Clean Development Mechanism (Article 12)

The CDM is another cost-effective and market-based tool to encourage the private sector and developing countries to contribute to emission reduction efforts.127 The nature of the method makes it a mitigation tool for combating climate change.128 In this method, industrialised countries can earn credits by making sustainable investments that reduce CO2 and GHG

emissions in developing countries. This mechanism is another way for industrialised countries to meet their commitments to CO2 and GHG reductions without focusing within their own

countries.129 Thus, the CDM resembles the JI system, but the host country may be a developing country rather than an Annex B country. This is important given that, while under the Kyoto Protocol developing countries (i.e., non-Annex 1 countries) are not allocated emission reduction targets, these developing countries are nonetheless producing emissions, especially India and China. According to the World Health Organization, New Delhi, the capital of India, is the eleventh-most polluted city in the world, with other Indian cities— Patna, Gwalior, Allahabad and Raipur—appearing in the top ten.130 _{Developing countries, often lacking in}

institutional capacity, are also less equipped to respond to environmental problems without international investment.131

The aim of the CDM is to accomplish the goals and objectives of the Kyoto Protocol and UNFCCC. At the functional level, the key objectives of the CDM are (a) to steer sustainable investments to developing countries to assist in achieving sustainable development, and (b) to reduce the high cost of meeting emission targets for developing countries by providing a cost- effective mechanism to achieve their emission targets.132

127 _{Michael Gillenwater and Stephen Seres, Clean Development Mechanism: A Review of the First International}

Offset Program (Pew Center on Global Climate Change, 2010),

<https://www.c2es.org/site/assets/uploads/2011/03/clean-development-mechanism-review-of-first-international- offset-program.pdf>, 6.

128_{Anita Talberg and Leslie Nielson, The Kyoto Protocol's Clean Development Mechanism (Parliament of}

Australia, 2009),

<http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BN/0809/ KyotoProtocolCDM>.

129_{CINU Mexico, above n 70.}

130 _{Oliver Smith, ‘Is Delhi the Most Polluted City on Earth? Not Quite’, The Telegraph (online), 9 November}

2017), <https://www.telegraph.co.uk/travel/destinations/asia/india/articles/delhi-most-polluted-city-in-the- world/>.

131_{K., Begg, T .Anderson, S. Parkinson and Y. Mulugetta, Issues for the Clean Development Mechanism. CES}

Working Paper 04/99 (Centre for Environmental Strategy, University of Surrey, 1999) 2.

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The benefits of the CDM mechanism are similar to those of the JI mechanism. CDM benefits developing countries through (a) direct foreign investment in their infrastructure, (b) access to better technology, and (c) environmental benefits such as reduction of emissions and decreased environmental degradation. Industrialised countries are required to meet their own emission targets, which they can do in one of three ways: (a) investing in their own country, where land, labour and technology is expensive; (b) investing in other industrialised or transitioning countries—where cost, although it may be lower, is still often significant—under the JI mechanism; or (c) investing in developing countries through the CDM. As developing economies offer low land and labour costs, the CDM provides an option that generates emission credits at a lower cost than investing in projects in their own countries. This is, therefore, a relevant economic instrument for Bangladesh.

In short, the CDM appears to offer effectiveness, efficiency and flexibility and to create a win– win situation for the sponsor (industrial country) and host (developing country). Whether it is effective, however, depends upon whether it contributes to the goals and objectives of the Kyoto Protocol. To assess this, it is necessary to examine the performance of the CDM.

The planners of the CDM highlight its five defining features.133 First, the CDM is a cost- effective way to reduce the GHG emissions, especially for the industrial countries. As discussed above, industrialised countries are legally bound to meet their emission reduction commitments, which is expensive when they develop sustainable projects in their own countries. The CDM allows them to meet these emission commitments at less cost by investing in developing countries. Second, the CDM provides flexibility, because the industrialised countries can meet emission reduction commitments either by investing in their own countries or in other (developing) countries. Third, the same benefit in terms of emission reduction is achieved whether measures are taken in the home country or in the host country. Fourth, successful execution of projects under the CDM will provide emission credits to the industrialised country, which can be used in three ways: (a) adjusting emission reduction targets, (b) saving into a credit bank for future use, or (c) selling on to another industrial country in accordance with the emission trading system under the Kyoto Protocol. Finally, another

133_{UNCC, The Clean Development Mechanism (UN, 2017),}

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feature of CDM is that it is not only available to governments; private investors or private companies can also make investments and earn profits under the CDM mechanism.

Projects under the CDM are supervised by a CDM Executive Board, which ensures that all processes—development of the proposal, approval of the recipient government, approval of donors, allocation of certified emission credits to the industrialised countries or private investors and other matters—are performed according to the guidelines of the Kyoto Protocol.40 _{To qualify for the establishment of a board, a project must meet several criteria,}

verified through due process and documentation: (a) the ability to reduce emissions, (b) the approval of all the parties, (c) a long-term orientation, and (d) reliability and measurability.

The CDM has been the target of considerable criticism. According to one study (which examined 16 CDM projects in terms of their contributions to CDM objectives such as technology transfer, reducing emissions and contributing to sustainable development), 72% of CDM projects are dominated by China, India and Brazil, and while these have been successfully reducing emissions by up to 77% in the host country, their contribution to sustainable development was a little as one per cent.134 The question may arise, why is the contribution to sustainable development as low as one per cent? One reason would be that the Kyoto protocol has neither explicitly defined sustainable development nor specified how it can be achieved alongside the CDM. Based on these findings, it appears that while CDM projects are largely able to fulfil the first objective of the Kyoto Protocol, the objective of sustainable development has not been achieved. This raises the question of why full performance has not been achieved. Are the problems on the implementation side or with the mechanism itself? If the latter, can the mechanism be rectified?

Another study has found that the effectiveness of the CDM is strongly influenced by transaction costs, the size of CDM projects and institutional rigidity.135 When a CDM project is initiated, it involves significant costs for project planning, registration, baseline development, verification and certification. As the implementation costs increase, they also increase the transaction cost of the project, which influences the feasibility of CDM projects. The research findings also show the impact of institutional rigidity, especially in the host country, such as

134 _{UNCC, The Contribution of the Clean Development Mechanism Under the Kyoto Protocol to Technology}

Transfer (UN, 2010), <https://cdm.unfccc.int/Reference/Reports/TTreport/TTrep10.pdf> 21.

135_{A. Michaelowa and F. Jotzo, ‘Transaction costs, institutional rigidities and the size of the clean development}

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delays, additional levies by governments and other institutional barriers. As the problems or barriers increase, the cost of the project goes up. These factors have tended to reduce the size of CDM projects in developing countries. This study concludes that the demand for CMD exists, but that relatively few CDM projects have been completed due to transaction cost and institutional rigidity; to address this, enhanced cooperation between governments is needed. Chapter 4 of this thesis will discuss scope, structures and potential areas that create opportunities for CDM projects in Bangladesh.