The effort to develop global climate policy is less than twenty years old. The United Nations' Intergovernmental Panel on Climate Change (IPCC) has assessed the state of scientific knowledge concerning climate change and provided policy makers with adaptation and mitigation options since 1988. After the IPCC had concluded that climate change was a threat and that an international treaty was needed to enforce joint action, an Intergovernmental Negotiating Committee was formed to develop the United Nations Framework Convention on Climate Change (UNFCCC).1 It was finalised in 1992 and it officially entered into force on 21 March 1994. It has now been ratified by: 41 Annex I Parties, which include the 24 industrialised countries that were OECD Member countries in 1992, the European Union, and 16 other countries (mostly European countries that are undergoing the process of transition to a market economy); and 148 non-Annex I Parties, which include most developing countries and microstates and two of the OECD's younger members, South Korea and Mexico. The 24 Annex I Party countries that were member of the OECD in 1992 and the EU have also been included in the Convention's Annex II, which urges them to provide both financial and technological assistance to developing countries for the adaptation to and mitigating of the adverse effects of climate change.
The UNFCCC established the Conference of the Parties (COP), which meets annually and offers a negotiation platform for a global climate policy regime. The ultimate objective is "[…] to achieve stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system" (UNFCCC Art.2). Besides domestic action, the UNFCCC acknowledges that it should be possible for the Parties to implement policies and measures jointly (ibed. Art.4, §2a) for the sake of cost-effectiveness (ibed. Article 3, §3). The cost of mitigating emissions tends to vary considerably from region to region, whereas the benefit is shared globally, irrespective of where action is taken. Yet, the implementation of such joint action was initially resisted by developing countries, mainly due to what Kandlikar and Sagar (1999) would later call the 'South-North divide'. In the view of the 'South', the industrialised 'North' (or OECD member countries)would first have to take action at home, as it is responsible for the largest share of anthropogenic GHGs in the atmosphere (see Figure 1). Moreover, in per capita terms, OECD member countries are projected to remain responsible for the largest share of GHG emissions in the future according to the Internatinoal Energy Agency (see Figure 2). The Northern perspective is that joint implementation should be possible because the South will be the largest polluter in the future (see Figure 1). At the first COP meeting, held in Berlin in 1995, the Parties could only agree on a pilot phase for joint implementation, called Activities Implemented Jointly (AIJ). As the AIJ phase did not allow for the crediting of emission reductions, only a few AIJ pilot projects were actually implemented (JIN, 2004, pp.2). In addition, the COP determined in its 'Berlin Mandate' that legally binding obligations to mitigate GHG emissions would only be set for Annex I Parties.
The COP adopted a protocol to the Convention at its third meeting, held in Kyoto in 1997. This 'Kyoto Protocol'2 includes 39 Annex I Parties in its Annex B3, which obliges them to mitigate their GHG emissions through quantified limitation and reduction targets.4 Each Annex B Party has been assigned an amount of CO2 equivalents (expressed in Assigned Amount Units, AAUs) that are permitted during the 'first commitment period' of 2008-2012. On average, the Parties need to reach emission levels that are 5.2% below their 1990 levels.5 After Russia's ratification in 2004, the Protocol entered into force6 on 16 February 2005 and, at the time of writing, it has been ratified by 357 Annex I Parties and 120 non-Annex I Parties.
The Protocol established two project-based 'flexibility mechanisms' that move the concept of joint implementation beyond the AIJ pilot phase as the generated credits can be used by Annex I Parties8 towards meeting their quantified emission targets under the Protocol. The two mechanisms are:
Joint Implementation (JI)9, defined under Protocol Article 6, which facilitates the implementation of projects that mitigate GHG emissions by Annex I Party countries in other Annex I Party countries, in return for emission reduction units (ERUs).
Clean Development Mechanism (CDM), defined under Article 12, which facilitates the implementation of projects that mitigate GHG emissions by Annex I Party countries in non-Annex I Party countries, in return for certified emission reductions (CERs).
