Markets working to support sustainable development

The UN Clean Development Mechanism

The Clean Development Mechanism (CDM) is one of the three market based instruments included in the Kyoto Protocol (1997). It is designed to help countries meet emissions reductions, encourage private sector involvement and contribute to sustainable development.

The CDM allows industrialised countries to offset carbon emissions by buying carbon credits from emissions reduction projects in developing countries. In this, the private sector from Annex 1 countries finance projects that earn Certified Emission Reduction (CER) credits - each equivalent to one tonne of CO2.

Benefits of CDM projects include:

  • investment in climate change mitigation projects in developing countries
  • transfer or diffusion of technology in the host countries 
  • improvemen in the livlihood of communities through the creation of employment or increased economic activity.

The CDM is portrayed as a win-win mechanism, benefitting both developed and developing countries by stimulating sustainable development in the Global South whilst affording Annex-1 countries flexibility in meeting their Kyoto Protocol emission reduction targets. Here, the CDM is filling a gap where it provides finance between developed (Annex 1) and developing countries (Annex 2) is central to the Kyoto protocol. 

The CDM rules are designed and implemented to ensure that emission reductions achieved are real, measurable, verifiable and additional to what would have occurred without the project. There are seven steps in the CDM project cycle:

  •  Project design: A project participant prepares a project design document (PDD) describing the project in detail.
  •  National approval: The PDD is submitted to the host country’s Designated National Authority, which issues a Letter of Approval for the project, indicating, among other things, that the project assists the country in achieving its sustainable development goals.
  •  Validation: The PDD is then forwarded to a Designated Operational Entity (DOE), an accredited third- party certifier, to validate that the project meets CDM requirements.
  •  Registration: Once validated, the PDD is submitted to the CDM Executive Board, via the UNFCCC secretariat, for registration.
  •  Monitoring: Once registered, the project participant must monitor the project’s actual emission reductions against business-as-usual baseline emissions following an approved methodology.
  •  Verification: A DOE verifies that the claimed emission reductions took place.
  •  CER issuance: The verification report is submitted to the Executive Board, via the UNFCCC secretariat,

with a request for issuance.

Market coverage: 
  • The CDM has been active since 2006 and there have been more than 7000 CDM projects worldwide. 
  • During 2012 and 2013, the market for credits issued through the CDM crashed. The price of a certified emissions reduction unit has fallen to almost zero, partly because of low demand to the global economic slowdown. 
  • As of April 2014, there are over 2,540 projects with over 1,451,714,517 CERs issued. 
Background information: 
  • The Kyoto Protocol signed in 1997 commits industrial countries and economies in transition (Annex 1) to reducing their Greenhouse Gas Emission by around 5% in the first commitment period (2008-2012). The Kyoto Protocol became legally binding in 2005.
  • The CDM is the main source of income for the UNFCCC Adaptation Fund, which was established to finance adaptation projects and programmes in developing country to the Kyoto Protocol that are particularly vulnerable to the adverse effects of climate change. The Adaptation Fund is financed by a 2% levy on CERs issued by the CDM.
Funding source: 

Annex 1 countries + CER issuance fees

Notable information: 

Despite the high number of countries (70+) involved, certain countries dominate. The Asia and Pacific regions account for 77.95% of CDM projects. Africa accounts for only 1.86%.