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The Clean Development Mechanism: promoting investment flows from developed to developing countries

The possibility for developing countries to participate
in the global carbon market

Principle: Combine sustainable development and economic efficiency

The Kyoto Protocol created the Clean Development Mechanism (CDM-Article 12). If the Protocol comes into force, the CDM should allow developing countries to participate in the market for emission reductions and to attract Annex I country investors.

The CDM has a dual objective:

The CDM grants "Certified Emission Reductions" (CERs) to projects located in developing countries that contribute to reducing greenhouse gas concentrations in the atmosphere. CERs will be allocated proportionally to this contribution. CERs are emission permits that can be purchased and used by entities in Annex I countries for reaching the assigned amounts set by the Protocol for the first commitment period in 2008-2012. They can be remunerated, and are therefore an addedrevenue for a project. The CDM could therefore be a windfall for developing countries, and could promote transfers of funds and technologies from private or public entities in the developed world. Thus, the CDM is designed to function as a lever for clean development.

The CDM's innovation resides in its quasi infinite potential - as long as a demand for emission permits exist - to attract investment flows from developed countries to developing countries. The value of CERs will be the result of transactions on the carbon market, and, at the project level, of an contractual agreement between the investor, the project developer, and the land-owner.

However, there is concern that the demand for carbon credits from projects in developing countries would be rather modest. The Annex I countries could fulfill fixed parts of their total commitment by resorting to the increment of their forests, which may be business-as-usual or result from specified additional management activities, and carbon sequestration though agricultural activities. These activities combined could deliver up to 90 percent of their commitments. The concessions obtained by the Russian Federation suggest that there might be a large number of Russian carbon credits offered during the first commitment period. The withdrawal of the United States of America from the Kyoto Protocol, if maintained until 2008, lowers expected demand for official carbon credits under the Protocol. A combination of these trends could result in a low potential price per ton of carbon, which would tend to limit the activities that could be implemented within the CDM framework, particularly in the forestry sector, where uncertainties still remain.

A cap applies to the use of CDM forestry sink projects by Annex I Parties to fulfill their emission reduction commitments: 1% of the 1990 emission level multiplied by five, or a total of 247 Mt of carbon including the USA, and 164 Mt. C without. For France alone, this maximum allowance of 1.5*5 Mt C represents planting of approximately 120 000 ha or 25 000 ha per year little-by-little over ten years (Loisel, 2001). The binding constraint on afforestation and reforestation projects under the CDM is less this cap but rather the ability of projects to meet the requirements of the certification process. Developing countries' capacity to create conditions to attract investors will also be important and this is particularly true in the forestry sector where times of return on investment are long, risks high, and land tenure rights uncertain. If those barriers are eliminated, the CDM could be a motor for development, making climate-friendly development projects possible.

Early projects

The prospects of a market for emission permits were foreseen well before the Kyoto Protocol. They lead to early private and public investments into carbon projects, involving different organizations, companies and foundations with a variety of goals: organizational culture or public relations, learning-by-doing, sponsorship and activism. Here are some examples in the forestry sector.

A precursor to the CDM: Activities Implemented Jointly under the Pilot Phase

In 1995 COP5 in Berlin established a pilot phase for Activities Implemented Jointly (AIJ). The aim of the pilot phase was to gain experience (learning-by-doing) and to build capacity in the field of projects for greenhouse gases emission reductions or CO2sequestration in developing and transition countries, involving developed country investments. Projects under the pilot phase did not acquire tradable emission permits, however they could hope to eventually be registered as full-fledged JI or CDM projects later on. The Marrakech Accords acknowledged in decision 8 the unbalanced geographical distribution of AIJ projects, particularly in Africa, and decided to continue the pilot phase noting that it constitutes an opportunity for learning- by-doing and should, as such, attract private flows.

Apart from the possibility of learning-by-doing and a "greener" image, the pilot phase does not offer any benefit that might attract Annex I investments in non-Annex I countries. This explains the low level of private investments of approximately 200 projects. The pilot phase nevertheless constituted an interesting experience in terms of capacity building for a future CDM. It is a way to identify difficulties, test methodologies and possibly identify eligible projects. This is particularly true in the forestry sector, where approximately thirty projects helped identify methodological difficulties, such as baseline construction, leakage assessment and technical difficulties in measuring removals and emission reductions7.

Potential of the CDM for forestry

For the first commitment period concerning developed countries emissions between 2008 and 2012, the following actions are eligible for certification  as CDM projects:

Annex I Parties will be allowed to use certified emission reductions to achieve their commitments under the period 2008-2012.

The CDM can benefit developing countries forestry in several ways:

It should be noted that a project combing biomass production through afforestation or reforestation and its subsequent use as a substitute for fossil fuel benefits twice from the CDM, as it combines CO2removals with CO2emission reductions.

Emission reduction projects could also be set up in the wood industries, for example regarding transport or energy efficiency. We will however concentrate in this report on the "sink" part of the CDM.

In future commitment periods, the range of eligible forestry activities might increase. Negotiations concerning the second commitment period (2013-2017), due to begin in 2005, should study this possibility, in particular regarding agroforestry, low-impact logging, forest rehabilitation or restoration, and sustainable forest management.

At this time, the definitions of "afforestation" and "reforestation" under the CDM, which will determine eligibility of projects, as well as the rules and modalities for such projects, have not yet been accepted unanimously and will not be finalized before COP9. The definitions contained in the Marrakech Accord and applying undoubtedly to developed country Parties for the purpose of land use, land-use change and forestry activities under Article 3.3 and 3.4, may serve as a reference point:

At this time it is unclear if these definitions will be adapted to developing countries' particular circumstances in the course of a SBSTA work programme currently underway. Of particular significance is the threshold date finally chosen for the non-forest / forest transition.


The restrictions for forestry activities under the CDM are the result of a compromise between opponents and supporters of including sinks in the flexible mechanisms of the Kyoto Protocol.

