CDM & the Poor

Jo Dirix
Free University of Brussels
Wouter Peeters
Blog Date:

In our previous post we touched upon two design characteristics of the EU ETS - i.e. grandfathering of emission entitlements and offsetting - that we deem ethically troublesome. In light of this predicament we offer some reflections on the practices of one feature in particular, namely, offsetting. The flexibility - offsetting - mechanism the Clean Development Mechanism (CDM) has the dual objective of assisting developing countries in achieving sustainable development and assisting developed countries in achieving compliance with their quantified emission limitation and reduction commitments under the Kyoto Protocol. Furthermore, the EU has made it possible to use Certified Emission Reductions (CERs) generated by the CDM to be used for compliance within the EU ETS. Hence, a European firm receives CERs when it invests in emission saving projects in developing countries and these credits can be used by the investor to comply with the EU cap on emission.

The CDM has been criticized for the questionable additionality of its projects, the wrong incentives it offers, the kind of projects it funds, the environmental efficiency and effectiveness of the projects, the alleged arbitrariness of its decision-making procedures and the geographical uneven distribution of its projects. Proponents argue that the CDM will deliver monetary and technological transfers from North to South. In evaluating the CDM according to principles of social and participatory justice, we have looked into a number of academics' findings on the matter. The body of research on the CDM is based on what project developers ex ante claim in their Projects Design Documents (PDDs), since no ex post verification of the claims is required. In addition, when evaluating whether CDM projects contribute to the sustainable development of a project's host country, it remains difficult to assess project contributions since the definition of sustainable development remains the prerogative of the host country. What qualifies as sustainable development is thus left to the host country's judgement.

The absence of an international standard of sustainable development results in host countries competing with one another to attract CDM projects, possibly leading to a race-to-the-bottom in terms of sustainable development standards, which take a back seat to emission reduction aspects. Research indicates that although CDM projects tend to deliver real emission reductions, they hardly contribute towards a host country's sustainable development. Moreover, benefits accruing from the projects do not appear to extend to poor people or local communities. However, there is a consensus in the literature that the social dimension of sustainable development should include poverty alleviation and equity as general criteria. In Neumayer's words, human development without sustainable development can never be true human development.

In the PDDs, social benefits such as poverty alleviation tend to be cited less often than economic and environmental benefits in all host countries. Furthermore, region specific research indicates that the CDM has hardly delivered benefits to the rural poor and although renewable energy projects have the highest potential to benefit the worst-off, rural CDM renewable energy projects are rare in the CDM pipeline. With less than 2% of CDM projects found in Africa, the CDM fails to assist those who will face climate change's most severe consequences. Moreover, the technology transfer the CDM claims to incentivize is found to be minimal or at best 'firm specific' in large-scale CDM projects. Concerning CER revenue flows, research states that a mere 0.3% of revenues were likely to flow to the poorer 50% of the host country population. In a recent study in Climate Policy,Tracey Crowe concluded that although the CDM has the potential to deliver individual pro-poor benefits, the CDM does not appear to make any noticeable contribution to poverty alleviation. However, Crowe did find that CERs with add-on standards - i.e. additional criteria project developers need to comply with - did outperform conventional CERs, but cost on average 25% more.

The OECD recently revealed that funding for adaptation programs has globally decreased from $3.1 billion in 2010 to $1.8 billion in 2011. Oxfam argues that the same rate of decline could be observed in 2012. Although we argue that the CDM fails to respect criteria of social justice, in light of the political inaction and the declining amount of global financial aid, we argue that the CDM needs a radical reform. A first move, inter alia, toward a more just CDM would be to discriminate between projects. Therefore, we propose to apply a discount rate on conventional CERs in favour of CERs with add-on standards. A further discrimination between host countries' levels of development could be made. Alternatively, an equivalent of the Tobin Tax can be raised on the trade of CERs, with the revenues funding local development projects. The most needed fundamental reform, however, is the refinement of a more specific definition of sustainable development, to be applied equally across nations.

It should be clear that the CDM fails its formidable task of helping the poorest to achieve sustainable development. It is therefore in urgent need of a structural reform along the lines mentioned above. If the CDM intends to deliver assistance in achieving sustainable development, the interests of the poorest should top its agenda.