Project developers operating under the Kyoto Protocol’s Clean Development Mechanism (CDM) now face additional scrutiny after several major organizations agreed to adopt a new voluntary verification standard. Eligibility for the CDM is premised on the requirement that a project will not proceed without the financial incentives provided by the creation of salable emission reduction credits. In other words, if a project is financially viable without generating emission credits, it is not eligible for CDM participation. This concept is known as additionality - the benefits generated by CDM projects must be additional to any that would have occurred without CDM support.

Organizations that verify emissions reductions for CDM projects, known as Designated Operational Entities (DOEs), have expressed concerns over their ability to reject ineligible projects, as a means of protecting the integrity of the CDM. As a result, a group of major DOEs recently agreed to criteria that may significantly impact the approval process for projects that wish to issue Certified Emission Reduction (CER) credits. The criteria will be considered for official inclusion into the CDM process by the Executive Board of the CDM, likely later this year. Until then, it is a voluntary agreement between many of the major DOEs, but still impacts projects being proposed from July forward.

The new criteria requires that project sponsors apply for validation within 12 months of the start of the project. The start of the project is marked by the earliest of: 1) financial closure, 2) purchase of major equipment, 3) obtaining construction permits, or 4) the start of construction. The theory behind the criteria is that projects actually dependent upon CDM benefits for financial viability will have the greatest incentive to file applications in a timely manner. Conversely, delays of more than 12 months from the start of the project are likely to indicate that the project was viable on its own, but that the sponsors are merely attempting to obtain additional profits by marketing CERs.

Moving forward, concerns are likely to revolve around how it is implemented, and how to make it work for industries that operate on varied timelines. For example, the planning process for a new wind farm varies considerably from planning for a methane capture project at an existing agricultural facility. DOEs need to be careful in determining when to start the clock for each project type, to ensure that individual project categories do not face unintended hardships in obtaining CDM certification merely as a result of this practice change. Keeping improper projects out of the CDM is critical for the system’s legitimacy; at the same time, however, if legitimate projects are kept out, then the desired environmental benefits will never be achieved.

This post was updated on July 22nd.

For further information about this topic, please contact Akin Gump.