Investing in clean development
Investing in clean development
An innovative initiative in the fight against climate change has given African countries an opportunity to attract more international financing for their own sustainable development, while at the same time helping curb global warming. After years of hard bargaining, the guidelines for the "clean development mechanism" (CDM) were approved by the parties* to the 1992 UN climate change agreement, during a November 2001 conference in Marrakech, Morocco. Under this mechanism, Northern industrialized nations can promote investments in cleaner technologies, forest preservation and other projects in the South in a way that enables them to earn credits toward their targets for reducing emissions of "greenhouse gases" that are harmful to the environment.
* A "party" is a country which has both signed and
ratified an international legal agreement. For more information
on the CDM, go to the Website <http://unfccc.int/cdm>.
The CDM is "a wonderful concept," promising substantial benefits to developing countries, declared Nigerian Presidential Adviser on Petroleum and Energy Rilwanu Lukman. "Africa must use this as a new development opportunity," said Mr. Pedro Sanchez, former director-general of the Kenya-based International Centre for Research in Agroforestry. Projects under the mechanism can help improve rural electrification and other development undertakings, Mr. Ad Dankers, a climate change expert with the UN Development Programme (UNDP), told Africa Recovery. New investments can create more jobs and enhance productivity, observed a CDM expert with the UN Industrial Development Organization (UNIDO).
In July 2001, a long stalemate was resolved over the implementation of the clean development mechanism and other provisions of the Kyoto Protocol, a 1997 follow-up agreement to the climate change convention. Without the US, which had withdrawn from the talks that March, other countries agreed on many of the regulations needed to effectively curb global emissions of greenhouse gases. The remaining issues were finalized at Marrakech, clearing the way for the industrialized countries to consider ratifying the protocol.
Greenhouse gases, mostly carbon dioxide, exist naturally in the atmosphere, and help trap the sun's heat to keep the earth comfortably warm. But scientists now believe that the amount of carbon dioxide being released as a result of the human consumption of fossil fuels (oil, petrol, coal, and, to a lesser extent, natural gas) has become excessive and risks heating the earth beyond life-sustaining levels. The phenomenon, known as "global warming," motivated the climate change agreement, officially called the UN Framework Convention on Climate Change, and the Kyoto Protocol. Both aim to curtail world carbon emissions, with more specific commitments under Kyoto.
Northern countries, which are responsible for most such emissions, mainly from their industries and transportation systems, negotiated individual emission reduction targets, with the European Union (EU) agreeing to a slightly bigger reduction than the US would be required to make. Southern countries, with comparatively lower emission levels, were not required to commit to specific targets, but were urged to also curtail the amount of carbon they released into the atmosphere.
In the negotiations, delegates from both North and South raised concerns about the costs of adjusting their energy consumption, whether through reducing fossil fuel use or developing cleaner alternatives (solar, wind and hydro power). While developing countries feared that the difficulties of industrialization would become more severe, industrial countries were anxious that such efforts could hinder their economic growth. The US had cited cost considerations and what it felt was an unfair emission reduction burden on Northern countries for its decision to pull out of the Kyoto deal.
For the Kyoto Protocol to officially take effect, it must be ratified by 55 parties to the climate change convention, including industrialized countries that together were responsible for at least 55 per cent of world carbon dioxide emissions in 1990. As of 5 April 2002, 53 of the 84 countries that signed the protocol had ratified it. The absence of the US, which accounts for some 25 per cent of global emissions, will make it harder but not impossible to reach the 55 per cent threshold. "If the Protocol does not enter into force," notes Mr. Lukman of Nigeria, "there will not be a CDM."
By funding clean technology projects in the South, Northern countries will need to spend less toward meeting their individual emission reduction targets.
The CDM was designed to address the concerns of both developing and industrialized countries. By funding clean technology projects in the South, Northern countries will need to spend less toward meeting their individual emission reduction targets. In general, it would require significantly greater investments to further reduce emissions from their own advanced and huge industries than it would take to develop cleaner processes in developing countries. There, even marginal investments can significantly reduce emissions through small-scale and effective technology upgrades. And since the atmosphere has no boundaries, emission reductions anywhere in the world benefit all humanity and advance the goals of the Kyoto Protocol. The South, meanwhile, can benefit from vital foreign investments and the incorporation of cleaner technologies into its economies.
Agreement on the terms of the CDM was not easily reached. Many delegates feared that enabling industrial countries to meet their targets by cutting emissions elsewhere would simply allow them to "buy the right" to continue excessive carbon emissions at home. While the EU proposed that half of all reductions must be made domestically, the Marrakech conference did not set limits on how much countries can use the CDM or other mechanisms. It did insist that they must strive to also cut emissions in their own countries. African and other developing countries raised another concern as well: that CDM investments might be categorized as a form of official development assistance (ODA), thereby further reducing aid flows. They were relieved when Marrakech decided that CDM investments would not count against aid commitments.
How the CDM will work
Participation in the CDM is voluntary and open to public and private agencies in industrialized and developing countries that have signed and indicated their intention to ratify Kyoto. Funding will come mainly from the North, including from private enterprises and multilateral financial institutions, such as the World Bank. Three years ago, the Bank established a facility known as the Prototype Carbon Fund mainly to finance CDM activities.
