the

Clean
Development
Mechanism:

a user’s guide

Energy & Environment Group • Bureau for Development Policy

 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE

Copyright 2003

United Nations Development Programme

One United Nations Plaza
New York, NY 10017

Any errors are purely the responsibility of the authors.

The views expressed in this publication do not necesarily represent those of the United Nations or UNDP.
The designations and terminology employed and the presentation of material do not imply any expression
of opinion whatsoever on the part of the United Nations or UNDP.
CONTENTS

Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

Chapter 1: Furthering Sustainable Development and Emissions Reductions . . . . . . . . . . . .9

Chapter 2: Going through the Project Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19

Chapter 3: Developing the Project Design Document . . . . . . . . . . . . . . . . . . . . . . . . . . . .35

Chapter 4: Streamlined Procedures for Small Scale Projects . . . . . . . . . . . . . . . . . . . . . . .49

Chapter 5: Efficiency, Transaction Costs and Supportive Governance . . . . . . . . . . . . . . . .55

Chapter 6: CDM Transactions: A Review of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69

Chapter 7: The Carbon Offset Marketplace . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .75

Annex I: The Project Design Doument . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-2

Annex II: The Gold Standard: Quality Standards for CDM and JI Projects . . . . . . . . . . . .A-11

Annex III: Additional Notes on Baseline Analysis, Leakage and Monitoring . . . . . . . . .A-16

Annex IV: Resources for Further Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-22

Annex V: Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-27

 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE

FOREWORD

This manual is designed as a tool to help diverse stakeholders put the Clean Development Mechanism
into action, and to implement projects efficiently and equitably in a variety of national and sectoral con-
texts. Produced by UNDP’s Climate Change Programme, this manual is being field tested in selected client
countries. A primary audience is UNDP’s country offices, which are actively engaged in policy advocacy,
institutional strengthening, and information and knowledge sharing. As national partners of developing
country governments, the country offices are also involved in piloting and testing innovative initiatives,
and in developing the national and institutional capacity for efficient CDM governance and implementa-
tion that will be instrumental to its success.
UNDP’s ability to contribute in this arena relies on the ability of the country offices to successfully
meet the demands of their respective countries. This manual is designed to help them in that regard. The
earlier drafts have benefited from regional discussions with UNDP country offices in Asia Pacific, Latin
America and the Caribbean, Arab states, the Central Africa regions and external resource persons and
stakeholders. We look forward to continued feedback, so that this evolving document can advance the use
of CDM as a voluntary and mutually beneficial resource for meeting the emissions reduction commit-
ments of developed countries while promoting sustainable development in developing countries. More
importantly, UNDP would like to ensure that the CDM projects maintain the integrity of the Kyoto
Protocol. These were the objectives agreed to at the Seventh Conference of Parties to the United Nations
Framework Convention on Climate Change (COP-7) in Marrakech.
The CDM manual is meant to be a living document that will be periodically updated, based in part on
learning from experience, as the rules and regulations relating to the implementation of CDM are
strengthened. It is being presented at this stage as a means of engaging a broader group of experts,
actors and users. We appreciate your continued comments to ensure that we have accurately presented
the attributes and process of CDM and have not overlooked its nuances. In addition to your feedback, les-
sons from UNDP’s field-testing of the CDM manual will contribute towards making it a stronger and more
practical document.
The challenge of addressing global climate change is a lengthy process. The UNFCCC has brought
about an awareness of the necessity to immediately undertake ‘no regrets’ options. With the Kyoto
Protocol coming into force eventually, the global community will have agreed to take the first, and very
initial steps, towards proactively combating climate change. As climate change is an issue of sustainable
development, UNDP intends to remain an engaged stakeholder in the CDM process, with a particular
emphasis on getting the governance issues in the CDM process right and engaging the private sector to
achieve mutually beneficial outcomes that can help alleviate poverty and contribute to sustainable devel-
opment. Ultimately, the CDM process should lead to greater equity and contribute to the progress
towards mobilizing low carbon technology and innovation to combat long-term climate change.

Shoji Nishimoto
Assistant Administrator and Director
Bureau for Development Policy
United Nations Development Programme
2
ACKNOWLEDGEMENTS

This UNDP Clean Development Mechanism manual was a teamwork effort. It was led by Marc Stuart,
Annika Lundgren and Svetlana Morozova from EcoSecurities, Ltd., supported by Arun Kashyap, Khalid Husain
and Vivienne Caballero from the Energy and Environment Group at the Bureau for Development Policy, UNDP.
Ad Dankers (ADventures in Sustainable NRG-Netherlands BV) and Asuka Jusen (Tohoku University, Sendai, Japan)
provided substantive editorial and quality control inputs.

Valuable inputs from various country offices and bureaux at UNDP helped to strengthen the contents and focus of
the document. The document benefited from regional discussions with UNDP country offices from Asia Pacific,
Latin America and the Caribbean, Arab states, the Central Africa regions. We would like to acknowledge the contribu-
tions of colleagues at UNDP, including: Kari Blindheim, Anne-Marie Cunningham, Bethany Donithorn, Sergio Feld,
Ermira Fida, Linda Ghanime, Yoko Hagiwara, Ines Havet, Richard Hosier, Stephanie Hodge, Aminul Islam, Selim Jehan,
Anders Knudby, Susan McDade, Charles McNeill, Leida Mercado, Nandita Mongia, Cielo Morales, Sara Nordstroem,
Frank Pinto, Kamal Rijal, Per Stromberg, Minoru Takada, Alvaro Umana, Jan van den Akker, Jake Werksman.

