Sustainable Development and the CDM: A South African Case Study

Joy A. Kim

November 2003

Tyndall Centre for Climate Change Research

Working Paper 42

Sustainable Development and the CDM: A South African Case Study
Dr. Joy A. Kim
Research Associate United Nations University Institute of Advanced Studies Email: kim@ias.unu.edu Tyndall Centre Working Paper No. 42. 2003

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Summary The clean development mechanism (CDM) is often seen as providing the financial benefits and transfers of cutting-edge green technology that enable developing countries to reduce emissions and achieve their sustainable-development goals. The process of applying the mechanism is, however, fraught with impediments. The limited capacity of developing countries to implement CDM projects is compounded by the differing concerns of CDM stakeholders and investors regarding the degree to which the mechanism can be expected to result in sustainable development. Moreover, the spirit of the CDM, as encapsulated in its mandate to promote sustainable development in host countries, could lead to policy options that run counter to letter of the law in terms of rules governing international investment. Below are examined barriers to the implementation of the CDM in South Africa, one of a few developing countries hosting pilot CDM projects with a focus on the disparity between stakeholder and investor views. While the stakeholders fear that CDM investment might fail to deliver the anticipated social benefits and only leave the country limited mitigation options, investors are apt to believe that the mechanism’s financial benefits should be the stakeholders’ primary interest and that their scepticism merely reveals that the state is not yet ready to host CDM projects. Thus, if the CDM mandate is to be pursued, the existing barriers must be factored into the mechanism’s institutional framework.

1 Introduction The twin objectives of the clean development mechanism (CDM), namely, to help Annex I countries achieve their emissions-reduction commitments and assist non-Annex I countries achieve sustainable development, place it in a unique position vis-à-vis other flexible mechanisms. Although it is based on market forces that stem from the principle of costeffectiveness, the CDM is expected to balance economic fundamentals against environmental integrity and equity by both incorporating the notion of sustainable development as well as involving clean-technology transfers and investment flows from North to South. Thus, from the perspective of non-Annex I countries, the CDM seems to hold promise, with its potential to channel financial flows and transfer cutting-edge greenhouse-gas abatement technology in a sustainable manner. The real concern regarding the sustainable-development attributes of the CDM, however, lies in the fact that insufficient attention has been paid to the degree to which the mechanism can allow sustainable development-related social benefits to be achieved, while there has been much speculation regarding the amount by which it will allow greenhouse gas emissions to be reduced (Austin and Faeth, 1999). These concerns reflect the unequal expectations, in terms of social benefits likely to accrue from the mechanism, of investors in developed countries on one hand, and stakeholders in developing countries on the other hand. The disparity is likely to result in conflict between the two parties, and stymie the fruitful application of the CDM. Moreover, the mandate of the CDM may lead to policy options in developing countries that run counter to rules governing investment at the multilateral level, since the mechanism has a set of rules for international investment that differ from those governing current investment practices. Thus, while international investment agreements attempt to liberalise investment and protect investors by restraining host-government intervention in the investment market, the CDM requires that a host government intervene in investment markets to promote sustainable development. In principle, therefore, not only does the CDM have the potential for being incompatible with the international investment regime, but the implications of investment rules are critical to the satisfactory development of the CDM.
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In the following pages, the above issues will be addressed in the context of a case study conducted in South Africa, one of a few developing countries hosting pilot CDM projects. Particular focus is placed on stakeholders’ perception of what CDM should deliver in terms of its contributions to sustainable development, and the perception gap between stakeholders and investors. It is argued that whether the intended development benefits of CDM can be delivered successfully directly depends on the degree to which these issues are factored into the design of the mechanism’s institutional framework. 2 Climate Change Policy in South Africa South Africa signed the United Nations Framework Convention on Climate Change (UNFCCC) in 1993, ratified it in August 1997, and acceded to the Kyoto Protocol in June 2001. As a nonAnnex I country, it has no commitment to reducing emissions under the Kyoto Protocol and is eligible to host CDM projects. Overall, South Africa’s negotiating position is aligned with that of the G77–China bloc1, the primary concerns of which are economic development and the issue of equity, as perceived by the developed and developing countries. At the same time, South Africa occupies a unique position in the climate change regime for, while emissions from the African continent are low and expected to remain so for the immediate future, it is the continent’s greatest emitter of greenhouse gases, depending as it does on coal for power production (Asamoah et al., 2000).2 According to the inventory prepared for the South African national communications report, greenhouse gas emissions in 1994 totalled approximately 380 million tons of carbon dioxide (CO2) equivalents, or 1.6 per cent of global emissions (World Bank, 2002). The country’s 1997 CO2 emissions placed it 15th in world ranking, with a 1994 per-capita CO2 emissions rate of 8.5 tons, more than double the global average of 4 tons (Thorne, 2001). Recognising the enormous threat that the international community’s commitment to a carbonless economy poses to South Africa’s coal-dependent economy, the government is striving to respond to the economic impact of climate change-related activities by formulating an emissions reduction strategy. To that end, in 2000 South Africa launched a country study programme reflecting the requirements of the UNFCCC. The mitigation-related study included such aspects as a greenhouse gas emissions inventory, vulnerability and adaptation, mitigation options, and the process of policy development. It explored the options available between 1999 and 2001, with a view to assisting policy makers develop strategies, and to identifying opportunities to develop and improve efficiency and skills, especially in the sphere of technology transfers. The study identified seven sectors in which are found most of the mitigation opportunities: electricity, liquid fuels, natural and synthetic gas, the commercial and residential sector, transport, mining, industry, and agriculture. The greatest mitigation potential was identified in the electricity sector, in which CO2 could potentially be reduced by some 1,320 million tons during the 2001–2025 period (World Bank, 2002; Thorne, 2001).

