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Clean Development Mechanism

The Clean Development Mechanism (CDM) allows developed countries (or Annex I countries) or companies within those countries, to invest in projects that either reduce greenhouse gas emissions, or sequester carbon in forests, in developing countries (or non-Annex I countries). This investment generates reduction units known as 'certified emission reductions' or CERs. Emission reductions are limited to specific project boundaries and are generated on the basis of their additionality. In other words, emission reductions go beyond what would normally be achieved in a traditional 'business-as-usual' scenario. These credits are used to help meet Annex I Kyoto targets. Because developing countries currently do not have targets under Kyoto, the opportunities are virtually unlimited as long as reductions remain additional.

From a strictly Kyoto standpoint, both developed and developing countries must meet three basic requirements in order to participate in the CDM: participation must be voluntary, countries participating must establish a Designated National Authority (DNA) for the CDM, and must have ratified the Kyoto Protocol. Annex I countries participating in the CDM must meet the following additional requirements: they must have established their total assigned amount under Article 3 of the Protocol, and have put in place a national system for the estimation of greenhouse gases, a national registry, an annual inventory and an accounting system for the sale and purchase of emission reductions. As it stands, New Zealand can be expected to meet all these conditions in the near future and will therefore be eligible to participate in the CDM.

New Zealand has now established a Designated National Authority (DNA) on the CDM. As outlined above, both investor nations and countries that are to host CDM projects must appoint a DNA. The DNA will ultimately be responsible for issuing project approvals for New Zealand entities that participate in CDM projects.

At the project level, countries or companies can engage in CDM projects. There are currently a number of government purchasers in the market such as Austria, the Netherlands and Japan. An Annex I country, or company within an Annex I country, participating in the CDM, must demonstrate that it owns the reductions that it is financing. Buyers will typically work with technology providers, project developers, and the host country, to negotiate what is called an Emission Reduction Purchase Agreement. The purchase of CERs therefore helps leverage the provision of different types of technologies, such as landfill capture and flare, or wind.

Last updated: 20 March 2008