The Clean Development Mechanism: Is it meeting the expectations?

A Speech by Mr. Mohammed Barkindo, Acting for the OPEC Secretary General, to the First International Conference on the Clean Development Mechanism, Riyadh, Saudi Arabia, 19-20 September 2006

Excellencies, Ladies and Gentlemen,

It gives me great pleasure to be the keynote speaker at the first International Conference on the Clean Development Mechanism (CDM). Let me repeat the last part of the sentence: ‘the FIRST International Conference on the CDM’. Given that the CDM has been on the table for over eight years it is surprising that this is the ‘first international conference’. As I will underline, this situation very much mirrors how the CDM is playing out in reality.

So let me initially congratulate OPEC founding member, Saudi Arabia, for hosting this historic event. At OPEC, we concur with and support the original objectives of the CDM, the Kyoto Protocol and the UNFCCC process and as such it heartens me to witness this event taking place in Riyadh; a clear demonstration of Saudi Arabia’s and OPEC’s commitment to the CDM.

In fact, Saudi Arabia, under the extremely able and intuitive guidance of HE Ali I. Naimi the Minister of Petroleum and Mineral Resources, has always been very dedicated in its commitment to the United Nations Framework Convention on Climate Change (UNFCCC) and the Kyoto Protocol process. I would like therefore to take this opportunity to commend HE Naimi for his consistency in providing the much needed leadership to us in OPEC during this process and for his active participation in all COP meetings. I would also like to acknowledge the tremendous contribution made by our Conference Chairman, Dr Mohammed Al-Sabban who has remained in the vanguard of defending the interests of OPEC in this process.

[Before moving on, I would also I like to congratulate Yvo de Boer on his appointment as the new Executive Secretary of the United Nations Climate Change Secretariat. This is a well deserved appointment and at OPEC we look forward to working closely with you and the Secretariat in a positive and constructive manner.]

From reviewing the speaking panel, I can see we will be hearing from a wide and varied collection of industry stakeholders and I hope that over the next few days we can together paint a clearer picture of how the CDM is, or is not reaching its objectives. This is in fact the basis of my presentation today, ‘CDM: Is it meeting the expectations?’, but before we look at the current picture, allow me this opportunity to take you back to the origins of the CDM.

As many of you may well be aware, in the run up to the Kyoto meeting, OPEC Member Countries proposed that a “Compensation Fund” be established for adverse impacts arising from the implementation of response measures by Annex I countries on developing countries. This proposal was formally included in the G-77&China position unveiled in 1997, [but the idea of compensation never received widespread support from developed country Parties.]

The follow-up concept came from a Brazilian proposal in June 1997, just prior to the announcement of the Kyoto Protocol agreement. Brazil proposed that Annex I Parties should be subject to a financial penalty if they did not comply with their quantified commitments under the Protocol. The fine levied would be proportionate to the level of non-compliance and would be paid into a “Clean Development Fund” that would be leveraged to support sustainable development projects in developing countries, having in mind those Parties listed under Art 4.8 of the Convention.

Both proposals were indeed in accordance with Article 4.8 (h) of the UNFCCC that states that Parties shall give full consideration to what actions are necessary under the Convention, including actions related to funding, insurance and the transfer of technology, to meet the specific needs and concerns of developing country Parties, arising from the adverse effects of climate change and/or the impact of the implementation of response measures on countries whose economies are highly dependent on income generated from the production, processing and export, and/or on consumption of fossil fuels and associated energy-intensive products.

The Brazilian proposal was rallied behind by developing countries, but the concept once again proved unpalatable to developed country Parties due to the contentious issue of financial penalties for non-compliance as well as the notion of compensating oil exporting countries.

The idea of a penalty for lack of compliance by Annex I Parties was thus transformed into a ‘mechanism for investment’. This then formed the basis from which the CDM was born in the wee hours of the last day of COP3. As the Conference Chairman, Dr Mohammed Al-Sabban stated in an introduction on this conference’s website, the CDM should be, “a win for the investor, a win for the country hosting the project, and a win for the environment”. The CDM, as defined under Article 12 of the Kyoto Protocol, has three key objectives: to assist non-Annex I countries in achieving sustainable development; to contribute to the ultimate goal of the convention, to stabilise emissions to the atmosphere; and assist Annex I countries comply with their emission reduction commitments at the least possible cost.

