One great advantage of the CDM is its capacity to reduce the cost of CO2 mitigation for companies based in developed countries. Furthermore, it encourages other companies without emission restrictions to voluntarily choose to develop green projects and sell their carbon reduction credits to companies or nations which have imposed a GHG cap and trade system. Project developers will receive the credits for seven years and can renew this period twice (thus a maximum of 21 years) or optionally once for a single period of 10 years.

 

Before participating in a CDM project, the developer needs to receive an authorisation from a Designated National Authority (DNA) counter party in a country that ratified the Kyoto Protocol. The project developer has to meet and show the required criteria established by the project host country. The DNA then accepts the project with a letter of approval. Further control is conducted to ensure true GHG reduction occur during the project lifetime.  Host country approval is one of the key components to ensure that governments retain sovereignty over their natural resources. Apart from approving the development of the proposed project under CDM, it is also the host country’s responsibility to confirm whether the CDM project activity will help it meet its own sustainable development criteria. 

 

Validation and realization of a CDM project is not a simple affair. In order to receive the approbation from the local authorities, it is first necessary to have a good understanding of the legal context of the hosting country. The next step is to prove the project additional. Additionality is the fundamental criterion for the recognition of a project. Under this criterion, the project developers must, from a business-as-usual (BAU) scenario, show that their project will result in GHG emissions reductions which would not occur otherwise. The difference between the level of emissions in the BAU scenario and in the scenario with the CDM project determines one’s right to CERs. The additionality test is essentially composed of three elements: environmental additionality (does the project reduce emissions below the BAU scenario?), investment additionality (does access to CERs make the project viable?) and technological additionality (does the project lead to a transfer of technologies in the host country?). 

 

The study of the BAU scenario with the demonstration of additionality is therefore essential and both are key elements of the project design document (PDD). In the project cycle, this PDD is a key documentation and hiring a carbon consultant to draft it is very often of necessity. The PDD is subsequently submitted to an auditor (designated operational entity) for validation, and once validated, to the CDM Executive Board for registration. This latter is dependent on the United Nations and was established to practically implement the CDM. This Board is also responsible for the quality inspection of independent projects. 

To produce a PDD is mandatory: no project can earn CERs without its validation and Executive Board registration. 

Reductions then need to be determined objectively. This is why the project designer has to include a monitoring plan establishing how they will measure the emission reductions. 

 

If developing a CDM project sometimes requires going through onerous processes, CO2 credits do on the other hand have a real financial value for entrepreneurs. For a CDM project in renewable energy, carbon credits can increase the IRR by at least 15% of the total. In the wastes management sector, a project such as the destruction of methane, can double its profits. It is even possible to create a project based on carbon credits alone as single source of revenues. In fact, it is easier to prove the additionality of those projects to the United Nations registration board.

 

Analyzing a project proposal requires making an assessment of the CDM potential, of the different offset market options, an evaluation of the associated risks and of the costs of the transaction. Using the service of a CDM specialist consultant ensures that this complex task is carried out professionally and can help avoid significant costs. 

 

Various options exist to maximize the benefits of carbon credits supplied from such projects . A company involved in the EU ETS might keep these carbon credits to help them reach their carbon reduction cap and trade target. Otherwise, a company might sell it’s credits or keep them and speculate on future demand and price increase. Buyers include companies with cap and trade objectives as well as countries (e.g. Belgium or its regions that launched public tenders), or private investors.