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The Future of CDM: Observations and Reform Proposals

This presentation discusses the current experiences and problems with the Clean Development Mechanism (CDM) and proposes solutions to improve its effectiveness and contribution to sustainable development. Topics covered include slow project registration, high transaction costs, post-2012 uncertainty, and insufficient incentives for private investors. Proposed solutions include shortening approval times, reducing transaction costs, expanding applications for Certified Emission Reductions (CERs), and enhancing sustainable development benefits.

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The Future of CDM: Observations and Reform Proposals

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  1. Where is the CDM’s future? Some critical observations and reform proposals Oxford, September 19th 2005 Sonja Butzengeiger Perspectives Climate Change Hamburg Institute of International Economics

  2. Contents of Presentation • Recent CDM experiences and problems • CDM: lame duck or success story? • Real contribution to sustainable development? • Slow registration of projects • High transaction costs (TAC) • Registration/approval risk • Post-2012 uncertainty • Insufficient incentives for private Annex-B investors • Proposed solutions • Shortening of approval times, reduction of TAC • Long-term planning security • Expanded applications for CERs • Enhanced SD-benefits (project type, levies) • Discussion

  3. Review of CDM-developments • Lame duck or success story? • 1997 - Kyoto Protocol • 2001 - Marrakech Accords • 2002 - Set-up of CDM-EB, development of PDD-template • 9 DNA-Host Country, 1 Investor Country • 2003 - First baseline-submissions, none of the 35 accepted • DNA-boom at year end: 33 + 8 new DNAs • 2004 - 1st CDM-project registered • Current demand for 1st Kyoto-Period • 2-3 billion tons CO2-eq, • (of which 1.5 billion by funds alone)

  4. Lame duck or success story? > 175 projects, estimated CER-volume 341 Mio. until 2012

  5. (April 2005) Trends in submitted project methodologies 45% Small Scale !

  6. Real contribution to SD?

  7. Barriers against CDM-investment • Slow registration of CDM-projects • Lead-time of 1-2 years (with/without AM) • Cut-off date 31.12.05 for pre-registration crediting High up-front transaction costs • Regular scale projects with AM • PDD + validation + registration = 25,000-60,000 EUR • Verification = 5,000 -10,000 EUR • EB Administration fee = ? • Host country approval = ? • Lower for small scale projects, but generally not viable if less than 20,000 CERs/year

  8. CDM Barriers II • Difficult additionality assessment • Business as usual versus additional benefits • Opposed by business, but needed from environmental and SD-perspective • Consolidated additionality test of EB - complex High risk of rejection • Average rejection rate is 50% • Especially for complex project types as energy efficiency + transport (SD-benefits), and forestry Low incentives for business engagement in past • Now EU-ETS Post 2012-uncertainty • Closing window for investment opportunities

  9. Contents of Presentation • Recent CDM experiences and problems • CDM: lame duck or success story? • Real contribution to sustainable development? • Slow registration of projects • High transaction costs (TAC) • Registration/approval risk • Post-2012 uncertainty • Insufficient incentives for private Annex-B investors • Proposed solutions • Shortening of approval times, reduction of TAC • Long-term planning security • Expanded applications for CERs • Enhanced SD-benefits (project type, levies) • Discussion

  10. Proposed Solutions I • Shortening of approval periods • Strict timelines for international bodies • need to secure sufficient personal capacities • Shortening of pre-registration period (4 instead of 8 weeks) • Accelerated development of consolidated methodologies Reduction of TACs • Allowing bundling for unlimited sizes • Centralized database for baseline data • Sectoral CDM • Streamlined but environmentally integer additionality determination • Decision on administration fee and cross-subsidization of small projects

  11. Proposed Solutions II • Contribution to SD • Financially supported development of methodologies for energy efficiency and transport • Higher adaptation levy for low-development benefit projects • Concentration of capacity building in low income countries with high emissions Increased incentives for business participation • Crediting of CERs against domestic climate policy instruments • Planning certainty beyond 2012

  12. Proposed Solutions III • Provide long-term CDM perspective • No such perspectives without long-term international climate policy regime • Constructive Post-2012 negotiations need both • additional commitments by current Annex-B countries, but also • clear commitments by recently industrialised countries and major emitters from the developing world. • Difficulty to merge intensity targets with CDM-concept • Unilateral declaration of post-2012 CER validity

  13. The floor is open.. Discussion

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