The deal for developing countries was the opportunity to access much needed investment, capacity building and technology transfer. This would pave the way for these countries to explore cleaner, more environmentally friendly ways to develop while continuing to further the advancement of the three pillars of sustainable development, namely economic growth, social progress, and environmental protection, at both the local and global level. Consistent with the Bonn Agreement, developing country governments also have the prerogative to judge how the projects will meet their sustainable development goals. For Annex I industrialised countries, the arrangement would allow them to lower the cost of meeting their quantified emission reductions by making emissions cuts outside their own borders. These two elements combined would then, in turn, help stabilise emission levels.

Given that all our OPEC Member Countries are developing nations, let me offer a few pointers as to what is at stake for us and developing countries in general (even at the risk of sounding monotonous) - that it is developing nations that are most in need of expanded energy services to meet their growth and development needs. It should be continuously remembered that 1.1 billion people are currently living on less than $1 a day, 1.6 billion people currently lack access to modern energy services and almost two billion have no electricity. It needs to be remembered that the very first UN Millennium Development Goal stresses the critical importance of reducing by half those living in these conditions by 2012.

It is clear therefore, that access to modern energy services plays a crucial role in the fight to alleviate and eventually eradicate poverty. In turn, investment, capacity building and technology transfer are necessary policy ingredients if we are to dramatically expand the reach of affordable, improved energy services and to be better equipped to adapt to the negative impacts of climate change.

Today, it is patently obvious that the three key objectives of the CDM, as originally envisaged, have not gone to plan. Initially lauded as the basis for the future development of the Kyoto Protocol and deemed significant as it brought together the interests of countries of the North and countries of the South, it has remained a mechanism with potential.

To date, the scale of investment has not provided the much expected benefits to the particular conditions and needs of developing country Parties. The investment in capacity building has been minimal and the transfer of technology has been almost inconsequential and where it has occurred it has focused narrowly on just a few activities of interest to developed countries markets. [Allow me to explore some of the most significant problems, and in turn challenges, in more detail.]

One major failure is the non-performance of the CDM in some parts of the world. This is particularly apparent in Africa. The CDM needs to make inroads into every sinew of the developing world. This is the scale of the challenge we face. Capacity building and appropriate investment are critical to bringing many people out of poverty, while the industrialised world leads the way in its efforts to change unsustainable patterns of consumption and production.

The CDM is, at present, an entirely market driven mechanism, which is at odds with satisfying its other two aims, namely to contribute to the sustainable development of developing nations and to provide a vehicle for the effective transfer of technology. [It is also clear that any private investor has a short-term vision guided by the need to get the greatest return on investment in a very limited timeframe. Let me stress, however, that this does mean I am in not in favour of a fair return on investment, but if this is a challenge of a truly global scale, recognised as such by the international treaties, we must all work together to find ways to ensure that all Parties are fairly treated, particularly developing countries.]

In order to finance CDM projects, we are required to tax earnings from the sale of Certified Emissions Reduction (CER) units accruing from these projects. Therefore, even the ‘Adaptation Fund’, is effectively financed by a tax levied on earnings accruing to one group of developing countries in solidarity with another group of developing countries.

Furthermore, the administrative costs of registering a project by the CDM Executive Board are covered by project developers, which once again means that host countries (developing countries) effectively pay the bill. Hence, the objective of cost minimisation to Annex I Parties is fully realised, while other objectives important to developing countries are sidelined.

The market-based approach also means that real technology transfer and capacity building for sustainable development are simply not attractive to project financiers. Furthermore, ‘unilateral CDM’ is a term we see increasingly creeping into the remit of CDM, in fact, nearly one third of the proposed CDM projects are designated as ‘unilateral’. This means that the Project Design Document (PDD) is submitted without an Annex I investor. This is not how CDM was envisaged to work, as put simply ‘unilateral CDM’ is as an opportunity for private sector initiatives, to participate in the emissions trading market at their own risk. Where is the technology transfer, capacity building or partnership in this?