Protocol Article 17 provides for a third mechanism, called International Emissions Trading, which allows Annex I Party governments to trade AAUs among each other. Although this kind of trading has not occurred thus far, a mandatory regional emission allowance trading scheme for energy-intensive companies in the European Union, the EU ETS, commenced operation in January 2005. The transfers made under this 'non-Kyoto' scheme fit under the umbrella of Article 17 because they need to be reflected under the assigned amount accounting rules of the Protocol. In addition, a so-called Linking Directive has been created so that ERUs and CERs can be used towards meeting emissions targets under the EU ETS.
The Kyoto Protocol determines that the COP/MOP10 shall elaborate modalities and procedures for the implementation of the Protocol in general (Protocol Art.2, §4) and the flexibility mechanisms in specific (ibed. Art.6, §2 and Art.12, §7). Consequently, the seventh COP meeting, held in Marrakech in 2001, yielded the 'Marrakech Accords'. Among other things, the Accords re-affirmed that the use of the mechanisms must be supplemental to domestic action and that domestic action shall thus constitute a significant element of the mandatory effort made by each Annex B Party.11 Furthermore, the Accords merely provide a first set of modalities and procedures for the implementation of the flexibility mechanisms. The COP/MOP agreed that further elaboration would be necessary in order to establish a system that would fulfill the cost-effectiveness promise of the mechanisms, while addressing concerns about environmental integrity and equity. Under the authority and guidance of the COP/MOP, a Supervisory Committee and an Executive Board (EB) have been assigned to supervise the JI mechanism and the CDM respectively. In addition, the CDM EB has been given more proactive regulatory responsibilities as well.
1 See http://unfccc.int/resource/docs/convkp/conveng.pdf.
2 See UNFCCC (1997), Decision 1/CP.3, Annex.
3 All Annex B Parties are Annex I Parties, but not all Annex I Parties are Annex B countries. There are two Annex I Parties that have been left out of Annex B: Belarus and Turkey.
4 The targets cover six GHGs: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs); perfluorocarbons (PFCs); and sulphur hexafluoride (SF6) (see Annex A of the Kyoto Protocol). In order to allow for aggregation, all six are measured in metric tonnes of CO2 equivalent.
5 The target differs per country and the base year is not always the same for all countries and GHG gas types (see Kyoto Protocol Art. 3, §5-8).
6 For the Protocol to enter into force at least 55 Parties to the UNFCCC had to ratify and at least 55 per cent of the aggregated 1990-level CO2 emissions of the Annex I Parties needed to be accounted for (see Protocol Art. 25, §1).
7 Six Annex I Party countries have not (yet) ratified the Protocol: Australia, Belarus, Croatia, Monaco, Turkey, and the USA.
8 Formally, Annex I Parties can use the credits, but in practice, only Annex B Parties that have ratified the Protocol will be interested in doing so. This creates a special case for Turkey, which is an Annex I Party that ratified, but it has not been assigned an amount of permitted GHG emissions under Annex B. The same will apply to Belarus, once it ratifies the Protocol.
9 The term 'joint implementation' refers to the joint implementation of policies and measures, but its usage has now become commonplace for projects under Protocol Article 6 as well.
10 The COP/MOP refers to the Conference of the Parties serving as the Meeting of the Parties to the Kyoto Protocol. The COP to the UNFCCC assumed the role of the MOP until the entry-into-force of the Protocol. Decisions taken by the COP on behalf of the MOP are referred to as 'draft decisions'. The MOP will decide whether to adopt these draft decisions at its first meeting (scheduled for December 2005).
11 A quantified proportion that is to be met through domestic action has not been set. In practice, high risks and costs have so far limited the popularity of the flexibility mechanisms. This has made the cry for precise quantifications less urgent.
The formal purpose of the Clean Development Mechanism is threefold: (1) to contribute to the ultimate objective of the UNFCCC; (2) to assist Annex I Parties in achieving compliance with their emission limitation and reduction commitments; and (3) to assist non-Annex I Parties in achieving sustainable development (Kyoto Protocol Art.12, §2). In essence, the CDM has been developed to create opportunities for synergies between cost-effective climate change mitigation and sustainable development. However, the fact that the very initiative to implement a global climate policy regime originates from the North, has made the raising of awareness and willingness to participate in the South a considerable challenge. Figueres (2002) pointed out that developing countries tend to give priority to pressing national concerns over global concerns such as climate change. With the CDM, however, the climate change regime provides a financial instrument that has been designed to integrate a global concern into the national development goals of developing countries.
