framework for managing all types of cooperative approaches, be it emissions trading between states, linking of Emissions Trading Schemes (ETSs), bilaterally or multilaterally designed, or agreed baseline-and-crediting mechanisms. In principle, countries are free to “relabel” CDM activities into activities under Article 6.2. For ITMO transactions under Article 6.2, countries are likely to have to apply “double bookkeeping” as was the case for industrialized countries under Joint Implementation, called “corresponding adjustments” in the Paris Agreement.

Article 6.4 creates a new mitigation and sustainable development mechanism with a governance structure subject to centralized oversight (as was the case under the CDM). It generates Article 6.4 emission reductions (A6.4ERs) that will then become ITMOs once internationally transferred.¹⁰ Article 6.4 may take up CDM modalities and adopt elements of the CDM if Parties and international regulators are willing to do so. To what extent developing countries have to apply “corresponding adjustments” under the Article 6.4 mechanism is still heavily contested by a few countries.

3. What and How Much to Transition

Discussions and negotiations on the CDM transition typically focus on three different parts of the CDM: (i) methodologies and relevant components of the international institutional infrastructure, (ii) activities, and (iii) emission credits (CERs).¹¹ This study is focused on the transition of CDM activities to the Article 6.4 mechanism and the transition of CERs for compliance with mitigation commitments in NDCs, but it also touches upon the use of existing CDM methodologies and the accreditation system.

Given the long-term nature of the climate change challenge, ensuring regulatory continuity and the credibility of the UNFCCC process is important. Well-established international policy instruments should not be discarded lightheartedly.¹² Adapting relevant components of the existing international institutional structure of CDM for the new mechanism under Article 6.4 would save time and resources and could accelerate the start of the new mechanism.

Transitioning methodologies and components of international infrastructure is also resource-efficient. The infrastructure of the CDM was built over many years and constitutes a significant value. There ...

Table of contents

• Front Cover
• Title Page
• Copyright Page
• Contents
• Tables, Figures, and Boxes
• Foreword
• Preface
• Acknowledgments
• Abbreviations
• Executive Summary
• 1 Background
• 2 Article 6 of the Paris Agreement
• 3 What and How Much to Transition
• 4 Clean Development Mechanism Transition Discussions Under the Article 6 Negotiations
• 5 Implications Moving Forward
• 6 Host Country Considerations and Challenges in the Context of Clean Development Mechanism Transition
• 7 Conclusion
• Appendix: Certified Emission Reductions Transition Options—Subsidiary Body for Scientific and Technological Advice Chair’s Summary, June 2021
• References
• Footnotes
• Back Cover