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lead.jpg (22302 bytes)    Volume 3 
   Number 4
   26 October 1998 

DESIGNING A LEGAL AND INSTITUTIONAL FRAMEWORK FOR THE CLEAN DEVELOPMENT MECHANISM
Center for International Environmental Law (CIEL)


Introduction

The CDM of the Kyoto Protocol is designed to allow developed (Annex I) countries to sponsor projects in developing (non-Annex I) countries designed to reduce atmospheric concentrations of greenhouse gases. For example, such projects may be designed to reduce the carbon emissions by improving the efficiency of the energy sector or to increase carbon "sinks" by preserving or expanding forests. The Protocol provides limited detail as to how the CDM should operate. Consequently, many operational details remain to be clarified by the Parties.

This article summarizes the recommendations for a legal and institutional framework for the CDM contained in a report, Carbon Conservation: Climate Change, Forests and the Clean Development Mechanism, presented by the Center for International Environmental Law at the meeting of the UNFCCC subsidiary bodies in June 1998. The report, identifies problems and solutions emerging from experience with activities implemented jointly (AIJ) forestry projects in Costa Rica, and discusses their significance to the design of the Clean Development Mechanism (CDM) established by the 1997 Kyoto Protocol. It also addresses many of the concerns of project developers, environmentalists, and Parties as they grapple with defining the CDM and the role of forest management in climate change mitigation.

The report concludes that a legal and institutional framework must be in place before project crediting can begin. If this framework is not in place and project credits are accepted, investors and host countries will create a de facto framework through their actions. This could lead to serious imbalances and flaws in the framework, threatening the integrity and legitimacy of the CDM.

Article 12 of the Protocol lays out the beginnings of an institutional framework. The CDM is to be subject to the authority and guidance of the Conference of the Parties/Meeting of the Parties (COP/MOP), which must:

elaborate modalities and procedures with the objective of ensuring transparency, efficiency, and accountability through independent auditing and verification;

ensure that a share of the proceeds from certified project activities will cover administrative expenses and assist in meeting the costs of adaptation for particularly vulnerable developing country Parties;

determine what "part" of Annex I Parties’ quantified emissions limitation and reduction commitments may be met with certified emission reductions (CERs).

establish an executive board to supervise the CDM; and

designate operational entities to certify emissions reductions resulting from project activities.

Based on this skeletal framework and the results of CIEL’s review of existing JI forest projects, we make the following recommendations for the legal and institutional framework of the Clean Development Mechanism.

Recommendations for a Legal and Institutional Framework

The Executive Board

The structure and composition of the executive board must reflect a careful balance between developed and developing country interests. The executive board should coordinate its activities with the Council of the Global Environment Facility (GEF) to ensure that the work of the two institutions is complementary and not competitive or redundant. There is a natural divide between GEF and CDM projects. The GEF could finance cutting edge projects utilizing technology that might be deemed inappropriate for CDM projects. It also could fund infrastructure development and capacity building to support CDM activities. The GEF even has a mandate to assist vulnerable developing country Parties with adaptation. As reflected in Article 12, the executive board should provide "guidance" for both public and private projects.

Operational Entities

Operational entities should be independent auditors performing third party certifications. To avoid conflict of interest, operational entities should not be organizations that are themselves helping to finance projects, such as multilateral development banks. If institutions such as the World Bank are designated as operational entities, however, certification should be contingent upon a third party verification of the certification.

Criteria for Certification

For CDM project activities to be certified, climate benefits must be real, measurable, and long-term; and the resulting emissions reductions must be additional to any that would occur in the absence of the certified project. Consequently:

additionality should be based on objective, clear criteria;

these criteria should be established by technical advisory panels of experts acting in their own capacity;

where uncertainty exists, estimates of benefits must be conservative, and CERs must be discounted for that uncertainty;

emission reductions may be certified only after they have accrued and been verified by an independent audit; and

the temporal dimension of greenhouse gas emissions must be fully accounted for on a ton-year basis.

