Voluntary vs. CDM Carbon Projects in Mexico

Horses for Courses
Ecosystems Marketplace e-newsletters

by Amanda Hawn
Despite its considerable advantages, Mexico has been slower than other Latin American countries to sign purchase agreements for carbon via the Clean Development Mechanism (CDM). In March, however, Mexico signed its first emission reductions purchase agreement. At the same time, a local NGO recently sold forestry carbon credits into the voluntary carbon market. The Ecosystem Marketplace looks at what these two deals might tell us about Mexico, the CDM, and the implications of carbon markets for communities in developing countries.
A 30 foot heap of fetid food, old tires and decrepit shoes hardly sounds like a "clean development mechanism," but the World Bank is betting that, in Mexico at least, it will prove to be just that.
In March, a Mexican business signed its first emission reductions purchase agreement for a Clean Development Mechanism (CDM) project, paving the way for a US $8.4 million dollar investment in the country's waste management and energy sectors by the World Bank's Prototype Carbon Fund (PCF).
The Fund says it has agreed to purchase two million metric tons of carbon dioxide equivalent from the Waste Management and Carbon Offset Project.
The Kyoto Protocol requires that industrialized countries reduce their carbon emissions to five percent below 1990 levels, either by cutting emissions domestically or via a variety of so-called "mechanisms for flexibility", the most prominent of which involves investing in carbon emissions reductions projects in developing countries.
This latter option, known as the CDM, is the Protocol's primary means of involving developing countries in its attempts to reduce greenhouse gas emissions. So far, India, Korea, Argentina, Brazil, Chile and Colombia have all attracted more investment in CDM projects than Mexico; a fact that makes this first Mexican CDM deal that much more important.
Not only is it likely to shed light on what investors might be looking for when considering CDM deals in the country, but –when it is compared to another, very different, carbon deal now being negotiated by a small Mexican NGO—it also highlights why the voluntary markets, and not the CDM, may be the only way for communities in developing countries to enter the much-touted carbon market. In other words: Which Mexican projects should entertain hopes of receiving CDM money? And, just as important, which should not?

Green "Black Gold"
The Waste Management and Carbon Offset Project, owned and operated by the private company Sistemas de Energia International SA (SEISA), plans to capture methane at three landfill sites in Mexico, using it to generate electricity at two of them and just burning it at the third (since methane is a more powerful greenhouse gas than the carbon dioxide that results from its combustion, see below, this is desirable) .
As garbage decays within the oxygen-starved depths of a landfill, bacteria metabolize the waste anaerobically, giving off methane as a by-product. Solid-waste landfills leak between 30 and 70 metric tons of methane (a greenhouse gas with a warming effect roughly 21 times greater than carbon dioxide) into the atmosphere each year.
SEISA hopes to harness this giant natural gas leak for energy production, fashioning a tidy solution from a messy problem."The project will put wells into the waste and then pump out the methane from below," explains Fernando Cubillos, Project Manager for Mexico and Central America, Caribe and Colombia in the Carbon Finance Division of the World Bank. "Then the gas is either burned to convert it to carbon or used in place of fossil fuels to generate electricity through combustion."

Clinching the Deal
The technology behind the SEISA venture is nifty, but Cubillos stresses that theWorld Bank PCF invested in the project because it represented a good business deal, not just an elegant science experiment. "We are buying on behalf of our investors," says Cubillos. "When we do that, we look for a reliable sponsor who has a good project with a substantial sustainable development component."
In the case of the Carbon Waste Management and Offset Project, Cubillos says those directing investment strategy at the Prototype Carbon Fund (PCF) were already familiar with project developers at SEISA because they had worked with them on a very similar Global Environment Facility (GEF) funded landfill project in Monterrey in 2003.
In addition, the SEISA Project allowed PCF managers to tick off two other boxes – namely, the project had both clear environmental and social components. Fifteen percent of the net revenues from the sale of emissions reduction credits will go towards keeping groundwater pollutants from leaching out of the landfills, and the methane burned will provide electricity for the rural community of Ejido Los Lirios in Nuevo Leon."This project shows that landfill gas for energy is a viable Clean Development Mechanism option that can complement global with local priorities," says Jaime Saldana of SEISA.
The familiarity of its sponsors, the clear opportunity for environmental improvement, and the contribution to sustainable rural development all made the Carbon Waste Management and Offset Project a pretty sure bet for those at PCF. But, says Cubillos, the make-or-break consideration was that the project was pretty much ready-to-go."Ultimately, we look for projects that are feasible, projects that are not just good ideas but that are actually likely to happen within the next two or three years," he says.