The CDM will now definitely include certain carbon sinks. However, in comparison with Annex I countries that can implement a full range of activities under Article 3.4 of the Kyoto Protocol, that is forest management, management of croplands, grazing lands, revegetation, the range of sink activities under the CDM is very restricted.

Most Parties would like to accept for the CDM the definitions of forest, afforestation and reforestation which have been agreed upon for developed country Parties. Others argue that these definitions would fail to fit the situation in developing countries. Here, a 50-year non-forest condition might not be demonstrable for afforestation; reforestation would not be acceptable if it occurred on lands which had been cleared after 1989. Conceivably, plantings on non-forest land might compete with and replace agricultural activities, thus promoting leakage.

The above-mentioned definition of reforestation excludes, for example, any reforestation according to the FAO definition, such as enrichment planting, which is carried out within degraded natural forests and might enhance restoration or rehabilitation of the natural forest cover. This type of activity is particularly suitable, in terms of both ecology and economics, in a number of African countries, such as Ivory Coast, Ghana, where development and agricultural practices have degraded large forest areas. Where remnants of the old forests exist alongside these degraded areas, reforestation activities using commercial species that have either become rare or have completely disappeared may be particularly useful. The example of gazetted forests in Ivory Coast is significant: many of these "forests" consist now of deforested or sparsely wooded lands. But the definition for "forest" in Annex-I Parties excludes any rehabilitation activities under the CDM during the first commitment period, unless the areas in question do not attain or are not expected to attain the minimum crown-cover selected in the definition of "forest".

The exclusion of forest conservation as eligible activity reflects the desire to reduce the role of land-use and forestry activities in the Kyoto Protocol, and the difficulties concerning an applicable baseline and evaluation of net emission reductions for such projects, given the complexity of the socioeconomic dynamics that lead to deforestation.

Restrictions of CDM activities could make the GEF assume responsibility for activities which are not currently eligible under the CDM, but which nevertheless provide multiple benefits, support innovation and learning-by-doing, such as certain types of agroforestry, sustainable forest management, reduced impact logging. The GEF might also support pilot projects involving forestry activities that have been excluded from the CDM during the first commitment period. Developing biometric methods or technical and economic reference cases in the form of forestry and agroforestry pilot projects might help future negotiations on agricultural and forestry activities under the CDM during the second commitment period.

Setting up a CDM project

The CDM is still an evolving instrument, which depends above all upon the entry into force of the Kyoto Protocol. Definitions, rules and modalities for its use are currently being developed. Here are some elements from the Marrakech Accords.

CDM-Project Cycle

A CDM project should involve the three following entities:

Project Participants:Investors and implementers from developing and industrialized countries

Operational Entities:legal entities accredited by the CDM Executive Board.

CDM Executive Board: Composed of ten members designated by and under authority of the COP, six of them coming from developing countries.

The CERs issued to a CDM project will be calculated by subtracting the actual anthropogenic removals/emissions by sinks/sources from baseline removals/emissions and adjusting for leakage. This should be possible by the elements given in the monitoring plan presented by the project developers for certification.

The methodologies to construct a monitoring plan for CDM sink projects are under development by the SBSTA and the Executive Board of the CDM, and should be decided at COP9 in December 2003.

Measurement of emissions and removals

The evaluation of greenhouse gas removals resulting from forestry project activities can be carried out in two ways8:

The COP requested the IPCC to pursue work on Good Practice Guidance for measuring carbon sequestration in the land use and forestry sector , with adoption expected at COP9.

Setting a baseline

The baseline or reference scenario is a model which reasonably represents the anthropogenic emissions/removals by sources/sinks of greenhouse gases that would occur in the absence of the proposed project activity. The methodologies to be used for establishing baselines for sink projects have not yet been decided, but general ideas can be deduced from what was proposed for emission reduction CDM projects in the Marrakech Accords.

The baseline should be established:

Baseline may include a scenario of increasing future anthropogenic emissions due to specific circumstances of a host party. CERs should not be earned for decreases in activity levels outside the project activity or due to force majeure.

Different baseline options are proposed in the Marrakech Accords:

In the case of the CDM sink projects, the issue of general technologic performance is not as relevant as in emission reduction projects and the criteria for baseline establishment might well be different.

Allowing for leakage

The assessment of leakage is necessary to make certain that emission reductions resulting from a project do not increase emissions in another geographic area or another activity sector. Leakage is defined as "the net change of anthropogenic emissions by sources of greenhouse gases which occurs outside the project boundary and which is measurable and attributable to the CDM project activity" (IPCC, 2000). It should be evaluated by the project participants through monitoring. This implies the need to define an appropriate project boundary.

The leakage issue is particularly vital in the case of forest conservation activities. It was one of the causes for excluding such project activities from the CDM, at least for the first commitment period. In conservation projects, the possibility exists that the actors will transfer their exploitation efforts to another geographical area, now or even later.

The question of market leakage involves the modification of market prices as a result of the implementation of a CDM project. An increase in the wood supply due to the development of plantations could cause a decline in local wood prices and affect the profitability of other plantation projects, obviously discouraging their implementation. It could also lead to conversion of forest to agricultural use. Forecasts in this domain are extremely uncertain, and the effects of projects can be the counterintuitive. Wood grown on plantations can also lead to reducing the pressure on natural forests, which supply most of the wood used in the majority of tropical African countries.

Non-permanence of CO2removals by forest sinks:
towards a system of temporary credits

Forest carbon pools are susceptible to anthropogenic and natural disturbances. They may thus provide only temporary or short term storage - in contrast to geologic or underwater carbon pools which are far more stable. A forest can burn or be cut down, and become a GHG source. A project which reduces emissions cannot be reversed: emission reductions are permanent.

This constitutes one of the most difficult technical questions involving inclusion of "sinks" in the CDM. The CDM is based on the permanent reduction of developed countries' emissions during a given commitment period. The possible non-permanence of CO2removals by forests should be taken into account in order to guarantee the environmental integrity of the CDM. The SBSTA experts have proposed different options.

