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Sustainability assessment in the clean development mechanism (CDM) : current state and opportunities… Ghatala, Frederick Jamal 2006

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Sustainability assessment in the Clean Development Mechanism (CDM): Current state and opportunities for improvement By FREDERICK JAMAL GHATALA B.B.A., The George Washington University, 2002 A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF SCIENCE in THE FACULTY OF GRADUATE STUDIES (Resource Management and Environmental Studies) THE UNIVERSITY OF BRITISH COLUMBIA JULY 2006 © Frederick Jamal Ghatala, 2006 Abstract: The Kyoto Protocol, a treaty that sets legally binding emission reduction amounts for a group of industrialized countries, was signed in 1997 and came into force in 2005. To provide flexibility in meeting their reduction requirements, industrialized nations are allowed the use of three flexible mechanisms, one of which is the Clean Development Mechanism (CDM). The CDM is a system that allows for Annex 1 nations to use emission reductions occurring in developing countries for their own compliance with the Kyoto emission reduction requirements. During subsequent Kyoto negotiations (the Marrakech Accords, November 2001), it was established that CDM projects must contribute to sustainable development in the countries in which the projects occur. It was decided that the criteria for sustainable development contributions, as well as how these contributions are to be measured, would be the prerogative of the developing countries in which the project occurs.1 The perceived lack of sustainable development contributions from CDM projects to host countries has become a source of major criticism of the mechanism (Peterson 2005). In this thesis it is proposed that there is a link between this perceived lack of sustainability benefits and the failure of the CDM governing board to institute required sustainability assessments of projects. The focus of this thesis is to evaluate how sustainability concerns have been taken into account in the newly created CDM. An evaluation of a representative set of CDM projects to ascertain the types of sustainability assessment methodologies utilized revealed that there is a gap between the sustainable development benefits envisioned from the CDM and the implementation of any evaluation method for verifying those contributions on the ground. The available CDM-specific methods to assess sustainability are evaluated and compared against an assessment criterion that takes into account a set of CDM-related host country equity concerns proposed in this thesis. Based on this analysis, it is recommended that the role of the CDM Executive Board be expanded to include a focus on sustainability concerns, including a mandated sustainability assessment, thereby ensuring measurable contributions to sustainable development and increased transparency in the CDM. ii Table of Contents Abstract: ii Table of Contents iii List of Tables iv List of Figures v Chapter 1: Introduction to the thesis and motivations for topic selection 1 1.1 Introduction : • 1 1.2 Obj ectives and research questions - 2 1.3 Research methodology 3 1.4 Structure of thesis 6 Chapter 2: CDM and Sustainable Development ••••7 2.1 Introduction... 7 2.2 Conceptual Evolution of the CDM 7 2.3 Operational life cycle of CDM projects and current project activities 10 2.4 Sustainable development in the CDM 12 2.5 Sustainable Development, select critiques and their application to the CDM 16 Chapter 3: Global and Project-level Evaluation of the CDM 19 3.1 Chapter introduction 19 3.2 Global Analysis of Current CDM Proj ects 19 3.3 Proj ect-Level Evaluation 27 Chapter 4: Evaluation of Sustainability Assessment Methods and Recommendations for a More Sustainable CDM 36 4.1 Review of existing methods to assess sustainability at the project level in the CDM 36 4.2 A Framework for a Mandated Sustainability Assessment 57 4.3 Recommendations for a more sustainable CDM 59 4.4 Conclusion and areas for further research • 62 5. References 63 i n List of Tables Table 1: Mitigation mode classification 22 Table 2: Basic project descriptions 28 Table 3: C D M analysis coverage 28 Table 4: Project-Level Analysis Results :....30 Table 5: Evaluation of Assessment Method: Guidelines 38 Table 6: Evaluation of Assessment Method: Checklists ; 43 Table 7: South South North Matrix Tool 45 Table 8: PCF proposed scale for assessing relative benefits of C D M projects 50 Table 9: Evaluation of Assessment method: Scorecard Checklist 51 Table 10: Evaluation of assessment method: M A T A C D M 54 Table 11: Consolidated results 55 i v List of Figures Figure 1: CDM Validation and Registration Procedure 11 Figure 2: CDM Project Cycle 12 Figure 3: Qualitative distribution of hypothetical CDM projects and their respective contribution to SD and CER abatement costs 15 Figure 4: Number of registered projects and CER generation over time (with and without HFC project CER volumes) 20 Figure 5: CER Production and # of Projects by Host Country 21 Figure 6: CER production by mitigation mode 22 Figure 7: Comparison of number of projects and CER generation by project design 24 Figure 8: C02 vs Non-C02 by different project designs ; 25 Figure 9: CERs by project and design 26 Figure 10: Steps involved in MATA-CDM and its central equation to compute the overall utility of CDM projects 52 v Chapter 1: Introduction to the thesis and motivations for topic selection 1.1 Introduction The prediction of modern climate change due to human activities began with observations made by the Swedish chemist, Svante Arrhenius, in 1896. He noticed that the Carbon Dioxide being emitted into the atmosphere from increased industrial activities could have a warming effect on the Earth's climate (NASA 1995). Since Arrhenius's times, it is estimated that the Earth's temperature has risen by .6 degrees Celsius and is predicted to increase another 1.4 - 5.8 degrees Celsius by the year 2100 (UNFCCC 2005). The main reasons identified for human-induced climate change are the increased burning of fossil fuels, deforestation, and certain farming practices. These activities have increased the quantities of greenhouse gasses such as carbon dioxide, methane, and nitrous oxide. The warming trend is expected to cause the extinction of numerous plant and animal species, disruptions in land use and food supply, increases in disease (malaria especially), rising sea levels and increases in storm events (UNFCCC 2005). In the last decade of the 20 t h century, many countries joined an international treaty called the United Nations Framework Convention on Climate Change to begin learning about what can be done to reduce global warming and also what can be done to cope with the effects of unavoidable temperature increases. In 1997, an additional section was added to the Framework Convention. This portion, the Kyoto Protocol, set legally binding emission reduction amounts for a group of industrialized countries called the Annex 1. Under the Kyoto Protocol, the emissions reductions from Annex 1 nations combine to reduce emissions 5% below 1990 levels during the first commitment period of the Protocol (2008-2012) (UNFCCC 2005). To meet its emission reduction targets, each Annex 1 nation must undertake actions to reduce domestic emissions. In addition to domestic actions, the Kyoto Protocol contains 'flexible mechanisms' which enable parties to the protocol to access cost-effective opportunities to lower emission or to remove carbon from the atmosphere in other countries (UNFCCC 2005). The three flexible mechanisms outlined in the Kyoto Protocol are the following: Emissions Trading (ET) - this mechanism allows for Annex 1 nations to acquire portions of emissions quotas distributed under the Kyoto Protocol. These units, which represent one ton of carbon emitted to the atmosphere are called Assigned Amount Units (AAUs). If an Annex 1 nation has 'extra' A A U s (meaning that domestic reductions were sufficient to meet their allotted reduction requirement), they are allowed to sell them on a market-style exchange to other Annex 1 nations. Joint Implementation (JI) - this mechanism permits Annex 1 countries to invest in projects that reduce emissions in other Annex 1 nations. The abated emissions are quantified and certified as 'Emission Reduction Units (ERUs) and are used by the investor nation for meeting their own reduction requirements. Clean Development Mechanism (CDM) - this mechanism is similar to Joint Implementation. The main difference is that the Clean Development Mechanism involves an Annex 1 nation implementing a project to reduce emissions in a non-Annex 1 nation. Potential C D M projects must be proven to be 'additional' to what would have occurred without this Kyoto flexible mechanism. The emission reductions generated through these activities are quantified and called - 1 -Certified Emission Reductions (CERs). Article 12 of the Kyoto Protocol stresses that projects implemented under the Clean Development Mechanism should assist the developing country host parties in achieving sustainable development and to contribute towards the ultimate objective of the Convention. How this 'contribution to sustainable development' is assessed is the focus of this thesis. As mentioned, the Clean Development Mechanism (CDM) was established to assist Annex 1 nations in meeting their emission reduction requirements with greater economic efficiency and to help developing countries achieve sustainable development through hosting CDM projects. The 'dual-objectives' of the CDM raise many questions that strike at the core of the entire mechanism. For example, is the CDM a way of allowing developing countries to participate in international climate change agreements by supplying low cost emission reductions to Annex 1 nations with some type of sustainability benefit happening in the process? Or is the CDM a loophole allowing Annex 1 nations to benefit from relaxed LDC environmental regulations so that their emission targets are met at the least cost while the notion of 'sustainability' becomes unimportant and unmeasured. This debate continues while the amount of registered CDM projects increases (Kelly 2000; Metz 2000; WorldWildlifeFund 2002; Sutter 2003; Foot 2004; Loong 2005; Rao 2005). The motivation to pursue this research on sustainability in the CDM exists for various reasons. Firstly, in the context of the CDM, the use of the terms 'sustainability' and 'sustainable development' run the risk of becoming devoid of meaning. This loss of clarity when asserting that something is 'sustainable' or 'un-sustainable' could have a detrimental effect on sustainability initiatives worldwide. Secondly, it is possible that the CDM has tremendous potential for assisting developing countries to 'leapfrog' conventional energy production/utilization methods and reduce global GHG emissions below the scenario without the CDM. For this reason, identifying weaknesses in the mechanism at an early stage will allow for adjustments to be made that could enhance the long-term survival and net benefit of the mechanism. Finally, the CDM has the potential to spread the notion that infrastructure investments should be made with their effects on environmental and social sustainability being taken into consideration. A properly functioning CDM can provide an economic incentive for environmentally friendly investments that can have the effect of changing the way business is done in developing countries - both in the context of the CDM and because of social learning that occurs because of the CDM. The evaluation of the overarching sustainability of the CDM mechanism would be an arduous process requiring extensive on-the-ground research of CDM projects throughout their entire life cycle. Due to the relative newness of the mechanism and time/funding limitations, this type of in-depth analysis is impossible at this time. However, it is possible to gauge the extent to which sustainability concerns are being incorporated into project designs through the evaluation of project documentation available from the UNFCCC. To this end, this master's thesis will evaluate the level of sustainability assessment used in current CDM projects and assess the hypothesis that sustainability assessments in the CDM are not utilizing the available best practice methodologies and show significant opportunities for improvement. 1.2 Objectives and research questions The following are the research objectives and the questions selected to fulfill the research objectives. 1. Develop an understanding of the role of sustainability in the CDM. 1. How did the CDM evolve from a concept into an operational mechanism? 2. How has sustainability been defined in the CDM? Understand how sustainability has been assessed in current CDM projects. 1. What sustainability assessment methodologies are available for use in CDM projects? 2. How do these methods perform against a developed CDM-specific evaluative framework? 3. How have project developers and validators (DOE) evaluated a project's sustainability? Propose new methodologies to ensure the sustainability of the CDM. 1. What recommendations can be made for a verifiably more sustainable CDM -1.3 Research methodology The research methodology utilized in this thesis involved a desk review of available sustainability assessment methods for CDM projects and an evaluation of the extent to which they have been utilized in a representative sample of CDM projects. This review involves the comparison of available CDM sustainability assessment methods with available best practices. After this, 8 CDM projects are extensively reviewed to see how they have assessed their performance across a range of sustainability-related areas (i.e. environmental, social, and economic performance). The information used in this thesis is publicly available. The project-related documents are accessed through the UNFCCC database and are among the following: 1. Project Design Document (PDD) • This document describes the entire project and can include sections such as the project's impacts, baseline used for the project, monitoring methodology, additionality justification, environmental impacts, details of the stakeholder consultation process, involved organizations, and potentially a sustainability assessment and statement of sustainability benefits. 2. Registration request form • This document is the official request for the project to be registered by the CDM EB. 3. Host/Annex 1 Nation Approvals • These are the official documents stating the approval of the project. These also include the affirmation by the host nation that the project contributes to sustainable development. 4. CDM methodology • This document describes the methodology used for determining the GHG benefits of the project 5. Validation report • This section is basically an auditor's report and can include documents describing the stakeholder consultation process, the taking into account of received comments (during the mandatory 30 day comment period), a list of interviewed persons, modalities and procedures, the project's monitoring plan, the validation report and opinion, and can also include a sustainability appendix. Through the analysis of project documents, the researcher can understand what type of sustainability assessment were performed for the CDM project. Information on the type of Environmental Impact Assessment performed, details of the stakeholder consultation process, and other pieces of information relevant to the specific project has been obtained through a review of this documentation. To understand aspects of the CDM projects used in this analysis, information in the following areas has been gathered using the available project documentation: 1. General description of the project activity • This serves to explain what the project involves, including the technology utilized, the project location, and other information that establishes understanding of the project prior to other areas of review. 2. Environmental analysis used for the CDM project • This information will communicate whether any type of environmental assessment has been performed for the project activity. This indicates whether the full range of a project's potential environmental impacts have been identified, measured, and perhaps used to modify project design. 3. Stakeholder consultation process, social concerns and summary of comments • Information in this area will gauge the level to which the local citizenry are involved in the project and how social impacts have been incorporated into the project design. 4. Project additionality • Evaluating how a project's 'additionality' is explained provides information on the current state of environmental regulation in the host country and how the proposed project activity reduces emission below the regulatory baseline. While additionality is not part of traditional sustainability (environmental, social, economic), in the CDM, proving that a project is additional is essential for the functionality of the entire mechanism. 5. Use of any defined sustainability assessment methodology • In certain projects, the developers have used a specific sustainability assessment methodology. This will identify the method that was utilized. 6. Analysis of project's stated contributions to sustainable development • This section will state whether the project developer has stated any claims about the project's sustainable development contributions and what those claims were. 7. Analysis of legality of project activities in Annex 1 nations (using the Canadian example) • This information will assist in the evaluation of the sustainability of the CDM in general. This information is utilized to substantiate the recommendations for a more sustainable CDM made in this thesis. Canada's environmental legislation was chosen as the benchmark for evalulation because this thesis was completed in Canada and policy recommendations could be made for Canada's climate change strategy. This research methodology is sufficient for this, master's thesis for a few reasons. The potential language barriers that could be encountered in interviews are eliminated (as all UNFCCC documents are submitted in English). Also, the project documentation is immediately accessible through the Internet on the UNFCCC website: (http://cdm.unfccc.int/Projects/registered.html). Project document review was chosen as a research method in lieu of interviews with project participants for two principal reasons: 1. As the subject matter of this thesis involves sustainability assessments of projects, it should be the case that assessments themselves rather than conversations related to the assessment process should be sufficient for collecting the necessary data. Project participants might be unwilling to state that there was a limited sustainability assessment of the project when the project documentation contains the written assertion by the local government that the project is viewed as contributing to sustainable development. In the absence of a sustainability assessment, the Project Design Document contains information on all of the assessments (environmental impact, stakeholder consultation, etc) that were performed for the CDM project prior to registration. 2. The amount of funding available for this thesis does not give the researcher the ability to travel to the different project locations to conduct extensive interviews with project participants (locations ranging from Chile to India). It would be an incredible opportunity to perform research on the ground with local stakeholders but unfortunately was unfeasible for this project. It should be noted that the research methods chosen place significant limitations on the analysis carried out in this thesis. Though undertaking what is essentially a 'desk review' of sustainability assessments, the researcher is not privy to the inner workings of creating and performing sustainability assessments on a CDM project. Certain observations that can only be made through direct interaction with project participants will be absent from this thesis. All of the recommendations and conclusions generated through this research are caveated by the fact that the researcher has not spent any time 'on the ground' in a CDM context. The number of CDM projects has increased significantly since the coming into force of the Kyoto Protocol on February 16, 2005. When this research idea was first generated, there were only two projects that had been registered by the CDM EB. Currently, there are more than 20 registered projects (October 2005). Including each registered CDM project in this analysis would be an arduous task that falls outside the time limits of this master's thesis. For this reason it has been decided to include each project type in the analysis. To date there have been eight different project types. The largest project of each type has been selected for inclusion in the analysis. By selecting the largest CER producing project in each project type, the research sample will represent the largest possible coverage of CERs while maintaining representation from each project type (HFC, landfill gas, etc.). This choice of projects does, however, place limitations on the results of the research. The data collected in this thesis is more representative of larger CDM projects and therefore not incorporate the experiences of smaller scale CDM projects. This coverage, while not complete, is viewed as casting the widest net of analysis of the CDM projects. In addition to an in-depth review of 8 CDM projects, the thesis also contains a global analysis of the first 25 registered CDM projects. This section, which immediately precedes the project-level analysis, serves to present the current state of the CDM by identifying the general characteristics of the emerging mechanism. Information conveyed in this section includes current volumes of CERs, geographical distribution of projects, technology types utilized, crediting period selection, and also the differences between different project designs. 1.4 Structure of thesis The thesis is divided in four chapters. This first chapter has been an introduction to the research topic, a discussion of the motivations for the research, and a discussion of the research methodology. The second chapter discusses the evolution of the CDM and the role that sustainability plays in the mechanism. Included in Chapter 2 is a discussion of the potential 'race to the bottom' argument and a review of critiques of the concept of sustainable development and how these critiques can be applied to sustainability requirements in the CDM. Chapter 3 presents a global analysis of the current state of the CDM as well as a project level analysis of sustainability assessment. In Chapter 4, an evaluation of available CDM sustainability assessment methodologies is presented. This evaluation consists of assessing the ability of available methods to take into account a set of proposed CDM-related host country equity criteria. Also, they are assessed for their ability to be modified for diverse project types and to different development concerns. Chapter 4 concludes with a set of recommendations as to how the CDM can become a verifiably more sustainable mechanism and identifies areas for further research. - 6 -Chapter 2: CDM and Sustainable Development 2.1 Introduction The Clean Development Mechanism was established in 1997 at CoP-3 after nearly 6 years of development. During the formation of the C D M , its role and operational design were intensely debated by representatives from both Annex 1 and non-Annex 1 nations. To date, there have been various types of C D M projects registered by the C D M Executive Board. These projects range in scale from massive multilateral projects producing 3 million CER credits to unilateral small-scale projects producing less than 32 thousand CER credits. This chapter begins by chronicling the conceptual evolution of the C D M throughout the development of the Kyoto Protocol. This section will also discuss the C D M project process, from the initial project idea development through to CER generation. This will be followed by a discussion of how sustainable development came to be incorporated into the C D M . 