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Emission reduction targets and outcomes of the Clean Development Mechanism (2005–2020) [1]

['Alex Y. Lo', 'New Zealand Climate Change Research Institute', 'School Of Geography', 'Environment', 'Earth Sciences', 'Victoria University Of Wellington', 'Wellington', 'New Zealand', 'Ren Cong', 'Guangdong Finance Investment Holdings Co.']

Date: 2022-08 

The Clean Development Mechanism (CDM) allows developing countries to earn carbon credit units by reducing greenhouse gas emissions. Here we assess the emission reduction outcomes of the CDM between 2005 and 2020. The analysis covers 3,311 CDM projects hosted by 79 countries and over 10,000 Monitoring Reports. We identify which host countries and project types departed from original forecasts more. Overall, the total amount of actual emission reductions was 16% below the targets envisaged by project proponents. Emission reduction projects consistently under-performed over the year, but performance varied between and within regions. Industrial HFCs and N 2 O projects exceeded their targets, whereas landfill gas and methane avoidance projects under-performed by larger margins. Economic gains were unevenly distributed. Estimated revenues relative to GDP were higher for larger emerging economies, and disproportionately smaller for the deprived members of the Global South. Four host countries (China, India, South Korea and Brazil) not only dominated the market, but also gained an advantage from the higher carbon prices before 2012. Least Developed Countries had their carbon credits issued in more recent years when prices were much lower. The results show an imbalance in economic outcomes and raise questions about the effectiveness and equity of this Kyoto mechanism. Weak targets under Paris Agreement could intensify these challenges.

Competing interests: I have read the journal’s policy and the authors of this manuscript have the following competing interests: • AL is a member of the PLOS Climate editorial board. • RC is affiliated to Guangdong Finance Investment Holdings Co., Ltd. The authors declare that they have no other known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.

Funding: AL received funding for this research from the National Natural Science Foundation of China (Grant No.: 41601605). RC receives salary from Guangdong Finance Investment Holdings Co., Ltd. The funders had no role in study design, data collection and analysis, decision to publish, or preparation of the manuscript.

The CDM was also designed to channel carbon finance to the Global South. The size of direct economic contributions to non-Annex I Parties depends on the quantity and price of CER units. Our analysis compares the price expectations of project proponents and market CER prices to understand the discrepancies in economic contributions. We show the extent to which direct economic contributions relative to GDP, are unevenly distributed between higher- and lower-income developing countries. We explain this in terms of the timing of CER issuance and price volatility. Our study covers the active lifetime of the CDM to provide conclusive evidence and insights into the ways forward. The findings raise questions about the effectiveness of the CDM in meeting its targets and delivering equitable outcomes. CDM-style Paris mechanisms may result in similar patterns of uneven distribution of benefits, if their scope and designs largely replicate those of Kyoto mechanisms. These results are particularly important for re-thinking the limits of these mechanisms in delivering development benefits and how they should be designed in order to benefit the economically deprived members of the Global South in more direct and effective ways.

This article assesses the emission reductions outcomes of 3,311 CDM projects that have been issued CERs. The main objective is to measure project performance by comparing actual emission reductions (ex post) with estimated emission reductions (ex ante). There were signs of under-performance as early as 2006 [ 4 ], but evidence is conclusive only when most projects are given time to operate to their proposed timeframe. Most projects have a crediting period of either 7 or 10 years, and most of them were registered on or before 2011. We identify the project types and host countries that did not meet the emission reduction targets stated in CDM project proposals, known as Product Design Documents (PDDs). To determine how many CERs to issue, the CDM Executive Board (EB) requires the project proponent to submit a Monitoring Report (MR), which specifies the amount of estimated and actual emission reductions in a given monitoring period. The data we used are derived from these MRs published between 2005 and 2021, and an official CDM project database.

