Making the mechanism work better For wind
The Kyoto Protocol's Clean Development Mechanism may be proving a roaring success for wind industry development in China (previous story), but the same is not true for other developing countries. India is perhaps the exception, though in megawatts its pipeline of projects qualified for CDM status is just half the volume of China's pipeline. Registered CDM projects in developing countries can sell Certified Emission Reduction units (CERs) to buyers in developed countries as part of the broad commitment by signatories to the Kyoto Protocol to reducing overall carbon emissions.
Compared with China, where nearly all wind projects are registered for CDM status, developers in India are less interested in the extra income that sale of CERs can bring. In India's established wind market, already with a strong manufacturing base led by Suzlon, the CDM is quite often seen more as a costly burden than an opportunity for investors, a mindset the government is trying to change. Even so, India has almost 3 GW of wind plant up for CDM registration. While a lot less than China's 5960 MW of registered projects, it is still 2 GW more than its nearest competitor in the wind CDM rankings (table next page).
Market mechanisms like the CDM "need large, dynamic markets and something of a secure government framework in place," says Steve Sawyer of the Global Wind Energy Council. China certainly has that, as does India. Both countries also have strong renewable energy legislation, which provides good incentives to potential investors, particularly for wind power. Christiaan Vrolijk of Carbon Resource Management agrees. "They also have good access to capital, which makes investment in wind projects easier than in somewhere like Vietnam or Mongolia," he says.
Few other developing countries come close in policy terms and many, notably in Africa, where CDM has been a resounding failure so far, have unstable regimes and are categorised as high risk destinations for investors. Combined, these factors are in large part why the other CDM countries lag so far behind China and India. Only Mexico comes anywhere near them with 1132 MW of wind planned for CDM registration, followed by Brazil with 436 MW.
Both Mexico and Brazil, each with good wind resources, have made half decent attempts to form effective policy (Windpower Monthly, March 2006). "If there are major problems in terms of the overall investment climate of a country, CDM is not going to help," notes Jane Ellis of the Organisation for Economic Co-operation and Development (OECD). She is one of the authors of an OECD report, "Overcoming Barriers to CDM Projects," published in May. CDM, she says, helps projects that are only just shy of financial viability, adding around 10% to their revenue stream in the case of wind projects in China, just enough to push them into acceptable profitability.
CDM is no substitute for good local policy and was never intended to be, she stresses. Some countries, however, seem to have taken it that way. "Expectations were high that CDM would catalyze and promulgate the adoption and implementation of climate friendly policies in developing countries," says Christiana Figueres of the UN's CDM Executive Board, who together with Ken Newcombe of Climate Change Capital in Britain reported on the "Evolution of the Clean Development Mechanism: Toward 2012 and Beyond" in July. But instead in some cases the CDM has actually discouraged developing countries from cleaning up their act because they fear in doing so they cannot qualify for CDM status. "Over the past few years the CDM has acted as a perverse incentive for developing countries, actually motivating them to restrain from undertaking climate protecting policies and measures," say Figueres and Newcombe.
They argue that the key problem lies in the mixed views about the definition of "additionality." To be eligible for CDM status a project must prove that the reduction of emissions it will result in would not have been achieved without the extra revenue from sale of CERs. "Although it was never explicitly stated, for several years there was an underlying notion the existence or introduction of a climate-friendly policy or regulation in a developing country would make a project in that sector non additional, and thus not eligible for the CDM," say Figueres and Newcombe.
In late 2005, the CDM executive board clarified the issue, ruling that national policy in support of clean technology would not affect the baseline of a project. China and India clearly got the message, but others have been slower to act. Hope lies, however, in the CDM executive board's recent approval of "programmatic CDM," a mechanism Figueres and Newcombe say "is the first step toward policy-based and sector-wide emission reductions in developing countries."
Under programmatic CDM, emission reductions are achieved by multiple actions executed over time as a result of a government measure or private sector initiative, they explain. The recent 18-project wind carbon credit deal between EDF Trading and China Longyuan Electric Power Group (previous story) is a good example. "Unlike traditional CDM that focuses on individual efforts at a carbon upgrade within the limited boundary of a single facility with little or no transformational effect on the sector or economy, programmatic CDM promotes decarbonisation of the respective sector," they say. "By assigning a CER-value to reductions achieved under a program of activities, the regime is providing the first incentive for developing countries to adopt and implement climate friendly policies and measures."
GWEC's Steve Sawyer agrees. "But we need a more robust CDM type mechanism," he says. "We [GWEC] are working on a proposal for sectoral agreements, one of which will cover the power sector." He adds: "Sectoral agreements driven by carbon markets would do more for the power industry generally and wind industry specifically and the CDM would be more of what it was intended to be."
The idea is gaining widespread and high level support. Last month, the Global Leadership for Climate Action, a coalition of world leaders from business, government and civil society across more than 20 countries, proposed the same idea. "In order to promote policy reform, underwrite technology development, and stimulate investment flows at a scale that is truly transformational, an additional market mechanism must take a sectoral approach," it says in its proposal, A Framework for a Post-2012 Agreement on Climate Change.
"A developing country could set sector-wide baselines for carbon intensive sectors at levels that coincide with its economic interest while meeting commitments to reduce the energy intensity of its growth." A climate fund of additional resources, starting at $10 billion and growing to $50 billion a year, should be established to support climate change activities in developing countries, including clean energy development and deployment, it adds.
Figueres and Newcombe agree, saying a sectoral crediting approach could "potentially leverage hundreds of billions of dollars a year of new resources in new low to zero carbon economic development." Wind power development would, suggests Sawyer, be a key beneficiary. "If you look at the power sector, one of the biggest sources of carbon emissions, what can make a big difference between now and 2020? You have energy efficiency, fuel switching and you have wind power."