FACTBOX-The future of the Clean Development Mechanism

Mon Nov 30, 2009 8:35am GMT

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BEIJING Nov 30 (Reuters) - The Clean Development Mechanism, part of the U.N's Kyoto Protocol, promotes investments in emission-reducing projects in the developing world by companies and governments in rich nations.

In return for building wind farms or other projects, such investments can earn valuable carbon offsets called certified emission reductions (CERs) that can be sold for profit or used to meet mandatory targets to cut emissions.

Reforming the CDM will be part of the agenda at U.N. talks that start next week in Copenhagen, when negotiators from around the world gather to discuss a new global agreement to combat climate change once the first phase of Kyoto expires in 2012.

Below are the main issues surrounding the reform of the CDM.

CHINA

China -- by far the biggest generator of CERs -- has strenuously defended the current system and the onus it puts on industrialised countries to fund CO2 reduction projects in the developing world. China says it does not oppose reform, but any changes should enable more investment and technology to flow into China and other developing countries.

China has also called for the CDM system to be scaled up -- possibly through a much wider application of "programmatic CDM" that will allow a whole village or community to earn credits by installing more efficient cooking stoves, solar panels or energy-saving lightbulbs. [ID:nSP390197]

Officials also say there should be less bureaucracy and fewer delays, and streamlining the complex approval process is expected to discussed at Copenhagen and beyond.

Beijing also opposes European proposals to overhaul the "project-based" CDM and impose targets on entire industrial sectors, calling them covert attempts to impose binding emission targets on developing nations.

THE EUROPEAN UNION

The European Union -- the biggest market for CERs -- has criticised the CDM on three fronts. First, the CDM has failed to maintain "environmental integrity" because of its focus on so-called low-hanging fruit -- easy and cheap greenhouse gas abatement projects that are not doing enough to curb global warming. It is also considering a two-tier system in which low-quality CERs are traded at a lower price.

Second, the CDM so far has been dominated by the most advanced of the developing nations -- primarily China, India and Brazil -- while vulnerable and unindustrialised nations in Africa have been given nothing.

Third, the EU has said the project-based CDM has been too small in scale to have any meaningful impact on global CO2 emissions.

Their answer to all these problems has been a sectoral approach in which emission reduction targets are imposed on entire industries such as power generation, cement or steel. According to EU proposals, each sector is assigned a benchmark, and will be awarded carbon credits if it makes CO2 cuts above and beyond that benchmark.

Europe still hopes major developing countries such as China and India can be persuaded to join such a scheme, while the old CDM could be maintained to fund clean-energy projects in poorer nations.

THE UNITED STATES

The United States never ratified the Kyoto Protocol and hasn't participated in the CDM up to now, Even though the Obama administration has made a commitment to implement its own cap-and-trade regime, many legislators are unhappy with the idea that domestic CO2 targets can be subject to monitoring and verification by the United Nations.

Draft climate legislation in the United States allows the use of overseas mechanisms to offset carbon emissions, and the country's negotiators have said they could work with the CDM.

But many are still reluctant to join a treaty that commits its own industries to stringent CO2 cuts without forcing those in China to do the same. For that reason, they are supportive of EU sectoral measures, which could help allay U.S. concerns about lost competitiveness.

BRAZIL

Brazil is the third biggest beneficiary of the CDM after China and India. Analysts have predicted it could earn $16 billion per year should REDD projects -- "reducing emissions from deforestation and degradation" -- be approved in any new scheme. However, Brazil is backing a separate REDD scheme, arguing that the inclusion of forest projects under the CDM would enable rich nations to meet their CO2 targets on the cheap.

JAPAN

Japan has been the second biggest buyer of CERs after the European Union and has also been calling for reform, saying a new system needs to ensure developing countries make bigger commitments to reducing greenhouse gases. It has also called for more standardised rules for CDM projects, particularly for the baselines by which a project's CO2 cuts are evaluated.

NON-INDUSTRIALISED NATIONS

The CDM has focused primarily on reducing industrial greenhouse emissions, and it has not brought much to relatively unindustrialised regions like Africa. According to the latest statistics from the UNEP Risoe Centre, only around 2 percent of the total CDM projects and 3 percent of CERs currently in the pipeline have originated from the continent.

The major parties in the negotiations concede that CDM wealth should be spread more evenly, and the CDM's executive board has also said that a more equitable distribution of projects will be discussed at Copenhagen. (Reporting by David Stanway, Editing by David Fogarty) ((david.stanway@thomsonreuters.com; +86 10 6627 1289; Reuters Messaging: david.stanway.reuters.com@reuters.net))

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