CDM for the Everyman Ecopreneur: Reforming the Carbon Credit Process

Sebastian Foot hadn’t meant to create such a frustrating job for himself.

Last year, he founded a Clean Development Mechanism (CDM) project finance structuring firm called Frontier Advisors with the “intention to take equity” in the emerging green market space. Instead, he ended up in a constant tussle with an interminably slippery bureaucracy that is the UNFCCC CDM Executive Board.

Foot has watched the debate surrounding its reform, and, in his mind, it doesn’t go far enough.

“I think the goal, aspirations, of the CDM really should be to engage people in developing countries to develop projects and to be able to seek approval themselves,” Foot says.

He’d like to see the everyman ecopreneur in a developing economy empowered to benefit from what the CDM offers: a stake in the economic development of their country. Instead, Foot explains, the everyman ecopreneur faces a shifting qualification maze, rising costs, and an executive board that has lost the plot:

“The CDM creates a carbon market — which is fantastic — but it should have a lower barrier to entry, and instead it has a very complicated, high barrier to entry. And that doesn’t make it efficient for what I think its goal is, which is sustainable development.

"It makes it efficient for consultants and it creates a group almost that understands how it works and therefore you tend to have to go through those sorts of entities in order to even get to the stage where you’ve got a project that is recognized that you can generate value.”

The CDM was created so emissions-reduction projects, such as renewable energy projects, in developing countries could earn certified emission reduction credits, which could then be sold to industrialized countries to help them meet their emission reduction targets under the Kyoto Protocol. The executive board oversees the qualification process.

According to Samuel Frankhauser, senior research associate at LSE’s Financial Markets Group, part of the problem in the CDM process is a result of asymmetric information.

“We have a regulator that doesn’t know everything that industry knows, and therefore you build in industrial regulatory structures to reveal the information to make sure the industry reveals what they truly think," Frankhauser says.

"The whole CDM procedure is sort of its own dance between project developers and the executive board to make the elements reveal what they would have done.”

Christopher Wright, a research fellow at the Centre for Development and Environment at the University of Oslo agrees that the scope of the CDM needs to be expanded, because, as it is, it allows for the preference of investors for “large projects in middle-income countries.”

A plan for CDM reform was agreed to at the international climate conference in Copenhagen late last year that includes procedural “streamlining” and funding for countries with fewer than 10 approved CDM projects, a group that includes most of Latin America and Africa. But the reforms still fail to get at the heart of the matter.