EU Energy Policy Blog

While its primary goal is to save abatement costs, the Clean Development Mechanism is considered by many as a key means to boost technology transfer and diffusion to developing countries. Is there empirical evidence on this secondary effect?

The Clean Development Mechanism (CDM, hereafter) allows industrialized countries which have accepted emissions reduction targets to develop or finance projects that reduce greenhouse gas emissions in non-Annex 1 countries in exchange for emission reduction credits. If the technology used in a CDM project is not available in the host country but must be imported, the project leads, de facto, to a technology transfer. This technology may consist of “hardware” elements, such as machinery and equipment involved in the production process, and/or “software” elements, including knowledge, skills, and know-how.

So far, most climate-friendly technologies have been developed and used in developed countries. Therefore, expecting international technology transfer through CDM projects sounds reasonable. However, whether this is true in practice is an empirical question. In a recent study financed by the French environmental agency (ADEME), we used a dataset describing the 644 CDM projects registered up to 1 May 2007 in order to explore this issue.

Data show that international technology transfers take place in 44% of CDM projects, accounting for 84% of the expected annual CO2 emissions reductions (towards 2012). Very few projects involve the transfer of equipment alone. Instead, projects often include the transfer of knowledge and operating skills, allowing project implementers to appropriate the technology.

Current technology transfers under the CDM mainly concern two areas. The first area is end-of-pipe destruction of non-CO2 greenhouse gases with high global warming potentials, such as HFCs, CH4 and N2O, which are mainly transfers focused on the chemicals industry, the agricultural sector and the waste management sector. The second category is wind power, with 60% of projects using equipment from abroad. Biomass electricity production projects or energy efficiency measures in the industry sector mainly rely on local technologies.

Our data also show that host countries are very heterogeneous in their propensity to attract technology transfers. For example, 59% of the Chinese projects involve a transfer while the percentage is only 12% in India.

Frequency of technology transfer for the main host countries (% of the projects)

European countries are by far the main technology suppliers. In particular, Germany, Spain and Denmark account for 45% of the exported machinery altogether. This means that the money spent by Annex I countries to finance CDM projects – through the purchase of carbon credits – is only marginally used to buy machinery from countries that have not ratified the Kyoto Protocol.

Technology suppliers (% of the projects involving a technology transfer)

As regards the partners involved in CDM projects, only 8% of the projects are implemented in subsidiaries of companies located in Annex 1 countries. This is much lower than what was expected. By contrast, we frequently observe the involvement of CDM project designers that manage the whole CDM project cycle, from PDD writing to credit sale.

We have run econometric regressions in order to identify what drives technology transfer. All other things being equal, they show that transfers are more likely in large projects (in terms of emissions reductions). Furthermore, the probability of transfer is 50% higher when the project is developed in a subsidiary of an Annex 1 company. Having an official credit buyer in the project also positively affects transfer likeliness, albeit much less (+16%). The host country’s features also matter a lot. Both the openness of the economy and the economic dynamism, as proxied by the recent average annual growth of GDP encourage technology transfer. In particular, one additional percentage point of average GDP growth raises transfer likeliness by 19%.

Do the host country’s technological capabilities influence technological transfer? In theory, this factor has ambiguous effects. On the one hand, high capabilities may be necessary to adopt a new technology, but, on the other hand, they also imply that many technologies are already available locally, thereby reducing transfer likeliness. Our estimations show that the first effect strongly dominates in the energy sector and in the chemicals industry, whereas the second effect is stronger for agricultural projects. The interpretation is that technologies transferred in the agriculture sector are not very elaborate, implying that only countries with poor technological skills need to import them, whereas, wind turbines, solar panels in the energy sector or abatement devices in the chemicals industry would require technically qualified manpower to be built and operated.

Our study suggests several policy lessons for CDM design. Encouraging large projects – or project bundling – allows the exploitation of increasing returns in technology transfer. Promoting projects in subsidiaries of Annex I companies could also be of great use. In practice, one could imagine different ways of providing incentives for companies to do so (e.g. additional credits, simplified administrative procedures).

M. Glachant, A. Dechezleprêtre and Y. Ménière, Cerna, Ecole des mines de Paris

This entry was posted on Saturday, May 10th, 2008 at 8:21 pm and is filed under Climate Change, English. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.