The option most seriously discussed is that of temporary credits, based on a proposal by Colombia during COP6 at The Hague. It involves the creation of a specific credit system for forest sink projects, with allocation of temporary credits having a fixed validity period. These temporary certified emission reductions are called TCER's. A temporary credit would be recorded in the registry of the entity receiving them, and could be used to fulfill commitments, be placed in reserve or sold. Once applied to attain the assigned amount of a Party, a temporary credit would expire after the validity period has passed; the entity that had used them would be obliged to replace them with other reduction units, that is e.g. by domestic emission reductions, permanent credits from emission reduction projects or even with new temporary credits. This system achieves the same effects as that of the "permanent" CERs from emission reduction projects. The two credit forms are only exactly equal, if an infinite sequence of temporary credits would replace a permanent CER. Of course, market values will differ.

The length of the validity period of these temporary credits is still under discussion. It is probable that a common value shall be decided for all forestry projects, so as to simplify procedures. A value of five years is currently favored, corresponding to the duration of one commitment period. However, this value could also be longer and based upon the time during which the project could guarantee stock maintenance by providing adequate insurance or a buffer of unused credits. The question of the responsibility for the stock's reversibility during this validity period is also under discussion. Detailed modalities will be decided at COP9.

The creation of a temporary credit system specific to forestry projects is an innovation and definite improvement in comparison to previous proposals which involved permanent credits:

The crediting method chosen for sink projects determines the quantity of carbon credits issued, the point in time when they are issued, and their value on the carbon market. The latter will be important for the magnitude of investment flows to forestry projects, that is, the CDM's potential to function as a lever for sustainable forestry in developing countries. A CER market value from sink projects that is too low would relegate sink projects to a marginal activity compared to energy projects. The African continent would be the loser, since the size of the energy sector in Africa cannot be compared to the size of that sector in emerging countries like China, India or Brazil.

As temporary credits need to be replaced after their period of validity, they will have a lower value than permanent CERs. However, for the buyer, temporary credits buy time which may be essential for innovation, restructuring or adapting. It also allows him to fulfill his obligation cheaper than by purchasing more expensive permanent reductions . Despite the lower market value of temporary credits, TCERs might constitute an interesting potential for forestry in developing countries, as tropical forestry, offers low-cost opportunities to remove CO2from the atmosphere. Moreover, revenues for the host over the entire lifetime of a project will not be reduced, as new temporary credits will be issued, provided that growing stocks and carbon stocks are maintained. Should a project hostess decide e.g. on a growing stock reduction, a final harvest of a plantation or a change in land use, temporary CERs do not restrict her. She will simply not re-obtain some or all of the original new TCERs.

Additionality: a filter for eligibility

Emission permits will be issued based on "additional" sequestration or emission reductions achieved by a project, i.e. sequestration that would not have occurred in the absence of the proposed project. Environmental additionality is the fundamental eligibility requirement for a CDM project: this means that a CDM project, be it a sink or an energy project must induce an additional reduction of greenhouse gases in the atmosphere. The additionality of sequestration or emission reductions can be ascertained by asking the three following questions:

The last step is to be carried out in the monitoring plan of a CDM project, presented by the project developer (see paragraph on baselines).

The first and eventually the second step however require that a choice be made by the COP as to what projects in a given region and for a given technological should be considered additional and thus possibly eligible for CDM accreditation. Discussions on this complex issue of additionality continue and should be settled at COP9. Here are some elements.

A first possibility to determine additionality would be to use the GEF's additionality criteria, with all the imperfections described above. This would mean that only an activity that is unprofitable at the outset can benefit. The implicit hypothesis in this approach is that profitable projects which remunerate the invested capital at or above the alternate rate of return on investments, will be undertaken anyhow, provided that the information is accessible to investors, and that there are no regulatory or other barriers. The a priori financial profitability indicator used in this approach is however of little use: the lack of objective information about true project costs and potential profits facilitates data manipulation which could make non-additional projects eligible.

Another method to determine additionality could be based upon the examination of barriers impeding clean development in the project's or a broader, national or regional context . This approach is in the tradition of political economics that maintain that an economic activity need not necessarily be merely profitable for it to be undertaken, due to the existence of barriers. This is especially true in developing countries, where lack of investment may be due to many barriers, e.g. property rights, institutional impediments, psychological obstacles, lack of capital and human resources. Breaking away from the financial criteria alone in determining additionality would make it possible for profitable activities to be eligible to the CDM, provided that valid reasons why the activity would not have been undertaken without CDM are provided. The CDM would act as a lever for removing barriers to development. Using this method would consist in analyzing a project area that is well-defined geographically on the scale of a region, a country, or an ecological/economic area within a country, analyzing the development trends of the area, making an inventory of obstacles - economic, institutional or organizational-, and finally determining the activities that could be considered additional and therefore eligible to the CDM. However, the range of possible reference scenarios must clearly have been determined by sector and geography and the exercise carried out beforehand. To be clear, the projects will still have to undergo a specific analysis in order to quantify on site the additional emission reductions or sequestration compared to a scenario "without project". By setting norms for reference scenarios for a given sector in a given territory, this approach has two advantages:

Another advantage of this method is that it offers host country governments an analytical framework enabling them to recognize the nature of investment barriers, as well as the innovations that are vital to their removal. Finally, the link between CDM policies and concrete activities and projects is facilitated by this approach.

Additionality could be the most restrictive criteria to CDM eligibility. Phillips (2002) considers that "high-impact" forestry projects using exotic species with short rotation cycles grown for wood fiber products for national and international markets could face difficulties in terms of additionality, while "low-impact" forestry projects using native species should obtain certification more easily.

How could the CDM help achieve sustainable development?

How to define sustainable development criteria?

