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emissions without requiring them to accept reduction obligations. There was also the stark fact that emissions reductions in the South were simply much cheaper than in the North, so pursuing reductions there was much more cost-effective overall.

the clean development mechanism: bringing in the south

While Americans were worrying about losing out to rapidly growing countries like China, many in the South started to see opportunities in climate change to attract new investments. Some worried that the hard-line negotiating strategy the South had adopted would prevent them from attracting such investment. Though Southern countries were not obliged to reduce their GHG emissions under the Kyoto Protocol, the interest of investors in capturing the enormous potential that existed within these countries for cheap emissions reductions was growing. Such gains would be delivered not just from offsetting emissions in the North, but through paying for energy and emission-saving projects in the global South. Clean development became the phrase to describe these projects.

Institutions such as the World Bank's Global Environment Facility (GEF), set up in 1991, had played a role in overseeing transfers of aid and technology to the South to help those countries meet the overall goals of the UNFCCC. But there was demand for a new institution that could cope with the expected high levels of demand for investments in projects in the global South that climate entrepreneurs had identified. Given its association with the World Bank, the GEF was never the preferred choice for most in the South, and in any case it had responsibility for tackling many other environmental issues than climate change, such as biodiversity and ozone depletion. The scale of the climate change issue required a new body. The CDM proposal filled this gap.

The CDM started off as a proposal for an international compliance fund whereby revenues raised from fines imposed on Northern countries failing to meet their obligations could be re-directed towards projects and funds for adaptation in the South. It was proposed by Luiz Gylvan Meira Filho, a long-time member of the Brazilian negotiating team. The Brazilians made their proposal just a month before the Kyoto conference. After a little tweaking, the CDM soon became a revamped version of AIJ, reframed as a development tool. Dan Reifsnyder, leading negotiator in the US delegation, jumped on the chance to expand the flexibility available to the USA and its allies in meeting their targets, as well as to involve the South in carbon abatement. It was proposed formally and rapidly became a key part of the Kyoto architecture.

Kyoto's surprise

The CDM is thus often described as the 'Kyoto surprise' because it arrived so late in the negotiations that many negotiators did not see it coming.1 That said, in the Kyoto Protocol agreed in 1997, it existed in name only. The battles over its rules, procedures and the activities it would cover were all still to come. The main operational guidelines of the CDM were only finalised in 2003.

But behind the 'surprise', the CDM responded to many problems left unresolved by restricting JI to projects between Northern countries only. Many in the North, both from governments and business, asked themselves the question: what about the vast untapped potential to invest in countries that don't have obligations under the UNFCCC or Kyoto? It was those areas of the world, where cheap investment opportunities were rife, where 'low-hanging fruit', as it is referred to, was abundant, that attracted the new carbon entrepreneurs. The AIJ pilot phase exposed such entrepreneurs to the potential of such markets, but they came to believe that it was much more viable in a North-South context.

These efforts to enable North-South deals also have to be understood in the context of anxiety on the part of many in the North, but especially the USA, that rapidly industrialising countries in the South were not required to accept legally binding emissions reductions under Kyoto. China, in particular, but also Brazil and India, were fast approaching levels of emissions comparable to those of Northern countries (in absolute terms at least, if not on a per capita basis). So the USA was looking for ways to draw these countries into the regime to ensure US industry was not placed at a competitive disadvantage through controls on its energy use which its economic rivals were not subject to. The Byrd-Hagel resolution, which was passed in the US Senate in 1997, insisted upon Southern reduction commitments as a prerequisite for US support for the Kyoto Protocol. This legislation,

1 J. Werksman, 'The Clean Development Mechanism: Unwrapping the Kyoto surprise' Review of European Community and International Environmental Law, 7 (1998), 147-58.

From flexibility mechanism to global market 83

combined with intense levels of industry lobbying, made it impossible for the USA to sign up to an international agreement that did not contain commitments for countries in the South. Though not implying direct commitments on the part of Southern countries themselves, the CDM provided one step towards emissions reductions actions from those countries given that they were charged with ensuring that projects delivered the required emissions savings.

from flexibility mechanism to global market

While the CDM started through the search for flexibility and efficiency in meeting commitments, entrepreneurs seized on what they viewed as a market opening. They rapidly started projects, developed methodologies to get projects through, built elaborate market structures to spread investment risk and so on. Indeed, by the time Russia agreed to ratify the Protocol in October 2004, bringing Kyoto into force, more than 120 transactions had already been recorded. Since then, the CDM has exploded to become literally the jewel in the crown of the three mechanisms provided for in the Kyoto Protocol, at least from the point of view of Kyoto's supporters. It is currently anticipated that at least three times as many carbon emissions will be reduced through the CDM than its designers originally thought.2

So how does the CDM work? Basically, it creates emissions credits for countries funding projects that reduce GHG emissions overseas. The range of possible projects is diverse - from wind or solar energy, to energy efficiency, to landfill gas capture (of methane, a GHG), to destruction of powerful GHGs like hydrofluorocarbons (HFCs). The projects are also supposed to promote sustainable development, for example through positive social impacts such as on employment, and deliver other environmental benefits such as for biodiversity. So, for example, a country such as Switzerland can invest in a wind energy project in, say, India, and the credits this generates count towards Switzerland meeting its obligations to reduce its own emissions under the Kyoto Protocol.

But if the basic logic is simple enough, the operation of the CDM is highly complex. Mostly this is because its designers wanted to ensure that projects would only be accepted if they could demonstrate 'real' emissions reductions. It works roughly like this (see

2 Interview with Christine Zumkeller, former senior member of the UNFCCC secretariat, Bonn, 16 October 2007.

Stage Actors Outputs

Stage Actors Outputs

Figure 5.1 The CDM project activity cycle.

Source: adapted from UNFCCC, 'CDM Project activity cycle', available at: http://cdm.unfccc.int/CommonImages/ProjectCycleSlide.

Figure 5.1 The CDM project activity cycle.

Source: adapted from UNFCCC, 'CDM Project activity cycle', available at: http://cdm.unfccc.int/CommonImages/ProjectCycleSlide.

Figure 5.1 for a schematic version). A project sponsor, investor or buyer (PP - project participant) produces a Project Design Document (PDD). Often this is done using a consulting firm. The PDD includes a description of the project, the methodology that will be applied, a discussion of the projected environmental and social benefits of the project and any comments received from stakeholders. A private company, called a Designated Operational Entity (DOE), is then hired to validate the claims made in the PDD. Such companies are usually auditors or certifiers. Once validated, it must be approved by the host country government, through part of that government bureaucracy called a Designated National Authority (DNA) - often a small office in the environment ministry. After this stage, it is passed to the CDM offices in Bonn. If there is a new methodology for measuring the emissions reductions the project developers want to claim for their project,

From CDM to global carbon market

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