2.2 Conceptual Evolution of the CDM The concept of the Clean Development Mechanism has its roots in the original concept of Joint Implementation (JI) developed by (Hanisch 199 l)for Norway in 1991(Michaelowa 1999). This plan of JI envisaged a system in which emission reductions occurring outside a country's borders could be counted towards domestic emission reductions. At the Rio Summit in 1992, JI was included in the U N F C C C as Article 4.2(a) in an unspecific form that did not meet with resistance from summit participants. Article 4.2(a) states that '(Annex 1) Parties may implement such policies and measures jointly with other Parties and may assist other Parties in contributing to the achievement of the objective of the Convention". In 1993, opposition to the intent of JI surfaced from many developing and OECD nations (most notably France, Germany, and the Netherlands) during the 8 l h Session of the Intergovernmental Negotiating Committee (INC). The most important concerns according .to (Grubb 1999) were that JI might allow developed countries to achieve their emission targets without sufficient domestic action. In this way, developed countries would be perceived as shirking their responsibility to limit their domestic emissions in favor of sourcing emissions reductions from abroad. The second concern was that these emission reductions would represent the least cost, 'low hanging fruit' options. This exploitation of the cheapest emission reductions by developed countries could lead to the developing countries being left with only higher priced domestic emission reduction options should they eventually adopt emission reduction commitments. In response to these concerns, a coalition formed in support of the concept of the C D M to lobby for greater flexibility in international climate change negotiations. This group, dubbed JUSSCANNZ consisted of Japan, the U.S., Switzerland, Canada, Australia, Norway and New Zealand. This coalition served to counterbalance the opposing view regarding internationally sourced emission reductions held by both the E U and the developing countries bloc called the G771 (Sutter 2003). An agreement on JI was reached in 1995 during the First Conference of the Parties (CoP-1) held in Berlin, Germany. Despite opposition from developing countries, it was then decided to implement a pilot phase of JI called Activities Implemented Jointly (AD). This pilot phase was 1 Group of 77 and China (G77) - Founded in 1967 under the United Nations Conference for Trade and Development (UNCTAD). The G77 sees to harmonise the negotiating positions of its 132 developing country members Michaelowa, A. K., T. (2001). Glossary of International Climate Policy Terms, Hamburg Institute of International Economics (HWWA). - 7 -intended to promote operational learning and to address methodological issues as they arose through the implementation of this type of joint venture (UNFCCC 1995). It was decided during CoP-1 that the emissions reductions generated through projects under the AIJ program were not transferable into internationally accepted credits. From 1995 - 2000, developed countries (most notably the United States, Switzerland, and the Netherlands) actively supported the AIJ by establishing national AIJ offices and investing financial, technological and material resources in human and institutional capacity-building activities (Dixon 1999). Despite the 'slow' start which AIJ experienced (mostly ascribed to the non-transferability of AIJ derived credits), 152 projects were registered by June 2001 (Michaelowa 1999). These projects were geographically concentrated in Latin America, Central America and Eastern Europe. The majority of these projects involved the renewable energy/energy efficiency sectors (UNFCCC 2001). One of the strongest supporters of the AIJ program was Costa Rica. Costa Rica had already initiated AU-type projects in 1995 and was an ardent supporter of such mechanisms in CoP-1. This support was demonstrated by Costa Rica's backing of the Brazilian proposal for a Clean Development Fund (CDF). This was the initial proposal that was eventually combined with the JI program to form the Clean Development Mechanism. Brazil's 1997 proposal for a Clean Development Fund suggested a growing openness to some form of JI between the North and South despite the fact that the G77 as a bloc was still opposed to JI. The Brazilian proposal suggested that there should exist a penalty system for industrialized countries which fail to meet their proposed emission reduction requirements. Nations who superseded their required reductions would be levied fines in proportion to their level of non-compliance. The funds collected from such activities would be channeled into a Clean Development Fund to be used to support GHG mitigation projects and climate change adaptation projects in those regions most affected. Most industrialized nations were generally opposed to the Clean Development Fund proposal and preferred a Jl-type system that allowed for the application of developing country-generated credits to Annex-1 required reductions. During CoP 1 Costa Rica played the role of mediator by successfully encouraging the Brazilians to change their proposal from a Clean Development Fund (CDF) to a Clean Development Mechanism (CDM) that would in part finance adaptation but would otherwise function as a market-based program to help Annex-1 nations to meet their reduction commitments (Figueres 2002). Prior to Cop-3, intensive discussions between Brazil and the United States resulted in the emerging Clean Development Mechanism taking elements from JI, AIJ, and the CDF (Oberthur 1999). Thus transformed from financial penalty to investment vehicle, the Clean Development Mechanism was adopted as a part of the Kyoto Protocol in 1997 during CoP-3 in Kyoto, Japan. As the Kyoto Protocol was adopted in the last hours of CoP-3, many issues relating to the CDM were left to be decided in later CoP meetings. Despite the lack of an explicitly defined mechanism, there were some key points that differentiated the CDM from the originally proposed JI. The CDM refers solely to projects carried out between an Annex 1 and a Non-Annex 1 parties while the definition of JI was modified to only include projects carried out between two Annex 1 countries, thus differentiating the two similar mechanisms. The CDM was further modified to include the provision that in addition to providing cost-effective emissions reductions, projects 'shall assist Parties not included in Annex 1 in achieving sustainable development'. Assessing how these contributions to sustainable development are determined is the focus of this thesis. Another difference between the CDM and the initial JI proposal was that the CDM was to be made subject to control and oversight by a CDM Executive Board and managed in a multilateral fashion by the involved parties. In maintaining some of its CDF roots, a decision was reached that a portion of the revenue from project activities would be used to assist the most vulnerable Non-Annex 1 countries in adapting to climate change and to fund overhead costs. The Association of Small Island States (AOSIS) championed this provision as it provided a source of funds for adaptation measures. The use of credits generated from activities under the C D M by Annex 1 countries was approved for the first Kyoto budget period (2008-2012) with an early crediting period to begin in 2000. Operational aspects o f the C D M that were left open during CoP-3 in Kyoto were left for decision during CoP-4 in Buenos Aires . During this meeting a two-year 'P lan o f Ac t ion ' was established with the aim of finalizing certain aspects of the Kyoto Protocol by the year 2000. A consensus was unable to be reached in both CoP-5, November 1999, in Bonn and CoP-6, November 2000, in the Hague. A n additional session of CoP-6 was held in July 2001 in Bonn though by that time the U S had dropped out of the Kyoto Protocol claiming that it was 'fatally flawed' as it would damage its economy and because developing countries would be exempt from taking on emission reduction requirements (Sutter 2003). A n important area of contention between the European Union and the U S and other members of the Umbrella Group 2 was the extent of use of carbon sinks to meet Kyoto requirements. The Umbrella Group was in favor o f the broadest and most generous definitions of sinks while the E U sought to curb their use. Also , the Umbrella Group was in favor of unrestricted use of the flexible mechanisms to meet emissions reductions requirements whereas the E U put forward a proposal for quantitative ceilings on their use. The E U proposal included a 'supplementarity requirement' that stipulated that 50% of a country's emissions reductions must be met through domestic mitigation activities. A l l o f these issues contributed to the decision o f the newly elected president George W . Bush to withdraw from the Kyoto Protocol (Loschel 2002). The withdrawal of the U S from the Kyoto Protocol certainly decreased the overall environmental effectiveness of the agreement as the U S was and continues to be the largest G H G emitter on the planet. Despite this glaring environmental reality, other negotiating parties continued a sustained diplomatic effort to keep the Kyoto Protocol alive (Babiker 2002). The E U softened its stance on the limits to which sinks and flexible mechanisms could be used. This served to secure the reluctant support o f the other Umbrella Group members, minus Australia. After tough negotiations, an agreement, called the Marrakech Accords, was reached during CoP-7 in November 2001. The U S withdrawal from the Kyoto Protocol was expected to have considerable effects on the C D M . The United States, as the largest G H G emitter, was expected to be the largest buyer of foreign emissions reductions. Model ing studies have shown that with the U S demand for emissions reduction permits removed, the market price o f these permits would fall considerably and allow for other Annex 1 countries to meet their requirements at much lower costs than previously calculated (Hagem and 2001). Wi th decreased demand, it seems plausible that sellers would modify their behavior to maximize their gains in what is forecast to be a supply-heavy market (Manne 2001). This issue is further examined in the following section. The U S withdrawal also led to the increased importance of Canada, Russia, and Japan in climate change negotiations. Asserting their power, these nations were able to gain additional sink allowances in both CoP-6 and CoP-7. The Russian Federation, for example, was able to increase its sink allowances from 18 MtC/year to 33 MtC/year (Loschel 2002). 2 The Umbrella Group refers to the JUSSCANNZ countries (Japan, the United States, Switzerland, Canada, Australia, Norway, New Zealand). Despite this shift in bargaining positions and forecasted permit market conditions due to the US withdrawal, rules and procedures for the CDM were adopted as part of the Marrakech Accords in November 2001 at CoP-7. The election of members and the first meeting of the CDM Executive Board (EB) demonstrated that the CDM was progressing towards an implementation phase (Sutter 2003). The CDM Executive Board (EB), which started meeting regularly in 2002, is charged with structuring the necessary procedural modalities of the CDM. The CDM Executive Board (EB) is comprised of 10 members from Parties to the Kyoto Protocol as follows: one member from each of the five United Nations regional groups; two other members from the Parties included in Annex I; two other members from the Parties not included in Annex I; and one representative of the small island developing states. The CDM EB has many roles among which are the creation of formats to describe CDM projects (the CDM Project Design Document, PDD); the development of procedures for different scales of CDM projects; the designation and accreditation of operational entities; the dissemination of available information on approved rules, procedures, methodologies and standards; and the development and maintenance of a publicly available database of CDM project activities containing information on registered project design documents, comments received, verification reports, its decisions as well as information on all CERs issued (UNFCCC 2001). 2.3 Operational life cycle of CDM projects and current project activities The focus of this master's thesis is sustainability assessment in the CDM. To understand the role that sustainability assessment plays in project activities it is first necessary to gain familiarity with the process that allows for projects to evolve from the initial idea development stage to the registered activities that will eventually yield certified emission reductions (CERs). The CDM project life cycle begins in the project design phase with the project participant developing a Project Design Document (PDD). This can be done by an entity within the host country with the assistance of an Annex 1 country or international/national entity such as a consulting firm or a NGO. A project idea can be developed unilaterally by a host country entity or can be in response to a tender for CDM projects by an Annex ,1 entity. Once the Project Design Document (PDD) has been completed, it is analyzed by an organization that is responsible for verifying whether the methodology for determining the project's emission reductions relative to a baseline is an application of an existing CDM EB approved methodology or necessitates the submission and approval of a new methodology. This organization, called a Designated Operating Entity (DOE), is a domestic or international entity that is accredited and designated by the Executive Board (EB). The DOE is responsible for validating and requesting registration of a proposed CDM activity as well as verifying emission reductions of a registered CDM activity so that CERs can eventually be issued. If the project requires a different methodology, the CDM EB will evaluate the submitted methodology and either approve or reject the proposed methodology. Once the methodology is approved (or the project proposes to use an already approved methodology) the DOE requests that the CDM EB register the project. The CDM EB then has 8 weeks to request a review of the project (if requested by a project participant or three members of the CDM EB) or else it is automatically registered. If a review is requested, a time limit of two CDM EB meetings is set after which the decision to register or deny registration to a project must be generated by the CDM EB. This process of validation by the DOE and registration by the CDM EB is displayed in Box 1. - 10-Figure 1: CDM Validation and Registration Procedure <» w <D O O c O > «> 05 O O Design of project activity, subni •j-.-cn of Project Design Document to D O E D O E : Checks validation requirements A p p r o v e d methodology NBW methodology E B : T o consider new methodology If approved. D O E : Finalizes validation Request Tor review • wimin 8 weeKs N O Co-iairt zn-i -crcluds review within two meetings CDW! project activity registered Project activity rejected, possibility to start proceBS a pain (UNFCCC 2005) Once a C D M project is approved and registered by the C D M EB, there is a chain of activities that occur in order for the issuance of CERs by the C D M EB. Project monitoring is required to ensure that emissions reductions and other factors are in accordance with those outlined in the approved PDD. This monitoring is the responsibility of the entity implementing the C D M project, the so-called Project Participant (PP) and is subject to the verification of the DOE. Upon certification by the DOE, a request for CER issuance can be generated and reviewed by the C D M EB. At this point, pending approval, the CERs can be issued and distributed to the project investors. This chain of action as well as the responsibilities of each of the stakeholders in a C D M project's life-cycle are presented in Figure 2. Also, the additional process of an Applicant Entity (AE) applying to the COP/MOP to receive a DOE certification is shown. Figure 2: CDM Project Cycle Design Validation/registration Moni tor ing Verifi cali bnfmtWic att so I s s u a n c e (UNFCCC 2005) At the time of this writing, only a handful of CDM projects have progressed to the stage in which the DOE can request the issuance of CERs. This project list is visible at http://cdm.unfccc.int/Projects/registered.html. The specific procedural modalities of the CDM can appear as complex given the many stakeholders that must interact during the entire project's life cycle. These different entities, both public and private institutions located in both the developed and developing world, are in a process of 'learning by doing' given the relatively recent creation of the CDM and the subsequent process of defining and sometimes changing procedural rules for project related activities. This 'newness' of the CDM provides a timely opportunity to evaluate the degree of sustainability assessment in current projects in hopes that relevant findings can be incorporated into future project decisions and hopefully shape future CDM projects in a way that leads to improved efficacy of the Kyoto Protocol. 2.4 Sustainable development in the CDM This section of the thesis will explore the role of sustainable development (SD) in the Clean Development Mechanism (CDM). This is achieved by examining the relationship, in principle, between the dual-objectives of cost-efficiency and contributions to host country SD. Following this, section 2.5 incorporates select literatures that examine SD in its legal-institutional paradigm. This section will also examine three criticisms of SD in general (that it is vague, fosters delusions, and is hypocritical) and view the treatment of SD in the CDM through the lens of these criticisms. Incorporating sustainable development in the CDMfrom JI and CDF proposals At CoP-7 (November 2001) in Marrakech, the term 'sustainable development' was included in the design of the CDM. During that meeting it was decided that CDM projects must help a non-Annex 1 country in achieving sustainable development through the promotion of environmentally friendly technology transfer. - 12-The responsibility of determining if a project contributed to SD was left to the host country as articulated in Decision 17/CoP-7 which states that "...it is the host party's prerogative to confirm whether a clean development mechanism project activity assists it in achieving sustainable development'(UNFCCC 2002).3 The CDM was designed with three broad goals in mind; to 'assist Parties not included in Annex 1 in achieving sustainable development, to contribute to the ultimate objective of the Convention (global GHG mitigation), and to assist Parties included in Annex 1 in achieving compliance with their quantified emission limitation and reduction commitments under Article 3'. These three goals can be operationally reduced to the two goals of (1) providing low cost emissions reductions to the market and (2) helping host countries achieve SD. If both of these are accomplished then the remaining goal of contributing to the objective of the Convention is necessarily achieved. Thorne (1999) argues that the two identified goals are not mutually exclusive. If well managed, the CDM could foster a flow of investment into low-income, non-Annex 1 countries that will support innovative projects contributing to SD while reducing GHG emissions globally. This view is quite optimistic on the ability for SD and price efficiency to coexist and possibly be synergistically connected. Less optimistic interpretations of this relationship exist as demonstrated by an Indian government official who highlights the increased difficulty that SD adds by questioning "why do you make the whole thing [the CDM] even more complicated with a sustainable development objective?"(Sutter (2003) citing interview). This statement highlights the complex nature of bringing a CDM project from early implementation stages all the way to the generation of CERs. It also can signify that decisions made regarding CDM projects are made without explicitly taking sustainability into account. The following section demonstrates how the CDM evolved from earlier proposals to be palatable to both developed and developing countries and include a sustainability requirement. The CDM compromise reached during CoP 3 (December 1997) in Kyoto, the so-called "Kyoto surprise" emerged after intense behind-the-door negotiations. Negotiators were able to use the developing country support for the CDF proposal to include the emissions trading aspects of the JI plan (which the developing countries had previously been opposed to) to change the CDF from a fund into a mechanism, with the subsequent letter change in the acronym. The CDM therefore became a mechanism that allowed Annex-1 nations to invest in non Annex-1 generated emissions reductions to comply with their reductions requirements rather than being forced to contribute to a fund which, in turn, invested in non Annex 1 emissions reductions. Also included in the CDM was the US proposal for projects to be 'compatible with and supportive of national environment and development priorities and strategies', terminology later included in the CDM as 'contributions to sustainable development'. Thus the following was adopted: "The purpose of the clean development mechanism shall be to assist Parties not included in Annex I in achieving sustainable development and in contributing to the ultimate objective of the Convention, and to assist Parties included in Annex I in achieving compliance with their quantified emission limitation and reduction commitments under Article 3. " (UNFCCC 1997) 3 The italics in the above sentence highlight the vague CoP wording that could potentially lead to the understanding that contributing to SD was not a mandated requirement. - 13 -The international sourcing of emissions credits with commensurate gains in efficiency was the foundation of the initial JI idea proposed in Rio 1992. The US JI proposal linked project based emissions credits to sustainable development objectives. Thus the C D M became the amalgam of previous policy objectives, one emanating from the North and the other from the South. The cost-efficiency of sourcing credits from low-cost mitigation activities is fairly straightforward -the marginal cost of G H G abatement can be lower in places using less advanced or more polluting technologies. Sustainable development, on the other hand, is a bit more complicated and difficult to define. SD within the Kyoto Protocol and the C D M is defined as 'development that meets the needs of the present without compromising the ability of future generations to meet their own needs'. This definition, derived from the U N Commission on Environment and Development (the Brundtland Commission, 1987), is an anthropocentric approach focusing on intergenerational equity. The definition of SD used by the U N F C C C lacks prescriptive action or requirements useful for determining a C D M project's contributions to SD. It was decided at CoP-7 (December 2001, Marrakech) that host countries will carry the responsibility for affirming a project's contributions to national SD. This conferring of responsibility raises the issue of how locally determined sustainability requirements (or the absence of pervasive, internationally mandated requirements) could affect the C D M in terms of $/CER (cost efficiency) and contributions to SD. Sutter (2003) examines the performance of hypothetical C D M projects in terms of their contribution to SD and cost efficiency. Cost efficiency is measured on the y-axis by CER cost ($/tC02) and