This month we are delighted to welcome James Anderson. James is the Director of Sustainability & Strategic Advisory Services of Montgomery Watson. James has over 25 years experience in environmental engineering, planning, legislation and consultancy, half of which focused on strategic advisory services to corporations & governments. James has also made substantial contribution to business led climate change legislation globally & nationally.

Who is benefiting from a changing climate & how?

Abstract:
In 1992 word leaders, governmental and non-governmental representatives and scientists gathered in Rio for one of mankind's biggest summits on the state of our planets environment. Shortly after, a selected group of scientists, politicians and economists developed a revolutionary set of regulatory drivers to try to engage businesses and the industry to combat climate change. Their thoughts, recommendations and ideas were finally realised in a historic protocol in the city of Kyoto in 1997. The Kyoto Protocol has been signed by over 100 countries, including many who contribute to less than a fraction of 1% of the global greenhouse gas emissions. One of its most important mechanisms is called the Clean Development Mechanism (CDM). This article examines the facts and figures of how CDM projects are now worth 14 billion euros and why CDM the system it is not always benefiting those that it was designed to!

The concept about CMD projects was meant to be very simple. It is one of the primary mechanisms of the Kyoto Protocol. Its financial carbon credit system will easily outlive the Protocol itself. Some CDM projects now have a life-span beyond 2025! The principle behind CDM is that it should provide an opportunity for the project host country, which must be a developing as opposed to a developed country to be able to attract carbon funding, technology transfer, economic boost, social improvement as well as being able to develop clean industries whilst having less dependency on fossil fuels.

The host countries, otherwise referred to by a fancy UN name as a Non-Annex I Party, as opposed to highly developed countries called an Annex I countries, argue that we in the Western developed countries are the main culprits of this climatic change. The Protocol warranted the Annex I countries to implement an emissions reduction and trading system in their territories and put meaningful pressure on the large emitting industries. This was meant to be done in a clever, economically rewarding way by making a unit of carbon reduction a commodity. For the European Union’s 27 member states the EU Emissions Trading Scheme (EU ETS) is meant to address this as an EU bubble. Other Annex I countries are struggling to adhere to this binding agreement, bizarrely Japan, which actually hosted the Kyoto Protocol summit. The EU ETS has had its ups and downs and like any other European phenomenon its success and failure is being examined every year by a large number of analysts and economists. The annual value of emissions trading within EU ETS ranges from 10 to 30 billion Euros.

For Non-Annex I countries, the CDM is meant to be a saviour industrially, economically, socially and environmentally. All CDM projects have to meet two principal criteria. Firstly, the additionality criteria meaning that the project bring something in carbon reduction that other “business as usual” and environmental legislative processes would not have other wise bring in and secondly, all CDM projects must meet the sustainability criteria, i.e. contribute tangibly to social, environmental and economic welfare of the communities they affect as well as the host country in which they are implemented.

Experts in the CDM arena have identified the time-consuming approval and registration process, the uncertainty about demand for carbon credits after 2012 and the risks due uncertainties of national approval, validation, registration, technical failure, etc. as the most important barriers to the implementation of CDM projects. The lack of knowledge about the CDM and the lack of access to capital are of less importance, although remain relevant. By contrast, the share of proceeds, which has been discussed as discriminating against the CDM and favouring JI, and the costs for monitoring and validation are not considered barriers to the implementation of CDM projects.

Despite all this doom and gloom about CDM projects, to date they have grown to over a 1000 projects in 43 developing countries with Certified Emission Reductions (CERs) or carbon credit units worth 11 billion US Dollars! China and India are having the lion share of the projects to over half of all the projects globally.

 

What is more interesting is the distribution of project types as seen below from the latest UN statistics:

 

Due to the nature and complexity of CDM projects there are a number of disciplines and experts involved. Each of these parties above has its own specific set of priorities and perspectives. Here we list a few of the most common ones but also include the perspective of the counterpart party in the table 1 below:

1st Party	Priority	2nd Party	Expectation from 1st Party by 2nd Party
Host Community	Long lasting commitment and capacity development for achieving independence	Principal project participant	Reliability & Continuity in host community
Host Country DNA	Meeting national and regional development objectives and economic growth priorities	Investor	Competency of officers in charge and clear set of published rules
Principal Project Participant	Reliable, validatable Project Design Document ( project business plan ) with string prospects of funding	UNFCCC	Clear, technically acceptable set of deliverables
Investor	Return on investment and reliability of project performance as per PDD	Principal project participant	Investment commitment with minimum bureaucracy
UNFCCC	Adherence to UNFCCC protocols	Consultants	Minimum bureaucracy
Consultants	Competent parties	Other parties	Highest level of competency taking highest level of projects list

 

UNFCCC stands for the United Nations Framework Convention on Climate Change, the UN organisation that deals with climate change legislation.

The controversy of CDM projects are also with refrigerant-producing factories in non-Annex-1 countries (particularly China) that generate the powerful greenhouse gas HFC 23 as a by-product. By destroying the HFCs, the factories can earn CER credits. Destroying the HFCs requires a simple and relatively cheap piece of equipment called a scrubber; it is argued that it would cost only €100 million to pay producers to capture and destroy HFC 23 compared with €4.6 billion in CDM credits. While this is still cheaper than the typical cost of reducing emissions in industrialised countries, it is seen as a major loophole in the carbon trading system and undermines the tenet of emission trading being as a cost-effective tool for reducing emissions. Also, "HFC 23 emitters can earn almost twice as much from the CDM credits as they can from selling refrigerant gases – by any measure it is a major distortion of the market.

China’s GDP & in particular its rate of growth has surpassed all other G8 members and as from the beginning of this year it has become the global top emitter of carbon dioxide.

It now begs the question whether China should actually be classed as a Non-Annex I?