The Clean Development Mechanism (CDM) of the Kyoto Protocol, which enters into force tomorrow and is aimed at reducing the greenhouse gas emissions of industrialized countries, could become an important source of new finance for projects in developing countries, says a forthcoming article in Transnational Corporations, released today. The paper, written by Anne Arquit Niederberger and Raymond Saner for the April issue of the UNCTAD journal(1), argues that developed-country firms can begin meeting their reduction targets by funding emission reduction projects in the developing world and contribute to sustainable development in the process.
The Protocol has been ratified by 140 countries and the EU. It contains legally binding emissions targets for so-called Annex I (industrialized) countries, which are to reduce their collective emissions of six key greenhouse gases by at least 5% on average over the period 2008-2012 compared with 1990 levels. The CDM allows the Annex I countries (and authorized private entities) to acquire credits for emission reductions resulting from the implementation of climate protection projects located in developing countries - projects to which the industrialized countries or private entities contribute financially. The projects, which cover a wide range of industries that produce greenhouse gases (table 1), must also contribute to the sustainable development of the project host country. The resulting credits (known as certified emission reductions, or CERs) are fully fungible and can be used by private entities or governments to meet their domestic or international climate protection obligations.
The CDM, says the article, creates "win-win-win" synergies for:
- the global climate system, by encouraging additional greenhouse gas emission reductions;
- the sustainable development of developing countries, by encouraging additional FDI flows to complement local financing of projects that contribute to local sustainable development; and
- improved corporate performance for transnational corporations (TNCs) that utilize the CDM, e.g. by creating opportunities for lower cost compliance with environmental legislation, expanded markets for advanced technologies and new business opportunities.
The first CDM project to be approved and registered by the CDM Executive Board is a Dutch-funded landfill gas-to-energy project in Brazil. A gas collection system, leachate drainage system and modular electricity generation plants are being installed at a number of landfill sites (total capacity 12 million watts) in the Municipality of Nova Igauçú, Rio de Janeiro. The project was developed by NovaGerar thanks to investments from the World Bank Netherlands Clean Development Facility. Methane in the landfill gas will be combusted to produce electricity for export to the grid, and excess landfill gas will be flared. Combustion and flaring combined are projected to reduce emissions by slightly over 14 million tons of CO2 equivalent over the project´s 21-year lifetime. Local benefits include improved water quality; reduced risk of explosion of landfill gas; some job creation; 10% of electricity donated for use in schools, hospitals and other public buildings; and technology and CDM demonstration effect. Although this project does not involve FDI, it illustrates the types of projects that can be undertaken through such investment.
Brazil, China and India have the greatest potential for the new mechanism. Brazil was one of its pioneers, having proposed the initial concept and hosted the first such project. India has developed more CDM methodologies and project proposals than any other country, and China recently adopted a proactive approach that is expected to make it a key player.
The CDM also expands the traditional economic determinants of FDI flows. TNCs can consider CDM-related business opportunities, such as the production of CERs by foreign affiliates (and their subsequent internal use or sale). And the transfer of technology can give foreign affiliates a competitive advantage, e.g. through the installation of energy efficiency improvements.
The potential for the use of the CDM Mechanism - and hence FDI - is considerable: under the EU Emission Trading Scheme launched early this year, for example, over 12,000 industrial installations in the Union´s 25 countries must limit their greenhouse gas emissions. As of 2008, failure to comply will result in a fine of 100€ per ton of CO2. The scheme thus provides an economic incentive for firms to consider lower-cost CDM production opportunities in developing countries.
The CDM mechanism is also available for TNCs from developing countries investing in other developing countries. The resulting credits can then be traded.
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Source: UNCTAD, 2005
