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: [email protected]

Tyndall Centre Working Paper No. 42.

2003

1
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 cost-
effectiveness, 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.
2
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 non-
Annex 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 carbon-
less 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

1
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
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, inter-
departmental 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 community-
based 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 change-
related 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

3
Personal communication (Interviewee # 1). For the details of interviewees, see Appendix 1.
4
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

5
Personal communication (Interviewee # 1).
6
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

7
Personal communication (Interviewee # 4).
8
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 Sustainable Development Indicators

(a) Principal 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

11
Personal communication (Interviewee # 1).
12
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
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
13
Personal communication (Interviewee #2).
14
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.

15
Personal communication (Interviewee #1).
16
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 Investor 119 Investor 220 Investor 3 21 Investor 4 22

Prioritising disadvantaged Quite Depends on Not too Very difficult
groups in job creation difficult skills/capacity difficult
Targeting disadvantaged Very difficult Depends on Not too Very difficult
households, communities project scale difficult
for provision of affordable
energy
Redistribution of resources Very difficult Depends on Depends on Very difficult
to disadvantaged people project help from
location government or
project
partners
Skills development for Quite Very difficult Not too Very difficult
disadvantaged people 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

18
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
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 Investor 2 Investor 3 Investor 4

development
Use of local Difficult Depends on Not too Difficult
employees skills, capacity difficult
Procurement of local Not too Not too Not too Depends on
goods, services difficult difficult difficult transaction
costs
Provision of Not too Not difficult Not too Not too
technology training difficult difficult 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.

26
Personal communication (Interviewees #14 and # 11).
27
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 grid-

12
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

29
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.

34
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
 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 CDM-
related 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

16
 Appendix 1
Interviewee Details

The individuals interviewed in connection with this paper have below been identified by number
to ensure their privacy.

Interviewee Location of Stakeholder Organisation

Number Interview Group
1 South Africa Government Department of Minerals and Energy
(Energy Planning Department)
2 South Africa Government Department of Trade and Industry
(Standards and Environment Directorate)
3 South Africa Quango Eskom/Technology Service International
4 South Africa Industry Industrial Environmental Forum of
Southern Africa
5 South Africa Industry Chamber of Mines
6 South Africa Project KPMG
developer
7 South Africa Project Shell Solar Southern Africa (Pty.) Ltd.
developer
8 South Africa NGO Minerals and Energy Policy Centre
(MEPC)
9 South Africa NGO Energy and Development Research Centre
(EDRC)
10 South Africa NGO Earthlife
11 UK Investor Shell International
12 UK Investor British Petroleum
13 Japan Investor Tokyo Electric Power Co.
14 Japan Investor Mitsubishi Corporation
15 Japan Investor Mitsui Corporation

17
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Kim, J. A. (2003), Sustainable

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Anderson, D. and Winne, S. (2003),

Innovation and Threshold Effects in
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