ADB's CDM Facility - A Guide
What are greenhouse gases (GHGs)? The presence of certain gases, such as carbon dioxide (CO2), methane, and nitrous oxide, enables the atmosphere to act like a greenhouse, retaining part of the solar heat. The natural greenhouse effect is desirable as it traps part of the incoming solar energy to maintain habitable temperatures on the earth's surface. However, human activities, like burning of fossil fuels, deforestation, agricultural practices, and manufacturing are increasing the concentration of GHGs in the atmosphere and increasing the greenhouse effect resulting in higher global average temperatures. What are the likely impacts of GHGs? Impacts are likely to include changes in rainfall, increased frequency and intensity of storms and hurricanes, changes in vegetation, global warming, and a rise in sea level. Developing countries, especially the poor ones, are more vulnerable to these changes given their high dependence on natural resources and their limited capacity to adapt to extreme events. Extreme climate conditions exacerbated by climate change can thus divert scarce development resources from poverty reduction into disaster recovery. What is the Kyoto Protocol? At the third Conference of the Parties to the United Nations Framework Convention on Climate Change (UNFCCC) in Kyoto in December 1997, developed countries and economies in transition (Annex B countries) agreed to reduce their GHG emissions by an average of 5.2% from their 1990 levels during 2008-2012. It will enter into force with the expected ratification by the Russian Federation later this year. The Kyoto Protocol outlines a framework for three cooperative mechanisms: joint implementation, the Clean Development Mechanism (CDM), and emissions trading. Of the three mechanisms, CDM is the only one in which developing countries can participate. How does CDM work? A project in a developing country that reduces GHG emissions, relative to a baseline, generates an emissions reduction (ER). Under the CDM, the project owner can then sell the ER credits, once they are certified, to an interested buyer. Who buys and sells ERs? The project owner or seller may be a DMC government or a DMC-based company and the buyer could be an industrialized country or an industrial-based company or any other company that might be interested in buying emission credits for investment, resale, or enhancement of its green image. What are the benefits for the buyer and seller, and for GHG mitigation? As emissions have the same global effect irrespective of their geographical origin, CDM provides a cost-effective way of addressing the adverse effects of global warming. The benefits of CDM for the developing country are new financial resources, better technology, and achievement of its sustainable development objectives, while the benefit for developed countries is access to less expensive ER opportunities in a developing country. What would be an example? For example, a wind power project generates electricity without emissions of GHGs, while an alternative thermal power plant (baseline) would have produced GHG emissions. The avoided emissions or ER credits for the wind project once quantified and verified by independent operational entities and certified by the CDM Executive Board have a financial value and can be sold to the entity in the developed/transition economy. Why is ADB getting involved with CDM? The CDM is a "win-win" solution that helps promote sustainable development in ADB's DMCs by accelerating the penetration of cleaner energy production and use, efficient resource utilization, and conservation of natural resources. CDM activities yield local as well as global environmental benefits and the mechanism ensures compensation to DMCs for their initiatives. However, the CDM is a new financial instrument involving a new and complex process in the initial stages. DMCs are thus least equipped to participate in this innovative. Also, the developed country parties wanting to participate in the CDM are hesitant to transact in a new area with DMCs given their own limited or lack of experience with the CDM. What will be ADB's role? In the absence of a mature ER market, the CDM facility will aim to bridge the gap between buyers and sellers, ensuring a fair return to DMCs for their GHG abatement initiatives. The operation of the CDM facility will help develop a robust ER market and strengthen the market position of DMCs. - First, the CDM facility will assist DMCs with the complex process of obtaining certified credits. Advice on use of the CDM is not as yet available on an institutionalized basis. Very few developers of ER projects are aware of the potential value of their ER, and most are not informed about the CDM process and options for approaching an ER buyer.
- Second, as DMCs do not have access to a market for ER credits, the CDM facility will fill in an important gap. The CDM facility will allow sellers to explore multiple offers from buyers and select the most appropriate one.
- Third, sellers do not have adequate information on the demand and supply of ER credits, prices, etc The CDM facility will undertake the task of providing market intelligence to all. The CDM facility will thus work as an information exchange that will be useful for sellers and buyers.
How will projects suitable for CDM be identified? The CDM facility will support ADB's operations departments in identifying projects with CDM potential and evaluate the likelihood of their meeting the eligibility criteria. It will provide all necessary support to the operations departments for the CDM component -- from project identification, project development and validation, to registration of the CDM project activity. All projects proposed for CDM will require the approval of the DMC government. Where will the ER credits be generated? Initially the ER credits are expected to come from projects in ADB's pipeline. However, CDM ER credits could also originate in the private sector, or local development banks or bilateral agencies could suggest projects that will generate ER credits. How much potential is there to generate ER credits from ADB projects? A preliminary review of ADB's pipeline of projects for the next three years indicates about 40 projects that could have CDM potential for saving over 20 million tons of CO2. Additional CO2 can be saved in a few ADB projects implemented since 2000. What is the facility costing ADB? The CDM facility will operate on the basis of cost recovery where full costs of CDM advice will be internalized in the project design and these costs will either be borne by the project developer or the buyers of the ER credits. This is necessary in light of the Kyoto Protocol requirements that projects accessing CDM should not result in diversion of official development assistance. This will be done by establishing a cost center within ADB for the CDM facility and instituting a system of accounting for all costs for this operation. However, during the first year of operations before the first deals are made, the CDM facility will be financed by ADB's administrative budget at an estimated total cost of US$800,000. Of this amount, about $200,000 will be met through reallocation of budgetary resources in 2003. How long is the facility going to last? During the pilot phase of three years, the role and function of the CDM facility will be reviewed annually in the light of developments in the ER market and the relevance of its continued operation. At the end of the pilot phase, a detailed assessment will be made to determine in what form, if any, the CDM facility should continue. Read the full CDM Facility paper. | 
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