Project activities undertaken in non-Annex I Party countries yield certified emission reductions (CERs), which may be used by Annex I Parties towards compliance with their quantified emission mitigation commitments (Kyoto Protocol Art.12, §3). The generated emission reductions must be certified on the basis of (a) voluntary participation approved by each Party involved; (b) real, measurable, and long-term benefits related to the mitigation of climate change; and (c) reductions in emissions that are additional to any that would occur in the absence of the certified project activity (ibed. Art.12, §5). The latter criterion has led to the creation of the much-debated concepts 'baseline' and 'additionality'.12 They are briefly discussed below.
The Marrakech Accords prescribe that the projected GHG emissions of a CDM project be compared to those that would occur in the absence of the proposed project activity. Reference needs to be made to a realistic 'business-as-usual' scenario, i.e. the baseline. It is by definition counterfactual, because it reflects a situation that does not occur in reality. This obviously gives rise to a certain degree of uncertainty (for a discussion, see JIN et al., 2003). For a baseline to be accepted, it needs to be based on a so-called 'baseline and monitoring methodology' approved by the EB.
If the projected emissions of the planned CDM project activity fall below those of the appropriate baseline, they can be considered 'additional'. Unfortunately, there is the inevitable moral hazard of the baseline being inflated and/or a project's emission reductions being overreported, as project developers will want to harvest as many CERs as possible. Furthermore, the risk of free riding can be substantial when it is impossible to establish a reliable project-specific baseline and a broader, standardised baseline is used instead.13 Given those risks, the EB has been particularly cautious with the approval of baseline methodologies and it has developed a special additionality test next to the baseline analysis. Project developers are now encouraged to use the 'tool for the demonstration and assessment of additionality'. The tool follows a stepwise approach, which is outlined in Figure 3. Developers may choose to include either a quantitative investment analysis (step 2) or a more qualitative barrier analysis (step 3) - or to integrate them and do both. Without the option of deploying the barrier analysis instead of the 'financial additionality' investment analysis, it would have been difficult, if not impossible, for the more commercially attractive projects to access the CDM. Providing the information required by the tool has its cost and project developers who are convinced that their baseline is sufficiently specific and accurate, may argue that they should be exempted from having to use the tool. In response, the COP/MOP decided that the tool would not be obligatory.14
Finally, besides affirming its voluntary participation in the development of each individual CDM project15 - by providing a Letter of No Objection -, a CDM host country must be a non-Annex I Party that has ratified the Kyoto Protocol and that has established a Designated National Authority (DNA) for CDM operationalisation.
12 See UNFCCC (2001), Draft decision -/CMP.1 (Article 12), Annex, §43-44 for the formal definitions.
13 This risk can be particularly large with greenfield projects, which replace general, grid-connected power generation capacity instead of specific, existing plants or systems.
