Opportunities under the Clean Development Mechanism and Barriers to Investment.

Abstract

The need to reduce the global carbon footprint and mitigate the adverse effects of global warming led to the Kyoto Protocol, an international action plan set up under the United Nations Framework Convention on Climate Change. Under the Protocol, South African industry stands to benefit financially, if businesses were to register and successfully implement Clean Development Mechanism (CDM) projects through which they would reduce their Green House Gas emissions. Theoretical projections show that South Africa’s CDM potential ranks alongside that of China, India, Brazil, Argentina and Mexico. However, in practice, South African projects still represent a low fraction of the entire CDM pipeline. This study builds upon the limited existing body of knowledge on the CDM within South Africa. Specifically, it aims to determine the relative importance of barriers that currently exist, or are perceived to exist, and which have resulted in limited investment in the CDM in South Africa. The research performed was largely qualitative and used a questionnaire-based descriptive survey method to solicit opinion from key South African CDM experts across all spectra of the industry. Based on responses, the main GHGs that are likely to be reduced by investment in the CDM within South Africa are CO2 and then methane. Reduction of these gases is most likely to occur through investment in energy efficiency, renewable energy (such as wind, biomass and solar power) along with methane recovery and utilisation, predominantly from landfill gases and animal waste. The research examined the critically important barriers to investment in such projects, which were found to include: lack of clarity of the Kyoto Protocol post 2012, complicated project identification and validation, lack of awareness within industry, low and volatile Certified Emission Reduction (CER) prices and high transaction costs. Other factors deemed important, but not necessarily critical, included poor national policy and legislation and delays in decisions by the Executive Board. Factors such as tax on cash streams from registered CER sales, approval - ii - process of Designated National Authority (DNA) and CDM project opportunities within South Africa did not appear to have a major influence on investment in the CDM within South Africa. Given the uncertainty and confusion around the CDM market within South Africa it is suggested that government provide provisional CDM guidelines to facilitate the smooth implementation of key CDM project types. This would raise awareness of CDM projects to local/national development banks and other commercial entities, and thus facilitate increased engagement and investment by the business community. Within South Africa, it appears the critical mechanism to ensure that CDM becomes embedded in business models is the replacement for the Kyoto Protocol post 2012 (when it is due to expire). This is likely to facilitate increased investment in the CDM, as well as to demonstrate a continued commitment by South Africa, and global governments, to address climate change through a replacement mechanism. Such a mechanism provides a platform through which business can play a crucial role to ensure success of the Kyoto replacement and actively address climate change. South African Government will have an integral role in negotiating the replacement within the global arena, and will subsequently need to establish national priorities to facilitate the long term policy implementation and national success of carbon markets.