Understanding Carbon Offsets

Clean Development Mechanism (CDM)

The Clean Development Mechanism (CDM) was part of the United Nations Framework Convention on Climate Change (UNFCCC). The CDM was the largest project-based crediting program and offered the public and private sector in high-income nations the opportunity to purchase carbon credits from crediting projects in low or middle-income nations (non-Annex 1). CDM was involved in setting standards and overseeing auditing of projects. Crediting projects were audited by accredited third parties named Designated Operational Entities (DOEs).

The CDM allowed Annex I (developed) countries to partly meet their Kyoto targets by financing avoided emission or enhanced removal crediting projects in low and middle-income countries. Such projects were arguably more cost-effective than projects implemented in higher-income nations because lower-income countries on average had lower energy efficiencies, lower labor costs, weaker regulatory requirements, and less advanced technologies. The CDM was also meant to deliver sustainable development benefits to the host country. CDM projects generated carbon credits called Certified Emission Reductions (CERs), which were bought and traded. Read the Paris Agreement page for more information about international carbon trading under the current climate policy regime.

Type of Standard and Context

The CDM was a project-based carbon crediting program under the Kyoto Protocol. The scheme aimed to assist Annex-I parties (industrialized countries with binding national inventory emission reduction targets) to cut global GHG emissions in a more cost-effective manner by allowing them to invest in crediting projects in non-Annex I parties (low- and middle-income countries without binding targets).

The parties to the United Nations Framework Convention on Climate Change (UNFCCC) negotiated and adopted the Kyoto Protocol in 1997. Initially, they only sketched out the basic features of the crediting program. In 2001, following a series of negotiations, the rules governing the operation of the program were fleshed out in what is now known as the Marrakech Accords. The first CDM project was registered in 2004. In the following year, after Russia’s ratification of the Kyoto Protocol saw it enter into force, the first carbon credit was issued to a project. The scheme grew rapidly from its inception and soon dominated the carbon credit market. Since September 2007, the CDM self-financed its regulatory functions through fees charged to projects. In the absence of a renewed commitment period for the Kyoto Protocol (the Doha Amendment), carbon credits generated in CDM projects were primarily used by voluntary actors (visit the Climate Neutral Now Initiative which still facilitates voluntary purchases of CERs).

Standard Authority and Administrative Bodies

The CDM Executive Board (EB) oversaw the functioning of the CDM. The EB was ultimately accountable to the governing body of the Kyoto Protocol, which included representatives of all the countries that ratified the treaty. The EB was supported by expert panels that focused on specific tasks.

The Accreditation Panel oversaw the accreditation of designated operational entities or auditors. The Methodologies Panel (Meth Panel) reviewed the methodologies for the 100+ approved project types and the methodologies for setting and monitoring baselines. The Registration and Issuance Team (RIT) was responsible for reviewing requests for project registration and issuance.

Each member country had a Designated National Authority (DNA), confirming projects’ voluntary participation in the CDM and facilitating host countries’ confirmation that the activity assisted national sustainable development.

DOEs were UNFCCC-approved auditors who validated and verified CDM projects.

Regional Scope

The scope of the CDM was international, involving all countries that ratified the Kyoto Protocol.

Recognition of Other Standards/ Linkage with Other Trading Systems

Although the tradable units of other schemes could not be used as CDM credits, several other compliance programs, and voluntary standards either recognized or accepted CERs. Such schemes or standards included the EU ETS and the Verified Carbon Standard (VCS). The Gold Standard certifies projects that use CDM methodologies and also comply with additional Gold Standard criteria.