An executive board comprising ten members drawn from industrialized and developing countries is being created to manage the mechanism. It will publicize project proposals seeking funding and investors interested in such ventures. The deadline for proposals is 31 December 2005, with enterprises set up as of 2000 eligible to apply.
To qualify, evidence is needed that proposed projects would actually reduce carbon emissions, result in the transfer of technology to host countries and meet those countries' own sustainable development needs. Proof of carbon emission reductions can be established, among other ways, by citing the outcomes of comparable projects elsewhere. To make the process workable, Southern countries must define their development objectives precisely, develop credible criteria for measuring a project's potential to help realize them and solicit the views of people likely to be affected by the project. Finally, potential investors must secure statements from their governments that ODA would not be diverted.
Auditors will verify an approved project's carbon emission level over time and compare it with estimated emissions that would have occurred without the project. The difference will then be certified as the project's credits, known officially as "certified emission reductions" (CERs), with one metric tonne of carbon dioxide equivalent to one CER. For example, if a project for cleaner rural electrification emits 1,000 tonnes of carbon dioxide, and it is shown that 1,500 tonnes would have been emitted by fossil fuels serving the same purpose, the difference -- 500 metric tons -- would earn 500 CERs.
Northern investors may count such credits in meeting their emission reduction targets under the Kyoto Protocol. They can also sell any surplus CERs to other countries, much like commodity trading. In 2000, the market value of 1 CER ranged between $13 and $37.
Forests and cleaner energy
Clean development projects can include "afforestation" (growing and nurturing new forests) and "reforestation" (repairing old ones stripped bare of trees and other vegetation). Both activities would involve large-scale tree-planting schemes. More trees would create natural blankets to soak up carbon dioxide from the atmosphere ("carbon sinks"), thereby helping industrial countries achieve part of their individual emission reduction targets. Such schemes would simultaneously enrich soil quality in host countries' farms, enhancing agricultural yields. And more natural parks and wild-life preserves could boost revenue from tourism.
Tree-planting projects would also help many sub-Saharan African countries better tackle the harsh impacts of climate change. They would provide natural defences against the spread of deserts, frequent floods and soil erosion, which cause loss of farmlands and other natural resources and worsen poverty. Similar projects are already under way or being proposed in many countries. One in Mozambique, which the UN Environment Programme expects will qualify as a CDM project, aims to restore the native woodland in a national park and to aid sustainable timber harvesting.
The CDM also specifically recommends investments in energy projects, including small-scale enterprises that can develop renewable and cleaner energy sources such as hydro-power, solar energy and natural gas as alternatives to fossil fuels. Other projects can improve the fuel combustion and energy efficiency of existing technologies in the South. Nuclear power projects are excluded from the CDM.
A 1999 UNIDO study of the industrial priorities of six African countries (Ghana, Kenya, Nigeria, Senegal, Zambia and Zimbabwe) shows that all have a common interest in developing cleaner energy sources. Their industries, which are responsible for the bulk of their carbon emissions, are urgently in need of development on a more environmentally sustainable basis. Nigeria, which probably emits more carbon than the others due to the burning off of huge quantities of natural gas released daily in the production of crude oil, intends to better utilize this wasted resource, in part by building a pipeline to carry some of the gas to Benin, Togo and Ghana (which in turn will help promote regional integration).
Will Africa get a fair share?
Some CDM experts argue that up to $10 bn could be invested in clean development projects in the South yearly. "This is a significant figure for developing countries," says Mr. Richard Sandor, chairman of Environmental Financial Products, a US-based company dealing with commodity markets.
The CDM executive board has been mandated to ensure an equitable geographical distribution of projects, so that all developing regions benefit. Some fear, however, that sub-Saharan Africa is not yet equipped adequately to attract its fair share. A big problem is that the private sector "is barely aware of the CDM," according to Youba Sokona and Djimingue Nanasta, climate change researchers at Environment and Development Action-Third World (ENDA), a continent-wide non-governmental organization headquartered in Senegal. The ability to recognize, package and promote potential opportunities for funding is lacking, they say. Mr. Dankers of UNDP agrees. Another major obstacle, he told Africa Recovery, is inadequate human and institutional capacity to pursue the CDM process, although UNDP and other donors are providing some assistance to address the problem.
Africa's tiny share of man-made greenhouse gases, put at just 2-3 per cent of the estimated 6 mn metric tonnes emitted globally as of 1990, makes the continent one of the "cleanest" parts of the world. And while African leaders take pride in that, Sokona and Nanasta doubt it will be an incentive for potential CDM investors. Industrialized nations can earn more credits from projects in countries with much higher emissions, such as India or China.
Moreover, the same factors that contribute to low flows of foreign direct investment to Africa -- weak transportation, communication and energy infrastructure, as well as political instability -- may make private companies reluctant to invest in CDM projects. As South African Chamber of Commerce Chief Executive Zoli Diliza has pointed out, "while the business opportunities are certainly there, they will not be simply handed out as freebies on a silver platter."
However, the CDM's provision for equitable geographical distribution may help counteract such obstacles. So far, African proposals under the CDM are getting some initially encouraging responses. Environment Minister Modou Diagne Fada of Senegal has reported that proposals by his government for chemical production and electric power generation projects have been received "favourably" for possible funding. Mozambique, Zimbabwe, Uganda and Nigeria, among other African countries, are actively designing proposals of their own.