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Climate negotiations must promote capacity building, not impose quotas, argues ZhongXiang Zhang.

The Clean Development Mechanism (CDM) is an innovative financial incentive built into the Kyoto Protocol to channel funds and technology to developing countries to help them meet their sustainable development goals. Through it, wealthy countries committed to lowering their carbon emissions can invest in emission-reduction projects in developing countries instead of more expensive alternatives at home. Such projects can also earn saleable emission-abatement credits that can be used to meet Kyoto targets.

The CDM has, in part, been successful. The global number of CDM projects registered and in the pipeline totals over 4600 — well above what was envisioned by countries when they negotiated, designed and launched the mechanism.

And with the pledged funding under the UN Framework Convention on Climate Change and the Kyoto Protocol representing only a fraction of the anticipated mitigation and adaptation needs of developing countries, a market mechanism like the CDM will be crucial when the first commitment period of the Kyoto protocol runs out by the end of 2012. Moreover, industrialised countries, in particular the United States, need to commit to steeper emission reductions and set the least restrictions on the use of offsets in the post-2012 climate negotiations, which will further increase demand for CDM credits.

But the exponential growth in CDM projects raises concerns about whether these projects actually reduce carbon emissions. Moreover, the uneven distribution of CDM projects across developing nations begs the question of whether this mechanism is delivering value to the countries it was set up to help.

A solution proposed by the European Union is to impose quantitative restrictions on overall CDM credits. But this will limit the scope of CDM and hinder its evolution from being project-based to sector-based — a change that is generally considered necessary to broadly engage developing countries until 2020.

Rather, the key lies in building capacity in host countries to design and implement effective CDM projects, and in providing rules and incentives for developed countries to invest in key sectors and regions.

Building capacity and strengthening local institutions

To date, the lion's share of CDM projects has gone to a handful of developing countries. Latin America was an early beneficiary. Asia soon caught up — China and India have both seen an exponential growth in CDM projects since 2005 and China is now the world's largest CDM host. But other regions, including South-East Asia and Sub-Saharan Africa, have yet to take advantage of it (see 'Climate change: Bring Africa in from the cold').

Why this difference? China's experience clearly indicates that capacity building is the key to jumpstarting CDM projects. Extensive investment between late 2001 and 2006, including from many donor agencies, has helped China. For example, an Asian Development Bank project supported small-scale CDM energy projects, while the UN Development Programme built capacity in large-scale industry with three pilot projects in the areas of renewable energy, energy efficiency and coal bed methane.

At the same time the Chinese government has established clear institutional structures, transparent CDM procedures and sound governance with clearer lines of responsibility to facilitate the smooth implementation of CDM projects.

Expanding the CDM to countries left out in the cold will mean strengthening local institutions and building their capacity to initiate and undertake projects. This desperately needs support from developed countries and multilateral institutions — and is where specific commitments must be made in the post-2012 climate agreement.

Extending the benefits

However, a rise in capacity could lead to further increases in the overall number of CDM projects, intensifying skepticism over the CDM's environmental integrity. This issue must be addressed in the post-2012 climate negotiations, but is not an excuse for putting quantitative restrictions on CDM credits.

Rather, negotiators should improve the accreditation system for validating, verifying and certifying emission reductions of CDM projects and create lists of renewable and energy efficient technologies to ensure CDM benefits the environment.

Programmatic CDM bundles together a set of activities and can make a better contribution to sustainable development than single CDM projects, although they cost more to register. Assigning a price premium on programmatic CDM will help extend its reach.

A final question for countries negotiating the future of CDM after 2012 is when should nations move from hosting projects to financing them? Developing countries should not be given permanent rights to CDM credits, regardless of their stage of economic development — this is not in the interest of the environment. But asking major hosts like China or India to graduate from the CDM too soon is not practical either.

In China, cuts in emissions due to current CDM projects contribute, albeit a small amount, to China's energy-saving goals. Given its reliance on coal, having more renewable energy CDM projects would also help reduce China's greenhouse gas emissions. Clearly, increasing the overall number of CDM projects would be a win-win situation for China and global climate change.

ZhongXiang Zhang is a senior fellow at the East-West Center, Honolulu, the United States.