3 Key CDM Stakeholders in South Africa
The G77 countries—77 developing countries—together with China in 1991 formed a single negotiation bloc in the climate change regime. 2 South Africa is the world’s fifth-largest producer and second-largest exporter of coal. The country’s coal exports provide a substantial portion of its revenues and indigenous coal accounts for approximately 75 per cent of its primary energy needs. 3
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The agency leading the promotion of climate change-related activities in South Africa is the Department of Environmental Affairs and Tourism (DEAT), which has issued a climate change policy statement both stressing the need to incorporate climate change-related policies into national policies, and calling for collective action amongst the relevant ministries. In an endeavour to respond to the climate change-related movements in the international community, the DEAT has set up mechanisms to orchestrate climate change-related activities, namely, interdepartmental task groups and the National Committee on Climate Change (NCCC), an ad hoc multi-sectoral advisory body set up in 1996 to advise and support the DEAT. It comprises representatives from central and provincial governments, non-governmental and communitybased organisations, business, mining, labour, and the research community, and is responsible for informing stakeholders about climate change-related issues (NCCC, 1998; World Bank, 2002; Thorne, 2001). The DEAT has identified the Department of Minerals and Energy (DME) as its main partner in addressing climate change, with energy policy being an important determinant of the country’s emissions profile. The DME has begun to look at the impact of implementing Kyoto Protocol commitments on the South African coal market.3 The Department of Trade and Industry (DTI) is also becoming more interested and involved in climate change-related issues, although progress is slow as it appears unable to grasp the overall relevance and role of climate change. It has launched a few initiatives in connection with climate change-related policies at the local and international levels, the first of which was in 2001, to examine the impact of climate changerelated policies on the South African economy through the National Economic Development and Labour Council (NEDLAC), a tripartite (government, labour, and business) body (World Bank, 2002; Thorne, 2001). A number of industry associations are actively involved in climate change-related issues in South Africa, including the Chamber of Mines and the Chemical and Allied Industry Association (CAIA). Representing the majority of chemical firms in South Africa, the CAIA has been playing an active role in the NCCC. Contributing 5.3 per cent of the country’s gross domestic product (GDP), the chemical industry in South Africa accounts for 23 per cent of the manufacturing sector in value terms (CAIA, 1997). A number of Activity Implemented Jointly (AIJ) projects have been carried out in the chemical industry, including a natural-gas conversion and an energy-efficiency project. One of the most active players in this industry is Sasol Technology (Pty.) Ltd., which is exploring potential CDM project opportunities and, as a first step, in 2001 stated its intention to launch a natural gas-conversion project as a unilateral CDM initiative (Sasol, 2001). The Chamber of Mines, an association representing the mining industry, plays a role in connection with climate change as it informs members of opportunities and challenges arising from the climate change regime. As a member of the NCCC, it has been intimately involved in developing South Africa’s climate change-related policy. Another key industry player in the climate change arena is Eskom, the largest and most significant national energy supplier in South Africa and, hence, the biggest greenhouse gas emitter.4 While it does not have an exclusive right to generate electricity, Eskom has a monopoly in bulk electricity sales (Eberhard and Trollip, 1994). In particular, the country’s centralised, supply-oriented energy policy, coupled with Eskom’s self-financing capacity, has put the firm in a very powerful position in the energy market. While the DME is only responsible for electrification policy issues, Eskom has been mandated, by the electrification act of 1987, to be
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Personal communication (Interviewee # 1). For the details of interviewees, see Appendix 1. Eskom is state owned, but run by a private firm. 4

responsible for electrification planning. It has been able to provide cheap electricity from the country’s abundant coal supplies, thereby serving the government’s best interests. In addition, Eskom is known to possess world-class technology in the areas of coal combustion and nuclear energy.5 Despite the growing awareness in civil society of climate change-related issues, its capacity to tackle them appears to be still very limited. In addition, there is a huge capacity gap amongst non-governmental organisations (NGOs). Only a handful, particularly those involved with AIJ and Global Environment Fund (GEF) projects, have the capacity to engage the issues; most local NGOs have only a limited comprehension of what is involved. Of those NGOs at the forefront in the context of climate change-related issues, the International Institute for Energy Conservation (IIEC), the Minerals and Energy Policy Centre (MEPC), and Earthlife, as well as academic institutes such as the Energy and Development Research Centre (EDRC), have been developing greenhouse gas-reduction projects and have begun investigation of potential CDM projects in South Africa (World Bank, 2002; Thorne, 2001).

4 Barriers to CDM Implementation in South Africa Successful implementation of the CDM requires both an effective institutional framework and an environment conducive thereto in host countries. The limited capacity of developing countries often has been blamed for hindering CDM implementation, and South Africa is no exception. Stakeholders have pointed out its limitations, ranging from a lack of physical and human resources to inefficient governance, a lack of leadership and decision-making procedures at the ministerial level. The fundamental reason for its lack of CDM initiatives, however, appears to be rooted in stakeholders’ scepticism concerning the benefits that could accrue from the CDM scheme, as well as fear of the scheme’s potential impact on its economy and technology market. The disparity of views between stakeholders and investors is cause for concern on the part of the stakeholders, since it implies that the aspirations to achieve sustainable-development goals through the CDM might lead only to doom and gloom. This section will focus on the perception gap between the two parties, which constitutes another barrier that must be overcome if the CDM is to be successfully applied in South Africa. 4.1 Stakeholders Sceptical about CDM Benefits Although the government appears to generally support and encourage domestic firms’ engagement with the CDM, it remains reluctant to take an unambiguous stand on the mechanism, mainly due to the uncertainty surrounding the mechanism at the negotiating level and the deep scepticism concerning its principles. South Africa’s negotiating position has also played a role in its taking a reactive, rather than proactive, position on the CDM. Since it stresses the minimum impact of its climate change-related commitment on economic growth, its primary focus is on such issues as equity and supplementarity.6 Concern has been raised among developing countries that advanced nations will use the CDM to exploit all the easy, cheap options, leaving the developing countries with no choice but to tackle the expensive options when it is their turn to take on commitments, while profound scepticism prevails among stakeholders, government circles, as well as the public and private sector. Thus, a

