CDM directs here. For other uses see CDM (disambiguation).
The Clean Development Mechanism (CDM) is an arrangement under the Kyoto Protocol allowing industrialised countries with a greenhouse gas reduction commitment (called Annex 1 countries) to invest in projects that reduce emissions in developing countries as an alternative to more expensive emission reductions in their own countries. The most important factor of a carbon project is that it establishes that it would not have occurred without the additional incentive provided by emission reductions credits.
The CDM allows net global greenhouse gas emissions to be reduced at a much lower global cost by financing emissions reduction projects in developing countries where costs are lower than in industrialized countries. However, critics argue that by allowing "business as usual" projects some emission reductions under the CDM are false or exaggerated, and in early 2007 the CDM was accused of paying €4.6 billion for projects that would have cost only €100 million if funded by development agencies (see discussion below).
The CDM is supervised by the CDM Executive Board (CDM EB) and is under the guidance of the Conference of the Parties (COP/MOP) of the United Nations Framework Convention on Climate Change (UNFCCC).

History and Purpose

CDM project process
An industrialised country that wishes to get credits from a CDM project must obtain the consent of the developing country hosting the project that it will contribute to sustainable development. Then, using methodologies approved by the CDM Executive Board (EB), the applicant (the industrialised country) must make the case that the carbon project would not have happened anyway (establishing additionality), and must establish a baseline estimating the future emissions in absence of the registered project. The case is then validated by a third party agency, called a Designated Operational Entity (DOE), to ensure the project results in real, measurable, and long-term emission reductions. The EB then decides whether or not to register (approve) the project. If a project is registered and implemented, the EB issues credits, called Certified Emission Reductions (CERs, equivalent to one metric tonne of CO₂ reduction), to project participants based on the monitored difference between the baseline and the actual emissions, verified by the DOE.

Outline of the project process
To avoid giving credits to projects that would have happened anyway ("freeriders"), rules have been specified to ensure additionality of the project, that is, to ensure the project reduces emissions more than would have occurred in the absence of the project. There are currently two rival interpretations of the additionality criterion:
A number of terms for different kinds of additionality have been discussed, leading to some confusion, particularly over the terms 'financial additionality' and 'investment additionality' which are sometimes used as synonyms. 'Investment additionality', however, was a concept discussed and ultimately rejected during negotiation of the Marrakech Accords. Investment Additionality carried the idea that any project that surpasses a certain risk-adjusted profitability threshold would automatically be deemed non-additional set by the CDM Executive Board for assessing additionality.

What is often labelled 'environmental additionality' has that a project is additional if the emissions from the project are lower than the baseline. It generally looks at what would have happened without the project.
In the other interpretation, sometimes termed 'project additionality', the project must not have happened without the CDM. Establishing additionality
The amount of emission reduction, obviously, depends on the emissions that would have occurred without the project. The construction of such a hypothetical scenario is known as the baseline of the project. The baseline may be estimated through reference to emissions from similar activities and technologies in the same country or other countries, or to actual emissions prior to project implementation. The partners involved in the project could have an interest in establishing a baseline with high emissions, which would yield a risk of awarding spurious credits. Independent third party verification is meant to ameliorate this potential problem.

Establishing a baseline
With costs of emission reduction typically much lower in developing countries than in industrialised countries, industrialised countries can comply with their emission reduction targets at much lower cost by receiving credits for emissions reduced in developing countries as long as administration costs are low. However, many CDM projects have led to excessive profits (see next section).
IPCC has projected GDP losses for OECD Europe with full use of CDM and Joint Implementation to between 0.13 and 0.81 % of GDP versus 0.31 to 1.50 % with only domestic action.
While there would always be some cheap domestic emission reductions available in Europe, the cost of switching from coal to gas could be in the order of €40-50 per tonne CO₂ equivalent. CERs from CDM projects were in 2006 traded on a forward basis for between €5 and € 20 per tonne CO₂ equivalent. The price depends on the distribution of risk between seller and buyer. The seller could get a very good price if it agrees to bear the risk that the project's baseline and monitoring methodology is rejected; that the host country rejects the project; that the CDM Executive Board rejects the project; that the project for some reason produces fewer credits than planned; or that the buyer doesn't get CERs at the agreed time if the international transaction log is not in place by then. These risks the seller can usually only take if it is a very reliable counterparty rated by international rating agencies.

Financial issues

Concerns
As CDM is an alternative to domestic emission reductions, the perfectly working CDM would produce no more and no less greenhouse gas emission reductions than without use of the CDM. However, it was recognized from the beginning that if projects that would have happened anyway are registered as CDM projects, then the net effect is an increase of global emissions as the spurious credits will be used to allow higher domestic emissions without reducing emissions in the developing country hosting the CDM project. Similarly, spurious credits may be awarded through overstated baselines, causing the same problem.
NGOs have criticized the inclusion of large hydropower projects, which they consider unsustainable, as CDM projects . Other concerns are the lack of renewable energy CDM projects and the inclusion of sinks.

The risk of spurious credits
In early 2007 an issue that had by then already been known for a while