No Quick Fix
Two to three years represents a pipedream of a timeframe for those working on a carbon offset project in the Sierra Gorda Biosphere Reserve of central Mexico. Here, subsistence farms lie scattered across steep hillsides and forests surround tired, terraced fields. The Reserve's patchwork of people and nature extends across its million acres and includes roughly 100,000 people. Against this backdrop, Bosque Sustenable, A.C, a local NGO, is planting thousands of small tree plantations to suck up and store carbon, prevent erosion, and pave the way for sustainable forestry.
In the dying light of a spring afternoon, Jose Dolores Herrera, a 69 year-old farmer, and Juan Carlos Hernandez Ramirez, the Regional Sub-Coordinator of a US $31 million project to protect biodiversity in the Reserve, sit on a log surveying Dolores' small tree plantation on the opposite slope. Holding a Gatorade bottle at an angle resembling that of the slope, Hernandez moves a pencil along the bottle to demonstrate the angle and space at which Dolores should plant future trees. It is a makeshift forestry lesson on the frontlines of the world's fight against climate change. But, as in most battles, things are often messiest up at the front. And Mexico's frontlines, acknowledge both men, can be a tough place to do business.
Growing trees for sustainable harvesting is incredibly difficult in Sierra Gorda where the average plot size is just three-hectares and the average grade is back-breakingly steep. After four years, Hernandez reckons, Ramirez might be able to harvest his first trees. But it will be another two years before he is able to recoup some of the money he invested in planting them."The natural conditions and the social conditions in Sierra Gorda are not fit for fast progress," says Hernandez. "The progress is very, very slow; but it is real."
Pati Ruiz Corzo, the energetic Director of the Sierra Gorda Biosphere Reserve, says she has been trying to market reforestation efforts in the Reserve as a carbon offset project for seven years. But, for many of the same reasons that made SEISA's landfill project attractive to buyers, the Sierra Gorda project has proven a tough sell. For obvious reasons, CDM investors generally look to minimize risk when shopping for certified emissions reductions (CERs); they want to be sure that the projects in which they invest will deliver CERs on-time, satisfaction-guaranteed. Projects like the SEISA venture, with a proven technological fix, easy-to-crunch emissions numbers, and prospects for rapid progress (not to mention methodologies already approved by the CDM Executive board, click here for an article), are much more likely to attract investment dollars than projects like Sierra Gorda's reforestation program, which features none of the above. To make matters worse, the EU Emissions Trading Scheme (EU-ETS), the largest potential market for carbon offsets, does not accept carbon credits generated via reforestation.

Round Peg, Square Hole
This, argue Ruiz and others, is not as it should be. Despite the difficulty of putting a forestry project through the CDM hoops, twenty percent of greenhouse gas emissions in the world today are thought to be the result of deforestation and unsustainable agricultural practices. Trees take-up and store carbon as a natural part of their nutrient cycle, creating carbon 'sinks' around the world in the form of forests. Since poverty drives much of the world's deforestation and unsustainable agriculture, combating global warming via reforestation could also mean combating poverty in some of the poorest and most remote areas of the developing world."
Some developing countries will benefit from the Clean Development Mechanism (CDM) by hosting renewable energy and energy efficiency projects, but many countries, and especially the poorest ones, do not have the energy or industrial infrastructure that would allow them to benefit from the CDM in a significant way," reads an introductory brochure for the World Bank's BioCarbon Fund, a fund set up to invest in reforestation projects like that in Sierra Gorda. "For many, and in particular large rural populations that are the home of so many of the poor, sinks are the only significant avenue for participating in the carbon market."
According to those in Sierra Gorda, however, meshing the demands of the business world with the realities of the developing world is no easy task."
Our project has a really strong emphasis on sustainable development, so we are working with extremely low-income property owners on small plots of land spread across a huge area. When it comes to cost we are at a disadvantage when compared to a project designed solely for efficiency where just one landowner is involved with a single large property or where smaller properties are contiguous," says David Ross, a project manager for Sierra Gorda's carbon offsets program.
Lack of proper documentation regarding land ownership is also a problem. For instance, Ross observes that, while people in the Reserve plan to reforest 1600 hectares, only 500 or so of these are likely to have proper documentation of land rights.Even with papers in order and trees planted, any credits generated for the CDM market must be verified, an expensive prospect for places plagued by rural poverty. "We prefer to keep resources local and for the CDM, you have to use an external body for certification," explains Ross.
Last but not least, reforestation in Sierra Gorda requires upfront investment since impoverished farmers lack the start-up capital necessary to purchase and plant the first trees. The CDM, on the other hand, requires that verified reductions exist before they are sold. "CDM rules are too high and too expensive to create a good deal for the people of Sierra Gorda," concludes Ruiz.