The following institutions and associated individuals provided valuable time and input for the document:
Jackie Friedenthal (DANIDA), Leslie-Ann Robertson and Jeanne-Marie Huddleston (Department of Foreign Affairs
and International Trade of Canada), Helene Connor (Helio International), Jorgen Villy Fenhann (UNEP), and
Charlotte Streck and Luis Rodrigo (World Bank).

Janet Jensen did the final editing and Mary Zehngut designed the publication.

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 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE

ABBREVIATIONS

(see glossary in annex 5 for more details about many of the following terms)

AIJ Activities Implemented Jointly UNDP United Nations Development Programme

BAU Business as Usual UNEP United Nations Environment Programme
CDM Clean Development Mechanism UNFCCC United Nations Framework Convention on
CEF CO2 Emissions Factor Climate Change
CER Certified Emissions Reduction WEHAB Water, Energy, Health, Agriculture and
COP Conference of Parties to the UNFCCC Biodiversity
COP-3 3rd Conference of Parties to the UNFCCC, WWF World Wildlife Fund
(Kyoto, 1997)
COP-7 7th Conference of Parties to the
UNFCCC, (Marrakech, 2001) ENERGY MEASUREMENTS
COP-8 8th Conference of Parties to the
UNFCCC, (Delhi, 2002) k thousand
COP-9 9th Conference of Parties to the UNFCCC, kW kilowatt
(Milan, 2003) M million
COP/MOP Conference of Parties/Meeting of Parties to Mt million tons
the Kyoto Protocol MW megawatt
DNA Designated National Authority t ton
DOE Designated Operational Entity W watt
EIA Environmental Impact Assessment
ER Emissions Reduction
ERPA Emission Reduction Purchase Agreement
EU European Union
FDI Foreign Direct Investment
GEF Global Environment Facility
GHG Greenhouse Gas
GWP Global Warming Potential
IBRD International Bank for Reconstruction and
Development
JI Joint Implementation
LUCF Land-Use Change and Forestry
LULUCF Land Use, Land Use Change and Forestry
MDGs Millennium Development Goals
MOU Memorandum of Understanding
NGO Non-Governmental Organization
ODA Official Development Assistance
PDD Project Design Document
PIN Project Idea Note

4
EXECUTIVE SUMMARY

Of the three flexibility mechanisms in the Kyoto shortfall to ensure that CDM is implemented efficiently,
Protocol designed to engage the marketplace in meeting transparently and equitably through negotiations
the commitments of the developed countries, the Clean between developing countries, developed countries and
Development Mechanism (Article 12) is the only one the private sector as equal partners.
that involves developing countries. The CDM aims to The CDM is unique in that the commodity it delivers –
direct private sector investment into emissions-reduc- greenhouse gas emission reductions – requires no physi-
tion projects in developing countries while promoting cal infrastructure for placement into international mar-
sustainable development in these countries. In return, kets. Thus, if transaction costs and other barriers can be
the industrialized countries investing in projects will minimized, it is theoretically possible for even small-scale
receive credits against their Kyoto targets. Kyoto Parties development projects to enhance revenue flow to develop-
with emission targets for 2008-2012 are eligible to apply ing countries via the emerging market for greenhouse gas
certified emission reduction units from CDM-funded reductions.
emission reductions towards meeting their target in UNDP promotes the human, institutional and sys-
and after 2000. An important outcome of the Eighth tem-wide capacity development component of the CDM
Conference of the Parties (COP-8, 2002) was to make the and works to bring the financial and technological
Kyoto Protocol's CDM fully operational. The decision benefits of the CDM to less advantaged participants.
also adopted the simplified modalities and procedures UNDP, as a knowledge-based capacity development and
for small-scale CDM project activities and paved the way facilitating agent, can use its expertise to:
for possible early approval of CDM activities. ■ Identify demand-based national CDM capacity devel-

This manual is intended to be a reference tool for opment needs and work with private sector entrepre-
UNDP country officers so that they can assist national neurs, host country governments and the civil socie-
public and private stakeholders in implementing activi- ty to create an effective and efficient enabling envi-
ties under the CDM. Those stakeholders potentially ronment and a CDM management regime that not
include government negotiators, designated national only reduces transaction costs but also assists the
authorities, in-country government agencies in the developing countries achieve sustainable develop-
fields of environment, energy, development and ment as an intrinsic component of their national
finance, local project developers, relevant NGOs, local development priorities.
financial institutions, technology vendors and consult- ■ Identify types of CDM projects including small scale

ants and operational entities. projects that may be appropriate within different
The manual is not meant to – and cannot – replace country contexts;
the direct expertise that is required to identify, engage ■ Give project developers and host governments

and execute project finance and emission transaction realistic assessments of the external market situation
contracts under the CDM. Rather, it is intended to pro- and CDM transaction structures;
vide a holistic overview of the emergent CDM process ■ Identify in-country groups that may be able to

and the many supportive functions that are required provide services to CDM projects;
for its success. Engagement is the key to successfully ■ Help project developers understand CDM transaction

using this tool. UNDP seeks to have its country officers modalities;
understand client country strengths and weaknesses ■ Assist governments prioritize project types in view of

and to orient its efforts to shore up areas of identified their particular sustainable development criteria and

