Eligibility for funding under the CDM and SDM

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Date produced: 30/05/2017

1. If parties agree that the Adaptation Fund should be the recipient of the share of proceeds of the sustainable development mechanism (SDM) envisaged under Art.64 of the Paris Agreement, can a developing country who is not a party to the Paris Agreement benefit from this source of funding through the Adaptation Fund?

2. Can you clarify the linkages between the CDM and SDM if these are a source of funding for the Adaptation Fund and suggest options, including potential draft text, for modifications to the operation of the Adaptation Fund to ensure Parties eligible to receive funding under the CDM will continue to receive funding under the new SDM?

Summary:

In short, CMA 1 has decided that the Fund (a creature of the Kyoto Protocol) should serve the Paris Agreement, but the details remain to be decided (most likely in 2018). The operation of the SDM itself also remains to be decided, but, given the similarities to the CDM, it seems likely that a share of the proceeds arising from activities under the SDM will be available to the Fund.

The Fund is currently constituted for the benefit of vulnerable developing countries to the Kyoto Protocol, and those which have ratified the Kyoto Protocol but not the Paris Agreement might stand to lose access to the Fund if the Fund is reconfigured for the benefit of parties to the Paris Agreement only.

The CMA and CMP might decide to preserve access for such countries during the negotiations about the future of the Fund, the SDM and the CDM. Some possible drafting suggestions are set out in the response to Query 2 below.

1. SDM proceeds for Adaptation Fund

As a starting point, it should be noted that the Fund was established in 2001 to finance adaptation projects in developing country parties to the Kyoto Protocol which are considered particularly vulnerable to the effects of climate change. As such, it is a creature of the Kyoto Protocol and is currently constituted for the benefit of developing country Parties to the Kyoto Protocol. The Fund’s “Operational Policies and Guidelines for parties to access resources from the Adaptation Fund” (the “Operational Policies”) state in the first paragraph that Article 12.8 of the Kyoto Protocol is the legal basis for the establishment of the Fund.

Notwithstanding the above, the first meeting of the COP serving as the meeting of Parties to the Paris Agreement (CMA 1, Marrakech 2016) decided that the Fund should serve the Paris Agreement, following recommendation by the COP serving as the meeting of Parties to the Kyoto Protocol (CMP 11).

Despite the decision of CMA 1, the specifics of how the Fund will serve the Paris Agreement remain to be decided, and can be expected to be addressed in future meetings of the CMA and CMP. CMA 1 noted that the Fund should serve the Paris Agreement “following and consistent with decisions to be taken” at the third part of the first session of the CMA, to be convened in conjunction with COP 24, and by the CMP, that “address the governance and institutional arrangements, safeguards and operating modalities of the Adaptation Fund.” The ad-hoc working group to the Paris Agreement was requested by a decision of COP 22 to address these latter aspects of the Fund’s interaction with the Paris Agreement, and states parties were invited to submit their views in relation to the same by March 2017. It therefore appears that the manner in which the Fund will serve the Paris Agreement will be decided at COP 24 in December 2018.

While the mechanics of the Fund’s interaction with the Paris Agreement remain to be decided, Article 6.6 of the Paris Agreement (in wording which closely reflects that of Article 12.8 of the Kyoto Protocol) states that the CMA shall ensure that a share of the proceeds arising from the SDM “is used to cover administrative expenses as well as to assist developing country parties that are particularly vulnerable to the adverse effects of climate change to meet the costs of adaptation”.  With the CMA already having decided that the Fund should serve the Paris Agreement, it seems possible (or even likely) that a share of the proceeds from the SDM will eventually be channelled into the Fund. This view is supported by the Report of the Adaptation Fund Board to the CMP published on 6 September 2016. This document contained an addendum setting out the “Added value of the Adaptation Fund for the operationalization of the Paris Agreement”. This addendum noted, generally, that the Fund was “already contributing to the operationalization of the adaptation objectives of the Paris Agreement”. More specifically, it noted that the SDM “may be a market mechanism with similarities to the clean development mechanism”, and further that “the Fund, if it serves the Paris Agreement, may draw resources for sustainable adaptation financing for vulnerable communities in developing countries”. As noted below in the answer to Query 2, the operating rules, procedures and modalities of the SDM itself remain to be decided.