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Personal communication (Interviewee # 1). The principle of supplementarity requires that domestic measures be used as a primary source of greenhouse gas reduction and be supplemented by the use of flexibility mechanisms. 5

representative of a business association stressed that the business sector in South Africa needs to take a cautious approach to the CDM, since it is a highly political and sensitive issue.7 In particular, a number of key private-sector players appear to be alarmed by the introduction of the CDM scheme in South Africa, fearing its potential impact on the coal market as well as domestically developed technology. Thus, since the mining industry has a vested interest in coal, the Chamber of Mines has been striving to ensure that climate change-related initiatives have the minimum impact on coal exports. Although the industry concedes that instruments such as the CDM can lead to improved energy efficiency, which is one of its key agendas, it believes that CDM projects such as large-scale gas pipelines or renewable-energy projects may pose a threat to the mining industry.8 Domestic companies like Eskom, with its interests in the coal and nuclear-energy sectors and supported by its advanced technology, also appear to be on guard against certain types of technology transfer that might threaten the market for its own technology. Eskom is particularly keen to develop nuclear energy, which employs domestically developed technology, while the renewable-energy sector depends on imported technology. Moreover, Eskom is evaluating the future capacity of renewable energy in an energy facility research project, and is involved with a number of renewable-energy projects ranging from wind power to Solar Home Systems (SHSs).9 While it is seeking out a niche market for its renewable-energy technology where it can have a competitive advantage,10 it may remain reluctant to open the market to clean technology transferred through CDM schemes. In short, stakeholders’ profound scepticism, combined with the potential threat CDM schemes pose for the domestic coal and technology markets seem likely to constitute major barriers to the implementation of CDMs. 4.2 Disparity of Views on Sustainable Development Attributes of the CDM According to the fundamental spirit of the CDM, host countries should be enabled to attain their sustainable development goals, to which end the countries concerned have the right to accept or reject CDM projects on the basis of their development additionality. Accordingly, stakeholders expect CDM projects to address a wide range of development issues resulting in broad social benefits, while some investors are inclined to believe that a host country’s primary interest is in the financial, rather than social, benefits accruing from CDM projects. This disparity of views between the two parties is likely to result in conflict and, eventually, demean the spirit of the CDM by thwarting its achievements in terms of sustainable development. In this section, stakeholders’ perceptions of national development goals and their expectations concerning the social benefits the CDM will bring are analysed and compared with those of investors.

Sustainable-Development Goals in South Africa

Although no fixed set of sustainable-development criteria have been agreed, stakeholders have been able to identify key indicators of sustainable development based on legislation and policy guidelines in which their national development goals are enshrined. Overall, stakeholders are of the view that, in principle, the social benefits of the CDM should be in line with South Africa’s integrated-development policies. ‘Development is to ensure, in one way or another, the upgrading of people’s lives and the enhancing of the capacity of certain areas to perform certain functions. In
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Personal communication (Interviewee # 4). Personal communication (Interviewees # 5, #6, and # 8). 9 Personal communication (Interviewees # 9 and # 10). 10 Personal communication (Interviewee # 3). 6

order to do that, integrated policy guidelines that include all development-related policies in South Africa must be incorporated in sustainable development criteria for CDM projects’.11 The key to sustainable development has emerged in four areas, which are rooted in South Africa’s integrated-development policies: principal indicators, environmental benefits, local economic development, and public participation (Table 1). Theme (a) Principal indicators Sustainable Development Indicators Equity (empowerment of disadvantaged people) Job creation Poverty eradication (b) Environmental benefits Environmental improvement Enforcement of environmental regulations (c) Local economic Rural development (affordable energy) development Human development (adult basic education; skills development) Sustainability of projects (technology training; provision of basic infrastructure) (d) Public participation Empowerment of disadvantaged people Participatory environmental governance Sustainability of projects (through sense of ownership) Table 1 Sustainable Development Indicator [ Sources: Interviews with CDM stakeholders in South Africa, 2001]. (a) Principal Indicators Stakeholders were of the view that it is through the principal indicators that South Africa must address sustainable development issues such as equity, job creation, and poverty eradication, to which is linked virtually all legislation in South Africa. One of the pivotal pieces of legislation addressing these issues is the Reconstruction and Development Programme (RDP), a government-formulated strategy devised to facilitate the fundamental transformation required to jump from apartheid to a people-centred society. Under the RDP, the government is committed to redistributing resources to redress the inequalities inherited from the days of apartheid12 and achieve integrated, coherent socio-economic progress (Ministry in the Office of the President for General Information, 1994). The RDP comprises a number of programmes, one of which aims to meet people’s basic needs: jobs; land and agrarian reform; food; housing; water and sanitation facilities; energy supplies; transport; the provision of health-care information and facilities; information on environmental concerns; and social welfare and security. For these needs to be met, the infrastructure must be suitably developed, and the people encouraged to participate in making decisions concerning infrastructure-related development projects. The RDP is one of the most comprehensive policies to address the issue of equity between the privileged and the disadvantaged: the urban and rural populations, men and women, large
Personal communication (Interviewee # 1). Since the late nineteenth century, the South African government had maintained a ‘two-nation’ society through the systematic and often violent segregation of the privileged white and the socially and politically deprived non-white sectors of the population. When the African National Congress (ANC) was voted into power in 1994, the liberal-democratic system was adopted, marking the end of apartheid. 7
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conglomerates and small to medium-sized enterprises. Reflecting the country’s historical background, it seeks to redress, through a human resources-development programme, the distorted skills profiles and distribution of resources resulting from past discrimination. Through a process of consultation and joint policy formulation, the RDP works with formerly disadvantaged groups and small businesses to create jobs. Municipalities, meanwhile, are seeking to eradicate poverty by empowering poor, marginalised communities through their redistribution and development which they link to profitable growth and investment. Further, firms that supply goods and services to these municipalities can be required by them to invest in training, affirmative action, and community development (Ministry for Provincial Affairs and Construction Development, 1998). (b) Environmental Benefits In setting the criteria to evaluate the environmental benefits of CDM projects, most of the stakeholders pointed to the National Environment Management Act (NEMA), which places particular emphasis on integrated environmental management and local environmental sustainability (Ministry of Environmental Affairs and Tourism, 1998). Based on the assumption that ecosystems are all closely interrelated, integrated environmental management requires that an environmental impact assessment be applied to all projects likely to impact the overall environment. With regard to the application of the assessment to CDM projects, however, stakeholders were divided in two groups: some, particularly those representing industries, argued that streamlined environmental impact assessment can be applied to selective CDM projects, while those from NGOs and the government were of the firm belief that all CDM projects should be subject to assessment. Further on, the government expects the CDM projects to improve the enforcement of environmental legislation in South Africa.13 (c) Local Economic Development Another sought-after result of CDM projects is the sustainability of local economic development. According to the White Paper on Local Government, the principal goals that local government should achieve in pursuit of sustainable development encompass local job creation, training programmes for employees (particularly from small businesses), the empowerment of marginalised communities (Ministry for Provincial Affairs and Construction Development, 1998), and the provision of a sufficient supply of affordable energy. Focusing on rural areas in which there is a high level of poverty, incomes are constrained by economies that are not sufficiently vibrant, the population is sparse, and there is little access to the natural-resource bases to provide rural people with a means of subsistence (Ministry in the Office of the President for General Information, 2000)—which problems are compounded by those related to the legacy of the former homeland system14—, the government has put forward an Integrated Sustainable Rural Development Strategy (ISRDS), which emphasises the need to empower poor and marginalised communities by providing guidelines for rural development programmes. In this context, stakeholders strongly supported the use of local workers and the procurement of local goods and services for CDM projects. It was also expected that community-based CDM
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Personal communication (Interviewee #2). The apartheid regime devised a homeland system whereby tenant labourers were replaced by contract labourers and, between 1960 and 1982, some 3.5 million people—almost half of whom were indigenous Africans who had lived on white-owned farms—were forcibly removed by the state to homelands, which were densely populated ghettos isolated from economic opportunities. About 700,000 more people were subsequently removed from urban areas declared ‘white’. 8