The CDM enables Annex I Parties (industrialized countries) to produce and acquire carbon offset units through investments in GHG mitigation projects in non-Annex I Parties, predominantly in the Global South. These offset units, known as Certified Emission Reductions (CER), represent a reduction, avoidance or sequestration of one metric ton of CO 2 that would otherwise be emitted into the atmosphere. Annex I Parties can use CERs to meet their emission reduction targets under the Kyoto Protocol [ 2 , 3 ]. The CDM issued the first CERs in October 2005. Since then, it has mobilized more than US$162 billion of financing to non-Annex I Parties. As of September 2021. US$162 billion is the total capital investment by CDM projects, including Programmes of Activities (PoAs), that have been issued CERs. This is a conservative estimate, because not all projects reported their financial details. The US$162 billion is estimated from a fraction of projects with CERs issued (N = 2,786) that collectively accounts for 69.5% of estimated (ex ante) annual emissions [ 5 ].

Article 6 of the Paris Agreement provides a basis for establishing new mechanisms for mitigating greenhouse gas (GHG) emissions after 2020. The new mechanisms are likely to involve the use of internationally transferred mitigation outcomes to achieve nationally determined contributions (NDCs). These mechanisms are expected to replace the Clean Development Mechanism (CDM), a multi-billion euro carbon finance mechanism established under the Kyoto Protocol [ 1 ].

2. Methods

The timeframe of our analysis, which runs from 2005 to 2020, is important for understanding our findings. The first commitment period of the Kyoto Protocol commenced in 2005. The first few years after 2005 witnessed a market boom with higher CER prices. Sharp changes occurred towards 2012, when the first commitment period completed. The end of 2020 is another watershed. The second commitment period concluded on 31 December 2020. The European Union no longer accepts the use of international units, including CERs, for compliance under the EU ETS after 2020. While the CDM continues to operate, no new projects are expected to seek registration.

Emission reduction data were collected from MRs. Other project information was gathered from the official database of CDM projects (cdm.unfccc.int/Projects/projsearch.html), including project type, host Party (country), duration of monitoring period, date of CER issuance, and start date of validation. The database was accessed in March 2021 and updated in September 2021 [5].

2.1 CDM projects included in the analysis The full CDM database has 8,206 registered CDM projects. Our project-level analysis excluded 352 Programmes of Activities (PoAs), because new projects can be added to the programme without undergoing the complete CDM project cycle, and therefore it is hard to attribute emission reduction estimates to their component Project Activities. PoAs account for 2.2% of all CERs issued [5]. A total of 3,312 projects (out of 7,854), formally known as CDM Project Activities, have been issued CERs. The first set of carbon units was issued in October 2005, and the latest date of issuance was 30 August 2021. We excluded one project (CDM reference #1) and the first 19 Monitoring Reports (MRs) of another project (CDM reference #3), because their MRs did not clearly specify the amount of estimated emission reductions for the relevant monitoring period and their PDDs did not include a breakdown of yearly estimates. The project activities of these two projects (first 19 MRs of CDM Project #3) generated a total of 66,958,005 CER units. Our analysis on emission reductions is based on the remaining 3,311 CDM projects, which were hosted by 79 non-Annex I Parties.

