28th January

On the 28th, we meet with Arjun Some, a Senior Consultant from Ernst & Young LLp. He used to do a lot of work with Clean Development Mechanism (CDM) and therefore, we have many questions to ask him.

CDM, CER how does it work?

The Clean Development Mechanism (CDM) has been defined in the Kyoto Protocol (signed in 1997), and it specifies that the projects labelled as CDM projects can sell their Certified Emission Reduction (CER) on a public market, to companies. These are essentially European because no other countries have binding commitment to lower its Green House Gases (GHG) emissions.

The CDM projects are selected according many criteria, including the carbon emission reduction, the size of the project, or the importance of the eventual subsidies in the project. One can discuss the sustainability of some CDMs when they are granted to big oil firm, or related to the palm oil industry!

Each country in Europe has its own objective of GHG reduction by 2020 (see the “20-20-20 objective”). Global GHG emission reduction targets are given at the EU level then, each country decides, sector by sector, which reduction has to be made. Following that step, the competent ministry decides for each company the GHG emission allowed. Finally, each company decides for its sites the GHG emission reduction in order to fulfil the objectives. If the company’s emissions are above the legal limit, then it has to buy CER to CDM projects on the carbon market. The CER are thus exchanged between the providers (CDM projects in developing countries) and the buyers (European firms).

Evolution of the CER

The CER started around 2006, supported by the UN. At that time, the economy was going fine, growing. And there was a global preoccupation about the environment. Back in 2008, the CER was at its apogee. The rate was of 20-21€ per ton of CO2 equivalent. The CDM was at its peak of popularity. India and especially China obtained a huge quantity of CDM projects. Many of them should not have been considered so, and were accepted because the criteria were too loose at that time. The market got flooded with a lot of CERs. The economic crisis worsened the situation: in Europe, many plants were closed, or lowered their activity, because of the crisis. Because the European factories lowered their emissions, the demand for CERs decreased. The unfavourable demand/offer ratio lead to a dramatic drop in the price of a CER. Its current value is around 0.2€. As a consequence, here in India and all over the world, many companies related to CDMs have problems: their business plans are falling down.

We ask Arjun what can be done to save the CDM; can a minimum price for the CER be installed? But there would be no one to warranty it. Arjun tells us that the UN is currently thinking to exclude India and China from the CDM projects: they have used it fully, and saturated the market (about 95% of the CER comes from these two countries). The CDM projects should be reserved for really poor countries (Bangladesh, Africa, !), where these kind of subsidised projects can make a real difference.

The CDM projects for consultants

Generally, the PDD of a CDM project is redacted by a consulting company. The consultant has two complementary ways of getting paid for this job. First, a fix fee is paid in order to redact the documents (including the Project Design Document). On top of that, in case the project is accepted to be a CDM, the consultant earns small percentage of the money received by the project for its GHG emission reduction (around 5-10%). This second retribution is a way for the project responsible to lower the initial price of redacting the documents, and thus the risks in case their CDM demand is rejected. It also ensures a motivation from the consultant company to get the CDM label.

Due to the crash of the CDM initiative, the branch of consulting companies dealing with CDMs needed to change their field of expertise: instead of redacting documents for obtaining the CDM label, some consultant from E&Y are now focused on sustainability reports. This business reorientation was not dramatic for E&Y; the company is huge and has many other sources of income. In these sustainability reports, E&Y summarises the performance of the company in terms of economy, but also its impact on the environment. Obviously, E&Y cannot be too harsh with the company paying them, so they generally have to find the balance between the truth (that could dissatisfy the client) and too much green-washing (that would lower the reputation of impartiality of E&Y).

Solutions outside CDM

Now, with the economic crisis, everyone has forgotten about the environment. Instead of opposing environment and economy, these two notions should come hand in hand. The World Bank, or Asian Development Bank are now pushing projects economically viable (they are still a bank!), but taking care of the environment, like solar clusters or clean development projects, !. . The loans are adapted to such projects: no money is required to reimburse a loan in the first ten years. This gives time for the project to get stabilised.

The Indian government has recently taken measures to mitigate the GHG emissions. It asks each of the 28 states to come up with a plan of GHG emission reduction or mitigation, taking into account the energy issues, the affected people, affected areas, ! E&Y has been consultant for some of these states to help them realize where to focus, know what to do, or redact the mitigation plans.

There is also a new mechanism, started in 2012, called Perform Achieve Treat. It computes the specific energy consumption by industry during 3 years. The government sets objectives of reduction. If it is achieved, then the company gets some money, otherwise, it needs to buy some permits to compensate. For the moment, there is no positive result yet. It needs more time.