SD is represented along the x-axis as relative SD contributions. Figure 3 shows that of all available C D M projects, only those that meet the minimum SD requirements and do not exceed the market CER price (in the shaded region) are likely to be accepted by both Annex-1 nations (for the cost efficiency of mitigation) and by non Annex -1 nations (for the local investment and SD contributions). This assumes the CER market will be a buyer's market in that buyers will not pay amounts greater than the market price and that projects unable to deliver CERs at or below the market price will not receive CER-derived revenues. In the absence of defined SD metrics, this graph can only serve as a heuristic tool to show what could be the project distribution subject to the constraints of a prevailing CER market price and an enforced SD requirement. - 14-Figure 3: Qualitative distribution of hypothetical C D M projects and their respective contribution to SD and C E R abatement costs. CER abatement costs (S/tC02) + . Market pries for O H O emissions Contribution to sustdnable development Minimal S D requirements tot approval (Sutter 2003) Looking at Figure 3 it is clear that either an increase in CER price or a decrease in SD requirements (or both) would increase the number of CDM projects (given a distribution of projects across the axes) able to meet economic and SD minimum requirements. Because the potential supply of projects is vast, it can be asserted that project developers are price takers rather than price makers. This implies that project developers would attempt to increase their share of CDM revenues through developing projects that generate lower cost CERs relative to market prices. If the goal of project developers and non Annex-1 nations is to maximize CDM related revenues, the lowest possible SD requirement will be set in order that it does not conflict with economically motivated CDM strategy decisions. The above figure assumes that increases in SD benefits results in increased CER costs. Additional research in this area is needed to determine the exact relationship (e.g. possible synergies between SD benefits and project efficiency, etc.) This raises the issue of what SD requirement a host country would choose to implement for CDM projects. Given domain over SD criteria, it is possible that host countries would prefer a less stringent requirement in order to capture a larger portion of the CER market. While it is conceivable that a host nation could choose to implement very stringent SD requirements, it is more likely that they would choose to capture market share through a lower requirement (Sutter 2003). This loosening of SD requirements could lead to a 'race to the bottom' where minimum SD standards are continuously lowered by host nations in attempts to make previously unsustainable projects (under more stringent requirements) now fit for investment and CER generation. Examples of such standards could be a reduced requirement for local employment generation, or acceptance of a degraded local environment. Even renewable technologies can have negative environmental and social impacts. - 15 -What would be the hypothetical results of an internationally mandated SD requirement? In this case it is assumed that any internationally sanctioned criteria would be more stringent than that of a host nation because the market derived motivation to cut costs to attract investment might be less important to an international body than to an individual non-Annex 1 nation. It is plausible that increased Annex 1 demand could drive up CER prices, which would make projects with higher than the minimal SD requirements more economically attractive. To recap, while both SD and economic efficiency are seen as beneficial for both Annex 1 and non - Annex 1 countries, there exists a possible trade-off relationship. By giving host nations the power to determine a project's SD sufficiency, it is possible that a 'race to the bottom' would occur, where each nation lowers their SD requirement to attract more projects. This could lead to the erosion of SD in any substantive form in the CDM. Conversely, it has been shown that, in principle, an international minimum SD requirement would lead to the approval of only projects meeting more stringent SD requirements. This would, in turn, lead to a smaller number of projects available for approval and decrease CDM-derived rent from the already relatively poorer non-Annex 1 countries. 2.5 Sustainable Development, select critiques and their application to the CDM This section of the thesis will briefly examine the ideological and historical roots of sustainable development, examine its criticisms, and apply this knowledge to the treatment of SD in the CDM. This analysis, which is merely a footnote to a growing body of literature on SD, connects sustainability in the CDM with the preexisting conceptual roots and manifestations such as the 1987 Brundtland Report and moving back to the ancient Greeks. Critiques of sustainable development and their application to the CDM The UNFCCC has adopted the concept of sustainable development for use in qualifying CDM projects. Sustainable development is a tricky term - although there are established definitions of it - there does not exist an operational definition that is generally agreed upon. As the focus of this thesis is sustainability assessment in the CDM, critiques of the conceptual guiding principle of sustainable development are useful to understand the multiple levels at which the term is contested. The following is a presentation of three critiques of sustainable development. Sustainable development can be viewed from diverse perspectives. It can be understood as a popular buzzword created to distract critics from the continuation of business-as-usual activities. In response to this different groups have criticized the concept of sustainable development for diverse reasons. Among these are that sustainable development is vague and attracts hypocrites. These criticisms are examined in greater detail by Robinson (2004) and in Cohen et al (1998). In the following section a brief overview of these critiques is presented and discussed in the context of the CDM and its treatment of SD. The concept of sustainable development has been criticized for its vagueness. This critique is based on the assertion that the combination of the words 'sustainable' and 'development' is in itself controversial. This semantic combination could be understood as full force economic growth 'sustained' over an indefinite time period. Questions related to whether 'development' is synonymous with economic growth and what time frame 'sustainable' encompasses allow a variety of different interests with heterogeneous views on SD related issues to engage in discourse. As a result, the vagueness of the term sustainable development can be viewed as both - 16-an analytical weakness and possible political strength ("constructive ambiguity") which allows for political dialogue that can lead to policy formation (Robinson 2004). The critique that SD is conceptually vague can be extended to its use in the CDM. Solely providing the Brundtland Commission's definition of sustainable development, without standards determining what specifically constitutes a 'project's contributions to sustainable development', is an extension of conceptual vagueness to operational vagueness. The absence of universally accepted UNFCCC criteria for sustainable development in the CDM allows the possibility that every project and no project can be truly affirmed as sustainable in a way that is backed by real analysis. Therefore, while conceptual vagueness can perhaps be viewed as advantageous in certain contexts, it seems unlikely that extending this vagueness to the CDM will have useful consequences for sustainability assessments of registered projects. One possible outcome of this vagueness is that discussed by Sutter (2003) and presented in Figure 5 where a 'race to the bottom' of sustainability standards occurs among CDM project developers. Criticism has also been brought by environmentalists that the term 'sustainable development' easily lends itself to hypocritical usage by government and industry to mask continuing business as usual policies under the veil of cosmetic environmentalism (Robinson 2004). This critique is less related to the defining of sustainable development as a concept than to how it is used in practice. The propagation of numerous methodologies to measure sustainable development attests to importance placed on being able to substantiate claims made regarding a product or policy's environmental impact or social ramification. This is seen with such methodologies as the ISO 14000 and the Global Reporting Initiative reporting standards. Though the efficacy of these and other methodologies is open to question, their rapid emergence serves to highlight a growing interest in sustainable development indicators and measurements. Of course groups that view sustainable development as fundamentally serving the role of cosmetic environmentalism will reject such certification and evaluation methods as being merely means to affirm the application of a deeply flawed and hypocritical concept. In the context of the CDM this critique draws attention to the lack of a generally accepted reporting methodology for sustainable development. Although there could be many indicators for measuring a project's contributions to sustainable development, the absence of an internationally accepted methodology invites unsubstantiated claims of a project's contributions. This lack of rigor, places sustainable development assessment in the CDM to pre ISO 14000 levels where anything from saltless soda crackers to ethanol-enhanced gasoline can be marketed as 'green' products (examples are Robinson's). Host countries have the power to confer the effectively vacant title of 'contributes to sustainable development' to any project they choose. Cosmetic environmentalism becomes the norm in the CDM. Observing the process through which the Clean Development Mechanism was formed and how sustainability concerns were incorporated into it gives the impression that adding the 'SD' component to the CDM, without any strong guidance as to how it should be operationalized, leaves a vacuous space for interpretation and possible misuse. Bringing sustainability from the conceptual level down to the operational level in the CDM will be integral for ensuring that some minimal SD standards are adhered to. One might look as far back as the 19th century industrial revolution to realize that it is the lower levels of society who are taken advantage of in the pursuit of private profit. The industrial revolution exploited these groups while polluting the environment partly due to the absence of environmental and worker health and safety regulation. In the absence of similar regulations pertaining to sustainability in the CDM, it is possible that the environment and the people of the developing world could be exploited in the name of climate change mitigation in the same way workers in 19th century European cities were exploited in the - 17-pursuit of profit. If host countries are unwilling to protect their local environments and populations from potentially destructive CDM projects, there should be some type of international mandate that will do it in their place. The following chapters will evaluate how these sustainability concerns have been operationalized and validated at the project level. Before going to the individual project levels, a brief, global analysis of the current state of the CDM is presented. - 18-Chapter 3: Global and Project-level Evaluation of the CDM 3.1 Chapter introduction This chapter will examine the current state of the Clean Development Mechanism at both the global and individual project levels. At the time of writing, there have been 25 projects approved by the CDM Executive Board within the span of roughly one year. The global analysis of the CDM will incorporate data from all 25 projects to display some of the broader characteristics of the mechanism. The project-level analysis of the CDM will use data from a representative sample of projects to better understand how sustainability concerns are being incorporated into project design. For the global analysis, data from all 25 projects will be used. For the project level analysis, the largest project (determined by annual CER generation), from each of the 8 different project types (energy efficiency, landfill gas capture, fuel switching, small-scale hydro, HFC 23 destruction, swine methane capture, wind energy generation, and biomass power generation) will be selected for deeper analysis. This analysis will consist of in-depth reviews of available project documents to assess the level of sustainability assessment used in the project. Examined documents include the Project Design Documents (PDD), Validation Reports prepared by the Designated Operational Entities (DOE), and other CDM materials available in the UNFCCC CDM database. 3.2 Global analysis of the first 25 CDM Projects As mentioned earlier, this analysis includes the first 25 registered CDM projects. The first project was the Nova Gerar landfill gas-to-energy project in Brazil (registered in November 2004) and the last project included in this analysis is the Vataru and Wainikasou Hydro facilities in Fiji (registered in mid-October 2005). The number of projects approved began increasing with greater frequency after the Kyoto Protocol came into force in February 2005. This can be seen in Figure 4. These projects are each expected to produce an annual amount of Certified Emission Reductions (CERs). This stream of CDM projects are expected to produce over 7 million CERs annually (UNFCCC 2005). The cumulative annual CERs generated are also displayed in Figure 4. Two cumulative CER generation lines are shown to display the CER generation effect of the addition of HFC 23 destruction projects. - 19-Figure 4: Number of registered projects and CER generation over time (with and without HFC project CER volumes) C u m u l a t i v e C E R s a n d # o f P r o j e c t s 8,000,000 7,000,000 6,000,000 -f 5,000,000 4,000,000 3,000,000 2,000,000 + 1,000,000 0 •Cumulative C E R s •Cumulative C E R s w/o H F C -# of Projects Entry into force of Kyoto Protocol / J> / J* J* K& / / .X? & O ^ ' . A * ' .nP <^f ^ ^ ^ XT <$> woT <<^  <^  *r fir v& ^& Time (UNFCCC 2005) From above it can be seen that when the Kyoto Protocol entered into force in February 2005, there was a gradual increase in the number of projects approved and an immediate spike in the amount of CERs being generated from those projects. This spike, however, was largely due to the registration of two HFC 23 destruction projects. These C D M projects are able to take advantage of the high global warming potential (GWP) of the substance being mitigated (HFC 23 has a GWP of 11,700 times that of C02) (IPCC 1996). These 25 C D M projects are located in 14 different countries on 5 continents. India, Honduras, and Chile are currently leaders in the number of projects hosted. India, Korea, and Brazil lead in the number of CERs generated from the projects currently in operation. This is displayed in Figure 5. - 2 0 -Figure 5: CER Production and # of Projects by Host Country C E R P r o d u c t i o n a n d # o f P r o j e c t s b y H o s t C o u n t r y 3500000 3000000 2500000 u 2000000 LU O 1500000 1000000 500000 _E"I_ i CER production - # of Projects + 2 Host Country (UNFCCC 2005) The above graph highlights the fact that the number of projects in a host country has little bearing on the amount of CERs generated from involvement in the CDM. For instance, Korea only has one CDM project yet is currently the second largest producer of CERs. Honduras is only second to India in the number of projects yet is not in the top 5 CER producing nations. This noticeable disconnect between the number of projects and the amount of CERs produced in a host country can be explained by taking into account the mitigation mode of the project type. The mitigation modes are classified as containing the following project types in the CDM: -21 -Table 1: Mitigation mode classification Mitigation Mode Project Types Efficiency Fuel switching, household energy efficiency upgrades Natural Resource Biomass Non C02 HFC, LFG, swine methane Renewables Hydro, wind Figure 6 shows the annual CER production by the total number of projects in each mitigation mode. Figure 6: C E R production by mitigation mode 8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0 CERs produced by mitigation mode Efficiency Nat Resource Non C02 Renewables (UNFCCC 2005) From Figure 6 it is evident that the non-C02 mitigation mode (including HFC destruction and landfill gas capture projects) is the one producing the most CERs. This is related to what can be called the 'CER potential' of each technology used. The CER potential of the CDM projects is dependent on multiple factors. These are (1) the amount of capital investment required for the project activity (2) the GWP of the substance being mitigated, and (3) the regulatory baseline in the host country. The dominance of HFC 23 destruction in producing CERs can be explained by 3 factors (1) the project only requires that a single thermal oxidation unit be installed to an existing F-gas production facility and there are large economies of scale to be captured given the volume of HCFC 22 production in the plant, (2) the GWP of HFC 23 is 11,700 times that of C02 (IPCC 1996), and (3) there is no environmental regulation in the host country limiting HFC 23 venting to the atmosphere (PricewaterhouseCoopersLLP 2003). Taking into account all of these factors makes it clear why this project activity is accounting for the majority of CER production. - 2 2 -Landfill gas capture projects exhibit some of the same characteristics as HFC destruction projects in the sense that (1) a single methane flaring system can be utilized for the entire project activity, (2) the GWP of methane is 21 times that of C02, and (3) the baseline scenario in the host country involves the continued venting of landfill-produced methane to the atmosphere (Ecosecurities 2004). Due to the relative CER potential of the technologies and the geographical distribution of each project type, it is not surprising that India, Korea, and Brazil lead the other nations in CER production. Different CDM projects will have variation in their project 'life spans'. In all of the preceding analysis, annual rather than total CER generation data is provided. This is to facilitate the comparison of projects regardless of their respective crediting periods. The majority of CDM projects are given the option of choosing either a 7-year crediting period (with the option for either 1 or 2 renewals) or a one-time 10-year crediting period (UNFCCC 2005). This decision is made based on each host country's baseline scenario. The baseline scenario is all-important in determining the CERs generated from CDM projects. To do this, project participants first calculate the GHG emissions from the host nation's current practices in the sector that the CDM project is to be implemented (agriculture, power production, waste management, etc). After this, the emissions resulting from the CDM project are calculated. The difference between these two numbers is the amount of GHG reductions (convertible to CERs) that the project generates. These emission reductions are usually counted on an annual basis. The crediting period becomes important for GHG calculations because it essentially forcasts the GHG intensity of the CDM project area. Projects that apply for registration with a shorter crediting period might do so to reflect specific circumstances. For example, the Villa Dominico landfill gas capture project in Argentina applied using only a 7.5 year crediting period because the landfill is no longer in use - meaning that additional methane producing waste would not be added to the site (B.V. 2005). It is possible that after the first crediting period has ended, certain projects will apply for renewal and be denied. This could be due to problems with GHG monitoring protocols or other unforeseen changes in the baseline scenario. Alternatively, the projects could be renewed with a discounting of future CERs - also indicating a changing baseline in the host country. Each methodology used in CDM projects has the capability to be adjusted to reflect changes in the host country's regulation of the sector in which the CDM activity operates. As the CDM is still in its first year of operation, the potential issues arising from project renewals have not yet been experienced. From first glance, it is conceivable that CDM projects could indirectly contribute to a decreased desire of host country governments to strengthen environmental regulation in order to maintain CER incomes from projects applying for renewal. Currently there are three different CDM project designs: Unilateral - A project design where the CDM activity involves no Annex 1 foreign direct investment (FDI), only has the approval of the host country Designated National Authority (DNA), and sells its CERs after certification directly to an industrialized country entity or decides to use them for future Kyoto compliance. Bilateral - A project design where an Annex 1 entity invests directly in the project and in return receives CERs that can be used against a domestic GHG reduction commitment. Multilateral - A project design where Annex 1 entities deposit their money in a centralized investment fund that invests in either a single project or -23 -multiple projects. The initial Annex 1 investors would then receive an amount of CERs that corresponds with their initial share of the investment fund (Jahn 2004). Figure 7 (below) shows how the number of CDM projects and the amount of CERs generated from those projects are distributed across the three different project designs. From the below it is observed that multilateral and bilateral projects are generating the most CERs. This might indicate that international investors show preference for projects that generate more CERs. If there is a link between sustainability benefits and project design whereby unilateral projects, being chosen solely by entities within the host nation, have more sustainability contributions, these projects would likely receive less attention from international investors who prefer higher CER generating projects. Figure 7: Comparison of number of projects and C E R generation by project design Project Design Compar ison 12 10 o a o 4,500,000 4- 4,000,000 3,500,000 3,000,000 2,500,000 g 75 2,000,000 i < 1,500,000 1,000,000 500,000 j # Projects - C E R s Unilateral Bilateral P r o j e c t D e s i g n Multilateral (UNFCCC 2005) Figure 8 shows the comparison between the proportions of C02 vs. Non-C02 mitigation modes among multi/bi/unilateral projects. For these figures, 'C02' refers to the 3 mitigation modes besides 'Non-C02' such as (efficiency, natural resource, and renewables). From this figure and the three that follow, it is clear that multilateral projects mainly focus on non-C02 mitigation modes like swine methane, LFG capture, and HFC destruction. Unilateral projects, on the other hand, focus on hydro, biomass and LFG. What is the explanation for this difference in project types selected for different project designs? This could be due to the ability of local technology to be utilized in each of these project types - something that would not be possible for HFC -24-destruction projects or windfarm projects - each of which require some degree of technology transfer. Figure 8: C02 vs Non-C02 by different project designs (UNFCCC 2005) -25 -Figure 9: CERs by project and design C E R Generation by Project Type and Design 3 5 0 0 0 0 0 3 0 0 0 0 0 0 2 5 0 0 0 0 0 a. 2000000 tu o ° 1 5 0 0 0 0 0 1 0 0 0 0 0 0 5 0 0 0 0 0 -I 0 rg Unilateral • Bilateral • Multilateral P r o j e c t T y p e (UNFCCC 2005) Figure 9 shows which project types are being implemented through each of the different project designs (unilateral, bilateral and multilateral). Aside from again noting the overwhelming dominance of HFC projects in producing CERs, it is also apparent those projects are being implemented as either multilateral or bilateral projects, rather than of the host country's own initiative (unilateral design). This could indicate that the Annex 1 entities were the first movers for this type of high CER volume project. This could also indicate that host countries, when they are implementing projects unilaterally, prefer to focus on project types which have some sort of added benefit besides CER generation. Looking at the entire CER transaction structure, it logically makes sense that Annex 1 private corporations, who are committed to preserving shareholder value in the face of changing environmental legislation are going to be primarily concerned with reducing their environmental liabilities at the cheapest cost. Based on current CDM projects, HFCs are the cheapest reductions. There might exist a link between a firm's commitment to 'Corporate Social Responsibility' and their choice of CDM investment, though at this stage in the CDM's implementation, this preference is hard to verify. As the number of projects continues to grow, clearer relationships between project design and project type might be observable. After completing the analysis of 25 CDM projects to understand the broad characteristics of the mechanism, it will be useful to progress from the macro level (CDM global analysis) to the micro level (project level analysis). This will allow for the sustainability concerns of the individual projects to be contextualized within the broader trends of the CDM. -26-3.3 Project-Level Evaluation As mentioned earlier, the second part of this chapter will examine 8 different CDM projects (one from each project type - LFG, HFC, hydro etc) to assess the type of sustainability assessments used. Included in this analysis is a documentation of the: 1. Environmental analysis used in the project. This is relevant as it indicates how local, in addition to global, environmental concerns have been taken into account by the project developer. 