UNFCCC Provisions The Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC) provides several flexibility mechanisms for meeting the greenhouse gas (GHG) emissions reduction targets of the Annex I countries. These are the Joint Implementation (JI) and the International Emissions Trading (IET) among Annex I countries, and the Clean Development Mechanism (CDM) among the Annex I and Non-Annex I countries. Of these mechanisms, the Clean Development Mechanism (CDM) is of particular interest to developing countries as it provides them an opportunity to assist developing countries in achieving sustainable development and avail fund flows and technology transfer from Annex I countries, while assisting them in meeting their quantified emissions' limitations and reduction commitments. The additional funds and the technology transfer through CDM will further supplement the national sustainable development and adaptation efforts of the developing countries. Since the developing countries look at CDM as a mechanism supplementing their national sustainable development efforts, there may be a tendency in these countries to give preference to small scale projects that are generally considered to catalyse sustainable development. The CDM Project Cycle The CDM has many specific requirements of its own, such as validation of a project and its registration with the CDM Executive Board and monitoring, verification and certification of GHG offsets. The various steps in a CDM project cycle, as defined by Marrakesh Accords are shown in Table-1. The Table also depicts the parties that are responsible for carrying out the particular process. CDM Project Cycle and Transaction Costs The various steps in a CDM project cycle are a must to ensure that the project activity achieves the proposed emission reductions. The emission reductions are real and long term and the project activity contributes to the sustainable development concerns of the host country. The detailed documentations, various kind of agreements and mechanisms required to ensure these adds up to the transaction costs. The large projects are able to absorb these costs as these happen to be only a small fraction of the total project cost. Even if the absolute transaction costs for small scale projects may seem low, the ratio of transaction cost to the total cost comes to be very high in the small scale projects than in the large scale projects.
According to the AIJ experience from India, the transaction costs in some cases went up to as high as 30% of the total project cost. Based on his tremendous experience world over, Dr. Axel Michelowa gives an estimate of 20.5% of total project costs for average technical assistance and administrative costs for energy efficiency projects and 14.4% for the renewable energy projects in the Baltic region, under the AIJ scheme. According to Shell, transaction costs should not be more than 25% of proceeds from permit sales in order to make a project viable. Due to the high transaction costs, most small scale CDM projects become uneconomic and even unattractive to foreign investors. Thus, the investors will prefer large scale projects where the accruing CERs will lead to a profit. Levelling the Field for Small Scale CDM Projects The small scale projects can have considerable sustainable development benefits. Thus, they would further the main interest of developing countries participating in CDM. The efforts should, therefore, be made such that the small scale projects also become interesting to the investor and a necessary, but not always sufficient, condition to do this is to reduce their transaction costs. This could be achieved by giving some concessions to these projects, such as relaxing the procedural requirements wherever possible and setting up appropriate institutions at the host country level and at CDM Executive Board level. However, while doing so, due consideration should be given to environmental integrity - one of the main objectives of the CDM. Various options to achieve reduction of transaction costs may be as follows:
A combination of several of these options may bring the best result. However, to harness the cost-reducing potential of these steps, the host and investor governments have to set up an enabling environment by putting in place efficient institutional structures and streamlining the process at their level. Marrakesh Provisions for Simplified Rules and Procedures The Marrakesh Accords laid down the provisions for simplified rules and procedures for these projects so as to bring down the transaction costs in small scale projects. Given the lack of details in the Marrakesh Accord, the CDM Executive Board works on a clear cut classification of small scale projects, defining boundaries for different categories of projects, standardising the baseline designs and setting up standard monitoring and verification protocol etc. The CDM Executive Board has set up an Expert Panel on Small Scale Projects and the Panel is looking into many of these aspects with a view to prepare a decision by COP 8. In order to give a good start to small scale projects and meaningful participation of developing countries in CDM mechanism, it is essential that the rules of the game are finalised at COP 8 and other institutional and capacity building requirements are taken up on a priority basis. Simplified Rules and Procedures for Small Scale CDM Projects Based on our learnings from AIJ pilot projects and other international experiences, a set of possible simplification options for small scale projects have been discussed.
Burden Sharing A CDM project involves a number of stakeholders, if the transaction costs could be shared by different stakeholders, the burden on the host may be brought down. The Dutch government has tried this in a recent tender where the project developers, who were invited to elaborate a full proposal after the initial screening of the idea, were reimbursed their costs of baseline development (SENTER 2002). Several Annex B countries have opened CDM/JI offices that help project developers to find suitable partners. Recommendations Small scale CDM projects are unlikely to be commercially attractive under current forecasts of CER prices due to high transaction costs. Stringent procedural requirements (such as baseline design, establishing additionality, validation of the project activity, monitoring, verification and certification etc.) raise the transaction costs enormously. The simplified rules and procedures, as outlined in the Marrakesh Accords, will be a respite for the small scale projects. However, in order to formulate such simplified rules and procedures and implement those, certain action would be required at different stakeholder levels. Some of these requirements are highlighted below.
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