Introduction
Development with environment-friendly techniques is a very difficult task if not impossible. There is no ethical basis or political will for coercing developing countries into agreeing to limit their emissions. Naturally, such countries need to be incentivized for adopting environment friendly technologies. It is here that the Clean Development Mechanism (hereinafter “CDM”) plays an incentivizing tool to motivate developing nations into reducing their emissions.
CDM is a trading mechanism through which countries can purchase Certified Emission Reductions (hereinafter “CERs”), to meet its treaty obligations. CERs are the currency of the CDM system, where one unit of CER is equivalent to one tonne of carbon dioxide emission. It was created as a trading mechanism that aimed to promote the twin goals of reducing carbon emissions and promoting sustainable development at the same time.
Framework Lacunae
Despite its laudable functioning, CDM has mostly been a topic of constant criticism which is evident as even the supporters of CDM have not failed to acknowledge the drawbacks of CDM.
There have been only short-term emission reductions through CDM as private players have only invested in the cheapest carbon reduction technologies which have little or no long term advantages. In 2012, a report was published revealing the poor condition of the CDM due to lack of demand for carbon credits. This report raised alarm amongst countries to urgently decide upon the future of this flexibility mechanism. Thus, such a short term viewpoint has contributed only towards costeffectiveness undermining the other two primary objectives of the convention, namely sustainable development and environmental integrity.
Perhaps the most controversial issue under CDM is the concept of ‘additionality’ which means that the emission reductions from employing a carbon reduction technology project have to be shown to be in addition to the normal course of things. In other words, a project developer has to show that his project results in additional emission reductions which would be more than the reductions which would have resulted had the carbon reduction project/technology not been there at the first place. Additionality is an important requirement because if nonadditional projects are eligible for carbon finance, then the net amount of greenhouse gas emissions will continue to increase and the environmental integrity of carbon reduction projects will be called into question. However, no generally accepted concept of additionality exists. Some authors like Begg have divided ‘additionality’ into two components, namely environmental and financial additionality. In other words, a country would fulfil the additionality requirement if the environmental technology results in environment saving and financial benefit. On the other hand, Gillenwater has given a definition of ‘additionality’ with respect to baseline. Baseline according to him is a prediction made by taking into account all the factors that would influence the future performance of the project. The problem with baseline is that it is a relative term varying from country to country and sector to sector. Moreover, the actual issue is not whether there should be a baseline or not but who should set the limits of it? It is indeed a difficult task but it would be best if such task is left to the host governments which could establish appropriate baselines by studying the business environments in different sectors.
A peculiar feature of the CDM is the concept of ‘common but differentiated responsibility’. The Kyoto Protocol is designed in such a way that although the common objectives of emission reductions and sustainable development have been conferred upon each signatory nation but binding targets have been imposed only upon the developed nations. The reason behind this is that historically, developed nations have contributed most towards global green house emissions and therefore, it was thought that such a mechanism would be apt as it invariably incorporates the well known principle of ‘polluter pays’. However, in actual application this has resulted in an implied preferential right to use nonenvironmental friendly fossil fuels by the developing countries. Now even if the developed nations compensate for their historical contribution to green house gases emissions, the quantum of these gases in the atmosphere will be same or possibly even worse as the effect of such reduction will be negated by the increasing pollution caused by the developing countries. Thus, a free license to pollute given to developing countries is a serious drawback of CDM.
On the other hand, Ferrey has expressed his concern over the quality of carbon credits issued till date. He opines that primary focus of CDM has been on encouraging carbon as a tradable commodity and it pays little heed to use of renewable sources as an alternative to carbon-based fossil fuels. To illustrate, in 2012, the CDM Executive Board approved some coal-based projects because they were more resource-efficient. This example leads to the observation that the board has now focused its attention to incentivizing energy-efficiency rather than reducing carbon emissions which was the prime objective under the Kyoto protocol. Consequently, this has led many environmental jurists to opine that the trading regime has evolved into a purely financial market, which operates following traditional financial rules and behaviour, and that there is a tendency to forget the underpinning environmental dimension objective of reducing CO2 emissions. Moreover, a number of people argue that by not specifying the limits to which countries may purchase credits, it may result in buying out of environmental responsibilities by the developed and so-called “rich countries”. To rebut such criticism the CDM Executive Board chair has urged that CDM is much more than a market based tool and that it can be used to measure emissions and transparently report the reductions leading to real progress on climate change.
