Article 12.2 makes it clear that one of the CDM’s main purposes is to assist Annex I Parties in ‘achieving compliance’ with their commitments under Article 3. In order that Parties comply, it is absolutely essential that there is transparency, non-discrimination in the monitoring/evaluation system. There should be a penalty associated with non-compliance which should be legally operational.

Implications of Article 12.10 of the Kyoto Protocol, include implications for a possible interim phase approach to the CDM and of the Activities Implemented Jointly (AIJ) under the pilot phase.

Article 12.10 states "Certified Emission Reductions obtained during the period from the year 2000 up to the beginning of the first commitment period (2008) can be used to assist in achieving compliance in the first commitment period (2008-2012). In this regard, few questions arise:

This process involves not only the host and investing Parties but also the UNFCCC and the Executive Board. After the emission reductions are certified by an operational entity, the CERs should be in the custody of the Executive Board who will, in turn, transfer part of these to the Annex-I Party (investor) and also a part of the proceeds for adaptation to non Annex-I Party (host), based on a certain agreed ratio. The CERs that accrue to Annex I Party (Investor) have to be banked, the other CERs may be transferred or monetised due to the non-Annex I country Party (host), as per the cost of reduction per tonne of carbon, to the host country for its sustainable development and meeting the costs of adaptation.

The methodology of banking CERs from 2000-2008 through CDMs needs to be clearly brought out, including the institutional arrangements. The developing countries would like to encash on the proceeds from the CDM projects immediately, without waiting for banking to address to their sustainable development and adaptation measures. The proceeds from the CDM are required to be shared between the investing and the host country Parties as well as with the Executive Board of the CDM for their administrative expenses and a part of the share proceeds for adaptation measures in the vulnerable developing countries. Though the issue of vulnerability is being discussed elsewhere but it is worthwhile to mention that it is not only the small islands that are vulnerable to climate change but even a country like India, with a 7000 km coastline and various climatic zones, will be severely impacted due to climate change and therefore would need measures for adaptation and capacity building.

Due to the complicated nature of the flexible mechanisms in the Kyoto Protocol, particularly the CDM, it is worth considering at least an initial three year period from 2000-2003 as an interim phase of CDM. This phase will be used to take up very simple CDM projects to allow the process to take an early start. After gaining some experience, other CDM projects may also be taken up for implementation based on the experience and lessons learnt during the interim phase.

As per the decision 5/CP.1, the AIJ Pilot Phase will be reviewed by 2000. It is a well-known fact that countries in Asia-Pacific and Africa did not have the opportunity to implement sufficient number of AIJs during the pilot phase to learn their lessons. Hence the pilot phase should be extended to another three years so that countries in Asia Pacific can be initiated into the process of flexible mechanism for mitigation of climate change.

As per the Article 12.8 of the Protocol, the Conference of the Parties serving as the meeting of the Parties to the Protocol shall ensure that a share of the proceeds from certified project activities is used to cover administrative expenses as well as to assist developing country Parties to meet the cost of adaptation.

Again, the Article 12.2 states that the purpose of 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 of the Protocol.

Taking into account the interests of the investors as well as the hosts, who will also be predominantly from the private sector, and considering their main attraction will be to maximize their benefits/return from their investments, and to cover the costs of administrative expenses of the Executive Board and to meet the cost of adaptation in developing countries, how can we distribute the proceeds equitably among these different requirements ? We assume that all developing countries are vulnerable to climate change, and a part of the proceeds has to be utilised for meeting the costs of adaptation, which may be minimal from CDM projects. Similar adaptation costs must be borne out of the ERUs from JI & ET mechanisms as well.

No credit has been recommended to the private/public business sector host parties in the project since such parties are already getting a clean technology and additional finances under the CDM agreement. Such an arrangement will have less chance of gaming and/or generating paper tonnes.

We have discussed the legitimacy of maximum 30% share of the CERs to any Annex I Investor from any CDM project. This credit-sharing provision must be qualified further to avoid a situation that the Annex I Countries can meet all their QELRC through the flexible mechanisms alone. These provisions must be strictly supplemental to their domestic efforts. This means that this limit must be extended to Annex I country’s QELRC, which will not only address the ultimate objective of the Convention but also compel the industrialised countries for a strong domestic action and for innovative research to develop clean technologies. Any Annex I country other than CETs can only obtain a maximum of 30% of their total commitment from the three flexible mechanisms viz., Joint Implementation (Article 6), Clean Development Mechanism (Article 12) and Emission Trading (Article 17).

The CDM projects may be categorised under i) Energy ii) Transportation iii) Building Sector iv) Renewable: a) solar, b) wind, c) biomass energy as being the broad heads.

Before emission-reduction is certified, it must be ensured that the project has achieved the sustainability goals. Each country may prepare its sustainability goals through sustainability indicators to be quantified. This would need some research inputs in the initial stages of such projects. Some of the sustainable development (SD) indicators are given below as an illustration. They are:

At the project level, each mechanism will have a distinct product. However, finally all these clearly contribute to carbon credits, therefore we believe that at the COP/MOP and Executive Board level fungibility may be accepted, but not at the project level.

There is a need for simplification of national approval processes to AIJ/CDM projects to speed up approval and implementation. Host country Government approval can be a problem in large countries such as India where national authorities may be several bureaucratic steps removed from the local level or working level.

The process should be similar to that of the AIJ during the pilot phase where the host and investing country governments approve/endorse the CDM project before it is communicated to UNFCCC and other concerned institutions for taking up the project

Developing Country Party (host) would need funding for certified project activities besides additional funds that would be brought by the investor along with technology for implementing a CDM project. Such funding should be arranged through the CDM Executive Board as discussed under sharing of credits.