The Clean Development Mechanism seems on its way out

The Clean Development Mechanism was supposed to be one of the climate change weapons devised under the auspices of the United Nations to fight global warming. In essence the developed nations which are heavy emitters of greenhouse gas can buy carbon credits which are issued by undeveloped nations. The undeveloped nations get the right ti use carbon credits based on real measures that they have taken to prevent future emissions as a result of their attempts to change from undeveloped nations into developed ones. The undeveloped nations get UN money to finance these measures.

The Clean Development Mechanism has been heavily criticised (and not just by me). One criticism is that the UN money often goes to finance emission savings which would have happened anyway by companies with enough money and a commercial rationale to carry out the measures. In that sense the CDM has offered in some cases “free money”.

My criticism has been on a different basis. I think that the CDM is artificial and the emissions savings are largely theoretical not actual. It was conceived in the time when complex financial instruments were widely used – derivatives, hedges and hedges within hedges within hedges. This complexity did not in the long run help the world’s economy and the complexity and theory of the CDM will not help climate change; only real measures will do that.

At the height of its fashion the CDM received around 200 approval requests a month, which meant 200 projects seeking funding and claiming a climate change value to their projects. At first the administrators were, in my opinion, not sufficiently robust in rejecting applications which would have gone ahead without UN funding. Where there is a grant there will always be someone seeking to exploit it.

Today, for than five years after the CDM started its theoretical savings of emissions, grant application are down to around 75 a month and it looks as though they will fall further. Part of the reason is the present economic climate. It seems around 60% of people involved in CDM projects polled by Point Carbon give this the reason and there will be a reduction in carbon credits issued together with a corresponding reduction in theoretical emissions saved.

These credits are often financial investments for institutions and emitters of greenhouse gas. The recession is causing them to sell their existing credits (because they are polluting less with less economic activity) and not seek to invest in new credits.

Another reason of the decline seems to be the political uncertainty surrounding how to deal with climate change. The CDM was conceived at Kyoto and a new climate change treaty is due to be negotiated in 2012, so many investors and institutions are adopting a wait and see policy. While there is this political uncertainty at the international level the CDM applications will continue to decline.