The Research Committee on Risks in CDM/JI and
Abatement Measures

　The Research Committee on Risks in CDM/JI and Abatement Measures (The Research Project on Harmonization between Trade and Environment - 2^nd year) held five meetings under the chairmanship of Prof. Mitsutsune Yamaguchi (Dept of Economics, Keio University) to examine potential risks and response measures for abatement in an attempt to promote CDM and JI in harmony with trade promotion and environmental protection.

　We have identified risks in implementing a project and categorized into general international risks and intrinsic risks to CDM/JI. We further analyzed CDM/JI from the perspective of host countries/ companies and the risks arisen from international CDM/JI projects and studied the current situation in China regarding CDM. Recent trends in CDM projects, host countries’ institutional support and current initiatives by Japanese companies have also been examined. Finally, we have discussed how Japanese government could provide assistance to Japanese companies to implement CDM in the area of energy efficiency more actively. Major points are described as below:

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CDM/JI and the Government of Japan In the second step of the Outline for Promotion Effects to Prevent Global Warming, Ministry of Economy, Trade and Industry (METI) has laid its emphasis on implementing emission reduction projects such as CDM and JI in an attempt to increasing the availability of credits to comply with the Kyoto target. As part of its efforts, METI has launched a CDM/JI Acceleration Program to help businesses to reinforce their ability to identify prospective projects.

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Background: Why Japan is proactive in promoting energy efficiency projects? The amount of CO2 emissions is expected to grow dramatically in developing countries, thereby increasing demands for energy efficiency projects. Amidst the international circumstances, Japan possesses one of the most advanced energy/environmental technologies in the world. Energy-efficiency CDM projects would contribute to reinforce global energy security by reducing worldwide energy consumption.

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Background: Why energy efficiency projects have not been actively implemented? Efforts to increase energy efficiency have been undertaken on a global scale in the wake of the oil crisis, leaving little room for additional energy-saving measures at lower cost. The cost saved by efficient use of energy and returns on CERs may not offset necessary investment. Japanese stakeholders in energy-efficiency activities seem to get weary of CDM procedures. In fact, no new methodology in energy efficiency has yet been proposed by Japanese companies.

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Trends in CDM Among the new methodologies presented at the Executive Board of clean development mechanism (CDM-EB), most dealt with biomass or methane recovery. About 10% of total proposed methodologies covered energy efficiency and they were presented only recently.（With the difficulty in demonstrating “additionality,” only two methodologies relating to energy efficiency have been approved so far and both lacks versatility.） India and Brazil are the two most popular host counties. Many energy- efficiency projects have been undertaken especially in India. Regarding national circumstances in supporting CDM, India, Malaysia, Vietnam, and China are most active among Asian host countries with designated national authorities (DNAs) and project approval system already in place. In Central and South America, Brazil and Chile are most active. “Unilateral CDM” has been increasing in number, partly due to substantial workload in host countries and issues arisen from in-kind dividends and customs clearance. (In the case of unilateral CDM, investors are only described as buyers of emission credits in PDD.) China can hardly be regarded as advanced host country in terms of implementation of CDM projects, due to the complexity of CDM methodologies, nascent regulatory infrastructures by the central government, unclear domestic rules and the government's attempt to control credit prices. In addition, local governments and relevant organizations have very limited knowledge about CDM in general.

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Risks for credit buyers in using carbon funds Since credit buyers would not take project-based risks, the best way to hedge such risks would be to pay for the credit upon delivery. However, if the credit buyers use the credits to comply with their emission reduction targets, they should be noted that the fund should implement portfolio-based investment while the buyers (operators) themselves should diversify its sources of credits in order to minimize delivery risks.

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Risks for project participants of CDM/JI projects Risks can be categorized into three groups: 1) risks without any mitigation measures for project participants; 2) risks which project participants could limit (project-based risks); and 3) outstanding risks that could be mitigated by the government’s response measures. “Validation by DOE”, “approval of methodology by the CDM-EB”, “project registration” and “transaction cost” could lead to the third risks mentioned above. Also, financial risks are significant at the stage of project implementation.

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Risk abatement measures to promote CDM in the area of energy efficiency 1) Prior to registration as a CDM, outstanding risks can be mitigated by following ways: (a) identifying many potential CDM projects; (b) establishing new methodologies and consolidated methodologies for energy efficiency projects that are versatile in nature. 2) At the stage of implementing CDM projects, a financial scheme should be introduced in order to mitigate financial risks. The action for 1) (a) has already started by METI's “CDM/JI Acceleration Program”. Thus, for 1) (b), the financial support for establishing new versatile methodologies for energy efficiency CDM projects should be implemented. Institutional supports including subsidies can be provided in the development of sector-specific energy efficiency methodologies as well as consolidated methodologies for energy efficiency. 2) Regarding the financial scheme to facilitate projects, a funding facility dedicated for CDM could be established. It would help minimize financial risks originated from CDM projects and alleviate approval risks. Such a mechanism will demonstrate that a specific project shall require the facility to be financed, which would inevitably explain the need for “additionality.”