projects would provide the necessary training programmes and education, as stakeholders stressed the importance of human resources development for developing local economies. One stakeholder interviewed echoed the argument of many: ‘Local economic development is one of the key development priorities. It covers skills development, promotion of the standard of living and adult basic education, a central notion of education policy in South Africa. To this end, employers or job providers are called upon to provide basic education skills to the community and basic infrastructure such as for health. In this respect, CDM project sponsors need to create more sense of ownership in the community. Past experience shows that many projects in rural areas collapsed because of a lack of training and sense of ownership. Thus, whatever technologies come into the community, they should be understood at the local level’.15 (d) Public Participation Another critical indicator of sustainable development is public participation, which is embedded in many policies and areas of legislation. The principles of NEMA, for instance, embrace the notion of participatory environmental governance, with a particular emphasis on disadvantaged people, including women and youth (Ministry of Environmental Affairs and Tourism, 1998). The ISRDS also recognises that the participation of local communities in development projects, from start to finish, is critical to project sustainability, encouraging a sense of shared ownership and responsibility among those beneficiaries who also participate in the financing of sub-projects. According to the strategy, technical assistance and training as well as infrastructure should be provided to rural communities, so that they might identify, prepare, and implement their own sub-projects (Ministry in the Office of the President for General Information, 2000).

Investors’ Views on the Development Benefits of the CDM

Investors’ views on what social benefits CDM can and should deliver appear to diverge from stakeholders’ expectations in a number of areas, foreshadowing potential conflict between the two parties.16 In particular, those investors who believe that a host country’s priorities lie in attracting foreign investment, rather than attaining sustainable development, tend to assume that host countries are unlikely to require that social benefits accrue from CDM projects, since they are competing with other developing countries to attract foreign investment: ‘Host countries that are ready for the CDM will not apply complicated or strict sustainable development criteria. To do so would mean that the host country does not understand what the CDM is, and is not ready for it. When host countries realise that they are competing with one another for CDM investment, they might mediate the complexity of sustainable development criteria’. 17 With regard to the sustainable development goals outlined by CDM stakeholders in South Africa (Table 1), investors were of the view that local economic development, the sustainability of CDM projects, and environmental sustainability constitute the sustainable development requirements of CDM projects, to the exclusion of equity and human-resources development.

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Personal communication (Interviewee #1). Since the majority of the stakeholders in South Africa pointed out the Prototype Carbon Fund (PCF) as a potential CDM investor, four private-sector investors that are major participants in the fund were selected for interview along with Shell International, which is financing and developing a pilot CDM project in South Africa (see Annex I). 17 Personal communication (Interviewee # 10). 9

Investors considered equity to be least relevant to the CDM. In addressing the subject of equity by prioritising disadvantaged people and communities, and engaging with small-scale businesses to create jobs, provide energy-related services, redistribute resources, and develop skills, most investors indicated great difficulty in meeting the requirements (Table 2).18

Indicators of Equity Prioritising disadvantaged groups in job creation Targeting disadvantaged households, communities for provision of affordable energy Redistribution of resources to disadvantaged people

Investor 119 Quite difficult Very difficult

Investor 220 Depends on skills/capacity Depends on project scale Depends project location

Investor 3 21 Investor 4 22 Not too Very difficult difficult Not too Very difficult difficult

Very difficult

Skills development for Quite disadvantaged people difficult

on Depends on Very difficult help from government or project partners Very difficult Not too Very difficult difficult

Table 2 Investor Perceptions of Equity–Sustainable Development Link [Sources: Interviews with Investors, 2001–2002]. [Note: Scale of difficulty (escalating): not difficult, not too difficult, difficult, quite difficult, very difficult]. Some investors particularly stressed that the quality and skills of local employees need to be considered in their employment, rather than any equity-based criteria. ‘Prioritising disadvantaged groups in job creation, or using local workers depends on their skills and capacity. In addition, targeting disadvantaged people and small businesses in energy services depend on the scale of the project’.23 ‘We get a project in a host country through competing against other foreign companies. Thus, we want the highest-quality workers. If [hiring local workers] is a condition that applies to all investors, so that we are not disadvantaged by hiring additional workers from a particular group, then perhaps we could do that’.24 With regard to such requirements as local employment, the procuring of local goods and services,25 and the supply of technology training, investors were of the view that the second and third requirements were easier to deliver than the first requirement (Table 3). Some investors