By definition, the objective of the CDM is to "assist developing countries in achieving sustainable development, and contribute to the ultimate objectives of the Convention". To be registered, a CDM project must receive approval of the host country government.

The question of how to guarantee that any developments induced will be "sustainable" was the center of long discussions. It has now been decided that the host country decides if ancillary benefits, such as employment, revenues, regional development, infrastructure and environmental impacts contribute to sustainable development.

In the case of forestry projects, environmental criteria are particularly important. Thus, the project monitoring plan should address local environmental impacts. Compatibility with other international environmental agreements, particularly the Convention on Biological Diversity (CBD), should be a condition for eligibility. In its note of 27 October 2000 to the COP6 meeting at The Hague, the CBD Executive Secretariat emphasized the need to consider possible conflicts and to create common criteria for evaluating CDM projects that could affect biodiversity. This note echoed the fears of many non-governmental organizations that CDM forestry projects favor establishing fast-growing exotic species instead of native forests. This could reduce biodiversity and threaten the ecological balance. Environmental impact assessments could therefore be a prerequisite for registered CDM forestry projects, including local and global impacts. Using globally or regionally recognized forest certification schemes instead of environmental impact assessments to assess socio-environmental impacts could also be a way forward.

Development versus flexibility

The OECD countries will be unable to achieve their emission reduction commitments by domestic actions alone, since it appears now that their actual emissions will exceed these goals considerably. There will therefore be a strong demand for emissions rights.

However, the CDM competes with two other flexible mechanisms established by the Kyoto Protocol for Annex-I Parties to obtain emission rights:

The objective of these flexible mechanisms is to equalize and reduce the marginal cost of emission reductions, by relocating efforts to areas where they are less costly. It is estimated that the cost of emission reductions by domestic action in developed countries will be between US$ 67 and US$ 584/ton of carbon. The flexibility mechanisms would offer emission rights with a price between US$ 20 and US$ 50/ton of carbon. Before the US withdrawal from the Kyoto Protocol and the capping of CDM credits, the global carbon market was estimated at US$ 14-65 billion/year, although a more realistic estimate would be between US$ 10 and 20 billion/year. The anticipated supply of emission rights including all mechanisms has been evaluated between 621 million and 1.32 billion tons of carbon, with potentially 265-723 million tons of carbon/year arising from the CDM. The key problem is the developing countries' capacity to produce the CERs (Lecoq, 2000).

The CDM's unusual nature is due to the fact that it must accomplish two objectives simultaneously: flexibility and sustainable development. The clear concern for sustainable development was what motivated its creation in 1997, due to the fear of the developing countries that an instrument aimed at flexibility alone might imperil their development priorities. The CDM will hopefully be able to combine optimal climate mitigation with optimal sustainable development, that is, create a feasible compromise between simple maximization of each goal. The reference to sustainable development in dealing with the forestry sector places the CDM within the sphere of two other conventions on global environment that had been signed in Rio: the Convention on Biological Diversity and the Convention to Combat Desertification in the countries that had been seriously affected by drought and/or desertification, particularly in Africa. The consequences are significant: while pure flexibility mechanisms are required to offer maximum carbon fixation at the lowest possible cost, the CDM should encourage actions that optimize benefits for biodiversity and prevention of desertification as well.

As a mere flexibility instrument, the CDM will certainly be unable to promote sustainable and diversified forest management. In its dual dimension as a sustainable development and flexibility instrument however, it might serve in redirecting forestry investments. Although payment for the carbon sequestration function is needed for this redirection, it does not suffice, since optimum climate mitigation does not necessarily coincide with optimum biodiversity, or with optimum development. The CDM must be combined with other instruments and carried out in an institutional frameworks that remains yet to be created, so that its potential as an instrument for sustainable development materializes.

Investment structure

The CDM was conceived as a "bilateral" structure, referring to an investor from one of the Annex I countries seeking carbon credits, and a public or private partner from a developing country seeking to develop certain activities. These partners might have different solutions for sharing the carbon income, the CERs or TCER's generated by the activity, and the commercial income, that is any profits of the activity itself, independent of carbon sequestration.

The problem of equity for CDM project beneficiaries has led to the concept of a multilateral structure based upon investment funds or clearing houses that would be intermediaries between investors seeking CERs and project hosts and developers in developing countries. The clearing house idea is of definite interest, given the nature of CDM objectives. Without a coordination mechanism, bilateral investments would inevitably concentrate on projects removing a maximum of CO2and generating a maximum of CERs (mere dividend projects) according to the objectives of actors in industrialized countries and to the detriment of less profitable projects that could however provide numerous ancillary benefits for the host country, such as diverse land use, more equitable income distribution, or maintaining biodiversity. Investment funds could create a coordination mechanism with groups of projects that correspond to the national objectives of the developing countries. The Southern countries would then be able to promote their own environmental and development objectives, which would not necessarily be the case if a bilateral solution were to be used alone.

The Marrakech Accords seem to also allow for unilateral projects, with investors in the developing country undertaking an activity that would earn CERs, to be sold on the carbon market. This type of investor might exist in those Southern countries where significant investment capacities and a dynamic entrepreneurial class has emerged. Some wood manufacturers operating in West and Central Africa might use this model to undertake afforestation and reforestation activities with native, slow-growing species, and thus guarantee a sustained supply for their processing plants. Maintaining supplies of certain valuable species has become increasingly difficult due to the degradation of natural forests.

Each of the three possible options for the CDM market structure has strong as well as weak points. The bilateral and unilateral models both take full advantage of private investment dynamics, that is project identification and initiation is carried out by the entrepreneur, and flexibility is high, but both models benefit certain project categories and beneficiaries. In the case of investment funds, there is less flexibility, a risk of high transaction costs and the bureaucracy of the fund, possibly resulting in low efficiency. An open market could be created in which the three models would coexist, as proposed by the World Resources Institute (WRI) (Baumert et al., 2000).

