Clean Development Mechanism

The Clean Development Mechanism is a market-based mechanism for reducing greenhouse gas emissions internationally. This page explains how it works. 

Background and objectives of the CDM

The Clean Development Mechanism (CDM), established under Article 12 of the Kyoto Protocol, is a market-based mechanism designed to:

  • help mitigate climate change
  • assist developed countries attain emission reduction commitments
  • assist developing countries achieve sustainable development.

Clean Development Mechanism (CDM) [United Nations Framework Convention on Climate Change website]

How the CDM works

The CDM allows developed countries, or companies within those countries, to invest in projects that either reduce greenhouse gas emissions or sequester carbon in forests in developing countries (CDM projects).

CDM projects generate carbon credits called Certified Emission Reductions (CERs). The CERs are transferred to the investing developed country or company and are used to help meet the country’s or company’s greenhouse gas emission targets. 

CDM projects can be undertaken by direct investment in the creation of a project, or an off-take agreement for CERs only. An off-take agreement is an arrangement whereby the holder of the off-take agreement agrees to buy all CERs generated by the project activity.

This means transactions of CERs can be made through the following markets.

  • Primary market - the initial transaction between the CDM Register and the investor. It is the transaction that carries the CER from the project in the developing country to the international market.
  • Secondary market - any subsequent transaction after the primary transaction. The onward sale of the CER until it is bought by the final consumer who will surrender it to meet their target.

CDM projects

A number of projects have been registered since the CDM began operating in 2006. 

Types of CDM projects include:

  • renewable energy (eg, wind farms, hydroelectric power and landfill gas)
  • electricity and fuel efficiency for households and industries
  • reducing emissions in industrial and manufacturing processes (eg, cement production)
  • reducing fugitive emissions from production and consumption of fossil fuels (eg, halocarbons and sulphur hexafluoride)
  • sequestering carbon through afforestation and reforestation
  • improving animal waste management in the agriculture sector.

For a list of recent projects see Registered CDM projects [United Nations Framework Convention on Climate Change website].

Key criteria of CDM projects

The Kyoto Protocol stipulates two key criteria that CDM projects must satisfy, which are ‘sustainable development’ and ‘additionality’.

Sustainable development

The Kyoto Protocol specifies the purpose of the CDM is to assist developing countries in achieving sustainable development. It is up to the developing host countries to determine their own sustainable development criteria and project assessment process. The sustainability guidelines may include social, economic and environmental criteria.

Additionality

The Kyoto Protocol requires CDM projects to result in ‘reductions in emissions that are additional to any that would occur in the absence of the project activity’. CDM projects must be beyond business as usual and lead to real, measurable and long-term benefits related to the mitigation of climate change. 

CDM participants and benefits

The table below provides an overview of the benefits of the CDM for the various participant types.

Participant Benefit
Developing country (host) Investment in infrastructure and sustainable development
Developed country Meeting Kyoto Protocol commitments at low cost
Companies with emission reduction targets Ability to offset emissions; investment opportunity
Companies providing technology or services needed for projects Commercial opportunity; engineering, technology, legal, financial, greenhouse gas auditing and agricultural expertise
Brokers Commercial opportunity
Development banks Promotion of sustainable development; creation of new markets
Institutional investors Portfolio diversification; socially responsible investing

Links with the New Zealand Emissions Trading Scheme

Participants in the New Zealand Emissions Trading Scheme (NZ ETS) were able to meet their compliance obligations by buying and surrendering CERs until June 2015. Due to changes in the international rules in 2012, and the Government temporarily transitioning the NZ ETS to a domestic-only scheme, participants are no longer able to buy and surrender CERs.

In addition, the Government has put a hold on issuing Letters of Approval. This means organisations cannot apply to the Ministry for the Environment (the Designated National Authority) to invest in CDM projects and transfer the resulting CERs into the New Zealand Emission Unit Register.

Find out more

Reviewed:
09/08/16