Interviewee #12 argued that any CDM project would have merits similar to sustainable development goals. 19 Interviewee # 11 20 Interviewee #13 21 Interviewee #14 22 Interviewee #15 23 Personal communication (Interviewee # 13). 24 Personal communication (Interviewee #14) 25 In legal terms, when imposed by host countries as conditions to be met by investors, these requirements are often called ‘performance requirements’. 10

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expressed their willingness to use local goods, but only if they are good quality and compatible with their equipment.26 Area of Sustainable Investor 1 development Use of local Difficult employees Procurement of local Not too goods, services difficult Provision of Not technology training difficult Investor 2 Depends on skills, capacity Not too difficult Investor 3 Not difficult Not difficult Not difficult Investor 4

too Difficult too Depends on transaction costs too Not too difficult

too Not difficult

Table 3 Investor Perceptions of Performance Requirements [Sources: Interviews with investors, 2001–2002]. Investors were, however, concerned about the requirement that local workers be used, and expressed the caveat that this should depend on the ability of local workers. One investor said that ‘[The use of local employees] it hard, although it depends on the type of CDM project. If the project involves high technology, which means that it needs highly skilled employees, it might be difficult to use local workers. If it is a large project that requires less specialised staff, then perhaps it is easier.27 The investor interviews reveal an uneasiness about addressing issues—such as equity and human development—that stakeholders consider vital to achieving sustainable goals through CDM scheme. Satisfying sustainable development requirements should, of course, take account of the transaction costs and, as most investors agree, expecting to meet all the requirements outlined by stakeholders may be unrealistic, given the huge costs that would be added to CDM projects. Nevertheless, the disparity of views between the two parties as the potential to result in conflict and force either party to compromise their objectives. 4.3 A Case Study: Development Benefits of the Solar Home System Project The gap between what social benefits CDM projects can deliver and what stakeholders expect from them appears to diverge in the case of South Africa’s Solar Home System (SHS) project. Since 1998, the project has been run by Eskom-Shell Solar Home Systems (Pty.) Ltd., as part of the country’s off-grid programme in north-western Eastern Cape and in the southern part of KwaZulu-Natal (Figure 1). 28 Originally developed by Shell International as a CDM pilot scheme, it is a rural electrification undertaking designed to provide solar electricity to replace candles, batteries, and paraffin in these isolated and impoverished rural provinces of South Africa.

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Personal communication (Interviewees #14 and # 11). Personal communication (Interviewee # 11). 28 This is a fifty-fifty joint venture set up by Eskom and Shell Renewable International, and a separate entity from Shell Solar Southern Africa as well as Shell South Africa. 11

Figure 1 Solar Home System Project Site
This joint Shell Solar–Eskom project aims to provide 50,000 households with solar home systems in order to reduce the amount of greenhouse gas produced by the candles and paraffin burned to provide light, and the car batteries that are regularly recharged to power TV sets (Figure 2).

Figure 2 Solar Home System
According to a study conducted by the EDRC, household surveys reveal that the eight litres of paraffin consumed on average each month are likely to be replaced by electricity from an SHS. Given the current level of energy consumption, it is expected the substitution of solar power for that produced by paraffin will reduce CO2 emissions by an estimated 230 kilograms (kg) annually. Although the annual amount by which CO2 emissions are said to be reduced varies depending on the criteria used to measure reductions, it has been calculated at 40 kg for grid12

based power supplies. Thus, were the crediting time that applies to the project to be 20 years, CO2 emissions could decline by between 800 kg and 4,600 kg (Cloin, 2000: Ybema et al., 2000).29 When the SHS project was developed as a pilot CDM project, the justification was based on the assumption that it could provide development benefits such as economic development through the creation of jobs, the payment of taxes, and an increase in labour productivity; environmental protection by delivering a carbon-free source of energy; and social development by delivering electricity to rural areas, encouraging the development of skills and reducing migrations from rural to urban areas (Shell International, 2000). The SHS project developer claimed that electricity generated by these systems had boosted small businesses such as chicken farms and local spaza shops,30 and so far had created 160 jobs, mostly for local employees. It was also claimed that access to electricity and better-quality lighting was also contributing to improving people’s health at the household level by reducing the amount of indoor smoke, the incidence of fires, and eye-related medical problems. In addition, the availability of electricity in households was seen as possibly enhancing educational opportunities by increasing popular access to news programs on the radio and television.31 Although stakeholders agree that the combination of the above-mentioned benefits can contribute to an improved standard of living for the beneficiaries, the limited energy capacity of the solar home system and infrastructure deficiencies that plague the water supply and sanitation of, and roads giving access to, rural households appear to diminish the system’s sustainable-development benefits. For instance, one solar home system generates enough electricity to power a 12-volt black-and-white TV set, a radio, and lights for four hours a day (Shell Solar Southern Africa (Pty.) Ltd. 2001). Stressing the importance of energy supply in sustainable development, a government representative argued that CDM energy projects must supply affordable and sufficient energy in order to address wider sustainable development issues: ‘Energy is an input and engine for development. Energy sources should contribute to other needs of the community, such as access to water, safety, health, telecommunications, and education. Thus, renewable energy should also serve other purposes of sustainable development such as job creation, water provision, and agriculture uses. In this respect, the sustainable development benefits of the Solar Home System project are too limited, since the System only provides lighting and limited electricity. CDM projects should address wider sustainable development issues’.32 The SHS project developer indicated the gap between what the project could deliver and what stakeholders in South Africa expected from it when the admission was made that components such as infrastructure development and affordable energy services could not be delivered, since energy generated by the SHS project is very limited and there is virtually no infrastructure. 4.4 Potential for Conflict with Multilateral Investment Regulations Stakeholders’ aspiration to promote sustainable development through the CDM face another potential barrier in the form of either a possible conflict of interests or incompatibility among the
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The reduction of emissions is calculated only on the basis of the amount of CO2, not other greenhouse gases. 30 Spaza is a colloquial term used in South Africa to denote a local shop run by indigenous Africans. 31 Personal communication (Interviewee # 7). 32 Personal communication (Interviewee # 1). 13