Choosing only one or all of these options for the CDM would probably not resolve all the problems related to the preferred activities and the segment of beneficiaries involved. Other structures might yet be devised which would establish,a priori,an equilibrium between activities that cannot offer the same cost-effectiveness in terms of the carbon alone.

The Prototype Carbon Fund: a multilateral fund

The World Bank launched the Prototype Carbon Fund (PCF), in operation since the year 2000 ( This program, with US$ 180 million at its disposal, is an investment fund that seeks to energize a carbon market with the developing and transition countries. Its objective is to bring about "high quality" emission reductions, in the sense that all the relevant stages (calculation of baselines, evaluation of the resulting effects in terms of sustainable development, verification, validation, etc.) will be carried out with the utmost care. Moreover, the fund is explicitly meant to be an operation that "learns by doing", for the benefit of the entire international community. The PCF is funded from the private sector as well as from governments (The Netherlands, Finland, Sweden, Norway, Canada and Japan).

The fund is involved in CDM and JI projects, with particular emphasis at the outset on the CDM and on renewable energies. Due to the uncertainties regarding carbon sinks, no more than ten percent of the fund will be invested in forestry projects of this type, and then mainly in the "transition" countries in Eastern Europe. The African countries participating in this program (as host countries for fund projects) are Senegal, Togo, Morocco, Burkina Faso, Uganda, Ghana and Swaziland.

For private sector investors in this program, the World Bank has proposed a certain number of advantages, by offering them:

a means of satisfying their Kyoto Protocol obligations with a good cost/efficiency ratio
rapid learning in this new market
a better environmental responsibility image
a profit potential on the second stock market
the possibility of discovering new growth opportunities.

With regard to the host countries that are World Bank clients, the expected advantages are:

the possibility of benefiting from profits in the carbon market, for which they have a comparative advantage
finding opportunities for stimulating private sector investments
demonstrating how the development of the emission permits market should result in the transfer of cleaner technologies
emphasizing the benefits in the area of public health that result from the reduction of pollution
improving the capacity of countries in competing in the emerging market of emission rights.

The PCF serves as an intermediary between investors from Annex I countries and the host countries. It does not however present itself as a structure that coordinates funds between projects having a mixed environmental and social profile and with a different cost-efficiency ratio. Furthermore, the fund will only finance "additional" sums in relation to the base investment of the reference scenario, i.e. it uses the GEF incremental cost notion.

CDM and official development assistance (ODA)

CDM funds should not divert ODA

The risk of competition between funds meant for official development assistance (ODA) and the CDM is very real. The G-77 countries and China have therefore requested guarantees to make certain that the funds invested in the CDM are additional to ODA funds and other international financing. The European Union proposed in 1999 that participants in CDM projects financed in parts by ODA guarantee that these public funds would not be subtracted from the aid contributed to the GEF. The agreement concluded in Bonn in July 2001 emphasized that "public financing of projects carried out by the Annex I Parties under the Clean Development Mechanism must not divert ODA and must be separated from the financial obligations of these Parties and separately accounted for" (FCCC/CP/2001/2/Add.3/Rev.1, pp. 13-14). However, it appears difficult to demonstrate that this requirement has been met. For instance, the donor countries are not always aware of the precise amount of funds given to ODA each year. Furthermore, only a few Northern European countries actually devote 0.7 percent of their GDP to ODA, as the 1992 Earth Summit had recommended.

The most delicate situation involves "tied" aid, under which a country receiving ODA funds commits itself to purchasing goods and services from the country providing these funds. Developed countries might be tempted to support their companies' search for emission reduction certificates by subsidizing CDM projects. The tied aid would thus pressure the host country to accept the companies' projects rather than projects that correspond to their real development needs.

Complementarities between ODA and CDM

The Marrakech Accords allow economic activities benefiting from ODA to be simultaneously eligible under the CDM, that is, ODA financing of CDM activities appears possible. It is feared that the CDM investment flow might concentrate on certain countries that have the potential for carrying out large-scale projects, leaving aside the poorest countries and a large part of Africa that depend most on ODA and are characterized by a high aid / GNP ratio. It is also foreseen that CDM flows will concentrate on financially viable activities, to the detriment of activities with low-profitability that nevertheless contribute to local development and the combat against rural poverty. These countries and projects are already excluded from the growing North-South investment flows that now exceed ODA in most developing regions. Combining ODA to the CDM could help reverse this tendency and attract CDM investors. ODA could:

African participation in the CDM

Compared to Latin America, carbon projects are not widespread in Africa. However, some examples exist.

The Burkina Faso initiative - a project focusing on development.

This forestry-related project in Africa was officially registered at the Climate Convention Secretariat under the AIJ pilot phase. Its primary focus is development of the host country, while achieving reduction of greenhouse gases.

This project involves includes four sub-projects of considerable size that deal with:

The project thus deals simultaneously with carbon emission reductions (charcoal production, stoves and photo-voltaic systems) and with carbon sequestration (forestry activities).

Total emission reductions and sequestration of the project during the first six years amounted to 410,000 tons of carbon. The forestry activities accounted for 67,000 tons of carbon. One million tons are expected after 30 years at a cost of US$ 970,000. This gives a current cost of US$ 3.6/t of CO2, expected to diminish to US$ 0.25/t of CO2after 30 years.

Private initiatives: seeking emission permits

A few projects were initiated by private sector groups from industrialized countries that have become aware of the potential for carbon credits.

These private sector projects have raised numerous problems, the most important concerning land ownership rights and asymmetrical information. The twoTreeFarmsprojects have been criticized by a Norwegian NGO ( for paying very low land rents, given the profit potential of the carbon trade. This criticism, however, concerns the sharing of potential profits, a problem that can be solved when profits are actually made, rather than issues of competing land uses. The projects were accused of distorting competition between plantations and agricultural use. With regard to implementation, the companies provided financing for planting, but follow-up costs at the end of the project lifetimes have apparently not been fully considered.

