The Clean Development Mechanism (CDM) was established by Article 12 of the Kyoto Protocol. The Protocol sets a series of targets for the reduction of emissions of greenhouse gases (GHG) for so-called Annex 1 countries, i.e. the (industrialised) countries that have emissions targets under the United Nations Framework Convention on Climate Change (UNFCCC).
The targets can be achieved not only through reducing emissions in the home country but also through obtaining “Kyoto units”, denominated in tons of CO2 equivalent (tCO2-e). There are various mechanisms that allow countries to meet their target requirements by obtaining Kyoto units arising from emissions reductions made in other countries (see Yamin, this Bulletin, for an overview of the climate regime).One of these mechanisms is theCDM, which is specifically designed to promote GHG reduction projects in developing countries. It has been summarised as follows:
An investor from an industrialised country or an industrialised country government, can invest in, or provide finance for, a project in a developing country that reduces greenhouse gas emissions so that they are lower than what would have been without the extra investment – i.e. compared to what would have happened without the CDM under a business as usual outcome. The investment then gets credits – carbon credits – for the reductions and can use these credits to meet their Kyoto target. (CDMWatch 2003: 8)
Investments in projects that are approved and certified as providing additional reductions ofGHG emissions generate certificates of emission reduction (CERs), which can be used by Annex 1 countries as a contribution to meeting their emission reduction targets. The scheme is intended to benefit the Annex 1 Parties by allowing them to find the most cost-effective projects for reducing greenhouse gas emissions, even if these are not located within the Annex 1 countries. The scheme is intended to attract private sector involvement, either through investment aimed at generating saleable CERs, or through the purchase of these CERs by companies that have their own emissions obligations.
At the same time, the scheme is intended to provide specific benefits for developing countries by, first, involving them in emissions reduction activities and, second, promoting sustainable development. For the host (developing) countries, the CDM is expected to provide some of the following: transfer of clean technology, foreign direct investment in emission reduction projects, localised environmental improvement and an income stream from the sale of CERs. The precise benefits will vary from project to project, but the mechanism is specifically set up with development objectives in mind and host country governments have to confirm the development effects of proposed projects.
The development of the CDM is at an early stage and although various projects have been put forward for appraisal, none has been formally registered or implemented. At the same time, there are considerable uncertainties about how the mechanism will operate in practice and what will happen after the end of the first commitment period under the Kyoto protocol in 2012. In this context, analysis of the CDM and its impact on developing countries have been focused on issues such as the level of likely investment in CDM projects, the supply and demand factors that will influence the market price of a unit of emissions reduction (usually measured as tons of CO2 equivalent per annum, tCO2-e) and the developmental impact of different types of CDM project (particularly contrasting the difference between renewable energy projects, fuel switching projects and methane/fluorine gas reduction projects). There has also been considerable discussion of the questions of establishing baseline emission levels and additionality so that CERs arise from genuine reductions in GHGs.
This article focuses on the development question and in particular how market structures can impact on the level of benefits to developing countries from the CDM. It analyses this question from the perspective of global value chains. This pays particular attention to the way in which sequences of activities are bundled within enterprise boundaries, or split across them and the different ways in which activities are coordinated across firm boundaries. In particular, it draws attention to the different ways in which inter-firm coordination takes place within the global economy, going beyond the dichotomy between the vertically integrated firms and arm’s-length market relationships and also emphasising the importance of institutions and standards in structuring inter-firm relationships.
The benefits to developing countries will depend not only on the overall level of investments, but also on the nature of the projects and the extent to which they generate spillovers and learning in developing countries. These will be affected by the market structures that arise in response to the CDM and its governance requirements.
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This article comes from the IDS Bulletin 35.3 (2004) The Clean Development Mechanism: How to Increase Benefits for Developing Countries
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