policy options that may be chosen in pursuit of sustainable development through the CDM, and investment rules governing international investment. Foreign investment is currently governed by diversified international investment agreements including a growing set of bilateral, regional, multilateral, and other legal mechanisms that vary in terms of investment rules, geographic scope, coverage, and stringency. International investment agreements are designed to achieve two goals: the liberalisation of foreign investments by removing market barriers and distortions; and the protection of investors and their interests from the actions of host governments, thereby promoting foreign direct investment. Certain international investment agreements have ‘performance requirements’ that prohibit host countries from imposing certain standards or attaching conditions to investor activities. In order for local economies to benefit from foreign direct investment, host countries tend to impose certain requirements on foreign investors that concern particular aspects of their operations. Sometimes, they offer special incentives to induce investors to accept performance requirements, which include the obligation to hire host-country nationals, use locally produced raw materials and inputs, and export a portion of the finished product (UNCTAD, 1998; 1999). The most significant international investment agreement in force in this connection is the Agreement on the Trade-Related Investment Measures (TRIMs), under the World Trade Organisation (WTO). Because imports and exports are regulated under the heading of performance requirements, it is possible that the procurement of local goods, for instance, distorts international trade. Thus, the TRIMs Agreement prohibits host countries from applying investment-related measures that restrict the trade in goods or discriminate against imported goods. The Agreement (Article 2.2) incorporates a list in its Annex (Figure 3) that gives five measures which are inconsistent with the obligations of national treatment or elimination of quantitative restrictions (WTO, 1994).34 The use of performance requirements has also been regulated in certain bilateral investment treaties. For instance, that between South Africa and Canada prohibits the requirement that particular nationalities be used for certain positions, as well as the use of local goods and services (Republic of South Africa, 1995).35 Other requirements, to the extent that they affect the import and export of products, might also run afoul of the Agreement. 1. TRIMs that are inconsistent with the obligation of national treatment provided for in paragraph 4 of Article III of GATT 1994 include those which are mandatory or enforceable under domestic law or under administrative rulings, or compliance with which is necessary to obtain an advantage, and which require: a) The purchase or use by an enterprise of products of domestic origin or from any domestic source, whether specified in terms of particular products, in terms of volume or value of its local production; or b) That an enterprise’s purchases or use of imported products be limited to an amount related to the volume or value of local products that it exports.

The TRIMs Agreement does, however, allow developing countries ‘a grace period’ during which to eliminate any prohibited requirements (UNCTAD, 1999b). 35 Article 5.1 (a) states that ‘A Contracting Party may not require that an enterprise of that Contracting Party, that is an investment under this Agreement, appoint to senior management positions individuals of any particular nationality. 14

34

2. TRIMs that are inconsistent with the obligation of general elimination of quantitative restrictions provided for in paragraph 1 of Article XI of GATT 1994 include those which are mandatory or enforceable under domestic law or under administrative rulings, or compliance with which is necessary to obtain an advantage, and which restrict: a) The importation by an enterprise of products used in or related to its local production generally or to an amount related to the volume or value of local production that it exports; b) The importation by an enterprise of products used in or related to its local production by restricting access to foreign exchange to an amount related to the volume or value of local production that it exports; c) The exportation or sale for export by an enterprise of products, whether specified in terms of particular products, in terms of volume or value of products, or in terms of a proportion of volume or value of its local production.

Figure 3 The TRIMs Agreement Annex [Source: WTO, 1994].
Such investment rules prohibiting performance requirements, however, are on a collision course with some of the development requirements that stakeholders may attach to CDM investment. Their aspirations to create jobs emphasise the use of local employees, technology training for them, and the procurement of local goods, although this is not considered as significant as the use of local employees. In other words, the fundamental source of conflict between the CDM host country and investors is embedded in the different objectives of each: the primary concern of the host government is to promote sustainable-development goals, whereas investors are keen to earn carbon credits. Given the incompatibility between CDM and investment rules, there is a possibility that investors might mount legal challenges should a conflict arise between the two parties over the development requirements that constitute performance requirements prohibited by investment law. A representative of a business association ascertained that investors would undoubtedly rely on investment protection inscribed in such rules as pertain to conflict in connection with CDMrelated investment, although that is largely contingent on the size of the credit at stake and the rules or requirements that investors put forward.36

3 Conclusion The preceding analysis sheds light on some of the barriers that exist to the implementation of the CDM in South Africa. The profound scepticism that prevails among stakeholders has resulted in a reactive, rather than proactive, position on its introduction. In addition, fearing its potential impact on the coal-dependent economy and the market for home-grown technology, a number of key private-sector players appears to be on guard against the introduction of certain clean technologies through the CDM scheme. In particular, the analysis shows that the gap between CDM stakeholders and potential investors regarding CDM sustainable development benefits is likely to be a stumbling block to attaining the spirit of the CDM. While stakeholders consider it imperative for the attainment of sustainable-development goals that the issue of equity be addressed by prioritising disadvantaged people and communities when creating jobs and developing skills, investors perceive the issue of equity to be the least relevant to developing the CDM. The case study involving the solar home
36

Personal communication (Interviewee #4). 15

system pilot CDM project also shows that the development benefits the project can deliver fall short of stakeholders’ expectations, foreshadowing conflict between the two parties that could possibly force them to compromise their objectives. Lastly, there is the barrier to the achievement of CDM development benefits in the form of the potential conflict with investment rules. Were use of local employees, goods, and services to constitute performance requirements that are prohibited by investment rules, a host country’s policy to attach these requirements to CDM projects would be at odds with investment laws, adding yet another challenge to the successful implementation of the CDM. Appendix 1 Interviewee Details