In many instances the transactions costs, when viewed against the scale of projects and their positive impact on host countries, are also prohibitive to developing countries. Just registering a project can incur costs of between €60,000 and €120,000. Add to this the annual running costs for monitoring and verification, an adaptation levy of two per cent on the value of CERs, a five-to-10 per cent levy on the value of CERs when sold, as well as the uncertain cost of risk mitigation, and the overall costs significantly mount. It begs the question: do the costs outweigh the benefits, particularly when there are no economies of scale that make any significant contribution to sustainable development by way of technology transfer, capacity building or contributions to improve employment rates?

Fellow delegates, you may also be interested in OPEC’s point of view from an oil market perspective. Our Organization sees fossil fuel use, and energy in general, very much in the context of sustainable development.

We do acknowledge that renewables, such as biofuels and wind energy, have a role to play in the global energy mix, but it will be many decades before any of these alternatives acquire a significant share of the global energy mix. Therefore, the evaluation of energy sources should be undertaken in accordance with a balanced criteria: reliability, affordability, economic viability, social acceptance and environmental soundness. Oil, as the leading fuel in the global energy mix for the foreseeable future, is very much integral to this.

As was underlined by numerous speakers at the 3rd OPEC International Seminar last week in Vienna, it means that technological options that allow the continued use of fossil fuels in a carbon-constrained world must be actively promoted. Carbon capture and storage (CCS), in conjunction with CO2-enhanced oil recovery, offers a win-win opportunity by not only storing CO2, but also increasing oil reserves in mature fields. OPEC would like to see the CDM be adapted to facilitate the application of cleaner fossil fuel technologies such as CCS in developing countries.

A demonstration of OPEC’s commitment to the environment– aside from those undertaken by our individual Member Countries- can also be viewed in its active participation in the IEA’s Greenhouse Gas R&D Programme, and following this conference, an OPEC-EU Roundtable on Carbon Capture and Storage will be held in the context of our ongoing dialogue with our friends from the European Union.

Excellencies, ladies and gentlemen,

So where do we stand today? Putting this all in the broader context of the Kyoto Protocol we must remember that for any international agreement to succeed, the interests of all stakeholders must be taken into account and comprehensively addressed. To date, the European Union (EU) has been almost solely focused on emissions trading, which is very much the centre piece of their climate change strategy, to the exclusion of others. In fact, in the EU Green Paper on Energy, there is only a passing mention to the CDM. This is specifically in relation to renewables and how they could help many developing countries reduce their reliance on imported oil.

However, even in the EU, there is an increasing recognition that many industrialised countries will not be able to meet their emissions targets with the current mechanism being utilised. The latest figures, released by the European Commission in June, show that EU emissions rose by 0.4 per cent in 2004 relative to the previous year.

There has also been concern that EU Member States have given their industries too many pollution permits under the EU ETS, which has meant that there has been a surplus of ‘carbon credits’ to sell on the ETS market, causing the price of carbon to fall dramatically. In late April and early May this year, the price of carbon emissions dropped 60 per cent in a week, from about €30 to €12. This development may force governments to confront the question as to whether this market can, in reality, deliver the required reductions in GHG emissions.

Yet it should be recognised that all three Kyoto mechanisms, Emissions Trading, Joint Implementation and CDM, are integral to the Protocol’s success. The flaws of the CDM must be corrected in order to prevent the whole Protocol from becoming flawed. We all need to think long and hard, and turn this thinking into concrete actions, if we are going to take both the CDM and the overall Kyoto framework forward. This needs to take into account both for the current, and the post-2012 period.

Let me conclude by putting forward a very simple question. To date, are we meeting the ultimate goals of the Kyoto Protocol, to support sustainable development and reduce emissions? It is our sincere hope that this epoch making conference will at the end answer this and often fundamental questions on the CDM. It is also our hope that the outcomes will also feed into the next round of post Kyoto negotiations that would re-brand the CDM to meet the objectives of both developed and developing country Parties, including OPEC.

Thank you.


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