2. The projects' evaluation of social concerns. Involving the local public in the CDM project, as well as other types of social analysis have been indicated by the UNFCCC as a means to increase the sustainability of the projects. 3. Additionality statements. This indicates what host country barriers and CER financial factors have been taken into account when justifying that the project would not have occurred in the absence of the CDM. 4. Use of sustainability assessment methods. This will indicate whether any particular assessment methodology has been used to gauge explicitly identified sustainability benefits. 5. Project's stated contributions to sustainable development. These serves to show that the in certain cases, CDM project developers are aware of sustainability concerns and often provide a textual discussion of those impacts in a way that resembles what could be found in corporate social responsibility reports. 6. Comparison between the environmental regulations that would govern the type of CDM project activity in an Annex 1 nation. This serves to demonstrate that in certain cases, CDM project activities generate CERs from activities that are already prohibited in Annex 1 nations (e.g. HFC venting), or are already mandated (e.g. manure management practices). Canada's environmental regulations are used as a proxy for Annex 1 regulations. • Selection of projects for evaluation This chapter section will describe the current state of sustainability assessment in a representative set of the current CDM project list. At the time of writing (October 2005) there exist 8 areas of CDM projects. The largest project from each project category will .be evaluated in order to provide an analysis that includes the largest project (by CER volume) in each project category. The projects to be evaluated are the following: -27-Table 2: Basic project descriptions Project Host Country CER Mitigation Mode Project Type Brazil LFG Brazil 670,133 Non-C02 LFG Honduras Hydro Honduras 17,800 Renewables Hydro India HFC India 3,000,000 Non-C02 HFC India Biomass India 31,374 Natural Resource Biomass Power Generatior China Windfarm China 51,429 Renewables Windfarm Chile Fuel Switch Chile 19,438 EE Fuel Switch South Africa E. Efficiency South Africa 6,580 EE EE Chile Swine methane Chile 247428 Non-C02 Swine Methane The selection of these projects yields the following coverage: Table 3: CDM analysis coverage Total Project CERs 7,289,523 Evaluated Project CERs 4,044,182 Analysis Coverage by CERs 5 5 .48% Total Number of Projects 25 Number of Evaluated Projects 8 Anal)sis Coverage by # of Projects 32.00% Although the general project activities are described in Table 2, a slightly more detailed description is offered below. Description of the project activity: 1. Brazil NovaGerar Landfill Gas to Energy Project - This landfill gas capture and energy production process utilizes a methane collection system, leachate drainage system and a modular electricity generation plant at each site. The generators will combust the methane from the landfill gas to produce electricity available for export to the grid. Gas that is not used for electricity will be flared (Ecosecurities 2004). 2. Rio Blanco Small Hydroelectric Project - This project is a 'run-of-river' hydroelectric generating plant consisting of a Tyrol type diversion dam, a 233 meter tunnel, a forebay for sediment removal from incoming water, a 1,500 meter penstock, and a powerhouse with discharge channel and access road ((SHRB) 2004). 3. HFC Destruction using thermal oxidation in Gujarat, India - This project activity concerns the development, design, engineering, procurement, finance, construction, operation and maintenance of a system for thermal oxidation of HFC 23 (Chemical Formulae: CHF3) followed by treatment of combustion gases prior to the disposal of all emissions and discharges (PricewaterhouseCoopersLLP 2003). 4. Biomass in Rajasthan - Electricity Generation from Mustard Crop Residue - This small-scale CDM activity involves the implementation of a biomass-based power generation plant with an installed capacity of 7.8 MW and locally available mustard crop residue. Electricity produced by the activity will be sold to the electricity grid and large consumers in the area (Hofman 2004). - 2 8 -5. Huitengxile Windfarm Project - The project involves the installation of 22 turbines to generate renewable electricity using wind power resources. The generated output is to be sold to the Inner Mongolia Western Grid through a power purchase agreement (PPA) (TJVILYWPDC 2004). 6. Graneros Plant Fuel Switching Project - This project involves upgrading two boilers, two furnaces and an industrial coffee roaster in Nestle's Graneros facility so that they consume natural gas rather than coal and diesel fuels. The reduced coal consumption in the Graneros facility will lead to direct reductions in carbon emissions through fuel switching and reductions in fugitive emissions of methane associated with the mining and post-mining activities of coal (MGMInternational 2004). 7. Kuyasa low-cost urban housing energy upgrade project, Khayelitsha (Cape Town; South Africa) - The project activity aims to improve the thermal performance of the existing and future housing units, improve lighting and water heating efficiency. This will result in reduced current and future electricity consumption per household with significant avoided C0 2 emissions per unit (CCTURP 2005). 8. Methane capture and combustion from swine manure treatment for Pocillas and L a Estrella - This project activity involves the operation of a swine manure disposal system that utilizes anaerobic digesters and activated sludge treatments to avoid GHG emissions in the swine barns (Agrosuper 2005). The following table shows the results of the project evaluations based on the six areas identified above (environmental assessment, stakeholder consultations etc). -29-P r o j e c t E n v i r o n m e n t a l A n a l y s i s S takeho lder consultat ion process # o f C o m m e n t s received A d d i t i o n a l i t y A n a l y s i s T y p e of sustainabi l i ty assessment methodology in P D D T y p e o f susta inabi l i ty assessment methodo logy b y D O E D e s c r i p t i o n o f S D impac t s A n n e x 1/Host C o u n t r y E n v i r o n m e n t a l regulat ion conf l ic t? Brazil LFG EIA Multi-stakeholder meetings 1 IRR analysis with and w/o CER funds None Checklist Sustainability statement No Honduras Hydro Environmental Screening -Leopold Matrix Multi-stakeholder meetings 0 IRR analysis with and w/o CER funds None Checklist Sustainability statement No India HFC No Multi-stakeholder meetings 0 Environmental regulation additionality None Statement Sustainability statement Yes India Biomass No . 200 interviews with stakeholders 1 IRR analysis with and w/o CER funds None Checklist Sustainability statement No China Windfarm No World Bank funded stakeholder survey. 0 IRR & Barrier analysis None Checklist Reference to government letter of approval No Chile Fuel Switch No Selectively Distributed Survey 0 Economic (IRR Coal vs. Natural Gas) None Checklist Reference to government letter of approval No South Africa E. Efficiency No Multi-stakeholder meetings & Conference/W orkshop Presentations 1 Design additionality based on the current design of low-cost housing Scorecard Checklist (SSN Matrix) Checklist Sustainability Annex (Scorecard Checklist) & Sustainability affirmation No Chile Swine methane No Website & Industry publications 1 IRR and regulatory additionality None Checklist Sustainability statement Yes 1. Description of environmental analysis used for the C D M project The majority of evaluated projects have not utilized any type of environmental impact assessment. In many cases, the host country's government does not require these assessments -relieving the project developers of additional expenditures and potentially allowing for environmental concerns to be covered by textual discussions of environmental impacts rather than actual analysis. Projects are eligible to become C D M projects by showing that they can contribute to reducing G H G emissions below what would have been the case in the absence of the C D M mechanism. As GHGs mix uniformly in the atmosphere, it is argued that it is irrelevant where the G H G reductions are taking place as they benefit the global environment in the same way. This category will describe what consideration has been given to the local environmental effects of the C D M projects. In lieu of an Environmental Impacts Assessment, the Project Design Documents contain a textual discussion of the environmental impacts rather than evidence of a real assessment that might determine that there are potential negative effects of C D M projects local environment. In the cases where there were environmental assessments performed, detailed information was not provided in the project design documents. 2. Description of stakeholder consultation process and summary of comments The U N F C C C defines 'stakeholders' as the public; including individuals, groups or communities affected, or likely to be affected, by the proposed clean development mechanism project activity (UNFCCC 2005). The U N F C C requires that project validators assure that 'comments by local stakeholders have been invited, a summary of the comments received has been provided, and a report to the designated operational entity on how due account was taken of any comments has been received (UNFCCC 2002). After reviewing the 8 projects, it is apparent that the stakeholder consultation process has come to signify different things in the C D M project setting. In several projects, meetings were held, though the details of these meetings are often scarce (such as the Indian Biomass project). In other projects the stakeholder consultation process consisted of surveys distributed to a select government and academic 'stakeholders' (such as in the Chilean fuel switching project), or to local residents (China windfarm project). In the case of the Chilean swine methane project, the stakeholder consultation process consisted of industry conferences, industry publications, and information on the project participant's website. In addition to an 'on the ground' stakeholder consultation process, the potential C D M project is required to undergo a 30 day public comment period. This comment period is web-based and hosted by the Designated Operational Entity for the project. Diverse stakeholders (who have access and are capable of computer/internet usage) are invited to comment on the projects. The DOE and project developers then investigate the concerns. To date, there have been very few comments offered for C D M projects in the registration pipeline. Most of the comments are received from CDM Watch - an NGO based in Australia (www.cdmwatch.org). 3. Description of analysis used to prove project additionality Article 12 of the Kyoto Protocol states that emissions reductions created from the. Clean Development Mechanism must be 'reductions in emissions that are additional to any that would occur in the absence of the certified project activity'(UNFCCC 1997). The Marrakech accords state that 'a C D M project activity is additional i f anthropogenic emissions of greenhouse gases by sources are reduced below those that would have occurred in the absence of the registered C D M -31 -project activity' (UTSTFCCC 2002). An analysis of 8 CDM projects shows that the additionality arguments are made based on the comparison of the internal rate of return of the proposed investment both with and without revenue derived from CERs. These 'internal rate of return' analysis show the financial additionality of the investment. This is essentially the annual return on an investment expressed in percentage terms of the total amount invested. Proving financial additionality is intended to quantitatively prove that an investment decision is unattractive (and would likely not be taken) in the absence of CER-derived values. Other additionality arguments are made based on the current state of environmental legislation in the host country. The Indian HFC project is an example of this. The project developers state that because there are no existing HFC destruction mandates in India, the installation of additional infrastructure to generate CERs is an unnecessary expense (PWC 2003). Additionality has proven to be a difficult area for the CDM in general. Based on observations made of the CDM from its early implementation to its current state of development, it seems that once CER values become attached to an activity, additionality becomes hard to determine. This is likely due to host country actors behaviour being altered in response to what can be called the 'perverse incentives' created by CER financial considerations. These perverse incentives can be seen as undermining the mechanism. Entering into emission-intensive industrial activities becomes increasingly profitable if end of pipe GHG mitigation technology is added to the facility. Using the HFC example, once monetary value is attached to mitigating HFC venting, it becomes increasingly attractive for investors to enter into HFC production solely for the financial gain of CER generation rather for producing the refrigerant commodity. Instead of producing refrigerant gasses and making a profit, investors are essentially producing CERs, with refrigerant gasses as a by-product, and in the process making a windfall profit in the name of environmental stewardship. The additionality debate has been joined by stakeholders across the globe, partly in response to situations of perverse incentives as described above. 4. Description of use of any defined sustainability assessment methodology A sustainability assessment method would be useful to measure the performance of the project activity against a selection of sustainability indicators. These measurements would allow for the full spectrum of impacts on local economic, environmental, and social concerns to be identified and measured. Only 1 of the 8 projects used any type of sustainability assessment method. This CDM project, the South African housing energy efficiency improvement project, is also the smallest of the 8 analyzed - and the second smallest CDM project (after the micro hydro facility in Bhutan). The assessment method used in the South African project is the SSN Matrix, a scorecard checklist method described in the following chapter. 5. Description of project's stated contributions to sustainable development Through the review of each project's design document, it is apparent that each project has some type of text explaining why the particular project contributes to sustainable development. These 'sustainability statements' are similar to what would be found in a Corporate Social Responsibility report where their positive contributions to the community, environment etc. are detailed. These 'sustainability statements' do not contain detailed information about how sustainability impacts will be monitored or any other concrete information. In the case of the Indian HFC 23 destruction project, a lengthy sustainability statement is provided that offers -32-glowing text of the project's contributions yet reads more as a presentation of GFL's (host country private entity) continuous record of sustainable development. In a few cases, the project's contributions to sustainability are proven by reference to a government letter stating that the project contributes to sustainable development. In these cases, no information on what criteria the government has used is available in the PDD. As mentioned above, the PDD for the South Africa energy efficiency project contains a 'sustainability annex' in which the different economic, social, and environmental contributions are listed and scored based on a -2 to +2 scale. A description and evaluation of this assessment method is provided in Chapter 4. 6. Potential conflict of CDM activity with Annex 1 environmental regulation The analysis shows that select project activities that are being used in the CDM are creating emission reductions from activities that are already common practice, or mandated, in Annex 1 nations. This issue is essentially an argument over where the environmental legislation baseline should be set. This is important because it allows for Annex 1 firms to comply with environmental regulations through activities that would potentially be illegal in the countries in which they are operating. There are different sides to this debate though. One camp argues that mechanisms like the CDM allow for emission reductions to be capitalized wherever they are cheaper (as in developing countries with lagging environmental regulations). The other side claims that by allowing host country governments and private entities to profit from CER revenues because of less stringent environmental regulation, it is in effect incentivizing the retardation of those very regulations. Why would a nation outlaw certain environmentally damaging industrial practices if it was being paid large sums of money through the CDM to keep regulations relaxed so that projects are always reducing emissions below the existing regulatory baseline? The two CDM projects for which there exists a regulatory conflict are the Indian HFC 23 destruction project and the Chile Swine Methane capture project. The release of HFC 23 to the atmosphere (which was the baseline scenario in the Indian CDM project) is regulated in Canada where HFC-23 is classified as a Schedule A Class III Ozone depleting substance and is prohibited from release to the atmosphere under the Waste Management Act of 1999 (Canada 1999). Canada was not an Annex 1 sponsor of this project though it is possible that Canadian firms have bought, sold, or traded CERs generated from this project. Canadian swine manure management is regulated at both the provincial and the federal level whereas in Chile there exists virtually no legislation governing manure storage and disposal (Agrosuper 2005). Major regulations governing swine production are the Agricultural Operation Practices Act (AOPA), the Alberta Environmental Protection and Enhancement Act, the Public Health Act, the Livestock Diseases Act, and the Federal Fisheries ^ 4c(Canada 1995). While Canadian regulation does not stipulate that every manure pit be covered, there are significant regulations to control the negative environmental effects of manure storage. Both Canada and Japan have signed forward contracts to purchase the CERs resulting from swine manure projects. The use of CERs from activities prohibited in Annex-1 countries for those same countries's compliance is an issue sparking serious debate about the sustainability of the entire CDM (Dowlatabadi 2005; Loong 2005). This chapter has evaluated the CDM at both the macro and the micro levels. This has included an analysis of the current state of the CDM by providing an overview of the basic trends of the -33 -mechanism. Project level analysis is provided to determine the level of assessment (including sustainability and other assessment types) is being utilized. As a by-product of this analysis, certain issues on the sustainability of the entire mechanism have become apparent. The following chapter will present and evaluate the existing CDM-specific sustainability assessment methods. Recommendations on how the CDM can become more sustainable in a verifiable way will be presented as well. From the global and project level analysis presented above, a few broad issues rise to the surface: 1. The CDM is developing rapidly. The number of approved CDM projects (and the number of CERs produced by these projects) has increased steadily after the coming into force of the Kyoto Protocol in February 2005. 2. The overwhelming majority of CERs being produced are from non-C02 projects. Methane capture and combustion and HFC 23 destruction projects are the main sources of CER credits. It has been argued that these two project types (both within the non-C02 mitigation mode) do not provide the same degree of sustainability benefits to the host country, as they do nothing to address the C02 pollution associated with inefficient use of fossil fuels (Rao 2005). Given the huge CER potential of these projects, renewable energy capacity generation, fuel switching, or increases in energy efficiency are not undertaken. HFC 23 destruction and methane gas capture, while admittedly having large environmental benefits, are end-of-pipe solutions that do little to address issues of sustainable development in the host country. 3. There is a correlation between the project design and the type of mitigation technology utilized. Multilateral and bilateral projects tend to focus on the project types with the highest CER return (HFC 23 and LFG). Unilateral CDM projects, on the other hand, are composed of a larger proportion of lower CER producing projects such as hydro, energy efficiency, and renewable energy (biomass) than the multi/bilateral designs. Multilateral projects are producing the largest volume of CERs while unilateral projects are producing the least. There is also a difference between the types of projects selected by each of these project designs. While both unilateral and bi/multilateral project designs have generated CERs from mitigation modes other than non-C02 (efficiency, natural resources, and renewables), the proportion of these CERs compared with non-C02 project CERs is greater for the unilateral designs. 