An Analysis of Clean Development Mechanism

Editor's Notes

• #9: Transaction costs are part of almost any trade or investment. In economics theory, the price of a commodity is at an equilibrium when it equals the marginal cost of production. However, in order to get the product from the producer (seller) to the consumer (buyer), there are often additional costs beyond the production. These may include costs of – or of time lost during – negotiations and regulatory processes, as well as legal or banking fees and opportunity costs, among others. Transaction costs include expenditures that are over and beyond production costs. Transaction costs raise the price of a product beyond the marginal cost of production, thereby reducing demand for the product. Transaction costs associated with the CDM can be incurred at the project level, the national level and the multilateral level1. These may include: Project Design cost, National Approval cost, Validation cost, Registration Cost, Verification cost, Certification costs and a 2% contribution to adaptation fund for all CERs generated and sold in a particular year.
• #18: The CDM is a project-based emissions trading mechanism. To work effectively, it requires detailed rules upon which to base emission reduction calculations so that there is consistency and comparability in the results achieved for different project types. This is fundamental for the functioning of a fair and equitable trading system. The level of reductions achieved by a specific project is based on several components covering firstly, what the counterfactual scenario would be in the absence of the project (the ‘baseline’) and the emissions associated with such a scenario (‘baseline emissions’). Second the boundary of the activity and the emissions occurring within that boundary (as monitored during implementation i.e. the ‘project emissions’), and third, whether the project leads to any changes in emissions outside of its boundaries (what is called ‘leakage’).
• #19: This project has the purpose to selling renewable electricity to the Thailand national power grid. The rice husk fuel consumed in the power plant is a waste by-product of rice milling. Commissioning of the project was completed on 25/03/2009 when the project began selling electricity to the grid. Therefore, the power plant was fully operational prior to commencement of the CDM crediting period on 17/02/2010. The steam turbine generator, boiler and biomass combustion system utilized by the power plant produce electricity from renewable rice husk.
• #23: Clean Development Mechanism (CDM) is a mechanism that is based on the Kyoto Protocol. It is a scheme for GHG emission reduction through cooperation between developed countries (Annex I Parties) which are committed to certain GHG emission reduction targets under the Kyoto Protocol, and developing countries (non-Annex I Parties), which do not have any commitments to reduce GHG emissions. The purpose of CDM is to assist to accomplish the GHG reduction targets of developed countries under the Kyoto Protocol, as well as to contribute to sustainable development of non-Annex I Parties (host countries). Under the CDM, Annex I Parties are able to acquire all or parts of the credits (certified emission reductions (CERs)) which result from the projects. Non-Annex I Parties will benefit from the CDM projects. Although CDM has benefits for host countries and investors, it also has challenges of unexpected results. The recent crash in prices of CDM credits or CERs due to reduce demand and oversupply has led to the reduction of lost of incentive in long-terms for climate change mitigation. Any rescue options create to maintain the prices of CER to restore the confidence of private sector and ensure that it can play an important role in mitigating climate change in the long run.