CDM – Efficiency at the expense of Equity? 
Ashok Khosla

The type of climate change partnership most discussed since the Kyoto Protocol is the "Clean Development Mechanism" (CDM). While the basic concepts behind CDM and the purposes of CCP activities may well be exemplary, it is yet to be seen how and to whose advantage these will work out in actual practice. CDM is a project-based mechanism, in which the projects will have to be negotiated between commercial partners. Under the provisions of the climate change convention, the Annex 1 (industrialised) country partner will generally bring fuel-efficient technologies and some financial investment. The host (developing) country partner will provide the business opportunities and local investments.

Needless to say, the terms of the partnership agreed to will depend on the relative negotiating skills and strengths of the respective partners. And, many parties could well be impacted by the activities of the partnership even though they were not represented in the negotiations.

From the point of view of a developing country such as India, CDM could lead to very different outcomes, depending on how it is implemented in practice. The best outcome would be the win-win situation where CDM projects, in the aggregate and at a reasonable cost, accelerate the process of sustainable development in the host country and also concurrently reduce the overall emission of greenhouse gases into the atmosphere, providing some emission reduction credit to both partners.

But it is also possible to envisage many other outcomes that are not so good, and some, indeed, that are quite detrimental to the interests of the host country. The partnerships negotiated could well be at the expense of the local enterprise or of the host country if the technology and financial inputs contributed by investors are not of sufficient value to provide a fair compensation for the emission reduction achieved.

CDM also poses a number of other difficult questions. How much carbon emission has been saved by the project? What was the cost of these savings? How will the credit for the reduction in carbon emission achieved be shared? How long will the carbon emission credit be applicable for?

How will inter-company transactions between companies/divisions of the same multinational group be treated? Or any other partnerships that could involve collusion or minimal local economic contribution? Is the economic benefit the same whether the money generated stays largely within the local economy or gets siphoned off largely as profits to far away places?

And, more fundamentally, how will credits be evaluated in the first place? Unless the issue of entitlements to emit carbon is first dealt with, it is in fact difficult to imagine a fair allocation of responsibilities or benefits in the form of credits.

The complexities of calculating CDM costs and benefits, and the ambiguities inherent in them, are such that even rational and well-intentioned estimates could differ by two orders of magnitude. How would one choose the correct approach?

There are, of course, more fundamental problems with CDM. CDM is basically about efficiency – and least cost measures to reduce carbon emissions. It cannot deal adequately with the issues of equity. Equity, and the only solution that can be acceptable in the long run, demands that everyone in the world should be entitled to the same environmental space – in this case quantity of carbon emitted. This can only be achieved if the emissions in the industrialised countries are contracted and the emissions in the developing ones are allowed to rise so that both converge to a limit that is below the threshold above which climate change becomes unacceptable.