14 See Kyoto Protocol Article 12, §3a and UNFCCC (2001), Draft decision -/CMP.1 (Article 12), Annex, §28.
15 See Kyoto Protocol Article 12, §3a and UNFCCC (2001), Draft decision -/CMP.1 (Article 12), Annex, §28.
For a CDM project to generate CERs, it needs to be channelled through the so-called 'CDM project cycle' - which follows the Marrakech Accords and the relevant CDM EB decisions. The stages of this cycle are typically categorised chronologically and under a pre-implementation phase and an implementation phase.16 The pre-implementation phase can be sub-divided into a proposal phase and a preparation phase. Because fully preparing a CDM project already entails a substantial commitment of resources, a project supplier will generally want to propose his idea to potential investors first. Box 1 summarises the CDM project cycle with its three development phases and the underlying stages. The phases are discussed in turn and reference is made to their transaction cost consequences.17
I. Proposal phase
The initial documentation requirements in the proposal phase depend on whether the project developer seeks to secure a buyer for the future CERs prior to actual project preparation and implementation. If this is the case, potential CER buyers typically ask for the submission of an Expression of Interest (EoI). The Project Idea Note (PIN) is the principle document to be included in an EoI and it allows for an assessment of whether the proposed CDM project activity meets the basic eligibility criteria. CER buyers usually require technical and financial details to be included in the EoI as well. A Letter of Social Responsibility may be required in order to ensure that the project adheres to the OECD's ethical guidelines for multinational enterprises.18 After the submitted EoI has been accepted, an advanced version of the PIN - often called a Project Concept Note (PCN) - usually needs to be developed. A PCN adds an advanced baseline study, local stakeholder comments, and a risk analysis to the PIN. Once a CER procuring entity decides to proceed with the proposed project, an Emission Reduction Purchase Agreement (ERPA) - or a Letter of Intent to sign an ERPA at a later stage - is signed. Signing an ERPA basically involves a forward market transaction for the CERs that will be generated in the future. Due to all kinds of risks (see Box 2 for a summary), such a forward contract will generally entail a risk premium, which lowers the price offered. As an alternative, a project developer could channel his project through the project cycle before signing a contract with a CER buyer. This way, the accruing CERs can be sold directly at a higher price, i.e. risk-free on the spot market.
II. Preparation phase
The PIN or PCN needs to be elaborated into a Project Design Document (PDD). It includes a baseline study and a monitoring plan, both based on a methodology approved by the EB. Project developers may use an already-approved methodology or develop a new methodology if an appropriate one is not yet available.19 In addition, a general project description, proof of additionality, stakeholder comments, an assessment of the ecological and socio-economic impacts, and a calculation of the prospected emission reductions need to be documented. The Marrakech Accords also require project developers to choose between a fixed crediting period with a maximum of 10 years and a 7-year period that can be renewed at most two times.20 Whereas a Letter of No Objection suffices for a PIN and a PCN, a Letter of Approval from the relevant host country's CDM DNA needs to precede or accompany the submission of a PDD. Such a Letter does not only confirm the host country's voluntary participation, but also that the host country perceives the project to be contributing to sustainable development - in accordance with Kyoto Protocol Art.12, §2. If any Annex I Party is officially involved as a project participant in this phase, a Letter of Approval from its Designated National Authority is required as well.21
Before the EB can formally register a CDM project, the project's PDD needs to be validated first. The EB designates and accredits independent Operational Entities (OEs) to validate CDM project plans in the preparation phase and to verify and certify generated CERs in the implementation phase.22 If a new baseline and monitoring methodology is used, a validating OE must request the EB for approval of that methodology. If a renewable crediting period is chosen, re-validation by an OE is a prerequisite for each renewal. The extent of initial OE validation fees approximately varies from €5,000 to €30,000, depending on various factors, among which the most important are: the project's complexity, the time needed, and the costs of site visits.23 The extent of the EB registration fee is proportional to the annual amount of CERs generated, as it is outlined in Table 1.
III. Implementation phase
During the implementation phase, the project developer must execute the monitoring plan contained in the registered PDD and every time - usually annually or biannually - he wishes to have the generated emission reductions to be turned into CERs, an independent OE must be asked to verify the credits before the EB can actually issue them. Verification has not yet been performed for any CDM project, but the fees are generally expected to be - somewhat - lower than those for validation.24 The initial verification is likely to be more expensive than follow-up ones. For regular - i.e. relatively large scale - CDM projects, one and the same OE is not allowed to perform both the validation and verification/certification of a given project.25 So-called 'small-scale CDM projects' are exempted from this rule.26 More simplified modalities and procedures are increasingly available for small-scale CDM (SSC) projects in order to reduce transaction costs.