2.2 Estimating emission reductions and measuring performance The amount of emission reduction is stated in the MRs of these 3,311 projects. Each project has at least one MR published, and the average is four MRs. There are over 10,000 MRs. Typically, each Monitoring Report has only one issuance record, but those that transcend the first and second Kyoto commitment periods have two records. We reviewed each MR and recorded the amount of actual emission reductions reported by the project proponent, which was verified by an independent auditor and accepted by the CDM EB before CERs were issued. The majority of MRs were revised after reviews, and some of them were withdrawn. We adopted the revised and final versions of MRs and excluded withdrawn MRs from the analysis. Each MR indicates the amount of emissions actually reduced during a given monitoring period, against a ex ante estimate for the same period. We identified 13 MRs that indicate their actual emission reductions exceeding the amount of CERs issued. These 13 MRs reported more actual emission reductions than CERs issued. A common explanation is that the CDM EB requires the amount of CERs issued be capped at the level of average annual emissions estimated in the registered PDD. In analyzing emission reductions, we adopted the value of emissions actually reduced, as reported in the MR. As a result, the aggregate values do not perfectly match the total amount of CERs issued. Duration of monitoring period ranges from 1 days to 4,107 days and averages 419 days (N = 10,999). The start date of the earliest monitoring period was 1 April 2000, and the latest end date was 31 December 2020. Ex ante estimates are also extracted from MRs. However, some of the pre-2010 MRs do not indicate the amount of estimated emission reductions for the corresponding monitoring period. To document the original expectations of project proponents, we retrieved these emission reduction targets from the first PDD that was approved for registration, rather than the post-registration, revised PDD. Moreover, we did not take the self-reported estimates at face value, but cross-checked the calculation presented in the MR against the approved PDD to ensure accuracy and consistency. We believe that there are typos, miscalculations, and tendencies for strategically choosing variables (e.g., number of actual operating days) to present a lower value of estimated emission reductions in MRs. For some projects, the amount of estimated emission reductions varies every year. We therefore adopted the estimates specific to the monitoring period concerned, rather than the yearly average of the entire crediting period, where applicable. For this reason, we did not use the estimated emission reduction data from the official CDM Database. This database also does not provide data on actual emission reduction, which are gathered from individual MRs. Performance rate is calculated to indicate the extent in which a project met its pre-determined emission reduction targets within the crediting period(s) in which CERs were issued. It is the ratio of actual emission reductions to estimated emission reductions. Weighted performance rates are used to describe projects (N = 3,311). Each project resulted in a different amount of emission reductions, and therefore its impact on the overall performance rate of a host country or project type is weighted by the total amount of emission reductions generated from this project during the crediting period(s). Average performance rates (not weighted) are used to describe CER issuance records (N = 10,999).

2.3 Comparing carbon prices We compared the price expectations of project proponents with the market CER prices. A sub-sample of the 3,311 projects was used. An expected price is the level of market CER price predicted by the project proponent. It is the offer price at which they expected to sell their CER units. Price expectations are a key driver of CDM investment decision-making. The expected level of CER price is often stated in the PDD or its attachments for demonstrating the project’s expected higher financial performance over an economic baseline (i.e., return on investment without CER incomes) in order to justify that the investment would create ‘additional’ emission reductions, especially for renewable energy projects [6, 7]. We identified expected prices from 2,113 CDM projects. Where multiple expected prices were presented in a PDD, the lowest one was adopted as a conservative estimate (i.e., the closest to market prices, in most cases). Weighted reference prices are calculated on the basis of market CER prices. It is used in this study to approximate the market value of a CER unit at the time when it was issued, and to compare with the target (i.e., expected price). Our calculation was based on an average value of the daily CER closing prices in the 30 trading days prior to the date of CER issuance. We adopted the prices of monthly CER futures contracts traded in the Intercontinental Exchange, because there was very limited spot CER trading from the end of 2012. Monthly CER futures prices are the closest alternative to spot prices. Spot price is the current price at which a CER unit can be traded for immediate delivery. The price set in a monthly futures contract is usually very close to its spot price, due to the short timeframe. Yet, we were unable to retrieve this price information for CER units issued before March 2008, which account for 5.7% of total CER units issued. We used annual average secondary CER prices obtained from the World Bank’s reports (2007, 2009) to substitute for these missing prices. Weighting is based on emission reductions. A CDM project might have its CERs issued at different times during or after the crediting period. Accordingly, there were multiple reference prices for the different monitoring periods of the same project. The reference prices of each project were weighted by the amount of actual emission reductions the project generated in the corresponding monitoring period. As a result, these prices reflect the timing of CER issuance. Because CER prices were on a downward trend after 2011, the more the CER units issued in later years, the lower the weighted prices. These prices are plotted in a graph and ordered by the start date of project validation, which marks the time when the project proposal was submitted for third-party validation [8]. Same as the ‘Start of Project’s Public Comment Period’ specified in [8]. The official database of CDM projects includes complete information on the validation start date of each project, which is therefore reliable and consistent for the purpose of research [5].