4. The majority of CDM projects have not undertaken any type of environmental impact assessment. While absence of local country regulation is often cited as a reason for not undertaking an EIA, it can be argued that CDM projects should be held to higher standards than those in existence in the host country. This higher environmental standard could reflect the prevailing environmental legislation in the investing country. This would remove the incentive for local governments to intentionally retard the advancement of environmental regulations to attract high impact CDM projects. By only allowing CDM projects that are at parity with Annex 1 environmental regulations, it is possible that the overall cost of implementing a CDM project will rise. It is, however, improbable that the total project cost would equal the cost of a similar project in the Annex 1 country (due to lower property values, wages, and other purchasing power parity-related costs). -34-5. From the stakeholder participation events detailed in the PDDs, it is difficult to gauge the quality of the dialogue occurring between project developers (including the multinational organizations in their consortium), and the local stakeholders. Standardizing the stakeholder consultation process at the U N level could be used to ensure that stakeholders in different geographical zones are treated in the same manner, whether it is a multi million-dollar HFC project or a relatively small micro hydro project. 6. Failure to resolve uncertainty about what constitutes additionality will continue to weaken the C D M . The potential for perverse incentives for host countries to retard local environmental legislation is, among other things, a highly visible fault that is undermining the efficacy of the entire mechanism. 7. The lack of defined 'sustainability assessment' in C D M projects does not coincide with the importance given to C D M projects 'contributing to sustainable development' in U N F C C C documents. Very few C D M projects (1 of 8) used a defined 'sustainability assessment tool'. It is recognized that different individual assessments (environmental, social, economic feasibility/additionality) could cover the areas that a sustainability assessment tool could. Regardless, this lack of sustainability assessment being undertaken is potentially due to the lack of an user friendly assessment tool. This will be explored in the following chapter. 8. Greenwash abounds in the C D M . Each PDD contains some type of verbiage attesting to the project's SD contributions in soaring terms. These statements are unsubstantiated through any direct measurement and weaken the credibility of the mechanism. 9. It seems that investors in Annex 1 countries are taking advantage of a loophole in the design of the C D M whereby activities already legislated in their own countries are generating 'additional' CERs that are usable in that country's domestic trading scheme. There is considerable debate about this issue though it is the author's opinion that the efficacy of the mechanism would be higher i f Annex 1 entities are only able to use CERs from activities that are additional to that Annex l 's environmental regulations. This could be easily achieved by 'tagging' CERs with the production method that generated them (e.g. landfill gas flaring, HFC 23, hydro, etc). This could have the effect of reducing the amount of available C D M projects to Annex 1 nations with higher environmental standards than others, though it could be argued that cost efficiency would be maintained as labour and other related costs are lower in non-Annex 1 countries. This point is similar to point #4 though this point looks beyond the lack of environmental assessments to probe the efficacy of the entire mechanism and the motivations for Annex 1 entities' use of CERs in various emission trading schemes. - 3 5 -Chapter 4: Evaluation of Sustainability Assessment Methods and Recommendations for a More Sustainable CDM This final chapter will do two things: (1) review and evaluate the sustainability assessment methods that have been offered specifically for the C D M context; and (2) based on the reviews of above, present a framework for measuring sustainability impacts and discuss a manner through which this new assessment framework can be implemented in the C D M . In the last part of this chapter, four recommendations are made for improving the C D M so that it is able to become a verifiably more sustainable mechanism. As the Kyoto Protocol has only recently become official, it is hoped that these recommendations can constructively contribute to a stronger C D M without adding unnecessary bureaucratic layers and costs to an already complex international policy framework. 4.1 Review of existing methods to assess sustainability at the project level in the CDM This section examines some of the available methods for assessing the sustainability of C D M projects. This review and discussion will suggest that there exists a broad range of assessment tools that can be applied to C D M projects - that the gap of sustainability assessment currently existing in the C D M is not solely for lack of available options. The evaluation of the sustainability assessment methods will determine i f the method: 1. assesses the local environmental impacts in addition to global G H G reductions; 2. takes into account social concerns (local employment generation, stakeholder participation, etc); 3. is applicable and adjustable for different project types and sizes (i.e applicable to swine methane, small scale hydro and HFC projects); and 4. incorporates C D M specific host nation development goals articulated by the nation's Designated National Authority These four criteria have been chosen based on the author's interpretation of important issues that the C D M must address in order to be a viable mechanism. Taking into account local environmental impacts is important because any project that benefits the global environment (in terms of G H G reductions) while harming the local environment could be considered a perverse means to achieve the ends of climate change mitigation. A project could negatively impact local stakeholders i f either environmental or economic conditions are worsened as a result of the C D M project's implementation. Without sufficient assessment of a project's affect on local stakeholders, projects that look good on paper but fail to benefit (or even do .harm) to residents in the project vicinity would be approved for implementation. The ability of an assessment method to be applied to different projects in different locations is valuable, as it would allow for a 'sustainability comparison' of disparate projects that would otherwise be impossible. The final evaluation criteria of whether the assessment method incorporates the host country's development goals serves to gauge the contribution of the C D M project to priority areas where the host nation government desires contributions from the C D M . The method for evaluating the different C D M sustainability assessment tools will be based on the judgement of the author as to whether and how well these four criteria are fulfilled for each type of method or tool. - 3 6 -There currently exist several means to conduct sustainability assessments of CDM projects. Although these approaches are evolving, they can be divided into four different types: guidelines, checklists, negotiated targets and multi-criteria-based methods (Sutter 2003). In the following section, the various approaches are presented with examples. The different approaches to sustainability are then evaluated in a matrix and discussed textually. 1. Guidelines Guidelines are normative descriptions of how CDM projects should contribute to SD in order to be approved by the host country. They are generally formulated in an unspecific manner in order to be applicable to a wide array of potential CDM projects. As guidelines do not define clear procedures and methods against which projects are assessed, they involve a large' amount of discretion which lowers the validity of assessments performed based on guidelines (Sutter 2003). An example of CDM sustainability guidelines are those provided by the Indian government Designated National Authority (DNA): It is the prerogative of the host Party to confirm whether a clean development mechanism project activity assists it in achieving sustainable development. The CDM should also be oriented towards improving the quality of life of the very poor from the environmental standpoint. The following aspects should be considered when designing CDM project activities: Social well-being: The CDM project activity should lead to alleviation of poverty by generating additional employment, removal of social disparities and contributing to provision of basic amenities to people leading to improvement in their quality of life. Economic well-being: The CDM project activity should bring in additional investment consistent with the needs of the people. Environmental well-being: This should include a discussion of the impact of the project activity on resource sustainability and resource degradation, if any, due to the proposed activity; biodiversity-friendliness; impact on human health; reduction of levels of pollution in general; Technological well-being: The CDM project activity should lead to transfer of environmentally safe and sound technologies with a priority to the renewables sector or energy efficiency projects that are comparable to best practices in order to assist in upgradation of the technological base. (Source: Ministry of Environment and Forest (2005) accessed at http://www. cdmindia. com/ministry/policy, htm) -37-Takes into account: Local Environment Local Stakeholder Equity Different Project Types/Sizes Addresses National Development Goals No No No Yes D N A guidelines are generally formed at the national level and do not distinguish between national and local effects. With broadly defined national guidelines for C D M projects, local negative effects could be disregarded for national gains. A n example of this could be the loss of environmental quality because of deforestation related to a micro hydro project. The local inhabitants experience a degraded environment while the nation as a whole benefits from an increased renewable energy portfolio and C D M investment. Guidelines are normative and not adjustable from the national to the local levels unless explicitly included. If national level C D M guidelines stipulate that C D M projects should improve the well being of a country's citizens (as India's DNA's guidelines do), it is possible that the benefits from a C D M project are distributed outside of the local project area. A n arrangement such as this involves the preference of national stakeholder equity rather than local stakeholder equity. Guidelines are made at the national level and are intended to serve as general guidelines for developing a C D M project. Due to this, guidelines cannot distinguish between differing project sizes and types unless specifically formatted for different sectors. Guidelines, while not distinguishing between different project types and sizes, can be applied to differing projects. The challenge here is that the criteria presented in the guidelines must be both general enough to encompass all potential projects, and substantial enough so that major concerns are addressed. Guidelines directly reflect a set of national development goals that are (from the perspective of the host country) able to be advanced through participating in the C D M . One problem is that as guidelines are designed to be applied uniformly to every potential C D M project, the potential for them to be vague and overly generalized exists. Given that C D M projects can differ greatly, it is possible that the articulation of development priorities could be diluted in favor of increased guideline applicability. Guidelines could be shaped to explicitly include local environmental impacts. As guidelines are normative rather than descriptive, they would need to be enforced by the host government to have any efficacy in an actual project setting. A host country could stipulate in CDM-related guidelines that there must be local, as well as national benefits accruing from a C D M project. Again, verification and monitoring systems would be needed for the efficacy of the guidelines. The guidelines that are available on a DNA's website have the potential to direct project developers and investors towards specific areas in which the national government desires to build capacity through participating in the C D M . Brazil, for example, includes criteria with 'multiplying potential' such as technological innovation, internalization of CER revenue, and C D M synergy with other initiatives, in their national C D M guidelines. These different DNA-produced criteria could be created for different project types, thus making them adjustable. Countries participating in the C D M might find their national policies regarding sustainable development being informed through their participation in the C D M . Cambodia, for example, when designing the administrative structure for their D N A made clear that they would stay informed of other nations' articulations on sustainable development. Also, host countries could consider creating C D M guidelines for different project types and sizes. For example, different guidelines could be created for different project types. This makes sense as potential project benefits and harms from a small hydro facility are quite different from an H F C destruction plant. From the above it can be argued that guidelines have an important role to play in the CDM but fall short in being able to ensure that the projects contribute to sustainable development in the host country. At the time of writing, there were only select countries that had articulated guidelines for CDM projects, leaving observers to wonder on what criteria projects were deemed to 'contribute to sustainable development' by host countries in the absence of any defined criteria. Also, interesting approaches to guidelines were undertaken by the Brazilian DNA which provided links to guidelines produced by Annex 1 countries as well as a 27 page document describing the eligibility criteria for CDM projects. Carefully crafting CDM guidelines can allow host countries to take an active role in determining which sectors benefit from the CDM and what overarching development goals can be furthered through international investment. Guidelines, at present, are underutilized. Even though they are not a very strong means of addressing sustainability concerns within the context of CDM projects, they are important for host countries to use as they provide strategic direction for their interaction with the flexible mechanism. The matrix above basically paints the picture that guidelines, while able to promote national development goals and priorities, lose their applicability on the local levels. The potential 'dilution' of this tool's strength is not surprising - any one-size-fits-all approach to something as complex as a nation's development across numerous sectors cannot be expected to address the complexities of different project types. Also, the normative nature of guidelines prevents them from being adjustable to different projects in a reactive way whereby individual project circumstances can be addressed. Another issue with guidelines is that if they do not contain reference to quantifiable outcomes (employment, GHG quantities, etc) their estimation could prove more difficult and especially prone to exaggeration by project developers eager to have their particular project progress through the pipeline. - 3 9 -2. Checklists The checklist approach to evaluating a project's SD consists of a set of criteria against which a potential project can be measured. Under this approach, a project's performance is evaluated by the project developer and receives either a negative, positive, or neutral value. Only projects that receive a net positive rating would be considered sustainable. A checklist is different from a guideline due to its source. A guideline is produced by a government entity and is a normative description of what [general] criteria a CDM project must conform with. Guidelines, as they are treated in this thesis, represent-the host government's position towards the CDM. A potential checklist is the following (Kelly 2000): Economic Increased investment in a priority sector of the economy Transfer of clean and cost-effective technologies Generation of local employment opportunities Positive effects on the trade balance Improved local economy Social and Infrastructural Improved access to power Capacity building (e.g., transfer of technical skills) Reduction of wealth disparities Environmental Reduced air pollution Reduced water pollution Conservation of biodiversity Reduced soil erosion caused by deforestation A list such as the above could serve as a general guide that host countries could modify to match their particular development priorities. Kelly (2000) suggests that host countries attach weights to each checklist item in order to respect country preferences. Additionally, limits on weighting schemes could be added to prevent projects that receive poor ratings in all but a few categories from receiving an overall positive rating. This method allows for minimum standards to be set while respecting different economic and social conditions in host countries. This method also respects the sovereign rights of nations to focus on projects which bring the benefits valued most (Kelly 2000). The means of establishing a weighting scheme is in itself a political act where special interests in the host country could steer the nation's involvement in the CDM towards particular sectors. Kelly does not offer a method to establish the weighting scheme. Before Kyoto came into force, the checklist method was envisioned as a potential requirement for all project activities. Under this scheme, host countries would be required to submit a copy of their SD checklist (including additional categories and ascribed weights) to the DOE. The DOE would then either certify the project's SD contributions or, if in disagreement with the host country's positive rating of a project, draft a report detailing its findings and recommending possible measures for improvement. This report would then be submitted to the host country, project developer and the CDM EB. After changes to the project had been made, the final decisions on whether it is to be certified as a CDM project is then left to the CDM EB (Kelly -40-2000). To date, this has not been required in the form originally envisioned in which the host country specific SD goals are articulated. In place of this, the DOE have applied a non-specific checklist to ascertain the SD contributions of the project. The questions asked in the DOE validation are the following: Will the project create other environmental or social benefits than GHG emission reductions? Will the project create any adverse environmental or social effects? Is the project in line with sustainable development policies of the host country? Is the project in line with relevant legislation and plans in the host country? (Det Norske Veritas 2005) While the above DOE validation checklist items can be seen as similar to guidelines presented earlier in this section, they are differentiated by the fact that they are created by a CDM validation entity (rather than a host government) for the purpose of providing assurance to the CDM EB that the project conforms to their developed criteria. An application of the checklist method is that utilized by South South North (SSN), a NGO based in South Africa (http://www.southsouthnorth.org/). This checklist is intended for utilization by project stakeholders in the early stages of a CDM project to assess their project's potential performance in a more comprehensive SD assessment. SSN and its CDM SD checklist are described in the following subsection. South South North Sustainable Development Tools South South North (SSN) is a non-profit NGO that is active in South Africa, Brazil, Bangladesh and Indonesia. Its mission is the design and development of CDM projects, including the approval, validation, registration and transaction of these projects. In 2004 SSN launched the CDM Toolkit, a source of information for potential CDM project developers, government officials and other stakeholders. This web-based toolkit is an instructional guide for the development of a CDM project. It provides the necessary documentation to support an application to a host country DNA as well as the CDM EB (available at http://www.cdmguide.com/)Along with other areas of project development, this toolkit deals explicitly with sustainability assessment of both the initial project idea (which informs the project idea notes document (PIN)), and the final implementation of the project. It is an easy to follow guide that appears to be intelligible to a wide array of stakeholders. In regards to sustainable development, the toolkit provides two assessment frameworks, a simplified pre-feasibility sustainability checklist and a more complete 'Matrix Tool' for use after the project has become viable. The simple checklist will be discussed below while the more advanced SSN Matrix tool is discussed in the Scorecard Checklist section that follows. The simplified pre-feasibility sustainability checklist is intended to allow for project developers to conduct a sustainability 'litmus test' to see if their project would have the minimal SD contributions necessary so that a host country DNA would approve it. As many countries do not yet have operational DNAs, the toolkit advises project developers how they can help in the creation of a local DNA. In this sustainability 'litmus test', the following questions are answered with yes/neutral/no responses from project developers. The questions are divided into three categories dealing with economic, social, and environmental aspects of sustainability. A sample of these questions is the following: -41 -Economic Indicators Increase investment in a priority sector of the economy? Introduce cleaner and cost efficient technologies? Generate local employment opportunities? Improve the local economy? Social Indicators Improve access to energy? Build capacity or transfer technical skills? Reduce wealth disparities? Environmental Indicators Reduce air pollution? Reduce water pollution? Conserve biodiversity? Reduce soil erosion caused by deforestation? Improve other local environmental conditions? (South South North 2005) If answers to any of the questions are negative, the project developers are instructed by the guide to continue refining their project ideas until the potential project can better perform in this initial sustainability assessment. Note the similarity between the SSN and Kelly's checklists. This initial test is not specific to any country's SD criteria and carries with it no authority or assurance that the assessment carried out reflects whichever host country procedure would be applicable. Although this is only an initial SD test for projects, the absence of any adjustable weighting scheme for the different criteria indicates an implicit equal weighting scheme that makes this method unable to be changed to reflect different preferences. The introduction to this section of the CDM Toolkit dealing with a project's initial sustainability assessment briefly provides the WCED Brundtland definition of sustainable development and explains how SD is one of the dual objectives of the CDM. The CDM Toolkit states: From an environmental perspective this means that a country developing sustainably will pass on to the next generation a stock of natural resources equal in value, either in the physical sense or in some other form, to the stock it inherited. Some economists argue that this is a bit too strict, and that the. stock is in fact a combination of natural and human-made resources. Hence mining coal may decrease the natural resources for the next generation, but may increase other resources through energy delivery and infrastructure. The question is: does your project in some way materially decrease this stock of natural/human resources in your country? Or, to put the question more optimistically, does your project increase this