After having performed the verification, the relevant OE is expected to certify the verified credits and to request the EB to issue the CERs. In order "[…] to cover administrative expenses as well as to assist developing country Parties that are particularly vulnerable to the adverse effects of climate change to meet the costs of adaptation" (Kyoto Protocol Art.12, §8), the EB withholds a percentage of the CER proceeds.27 While this percentage has been fixed at two per cent for the Adaptation Fund for the particularly vulnerable countries, the percentage for covering administrative expenses has not yet been determined. Until a decision is made, the EB will charge a fixed fee - probably comparable to the registration fee discussed above. Furthermore, it has been decided that CDM projects in Least Developing Countries are exempted from the adaptation levy.28
Finally, the CDM registry administrator, working under the authority of the EB, forwards the CERs to the registry accounts of the project participants involved, in accordance with their request.29 The central CDM registry system includes national accounts of both Annex I and non-Annex I Parties and all Parties are encouraged to develop national registry systems30, so that CER holding accounts are made available for non-governmental legal entities.31 Once the CERs are forwarded to the appropriate accounts, they can be used to assist Annex I Parties and/or EU ETS companies in achieving compliance with their emission mitigation commitments. The form of the CER transactions depends on the identity and role of each of the project participants involved. This is further clarified in the section 4.
16 See PricewaterhouseCoopers (2000).
17 For a more extensive analysis of CDM transaction costs, see for example Krey (2004).
18 See http://www.oecd.org/findDocument/0,2350,en_2649_34889_1_1_1_1_1,00.html.
19 See UNFCCC (2001), Draft decision -/CMP.1 (Article 12), Annex, §37e-39. As of 22 July 2005, 23 regular, 4 consolidated, and 15 small-scale methodologies have been approved by the EB (see http://cdm.unfccc.int/methodologies).
20 See UNFCCC (2001), Draft decision -/CMP.1 (Article 12), Annex, §49. Note: Although the official crediting period of a CDM project can last up to 21 years, buyers are presently only interested to procure CERs up to 2012, the year the first commitment period of the Kyoto Protocol expires.
21 The Marrakech Accords require the approval from the DNA "of each Party involved" (UNFCCC (2001), Draft decision -/CMP.1 (Article 12), Annex, §40a). Notably, Annex I Party approval cannot be circumvented, but only delayed.
22 As of 21 July 2005, ten OEs had been appointed by the EB (see http://cdm.unfccc.int/DOE/list). Although any legal entity may apply for OE status, all current OEs are well-established auditing companies based in either Western Europe or Japan.
23 Source: personal communications with OE representatives. Site visits are more likely to be necessary if a project's baseline is based on existing actual or historical emissions (UNFCCC (2001), Draft decision -/CMP.1 (Article 12), Annex, §48a) than if it is based on emissions data of a technology (ibed., §48b) or similar projects (ibed., §48c).
24 Source: personal communications with OE representatives.
25 See UNFCCC (2001), Draft decision -/CMP.1 (Article 12), Annex, §27e.
26 See UNFCCC (2002), Decision 21/CP.8, Annex II, §20.
27 As of 21 July 2005, it had not yet been determined on what price these withholdings should be based and at which moment the proceeds should be wired into the two funds. The Marrakech Accords appear not to be taking into account that the CER selling price is not necessarily known upon issuance and that a share of the proceeds cannot be withhold prior to the factual accruing of such proceeds.
28 See UNFCCC (2001), Decision 17/CP.7, §15-17.
29 See UNFCCC (2001), Draft decision -/CMP.1 (Article 12), Annex, §66b.
30 See UNFCCC (2001), Decision 22/CP.7, Appendix, §3.
31 This is in accordance with Kyoto Protocol Article 6, §3. This article formally relates exclusively to JI, but it has been applied to the CDM as well.
The development of CDM projects can involve various combinations of stakeholders. Both public and private entities and both host country-based and 'foreign' entities are allowed to participate. Streck (2004, pp.307-313) and Krey (2004, pp.18-21) have provided basic overviews of the identity and role of different possible CDM project participants. This section elaborates on their work in this respect. Section 4.1 proposes a model for CDM project participation possibilities, to which section 4.2 adds the participation variable of indigenous host country entities by taking a closer look at the projects that are presently in the pipeline.