Paris Agreement and SDM: Death or Rebirth of CDM?
Carbon trading has a crucial role to play in the foreseeable future. However, the limitations pointed out by various scholars cannot be ignored. Wara has suggested that limited reforms must be made in the existing CDM structure. Moreover, he opines that by simply eliminating CDM without replacing it with a suitable alternative will leave the newly discovered benefits on the table.
In light of this background, the newly ratified Paris Agreement on Climate Change (hereinafter “Paris Agreement”) comes into picture. Paris agreement is a voluntary system for defining parameters to climatic change. The agreement does not specifically state CDM as the preferred system but there has been a clear implication to learn from CDM experiences. Moreover, some signatories have taken into account the limitations of CDM and have proposed systems like enhanced CDM or CDM+. This successor of CDM has gained the title of Sustainable Development Mechanism (hereinafter “SDM”). SDM aims to overcome the flaws of CDM by providing for a better, more voluntary and more accountable carbon trading mechanism.
SDM VIS-À-VIS CDM
SDM is much wider in scope than CDM. Under the CDM regime, only developed countries were permitted to buy CERs whereas under SDM any signatory, public or private, will be able to participate in the SDM carbon market. However, this does not necessarily mean the end of CDM. CDM can still be used as a tool for monitoring, reporting and verifying (MRV). This speculation has been endorsed by theCDM executive board by opining that CDM is an established mechanism which can measure significant carbon reduction in terms of carbon credits and report the results in a transparent way. Moreover, if one even glances at the shortcomings of CDM, the main issues pertain to the lack of an elaborate framework for the implementation of the CDM mechanism which has given rise to problems when CDM is applied in real world scenario but there has been no major criticism regarding the MRV procedures under the CDM regime. On the other hand, SDM has its own set of problems which are already creating confusions in the international community. The biggest concern is of voluntarily creating targets instead of binding targets in the CDM regime.
This is because there is an apprehension that countries will set undervalued targets which are much lower than what is desirable. Moreover, there are issues which are already creating confusions in the minds of the international community.
For example, under CDM, the developing countries could sell off any quantum of their CERs without accounting for them simply because they had no binding targets but the same is not with SDM. Until now it is abundantly clear that all nations, irrespective of whether such a country is a developed country or a developed country, would have some voluntarily set targets. This has led to the problem of ‘double counting’. Suppose, A is a developing country and B is a developed country where A is selling 20 CERs to B. Now, in CDM A being a developing country would have had no binding targets and the 20 CERs sold would have to be counted towards binding targets of B.
However, let’s assume that under SDM A has voluntarily set its targets to 100 CERs. Now, the question arises, whether sale of 20 CERs be counted towards target of A. If yes, then the same CERs would be counted towards target of B as well as A resulting in double counting.
Conclusion
The discussion has revealed that CDM has been a victim of its own success. In its initial years of application, the CDM was welcomed by all which was witnessed by the increase in the number of projects registered under the CDM regime. However, as the world continued to explore the first global carbon market regime, procedural loopholes and definitional irregularities came to light. For quite some time, CDM has declined due to various limitations and lack of demand for carbon credits.
Amidst these tensions, the Paris Agreement has emerged with the fate of CDM lying in its hands. There is a high probability that SDM will be the successor of CDM. Though, the procedural framework has not been laid down, which is not at all surprising considering the time taken by the counties to lay down rules for CDM under the Kyoto Protocol, the future of carbon trading lies in SDM which will be much wider in scope and hopefully, better than the existing CDM regime.
Nevertheless, the policy makers would need to be cautious while overcoming the drawbacks of CDM as in an attempt to create an ‘ideal carbon market’, they may end up doing more harm than good which would ultimately hinder the agenda of global sustainable development.
Adv. Meenal Garg practices at Punjab and Haryana High Court