2.4 Estimating economic contributions The volume of CER units generated relative to the GDP of a given host country is used by the UNEP DTU Partnership as “an immediate expression of the importance of CDM to the economy” [9]. The ratio of these two variables provides an indication of the direct economic benefits of producing and exporting these units, given the economic scale of the host country. We used the amount of actual emission reductions for estimating economic contributions, but also included revenue estimates to account for price variations. We estimated revenues (ex post) from sale of CER units for each of the 3,311 projects, which are the product of actual emission reductions in a given monitoring period and the reference CER price (without weighting). Because we used secondary market prices as reference prices, the value of CER units generated from ‘bi/multilateral’ CDM projects might have been underestimated. Bi/multilateral projects have a formal arrangement at the time of project development with an Annex I Party that intends to buy and use the credits. They operate under a forward purchase agreement, which typically specifies a mutually agreed price level or a price range at which the CER units generated from the project would be sold to a buyer from an Annex I Party. Purchase agreements with set prices could protect project proponents and host countries from volatile prices. On the other hand, ‘unilateral’ CDM projects do not have a letter of approval from an Annex I Party at the time of registration and do not have a prior contractual arrangement with an international buyer [2]. We do not have access to all forward transaction data and therefore cannot include agreement prices in our analysis. Despite this limitation, our revenue estimates are useful for comparing economic contributions between countries. Many emission reduction purchase agreements are guaranteed only up to 2012 [4], but over 45% of CER units were issued after 2012. Agreement on a transaction price was typically reached long before the project started and therefore likely to be higher than market prices, which began to fall sharply from 2011. The large differences between the two prices since 2011 challenge the assumption that all purchase agreements would be exercised at the indicative prices and volumes [10]. CER units might eventually be sold outside the range of these agreement prices—likely at a lower level, given the availability of significantly cheaper CER units in the market. Renegotiations and cancellations did occur. Official data suggest that 19% of buyers have withdrawn from the bi/multilateral projects to which they were committed [9]. Moreover, 69.6% of all CDM projects were bi/multilaterally established (Table 1), but China alone accounts for most of these projects and has an exceptionally high percentage of bi/multilateral projects. Excluding China, less than half of the CDM projects were bi/multilaterally established. Although market prices do not perfectly reflect actual transaction prices, the changes in the latter track market trends. This is important for the purpose of this analysis, which aims to highlight the time-sensitive economic contributions of the CDM in a period of over 15 years. PPT PowerPoint slide

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TIFF original image Download: Table 1. Number of bi/multilateral CDM projects with CERs issued by host country and region. https://doi.org/10.1371/journal.pclm.0000046.t001 The revenues analysis adopted the amount of CERs issued, rather than actual emission reduction, because only CERs are traded in the market. All revenue estimates were discounted by 2% to account for the transfer of proceeds from CER sales to the Adaptation Fund established under Kyoto Protocol. To address the different price levels at different times of CER issuance, the aggregate revenue estimates were converted to 2010 prices using the International Monetary Fund (IMF) Euro Area GDP deflators for the time (year) of CER issuance. For estimating economic contributions to individual host countries, the IMF GDP estimates were adopted as denominators and expressed in Euro (converted from USD using year-end exchange rates). The ratio between revenues (current prices) and GDP was calculated for each country and each year between 2005 and 2021, using the nominal GDP estimate for that year. The values were then aggregated for each country. Project type, geographical region, Commitment Period, host country and whether it is a ‘Least Developed Country’ (LDC) were specified in the CDM database.

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[1] Url: https://journals.plos.org/climate/article?id=10.1371/journal.pclm.0000046

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