If we assume that the CMA and CMP decision on the “governance and institutional arrangements, safeguards and operating modalities” of the Fund in relation to the Paris Agreement will prescribe that a share of the proceeds arising from activities under the SDM will be received by the Fund, the question arises (Query 1) whether a country which is not party to the Paris Agreement would be able to benefit from funding sourced from the SDM and channelled through the Fund.

There are only two signatories to the Kyoto Protocol which are not signatories to the Paris Agreement (Nicaragua and Syria). However, almost forty developing counties which are signatories to both agreements have ratified the Kyoto Protocol but have not ratified the Paris Agreement to become full parties. Subject to their being “particularly vulnerable” to the adverse effects of climate change, these countries may be at risk of losing the availability of funding through the Fund in the event that the Fund is reconfigured for the benefit of parties to the Paris Agreement rather than the Kyoto Protocol. The answer to query 1 will depend on the nature of the decisions taken in relation to the Fund. [1]

De facto lapse of the Kyoto Protocol

Pursuant to the Doha amendment, the second commitment period for the Kyoto Protocol expires in 2020 – at which point, significantly, it seems that the Kyoto Protocol will de facto lapse. Provided that no third commitment period is established by agreement of the CMP, it seems probable that the Fund will thereafter be reconfigured to serve the Paris Agreement only (ie possibly for the benefit of vulnerable developing country parties to the Paris Agreement alone). If this happens, countries which have ratified the Kyoto Protocol but not the Paris Agreement may lose access to the Fund, unless the operation of the Fund is amended in such a way that right of access is preserved for parties to the Kyoto Protocol (see the response to Query 2 for further detail on this possibility).

Prior to lapse of the Kyoto Protocol

 Assuming the CMA/CMP make a decision on how the Fund will serve the Paris Agreement in 2018, there would be a period between the date of such decisions and the date of the de facto lapse of the Kyoto Protocol. It is unclear how this situation will be dealt with. It is possible that the Adaptation Fund will be configured to serve both agreements in this intervening period. If this happens, two main possibilities present themselves, further described below.

One possibility is that once SDM-sourced funds are received and controlled by the Fund, during this intervening period the Fund will be at liberty to dispense them to developing countries parties to both agreements without differentiation. In this scenario, at least for a time, vulnerable developing countries which have ratified the Kyoto Protocol but not the Paris Agreement may be able to benefit from funding sourced from the SDM.

An alternative scenario would be that the operation of the Fund would be amended in such a way that it would differentiate between funding sources, such that funds arising from the CDM would be used for the benefit of developing country parties to the Kyoto Protocol, and funds arising from the SDM would be used for the benefit of developing country parties to the Paris Agreement (whilst acknowledging the considerable crossover between the two). This would arguably result in a more accurate operationalisation of both the Kyoto Protocol and the Paris Agreement, since each of Article 12.8 and Article 6.4 (respectively) seek to ensure that proceeds arising from activities under the CDM/SDM are made available for the benefits of “developing country Parties” to each respective agreement.

On the other hand, given the complexities in reconfiguring the Fund for a short period (with the Kyoto Protocol set to de facto lapse in 2020), and the fact that the mechanics of the SDM itself remain to be decided, it also seems possible that the CMP/CMA will simply decide to reconfigure the Fund with effect from 2020 to serve the Paris Agreement alone, thus bypassing the intermediate stage at which it might serve both agreements simultaneously. It is important to remember that the Paris Agreement has come into force considerably sooner than expected (hence the overlap with the second commencement period).

2. Linkages between the CDM and SDM

The CDM and the new SDM are separate mechanisms with considerable similarities. Both are voluntarily mechanisms which allow a party to contribute to emissions-reducing projects in another country and to apply credit for such reductions against their own national targets for reducing emissions.

Arguably, the SDM represents an adaptation of the CDM in the context of the Paris Agreement. Despite the similarities between the mechanisms, there are a number of differences. Perhaps the most important are:

It appears that any party to the Paris Agreement may participate in the SDM, either as a “host” party or in the contributor role in order to make progress towards satisfying NDCs. By contrast, the CDM was designed to allow Annex I countries (developed countries with binding emissions reductions targets) to benefit from contributing to emissions reduction projects in non-Annex I countries.