Section 4.1: Project participation possibilities
National governments of Annex I Party countries that are listed in Annex B of the Kyoto Protocol and that have ratified the Kyoto Protocol are legally obliged to mitigate their greenhouse gas emissions. Therefore, they may be interested in buying CERs32 and using them to assist in complying with their commitments under the Protocol at relatively low cost. They may also want to engage in the actual development of CDM projects as a direct investment partner, but this can also be outsourced to a specialised credit procurement entity33 or carbon fund, possibly in cooperation with other Annex I Party governments, private sector entities and international organisations. Some existing carbon funds are in principle open to any interested legal entity34, but others are more exclusive cooperation efforts between, for example, one particular Annex I Party government and an international organisation35 or even between private sector entities that are primarily interested in making a profit.36
Cooperation between the public and the private sector is often essential. As Hart (1997) has once remarked, the insufficient sustainability of the world's economic development is a political and social issue that generally exceeds the mandate and the capabilities of the private sector. Simultaneously, companies are the only organisations that have both the technology and the global reach to achieve sustainability. Governments can encourage private sector entities help them meet their Kyoto targets, but this will not always be enough. Given the high degree of privatisation of emission-intensive companies in many Annex I Party countries, it may well be necessary to enforce binding regulations. This reflects precisely what has happened within the European Union. As it has already been briefly mentioned in section 3.1, the EU Emissions Trading Scheme (EU ETS) is now in place. The scheme covers over 11,000 installations in five GHG emission-intensive industrial sectors in the 25 EU Member States (see Table 2).37 The aim of the scheme is to help the Member States achieve their Kyoto Protocol targets by passing on part of the required effort to the largest contributors to their GHG emissions.38 Emission allowances have been assigned through national allocation plans (NAPs). Scarcity of these allowances forces the participating companies to take action. Costs may be reduced through the Linking Directive39, which allows for the conversion of ERUs and CERs into allowances that can be used for compliance under the EU ETS. Similar to Annex I Party governments and some of the specialised carbon funds, EU ETS-tied companies can choose to buy CERs, but they may also extend their involvement in CDM project development and become a direct investor. They may even be capable to supply the necessary technology.
In certain cases, an indigenous company in a CDM project's host country may be able to deliver the 'clean' technology needed for a particular CDM project, but otherwise the technology needs to be imported. Technology transfers have received considerable attention in the literature and TERI (1997), Forsyth (1998) and Kline et al. (2004) have provided applications for the climate change debate. Apart from supplying technologies, the private sector is assumed to be able to deliver requested services better and faster than the public sector. This is particularly the case in developing countries in which distrust of government prevails. Simultaneously, the potential merit of government interference in market dealings is also recognised. The public sector can plant the seeds for future, commercially viable operations by private entities. So-called 'public-private partnerships' (PPPs) have been popular for raising such 'seed capital' for new business undertakings and stimulating the engagement of the private sector in developing economies. Jamali (2004) has considered the effectiveness of PPPs in developing countries and Stewart (2000) and Streck (2004) have applied the PPP concept to the CDM context. The public sector has a responsibility to safeguard the equity and the environmental integrity of the system, but it cannot afford overly restrictive controls as these would scare off interested private sector entities. A balance must be struck. Tight cooperation under a long term-oriented PPP obviously increases the chance of mutual benefits.
Even though private sector entities and international organisations without binding emission targets do not have a direct interest in buying CERs, several CDM participation options may well be available to them. Clean technology supplying companies, consultants, brokers, commercial banks, development banks, NGOs, and project site owners may all get involved. The most prominent examples are the Japan GHG Reduction Fund and the European Carbon Fund, which are both private sector initiatives with the twofold purpose of developing the carbon market and making a profit out of CDM - and JI - project development through the sale of generated emission reduction credits, but various individual and smaller joint private sector initiatives have also been popping up.
Although recognising the relevance of the source of the technology used and the participation of the private sector in the CDM as determinants of a project's organisational design, this section focuses on the participation of host country-based entities in the development of CDM projects instead. Being listed as an official project participant in a PDD does not automatically imply that the particular entity is actually involved in the CDM project cycle. Table 3 provides a summary overview of the different entities that may seek involvement in CDM projects. The roles are not mutually exclusive. Column 6 is rendered in bold because it refers to real, active involvement in the development of an investment project as a CDM project activity. In this particular setting, a 'CDM project investor' does not necessarily have to be a 'funds provider' (column 2). For example, an NGO may be deeply involved in CDM project development without providing any monetary funding. Columns 1 and 2 both refer to involvement in the overarching investment project as a whole. Column 3 refers to the passive facilitation of a CDM project activity. If an entity is seeking to either sell or buy CERs - columns 4 and 5 respectively -, it is not forcibly involved in proactively channelling a project through the CDM project cycle either.
