Clean Development Mechanism (CDM)
The Clean Development Mechanism (CDM) is the second type of Kyoto Protocol’s flexible mechanisms. Mandated by Article 12 of the Kyoto Protocol, CDM allows Annex B parties with an emissions reduction commitment to invest in emissions reduction projects in developing countries as an alternative to more expensive emission reductions in their own countries. Under the CDM, investors from Annex B parties receive tradeable Certified Emissions Reduction units (CERs) for the actual amount of greenhouse gas emissions reduction achieved, subject to host and investor country agreement, third party assessment, and registration by the UNFCCC’s CDM Executive Board (EB). The CDM allows CERs from projects initiated after 2000.1
After the EU ETS, CDM is the second largest cap-and-trade emissions trading program. In 2007 CER volume was 947 Mt, representing €12bn in transactions value. This represents a volume growth of 68% and a value growth of 199% from 2006. Based on this, the CDM held 35% of the physical market and 29% of the financial market.
CERs purchased in the forward market are called Primary CERs (pCER). A pCER, typically purchased from a project developer, bears significant delivery risks. To mitigate this risk, buyers are willing to pay a premium by buying CERs with guaranteed physical delivery. This has led to the creation of Secondary CERs (sCER). The sCER market has been the fastest growing segment in CER trading. The 2007 volume for sCER trades was about 300 Mt1, much of this related to EUA-sCER swaps.
- Source: Point Carbon