Since there seems to be resurgence of attempts to defend the Clean Development Mechanism (CDM) offset system, it seems time for a reminder of how badly the idea has failed. The fundamental idea behind CDM is that greenhouse gas polluters in rich nations could continue to release greenhouse gases, but pay polluters in poor nations to reduce emissions. The results, it was claimed, would be the same greenhouse gas reduction as the rich polluters could have achieved, but at a lower cost. 

CDM works by having a polluter in a poor nation accept CDM money, then compares their actual situation to a story about what might have been if they had not been paid that money. The claim then undergoes a certification process. If the story is accepted as true, the process generates a Certified Emissions Reduction (CER), which can be used as permission to pollute within rich Kyoto signatories. Any approved claims based on untrue stories  increase greenhouse gas pollution, because they act as permissions to pollute.

This has worked out as badly might be expected. Almost 70 percent of CERs approved as of Nov. 1, 2011 were based on highly concentrated HFC, and N2O greenhouse gases. The scandals around these gases have grown so large that they will no longer be approved to generate new CDM CERs after mid 2013, though China is trying to use climate extortion to push back against this. 

Further, prominent institutions and individuals who helped create CDM have admitted it is not working. In wonky jargon, The Independent Evaluation Group(IEG) of the World Bank has admitted that these offsets are a failure:

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… the additionality screening process has been widely criticized as ponderous, costly, and ineffective. Environmentalists press for stricter screening, investors for more streamlined procedures. The current system may combine the worst of both worlds: high transaction cost with substantial nonadditionality. A growing consensus views determination of additionality as quixotic at the project level.

“Additionality” is simply a term for the degree to which the story a CDM project is true. To the extent that the story about what would have happened without CDM money is false, the project is not “additional.” A partially “additional” project is based on a partially false story. A completely “non-additional” project is based on a completely false story.

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There are even franker admissions from people in a position to know which came out in the Wikileaks releases. Statements made confidentially to State Department employees were included in a released cable that was never expected to be seen publicly. This cable is temporarily unavailable at the wikileaks site, but fortunately the main quotes were preserved in at least two blogs.

Payal Parekh’s quotes are so juicy, and he gives such great translations from jargon that I’m tempted to just quote the whole thing. Instead, I suggest you read at his blog, and will extract just a few quotes:

[Somak Ghosh, President of Corporate Finance & Development Banking at Yes Bank], pointed out that no bank would finance a project which is viable only with carbon revenues because of the uncertainty of the registration process, unclear guidelines on qualifying CDM projects and because carbon revenue is only a by-product revenue stream of the main operations of the company.

My translation: Banks don’t finance projects that can qualify for CDM money without false stories, because projects that would truly qualify for CDM are too risky …

He [Ghosh] admitted that project developers prepare two balance sheets to secure funding: one showing the viability of the project without the CDM benefit (which is what the bank looks at) and another demonstrating the non-viability of the project without the CDM benefit.

No translation needed on that one.

At a seminar on CDM in Mumbai, R K Sethi, Member Secretary of the [Indian] National CDM Authority and the present Chairman of the CDM Executive Board, publicly admitted that the National CDM Authority takes the “project developer at his word” for clearing the “additionality” barriers

No translation needed there either, if you remember that the “additionality” barriers basically consist of not lying.

There are a number of attempts to defend CDM. One is to argue that, regardless of whether it benefits the climate or not, it has transferred nearly 150 billion dollars to the poor over the past decade or so. Unfortunately it turns out that less than one third of money spent on CDM ends up spent on operational and capital costs for CDM projects. Around half of CDM money ends up the  hands of brokers and consultants and other sources outside the nation where the project take place.  Much of the rest pays for transaction costs, and profits which ends up in the hands of the rich in nations where the projects take place. In short, CDM is mostly a transfer from the rich to the rich, not to the poor [PDF].

Another defense is to acknowledge problems, but to claim that CDM flaws are not fundamental to turning story-telling into precise financial instruments, but rather merely a problem of transaction costs. Those making that claim want to solve the CDM problem by scaling offsets up, by making them bigger. One example would be project standards, also called “aggregate offsets.” The idea is to set up a rigorous standard for a type of offset, like HFC. Any project that meets that standard then qualifies to generate CERs. That just multiplies the original flaw. The story on which the “standard” is based can be just as false as a project story. And there is plenty of room for game-playing in determining whether or not a project qualifies for a standard.

There is one last argument some defenders of CDM make. They admit minor problems but deny major ones. If you follow the link at the top of this post to the main CDM web site, it triumphantly features a study that proclaims wonderful benefits for CDM. If you actually download that study it is so blatantly dishonest as to deserve a discussion of its own — my next post on Grist. The short version however is that its primary source for CDM benefits is a survey of non-expert opinion, which it takes as evidence of facts.

In short, in spite of the attempts to revive CDM, it remains a miserable failure — at least if you believe the object of CDM is to help the climate, rather than to make money. And CDM is the most rigorous type of offset project that exists — subject to an extensive multi-institutional series of checks. I’m familiar with no non-CDM offset that is not far worse, subject to much weaker processes than CDM. So that can be extended to say that offsets, not just the CDM form of offsets, are a miserable failure.