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 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE

establish internal policies to facilitate their develop- Chapter 2 presents the CDM participants and proj-
ment; and ect types. It then walks the reader through the entire
■ Help governments establish internal check and bal- CDM cycle, from a preliminary checklist of eligibility
ance systems for regulating and promoting CDM proj- factors through to the process of validation and regis-
ects and ensuring that they support sustainable tration of CERs. Most UNDP interactions in developing
development aims. capacity for CDM market interaction will have to do
There is currently no single model for successfully with the project components described in the chapter,
operationalizing the CDM and probably never will be. including technical analysis, documentation require-
UNDP country officers will encounter a wide range of ments and the need to successfully interact with stake-
situations in engaging with CDM participants. The key holders and regulators at both the domestic and inter-
to success will be to listen to this client base, efficiently national level.
disseminate important information to stakeholders and Success in steering a project through the CDM
act as a de facto neutral clearinghouse for information process hinges largely on developing a clear, accurate
and knowledge that strengthens national capacity to and comprehensive project design document, or PDD.
effectively participate in the opportunities afforded by This is the key document that the host country,
the CDM. While some country officers will spend the investors, stakeholders (local, national and internation-
majority of their early stage efforts with the project al) and designated operational entities will use to eval-
development community, others will be more engaged uate the project’s potential and judge its merit. Indeed,
with the governmental process and work with local no project can earn CERs without the development, val-
NGOs that seek to ensure that their voices are heard. idation and Executive Board acceptance of a project
It is expected that over the coming years, UNDP will design document. Because the Kyoto Protocol specifies
make ongoing efforts to document successes – and lessons that CDM projects must contribute to greenhouse gas
learned – in the implementation of the CDM across vari- emission reduction that are additional to what would
ous countries. This will, over time, add a real ‘learning by have occurred in their absence, a critical element of the
doing’ context to this manual. As this manual represents project design document is development of the baseline
only the first iteration of work-in-progress, subsequent scenario for use in assessing this key issue. Chapter 3
versions will necessarily incorporate future policy devel- discusses the project design document, paying particu-
opments and market trends and add to the guidance pro- lar attention to the technically complex issue of devel-
vided here. This manual is, therefore, the first step in an oping a credible baseline and using it to establish the
on-going process to establish a common understanding of project’s additionality. This last issue is also discussed
CDM procedures and experiences. in annex 3.
The manual begins with background information Contributions to sustainable development in the
about the CDM’s evolution and objectives, and a discus- host country are a primary product of CDM projects.
sion of UNDP’s role in building the kinds of human, The definition of sustainable development and how
institutional and system-wide capacity that will make it CDM projects should contribute to it is considered the
a success. Chapter 1 also considers how climate change host country’s prerogative. The CDM is potentially a
is linked to sustainable development, discusses lessons way to foster rural development in host countries by
learned in the course of implementing similar projects, directing investments in appropriate energy technolo-
and outlines the need for capacity strengthening and the gies through small-scale projects to people living in
forms of enabling governance that will be needed to rural communities. However, its potential in this
make the CDM a success. The chapter concludes with a regard could be undermined by the high transaction
discussion of some of the more controversial aspects of costs associated with small-scale and community-based
the mechanism, and how these are being resolved. development projects relative to the likely return on

6
investments. Chapter 4 discusses strategies and simpli- that poorer developing countries will not be able to
fied procedures that could reduce the transaction costs negotiate as equal partners. Purchasers of CERs will
for smaller projects. often be large, sophisticated multinationals with signif-
Precisely because so much is at stake – not only icant experience in project finance, commodity and
investments, but also the development paths of many derivative transactions. While some CER sellers will be
countries and the world’s ability to effectively address multinationals as well, the sustainable development
climate change – many safeguards and checks have component of the CDM means local energy developers,
been built into the CDM project cycle. The objective is community groups and even NGOs may end up as count-
to make the CDM live up to its promise. One result, er-parties. In order to successfully execute a CDM trans-
however, is a complex and expensive approval process action, the buyer and seller need to reach agreement on
that can moderate the degree of utilization of CDM. The an appropriate structure for the transaction, and an
costs of implementing CDM projects will likely decrease appropriate contract for the transaction. Chapter 6
over time as a result of learning and ‘learning by shar- examines various ways of structuring suitable CDM
ing’ effects. However, several institutional arrange- transactions.
ments can keep CDM transaction costs down even in the International agreements designed to combat cli-
early stages of its implementation. Chapter 5 first pro- mate change, including the CDM, have effectively creat-
vides an introduction to transaction costs and their ed a new ‘commodity’ in international trade – one that
implications on project feasibility. It then examines will increasingly be produced in the global South and
ways in which the CDM can be efficiently managed by consumed by richer, more industrialized countries.
host country governments, if capacity in the area of International trade in this new commodity of carbon
governance can be strengthened. offsets has already begun to develop as countries and
The CDM’s dual goals of yielding sustainable devel- companies seek to meet international agreements.
opment benefits while creating low-cost greenhouse gas Chapter 7 describes the evolving market for CERs in
emission reductions can be achieved only via carefully terms estimated market size, prices and buyers.
structured contracts. Although all contracts can be com- The manual concludes with the following informa-
plicated, CDM transactions offer particular challenges, tional annexes:
as the parties often have very different business and Annex 1: The Project Design Document
cultural perspectives. Carbon trading can be extremely Annex 2: Gold Standard: Quality Standards for CDM
complex and has the potential to impact development and JI Projects
trajectories in ways that may be unforeseen and unin- Annex 3: Additional Notes on Baseline Analysis,
tended. Shortfalls in analytical and negotiating capaci- Leakage and Monitoring
ty in developing countries relative to their industrial- Annex 4: Resources for Further Information
ized country counterparts create a very real possibility Annex 5: Glossary