stock? (Source: South South North CDM Toolkit) As the CDM Toolkit is mainly aimed at potential project developers who have vested interest in seeing their projects being accepted as CDM projects, it is possible that definitions of sustainability can be adopted which would support projects that could reduce natural capital while increasing man made capital - essentially the application of weaker sustainability criteria. Lacking any explicit SD criteria, the UNFCCC has left these different interpretations available for use by project developers and host countries. -42-Takes into account: Local Environment Yes Checklists can include specific local environmental impacts. Kelly's (2000) and South South North's (2005) checklist include local environmental concerns. These methods can be expanded to include additional criteria. The checklist tool does not offer specific metrics to measure the local environmental impacts. These are left to the user, whose ability to identify important local environmental quality issues is unknown. Although there is a 'yes' in this column, it is altogether obvious that without any system of oversight, little might stop an overeager project developer from simply providing positive remarks about the project in question. Checklists can include anything under the sun - including important local environment concerns - though there is zero assurance that answers reflect a truthful representation of a project's potential performance. Local Stakeholder Equity Yes As local environmental quality is dependant on the unique characteristics of the project type and location, a singular heading of 'local environment' will definitely fail to capture all important characteristics. A method to improve the checklist tool would be to have a different checklist for each technology type (i.e. HFC 23 destruction local environmental impacts, small hydro). This would inform project developers of the unique local environmental implications of their projects in a way that can lead to increased stewardship. Checklists direct the project developers to consider the impacts of their project on the local populations. While the list is not detailed enough to encompass all of the possible social impacts from a CDM project, it is possible that even the most basic impacts would not have been contemplated in the absence of a sustainability checklist. Checklists can be best described as 'a good start' towards incorporating sustainability principles into the CDM, though it does not offer any measurement advice to ensure that the social performance of the project measures up to expectations. Again, the same caveat appears hens as in the 'local environment' column: without any oversight, CDM checklists can become useless. Stakeholder concerns can be swept under the rug. Different Project Types/Sizes No Similar to the suggestions made regarding the checklist's approach to incorporating local environmental concerns, the stakeholder equity portion of the checklist tool can be strengthened by the addition of increasingly specific criteria and potentially offering metrics that can be used to measure progress in the checklist item. This would help project developers gain insight into the effects of their projects as well as introducing sustainability-monitoring knowledge into the local setting. Checklists have the potential to include a substantive list of questions, of which a selection could apply to different project types and sizes. Neither Kelly (2000) nor the South South North (2005) checklists differentiate between project types. The vagueness of the checklist could be argued as a strength in the same manner as Robinson 2004 does with the concept of sustainability. In the case of a CDM assessment tool, however, specificity is valuable as it can act as a filter of sorts where unsustainable projects would not progress through the host country approval pipeline. This assessment tool could be improved through the addition of project type specific checklist items that would give project developers increased awareness of the different areas to monitor during the development and execution of the project. This would entail increased effort by the DNA, though it would result in higher quality CDM projects that enhance sustainability in the host country in a verifiable way. Addresses National Development Goals No Neither of the checklists reviewed mention national development goals. These checklists could be expanded to include development priorities of host countries. It could be said that any checklist developed by the DNA would reflect the development priorities of the host country. At present there are only a few DNA's with checklists available to the public in an accessible form. The reviewed checklists (Kelly 2000 and SSN) are not country specific. The direct way to incorporate national development goals into a CDM sustainability checklist tool is that either 1) DNA's create their own separate checklists that reflect their own development goals or 2) the SSN or other checklists be modified so that there is a section where each DNA can insert items relevant to their specific national development goals. It is possible that a checklist could refer to a set of CDM - related DNA goals without those goals being of any discernable quality. A checklist that enforces reference to development goals can only be as useful as the development goals themselves. H SS 5" < £ T 5" 3 © >•*> > re 3 o a re re g 53 Despite its obvious simplicity, the checklist method does seem like a means to encourage local project developers to begin thinking about the possible implications of their CDM projects. It is possible that the investment communities in the global South have not been exposed to the concept of sustainability and how their actions (both CDM projects and other investments) have environmental, social, as well as economic implications. In the North, concepts such as Corporate Social Responsibility and Socially Responsible Investing have currency whereas in the South they are not part and parcel of business operations. Although the checklist approach to drive sustainability contributions of CDM projects is a simple method, its value lies in the fact that it can at least introduce sustainability-related concepts. The checklist method is also easily improved to include impacts not included in its original form. While the checklist tool has the benefits listed above, it also has considerable limitations. Some of the limitations brought to the surface in the matrix analysis lie in the ability of the checklist to be manipulated by project developers to present the most positive (and perhaps untruthful) picture of their projects. This is a critique that extends across most of the tools evaluated in this thesis. It is apparent that the CDM is as much about monetary gain for Annex 1 corporations and developing country project proponents as it is about climate change mitigation. Perhaps even more. The potential monetary benefit to project developers in the form of CER-derived incomes can certainly be a factor in the minds of project developers. It certainly would persuade them to put forward the most ecologically harmonious, stakeholder inclusive, and all other varieties of positive anointments on their potential project. One can imagine the thoughts of the project developer when asked: "Does the project generate local employment?"... - why sure, maybe it does...in the least case I will certainly hire a new chauffer and gardener and make sure they are from the poorest levels of society...and the new trees planted in my new estate will certainly contribute to local environmental quality. While potentially exaggerated - I do not doubt that similar thoughts might occur in many a project developer when approaching the potential monetary gain from CERs. The fact is that without any type of oversight project developers have the opportunity to manipulate even the most complete and NGO-supported checklist. -44-3. Scorecard Checklists More advanced forms of the checklist method mentioned above can be grouped into a 'scorecard checklists' category. This related category is useful to distinguish checklists with 'yes/no/maybe' type responses from ones where an actual 'score' denoting performance in a particular area is determined. These two checklist categories are very similar, though the increased 'quantification' of SD performance, in which a final 'score' is achieved, differentiates them. An important feature of the scorecard checklist is that it allows for the relative comparison of different projects. It is perhaps more useful to project reviewers to be able to compare numeric scores rather than a tally of yes vs. no answers, even if the scores are not done in a wholly transferable manner. The scorecard checklist type of assessment tool is useful for certification purposes, as demonstrated by South South North's Matrix Tool,the World Wildlife Fund's CDM Gold Standard system, and the Prototype Carbon Fund's proposed scoring system - each of which are well-known assessment tools for the newly emerging CDM. SSN Matrix Tool Included in South South North's CDM Toolkit is a more advanced sustainability assessment method for use once the potential CDM project has been substantially developed to the point where a complete Project Design Document (PDD) exists. SSN recommends that project developers include a Sustainable Development Annex in their PDD which explains, both for the host country DNA and the DNAs of potential investor nations, the SD performance of the particular project. SSN states that the SSN Matrix Tool can be used in addition to, or in absence of a host country's DNA SD criteria. This additional assessment can serve to reduce validation risks. The SSN tool is based on one of the first iterations of a multi-criteria assessment for CDM projects that was presented by Helio International at CoP-5 in Bonn, Germany held November 1999. From 2001 onwards the SSN Matrix Tool has been applied in different countries and project types. The Tool has been revised and adjusted to fit local preferences. The structure of the tool is somewhat similar to the sustainability 'litmus test' described above. This more advanced tool incorporates values for each criteria and inputs those values to an equation which determines the net sustainability of the proposed project. The generic SSN Matrix Tool indicators' are the following: Table 7: South South North Matrix Tool Indicators Score -2 to +2 Local/Regional/Global Environment Water quality and quantity Air quality (emissions other than GHGs) Other pollutants: (including, where relevant, toxicity, radioactivity, POPs, stratospheric ozone layer depleting gases) Soil condition (quality and quantity) Biodiversity (species and habitat conservation) Sub total Social sustainability and development -45 -Employment (including job quality, fulfilment of labour standards) Livelihood of the poor (including poverty alleviation, distributional equity, and access to essential services) Access to energy services Human and institutional capacity (including empowerment, education, involvement, gender) Sub total Economic and technological development Employment (numbers) Balance of payments (sustainability) Technological self reliance (including project replicability, hard currency liability, skills development, institutional capacity, technology transfer) Sub total Total (South South North 2005) For each of the indicators, the project is given a ranking based on the following system: -2: major negative impacts, i.e. where there is significant damage to ecological, social and/or economic systems that cannot be mitigated through preventive (not remedial) measures. -1: very minor negative impacts, i.e. where there is a measurable impact but not one that is considered by stakeholders to mitigate against the implementation of the project activity or cause significant damage to ecological, social and/or economic systems. 0: no, or negligible impacts, i.e. there is no impact or the impact is considered insignificant by stakeholders. +1: minor positive impacts +2: major positive impacts A l l changes are to be considered relative to the baseline situation (i.e. without the proposed project) as defined in the project documents. One issue that seriously brings into question the strength of this tool is that much of the responsibility for the a project's assessment lies on the shoulders of the project proponent. A conflict of interest naturally occurs similar to that experienced by the project developer completing a C D M 'checklist' described earlier. Taking the perspective of the project developers of the 8 projects evaluated in this thesis (ranging from micro hydro to large scale HFC destruction), it can be offered that the smaller project developers might inflate the environmental and social benefits of their projects to aid their registration chances while the HFC project developers (large corporations with extensive financial resources) might brush off any type of checklist tool-type activity as being unimportant given the magnitude and cheapness of their reductions. Also, as it was a large auditing firm who was the HFC project developer, it is possible that a tool as 'simple' as a checklist or scorecard checklist (or even any tool examined in this thesis) is too unsophisticated to engage their participation. - 4 6 -WWF Gold Standard Variations can be made to the SSN Tool that allow for certain minimum thresholds to be determined. Screens can be put in place to reflect each DNA's or institution's requirements. One group, the World Wildlife Fund (WWF), has put in place a set of additional screens which eliminate certain project types (fossil fuel technologies, large hydro and potentially large-scale monoculture plantation forestry) and set minimum requirements for SD performance. Their standards for project performance are that the total score and each subtotal must be positive and no criteria can receive a -2 ranking to be eligible for the WWF Gold Standard. SSN has a portfolio of potential projects for which they are seeking investment. Most of these projects will receive the Gold Standard rating according to SSN (Source: South South North, 2005). The World Wildlife Fund's Gold Standard certification system was the first independent best practice benchmark for CDM and JI projects. It is aimed at providing project developers with a certification tool to ensure that the flexible mechanisms deliver credible projects with real environmental benefits which will, in turn, give confidence to host countries and the public alike that these projects represent new and additional investments in sustainable energy services (WorldWildlifeFund 2002). The Gold Standard was developed in response to the WWF's perception that the CDM projects being proposed for CDM EB approval were of low quality. The WWF's rason d' entre in the CDM landscape is its belief that without some type of best practice standard being enforced, the CDM will fail to achieve its reason for creation - at least the portion concerning sustainable development. The WWF created a standardized set of procedures to assess the SD aspect of a project, and for that reason their work is important to the CDM - both for the tool they provide and the attention their tool has focussed towards the perceived 'sustainability gap' in the CDM. The WWF's critique of the current CDM is that it would: 1. Generate few, if any, net emission reductions, increasing global emissions at a time when the need for deep cuts is becoming increasingly evident. 2. Result in the market being inundated by non-additional projects, generating little new investment and maintaining low CER prices. 3. Promote the continued dependence on unsustainable energy sources and technologies and do little to transform the market for sustainable energy technologies and other long-term climate solutions. 4. Cause environmental and social damages to host country communities through the delivery of unsustainable projects. WWF states that the Gold Standard seeks to build confidence in the CDM's ability to deliver projects that have positive benefits by providing: 1. Direct financial incentives for proving the competitiveness of renewable technologies. 2. Development of supporting policy initiatives. 3. Increased stakeholder knowledge of sustainable energy technologies. 4. Dissemination of best-practice techniques. 5. Strengthening of local institutional capacity, including: credit provision, extension services, technology development and training. The rationale for developing the Gold Standard is quite explicit as the WWF claims that in the absence of any independent assessment, the CDM would only result in projects with little (or -47-even negative) environmental and social benefits; the CDM as it is currently structured will not work. The actual Gold Standard assessment tool has three components: 1. A project type screen based on a list of technologies comprising renewable energy, and demand-side energy efficiency, and some transition technologies. 2. An additionality and baselines screen focused on ensuring that a) projects would not occur in the absence of the CDM and b) that projects will have lower emissions than would occur than in the absence of the CDM. 3. Sustainable development standards that will ensure projects are evaluated against specific environmental, social and economic/technological criteria and deliver a net positive result for sustainable development. The project type screen and additionality/baseline analyses are similar to those utilized by the UNFCCC. The sustainability assessment, which is not mandated in any real form by the UNFCCC, is the relevant part for this thesis. The Gold Standard's sustainability assessment component consists of: 1. An Environmental Impact Assessment (EIA) of the project performed by local stakeholders which must comply with national legal standards of the host country as well as with minimum standards specified by the WWF. 2. A stakeholder consultation process performed at the outset and before project implementation that allows local concerns to be incorporated into the project's design. 3. The creation of a qualitative 'sustainability matrix' based on indicators developed by Helio International and South South North analyses the project's performance in terms of its economic/environmental/social performance. Projects must show net contributions in each of these areas to meet the Gold Standard. (Source: World Wildlife Fund, 2002) The WWF Gold Standard stands out as a tool capable of ensuring that the projects that pass through its different requirements (project screens, mandated stakeholder consultation, EIA, etc.) will be of a higher quality than other CDM projects that are solely approved by the CDM EB. The strength of the WWF Gold Standard is in part derived from its view that the CDM is a flawed mechanism and that without additional measures to ensure sustainability, there will be zero (if not negative) sustainability benefits to host countries. The benefit of the Gold Standard is that it simply sets the bar a bit higher by not allowing fossil fuel technologies or large-scale hydro projects that could have negative environmental impacts receive their Gold Standard distinction. These projects (fossil fuel technologies etc.) could be certified as projects and used by other Annex 1 entities. One thing that is particularly laudable about the Gold Standard is that it has a fair amount of 'branding'. The fact that projects that are given the Gold Standard certification are receiving higher market prices for their forward contracts signifies that there is some added value in the recognition of verifiably sustainable CDM projects. The Gold Standard has received media attention and marquee subscribers, one of the most notable being the 2006 FIFA World Cup. The organizations running and sponsoring the World Cup (FIFA, German Football Association and a number of official suppliers) have agreed to spend 1.2 million Euros to make the games carbon neutral. Each of the emission reduction projects receiving investment is to be a certified Gold Standard project. From personal observation of the CDM landscape, it appears that the WWF Gold Standard is being taken seriously by investors and represents a more sustainable alternative -48-to normal C D M projects. This statement must be qualified by the fact that C D M market transaction information is quite opaque. Usually the news regarding purchases of Gold Standard credits comes in the form of press releases rather than market data. This could indicate that only those who want to be seen as publicly 'doing good' will opt for the more expensive credits. In the end, what will matter for the efficacy of emission reductions under the Kyoto Protocol is how large final emitters, rather than special events such as the World Cup or the G8 Gleneagles Summit, choose to offset their emissions. Prototype Carbon Fund The Prototype Carbon Fund (PCF) is a World Bank initiative that pilots the production of emissions reductions within the framework of the C D M and JI. The PCF uses funds invested by governments and companies to finance C D M and JI projects that produce emission reductions consistent with the emerging Kyoto Protocol framework. Investors are given emission reduction units on a pro rata basis based on their investment amounts. The PCF has three stated objectives: 1. High-Quality Emission Reductions-to show how project-based greenhouse gas Emission Reduction transactions can promote and contribute to sustainable development and lower the cost of compliance with Kyoto Protocol; 2. Knowledge Dissemination-to provide the Parties to the U N F C C C , the private sector, and other interested parties with an opportunity to "learn-by-doing" in the development of policies, rules, and business processes for the achievement of Emission Reductions under C D M and JI; 3. Public-Private Partnerships-to demonstrate how the World Bank can work in partnership with the public and private sectors to mobilize new resources for its borrowing member countries while addressing global environmental problems through market-based mechanisms. (www.carbonfinance.org) The PCF's approach to sustainability assessment is useful to study as they have been the dominant players behind C D M project creation - tendering the largest amounts of emission reduction units. Though the C D M EB set of 'approved' projects remain the focus of this thesis, insights gained from non-CDM EB approved projects can lend insight into the entire C D M mechanism, especially sustainability assessments. For the portfolio of PCF projects, Huq states that: The analysis of PCF projects with respect to their sustainable development (or environmental and social co-benefits) shows that most of the projects have some environmental co-benefits in terms of local water or air (or in some cases noise) pollution abatement. However on the social benefits side they are relatively weak, with the employment benefits from the project being the main social benefit considered. There does not seem to have been any explicit assessment of project compatibility with national level sustainable development goals; also, in many cases clearly applicable national sustainable development objectives have not been defined. However, in each case the host country was responsible for making such assessments and had approved the projects. In addition, all PCF project have to comply with World Bank safeguard policies4(Huq, 2002). 