The Clean Development Mechanism

The carbon credits market is a product of the Kyoto Protocol Clean Development Mechanism, or CDM. Under this mechanism, companies in rich countries can buy credits that let them avoid cutting their own GHG emissions by paying companies in poorer countries to do it.

A CDM credit, which allows a company to emit a ton of CO₂, fetches around €15. But before a project can earn the right to sell credits for GHG emissions, it needs to be approved by a U.N. body overseeing the CDM program. In 2004 and 2005, the U.N. board automatically approved 95% of projects proposed to it. These days, the U.N. is rejecting projects at a greater rate. Last year, the U.N. board gave automatic approval to only 57% of projects. Overall, it rejected 9% of proposed projects last year, more than double its rejection rate in 2006.

The issue centers on the principle of “additonality” or whether projects would have been built anyway without financial assistance from selling credits. If so, credit buyers wouldn’t be fulfilling their obligations to reduce GHG outputs. This issue is especially relevant as the U.S. mulls a carbon-trading system.

In total, the carbon market last year was valued at €40.4 billion, according to Point Carbon, aNorway based industry consultant. Of that total, Western companies and governments invested €6 billion in 2007 in credits from projects in the developping world.

Source: WSJ, 14/04/08, 15/04/08, 23/04/08