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 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE

CHAPTER 1:

Furthering Sustainable Development

and Emissions Reductions

This chapter provides background information about the Clean Development

Mechanism’s evolution and objectives, as well as about UNDP’s role in building
the kinds of human and institutional capacity that will make it a success.
The chapter addresses:

CLIMATE CHANGE AND Box 1.1: The CDM in brief

SUSTAINABLE DEVELOPMENT Box 1.2: Status of the Kyoto Protocol
Box 1.3: Learning-by-doing
OPERATIONALIZING THE CDM
capacity development
WHAT UNDP HAS LEARNED Box 1.4: Greenhouse gases
addressed by the CDM
UNDP’S APPROACH TO CAPACITY BUILDING

KNOWLEDGE SHARING

RESERVATIONS AND RESPONSES TO THE CDM

■ Common but differentiated responsibilities
■ Emissions reductions trading
■ Sovereignty issues
■ Exhausting inexpensive reduction options
 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE

10
CHAPTER 1: FURTHERING SUSTAINABLE DEVELOPMENT
AND EMISSIONS REDUCTIONS

Adopted at the Third Conference of Parties (COP-3) to lower cost than would otherwise be possible. Whether
the United Nations Convention on Climate Change, the or not the CDM achieves these aims will depend to a
Clean Development Mechanism is an emissions trading great extent on the ability of project developers, host
mechanism designed to simultaneously benefit develop- countries and other stakeholders to implement it effi-
ing and industrialized countries. The CDM is the only ciently, and in ways that promote social, economic and
flexibility mechanism created by the Kyoto Protocol environmental objectives and maintain the integrity of
that involves developing countries. Innovative and com- the Kyoto Protocol. This chapter describes the CDM’s
plex, the mechanism is designed to stimulate emission evolution and objectives, and discusses UNDP’s role in
reductions in the developing countries, while also pro- building the kinds of human and institutional capacity
moting sustainable development. Ideally, it will encour- that will make it a success.
age additional capital flows into developing countries,
accelerate technology transfer, and enable developing CLIMATE CHANGE AND SUSTAINABLE DEVELOPMENT
countries to leapfrog to cleaner technologies. At the Climate change is one of UNDP’s priority areas. For
same time, it is intended to help developed countries UNDP, climate change is not simply an environmental
achieve their emission reduction commitments at a issue. Rather, it is a part of the larger challenge of sus-

BOX 1.1: THE CDM IN BRIEF

The CDM has two primary goals:
■ To assist Annex I countries in reaching their emission reduction targets, and;
■ To promote sustainable development objectives in the host countries (non-Annex I countries).
The first goal allows developed countries to achieve part of their reduction obligations through projects in developing
countries that reduce emissions through clean energy, energy efficiency and renewable energy projects or sequester CO2 from
the atmosphere in the form of biomass through reforestation or afforestation.
The mains characteristics of the CDM are:
■ Participation in a CDM project activity is voluntary and CDM investments will be market driven. Public and private parties
are eligible to participate.
■ CDM activities must lead to measurable reductions in emissions, which will be transferable to the investor in the form of
certified emission reductions, or CERs, upon quantification and certification by a third party.
■ The reduction in emissions must be additional to any that would occur in the absence of the approved project activity. In
order to earn CERs, emissions reductions must be quantified and certified by a third party.
■ Contributions to sustainable development in the host country are a primary aim of CDM projects. The definition of
sustainable development or how CDM projects should contribute to it is considered to be the host country’s prerogative.
The CDM allows transfer of CERs to a parties investing in such projects. This market-based system will allow
individual firms, as well as countries, to select the most cost-effective solutions to mitigating greenhouse gas emissions.
The Marrakech Accords, agreed upon at COP-7 in 2001, established a CDM Executive Board and recognized that CERs
achieved in the CDM host developing countries can accrue from emissions reductions activities undertaken since 2000.
The developed countries in turn can use these to fulfil their emissions reductions commitments in the first commitment
period (2008-2012).