The FACE foundation

The FACE (Forests Absorbing Carbon Dioxide Emission)foundation was created in 1990, as an initiative of four major Dutch electricity companies of theDutch Electricity Generating Board(SEP).

Ninety percent of the Dutch electricity production comes from the burning of fossil fuels (Cornut, 1999). The initial objective of the FACE foundation was to offset the emissions of a 600 MW coal-fired power station for a period of 25 years, or approximately 75 million tons of CO2(20 MtC coal equivalents). In order to achieve this, the project provided financing of reforestation programs involving a total area of 150 000 hectares, for a period of 25 years. The cost of these programs was estimated at approximately US$ 8.5 million. They would be located for the most part in in Central Europe (nearly 15 percent of the planned total) and in tropical countries of Latin America, Asia and Africa (over 80 percent of the total). The first plantings were carried out in 1992, and pilot projects have been undertaken at present in the Netherlands, the Czech Republic, Poland, Ecuador, Uganda and Malaysia.

During 1990-1997, more than US$ 25 million was invested in the project. The sequestration costs have turned out to be lower and the projects' impact greater than expected. The FACE foundation estimates that the 150 000 hectares will make it possible to sequester 115 million tons of CO2, or approximately 31 Mt of carbon.

Fears and expectations

An instrument - such as the CDM - differs fundamentally from ODA, since it is a medium for mobilizing private investment for implementing projects in developing countries and for achieving the climate change convention's objectives at a reduced cost. Its potential depends upon institutional and economic factors, the dynamics of private partnerships, prospects for new activities, an effective legal system that can help guarantee the contracts between partners, and insurance systems for covering risks. These are obviously characteristics that one rarely finds in developing countries in Africa.

Work by Youba Sokona and Djimingue Nanasta (2000) presents the expectations and concerns of African countries with regard to the CDM:


• encouraging foreign investment, transfer of means and mitigation technologies, and projects involving adaptation to climate change.
• establishing a link between the needs of developing countries and the global environment.

Africa's assets:

• The increasing awareness by African countries of the opportunities offered by climate change for development and business, thanks to past capacity building by the GEF and others.
• Africa is able to offer attractive CDM projects thanks to marginal costs which are competitive with those of the AIJ pilot projects, and because of the great potential for technology transfer and capital flows.

Disadvantages and delays:

• Limited appeal for private investors: only three percent of direct foreign investment in 1995
• high risks compared to other areas
• Low level of emissions (four percent of global emissions), therefore little opportunity to reduce them
• Low participation in GEF programs
• Low participation in the AIJ pilot phase
• Insufficient experience for the CDM
• High project establishment costs due to inadequate infrastructure (transport, telecommunications, energy supply, institutions)
• Opportunities mostly for small-sized projects, which have higher implementation costs


• Diverting official development assistance toward activities for the mitigation of climate change would risk intensifying difficult conditions in Africa
• The African private sector's difficulty in identifying, creating and submitting possible eligible activities for financing


• Fairness in the geographic distribution of CDM projects
• Avoiding future emissions rather than reducing emissions; the relevant criterion is not reducing emissions compared to the initial situation, but to compare future emissions at a comparable level of development
• A preparatory program to encourage CDM investments in Africa
• Building local capacities, establishing transparent project criteria and establishing capacities and procedures for measurement and verification
• Building national mechanisms for attracting and managing investments and guaranteeing convergence with national and international objectives

CDM-Assist: a World Bank's initiative

The "CDM-Assist" program of the World Bank is aimed at Southern and Western Africa. Financing is provided by the energy sector management assistance program (ESMAP) of the World Bank and the OECD member governments, particularly through the FFEM. The general objective of CDM-Assist is to enhance Africa's ability to attract CDM projects, and to build capacity in Africa to develop and manage such projects.

Specific objectives include:

- Promotion of the regional balance and diversity in the CDM,
- Building capacity through methodological studies, workshops, training of national experts,
- Following up pilot projects initiated under AIJ or as National Strategic Studies by the World Bank since 1997,
- Negotiating and transfer of CERs,
- Promoting the transfer of technology.

Eligible activities cover renewable energy, alternative energies, avoiding methane emissions, energy efficiency and land use. The CDM-Assist will also collaborate with climate change capacity building efforts undertaken by other multilateral organizations active in the region (UNIDO, UNDP, GEF, UNEP, UN foundation), to facilitate information sharing, optimize networking opportunities, and avoid duplication of activities.

This program successfully meets some of the needs of the African continent with by reinforcing CDM-acquisition capacities. It is interesting to compare the CDM-Assist and the Prototype Carbon Fund principles in order to better understand their respective focus:

Prototype Carbon Fund (PCF) CDM-Assist
Capacity for the OECD Capacity for Africa
Market development Search for equity
Rigid: specific criteria for projects and portfolio Flexible: experimentation possible
Exclusively for GHG reduction Also adaptation, forestry projects
Global distribution Centered on regions
Geared to investors' needs Geared to the needs expressedby the host
Multilateral funds bilateral agreements
Indirect investments Direct involvement in projects
Business relations Partnerships
Carbon transactions Transition toward the CDM
Specific projects Synergies and follow-up
Needs host institutions Creates institutions in the host countries

Presented by the World Bank, Lyon, September 2000

CDM-Assist finances capacity building efforts in Uganda, in connection with a PCF financed project in Kenya, Mauritius, Senegal, Swaziland, Ghana, as preparation for PCF projects in Tanzania and in Burkina Faso, as support to sustainable biomass energy management projects developed by the World Bank and the Norway AIJ program.

