The threat of climate change is real and urgent. The Clean Development Mechanism (CDM) was supposed to be a win-win deal for the North and the South, and an effective way to combat this threat. Under it, the industrialised North got flexibility in achieving its emission reduction targets, in exchange for paying developing countries to shift to cleaner energy sources.

Murky deals
But the real story behind the CDM deals is murky. The UN designed-CDM procedures make it easy for the rich polluting nations to buy cheap credits for reduction of carbon emissions. As a result, CDM has turned into not only a cheap development mechanism, but also a corrupt development mechanism, says a recent report in the fortnightly Down To Earth, published from New Delhi.

The report done by the Delhi-based Centre for Science and Environment says the losers in this deal are the developing countries. They take on the risk of implementing projects; pay between US $30,000-100,000 for a lengthy certification process to get projects cleared by the United Nations Framework Convention on Climate Change (UNFCCC). They enter ERPA (Emission Reduction Purchase Agreements) that puts the penalty of non-compliance on the South. Yet, the price that developing countries get for credits is a meagre US $5-10 per tonne of carbon dioxide, while carbon credits get traded in Europe for US $27. All this is achieved by keeping the negotiations on price non-transparent and building a market that assists buyers and not sellers of the climate credits.

This perversion of CDM’s stated purpose works because rich countries have created a mechanism so that they can get the cheapest deals – buying emission reductions from the developing countries by directly negotiating with private companies, through the involvement of privately hired auditors to certify the projects.

International auditors indicted
CSE has found, shockingly, that the reports prepared by internationally acclaimed auditing firms like PricewaterhouseCoopers(PWC) and Ernst & Young(ENY), which are used to get these million dollar projects cleared, are at times clearly fraudulent. For instance, the project design documents prepared for the two companies referred to above simply copy and paste entire sections relating to stakeholder consultations. In other words, the provision of CDM that the environmental sustainability of the project must be certain is completely discounted.

The process designed by the UN agency is one in which the project proponent (industry) pay the consultant (PWC or ENY) to prepare a project design document and then pays the validator (another auditor, designated by the UN agency) to audit the report. The audit report is then cleared by the international CDM board based in Bonn. Not only does this entire procedure lead to higher transaction costs, but its very design makes it open to corruption and fraud, as the study shows.

"CDM has been designed deliberately to make it a bilateral business deal, a private-private partnership, which will give the rich countries a cheap deal. These procedures are leading to corruption and must be reformed," says Sunita Narain, director, CSE.

Meeting sustainable development needs
Not only are the project design documents as well as the validation by acclaimed international consultants suspect, but the fact is that little is understood of how these projects will help the South meet its sustainable development objectives. The UN rules to determine if projects are "additional" –would not have happened without CDM – have lead to convoluted methodologies for qualification of projects. This, the Centre finds, is leading to poor quality of projects, which do little to improve environmental sustainability goals of the host country.

CSE is calling for reform of CDM by the UN agency so that is can be used as an effective tool to combat climate change. Currently, the procedures are convoluted, the discussions on price are non-transparent, the methodology to assess what project qualifies makes for bad decisions. In all these arrangements – of private and private to get cheap and easy deals – the role of governments is minimised. This obsession with lack of regulation is leading to a corrupt and highly ineffective system, says CSE.

Narain, therefore, calls for reform of the mechanism. "CDM cannot become an industry mechanism, made for industry, by industry," she says. "To permit this to happen will subvert the objectives of CDM." The international community must be forced to bring in accountability and transparency in the governance of CDM and developing country governments like India must use CDM for their benefits: to reduce the threat of climate change in the interests of all.

The reform proposal
CDM can be reformed and these reforms should be an integral part of India’s demands in climate change negotiations. India must call for:

• Greenhouse gas emission reduction commitments from the North to encourage longer-term CDM projects
• Transparency and more public accountability in procedures
• Less convoluted procedures for real small scale community projects
• Reform of CDM so that projects are in line with government policies, and the countries’ priorities
• No emission reduction commitments for the South -- participation through a meaningful, socially and ecologically effective CDM

Combating climate change is about building cooperative arrangements between the countries of the North and the South. The complicated, cheap and now corrupt development mechanism must be changed so that it can become the clean development mechanism, says the Centre. Only then can the world make the transition to cleaner energy futures.