# **5.1 THE ACTIVITY-BASED CDM**

Today’s wisdom demands higher emission reduction levels than those made possible through a project based CDM, and many voices have understandably joined the chorus to expand the CDM (or create a similar mechanism) toward sector-wide mitigation efforts. However, it is likely that the CDM will remain an activity-based market mechanism, now and beyond 2012. By ‘activity-based’ we mean a mechanism whose logic is to measure tons reduced by individual projects rather than encourage a shift in emission trends (Figueres 2007a). In this system, baselines and additionality are determined at the individual project activity level, and the rules seek to differentiate those individual efforts that are better than the norm, rather than promoting a betterment of the norm.

The Marrakesh Accords flow from an activity-based logic. To change that logic the CDM Executive Board would need a decision of the COP/MOP, and there no political will to make such a shift, and certainly not before 2012. Guidance emitted by the COP/MOP to the EB since 2005 has focused on incremental adjustments to increase efficiency, consistency, predictability and transparency of the CDM. The guidance has not made any substantial changes to the system or to the rules.<sup>32</sup> Over the next two years negotiators are not likely to consent to material changes particularly if they could lead to higher CERs volumes, for the simple reason that the market is not dramatically short, even considering delays in registration and underperformance of registered projects. The latest estimate of the demand for Kyoto units is about 2.4 billion tCO2eq for 2008-2012 (UNFCCC 2008a). CDM projects in the pipeline have the potential to produce 2.9 billion tCO2eq by 2012,<sup>33</sup> although transaction bottlenecks and project underperformance seem to put the more realistic supply estimates in a range between 1.6 and 1.9 billion tons (UNFCCC 2008a).<sup>34</sup> Developing countries fear that a substantial change in rules could open a floodgate to supply which would overwhelm demand, tank prices, and cause environmental damage due to the offsetting nature of the CDM. Thus it is our sense that the CDM will not be subjected to any serious revamping during the first commitment period, despite the pressures from stakeholders desirous of change.

Furthermore, the CDM may continue to offer developing countries the opportunity to engage in activitybased offsets in the post 2012-regime. The operational structure that has been developed for the CDM, including the rules that apply to activity-based offsets, is only just coming into fruition. There are some countries that are not yet participating in the CDM and for which the current requirements of host country approvals remains a challenge. Most medium to large-sized installations in small countries can

> 32 Substantial changes to the CMD which were discussed under Article 9 negotiations at COP/MOP 4 in Poznan did not prosper and were deleted from the text, even before the entire Article 9 was dropped.

> 33 <u>http://cdm.unfccc.int/Statistics/index.html on June, 2009.</u>

34 The estimates do not yet take into account that the recent global financial crisis has decreased investment capital available to CDM projects that produce the supply of CERs, as well as slowed production in industrialized nations (thereby decreasing the demand for compliance offsets). Figures are sometimes dramatic: Corus, a UK-Dutch steel maker owned by Indian Tata, has announced a 30% cut in steel production by March 2009, resulting in a cut of by 8,1 million tons of CO2 emissions. Other steelmakers have announced similar cuts according to PointCarbon, 2008a.

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