The EU Emissions Trading System (ETS) was designed as a climate change mitigation scheme, which would distribute the burden of greenhouse gas (GHG) emission reductions amongst the participating EU member states. The idea behind employing a cap-and-trade system was to improve the cost effectiveness of mitigation. Hence, when the Linking Directive in 2004 introduced the Kyoto Protocol’s Clean Development Mechanism (CDM) into the ETS, it was understood that the economic efficiency of the system would improve. Unfortunately though, CDMs have been widely critiqued and the overall value added to the system challenged; hence, we have to determine if this link was truly a good decision or a very harmful one.
The EU ETS is based on the understanding that the costs of emissions abatement differ across Member States, for which reason allowances can be traded within the market mechanism. Likewise, it is widely accepted that abatement costs are significantly lower in other regions of the world, namely emerging countries. For this reason, CDM projects offer an opportunity for states to invest in a wider range of abatement projects whilst working towards the goal of reducing global concentrations of GHGs by 70% compared to 1990 levels.
Looking at the UNFCCC’s website today, we are presented with a rosy image of CDMs, in terms of the global CO2 emissions they have avoided and the billions of dollars that have been saved with regards to mandatory abatement costs. What these figures fail to highlight is the overall contribution of these projects to the environmental goals set and what impact they have had on the EU ETS. Unfortunately, though these projects were intended to improve the environmental health and sustainability of the Global South, economic incentives have driven several CDM projects away from these objectives.
One of the clearest examples of this is the case of the HFC-23 destruction projects. The objective behind these initiatives was to destroy a harmful by-product of HCFC-22, a common refrigerant. Given the immense global warming potential of HFC-23 (as compared to that of CO2), participants realised that by destroying small quantities of this GHG, they could obtain huge credits which they could exchange for CO2 allowances. As a result, higher volumes of HCFC-22 were produced, thereby releasing higher quantities of HFC-23, which was completely contradictory to the objectives of the Kyoto Protocol and EU ETS.
The popularity of such projects not only had environmental repercussions, but also impacted negatively on the carbon market. Coupled with the over-allocation of allowances, credits from CDM projects essentially flooded the market and contributed to the landslide drop in the price of carbon. As a result, stricter emphasis was given to the principle that CDM projects were intended to support national reduction policies, and now only a limited percentage of allowances from these projects can be used to cover emissions. Nonetheless, this percentage varies within the EU, so CDM projects still play a large role in some member states.
Given their continued presence, other regulations have been implemented, including the type of projects that can be carried out. Land use, land use change and forestry are no longer viable options, and hydropower projects over 20MW must comply with the standards of the World Commission on Dams. With the risk of environmental damage and market inefficiency, we may ask ourselves why CDM projects have not been banned from the ETS altogether. The reason stems from international negotiations on climate change; principally, in a ‘promise’ made to the Global South…
This promise, set in the Copenhagen Accord, obliges the industrialised nations of the Global North to mobilise $100 billion each year by 2020, to fund climate mitigation and adaptation. Given this immense sum of money it is evident that it must be sourced from a number of initiatives, which is where CDMs come into play. Though reduction burdens can be differentiated to reduce the costs of mitigation for the Global South, CDM projects initially appeared to create the best incentives for foreign direct investment in climate change abatement. The issue now is that with demands from Annex I nations for ‘meaningful participation’, wherein non-Annex I countries would also have to take on reduction burdens, CDM projects are likely to become obsolete. Given the principle of ‘additionality’, wherein only projects that would not have occurred otherwise can be credited as CDM, any project carried out in a country with a set commitment would be difficult to justify. For this reason, it is presumable that participants in the EU ETS will move their focus to Europe and, as a result, that international mitigation efforts will suffer.
Though the EU complied with its pledge to raise €7.2 before 2012, to fund immediate action, climate financing may become increasingly difficult. With reduced economic demand and over-allocations of allowances, the price of carbon continues dropping and credits from CDM projects are currently being traded at €0.15. Given that the majority of credits allowed from CDM projects for phase II have already been purchased and surrendered, further investments in CDM are highly unlikely. Though this may improve market efficiency and increase national mitigation efforts in the EU, it does not paint an optimistic picture for international climate change decisions.
 Ballesteros, M. (n.d.). Possible actions at EU level to restrict certain type of CDM projects. CLIENTEARTH (Ed.), Retrieved from http://ec.europa.eu/clima/consultations/articles/0004/unregistered/clientearth_en.pdf
 Carbon Market Watch (2012). Hydro Power Projects in the CDM. Retrieved from http://carbonmarketwatch.org/category/hydro-power/
Mason-Case, S. (2011). SUSTAINABLE DEVELOPMENT LAW ON CLIMATE CHANGE. IDLO (Ed.), Retrieved from http://cisdl.org/public/docs/legal/Mason%20Case%20Sarah_The%20Cancun%20Agreements%20and%20Legal%20Preparedness%20for%20Climate%20Change%20in%20Developing%20Countries.pdf
 Richards, M. (2003). Poverty Reduction, Equity and Climate Change: Global Governance Synergies or Contradictions? Retrieved from http://se-server.ethz.ch/Staff/af/AR4-Ch4_Grey_Lit/Ri083.pdf