Story of CDM - part 1

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It was the year 1997, place Kyoto, Japan. One of the milestone meetings held under United Nations Framework Convention on Climate Change (UNFCCC). After much debate Conference of Parties (COP) adopted Kyoto Protocol(Kyoto Protocol) as an immediate solution for climate change issues. As a testament to the issues it had, Kyoto Protocol took 8 years of its 15yrs of its 1^st Commitment Period (CP1) to enter into force under the UNFCCC. Nevertheless KP gave birth to whole new market mechanisms, introducing a whole new commercial product which went on to revolutionized the world of innovators, financiers and overall development of the whole world. Those mechanisms are known as Joint Implementation (JI) and Clean Development Mechanism(CDM) and that commercial product is better known as Carbon Credits.

Clean Development Mechanism, and Joint Implementation are the paternal twins of KP. Where the JI focused only developed countries, CDM focused on rest of the world. Reason why CDM is more popular than JI is because of the larger audience CDM catered to. Now this isn’t about the controversial KP or the rivalry between the brothers JI and CDM. Its only about CDM.

Clean Development Mechanism or CDM is a market mechanism which dictated that the Country A who had technology, financing and any other resource of importance/use to reduce carbon emission would use those in a CountryB which has no such technology, finance or any other resource of importance/use. And in return the emission reduced or the Carbon Credits produced would be owned by the Country A.The idea behind is the credits earned by Country A from Country B using CDM would be used to offset the emissions of Country A so as to meet the any commitment (if any) of Country A under the KP.

Ok before I head on, I should explain, under KP, the Parties to KP were categorized into 2 groups. The Developed Countries aka Annex 1 countries and Developing Countries aka Non-Annex 1 countries. Annex 1s are the have it alls, and Non-Annex 1s are the want it alls. Although imperfect CDM gave an avenue under KP to let them both have what they want (I.e. to be have it alls). This particular grouping is the main reason why KP is under fire today, but will not talk about that here.

Now under CDM, green technologies (which were environment friendly and reduces the green house gas) which were expensive than normal technologies got a financial edge. That is by the emission reduced by using green technology instead of using normal technology will be counted as Certified Emission Reduction (CER). By the way 1 CER is 1ton of CO2 equivalent. Due to the emission reduction commitments of Annex 1 countries and the high cost of reducing that much emission whithin their country left them needing CER to meet their commitments. And with lower cost of CO2 reduction in Non-Annex 1 Countries in comparison with the same in Annex 1 countries, CDM became attractive. But CDM was new and it took time to set up some rules/guidelines and whatever else needed for it. And that caused the huge demand and low supply of CER by CDM in the beginning, the price of CER in the market sky rocketed attracting everyone and anyone who had something to offer into the carbon business (technology developers, financiers, brokers etc...). And thus began the story of CDM.