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 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE

tainable development. It is also one of the most serious WEHAB areas, one that is integral to a coherent
threats to poverty eradication. In 2000, in committing approach to sustainable development. Thus, addressing
themselves to the Millennium Declaration, the world’s climate change should be integrated into national
leaders resolved to improve the quality of life of poor strategies for poverty eradication. In theory, CDM can
people through the achievement of global development assist in accomplishing this objective through partner-
objectives. Of the eight fundamental Millennium ships with diverse stakeholders and innovative policy
Development Goals, foremost is the commitment of formulation and implementation. This will require
189 nations to reduce by half the proportion of people increased human, institutional and system-wide capaci-
living in abject poverty by 2015. The Millennium ty at the national level and enabling policies, laws and
Development Goals recognize the fundamental connec- regulations in the host countries.
tion between energy, environment and sustainable
development. Similarly the Delhi Declaration on cli- OPERATIONALIZING THE CDM
mate change and sustainable development (agreed to at An important outcome of COP-8 (Delhi, 2002) was to
the Eighth Conference of the Parties to the UNFCCC in enact many decisions to make the CDM fully opera-
2002) highlights the principle of common but differen- tional. At that meeting, simplified modalities and
tiated responsibilities of countries to address climate procedures for small-scale CDM project activities were
change, reaffirms development and poverty eradication also adopted (see chapter 4).
as overriding priorities in developing countries and Participation in a CDM project activity is voluntary
emphasizes the integration of climate change objectives and investments in CDM will be market driven. While
into national sustainable development strategies. both public and private entities are eligible to partici-
UNDP has adopted a strategic approach to sustain- pate in CDM, investments are likely to be private sector
able development proposed by the UN Secretary General driven. CDM activities must lead to quantified reduc-
that emphasizes action in five key thematic areas: tions in emissions, which will be transferable to the
water, energy, health, agriculture and biodiversity (col- investor in the form of CERs, a marketable commodity
lectively called WEHAB). Climate change is recognized in the carbon market under the Kyoto Protocol.
as a cross-cutting issue that impacts all of the five Contributions to sustainable development shall be a

BOX 1.2: STATUS OF THE KYOTO PROTOCOL

Despite the fact that more than 100 countries have already ratified it, the Kyoto Protocol still had not come into force as this
publication was going to press.
The environmental treaty sets individual targets for industrialized countries to lower their emissions of carbon gases, on
average by 5.2 per cent below their 1990 levels, over the next 10 years. It suffered a serious setback in 2001 when the United
States, which alone accounts for around 35 per cent of the world's greenhouse emissions, pulled out of the treaty.
Under the Kyoto Protocol’s complex weighting system, 55 Parties to the Convention should ratify the Protocol including
Annex I Parties that were responsible for producing 55 percent of that group’s carbon dioxide emissions in 1990, before it
comes into force. With the decision of the US to pull out of the treaty, Russia’s ratification is required to put the protocol into
force.
At the opening of a five-day World Climate Change Conference in Moscow in September 2003, Russian President Vladimir
Putin officially postponed a decision on the country’s ratification of the Protocol. He said his country agrees in principle to the
treaty, but wants more time to study the plan.

12
 CHAPTER 1: FURTHERING SUSTAINABLE DEVELOPMENT AND EMISSIONS REDUCTIONS

tually undertake emissions reductions of the magnitude

For UNDP, climate change is not simply that will be required globally, while maintaining their
an environmental issue. Rather, it is a commitment to sustainable development. The key to
part of the larger challenge of sustainable this is long-term thinking.
development.
.
WHAT UNDP HAS LEARNED
primary product of CDM projects in the host countries. Until the carbon market evolves sufficiently, the pri-
The definition of sustainable development or how CDM vate sector is likely to focus on ‘straightforward’ CDM
projects should contribute to it is considered the host projects that are commercially viable on their own, with
country’s prerogative. the resulting CERs providing an incremental benefit.
CDM promises to generate additional resources for UNDP’s experience from the country level informs us
investment in renewable energy, energy efficiency and that while a high internal rate of return is necessary, it
other projects to reduce greenhouse gas emissions in the is not a sufficient condition for attracting private sector
South. Although it will not solve all development prob- investment. Even though a number of projects analyzed
lems of host countries, CDM can potentially influence by UNDP in cooperation with host countries had a sig-
investments, technology and economic growth. nificantly high internal rate of return, they did not
However, the non-Annex I countries differ widely in attract investors. Non-economic project barriers –
terms of national capacities to utilize technology, access including inadequate human capacity, policies, institu-
finance and efficiently implement CDM activities. tions, legal frameworks, and add a lack of innovative,
The knowledge base to deal with the complexities of development-oriented financial institutions – were
CDM is rapidly increasing and serious efforts are being major constraints to attracting foreign investment.
made by the CDM Executive Board to make the final Similarly, learning from the pilot phase of Activities
architecture coherent and efficient. There appears to be Implemented Jointly2 highlights the critical importance
a high demand from the developing countries for initi- of adequate human, institutional and systemic capacity,
ating CDM transactions. Their successful implementa- an enabling environment and access to knowledge and
tion, however, will depend on the presentation of viable information by the host countries for its success. AIJ
projects capable of attracting foreign investments and projects were concentrated in countries and regions
on the assurance of efficient transactions. This, in that had targeted policies, adequate capacity to under-
turn, will demand clearly defined sustainable develop- take and implement projects, and actively encouraged
ment priorities by host countries, as well as the institu- stakeholders’ participation. Also ‘learning-by-doing’
tional capacity and system-wide support to make the capacity development was found to be an important
project approval process transparent, fair and efficient. component in the success of the projects undertaken.
CDM outcomes must be evaluated from a long-term Low and fragmented skill levels in developing coun-
equity1 perspective, that is, by considering how these tries constrain internal responses to climate change
projects can create capacity for implementation of miti- challenges within the framework of sustainable devel-
gation activities and increase the number of win-win opment. In order for the host countries to fully embrace
options that will result in a high-growth, low-carbon CDM as a tool for sustainable development, they must
trajectory within the financial, institutional, and tech- be empowered to be equal partners in negotiations with
nological reach of host countries. Strengthening broad- the developed countries and private sector. A critical
based capacity that fully integrates equity concerns into element of the solution lies in capacity development
the CDM will foster the ability of host countries to even- and institutional strengthening to address limitations