4 World Bank safeguard policies include Environmental Assessment (OP 4.01, BP 4.01, GP 4.01), Natural Habitats (OP 4.04, BP 4.04, GP 4.04), Forestry (OP 4.36, GP 4.36), Pest Management (OP 4.09), Cultural Property (OPN -49-The sustainability assessment methodology adopted by the Prototype Carbon Fund can be described as being different for each individual project. He states that 'sustainable development objectives and criteria have been incorporated in a project-by-project basis and not in a systematic manner' (Huq 2002). He determines that sustainability criteria should be used across different project types in different locations using a scale of sustainability performance against environmental and social criteria. Due to the simple addition of criteria rather than the use of an explicit weighting system, assessments showing a high degree of sustainability contribution must be viewed with caution. The assessment will depend largely on the indicators selected - which will in turn differ between each project if they are to be assessed individually. A project-by-project assessment methodology could prove to be more comprehensive than a 'one size fits all' solution to sustainability assessment though it can serve to erode the ability to make comparisons between projects using a single metric. An example of the assessment tool proposed by Huq (2002) is the following: Table 8: PCF proposed scale for assessing relative benefits of CDM projects Scale Sign Indicator -1 Negative Project has negative sustainable development impacts in terms of undermining other environmental and social development (ESD) policies and/or causing environmental/social impacts from the CDM project baseline 0 Neutral Sound CDM project but no difference from baseline in any discernable way in environmental/social or policy terms 1 Positive One additional significant benefit, e.g. One of social, local environmental, health, poverty, community participation or economic/welfare gains 2 Positive Two or more additional benefits in two categories 3 Positive Significant benefits in three or more categories, i.e. all of social, local environmental, health, community participation and welfare/employment (Huq 2002) 11.03), Indigenous Peoples (OD 4.20), Involuntary Resettlement (OP/BP 4.12), Safety of Dams (OP 4.37..BP 4.37), Projects in International Waters (OP 7.50, BP 7.50, GP 7.50), Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60). -50-Takes into account: H as X" vo H — S" &s «••• o" s o • ai rt cn WJ 3 a a 3 er o a a> n o n> ss a O 6S* L o c a l E n v i r o n m e n t L o c a l S takeho lder E q u i t y Di f ferent Pro jec t Types /S i ze s A d d r e s s e s N a t i o n a l D e v e l o p m e n t G o a l s S S N M a t r i x : W W F : PCF: Y e s Y e s N o S S N M a t r i x : W W F : P C F : N o Y e s N o S S N M a t r i x : W W F : P C F : N o Y e s N o S S N M a t r i x : W W F : P C F : N o N o N o The S S N and W W F tools indicate that impacts shou ld be evaluated i n the l o c a l , regional , and g loba l scales. Spec i f i c indicators are offered for assessment (soi l qual i ty , b iod ivers i ty , etc). W h i l e some o f these m i g h t be onerous to measure, the fact that they are presented is s ignif icant as their effects migh t otherwise be unnot iced. The S S N ma t r ix assumes that the user can dis t inguish between major and m i n o r environmental effects -a s l ippery s lope that can lead to different interpretations b y the project developer who desires to have the project registered to receive e m i s s i o n reduct ion revenues. Potential conflicts o f interest abound. W i t h the P C F ma t r ix too l , no specif ic local env i ronmenta l impacts are ment ioned though devia t ions from the project baseline are inc luded. L o c a l envi ronmenta l impact metrics cou ld be incorporated in to the assessment framework. The S S N M a t r i x does not specify the measurement o f impacts on the loca l level though a l l o f the metrics cou ld be examined on both the national and loca l levels. Bo th the S S N and W W F tools include a broad range o f equity concerns such as job creation, poverty concerns, stakeholder equity, and improvements i n human and insti tutional capacity. The W W F method receives a posi t ive result i n this field because it requires a stakeholder consultation process. Nei ther the S S N nor the P C F tools require this. The P C F tool does not dis t inguish between loca l and national stakeholder equity concerns. The method is capable o f indica t ing socia l benefits o f the project above the baseline. The P C F tool requires that the user have experience.with other W o r l d B a n k pol ic ies relating to social aspects o f environmental p o l i c y rather than conta ining them in the tool itself. A s this tool is not 'stand alone ' i n this regard, it receives a negative rat ing i n this category. The S S N M a t r i x tool does not take into account different project types and sizes. The W W F G o l d Standard includes a project-by-project addi t ional i ty analysis that is not ove r ly generalized i n such a way that important differences are glossed over . In the P C F too l , different project designs and sizes are not inc luded i n this method though they c o u l d be included through addi t ional checkl is t fields. The G o l d Standard a lso has 'project screens' w h i c h do not a l l o w fossi l fuel or large hydro projects. T h i s can be described as ' in-adjustabi l i ty ' though it can be argued that this is to the benefit o f the G o l d Standard i n terms o f sustainabili ty benefits. Na t iona l development goa ls are not inc luded in a specif ic way i n the S S N tool though they c o u l d be easi ly added. T h i s method is designed for use i n different nations - l eav ing specif ic development goa ls unaddressed. Genera l , rather than country specif ic environmental and soc ia l development po l ic ies are inc luded i n the P C F assessment. These are not ( though c o u l d be) d i rec t ly l i nked to a host county ' s na t ional development pr ior i t ies . The inc lus ion o f na t ional development goals could be as s imple as creat ing a separate checkl is t space for their inser t ion and scor ing . M e t r i c s for rat ing the cont r ibut ing to development goals cou ld be p rov ided b y the host country. B o t h the S S N and W W F tools c o u l d be expanded to inc lude speci f ic l o c a l , regional and global env i ronmenta l impacts that are measurable. One k e y l imi t a t ion o f not p r o v i d i n g specific areas i n w h i c h project developers are to evaluate the performance o f their projects is that the absence o f these cr i ter ia g i v e the developer (who desires the project to be cert i f ied) n o incentive to ' d i g deeper ' i n the analysis . Per forming analysis in spec i f ic areas w o u l d lessen the l i k e l i h o o d o f s ign i f ican t impacts b e i n g over looked b y the developers . A l s o , the requirement o f third party verif icat ion w o u l d be instrumental i n decreasing potential misrepresentations regarding project performance. Spec i fy ing loca l impacts w o u l d benefit a l l three analysis tools. The W W F stands out as the most complete i n terms o f p a y i n g attention to stakeholder equity due to its inc lus ion o f a mandatory stakeholder consultat ion process. W h i l e the C D M requires a stakeholder consultat ion process, it is interpreted in a variety o f ways ranging f rom in-depth interviews wi th loca l residents to the creation o f a website. A standardised stakeholder consultat ion process (wi th degrees o f stakeholder responses measured through a 'scorecard range') w o u l d a l l ow these tools to greater reflect stakeholder concerns and thereby reflect equity considerations. A g a i n , third party verif icat ion w o u l d provide a greater degree o f assurance that the consultat ion process was undertaken and stakeholder inputs were included in the project review. A d d i t i o n a l checkl i s t questions c o u l d be added for different projects that w o u l d make the S S N tool more specif ic . F o r example, large projects c o u l d be assessed us ing C E R revenue reinvestment and other concerns. The abi l i ty to differentiate between large and smal l projects w o u l d help p rov ide due di l igence for larger, industr ial projects w h i l e pos s ib ly reducing administrative hassles for smaller projects. The W W F project-specific indicators c o u l d be expanded to inc lude environmental and soc ia l concerns o f different project types and sizes. A l l three o f the assessment tools could be improved to conta in references to host country development goals . If the tools referenced development goals that were spec ia l ly crafted to pertain to the count ry ' s invo lvement i n the C D M , so much the better. The tools themselves cannot be faulted i f there is an absence o f c lear ly stated development goals , however merely p r o v i d i n g space for their inc lus ion w o u l d benefit those countries where such development goals have already been articulated. The different scorecard checklist methods presented above are slightly more refined than the 'yes/no' checklist methods evaluated earlier in this chapter. A similar critique emerges for the scorecard checklist tools as with the previous methods - that they must be made increasingly detailed in order to ascertain the information needed to decide whether the potential CDM project will have sustainability benefits. Also, it is important to note that the PCF matrix tool is created by an organization that is brokering emission reduction credits to buyers in both the public and private sectors. This position as both the emission reduction broker and assessor of sustainability performance of the projects is a potential conflict of interest. Although the World Bank is an international entity with a commitment to transparency, it is not immune from private sector influences, that desire to acquire emission reduction credits at the lowest cost, regardless of the sustainability performance of the projects. If any of these tools are used by the project developer themselves, without oversight, there is the possibility that important negative impacts could be disregarded or 'conveniently overlooked' as the developer wants to realize revenues from the sale of emission reduction units. This desire could potentially overrule desires to promote sustainability through GHG mitigation projects. Obviously not all project developers are seeking to exploit the CDM system, but if the possibility exists, someone will surely take advantage of it. Multi Criteria Tools (Mata CDM) Multi-criteria Decision Analysis (MCDA) is a procedure utilized to support decision maker(s) whose problems involve numerous and often conflicting evaluations. MCDA is able to integrate diverse, context-based criteria and because of this is applicable in a variety of situations in which other assessment methodologies would fail to sufficiently express the needs of diverse stakeholders under different circumstances. MCDA tools derive from multi-criteria decision theory and through the application of sustainability theory become relevant tools for sustainability assessment (Kasperczyk N. 2004). An example of a multi-criteria tool applicable to CDM projects is the Multi-Attributive Assessment of CDM (MATA-CDM) developed by the Swiss Federal Institute of Technology in cooperation with the World Business Council for Sustainable Development (WBCSD) and the International Emissions Trading Association (IETA). Figure 10: Steps involved in M A T A - C D M and its central equation to compute the overall utility of C D M projects Step 1: Step 3: Step 5: Identification of sustainability criteria Step 2: Defining indicators 2a: Specif ications of indicators 2b: Utility functions of indicators Weighting the criteria Step 4: Assessmen t of CDM project Aggregation and interpretation of results Legend: P " CDM Project W, ' Weighting of criterion! U C, « Sustainability criterion i U, OveraV Utility Single utility of criterion i -52-MATA-CDM is based on Multi Attribute Utility Theory which provides a formal and transparent method to deal simultaneously with multiple objectives and is capable of combining quantitative and qualitative data (De Montis 2000). The goal of MAUT is to obtain a combined measure of the utility of each outcome from a set of alternatives. Each alternative is decomposed into a set of attributes which are then quantified as importance weights or other such scaling factors. These factors then inform formal models which aggregate the single attribute evaluations to produce a one-dimensional utility measure (Sutter 2005) (Sutter 2005) The steps are composed of the following: Step 1: Identification of the assessment criteria is performed by through stakeholder consultations. The overall target of a "contribution to sustainable development in the host country" is divided into a hierarchical set of criteria (sub-targets). Step 2: Defining indicators: The criteria are associated with indicators, which can be applied on a project level. Indicators can either be quantitative or qualitative. The scales of these indicators, including maximum and minimum values, are identified. Step 3: Weighting the criteria: The criteria are weighted in order to determine their relative importance. The weighting can be performed as a stakeholder process. Step 4: Assessment of CDM project: The criteria are applied on CDM project proposals. The respective scorings of the projects can be displayed in a matrix. Step 5: Aggregation and interpretation of results: Results are aggregated and uncertainty is identified. Rules are defined, based on which the results lead to an approval or a rejection of the project proposal (Heuberger 2003). - 5 3 -Takes into account: H to C £. c S3 S" s 3 re S e a > O O 2 Local Environment Local Stakeholder Equity Different Project Types/Sizes Addresses National Development Goals 45* > o u a. C « 0> Yes Yes Yes Yes MATA CDM can show the relative performance of potential projects in different areas of concern identified by local stakeholders. It is important that the stakeholders identify those environmental effects that will be affected by the project or else the assessment could 'miss' certain important externalities of the project. Even if the local stakeholders do not identify the areas that would be affected by the project, they would have succeeded in identifying the environmental aspects of their location that were the most important to them. For this reason, it is important that the stakeholder group be inclusive of expert knowledge. It can be argued that the MATA CDM method, because of its emphasis on stakeholder and expert participation, takes into account stakeholder equity concerns in a way that the other sustainability assessment tools fail to do. To ensure the validity of the stakeholder consultation process, the MATA CDM tool should stipulate the composition of the audience participating in the workshops so that the entire spectrum of society and interests are represented. Although this might be impossible to achieve, making sure that the process is not dominated by the members of society who have the most to gain from a CDM project will assure increased equity. The MATA CDM tool could be improved by stipulating the participation of experts versed in the local environmental affects of different project types. Also, a possibility is that MATA CDM be carried out by an organisation that has a certification arm whereby experts in different project areas located in different parts of the world could be 'certified scientific experts' capable of providing opinions reflective of the most current understanding of environmental impacts of GHG mitigation techniques. Similar to the suggestions made in the 'local environment' column, the standardization of the MATA CDM process through the participation of some type of certification/accreditation agency would ensure that the sectors of society included in the workshops were truly representative. This would prevent the 'hijacking' of the process by certain groups. Another potential way to ensure that all voiced concerns are inputed into the process would be to mandate the recording of the workshops (audio, video, or notetaking) by an unbiased NGO-type organisation. A strength of the MATA CDM tool is that it can be applied to diverse project sizes and types without changing the structure of the assessment tool in the way that a checklist (for example) would need to be altered to include the specific characteristics of a different project type or size. MATA CDM does not rely on a static list of checklist questions to determine sustainability performance, but instead uses local and expert developed criteria to determine the performance of any potential CDM project - whether it is HFC destruction or the construction of a small hydro facility. The MATA CDM tool begins with the stakeholders and then analyses the project, rather than the reverse which is the case with the tools examined previously. National development policies can inform this assessment method through the participation of government officials who are representing the government's position regarding either a specific CDM project or the nation's participation in the CDM in general. As mentioned in the 'local environment' column, the efficacy of the MATA CDM to identify local environmental impacts of the project depends on the participating stakeholders' ability to know what to propose as evaluative criteria. If each different project type had an information sheet or presentation on what would be the typical environmental impacts of that particular technology, the participants would be able to propose more informed criteria. This does allow the stakeholders to be influenced towards certain criteria, however if these 'information sheets' were agreed upon at the UNFCCC level with the participation of an environmental NGO, it could be assumed that the best interests of all were being accurately represented. It is important for consistency in the CDM that the MATA CDM results regarding a particular project or sets of projects reflects the host nation's stated policy towards the CDM and development in general. Government participation is important to ensure that projects that are deemed sustainable through a sustainability assessment (MATA CDM for example) are not later stalled because of conflicts with national policies. In the above matrix it is clear that the M A T A C D M tool is quite capable of including local environmental, equity, and host country development concerns, as well as being adjustable for different project types and sizes. However there is a potential drawback of this tool which relates to its cost of implementation. At present there is no published information on the cost of holding a M A T A C D M workshop, though it can be ventured that it would be more expensive than each of the other methods. Mutimedia apparatus, travel expenses (plus per diems) for experts, government officials and most likely local stakeholders (depending i f the event was held on the potential project site or in a larger, more formal environment (i.e. the nation's capital city), all contribute to a relatively more expensive means of ensuring sustainability inputs in a potential C D M project. The more expensive nature of the M A T A C D M tool should not make it impossible to apply to certain set of projects. It is likely that projects that are seeking a 'visible sustainability contribution' (in the same vein as Gold Standard projects) will not shirk from the added cost to ensure that stakeholder concerns (and not to mention ample photo opportunities of stakeholders airing their concerns) are incorporated into the C D M project. Though as was mentioned for the Gold Standard, the organizations that would opt for this type of sustainable C D M project might be doing so for the public relations or 'goodwill' value that they-could bring. The intangible value of sustainability-related public exposure might offset the added transaction cost involved in the M A T A C D M process. These public-relations emissions offset purchases (such as the G8 Gleneagles and the World Cup) are quite small in comparison to the emission reductions mandated under the Kyoto Protocol. What will matter most for the sustainability of the C D M is whether the big Annex 1 players choose projects that involve a type of sustainability assurance process ( M A T A C D M and the Gold Standard for example) rather than massive HFC-style projects. Table 11: Consolidated results Local Environment Local Stakeholder Equity Different Project Types/Sizes Addresses National Development Goals Ration of Yes to No Guidelines No No No Yes 25% Checklists (SSN) Yes Yes No No .50% Scorecard Checklists SSN Matrix Yes No No No 25% WWF Matrix Yes Yes Yes No 75% PCF Matrix No No No No 0% Multi Criteria Tools (MATA CDM) Yes Yes Yes Yes 100% -55-Assessment method analysis conclusions After reviewing the available tools to ensure verifiable contributions to sustainable development, it becomes clear, that each of them is quite different and has different positive and negative attributes. They are not all the same type of animal. A government produced CDM guideline is so vastly different from a multi-criteria decision making tool (MATA CDM) that comparing them is difficult. The underlying similarity between these two tools (and the other tools reviewed) is that they have the aim of infusing the CDM with sustainability benefits, even if their efficacy is questionable at a deep level for reasons such as potential conflicts of interest and the absence of specific indicators. The intention of each of the CDM-specific sustainability tools is what allows their comparison. The CDM-specific sustainability assessment methods have been evaluated to see which of them are able to take into account the CDM-specific criteria developed earlier in this thesis. The analysis shows that the observed gap in sustainability assessment witnessed in the CDM is not caused by a lack of CDM-specific assessment methods. Each of the different CDM-specific sustainability assessment tools offers a larger degree of participation by project developers, local stakeholders and host country government representatives to more actively critique and design CDM projects that will be of larger benefit to all involved, including the local environment. The decision by project developers to use either a checklist or a scorecard checklist approach would be an important first step towards making the CDM a mechanism with increased transparency and visible concern over the sustainability impacts of projects. / Simply stating how the specific CDM project contributes to a set of defined host country development objectives (the guidelines approach) would be a powerful step forward for most of the projects included in this evaluation. If each country's DNA were to define a set of goals that reflect the development goals of the nation, project developers would have more direction in pursuing CDM projects. It also would not be prohibitively costly or time consuming to perform either a simple checklist or a scorecard assessment (such as that presented by South South North) to show that the project developers have contemplated these concerns. This alone could go a long way for installing increased confidence that the CDM has the potential to deliver sustainable development benefits. MATA CDM stands as the most complete method for evaluating sustainability contributions. This method is potentially more costly than the others as it involves a series of workshops and the participation of international experts to facilitate the process. One of MATA CDM's key strengths is its ability to be adjusted to reflect the concerns of local populations in different countries. This adjustability could be further enhanced if the particular development concerns of the CDM host country could be incorporated into the tool. On the other hand, MATA CDM, like other multi-attribute tools could be quite prone to gaps, unfounded assumptions, affected accuracy and potential manipulation by political interests. This being said, I do believe that the MATA CDM has a place in the CDM landscape -probably not for every project, but potentially for a few projects in each project type. This would help identify different concerns related to different projects. For example, a MATA CDM process might identify a distinctly composed utility curve for an HFC vs. a small hydro project. If MATA CDM were to be applied, it would require facilitation and expertise that might not be readily available within the local project environment. An outside expert who has experience in sustainability assessments would ensure that the methodology is applied correctly. This person or persons would be the natural choice to facilitate the MATA CDM process. Potential funding arrangements for implementing MATA CDM are introduced later in this chapter. -56-From the project level analysis it is clear that project developers are doing very little to ensure that their projects are verifiably sustainable. The global level analysis of CDM projects has shown that the overwhelming majority of CDM projects do not provide the sustainability benefits that the mechanism was designed to produce. The initial set of CDM projects more likely represents the 'low hanging fruit' of emission reductions - easily monitored flow rates combined with high global warming potential substances (HFC & LFG). Increased involvement of the CDM Executive Board in issues of sustainability would go a long way towards bringing benefits of sustainable projects to populations in host countries. One means to achieve this could be through a mandated assessment requirement that draws upon the strengths of the assessment tools to form a means of assessing the sustainability impacts of projects in a meaningful and practical way. Currently, there is no expert involvement in the sustainability dimensions of CDM projects on the ground. A UNFCCC mandated sustainability expert involvement in CDM projects could be the means to ensure that CDM projects are making verifiable contributions to host country sustainable development. A mandated protocol for ensuring that the CDM provides sustainability benefits in addition to economically efficient emission reductions would help make the CDM more what it was initially created to be rather than a vehicle for Annex 1 investors to achieve cheaper regulatory compliance without any benefit to local populations. This 'sustainability protocol' should not be overly complicated, or prohibitively expensive. If a sustainability assessment protocol were mandated, what would the assessment method look like? The following section presents a sustainability assessment framework. 