 

Contributing to Sustainable Development

One of the primary purposes of the CDM set forth in Article 12 is to assist developing countries to achieve sustainable development. In light of this:

activities must not harm forest ecosystems, biodiversity, or other environmental assets;

environmental assessments should be conducted to identify both positive and negative environmental impacts;

where opportunities are identified to provide ancillary benefits, though at a higher cost, co-financing arrangements should be made available;

the CDM should require that project benefits be shared with local communities and, in the case of forest projects, with long-term forest dwellers;

the CDM must promote the development of domestic institutional capacities to allow host countries to evaluate proposed CDM projects and monitor their outputs;

the CDM must promote the development and transfer of technology that provides maximum environmental benefit while complementing the social, economic and technical settings of host countries; and

the CDM should maintain a balance between forest and energy projects to ensure that the CDM promotes sustainable development in both these key sectors.

 

Ensuring Transparency and Public Accountability

Article 12 requires the CDM to be transparent, efficient, and accountable. Consistent with these criteria:

independent auditing and verification must be required and all complete audits be made available to the public;

the COP/MOP must also develop clear, detailed modalities for independent auditing and verification, so as not to exacerbate existing problems of incomplete data and lack of comparability between reported information;

all affected constituencies must receive early notice about which areas and resources are being considered for inclusion in CDM activities. These constituencies must have a meaningful opportunity to participate in project design, implementation, and monitoring;

in particular, long-term occupants directly dependent on forest resources being considered for inclusion in a CDM project must be asked for approval and invited to recommend modifications or alternatives and to share in the benefits of the project; and

projects should not be planned on indigenous people’s lands without their prior consultation and approval. Involuntary resettlement of long-term residents is not an option.

 

Ensuring that CER Prices Are Sufficient

Given the potential for different marginal costs of reductions in Annex I and non-Annex I countries, an unregulated market could result in prices for CERs from some CDM projects being bid down to very low levels. In order to ensure that developing countries are able to benefit from CDM projects, that sufficient resources are available to ensure environmental and social co-benefits, and to prevent the CDM from being skewed in favor of any particular type of project, mechanisms should be put in place to prevent the price of CERs from dropping too low. Potential options include:

Setting price floors for CERs;

Limiting the amount of CERs that may be used in a particular period;

Auctioning of available CERs by the CDM and;

Enhancing the value of CERs by reducing risk through market-based approaches (e.g. portfolios, insurance, escrows or guarantees).

 

Covering Administrative Expenses and Assisting in Adaptation

The CDM will need to raise sufficient funds to cover the cost of administrative expenses and assisting in adaptation. Hence:

proceeds from the sale of CERs should be used to assist in arranging funding of certified project activities (as required by Article 12.6), covering administrative expenses, and meeting a portion of adaptation costs.

alternatively, the CDM could acquire the necessary funds by retaining a certain share of CERs generated by projects.

the cost of CERs should be linked to the cost of adaptation to climate change; the greater the need for countries to adapt, the higher should be the price of CERs.

 

An Interim CDM Phase

Initially, the CDM, and all of its institutional parts, should operate an interim phase. This phase could culminate once the total CERs generated reaches some fixed percentage of combined Annex I assigned amounts. Other similar financing mechanisms, including the GEF, the Montreal Protocol Multilateral Fund, and activities implemented jointly (AIJ) under the FCCC, have gone through interim phases. While they experienced varying degrees of success, all of these mechanisms were either improved during their interim phase or, in the case of AIJ, replaced by a different and hopefully better mechanism. An interim phase would give the Parties an opportunity to experiment with and evaluate the mechanism, and make mid-course corrections where needed.

 

Determining What Part of Annex I Commitments May Be Met with CERs

Article 12.3(b) directs that Annex I Parties may use the CDM to achieve "part of" their emission limitation and reduction commitments under the Protocol. The COP/MOP is charged with determining how this limitation will be applied. There is currently no consensus as to how this limitation should be interpreted and applied. As suggested above, the CDM should start small and grow as it learns; with an automatic review triggered once the use of the CDM reaches some level (e.g., one or two percent of total Annex I assigned amounts). In addition, an overall limit on the use of the CDM should be imposed. Rather than imposing a per country limitation, the limit should again be based on an overall percentage of Annex I assigned amounts. Since Annex I countries presumably could purchase CERs from each other (or an equivalent part of their assigned amount), no obvious purpose would be served by limiting the portion of the total that could be purchased by any of them. The COP/MOP may decide to set a conservative initial limit on the use of the CDM, then if the automatic review proves that the CDM is functioning effectively, the limit may be further increased.