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Appendix 1 Interviewee Details The individuals interviewed in connection with this paper have below been identified by number to ensure their privacy. Interviewee Number 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Location of Interview South Africa South Africa South Africa South Africa South Africa South Africa South Africa South Africa South Africa South Africa UK UK Japan Japan Japan Stakeholder Group Government Government Quango Industry Industry Project developer Project developer NGO NGO NGO Investor Investor Investor Investor Investor Organisation Department of Minerals and Energy (Energy Planning Department) Department of Trade and Industry (Standards and Environment Directorate) Eskom/Technology Service International Industrial Environmental Forum of Southern Africa Chamber of Mines KPMG Shell Solar Southern Africa (Pty.) Ltd. Minerals and Energy Policy Centre (MEPC) Energy and Development Research Centre (EDRC) Earthlife Shell International British Petroleum Tokyo Electric Power Co. Mitsubishi Corporation Mitsui Corporation

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References Asamoah, J. (2000) ‘Darling Demonstrates the Power of Wind’. African Energy. 2 (4), 32-35. Cited in Doppegieter, J. J., J. du Toit, and E. Theron. (2000) Energy Futures 2000/2001. Cape Town: Institute for Future Research, University of Stellenbosch. Chemical and Allied Industry Association (CAIA). (1997) Responsible Care Report 1997. Johannesburg: CAIA. Cloin, J. (2000) Towards a Streamlined CDM Process for Solar Home Systems: Case Studies in Selected Countries: Republic of South Africa. Energy Research Centre of the Netherlands (ECN) home page. Http://www.ecn.nl/library/reports/2000e/c00110.html. Eberhard, A. and H. Trollip. (1994) Background on the South African Energy System. Cape Town: Energy for Development Research Centre (EDRC), University of Cape Town. Ministry in the Office of the President for General Information. (1994) White Paper on Reconstruction and Development. Pretoria: Republic of South Africa. Ministry of Environmental Affairs and Tourism. (1998a) National Environmental Management Act of the Republic of South Africa. Pretoria: Republic of South Africa. Ministry for Provincial Affairs and Construction Development. (1998b) White Paper on Local Government. Pretoria: Republic of South Africa. Republic of South Africa. (1995) Agreement between the Government of Canada and the Government of the Republic of South Africa for the Promotion and Protection of Investment. Cape Town: Republic of South Africa. Thorne, S. (2001) The South South North (SSN) Project: Final Report for South Africa. SSN home page. Http://www.SouthSouthNorth.org. United Nations Conference on Trade and Development (UNCTAD). (1998) Bilateral Investment Treaties in the Mid-1990s. New York and Geneva: United Nations. ———. (1999) Trends in International Investment Agreements: An Overview. New York and Geneva: United Nations. World Bank, (2002) South African National Strategy Study on the Clean Development Mechanism. Washington DC: World Bank. World Trade Organisation (WTO). (1994) Agreement on Trade-Related Investment Measures. Geneva: WTO. Ybema, J. R., J.Cloin, F.D.J. Nieuwenhout, A.C. Hunt, and S.L. Kaufman. (2000) Toward a Streamlined CDM Process for Solar Home Systems: Emission Reductions from Implemented Systems and Development of Standardised Baselines. Energy Research Centre of the Netherlands (ECN) home page. Http://www.ecn.nl/library/reports/2000e/c00109.html.

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The trans-disciplinary Tyndall Centre for Climate Change Research undertakes integrated research into the long-term consequences of climate change for society and into the development of sustainable responses that governments, business-leaders and decision-makers can evaluate and implement. Achieving these objectives brings together UK climate scientists, social scientists, engineers and economists in a unique collaborative research effort. Research at the Tyndall Centre is organised into four research themes that collectively contribute to all aspects of the climate change issue: Integrating Frameworks; Decarbonising Modern Societies; Adapting to Climate Change; and Sustaining the Coastal Zone. All thematic fields address a clear problem posed to society by climate change, and will generate results to guide the strategic development of climate change mitigation and adaptation policies at local, national and global scales. The Tyndall Centre is named after the 19th century UK scientist John Tyndall, who was the first to prove the Earth’s natural greenhouse effect and suggested that slight changes in atmospheric composition could bring about climate variations. In addition, he was committed to improving the quality of science education and knowledge. The Tyndall Centre is a partnership of the following institutions: University of East Anglia UMIST Southampton Oceanography Centre University of Southampton University of Cambridge Centre for Ecology and Hydrology SPRU – Science and Technology Policy Research (University of Sussex) Institute for Transport Studies (University of Leeds) Complex Systems Management Centre (Cranfield University) Energy Research Unit (CLRC Rutherford Appleton Laboratory) The Centre is core funded by the following organisations: Natural Environmental Research Council (NERC) Economic and Social Research Council (ESRC) Engineering and Physical Sciences Research Council (EPSRC) UK Government Department of Trade and Industry (DTI) For more information, visit the Tyndall Centre Web site (www.tyndall.ac.uk) or contact: External Communications Manager Tyndall Centre for Climate Change Research University of East Anglia, Norwich NR4 7TJ, UK Phone: +44 (0) 1603 59 3906; Fax: +44 (0) 1603 59 3901 Email: tyndall@uea.ac.uk

