The CDM is one of the flexibility mechanisms established by the Kyoto Protocol with the purpose of facilitating attainment of the targets for greenhouse gas (GHG) emission reduction that were defined for each of the ratifying countries. In short, the CDM proposal (described in Article 12 of the Protocol) states that each tonne of CO2 equivalents¹ (tCO2e) which is not emitted or which is removed from the atmosphere by a developing country (non-Annex I) may be traded in the form of carbon credits in world markets, thereby providing an additional incentive to further the reduction of global GHG emissions.

The Kyoto Protocol determines that all Annex I parties (industrialized countries with emission reduction targets) must establish the emission reduction targets of the main GHG emitters that reside within their territories, in accordance with the national target set for them by the Protocol. With the introduction of the CDM, companies which are not able or do not wish to reduce their emissions according to their government established targets may as an alternative purchase Certified Emission Reductions (CERs) from developing countries which have implemented GHG emission reduction projects, and use those purchased CERs to help them comply with their obligations. However, it should be noted that the use of this mechanism is limited to only a part of their reduction commitments. In order to benefit from the incoming revenues obtained from CER sales to industrialized countries, developing countries, in turn, must create CDM projects to foster sustainable development.

In order to obtain CDM project validation a proposed GHG emission reduction project must first comply with a series of legal procedures at which time it will receive authorization from the UN through its CDM Executive Board, which is the ultimate instance for evaluating CDM projects.

The following chart shows the different stages that a project must accomplish, in order to be granted CERs within the scope of the CDM:

Chart – A CDM project cycle

Prior to beginning the preparation and structuring of a CDM project, the applicant should note that, in accordance with the rules established by the Conferences of Parties (COPs), participation in a CDM project must be voluntary, that is, projects that are coerced or developed as a result of government legislation—thereby moving away from the volunteer nature of the initiative—shall not be accepted.

During the project configuration phase (see stage No. 1 in the chart above), in addition to using the monitoring methodology to verify the fulfillment of emission reduction targets and/or tCO2e removal, the applicant must set the project’s additionality and baseline. With regard to additionality, the activity related to a CDM project is considered additional when the CO2 equivalent anthropogenic emissions are smaller than those occurring in the absence of the CDM project; and/or when the tCO2e removal from the atmosphere is larger than that occurring in the absence of the CDM project. The baseline of a CDM project is the representative scenario of anthropogenic emissions/removals of CO2 equivalent occurring in the absence of the project.

To help Parties (countries) submit this information, the CDM Executive Board created a base document (a form) entitled Project Design Document (PDD), which is effectively the foundation that must be followed for the submission of projects seeking CDM certification.

Before the PDD is submitted, the project participant must hire an independent specialist company—Designated Operational Entity (DOE), duly recognized by the CDM Executive Board—which will review and validate the Project Design Document, as well as analyze other relevant information, such as comments from stakeholders and the likely socio-environmental impacts resulting from the implementation of the project. The validation (see stage No. 2 in the chart) is the independent evaluation process of a CDM project by a DOE with regard to the requirement criteria of this mechanism (as specified in Decision 17/CP.7 and all COP decisions) based on the PDD.

Approval (see stage No. 3 in the chart) of a CDM project in the host country is issued by the Designated National Authority (DNA), and corresponds to the acceptance of the CDM project-based activities by the government of that country. In Brazil, the DNA is represented by the Interministerial Committee on Global Climate Change, whose main attribution is to ensure that the projects are consistent with their two-way objective: (a) GHG emission reduction and/or CO2 removal from the atmosphere; and (b) fostering sustainable development. The Interministerial Committee on Global Climate Change—the Brazilian DNA—is composed of the Chief of Staff of the President of the Republic and the following Brazilian Ministries: Science and Technology (the Committee coordinator); Foreign Affairs; Agriculture, Livestock and Supply; Transportation; Mines and Energy; Planning, Budget and Management; Development, Industry and Foreign Trade; Municipalities; and Finance.

Following the DNA approval, the project undergoes the registration stage (see step No. 4 in the chart), which is the formal acceptance by the CDM Executive Board of a validated CDM project. The registration is a pre-requisite for the verification, certification and issuance of CERs related to the project-based activities.

Once registered with the CDM Executive Board, the project undergoes the monitoring stage (step No. 5). This stage must follow the plan established by the methodology defined in the project and must also produce reports that will be submitted to the DOE for verification. The verification stage (step No. 6 in the chart) is the periodic independent revision and ex post inspection–carried out by the DOE—of monitored reductions of GHG anthropogenic gas emissions, which have occurred as a result of a CDM project registered activity during the verification period.

Finally, the certification is the written guarantee by the Designated Operational Entity that, during a specific time period, a given project has reached the GHG anthropogenic gas emission reductions in accordance with the verification stage. The certification enables the issuance by the CDM Executive Board (stage No. 7) of a number of CERs corresponding to the reduced and/or removed amounts of tCO2e. These CERs have pre-determined expiration dates and may be renewed depending on the case.

In Brazil, Resolution No. 1/2003 from the Interministerial Committee on Global Climate Change conveys the CDM principles as defined by the Kyoto Protocol. This Resolution also describes the CER as a unit issued in conformity with Article 12 of the Kyoto Protocol, which is equal to one metric ton of carbon dioxide equivalent (tCO2e) calculated on the basis of global warming potentials defined in Decision 2/CP.3 or later revised in accordance with Article 5 of the Kyoto Protocol. Finally, the procedures to be followed for the submission of CDM projects to the Interministerial Committee are specified in Resolution No. 1/2003.

The carbon trading system currently under implementation by BM&F will enable CER trading in full compliance with the rules soon to be published by the BM&F.








¹The metric measure utilized to compare emissions of several greenhouse gasses based on the global warming potential of each one. The carbon dioxide equivalent is the result of the multiplication of GHG emitted tonnes by their global warming potential.