 

Financial Additionality

Financial additionality requirements should be mandated as well. Government funds to the CDM must be additional to GEF, Overseas Development Assistance (ODA) and other existing development assistance. This is very important because donor countries may have more incentive to finance the CDM than other development assistance institutions. For example, Annex I Parties, faced with the choice of financing the GEF and receiving global benefits, or financing the CDM and receiving CERs, will be tempted to put all their money in the CDM.

 

Increasing Non-Annex I Participation in the Protocol

After the interim phase, the CDM should review the need for conditioning the participation of non-Annex I Parties in the CDM on their agreement to increase their level of participation in the CDM and the rest of the Protocol regime, including developing sectoral or national baselines below business as usual, adopting full inventory and reporting requirements, and perhaps establishing national emission limitation and reduction commitments.

 

Consistency with International Norms

Project activities should not undermine other international environmental and human rights norms. Consequently:

the CDM should require that projects be consistent with the requirements of other international environmental agreements and international human rights norms;

countries should only be allowed to participate in the CDM to the extent they are in substantial compliance with other major environmental agreements and international human rights norms to which they are parties; and

CDM project activities should not be allowed on indigenous lands or territory without their informed consent and participation in the design and implementation of the project.

 

Vintaging of CERs

The location, date and project resulting in certified emission reductions must be identified on each CER. Tracking of CERs through this type of vintaging is essential for maintaining the integrity of the CDM. Identification of the project also allows buyers to choose the projects in which they want to invest, based on type of activity, integrity of project infrastructure and likelihood of project success.

 

Early Start for the CDM

Article 12.10 permits emissions reductions obtained between 2000 and 2008 to be used during the first commitment period provided that they have been certified by operational entities. These entities are to be selected by the COP/MOP, however, which means they are unlikely to be operational by 2000, or perhaps even much before the start of the commitment period, since the Protocol must enter into force before the COP/MOP may be constituted. Consequently, any projects that begin before that date do so at their own risk. This suggests that the COP, prior to the first meeting of the Protocol Parties, should provide guidance regarding what types of projects will be eligible for certification, possibly including retroactive certification.

 

Independent Evaluation of AIJ and Interim Phase of the CDM

The CDM should be informed by experience of the JI pilot phase (AIJ). Much work has already been done on methodological issues, such as additionality, baselines, leakage, project duration, monitoring, and verification. This information should be considered in the design of a set of standard methodologies for CDM projects. This could be accomplished as part of an independent evaluation of existing AIJ projects. In addition, any CDM interim phase should be subject to an independent review and evaluation.

 

Conclusion

A full range of climate mitigation and other environmental and social strategies should be linked through the CDM, not only because this approach can work, but because any other approach will fail. If the legal and institutional framework for the CDM is not carefully designed, with both climate and other environmental and social impacts considered, the resulting investments and incentives could undermine national and international goals beyond the climate change regime. The CDM should require that all projects internalize all social and environmental costs, over the long-term. Furthermore, the CDM must provide socio-economic benefits for recipient countries, and especially for local communities. Otherwise, long-term support for CDM projects cannot be guaranteed, and projects may not last. Given the right legal and institutional framework, the CDM can be a potent tool in achieving both global climate and sustainable development benefits.

 

The Center for International Environmental Law (CIEL) is a public interest, not-for-profit environmental law firm founded in 1989 to bring the energy and experience of the U.S. public interest environmental movement to the critical task of strengthening and developing international and comparative environmental law, policy, and management around the world. CIEL provides a full range of environmental legal assistance, including policy research and publishing, advice and advocacy, legal education and training, and institution building

For more information contact:

The Center for International Environmental Law (CIEL)
1367 Connecticut Avenue, NW Suite #300
Washington, DC 20036 USA
Tel.: (202) 785-8700; Fax: (202) 785-8701;
E-mail: cielus@igc.apc.org
Internet: http://www.econet.apc.org/ciel/index.html