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Clean Development Mechanism

Background to the Clean Development Mechanism

The Clean Development Mechanism (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 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 greenhouse gas emission targets. 

Article 12 of the Kyoto Protocol establishes the CDM and sets out its three goals to:

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

More than 2000 projects have been registered since the CDM became operational in 2006. CDM projects are anticipated to produce CERs equal to over 1 billion tonnes of carbon dioxide equivalent (CO2–e) in the first commitment period of the Kyoto Protocol (2008-2012).

Examples of CDM projects are:

  • renewable energy: 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.

Benefits and opportunities through CDM

CDM projects can be undertaken by non-profit, public or private organisations. CDM is a market-based mechanism designed with the private sector in mind, so the private sector dominates CDM. 

CDM provides opportunities for New Zealand business. There are commercial opportunities for providing climate change-related goods and services to developing countries, including the Pacific Islands, South East Asia and South America.

These opportunities can be facilitated through Environment Cooperation provisions in New Zealand’s Free Trade Agreements. New Zealand has Environment Cooperation arrangements with Thailand, Singapore, Brunei, Chile, China, Malaysia, the Philippines, and Hong Kong China. Negotiations are in progress for similar arrangements with South Korea and Bahrain. The Ministry for the Environment is responsible for implementing these arrangements and can provide contacts and information on CDM opportunities.

The key participants and the benefits they can gain from CDM are listed in the table below.

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

The CDM Bazaar website connects buyers, sellers and service providers through an exchange of information on CDM project opportunities.

Trading CERs

Opportunities for generating carbon credits through CDM projects are virtually unlimited as long as reductions remain additional and there is demand for CERs.

CERs can be bought and sold on carbon exchanges, through brokers or by private agreement. Transactions 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.

Links with the New Zealand Emissions Trading Scheme

Participants in the New Zealand Emissions Trading Scheme (NZ ETS) meet their emission targets by reducing their emissions or by surrendering emission units. Participants are able to buy CERs to meet their targets.

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 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. 

How to establish a CDM Project

CDM projects must be established in accordance with the rules given by the CDM Executive Board. The Executive Board was set up by the Conference of Parties (COP) to the United Nations Framework Convention on Climate Change (UNFCCC). CDM projects go through a rigorous registration process designed to ensure real, measurable and verifiable emission reductions. The CDM rules govern a number of stages and entities in the CDM, which is referred to as the CDM project cycle.

For more information on CDM rules and the CDM project cycle refer to:

CDM Rulebook (http://www.cdmrulebook.org/)
UNFCCC CDM website  (http://cdm.unfccc.int/index.html)

Approval for a CDM project

Designated National Authority

All countries wishing to participate in the CDM must appoint a Designated National Authority (DNA). The DNA serves as a point of contact for CDM in a country and evaluates and approves investor involvement in CDM projects.

New Zealand’s DNA is the Ministry for the Environment. 

Letters of Approval

To be considered for registration, a project must first be approved by the host (developing or non-Annex I) country DNA and be issued a Letter of Approval. 

Approval by the Annex I (developed) country DNA is not required at the stage of project registration.  A Letter of Approval is required from the developed country DNA before transaction of CERs can occur between the CDM Register (where the CERs are created) and the investor.

New Zealand DNA guidelines for approval

The New Zealand DNA is responsible for issuing Letters of Approval to organisations that wish to invest in a CDM project and want to transfer the resulting CERs into the New Zealand Emission Unit Register.

To apply for a Letter of Approval, refer to New Zealand’s guidelines and procedures for investment. This document sets out the application process for a Letter of Approval.

For further information email projects@mfe.govt.nz

Letters of Approval issued by the New Zealand Designated National Authority

UNFCCC reference number Project Title Project Participant Host Party Sectoral Scope
1313 MEN Tangerang 13.6MW Natural Gas Co-generation project ANZ Indonesia Energy industries
Manufacturing industries
31 Methane capture and combustion from swine manure treatment for Corneche and Los Guindos TEC Investments Limited (subsidiary of TransAlta Corporation) Chile Waste handling and disposal
32 Methane capture and combustion from swine manure treatment for Peralillo TEC Investments Limited (subsidiary of TransAlta Corporation) Chile Waste handling and disposal
33 Methane capture and combustion from swine manure treatment for Pocillas and Las Estrella TEC Investments Limited (subsidiary of TransAlta Corporation) Chile Waste handling and disposal

Government CDM support

Agency Role
Investment New Zealand Specialist unit within New Zealand Trade and Enterprise. Assists New Zealand businesses with:

  • facilitation of international corporate investors to invest in New Zealand and to work with New Zealand companies in global ventures
  • matching high-growth New Zealand businesses in strategic sectors to international investors.
Ministry of Economic Development Operates the New Zealand Emission Unit Register.
Ministry for the Environment Serves as the Designated National Authority (DNA) and is the national contact for CDM.

Approves participation of New Zealand-based organisations in CDM projects, by issuing Letters of Approval.

Implements regional and bilateral Environment Cooperation Arrangements associated with New Zealand’s Free Trade Agreements.
Ministry of Foreign Affairs and Trade Leads international negotiations on future action to address climate change.
Manages New Zealand's official development assistance programme (NZAID) and provides policy advice on international development issues. New Zealand's development assistance helps support sustainable development in developing countries to reduce poverty and contribute to a more secure, equitable and prosperous world.
New Zealand Trade and Enterprise Provides market intelligence and practical business assistance for New Zealand companies including:

  • country and economy profiles for New Zealand's export markets including Chile, China, India, Indonesia, Malaysia, Singapore and Thailand
  • information on market trends, regulatory issues and opportunities in these sectors and markets including ‘how to’ guides and legal checklists
  • MarketNewZealand.com – an online tool which connects New Zealand companies with overseas buyers
  • working alongside companies to connect them in New Zealand and internationally with trade and investment opportunities globally through a variety of services and programmes.
New Zealand Export Credit Office Provides financial guarantee products for New Zealand exporters, their buyers and banks.

Insures and guarantees the risk of non-payment of a credit or loan arising from defined political or commercial risks.

These products could be utilised by New Zealand entities or their buyers seeking financing to undertake or supply CDM projects.

Other information available

Audio files on explaining CDM in plain language(http://cdm.unfccc.int/about/multimedia/podcasts/index.html)

Capacity Development for CDM (http://cd4cdm.org/)

CDM Bazaar (http://www.cdmbazaar.net/)

CDM Pipeline (http://www.cdmpipeline.org/)

CDM Rulebook (http://www.cdmrulebook.org/)

UNEP Risoe Centre (http://www.uneprisoe.org/)

UNFCCC CDM pages  (http://cdm.unfccc.int/index.html)

Last updated: February 2010