Summary report of the joint UNIDO-MRI Forum about the Clean Development Mechanism

IS CLEAN DEVELOPMENT NEXT TO A MARKET NICHE?

Held in Tokyo 24 th -25 th June 2002

About 20 experts discussed attempts to create a market for controlling emissions of greenhouse gases responsible for Climate Change. Last June in Tokyo, 300 scholars, government officials and business people heard presentations and discussions about current efforts, future plans, financing schemes, country perspectives, and the views of the private sector on the Clean Development Mechanism (CDM), a new economic tool derived from the Kyoto Protocol, most probably entering into force early next year. A common concern was the need for clear rules from the CDM Executive Board - mandated under the Kyoto Protocol - on how to set up projects, use the carbon credits derived therefrom and fostering public/private partnerships in order to shift energy development in developing countries towards cleaner paths. Contentious issues discussed included the viability of the market, the extent of government intervention, and the priority of environmental concerns in developing countries. Speculative worries arose nationally about the likelihood of Kyoto Protocol endorsement by Russia and the United States, and regionally, about well-preparedness of Latin America compared to Asia.

The United Nations Industrial Development Organization (UNIDO) director-general Carlos Magarinos contrasted today's needed environmental restoration with the industrial revolution, saying that natural resources are now scarce and this scarcity makes them an additional economic factor countries should capitalize on. The ratification of the Kyoto Protocol in June by Japan will require the already environmentally efficient country to use the CDM to transfer clean technology to developing nations.

Background speeches set the scene for the two-day discussion of the CDM, describing the necessity for taking action before evidence proves the case of climate change. Cooperative international action could reduce greenhouse gas (GHG) emissions at the lowest possible costs. Article 12 of the Kyoto Protocol includes text on sustainable development and introduces the CDM as an international tool capable of helping countries with quantified limitations on their GHG emissions. International research and activity among private companies has already begun in this new commodity of "avoided carbon emissions".

In the introductory session, Lu Xuedu, CDM Executive Board member from China, spoke of events leading to the Kyoto Protocol signing and establishing the Kyoto Mechanisms including CDM. Neil Cohn, director of energy broker "Natsource", addressed the problem of the lack of international policy framework that unfortunately allows "systems to be created that are not in unison, and that will be difficult to eventually get to harmonize." He said the patchwork of state and local GHG programs in the US bodes well for the US as a unilateral participant in the Kyoto Protocol. He predicted price distortions but looked forward to a standard and more liquid carbon market maturing in three years.

In the second session, five speakers outlined the CDM in Asia. Jusen Asuka of Tohoku University in Japan elaborated Japan's policy options, adding that "The current phobia-like feeling must be put aside." Ryuji Matsuhashi of Tokyo University introduced his research about risk reduction associated with CDM investments involving partial securitization. Alex Michaelowa of the Hamburg Institute of International Economics concluded that Asian countries have feared that CDM would be "a road to emission targets." Mitsutsune Yamaguchi of Keio University elaborated on Japanąs strategies to meet the Kyoto Protocol, emphasizing the urgency for the government to give a clear signal to Japanese industry as to their options under the CDM.

Third session speakers looked into the CDM in the context of international commercial financing of energy projects. Using real examples, they illustrated the favorable impact of carbon financing but cautioned against viewing the CDM purely as a financing instrument. Vikram Widge of the International Finance Corporation defended the current buyerąs market as a learning place. Ikuo Nishimura of Tokyo Electric Power Company defined carbon finance as the finance required to achieve emission reductions compared with the baseline of "business-as-usual".

In session four, speakers outlined Asian countries' thinking in terms of shortcomings associated with use of the CDM for technology transfer. The Thai CDM priority of renewable energy struggles with the unsolved issue of how to set up CDM projects. The ASEAN Center for Energy planned infrastructure to connect the power grids and gas pipelines of its countries by 2020 seems "tailor-made" for the implementation of CDM. India stresses the need for replicability and continuity of the CDM because technology transfer is "not a piece of hardware." NEDO seeks to link its energy development activities to CDM to be "a pioneer for Japan." UNIDO prepares client countries to benefit from CDM by evaluating projects' ability to generate carbon credits.

In session five, private sector representatives talked about private sector participation in the CDM. They discussed existing projects that are candidates for carbon crediting in Indonesia and New Zealand, trying to utilize the Kyoto Mechanisms in Japan, the uncertainty of Japanese companies towards CDM, and the simulation of a project portfolio. A public/private partnership already exists between a developing country's state-run oil and electricity companies and a developed country's multi-national private oil company. The World Energy Council, an NGO begun in 1923, has cross border projects generating emissions reductions similar to certified emission reductions (CERs), said a speaker from New Zealand who added that the re-elected government would likely ratify the Kyoto Protocol in August (2002). Yuzuru Nonaka of Electric Power Development Company Ltd., in Japan, said a macro analysis model showed the global target could be achieved if there is world involvement, which implies that "We have to have emissions trading." The Kyoto Protocol sets rules for emissions trading in developed countries by giving all committed countries (mainly developed countries and economies in transition) an emissions cap that can be traded, which along with project-based mechanisms like the CDM, is the foundation of the Kyoto Protocol.

In a panel discussion, Robert Williams of UNIDO asked for interpretations of COP-7 decisions in Marrakech, noting that the media had reported the major outcome as a "rule book" for the Kyoto mechanisms. The private sector respondents spoke optimistically of opportunities in the ASEAN region, significance for the market and the viability of CDM, commitment to CDM based on private transactions with limited government involvement, and clarification by the Executive Board of procedures necessary for the established mechanism of Activities Implemented Jointly (AIJ) and the nascent CDM. However, a forum-wide consensus of criticism was voiced about the unresolved definition of efforts beyond business as usual that are called "additional." Lu of China dissented by saying that carbon creditsą price deriving from the CDM would be heavily influenced by government policy. Asked about private sector involvement in the CDM, panellists identified the major obstacle as a lack of clarity of the rules. "Private/public partnership could minimize government regulation," said Nonaka of Japan.

In an open discussion, Cohn offered assurance that companies can implement CDM. He also guessed that Russia flooding the market with " hot air " would be unlikely, responding to a worried question about market upset. Vute Wangwacharakul of Kasetsart University in Thailand highlighted the need for a paradigm shift, saying, "We have to look at the public of others." Many people expressed the need to create a market for the CDM tool. Summary statements about CDM painted a picture of restrained practical enthusiasm. There was a general agreement that the CDM is a regulated market in which minimum regulation allows market integrity. Japanese companies could invest in Asia and sell CERs to Europe, looking forward to a fully integrated market in the near future. A lot can be learned about the complexities of CDM by doing small transactions. Academic institutions and international organizations can help business sectors understand how to operate the CDM with economic rationality. Also, partnership between public and private sectors is a good approach to the problem of how to apply the global market mechanism of CDM from one country to another. In a closing statement, Yorimasa Takeda, Executive Director of the Mitsubishi Research Institute (MRI), said that although CDM as a mechanism may be unclear and the market lacks transparency, the UNIDO/MRI forum had heard participants "confirm what CDM is about" from their respective viewpoints.

Full report available from the following URL: http://www.unido.org/doc/310797.htmls

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