Section 4.2: Market observations
In order to obtain a better impression of what genuine involvement in the CDM project cycle of local entities in host countries can look like in practice, it is worth taking a closer look at the roles of project participants in existing projects. The projects underlying this section are not meant to serve as a representative sample to draw conclusions from for the entire population of CDM projects in the global pipeline, but rather as a scan to specify existing organisational designs for CDM projects.
Despite the fact that the CDM project cycle undergoes a standardisation process that results in a decreasing amount of obscurities, it appears that various host countries do not yet possess the capacity to run the cycle without outside help. Especially PDD development regularly turns out to be more difficult than anticipated. Often non-host country consultants provide the much-needed assistance and sometimes the prime project participant entity is in fact a host country-based special purpose company or subsidiary of a non-host country company or a local company that is either fully or partly owned by one or more non-host country companies. In effect, a participant entity may appear 'local' in a PDD, while the work is still done by foreigners. It is thus possible that a host country agrees on hosting a CDM project in exchange for 'sustainable development benefits' alone and that it does not really reap any of the revenues from the sale of the CERs generated.
When looking at the involvement of local entities in CDM project development this way, the following four project organisation categories can be distinguished:
(i) Hosting only - Non-host country nationals propose and develop the CDM project. The role of the host country is limited to passive facilitation. The host country DNA either approves or disapproves the project and possible local partners are only involved in the overarching investment project as technology or funds provider or as CDM project supplier (Columns 1, 2, and 3 in Table 3).(ii) Hosting & proposing - Host country nationals initiate the CDM project. Either with or without outside help, a PIN - often preceded by a (short) feasibility study - is developed and then made available to one or more potential CER procuring entities (see section 4). Once accepted, non-host country nationals develop the PIN into a PDD and the host country is not further involved in the remainder of the CDM project cycle.(iii) Bi- or multilateral CDM project development - Host country and non-host country nationals actively cooperate to channel a project through the entire CDM project cycle. The division of tasks and responsibilities can be agreed upon as it is found most appropriate. The distinction between bi- and multilateral CDM is popularly made to emphasise the difference between project development that involves one individual CER buying entity and a carbon fund that operates on behalf of multiple CER buyers.(iv) (Truly) unilateral CDM project development - Host country nationals develop a CDM project independently.
This categorisation is in fact an extension of the model developed by Stewart et al. (2000) that places uni-, bi-, and multilateral CDM along a continuum for a CDM project's organisational design. Various hybrid variations are possible. However, Stewart et al. have not considered the exact role of host country nationals in CDM project development. In their model, categories (i) and (ii) can be equally bi- or multilateral as category (iii).
Although the set of projects reviewed for this section cannot genuinely serve as a representative sample to draw conclusions from for the entire population of CDM projects in the pipeline, it does give rise to the impression that the actual contribution of host country entities to the development of projects under the CDM is generally limited. Therefore, the relatively passive participation categories (i) and (ii) are probably much more common than the other two categories that involve stronger host country participation.
32 Or ERUs from JI project activities, but these are not considered in this study.
33 The Dutch government, for example, has designated a government agency (SenterNovem) and a commercial bank (Rabobank) to procure CERs and ERUs in its name.
34 E.g. the Prototype Community Carbon Fund, the Community Development Carbon Fund, the BioCarbon Fund (all operated by the World Bank), and SouthSouthNorth.
35 E.g. the Netherlands CDM facility, the IFC-Netherlands Carbon Facility, the Italian Carbon Fund, and the Spanish Carbon Fund (all connected to the World Bank).
36 E.g. the Japan GHG Reduction Fund and the European Carbon Fund.
37 See as well http://europa.eu.int/comm/environment/climat/emission.htm.
38 The EU ETS currently covers about half of the CO2 emissions in the EU. The scheme is expected to incorporate other GHGs from 2008 onwards.
39 See http://europa.eu.int/comm/environment/climat/emission/pdf/dir_2004_101_en.pdf.
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