Some projects financed by the World Bank in Africa relate to forestry:

Opportunities for combating climate change in Africa's forests

Two instruments have been or should soon be established so that developing countries can participate in climate change mitigation:

Africa offers a wide range of opportunities for climate change mitigation in its forestry sector. Table 3 evaluates the potential of forestry mitigation activities under two aspects:


Instruments of potential interest

Concerned African countries

Criteria used for selection of concerned countries

Multiple-use forestry and agroforestry

CDM? ("A&R")
GEF CC Focal area
Special Climate-Change Fund (adaptation, forestry)
Adaptation Fund

South Africa, Benin, Burkina Faso, Burundi, Cameroon, Comoro Islands, Ivory Coast, Ethiopia, Gambia, Ghana, Kenya, Madagascar, Malawi, Morocco, Nigeria, Uganda, Rwanda, Senegal, Togo, Tunisia

population density
agro-climatic zone
agricultural dynamics

Reforestation on degraded areas

CDM? ("reforestation")
Special climate-change fund (adaptation, forestry)
Adaptation Fund

Ivory Coast, Ghana, South Africa, Algeria, Benin, Burkina Faso, Burundi, Cameroon, Guinea, Kenya, Madagascar, Malawi, Morocco, Nigeria, Uganda, Rwanda, Tanzania, Tunisia

deforested areas
degraded areas
agro-climatic zone

large scale afforestation

CDM, if socio-environmental, additionality and other criteria met

South Africa, Congo, Algeria, Cameroon, Madagascar, Nigeria, D. R. of Congo, C.A.R., Tanzania, Zambia

land availability
population density
private sector
agro-climatic zone

wood energy

CDM, if substitution eligible;
GEF CC Focal area

South Africa, Benin, Burkina Faso, Burundi, Cameroon, Ivory Coast, Eritrea, Ghana, Guinea, Guinea-Bissau, Kenya, Madagascar, Mali, Malawi, Morocco, Niger, Uganda, D. R. of Congo, Rwanda, Sao-Tome and P., Senegal, Tanzania, Togo, Tunisia, Zambia, Zimbabwe

existing wood resources
gas or oil alternative

Efficiency of wood-processing industry

CDM (cogeneration, if substitution eligible)
GEF CC Focal area
Special climate-change fund (technology transfer)

Angola, Cameroon, Congo, Ivory Coast, Gabon, Ghana, D. R. of Congo, C.A.R.

size of existing industry
development perspectives
forestry resources

Remark: Angola has strong potential but industrial development depends on long-term stability

Forest Conservation

Special climate-change fund (adaptation, forestry)
Adaptation Fund

D. R. of Congo, Congo, Cameroon, Ivory Coast, Liberia, Madagascar, Mozambique, Gabon, Equatorial Guinea, C.A.R., Angola

forest type and extent
extent of short and medium-term land tenure
pressure for deforestation rate agro-climatic zone

Remark: The country with the greatest potential currently too unstable

Reduced-impact logging

Special climate-change fund (technology transfer)

Gabon, Cameroon, Congo, Equatorial Guinea, D. R. of Congo, Liberia, Angola

large-scale harvest in dense forests established operators

Remark: Some countries with large potential are unstable, or political will to develop these activities is doubtful

Table 3 : Forestry mitigation activities in Africa, their potential and eligibility for financing

Multiple use plantations and agroforestry

Multiple use plantations and certain agroforestry activities could be eligible under the CDM in the first commitment period, depending on definitions and modalities for afforestation and reforestation eventually accepted for the CDM. If they can be considered as adaptation, they could be eligible under the Adaptation Fund of the Kyoto Protocol or under the Special Climate Change Fund of the Convention, in the latter case also as mere forestry activities.

This activity would be of interest to predominantly rural African countries with a sufficiently active farm economy and a sufficiently dense rural population. Existing cooperatives in rural communities are undoubtedly an advantage for the development of initiatives. In North Africa, olive and fodder tree plantations could constitute suitable options, since they could have a significant impact on the development and local industries of these areas. In other regions, such as the Sahel, options for open, park-like woodlands exist.

Reforestation of degraded areas

Reforestation of some degraded areas as rehabilitation or restoration could be eligible under the CDM in the first commitment period depending upon the definition of "forest" and "reforestation" ultimately chosen by Parties. The definition accepted for developed countries applies to land not occupied by forest before 1990. This definition, if applied to the CDM, would exclude forest rehabilitation in most instances. Possibly, this reforestation definition will be adapted to special circumstances of developing countries. If not, rehabilitation could still be eligible for funding through the GEF (mixed biodiversity-climate-degraded land projects, OP12). If rehabilitation can be billed as an adaptation measure to climate change, it could be eligible under the Adaptation Fund of the Kyoto Protocol or, as an adaptation and forestry activity, under the Special Climate Change Fund of the Convention.

This activity concerns countries that have suffered from erosion (Burundi, Madagascar, Ethiopia, North Burkina, Benin and Togo) and deforestation (Ivory Coast, Ghana and Guinea). Rehabilitation can be carried out by farmers in a watershed or a small region, or by agricultural or industrial enterprises. In the wood-producing West African countries (Ghana, Ivory Coast and Guinea), in Central Africa (Cameroon, Southern Congo) and in South Africa and Zimbabwe, the wood industries, often exporters, face the problem of renewing their wood resource base. Several of these countries have excess processing capacities, accentuated by degradation of natural forests. CDM activities could be integrated into existing local efforts, e.g. in Ivory Coast and Cameroon. "Unilateral" CDM, that is projects conceived and implemented by a local operator in a developing country to acquire and market CERs are also conceivable. Under overly restrictive definitions of afforestation and reforestation under the CDM, restoration or enrichment planting in degraded stands must use other instruments than the CDM to fund parts of operations. Land rights are undoubtedly the most serious institutional barrier. Ivory Coast provides one of the most striking examples, where instead of the land owner, concessionaires undertake reforestation on concession lands but face ambiguity regarding their rights to timber resource ownership.

Plantation forestry

Plantation forestry generally involves fast growing, short-rotation species for pulp or fuelwood. An example of industrial afforestation not under the CDM is the 43,000 hectares eucalyptus plantation in Southern Congo aimed at the export of pulpwood logs. It has also given rise to a fuelwood industry in the Pointe Noire region.