1
Equity does not imply equality; it entails the existence of an equal opportunity to access resources available under CDM.
2
A pilot programme established by the UNFCCC in 1992, AIJ allowed private entities in one country to reduce, sequester, or avoid emissions through a project in a different country.
During the AIJ Pilot Phase, projects were conducted with the objective of establishing protocols and experiences, but without allowing carbon credits to be transferred between
developed and developing countries.

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 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE

BOX 1.3: LEARNING-BY-DOING CAPACITY DEVELOPMENT

The ‘learning–by-doing’ strategy to capacity development is a solution-oriented approach grounded in investment and project
appraisal in the real world, while taking into account host country needs and concerns. It involves identifying a private sector
entrepreneur from an industrial sector, one who is amenable to sharing his or her learning, and taking the entrepreneur through
the project cycle, thereby decreasing transaction costs and developing capacity through hands-on tangible activities.
An important output of this strategy is an investment-grade project design document that can be taken by the host
country project developers to the potential investors. While only one entrepreneur is identified for designing the project
document, the gains of greater capacity are visible across the sector essentially because of the ‘learning by sharing’ activi-
ties involving entrepreneurs throughout the sector. The strategy successfully involves diverse stakeholders including the
government and civil society who gain an understanding of mutual needs and responsibilities. The result is greater trans-
parency of actions and participation.
CDM capacity development also needs to focus on creating in the host country an effective and efficient enabling environ-
ment and CDM management that not only reduces transaction costs but also assists the developing country in advancing its
national development priorities. Even if a host country has many attractive CDM project opportunities, it will not necessarily
mean that many projects will actually be implemented. An effective national institutional structure is necessary to attract
investors and harness the CDM’s potential. Host countries should develop a clear understanding about the approval criteria and
sectoral as well as technological priorities. The institutional and regulatory framework should be set up with an emphasis on the
competitive nature of the CDM. The CDM regulatory and outreach function also should be designed to avoid any conflict of
interest. It will be beneficial for countries with multi-tiered political structures to have creative and participatory processes to
keep all stakeholders well informed and avoid inefficiencies in the approval structure.

in the CDM implementation resulting from weak and in assisting developing countries to implement the
administrative structures. Ideally, this will lead to UNFCCC and the Kyoto Protocol. UNDP’s integrated
transparent, efficiently administered policies, laws and approach to national development – with a focus on
regulations, and to the accountability and participation creating an enabling policy environment and strength-
of diverse stakeholders. ening human and institutional capacities through a
Lessons from UNDP’s country level activities in the learning-by-doing strategy – is suited to overcoming
pilot phase also suggested that in the absence of effec- barriers to CDM’s success.
tive host country capacity to competently address issues UNDP has already analyzed several small-scale
relating to project approval, coherently articulated UNDP-GEF projects to determine their potential
national, sectoral and technological priorities and for viable CDM operations. It recommends taking
transparently defined sustainable development criteria, completed UNDP-GEF projects and GEF’s Small Grants
CDM processes will incur prohibitive transaction costs. Programme projects to scale as a way to increase
These issues constitute, inter alia, the primary responsi- capacity through practical experience. In keeping with
bility of the host country’s designated national authori- UNDP’s focus on promoting greater project level and
ty, in accordance with the participation requirements geographical equity in the implementation of CDM,
under CDM rules. many of these projects could be included in a portfolio
approach that will focus on disadvantaged countries
UNDP’S APPROACH TO BUILDING CAPACITY and, as relevant, on smaller projects.
As the lead agency for capacity building for sustainable
development, UNDP has a specific contribution to make
in the overall response of the United Nations system

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 CHAPTER 1: FURTHERING SUSTAINABLE DEVELOPMENT AND EMISSIONS REDUCTIONS

KNOWLEDGE SHARING entrepreneurs, host country governments and the

UNDP promotes the sustainable development compo- civil society to create an effective and efficient
nent of the CDM and works to bring the financial and enabling environment and a CDM management
technological benefits of the CDM to less advantaged regime that not only reduces transaction costs but
participants. UNDP, as a knowledge based facilitating also assists the developing country in achieving
agent, can assist the host countries to: sustainable development as an intrinsic compo-
■ Identify demand-based national CDM capacity nent of its national development priorities.
development needs and work with private sector ■ Identify types of CDM projects, including small-

