Clean Development Mechanism rejections skyrocket

Nearly a third of all projects reviewed under the Clean Development Mechanism (CDM) were rejected or sent for further review recently by the UN regulators administering the scheme.

The number, a huge jump compared with previous months, is seen as the regulators' response to recent criticism that the scheme is plagued with incompetence and fraud. In June, one senior figure associated with the CDM said up to 20 per cent of the credits currently sold may have been off the back of bogus projects that do not contribute to emission reduction.

The CDM, one of the central market-based mechanisms to be born of the Kyoto Protocol, allows polluters in wealthy countries to buy credits to emit carbon from the CDM, with proceeds used to fund environmentally sound projects in developing nations where the cost of these projects would normally be beyond reach.

One criticism of the CDM is that many of the projects it has backed do not pass the test for ‘additionality’ – that is, they are not dependent on CDM finance and would go ahead anyway.

Hence, as part of their crackdown, CDM regulators have recently rejected a wind farm in India and factories in India, Brazil and Malaysia which were designed to operate on biowaste.

Those pitching the projects for CDM funds say that the system is biased against small projects where CDM funds could be truly transformative because it costs the same to put a small project through the CDM approval process as a large one.

The actions have disrupted the nascent carbon markets in Europe and Chicago, where carbon is priced at about €20 (£16) a tonne. The UN issued credits last year worth up to $1.8bn (£900m). The global carbon market will see 4.2 billion tonnes of carbon emissions transacted during 2008, up 56 per cent from last year, according to market analysts at Point Carbon. At today’s prices, that would make the market worth $92bn.

If the CDM were to be discredited entirely, polluters could no longer buy carbon credits and would each have to cut their own emissions which, according to most analysts, would cause significant rises in the price of goods to consumers.