Recent Working Papers Tyndall Working Papers are available online at http://www.tyndall.ac.uk/publications/working_papers/working_papers.shtml Mitchell, T. and Hulme, M. (2000). A Country-by-Country Analysis of Past and Future Warming Rates, Tyndall Centre Working Paper 1. Hulme, M. (2001). Integrated Assessment Models, Tyndall Centre Working Paper 2. Berkhout, F, Hertin, J. and Jordan, A. J. (2001). Socio-economic futures in climate change impact assessment: using scenarios as 'learning machines', Tyndall Centre Working Paper 3. Barker, T. and Ekins, P. (2001). How High are the Costs of Kyoto for the US Economy?, Tyndall Centre Working Paper 4. Barnett, J. (2001). The issue of 'Adverse Effects and the Impacts of Response Measures' in the UNFCCC, Tyndall Centre Working Paper 5. Goodess, C.M., Hulme, M. and Osborn, T. (2001). The identification and evaluation of suitable scenario development methods for the estimation of future probabilities of extreme weather events, Tyndall Centre Working Paper 6. Barnett, J. (2001). Security and Climate Change, Tyndall Centre Working Paper 7. Adger, W. N. (2001). Social Capital and Climate Change, Tyndall Centre Working Paper 8. Barnett, J. and Adger, W. N. (2001). Climate Dangers and Atoll Countries, Tyndall Centre Working Paper 9. Gough, C., Taylor, I. and Shackley, S. (2001). Burying Carbon under the Sea: An Initial Exploration of Public Opinions, Tyndall Centre Working Paper 10. Barker, T. (2001). Representing the Integrated Assessment of Climate Change, Adaptation and Mitigation, Tyndall Centre Working Paper 11. Dessai, S., (2001). The climate regime from The Hague to Marrakech: Saving or sinking the Kyoto Protocol?, Tyndall Centre Working Paper 12. Dewick, P., Green K., Miozzo, M., (2002). Technological Change, Industry Structure and the Environment, Tyndall Centre Working Paper 13. Shackley, S. and Gough, C., (2002). The Use of Integrated Assessment: An Institutional Analysis Perspective, Tyndall Centre Working Paper 14. Köhler, J.H., (2002). Long run technical change in an energy-environmenteconomy (E3) model for an IA system: A model of Kondratiev waves, Tyndall Centre Working Paper 15. Adger, W.N., Huq, S., Brown, K., Conway, D. and Hulme, M. (2002). Adaptation to climate change: Setting the Agenda for Development Policy and Research, Tyndall Centre Working Paper 16. Dutton, G., (2002). Hydrogen Energy Technology, Tyndall Centre Working Paper 17. Watson, J. (2002). The development of large technical systems: implications for hydrogen, Tyndall Centre Working Paper 18. Pridmore, A. and Bristow, A., (2002). The role of hydrogen in powering road transport, Tyndall Centre Working Paper 19. Turnpenny, J. (2002). Reviewing organisational use of scenarios: Case study - evaluating UK energy policy options, Tyndall Centre Working Paper 20. Watson, W. J. (2002). Renewables and CHP Deployment in the UK to 2020, Tyndall Centre Working Paper 21.

Watson, W.J., Hertin, J., Randall, T., Gough, C. (2002). Renewable Energy and Combined Heat and Power Resources in the UK, Tyndall Centre Working Paper 22. Paavola, J. and Adger, W.N. (2002). Justice and adaptation to climate change, Tyndall Centre Working Paper 23. Xueguang Wu, Jenkins, N. and Strbac, G. (2002). Impact of Integrating Renewables and CHP into the UK Transmission Network, Tyndall Centre Working Paper 24 Xueguang Wu, Mutale, J., Jenkins, N. and Strbac, G. (2003). An investigation of Network Splitting for Fault Level Reduction, Tyndall Centre Working Paper 25 Brooks, N. and Adger W.N. (2003). Country level risk measures of climate-related natural disasters and implications for adaptation to climate change, Tyndall Centre Working Paper 26 Tompkins, E.L. and Adger, W.N. (2003). Building resilience to climate change through adaptive management of natural resources, Tyndall Centre Working Paper 27 Dessai, S., Adger, W.N., Hulme, M., Köhler, J.H., Turnpenny, J. and Warren, R. (2003). Defining and experiencing dangerous climate change, Tyndall Centre Working Paper 28 Brown, K. and Corbera, E. (2003). A MultiCriteria Assessment Framework for Carbon-Mitigation Projects: Putting “development” in the centre of decision-making, Tyndall Centre Working Paper 29 Hulme, M. (2003). Abrupt climate change: can society cope?, Tyndall Centre Working Paper 30 Turnpenny, J., Haxeltine A. and O’Riordan, T. (2003). A scoping study of UK user needs for managing climate futures. Part 1 of the pilot-phase interactive integrated assessment process (Aurion Project), Tyndall Centre Working Paper 31

Xueguang Wu, Jenkins, N. and Strbac, G. (2003). Integrating Renewables and CHP into the UK Electricity System: Investigation of the impact of network faults on the stability of large offshore wind farms, Tyndall Centre Working Paper 32 Pridmore, A., Bristow, A.L., May, A. D. and Tight, M.R. (2003). Climate Change, Impacts, Future Scenarios and the Role of Transport, Tyndall Centre Working Paper 33 Dessai, S., Hulme, M (2003). Does climate policy need probabilities?, Tyndall Centre Working Paper 34 Tompkins, E. L. and Hurlston, L. (2003). Report to the Cayman Islands’ Government. Adaptation lessons learned from responding to tropical cyclones by the Cayman Islands’ Government, 1988 – 2002, Tyndall Centre Working Paper 35 Kröger, K. Fergusson, M. and Skinner, I. (2003). Critical Issues in Decarbonising Transport: The Role of Technologies, Tyndall Centre Working Paper 36 Ingham, A. and Ulph, A. (2003) Uncertainty, Irreversibility, Precaution and the Social Cost of Carbon, Tyndall Centre Working Paper 37 Brooks, N. (2003). Vulnerability, risk and adaptation: a conceptual framework, Tyndall Centre Working Paper 38 Tompkins, E.L. and Adger, W.N. (2003). Defining response capacity to enhance climate change policy, Tyndall Centre Working Paper 39 Klein, R.J.T., Lisa Schipper, E. and Dessai, S. (2003), Integrating mitigation and adaptation into climate and development policy: three research questions, Tyndall Centre Working Paper 40

Watson, J. (2003), UK Electricity Scenarios for 2050, Tyndall Centre Working Paper 41 Kim, J. A. (2003), Sustainable Development and the CDM: A South African Case Study, Tyndall Centre Working Paper 42 Anderson, D. and Winne, S. (2003), Innovation and Threshold Effects in Technology Responses to Climate Change, Tyndall Centre Working Paper 43