Industrial afforestation falls under the eligible activities of the CDM, on the condition that definitions and modalities, such as additionality and environmental criteria are met. The CDM would allow industries to benefit from CERs. The industry could eventually share this added carbon income with wood producers.

Industrial afforestation can thrive even in regions with a low population density, but unless land rights are clearly established, transaction costs may reduce competitiveness. In South Africa, many plantations earmarked for supplying pulpwood have been established on the basis of contracts between the paper industry and local communities.

Large fuelwood plantations occasionally compete with small local growers: increasing supply might lower the price for fuelwood in the local markets. This was the case in Burundi. The South African contracting system has resolved this problem to a certain degree.

Fuelwood use

The importance of biomass energy in Africa

The African continent derives the highest fraction, almost two-thirds of its total energy, from biomass (fuelwood, agricultural waste, animal excrement, charcoal). By comparison, biomass energy represents three percent for OECD countries.

• Africa consumes approximately 205 Mt oil equivalents of biomass and 136 Mt oil equivalents of conventional energy.

• Most of the biomass energy is used in sub-Saharan Africa: five percent in North Africa, 15 percent in South Africa and 86 percent in sub-Saharan Africa, excluding South Africa.

• Wood, including charcoal, is the most common source of biomass energy. Fuelwood represents 65 percent of the use, charcoal approximately three percent.

Energy Information Administration (USA).

Activities that substitute biomass for fossil fuel energy are eligible under the CDM, as well as for the GEF climate change focus. This is based on the idea that biomass is a renewable resource.

In a number of African arid or semiarid countries, consumption of fuelwood has seriously degrades forest or tree resources, and has decreased the store of carbon in the growing stock; the usual assumption of automatic renewal of the standing biomass is clearly not applicable. Attempts are made to reduce fuelwood consumption to diminish pressure on natural forests. Programs which encourage use of natural gas instead of wood or charcoal were developed in Niger and Mali, and have been extended to other countries including Madagascar (where most of the fuelwood comes from plantations), in an attempt to balance the supply and demand for domestic fuelwood. This demonstrates that promoting wood fuels is only an option if sustainability is assured through plantations or the improved management of existing forests and woodlands.

Promoting sustainably produced wood fuel may involve more plantations and improved management of fallow lands, woodlands and agroforestry. If they match the definitions and modalities for afforestation, fuelwood plantations may also act as carbon sinks under CDM. In this case, energy producers could benefit from substitution credits and growers from sequestration credits. This activity offers the greatest potential for the majority of predominantly rural African countries.

Increasing efficiency in the wood processing industry

Two options exist in the sector:

• Using harvest slash, saw mill and veneer residue or scrap wood as fuel. This material is presently often used either as low yield boiler fuel or simply burnt. Producing heat and energy by co-generation necessitates costly investments which could be partially financed under the CDM if they achieve fossil fuel substitution. As technology transfer, the activity could also be eligible for the climate change focal area of the GEF and the Special Climate Change fund.

• Reducing waste in milling, veneer production, furniture and moulding by increasing the process efficiency and increasing total products recovery, and enhancing the pool in long-lived forest products. In principle, this activity should be considered in carbon accounting under the CDM, but it is currently still ineligible under the CDM. On the other hand, this activity might qualify for the Special Climate Change Fund as technology transfer. It could also significantly impact the wood industry's competitiveness, and allow adaptation of older plants and equipments to the new developments, such as increased use of small diameter timber and lesser species. This issue is particularly pressing in countries like Ghana and Ivory Coast.

Forest Conservation

This activity is not eligible under the CDM during the first commitment period. However, a double dividend related to climate change mitigation and biodiversity conservation makes it eligible for the multi-focal area of the GEF (OP12). If it can be considered an adaptation measure to climate change, it could be eligible to the Adaptation Fund of the Kyoto Protocol. It could also be eligible to the Special Climate Change Fund of the Convention under adaptation and/or forestry.

The countries concerned possess vast areas of primary forest, subject to strong land-use change pressures. They include countries like Ivory Coast (in its eastern part), Cameroon (the Centre-Eastern and Southern Coastal regions) and several regions of the Democratic Republic of Congo and Uganda. On the other hand, countries like Gabon, the Central African Republic, Equatorial Guinea, Angola, Mozambique or Congo do not have a sufficiently high overall land-use change pressure to justify the activity as climate change mitigation, even though it would enhance biodiversity conservation. While this assessment is valid at the national level it might be very different locally, e.g. specific forests, threatened in an area of agricultural expansion.

Reduced- impact logging

Reduced-impact logging mitigates usual impacts of conventional harvest, that is, the rapid release of greenhouse gases from decomposing biomass in damaged, decaying trees, roots and logging slash in the forests. Reduced-impact logging and sustainable forest management are currently not eligible for any financing instrument. Possibly, it might qualify as technology transfer under the Special Climate Change Fund of the Convention.

All the major forestry countries in the humid tropical region with exploitation of dense forest stands are concerned a priori, but only the countries that possess a relatively stable institutional framework would be able to benefit from projects of this sort. The countries in the best position to benefit from this type of activity are Gabon, Cameroon, Congo-Brazzaville and the Central African Republic. Equatorial Guinea and Liberia follow, but inasmuch as the two latter countries are not known for guaranteeing the application of even the minimum regulations regarding good exploitation, they would appear to be less suitable for benefiting from this opportunity. Finally, countries like the Democratic Republic of Congo, Angola and Mozambique appear lacking in political stability at the present time.

7See a synthesis of experiences learnt for forestry projects in Annex III.
8For further details on carbon measures, see Loisel 2001, and Locatelli 1996.
9 Several sources have been used: World Development Report 2000 (World Bank), State of the World's Forests 1999 (FAO), World Development Indicators 2000 (World Bank), World Resources 2000-2001 (UNDP, UNEP, World bank, WRI).

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