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Fancy complex finance terms again?

December 14, 2009

“I find that some terms used in CDM are just bizarre”, noted Mr. Pedro Martins Barata (member of the CDM Executive Board) at “PD-Forum: Realities of CDM as we enter into the year 2010”.

CDM stands for Clean Development Mechanism, one of the three Flexible Mechanisms of Kyoto Protocol created to help finance the costly transformation into a low-carbon economy. The basic idea is that if you develop a project that reduces carbon emissions, you are awarded carbon credits which you can sell/trade.

Mr. Barata’s comment was met with a chorus of agreement and a sigh of relief. The side event explored why the potential of CDM has been heavily untapped. Insufficient communication between different stakeholders (developers, originators, regulators) was highlighted as a key issue, and something as basic as the names of the terms can afford to be less “daunting”.

Certainly, with the financial crisis as a backdrop, finance mechanisms are under pressure to be more transparent and digestible. Derivatives have already developed a reputation of being deliberately complex for consumers to understand, and financial institutions are laden with burden to throw more information into the fine print, which is arguable if it does help consumers understand the system.

I recall what my Accounting Theory professor shared. “If you guys are already struggling to understand the cash flow and financial impact of derivatives over the four months in university, what makes you think the average consumer can understand it from a two page fact sheet?”

Investor confidence aside, with CDM and other carbon finance mechanisms – it’s not just a matter of profits, it’s the urgency that the world can actually reduce carbon emissions.

All I can say is I’m glad someone from the CDM EB doesnt believe in finance mechanisms to be clouded in tough-to-swallow terminology.

Live from COP15
ECO Singapore

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