1.2.1 Possible advantages of participating in the CDM

CDM investors may be foreign companies, or individuals or organisations within the country. The government may decide to invest in a local CDM project. CDM investors may form partnerships of local and foreign entities. CDM activities in partnership with foreign investors will provide an opportunity for local partners to learn new skills. While the credits for emissions reductions from the efficiency improvements may go to foreign investors (negotiations (1.4) on this are a key part of the process), the ongoing efficiency gains from other activities that build on the skills and experience of CDM project may benefit the country in the longer term.

Foreign companies and governments have a strong incentive to seek out cheaper emission reductions than may be expected in their own country. Foreign CDM investors are likely to approach developing countries seeking CDM opportunities. Foreign CDM investors will bring additional funds, technology and expertise into the host country. Many foreign investors may have a greater capacity to borrow than local investors. Large companies will have technical, financial and project management expertise within their organizations and may be able to introduce better production processes using the best technology that is available internationally.

Through the CDM approval process (1.3.4), leaders will be able to channel CDM finance into the sustainable development of sectors and parts of the country that require it most.

The environmental benefits of the CDM are a key advantage from a global perspective and for small island developing states. If developing countries follow the same industrialization path as the developed countries have, emissions will rise far beyond safe levels. High emission levels increase the likelihood that global warming (2.1) will have severe consequences globally, and particularly for small island developing states. Sea level rise and increased storm frequency and severity are just two of the climate change impacts (2.1) that could be devastating for small island developing states. Reductions in greenhouse gas emissions that will occur as a result of CDM projects can help the global effort to mitigate global warming (2.1). This process may also lead to a cleaner development path that avoids social and environmental problems of industrialization based on fossil fuels (ix).

Hosting CDM projects could raise environmental awareness and understanding within the country. Public statements in the press or an official launch of a CDM project will make the public more aware of the environmental threat that climate change poses, and of the links between energy use and other sources of greenhouse gases and potential climate change impacts (2.1) on the country.

Foreign CDM investors will invest in CDM projects that yield lower cost emission reductions than are possible in developed countries. Therefore CDM projects will help to reduce the costs to the developed countries of meeting their Kyoto commitments. Once investors start to seek the cheapest emission reductions and fund these through CDM projects, the cost of global emissions reductions will become clearer. The cost of addressing climate change is a crucial factor in developed countries’ ratification decisions and for negotiations on future commitments to limit and reduce greenhouse gases. Lower cost options for reducing emissions could mean that global leaders are able to agree to reduce greenhouse gas emissions to a safer level.

1.2.2 Possible disadvantages of participating in the CDM

Foreign investors will seek to buy cheap emission reductions from CDM projects in developing countries. At some time in the future, if a country decides to take on a commitment of some kind to reduce national emissions, the government or domestic entities may wish to take advantage of cheap reduction possibilities to meet these commitments. If a country thinks that it is likely to take on a future Kyoto commitment, for example after 2012 when the second commitment period begins, it may wish to approve only CDM projects that are completed prior to this.

In the short term, domestic investors may be smaller and less able to meet the requirements for establishing an activity as a CDM project than large foreign investors. Consideration may need to be given to ensuring that domestic investors are aware of the potential returns from CDM investments and have an opportunity to participate in the CDM.

CDM investment could affect national development strategies, possibly adversely affecting national decision-making processes. Until future commitment periods are agreed, the CDM may not provide incentives for financing long-term development projects and strategies.

Investors may favour large projects in the more industrialized developing countries, leaving less developed countries and small or geographically isolated countries without opportunities to participate.

Developed countries historically bear the greatest responsibility for global warming as they have had far higher levels of greenhouse gas emissions than developing countries. Although a CDM project reduces the greenhouse gas emissions, the CDM credits generated as a result allow developed countries to emit more greenhouse gases than their Kyoto commitments require when developed countries should be taking the lead themselves to find ways to reduce emissions.

The CDM may attract unfavorable or unwanted technologies which adversely impact local people. Government approval processes (1.3.4) that require clear benefits to the country (in terms of sustainable development in social as well as economic and environmental terms) will be needed to address this.

Countries which have policies that are adverse to foreign investment or that do not have the infrastructures to accommodate CDM projects may find the CDM to be unsuitable for them. Capacity building can help to improve the technical and administrative abilities that are helpful for facilitating CDM projects. However, if the size or level of economic development of the country is such that it will be difficult to attract CDM investments, then it may not be worth the cost of setting up the institutional and administrative frameworks to accommodate CDM investments.