4.2 A Framework for a Mandated Sustainability Assessment Any mandated sustainability assessment should be a transparent process that allows for participation from all of the stakeholder groups involved in the CDM process and affected by the project. For this reason, a mixture of aspects from each of the assessment methods evaluated in this chapter could provide a feasible and complete assessment package that draws on the strengths of each tool. In designing this, it is realized that there should be a balance between project developer independence and complete UNFCCC involvement in the sustainability assessment of each individual project. This would ensure that there are not excessive requirements placed on project developers or the creation of additional bureaucratic layers at the UNFCCC level. Also, it is noted that a prohibitively expensive assessment process, both in terms of time and monetary cost, could burden project developers and lead to an overall loss of efficiency in the mechanism. The desired aspects from each assessment tool are explained below: Guidelines - From guidelines, the direct involvement of the host country would be achieved by mandating that for participation in the CDM, host nations must have a set of sustainability principles that reflect national development priorities. These principles could be articulated by the DNA and be readily available to parties interested in establishing a CDM project. The formation of these guidelines would be the prerogative of the host countries themselves. If a country was not certain as to what should be included in their guidelines, they can have the option to adopt sections of the guidelines of others. As guidelines are normative, they will not be useful to actually assess the sustainability of the project, however, they can have the effect of stipulating which types of CDM projects are permitted to progress through the steps towards certification. This initial screening through publicly available CDM guidelines would have the effect of not allowing projects deemed unsustainable (in the host country's viewpoint) to progress. Guidelines could also allow the host country to manage their participation in the CDM in a self-benefiting way. For example, a host country could stipulate that a local company must be a partner in any - 5 7 -project. This would be beneficial as it would keep project-related revenues in the country as well as building local capacity for undertaking environmental projects. Checklists - In a mandated sustainability assessment, checklists would be required to ensure that the project ideas are in alignment with the host government's CDM guidelines. These checklists would be CDM project type specific so that the project developer would be aware of which factors require monitoring and reporting during the initial project development and lifecycle. These project type-specific checklists would be created at the UNFCCC level each time a new project methodology is approved by the CDM Methodology Panel. These checklists could be created by the submitter of the emission quantification methodology and subject to the same Methodology Panel review. These checklists would then be used by the project developer as well as the DOE charged with certifying the project. An example of this could be a checklist created in response to the HFC 23 destruction methodology (AM0001) being approved. The checklist could contain such items as (1) where to likely expect the local environmental impacts of HFC projects, (2) the number of jobs that will be created, and (3) water quality issues, among others. Having checklists created at the UNFCCC level would also reduce the inherent conflict of interest that exists when project developers themselves choose which checklists to use. Also, by stipulating that verification of the checklist is to be performed by the DOE, necessary oversight is created to avoid the conflict of interest that exists when the project developer is alone responsible for the checklist assessment. This would not be prohibitively expensive as it would be a one-time cost that could be rolled into the methodology submission fee which is currently set at USD $ 1,000. Scorecard Checklists - Scorecard checklist tools might continue to be used in the CDM though not in a mandated form. Their role as inputs to programs external to the UNFCCC that seek to differentiate specific CDM projects on exceptional contributions to sustainable development (as is the case with the WWF Gold Standard) will continue. These scorecard checklists could be used as 'project screens' as they exist in the WWF Gold Standard or other such 'sustainability value added' branding initiatives. MATA CDM - Based on the analysis and discussion earlier in this chapter, MATA CDM provides the strongest assessment of the sustainability performance of potential CDM projects across criteria chosen by local stakeholders - though at the highest cost. It would be ideal if MATA CDM could be performed for each CDM project though time though financial realities would most likely prohibit this. What would be possible is that in each country participating in the CDM, a MATA CDM workshop could be held (potentially through some cost sharing mechanism with the UNFCCC) to identify the preferences of stakeholders for a variety of CDM project types. This would represent an expense for the. already potentially cash-strapped host country. It would be up to the host country to decide if they see value in sponsoring their own MATA CDM workshops. Should they decide to undertake them, the outputs of these workshops would be valuable for national governments, project developers and the UNFCCC level bodies to identify the utility profiles of different projects and how they contribute to sustainable development as defined by the local populations affected by the CDM projects. It is also possible that the MATA CDM workshop could inform the creation of national guidelines. Alternatively, a MATA CDM workshop could be held each time a new project 'type' is introduced. The first HFC project, for example, would undergo a MATA CDM process so that all ranges of stakeholder inputs are included. It is likely that future projects of this type, (HFC projects in Korea for example) would be able to follow the recommendations that were the result of the previous MATA CDM process. It should not be the case that the first project be burdened with the expense of the MATA CDM workshop. There are some options for allocating these increased administrative costs discussed later in this chapter. One possible option is that funds -58-accruing from C E R s held in a C D M Executive Board registry be allocated to sustainability-related expenses. There is some research needed to verify that a utility curve generated in one setting (with the same project type) is similar to that o f another setting, it is l ikely that they would be generally the same. This would be helpful to identify the 'problem areas' that require monitoring in future projects (for example - local water contamination in the case o f H F C projects). Through using a combination o f the sustainability assessment tools evaluated in this chapter the contributions to sustainable development of each C D M project can be measured. This measurement can lead to greater accountability within the mechanism and potentially the generation o f real benefits for host countries. It is wholly recognized that there are many sophisticated approaches to monitoring the environmental, social and economic impacts on local populations. The C D M sustainability tool described above stands as a good start towards integrating sustainability concerns into the C D M . The following section concludes the thesis with a set of recommendations on how the sustainability component of the C D M can be improved. 4.3 Recommendations for a more sustainable CDM This final section o f the thesis w i l l integrate the results of both the project-level and global analysis to provide possible avenues of action for the U N F C C C to ensure the sustainability of present and future C D M projects. It is the goal of these recommendations'that the C D M become a verifiably more sustainable mechanism. In order for the C D M to improve, four suggestions are offered: 1. More C D M Executive Board involvement in sustainability dimensions o f C D M projects; 2. learning and continuous improvement must be infused into the mechanism; 3. increased role of the C D M Executive Board in prescribing appropriate sustainability monitoring activities; 4. institutionalized C E R discounting for low sustainability-benefit providing projects to increase funding for the C D M E B to implement the above. 1. More CDM Executive Board oversight in sustainability dimensions of CDM projects The C D M Executive board is responsible for certain activities including approving methodologies, requesting reviews of projects up for registration, certifying designated operational entities, and issuing C E R s from projects in operation. The l ink between the C D M Executive Board and the projects on the ground is through the Designated Operational Entities (DOE) - which are primarily concerned with providing validation services which currently do not encompass the measurement o f impacts that C D M projects have on local populations in the project area. A s companies that have been approved as D O E s by the C D M Executive Board have experience in the field o f verification services (Det Norske Veritas, K P M G , SGS, etc), it seems plausible that that they have internal capacity to expand their roles to include the validation of sustainability-related attributes o f the projects. How might the D O E ' s role be expanded? A possible means to increase the quality of sustainability assessments is by involving the D O E s to a greater degree in a U N F C C C mandated sustainability assessment process. The C D M E B - 5 9 -could add this assessment process requirement to the general guidelines, possibly included in its list of validation -related procedures. The institution of a UNFCCC mandated sustainability assessment (overseen through the CDM Executive Board) for all CDM projects would greatly help the mechanism achieve the sustainability benefits originally envisioned for it. While it is recognized that there will be a cost component to this, it is likely that it will not be exorbitantly high as the more costly sustainability assessments (such as MATA CDM and the full WWF Gold Standard) are not required for each project. There are a variety of ways that the cost component of this additional requirement could be allocated. One option that surfaces is that there could by a 'sustainability levy' charged on each ton of carbon (CER) transacted in the CDM. This would be similar to the Adaptation Levy that currently exists to provide funds for adaptation projects in vulnerable areas. This 2% levy is held in a CER registry account by the CDM Executive Board along with CERs to cover administrative expenses pertaining to project registration. It appears that given the volume of CERs being generated by HFC and LFG projects and the observed market prices for CERs in the price range of 8-12 Euros, there is ample room for a small percentage of the CER market value to be applied to sustainability verification and monitoring. 2. Learning and continuous improvement must be infused into the mechanism. In climate change research, negotiations, and management (especially the Kyoto Protocol), the 'learning by doing' principle has been cited to reflect the notion that the efficacy of actions would increase as the participants acquired experientially based knowledge and applied it to their field of work (Nor 2004). For the CDM Executive Board, the 'learning by doing' principle plays a significant role as they gain more experience with registering projects. The issue at hand is that the project developers and host countries themselves are not benefiting from the same type of learning process as the CDM Executive Board. This is the case as project developers are only exposed to their own projects, have little, if any, communication with other project developers to share experiences. Exchange of best practices and other information among project developers could benefit the CDM immensely. The previous project-level analysis shows that project developers are not using sufficient assessment methodologies. Increased learning in CDM projects on the ground could potentially lead to increased knowledge and application of sustainability assessments that can provide for a stronger overall mechanism. How should this 'learning by doing' be engendered on the ground? One possibility is the increased flow of information between the CDM Executive Board, project developers, and the host country. This increased interaction could take the form of expert participation in MATA CDM workshops. While expensive, it is possible that host countries will elect to hold a few of these workshops in which expert input can be included. These expert participants in the MATA CDM workshops would be able to impart experiential knowledge gained through other workshops and be able to offer advice on how to increase the sustainability benefits of the project. It is again recognized that this process might be prohibitively expensive in certain circumstances, and that the cost must be shared among the different CDM stakeholders. Even if these initiatives are funded by the CDM Executive Board, the actual funds might be accruing from other sources, such as a CER registry account in which value from CER levies is held. Another means to infuse learning into the CDM would be for the Methodology panel responsible for approving the sustainability checklists that would accompany each approved emission quantification methodology to produce a 'best practices' handbook that could be made available to project developers and other CDM stakeholders. Through the dissemination of this - 6 0 -knowledge, participants in the mechanism would gain awareness of other projects and how they can benefit from their experiences - both positive and negative. Of the 25 projects evaluated in the global analysis, more than 3 of them are some type of methane capture from a landfill site. At present, the only form of official contact that the project developers have between each other is from reading available project design documents on the U N F C C C database. After analysing those documents it is now clear that they offer insufficient information on performing sustainability assessments and ensuring sustainability contributions of the project. A slight extension of the role of the C D M ' s Methodology Panel could facilitate communication between developers and provide expert knowledge for incorporating sustainability evaluations to the current C D M project framework. 3. Increased role of the CDM Executive Board in prescribing appropriate sustainability monitoring activities. The role of the C D M Executive Board should be broadened to include the prescription of sustainability monitoring methodologies for different types of C D M projects. This role is currently unfulfilled by any entity within the C D M framework. The existing monitoring protocol presented in Decision 15 developed during COP-7 does not include any monitoring of C D M projects beyond baseline and emission reduction concerns. The monitoring of employment generation, local environmental impacts, and local equity concerns (among others) would be useful in evaluating the contribution of the entire C D M to its sustainable development objectives. This monitoring would serve to increase the attention paid to sustainability concerns by project developers and as a result, increase the sustainability of the entire mechanism in a way that is verifiable. As monitoring requires continuous measurement, it would be unfeasible for the C D M Executive Board to do the sustainability monitoring of the projects itself. It seems feasible that the monitoring criteria be developed at the U N F C C C level (potentially by the same Methodology Panel), disseminated to project developers for use during the course of the project, and regularly audited by the DOEs. This would not represent an exorbitant cost to either the U N F C C C or project developers as it could be local host country firms that carry out the verification services. What is envisioned here is something similar to an ISO - style certification regime where firms would become approved to carry out the different site audits. As there would be a growing set of firms capable of providing these services, competition would create downward pressure on prices of the monitoring/verification services. 4. Increased Levies on CERs for the promotion of sustainable development To a certain extent there already exists CER levies in various forms. One example is the Adaptation Levy described earlier which places 2% of CERs in a registry account held by the C D M Executive Board for use in adaptation projects. Other variations of a CER levy are those that can be created by host governments to derive revenue from CERs being produced in their country. An additional levy should be added to the C D M that would provide funds to cover the sustainability assessment and monitoring costs. This levy would have a temporal difference from the adaptation levy in that the funds for sustainability concerns would be needed during the project lifetime rather than once the CERs have been generated. A potential means around this could be to place a higher levy on current projects with larger volumes of CERs to finance future sustainability components of projects under development. C D M projects that provide minimal sustainability benefits that provide higher CER-based revenues (HFC, L F G , etc) could be taxed in a way that decreases the vast difference in CER -61 -returns between other, C02 mitigating projects (hydro, biomass, etc). The source of this revenue could be from a CER levy on high volume CER projects such as HFC 23 destruction. These projects, which mitigate high GWP substances while having questionable sustainability benefits, have the potential to improve the sustainability of the entire CDM, rather than being seen as evidence of the mechanism's failures. A CER levy could be implemented at the UNFCCC level with potential revenues shared between the UNFCCC and the host country (based on negotiations). Funded activities could include financing the sustainability assessment/monitoring process proposed above, increasing the level of financial support for the CDM Executive Board, and funding, climate change adaptation activities through the Adaptation Fund. 4.4 Conclusion and areas for further research At present, the CDM is not living up to both of the objectives that it was created to achieve: 1) providing cost effective emission reductions for Annex 1 nations and 2) contributing to host country sustainable development. Part of the reason why this has not occurred is that the entire 2nd objective was left to host countries that had minimal guidance from the UNFCCC on how to ensure that CDM projects were sustainable, or even how to define and operationalize sustainability. As the wave of multinational organizations with deep pockets seeking cheap emission reductions spreads into the developing world, it is not at all surprising that the overwhelming majority of CERs are being generated through end of pipe mitigation methods like HFC destruction. A key reason why this has happened is that there has not been any type of sustainability assessments for CDM projects. There are tools available which, if used together can be effective in assessing sustainability. Mandating a sustainability assessment in all CDM projects is the first step in creating a better mechanism and a stronger Kyoto Protocol. This thesis has identified and documented the sustainability assessment gap in the CDM and provided recommendations for how this gap can be eliminated. Elimination of this gap will create a verifiably more sustainable CDM that is capable of fully meeting its sustainable development contributions in addition to the economic efficiency benefit to Annex 1 nations. This thesis has presented a global analysis of the CDM to delineate broad trends in the mechanism and to show where CDM investments and emission reductions are flowing. The project-level analysis has provided the 'starting point' from which the future CDM can be judged regarding the incorporation and measurement of sustainability concerns. As the CDM is a relatively recent policy mechanism, it remains to be seen how effectively it can contribute to sustainable development on the ground. Further research on the sustainability performance over time of the currently registered CDM projects would be of use for the CDM Executive Board for possible improvements to the projects when they are being reviewed for crediting period renewal. Research should be undertaken to assess whether the CDM has the long-term effect of retarding environmental regulation in host countries. As there are different GHG trading regimes appearing all over the world (Asia Pacific Technology Partnerships, Chicago Climate Exchange, European Union Emission Trading Scheme, Canadian Offsets System) it remains to be seen what challenges to global GHG market harmonization exist and what role sustainability concerns will play in determining the value of project-based GHG mitigation derived credits. -62-5. References Agrosuper (2005). C D M Project Design Document, Methane capture and combustion from swine manure treatment for Pocillas and La Estrella, Chile, UNFCCC C D M EB # 0028. Babiker, M. H., et al. 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