BOX 1.4: GREENHOUSE GASES ADDRESSED BY THE CDM

The Kyoto Protocol addresses mitigation of the six gases believed to be the main contributors to the climate change effect,
which is associated with an increase in the global temperature and disturbed climatic patterns. The relative impact caused by
the release of greenhouse gases into the atmosphere is measured by the global warming potential or GWP. Global warming
potential is an index defined as the cumulative radiative forcing between the present and some chosen time horizon caused
by a unit mass of gas emitted now, expressed relative to a reference gas such as carbon dioxide. The Intergovernmental Panel
on Climate Change is responsible for setting and adjusting the indices based on the most current scientific knowledge.
For instance, in the Second Assessment Report of the IPCC, methane has a radiative forcing that was estimated to be about
21 times greater than that of CO2, thus it has a GWP of 21.
The three greenhouse gases most frequently found in nature are:
■ Carbon dioxide (CO2) – a naturally occurring gas released as a by-product of fossil fuel combustion, selected industrial
processes and changes in the patterns of land-use, particularly deforestation. In terms of gross volume of emissions, it is
by far the most important greenhouse gas. Carbon dioxide is given the base global warming potential value, 1.
■ Methane (CH4) – a gas released in coal mining, landfill operations, livestock raising and natural gas/oil drilling (among other
processes). Methane has a global warming potential of 21 (in other words, it is 21 times more potent in terms of global
warming effect than carbon dioxide).
■ Nitrous oxide (N2O) – a gas emitted during fertilizer manufacturing and fossil fuel combustion. The transportation sector is
usually a significant contributor to N2O emissions. N2O has a global warming potential of 310.
Human activity clearly contributes to the increased concentrations of CO2, CH4 and N2O in the atmosphere, but they can
also be released through natural processes. It is expected that the vast majority of CDM projects will involved these gases.
In addition to these three greenhouse gases, there are three additional classes of engineered gases, which occur on a very
limited basis in nature.
■ Hydrofluorocarbons (HFCs) – a group of gasses emitted in selected manufacturing processes and frequently used in refriger-
ation and air conditioning equipment. HFC-23, HFC-12, HFC-134a and HFC 152a have global warming potentials of 11,700,
2800, 1300 and 140 respectively.
■ Perfluorocarbons (PFCs) – similar to HFCs, PFCs were developed and introduced as an alternative to ozone depleting CFCs
and HCFCs. They are emitted in a variety of manufacturing processes. Their global warming potential ranges from 6.500 for
CF4 to 9,200 for C2F6.
■ Sulphur hexofluoride (SF) – the most potent greenhouse gas, released in a very limited number of manufacturing processes
where it is used as a dielectric fluid. The global warming potential of SF6 is equal to 23,900, and one molecule of SF6 has the
atmospheric lifetime of 3,200 years. Hence, SF6 represent the most dangerous group of anthropogenic-induced greenhouse
gas emissions.
As of October 2003, there has been only one project undertaken in Korea involving the destruction of the engineered gases.
Though the impact from such projects could be significant, they are not expected to constitute a large share of CDM projects.

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 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE

scale projects, that may be appropriate within RESERVATIONS AND RESPONSES TO THE CDM
different country contexts; Whether the CDM is the most effective and equitable
■ Give project developers and host governments way to reduce the impact of climate change has been
realistic assessments of the external market situa- debated by governments, the private sector and NGOs
tion and CDM transaction structures; since the concept was first conceived. It has taken the
■ Identify in-country groups that may be able to better part of a decade to negotiate the terms by which
provide services to CDM projects; the CDM should operate. Among the difficult negotia-
■ Help project developers understand CDM transac- tions were those concerning the allocation of required
tion modalities; emission reductions, responsibilities of non-Annex I
■ Assist governments prioritize project types in countries, future obligations and equity issues. Over
view of their particular sustainable development time the Conference of the Parties and other stakehold-
criteria and establish internal policies to facilitate ers have worked to try and address these major con-
their development; and cerns. Some of the key issues that were hotly debated
■ Help government establish internal checks and are discussed below.
balance systems for regulating and promoting Common but differentiated responsibilities
CDM projects and ensuring that they support sus- One issue has to do with what the Kyoto Protocol terms
tainable development aims. ‘the common but differentiated’ responsibilities that
There is currently no single model for successfully should be borne by industrialized and developing coun-
operationalizing the CDM and probably never will be. tries. The OECD countries are undeniably responsible for
UNDP country officers will encounter a wide range of a disproportionate amount of the buildup of atmospheric
situations in engaging with CDM participants. The key greenhouse gasses implicated in climate change. This
to success will be to listen to this client base, efficiently buildup began with dawn of the industrial revolution
disseminate important information to stakeholders and some 150 years ago. Developing countries have con-
act as a de facto neutral clearinghouse for information tributed less than one-third of the CO2 and CH4 accumu-
that impacts national capacity to fully participate in lated in the atmosphere and less that 20 per cent of all
the opportunities afforded by the CDM. While some industrial CO2 emissions, Accordingly, there is no
country officers will spend the majority of their early requirement that developing countries participate in the
stage efforts with the project development community, CDM or engage in emission reductions. They are free to
others will be more engaged with the governmental use the CDM – or not – as they engage in their own sus-
process and work with local NGOs to ensure that their tainable development priorities or emissions reductions.
voices are heard. Emissions reductions trading
It is expected that over the coming years, UNDP will Another issue is whether the CDM shifts the economic
make ongoing efforts to document successes – and les- ‘burden’ of emission reductions from those who are
sons learned – in the implementation of the CDM across responsible – industrialized countries – to the develop-
various countries. This will, over time, add a real ing countries. Developing countries are most vulnerable
‘learning by doing’ context to this manual. As this rep- to climate change and can least afford to pay for emis-
resents only a first iteration of work-in-progress, subse- sion reducing technologies, measures to adapt to cli-
quent versions will necessarily incorporate future poli- mate change and for the presumed problems that cli-
cy developments and market trends and add to the mate change will create. Does the CDM effectively insist
guidance provided here.3 This manual is, therefore, the that developing countries help the industrial world out
first step in an on-going process to establish a common of this mess by providing cost competitive emission
understanding of CDM procedures and experiences. reductions?