One of the express objectives of the SDM is “to deliver an overall mitigation in global emissions”. By contrast, it was remarked by some commentators that the operation of the CDM was really a “zero-sum” game.

The precise form of the SDM remains to be decided by the CMA. The work programme for the Paris Agreement required the SBSTA to “develop and recommend rules, modalities and procedures” for the SDM ahead of CMA 1, although given the unexpected speed with which the Paris Agreement entered into force, the outcomes of the work programme have been requested to be presented instead at the latest by the third part of the first session of the CMA, to be convened in conjunction with COP 24 (December 2018). For example, the extent to which the mechanism will be a facilitative, bottom-up or a centrally governed one, whether a trading mechanism will be incorporated, and the range of mitigation approaches that will be permitted remain to be seen.

The question of how the CDM may (or may not) co-exist alongside the new SDM also remains to be settled. However, it is difficult to see how the CDM will continue to subsist after the Kyoto Protocol has lapsed in 2020. It seems probable that the SDM will effectively replace the CDM, although it is also very likely that parties’ experience with the CDM will strongly influence the decisions to be taken on the operation of the SDM. As one legal commentator has remarked, “the considerable investment that has gone to develop processes, standards, systems and capacity of the Kyoto Protocol mechanisms offers valuable experience to guide the design of the new mechanism, including on how to achieve the right balance between promoting the participation of private actors, environmental integrity, additionality and sustainable development.”[2]

As suggested in the response to Query 1 above, it seems likely that following the de facto lapse of the Kyoto Protocol the Fund will serve the Paris Agreement alone, and so will be constituted for the benefit of vulnerable developing country parties to the Paris Agreement (and, as explained above, may receive a share of the proceeds arising from SDM activities).

In order to avoid such a situation, parties would need to agree to adapt the operational documentation for the Fund specifically to preserve a right to access of funding for developing countries which had previously had access but would lose out since they had not ratified the Paris Agreement (ie those countries which had been party to the Kyoto Protocol). This naturally involves a degree of speculation on the intention of the COP.

Drafting suggestions

The process of reconfiguring the operation of the Adaptation Fund to serve the Paris Agreement will involve considerable drafting changes to various documents governing the Adaptation Fund, particularly the Operational Policies, with the nature of the changes naturally falling to be decided by the CMA/CMP. This memorandum does not make general suggestions for such wholesale changes. However, some possible drafting changes for retaining access to funding by developing country parties to the Kyoto Protocol which have not ratified the Paris Agreement are set out below.

 The recitals/introduction might be adapted to include reference to corresponding decisions of the CMP and CMA that, notwithstanding the amendments to the Fund’s Operational Policies, the Adaptation Fund will, in addition to assisting vulnerable parties to the Paris Agreement, “continue to assist developing country Parties to the Kyoto Protocol that are particularly vulnerable to the adverse effects of climate change to meet the costs of adaptation, notwithstanding that some such Parties may not yet have ratified the Paris Agreement”.

The “Eligibility Criteria” of the Operational Policies would need to be amended to include similar drafting.

Corresponding changes would be required to the “Strategic Priorities, Policies and Guidelines of the Adaptation Fund adopted by the CMP” (and a revised version would presumably need to be adopted by the CMA).

More of a “compromise” position would be for parties to agree that, rather than permanently preserving a right of access for parties to the Kyoto Protocol, the Fund will continue to support (i) existing adaptation projects for which funding has been approved by the Fund, and possibly (ii) applications for funding for adaptation projects which were submitted prior to the reconfiguring of the Fund to serve the Paris Agreement.

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[1] Whatever the CMA/CMP decide, it does not appear likely that any developing countries which have not ratified either the Kyoto Protocol and/or the Paris Agreement will be able to benefit (either at present or in future) from funding through the Adaptation Fund.
[2] J. de Cendra de Larragan, The Paris Agreement, the Kyoto Protocol and the future of the carbon market, IBA, 18 October 2016.