As growing concerns and public awareness continued throughout the 1980’s, several United Nations General Assembly resolutions were adopted namely resolutions 44/228 of 22 December 1989, 43/53 of 6 December 1988, 44/207 of 22 December 1989, 45/212 of 21 December 1990 and 46/169 of 19 December 1991, urging for the protection of global climate for present and future generations of mankind.

The Second World Climate Conference on 7 November 1990 called for a framework of treaty and protocols on climate change. Thus on 9 May 1992, the environmental treaty, United Nations Framework Convention on Climate Change (“UNFCCC”) was opened for members’ signature. It entered into force on 21 March 1994. As of 11 April 2007, 191 countries and economic community have ratified the UNFCCC.

UNFCCC is concerned “that human activities have been substantially increasing the atmospheric concentrations of greenhouse gases, that these increases enhance the natural greenhouse effect, and that this will result on average in an additional warming of the Earth’s surface and atmosphere and may adversely affect natural ecosystems and humankind.”

UNFCCC’s main objective is to achieve “stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system. Such a level should be achieved within a time frame sufficient to allow ecosystems to adapt naturally to climate change, to ensure that food production is not threatened and to enable economic development to proceed in a sustainable manner.”

The Kyoto Protocol (“the Protocol”) an agreement made under the UNFCCC was adopted on 11 December 1997 and came into force on 16 February 2005. The Protocol provides for stronger and detailed commitments committing developed countries and countries under process of transition to a market economy to legally-binding targets to limit or reduce their greenhouse gas emissions (GHGs) (with the exception of Australia, Croatia, Turkey and USA, which have not ratified the Protocol. These countries and ultimately corporations within those countries are known as Annex 1 Parties. The Annex I Parties committed themselves to reduce their overall GHGs by at least 5% below the 1990 levels over the period between 2008 and 2012. Their GHGs reduction targets are specified in the Protocol and vary from country to country.

The GHGs identified in the Protocol are carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulphur hexafluoride (SF6). The Protocol allows the Annex I Parties to decide which of these gases will form part of their national emissions reductions strategy.

The Protocol provided three mechanisms to assist Annex I Parties in meeting their GHGs targets at a lower cost. The three mechanisms introduced are; (a) emissions trading, this allows Annex I Parties to trade parts of their emission allowances or assigned amount units (“AAUs”) to other Annex I Parties – Article 17 of the Protocol; (b) joint implementation (JI), which allows Annex I Parties receive emissions reductions units (“ERUs”) generate by emission reduction projects in the countries of other Annex I Parties. ERUs can be transferred through direct sale of ERUs or part of a return of investment in eligible JI projects – Article 6 of the Protocol; and (c) a Clean Development Mechanism (CDM), encourages joint projects between Annex I and non-Annex I (developing country) Parties. The non-Annex I Parties can create certified emissions reductions (“CERs”) by developing projects that reduce emissions of GHGs thus achieving its national sustainable development goals. Annex I Parties finances these projects and purchase the CERs as a means to comply with its own reductions commitments – Article 12 of the Protocol.

Despite the agreement being approved in 1997, various negotiations were held thereafter to determine the proper operational details to implement the Protocol to enable the Protocol to function and accepted worldwide. Thus in 2001, the Marrakech Accords was signed that establishes detailed rules, procedures and modalities to implement the three mechanisms and stimulate active participation in the Protocol.

The Marrakech Accords laid down the eligibility criteria of a proposed CDM project; (a) it must be approved by the host country i.e. the Designated National Authority; (b) reduce GHG emissions to a baseline that is defined according to the CDM modalities and procedures; (c) contribute to the sustainable development goals of the host country (as defined by the host country). For Malaysia, her sustainable development goals cover the environment, social and economic aspects; (d) define exact, physical boundaries of project activities and consider leakage i.e. emissions occurring outside the project boundaries, related to the project activity; provide for stakeholder participation and consultation. Stakeholders are individuals, communities likely to be affected by the project such as local residents, non-governmental organisations and town councils; (e) exclude nuclear and large hydro technology; (f) prove that no resources are diverted from official development assistance (ODA). The term ODA applies to financial aid directed for other purposes must not be used to finance and support CDM projects; and (g) carried out only by countries that ratified the Protocol.

The high-level process of undertaking a CDM project include: (a) the completion of a project design document (“PDD”) that describes the project activity, its purpose and the technology used; (b) submission of the PDD to a UNFCCC accredited operational entity (“DOE-A”) for validation. If the project meets the validation criteria it will be registered by the CDM Executive Board. The operational entity is a third party that will assess the project design against the relevant UNFCCC and host country criteria. The important components of this are validating the baseline and checking that the project fulfils the additionality criteria. The concept of additionality is most directly captured by simulating the investment decision process, and confirming that a project would not be undertaken in the absence of payments for emission reductions. Such an analysis would require consideration not only of the potential returns to an investor, but also consideration of the riskiness of the returns [Ingmar Jurgens, Gustavo Best and Leslie Lipper 2004]; (c) implementation by the project participants of the validated plan by monitoring emissions reductions, collecting and reporting data; (d) periodic verification of emissions reductions by another UNFCCC accredited operational entity other that the one who validated the PDD (“DOE-B”); and (e) if the emissions reductions are verified and certified by the DOE-B then the CDM Executive Board will issue CERs which will be distributed to the national registries and accounts of the project participants.

