The UN Framework Convention on Climate Change
At the Rio Conference in 1992, there was a broad international recognition of the need for a common effort in order to mitigate climate change. This resulted in the first international legally binding agreement aiming to curb greenhouse gas emissions – the United Nations Framework Convention on Climate Change (UNFCCC). The Convention entered into force in 1995.

The aim of the Convention is to stabilise atmospheric levels of greenhouse gas concentration in order to prevent significant man-made interference with the climate. According to the UNFCCC, industrialised countries, or “Annex-I” countries, have the main responsibility to mitigate climate change.

All signatory nations commit themselves to report national greenhouse gas inventories every year, and to review the progress of their greenhouse gas abatement programmes. Other commitments are technological assistance to developing countries that are especially vulnerable to climate change and participation in the meetings of the Conference of Parties(COP) to the Convention.

The Kyoto Protocol

In 1997, concrete targets for curbing GHG emissions were established in the Kyoto Protocol.The Kyoto Protocol came into force in 2005, and sets concrete emissions reduction targets and timelines for Annex-I countries. On average these countries have to reduce their emissions by 5.2 per cent below the 1990-level within 2008-12.

Non-Annex-I countries (primarily developing countries) do not have binding targets under the Kyoto Protocol, but must ratify the Protocol in order to be hosting Clean Development Mechanism projects. Saudi Arabia is a Non-Annex I country.

Annex I countries’ reduction targets can be met by reducing domestic emissions, e.g. through implementing national or regional emissions trading schemes or other policy measures, and by utilizing the three flexible mechanisms established under the Kyoto Protocol:

  • The Clean Development Mechanism (CDM) – Article 12 of the Protocol
  • Joint Implementation (JI) – Article 6 of the Protocol
  • International Emissions Trading (IET) – Article 17 of the Protocol

The Clean Development Mechanism

The CDM encourages cooperation between Annex I and Non-Annex I countries in achieving compliance with Annex I reduction targets, while at the same time assisting Non-Annex I countries in achieving sustainable development goals and contributing to the goals of the UNFCCC.

Under the CDM, investors in emission reducing projects can receive Certified Emissions Reductions (CERs) for the actual amount of greenhouse gas emissions reductions achieved. CERs accruing from CDM projects can be used for compliance by governments and private companies in Annex I countries, including by the installations covered by the European Union Emission Trading Scheme (EU ETS).

For a CDM project to start generating CERs that are transferred to the account of a buyer in an Annex I country, it has to be subject to host and investor country approval, third party assessment, and registration by the CDM Executive Board (EB). A key component of the CDM is the requirement of additionality. CERs generated under the CDM will only be issued when the reductions of greenhouse gas emissions are additional to any that would occur in the absence of the project activity.

More information on the CDM project cycle and approval requirements can be found here.

Economic potential of the CDM

The additional revenue created by generating and selling CERs can help a project opportunity to become economically feasible.

Figure 3: Historic and recent CER prices
"Source: Point Carbon 2009"

Category 1 Project is still at concept/prospect stage or has developed a Project Idea Note.
Category 2 Project has developed a Project Design Document (PDD), and the PDD has been submitted to a designated Operational Entity (DOE) for validation.
Category 3 Project has been registered by the CDM Executive Board and has received a Letter of Approval (LoA) from host country.
Category 4 Project has been issued with CERs

Latest statistics

So far, closely 2,000 CDM projects have been registered by the CDM Executive Board, yielding expected volumes of more than 1,680,000,000 CERs until the end of 2012.
Until today, more than 355,000,000 CERs have been issued. The figure below shows the volumes of CERs issued by project type.