Round Peg, Round Hole
Relaxing over a cup of tea after a long day of meetings about the future of the Reserve, Ruiz sighs when thinking back on her struggle to design a carbon sequestration project for CDM investors. Since 1998, Ruiz' Grupo Ecologico has been working with an environmental consulting firm in Canada, Woodrising Consulting, Inc., to identify investors for a large-scale forestry offsets project in Sierra Gorda. The project has been "investor-ready" since 2002, but has yet to get a nibble from corporations affected by new climate change regulations. "After all these years of looking for ways to package the product, I was very disappointed," says Ruiz. Then Ruiz says she went to Australia where she "saw a whole menu of innovative programs for ecosystem services.
"Inspired by what she saw in Australia, Ruiz decided to take another look at developing a carbon offsets project in Sierra Gorda. "I saw that there were many, many ways to use these markets. And so, when I came back, I decided that we would cut our own suit for a custom fit instead of trying to fit inside of the CDM guidelines. That's when I began looking at the voluntary market."

The Voluntary Market
The world's first carbon-sequestration deal was brokered in 1988, when AES Corp., an American electricity company invested in an agroforestry project in Guatemala. AES Corp., like other companies since, hoped to reduce its "ecological footprint" for philanthropic and marketing reasons, not because it was forced to do so by legislation or global treaty. The deal thus was voluntary, marking the beginning of the "voluntary carbon market" that remains as controversial and interesting today as it was back then.
The voluntary market was the only carbon market that existed for many years until the World Bank funds got up and running some years ago, and until the Kyoto Protocol was ratified and the EU-ETS went into effect earlier this year. Unlike the newly minted regulation-driven markets, the voluntary market does not require its tradable carbon credits to undergo a certification process ensuring their measurable emissions reductions. Voluntary carbon projects also frequently require upfront investment from their credit buyers, rather than a just a commitment to purchase the credits once they are generated (CDM projects, by contrast, don't collect from their buyers until after the credits are generated).
These differences have won the voluntary market a great deal of criticism from some environmentalists who claim that it is a game of smoke and mirrors rather than an engine of actual environmental progress. The differences, however, also make the voluntary market much more accessible to community forestry projects like that in Sierra Gorda. "I know now that I will not sell my carbon to corporations, I will sell it to buyers on the voluntary market who want to offset their emissions for philanthropic reasons or for marketing reasons," says Ruiz. Recent events suggest she is right. The Sierra Gorda Biosphere Reserve will announce its first sale of carbon credits to a buyer on the voluntary market this month. "After so long trying," says Ruiz, "it is very satisfying to finally have a deal."

A Spade is a Spade
In some respects, all's well that ends well, but in other respects, the differences between the SEISA and Sierra Gorda carbon offset projects in Mexico offer a telling lesson.
The CDM is designed for corporate businesses looking to limit their risk and maximize their buying power in a regulated, compliance-driven, market. Clearly, then, policy makers should not abandon the high legal, investment and scientific standards to which CDM projects are held. To sell unverified carbon credits which do not meet some basic criteria to businesses would be to subvert the Kyoto Protocol's most basic aim: namely, to curb global warming in the most effective way possible At the same time, however, community leaders like Ruiz stress that policy makers must recognize, and probably even publicize, the limitations of the CDM in fighting for sustainable development in some of the very places where it is needed most. To claim that the CDM is the perfect tool for fighting both abject poverty and environmental degradation in Mexico, she argues, seems a slightly dishonest form of green branding. And, importantly, it is a perversion of the truth that can cost time and money to those who need it most. Leaning forward in her chair to emphasize the point, Ruiz observes, "If only someone could have told me seven years ago that my project wasn't right for the CDM, it would have saved so much time, so much energy, so much money." Ruiz now hopes that the hard lessons her group has learned will help others facing similar predicaments. Even this cloud has a silver lining.
Amanda Hawn is the Assistant Editor of the Ecosystem Marketplace.
She may be reached at athawn@mac.com.
First Posted: June 22, 2005