Malaysia signed the UNFCCC on 9 June 1993 and ratified it on 13 July 1994. Malaysia ratified it the Protocol on 4 September 2002. The parties to the Protocol have agreed that renewable energy projects which are implemented as part of government policies to achieve sustainable development goals are eligible under the CDM.

This additional flexibility in the CDM rules not only reduce transaction costs for renewable energy projects, but also enable some smaller scale projects be recognized under the CDM. This flexibility is due to the high costs of renewable energy projects as compared to the conventional energy projects.

There are several types of project that qualify as CDM in Malaysia involving the renewable energy, energy efficiency improvement, forestry, waste management and transportation sectors.

As at 31 May 2007, there are 16 registered CDM projects in Malaysia and 31 projects with letter of approval provided by the Malaysian Designated National Authority. Not only CDM promotes investments from Annex I Parties, it also promotes the viability and increased use of renewable energy such as bio-diesel an alternative to diesel (derived from agricultural crops, wood, rice, sugar cane, empty fruit bunches, fibres and shells), biogas an alternative to natural gas (derived from plant and animal waste) and bio-ethanol an alternative to fuel (derived from agricultural crops, trees or grasses).

Malaysia considers the importance of having sustainable environment and has developed laws, national policies and plans towards achieving her sustainable development goals. Beginning from the Third Malaysia Plan (1976-1980), Eight Malaysia Plan (2001-2005), including the Outline Perspective Plan (OPP2 (1991-2000) and OPP3 (2001-2010) and thereafter the Fuel Diversification Policy introduced in 2001 recognises renewable energy (“RE”) as the economy’s fifth fuel after oil, coal, natural gas and hydro. The target was that RE contributes 5% of the country’s electricity demand by 2005. Following the policy, the government granted tax incentives in the form of investment tax allowances, import duty and sales tax exemption until 2010.

The government also introduced the Small Renewable Energy Power Program (“SREP”) aimed to promote RE as the fifth fuel. Other initiatives by the government through SREP include the Biomass Based Power Generation and Cogeneration for the Palm Oil Industry (BioGen) Project. The RM55.9 million BioGen project is funded by United Nations Development Programme, Global Environment Facility and the government. Among its goals are to reduce GHGs and to facilitate Malaysia’s commitment to the Protocol.

RE projects not only reduce GHGs but also provide additional stream of revenue to the non Annex I Party through the sale of RE & CERs and allow technology to be transferred to the non Annex I Party.

With the presence of enabling laws, policies and tax allowances Malaysia has an enabling environment that is attractive to Annex I Parties looking to develop CDM projects in Malaysia.

CDM encourages developing countries like Malaysia to participate in the advancement of her sustainable development goals by placing CDM development as a priority and offering initiatives that are beneficial to the participants.

From Malaysia’s perspective, CDM can: (a)attract investments for projects that can shift to a more thriving but less carbon-intensive industry; (b) allow active participation from private and public sectors ranging from various industries; (c) provide a mechanism to transfer technology if the investments from the Annex 1 countries are invested into projects that replaces inefficient fossil fuel technology or creates new technologies that are environmentally safe; and (d) help introduce new businesses in energy production.

Industrialization and modernization have led to the various consequences to the environment. However, with CDM beyond the financial benefits and technological assistance it may provide environmental benefits through carbon reduction benefits, reductions in air and water pollution, reduced fossil fuel use and the protection eco-systems.

In Malaysia, a substantial number of registered CDM projects come from the palm oil sector. There are several types of project that will contribute to better utilisation of technology in converting palm oil waste into fuel, extracting of gas from palm oil mill effluent retention ponds or water recycling of the palm oil mill effluent into treated water that will in turn improve the eco-system of the rivers.

On the social benefits, these projects would create employment opportunities in the target region thus progressing the social goals and address the environmental issues in the region.

In recent years, the demand for CER from developed countries has provided the opportunity of supporting CDM projects in developing countries. Since CDM projects is fairly new capacity building efforts need to be enhanced as many of the project developers are still understanding the CDM the process and the legal structure of the CDM projects. Not only project management is important, contract management is essentially important. The nature of the CER sale and purchase contract requires careful considerations as there are various important issues that may arise during the contract negotiations which may be a liability if not addressed carefully by both parties. Legal document structuring will provide the parties involved the basis support document that describes the risks and opportunities a CDM project can contribute to each party. A carefully chosen CER sale and purchase agreement models will provide parties the operational, strategic and legal advantages that will assist the parties in managing their relationship.

First Published at Current Law Journal Part 1 [2008] 1 CLJ i