The Clean Development Mechanism (CDM) and Carbon Credits
The clean development mechanism (CDM), a financial mechanism enabling international trade in Greenhouse gases, established in the Kyoto Protocol, allows industrialized countries to meet their GHG emission limitations by purchasing GHG emission reduction credits from developing countries. Industrialized countries can invest in developing countries and fund innovative technologies to help reduce GHG emissions. By investing in these technologies, the investing company can qualify for receiving certified emission reduction (CER) credits, also referred to as carbon credits, which purchasers can then use in place of reducing GHG emissions in their own country. This method helps industrialized countries attain their emission reduction goals with a low cost-benefit ratio. Moreover, companies that develop technologies which qualify as “sustainable technologies’’ in developing countries can benefit tremendously from the CDM in promoting solutions that qualify as sustainable.
Converting CERs into Money
The CDM market is a multi-billion-dollar a year market, and is viewed as a prime channel for streaming foreign capital, knowledge and technology into developing countries where initiatives exist for reducing GHG emissions.
Each emissions reduction credit represents a reduction equivalent to 1 ton of carbon dioxide, a unit that is traded on the market as a CDM. The price of a single emission reduction credit fluctuates according to market trends. In 2003 the price was $5 a ton; by August 2008 it reached $20 a ton; by September 2012 the price of a CER had collapsed to below $5; this number is expected to rise back to its original price.