Clean development mechanism: Leveraging the booming investment opportunities in carbon trading


Carbon trading is an accepted mechanism whereby market forces are applied to reduce overall emissions of greenhouse gases. But are the real investment opportunities realized in carbon trading? The social and environmental impacts of carbon trading are considered.

Carbon Trading

The basis of carbon trading is to reduce emissions through a “cap and trade” system, where the cap is set by a political process and individual companies are free to choose how or if they will reduce their emissions. This concept uses free market environmentalism to reduce emissions. In theory, firms will choose the least-costly way to comply with the pollution regulation and incentives are created to reduce the cost of achieving a pollution reduction goal.

The Clean Development Mechanism (CDM) is an arrangement under the Kyoto Protocol allowing Annex 1 countries with a greenhouse gas reduction commitment to invest in projects that reduce emissions in developing countries as an alternative to more expensive emission reductions in their own countries. The CDM is supervised by the CDM Executive Board and is under the guidance of the Conference of the Parties of the UNFCCC.

Since 2006, CDM has registered more than 1,000 projects and it is anticipated that Certified Emission Reductions (CERs) amounting to more than 2.7 billion tonnes of CO2 equivalent will be generated in the first commitment period of the Kyoto Protocol (2008–2012).

The CDM process involves:

•Preparation of a Project Design Document (PDD)*, the format of which has been specified by the CDM Executive Board.

•Validation of the PDD by a Designated Operational Entity that certifies the project is in compliance with the CDM framework

• Registration of the project with the CDM Executive Board

• Annual verification of the emissions reductions by the Designated Operational Entity

• Issue of CERs from the CDM registry

(*includes the quantification of the emissions reductions against a new or existing baseline methodology, a plan for the monitoring of the reductions over the life of the project, and a case that the emissions reductions achieved are additional to business-as-usual in the context in which the project is undertaken).

Under the Voluntary Scheme, the voluntary market trades Verified Emission Reduction (VERs); this scheme is dominated by forestry sequestration, renewable energy and industrial gases.

There are two main segments:

• Voluntary but legally binding, cap and trade systems, such as those employed by the Chicago Climate Change Exchange CCX

• Over the counter (OTC), which is a voluntary offset

Carbon Markets

The current total carbon market is estimated to be worth US$64 bn and will grow to US$400 bn by 2012. According to the World Bank, the CDM market is around US$18 bn and the voluntary market is about US$330 m. (see table below).

Investors in carbon markets look for: purchases of carbon credits (CERs or VERs); green energy sales; carbon sequestration (forestry projects); eco-tourism in areas of carbon conservation; development of low carbon technologies; and growth of micro-enterprises.

In addition, there are associated social and environmental impacts of carbon trading:

• Protection of rural livelihoods
• Reduced effects of pollution
• Redistribution of much-needed capital
• Creation of economic wealth
• Widespread poverty alleviation
• Ecological education
• Benefits recouped for the community
• Heightened global awareness to problems of climate change

Case Studies

Cambodian Firewood Saving Project

90 % of the Cambodian population depends on fuel-wood for cooking purposes. Forest resources are seriously threatened if no action is taken to control household wood consumption. The goal is to reduce charcoal and thereby fuel wood consumption by introducing improved cooking stoves in rural Cambodia.

This cook stove project is part of the Cambodian Firewood Saving Project (CFSP) to reduce the wood consumption in Cambodia and protect its forest resources. When using more efficient cook stoves, the demand for charcoal decreases and GHG emissions are reduced both during the production and combustion of charcoal.

The project started in 2002. An annual average of estimated reductions between 2003 and 2012 is 328,847 tonnes CO2e.

Laos Off-Grid Solar Project

Currently the electricity grid in Laos extends to just 38% of households. The proportion is lower in rural areas where extending the grid can be difficult and expensive due to the low population density, low income, limited loads and mountainous terrain.

The Laos Off-Grid Solar Project involves the installation of over 16,000 photovoltaic solar home systems (SHS) in rural areas to provide affordable, reliable and sustainable electricity service to households. The SHS have no greenhouse gas emissions and will offset the use of fossil fuels to drive small diesel generator sets. The additionality of this project is demonstrated using the barrier analysis method for small scale projects.

The project was started in 2002. A total capacity of 6 MW has been installed. The project activity is estimated to reduce annual emissions by 53,046 tonnes of CO2e equivalent over the crediting period from 2002 to 2012.

Pig Farm Biogas Project

A pig farm in Hebei Province, China, is using pig waste to generate biogas. The generation of electricity from biogas (methane) as a renewable energy source replaces the combustion of other fossil fuels. Currently the company is utilising its biogas chambers to process 30% of the pig waste generated on-site. There is scope to construct bigger and more efficient biogas chambers to process the remaining untreated pig waste.

Based on methane generation of 10,000 m3 per day, this is roughly 353,150. ft3 per day. This equates to about 50,000-100,000 tonnes of CO2e per year.

The installation of the biogas chambers will produce green energy for the company and surrounding farms and will also provide residue which can be used as biofertiliser.

Rural health and sanitary conditions will improve and the risk of infectious diseases will be reduced through animal waste processing. Additional employment opportunities will be created. Farmers who currently have to leave their families to work in cities will have a strong incentive to relocate back home.


Current mechanisms for carbon trading are in place but the market is still testing various products. The size of carbon market will increase post 2012. It is worth reminding ourselves of the social and environmental benefits that can arise from carbon projects.