3 A review of three UNDP/GEF biomethanation and landfill gas projects in Jordan, China and India is currently being undertaken. Their high cost-effectiveness makes them good
potential candidates as CDM projects. This study will form an annex to the CDM manual and will be included in subsequent versions.

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 CHAPTER 1: FURTHERING SUSTAINABLE DEVELOPMENT AND EMISSIONS REDUCTIONS

When its rules were being negotiated it became action – if taken on the basis of carbon sequestration –
clear that the only way for the Kyoto Protocol to suc- would undermine the rights of sovereign countries and
ceed was if it established reduction targets that were local inhabitants to manage their own resource base,
both possible to reach yet stringent enough to make a while also allowing multinationals to continue along a
difference. The economic dislocation and inefficiency path of excessive emissions at a small cost.
that would likely result from meeting emission commit- However, since the CDM process now excludes
ments without being able to use the most cost effective ‘avoided deforestation’ in the trading regime, the objec-
options were in no one’s interest. The notion of coun- tion is less pertinent. Furthermore, the ‘free for all’
tries trading emission rights and emission reductions that characterized earlier transactions has been
first emerged in the text of the original Framework reduced by rigorous standards mandated by the CDM
Convention of Climate Change as a way to bring greater process cycle. With the requirement for host country
economic efficiency to the task of lowering emissions endorsement, inclusion of sustainable development cri-
globally. There is little doubt that during the first com- teria based on the host country’s prerogative, the use of
mitments period, Annex I countries and industries will third party validators, and the requisite local and inter-
take advantage of the CDM to cushion the economic national stakeholders consultations, the CDM process
impact of their newly carbon-constrained economies. provides extraordinary –- accountability. This helps
The transition to a less greenhouse gas intensive econo- ensure that the eventual investments focus not only on
my is a long-term process and emissions trading is one cost-effectiveness, but also on the contribution of CDM
of many tools that should be employed to minimize projects to sustainable development priorities.
global economic impacts and enable developing coun- Exhausting inexpensive reduction options
tries to promote their economic growth in a sustainable Lastly, it was feared that the CDM would exhaust all
manner. The CDM can, in principle, be a win-win solu- inexpensive reduction opportunities in the host coun-
tion – a facilitating instrument to provide capital and tries, leaving them with very high-cost emission abate-
technology flows (that may otherwise not occur) to ment projects at the point when the countries are
developing countries, while keeping the overall basis of required – or opt – to take on an emissions cap during
the global economy flowing smoothly. future iterations of the UNFCCC. Observers have voiced
Sovereignty issues concern that once emissions reductions credits are trans-
Another contentious issue was whether the CDM would ferred from a developing country project to an industrial
diminish national sovereignty by allowing external country they will no longer be available for the use by
forces to change the development paths of the host the host country in meeting its own commitments.
countries. This issue is particularly acute with regard to However, several factors alleviate this concern. First
the land-use component of the CDM. This raised heated of all, CDM projects can receive credit for 10 or 21 years
debate during the time that international forest conser- (including baseline reassessments after year 7 and 14),
vation was being considered as a tool to combat climate meaning that any emission performance that occurs
change. The debate arose from the fact that some of the after the period of the CDM contract will be a compo-
earliest projects undertaken as Activities Implemented nent of the country’s emission inventory. Second, a
Jointly in the early 1990’s were based on forest conser- variety of contractual structures are available under
vation. Many of these projects made extravagant claims which a developing country can protect its emission
about the carbon savings attributable to their imple- reduction credits, including revisiting terms of the
mentation. A fear emerged that with large expanses of transaction if and when the country’s emissions are
undeveloped forest in the major tropical countries capped. Most importantly, CDM is a voluntary activity
worth just dollars per hectare on the open market in that host countries have considerable control over.
many cases, Western multinationals would purchase
land in vast scale and set up private ‘reserves’. This

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