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this methodology must first be approved. If not - if the developers are simply using a methodology already approved for use - then it goes to the CDM Executive Board (EB) for registration as a bona fide CDM project. The project is then implemented, monitored by the developers themselves as well as by another DOE (auditor). The DOE sends a report to the CDM EB which then, if it accepts the report, issues the credits, which under the CDM are called Certified Emissions Reductions units (CERs). These CERs have become one of the basic currencies in the global carbon market - treated by investors as assets, traded in financial markets and so on.

Central to the CDM (and to JI, which has a similar, but not identical, project cycle) are the methodologies by which projects are judged 'additional'. Projects in the words of the Kyoto Protocol have to be 'additional to any that would occur in the absence of the certified project'. These methodologies are often the source of the criticisms of the CDM which we discuss in Chapter 8. Essentially, project developers have to say what the trajectory of emissions would have been without the project (the 'baseline' emissions), and how much lower the emissions path will be with the project. This part entails all sorts of complexities to do with how the emissions saved should be measured. For example, you (the project developer) have to show that the host government wouldn't simply have required you in any case to do what you are going to do. You also have to show that the project depends on CDM financing to go ahead - without the money created by the credits to be sold to actors in the North, the project would not be financially viable.

All of these are complex hurdles which you have to jump over, but this complexity also raises questions about their efficiency and effectiveness in reducing global emissions. Even those who recognise the value of the projects fear that the high transaction costs exclude many potential participants in the market. When projects can take up to three years from initiation to receiving the CERs, with no guarantees of receiving the latter, the risks and costs are borne up front and can run into the tens of thousands of dollars - a combination of high transaction costs, risk and uncertainty of outcome that serves to deter many potential market entrants.

from cdm to global carbon market

The CDM, along with the European Union Emissions Trading System (EU ETS, see next chapter) has become the central element in what we now call the 'global carbon market'. It is thus a central institution affecting the emergence of what may become climate capitalism. It was thought of originally, however, just as a means of giving rich countries flexibility in meeting their emissions targets, and the South access to new sources of investment. How did this transformation from 'flexibility mechanism' to 'global market' occur?

The essence of the answer is that, while they didn't realise it, those creating the CDM were busy creating what financiers now regard as a set of asset classes. Along with the European Union Allowance (the unit in the European emissions trading system), the CER units have become the central commodity in global carbon markets. Various profit-making strategies have been developed and a series of secondary markets have been created.

These different units have become commodities like any other: traded, hedged, differentially priced according to various conditions and so on. And as the CDM became linked to other emerging carbon markets, especially the EU ETS, this entailed creating ways to make these commodities comparable to each other so the markets could all be linked up. In the language of finance, they have to be made commensurable and fungible; that is to say, they can be defined according to the same sort of accounting logic (commensurable) in order to become fungible (making different commodities alike so they can be traded).

What has been going on is a sort of reinvention of money. Money enables different things to be compared through their price. Similarly, the construction of units of carbon in different ways enables them to be traded. This unit of account has become the tonne of carbon dioxide equivalent (tCo2e). All the specific systems for trading carbon have come to adopt this as the unit, measure it in comparable ways, and express it through a simple acronym which traders can then relate to and construct products around. Thus we have the alphabet soup of AAUs (Assigned Amount Units, Kyoto's basic unit), CERs (CDM credits), VERs (Verified Emissions Reductions, voluntary carbon market credits), EUAs (European Union allowances), ERUs (Emission Reduction Units, JI credits), as well as the units being created in the newer markets. All these acronyms express, for traders, different sorts of value, and are the means by which carbon markets link up to each other.

The global carbon market was thus created out of the realisation of the potential of the CDM. This potential - to create markets, commodities and profits - also became part of what has sustained the CDM in the face of many criticisms (on which more in Chapter 8), and has

The World Bank gets the ball rolling

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