As a new methodology is approved, a veteran of the carbon market reflects on the rise and fall of the once-dominant CDM and the lessons from an old ledger.
The Supervisory Body of the Paris Agreement's Article 6.4 mechanism has just approved a new methodology for grid-connected renewable energy generation: A6.4-SBM022-A03. The news has energized the global wind, solar, hydro, and geothermal sectors, as the broader scope, relaxed entry barriers, and potential for a surge in project volume create a promising outlook. While I congratulate this development, my experience navigating two cycles in the carbon market makes me more inclined to do something less popular: dig into the past. Because two decades ago, there was similar excitement. That wave of enthusiasm ultimately "competed" its way into the first major downturn of the global carbon market.
Today, I will compare this new methodology with the old ones from the CDM era, explain three waves of "competition," and share a historical anecdote that every Chinese decarbonization practitioner should ponder. In short: competition itself is not the problem—the direction of that competition is.
The First Wave: Methodologies Competing Against Themselves
Under the CDM, the core methodology for grid-connected renewable energy was ACM0002 ("Grid-connected electricity generation from renewable sources"). It addressed two fundamental questions: how much electricity your project generates, and what the grid would have emitted in your absence. The answer to the second question relied on a key tool: the "grid emission factor."
The CDM offered a technical breakdown: the Operating Margin (OM), representing the emissions per unit of electricity from currently operating power plants, and the Build Margin (BM), representing the emissions from newly built plants, essentially indicating whether the grid will become cleaner or dirtier over the next five years. These two factors were weighted and averaged to produce the Combined Margin (CM), which represents the grid emissions displaced by the project over its lifetime. The formula is CM = OM × Weight + BM × Weight. The weight allocation, initially 50/50 but later adjusted based on the share of new plants, sparked debate. Giving higher weight to the OM implies the project replaces high-emission units today, while a higher BM weight means competing with "future plants," requiring a discount on emission reductions. This debate raged across Europe, Japan, and the US. China's grid, with its high reliance on coal-fired power and significant emissions from new plants, had OM values around 0.9–1.0 tCO₂/MWh in some regions, creating a relatively generous baseline for reductions.
Alongside the OM/BM debate, the "additionality" requirement became a major point of contention. The CDM imposed stringent conditions: you had to prove that the project would not happen without the carbon credit revenue. The proof methods evolved from three initial types—investment analysis (comparing IRR with similar projects), barrier analysis (identifying real obstacles like investment, technology, or financing), and common practice analysis (checking if similar projects were below a certain penetration threshold). The Executive Board (EB) later made the common practice analysis a dynamic table (PoAsDeviation), updated every few years. This forced project developers and Designated Operational Entities (DOEs) into constant conflict with the table. This was the first wave of competition—the methodologies themselves turned into a high-difficulty exam.
The Second Wave: Projects Turning China into the Main Stage
Looking at the timeline: in 2001, COP7 passed the Marrakesh Accords, laying out the plan for the Kyoto Protocol's three mechanisms (CDM, JI, IET). The Kyoto Protocol came into effect on February 16, 2005, ushering in the CDM's "certification" era. Initially, the CDM had many restrictions on projects like dams, nuclear power, and large hydropower, limiting the number of eligible project types and the volume of issued credits. Buyers grew anxious about supply shortages. In 2006, the EB gradually relaxed the conditions for dam-related hydropower, opening the floodgates for project volume. China seized this opportunity: its wind turbine manufacturing capacity rapidly advanced between 2006 and 2008, leading to many project approvals. The country already had a substantial number of eligible hydropower projects. The CDM price surged to around 13 euros per CER, providing a significant source of "green" foreign exchange. By the time of the Copenhagen conference in 2009, China's registered CDM projects accounted for over 70% of the global total. A popular joke emerged within the industry: CDM no longer stood for Clean Development Mechanism but for China Development Mechanism. This was the second wave—not a competition of methodologies, but a concentrated surge of projects from a single country within a single mechanism.
The Third Wave: The Market Collapses
The most dangerous situation for any market is not just oversupply, but a simultaneous decline in supply and demand. The 2008 financial crisis created this scenario for the CDM: on the demand side, the EU ETS experienced a tight Phase I (2005-2007), followed by excessive allowance issuance in Phase II (2008-2012) combined with falling industrial activity, leading to a severe quota surplus. The carbon price plummeted from 30 euros to around 5 euros. Compliance entities no longer needed CERs for offsetting, so CDM project credits could not be sold, causing funding gaps for project developers. The CDM effectively became "dead in name." The Kyoto Protocol's second commitment period, starting in 2012, failed to generate buyer interest, leaving a massive backlog of projects awaiting issuance while their credits went unsold. By the time of the Paris Agreement in 2015, the CDM had entered a "maintenance phase." After 2017, the new international transfer credit mechanisms were taken over by Articles 6.2 and 6.4 of the Paris Agreement—the origin of new methodologies like A6.4-SBM022-A03.
An Anecdote from the Past
This situation reminds me of an ancient Chinese economic warfare story. Duke Huan of Qi wanted to conquer the states of Lu and Liang. His advisor, Guan Zhong, suggested a strategy: the Qi court should wear "silk brocade" (a textile specialty of Lu), and purchase it at a high price. Seeing that sericulture and brocade weaving were more profitable than grain farming, the people of Lu and Liang converted their grain fields to mulberry trees. A year later, Duke Huan suddenly closed the border, stopping all trade with Lu and Liang. The price of grain in Lu and Liang skyrocketed tenfold within three months. Starving, the people abandoned their mulberry trees to return to farming, but they had missed an entire growing season. Qi won without a battle. This is an ancient prototype of "carbon tariffs"—exchanging your fundamental strengths for things you are good at.
Translating this story to today's international climate negotiations, the EU's CBAM, Sustainable Aviation Fuel (SAF) directives, and maritime green fuel rules are essentially new "purchase lists" for developing countries. If we focus solely on selling emission reduction credits for "green" foreign exchange, we risk being like Lu, replacing our "grain fields" with "mulberry trees." A nation's true "grain fields" are energy self-sufficiency, food security, an industrial base, and control over key technologies. If the direction of our competition is wrong, the harder we compete, the more we risk losing our core assets. This is the most expensive lesson from the three waves of competition: decarbonization should not involve sacrificing our energy and industrial foundations for the sake of green credits.
Returning to the Present: What Kind of Competition to Watch for with the New Article 6.4 Methodology
A6.4-SBM022-A03 is a good tool. Its benefits are clear: a broader scope including wind, solar, hydro, and geothermal; friendlier entry barriers after removing early "LDC/SIDs" restrictions; and more lenient common practice thresholds (5% and 10%) compared to similar methodologies, which is beneficial for project volume. However, my concern is not with the methodology itself, but how it could be used, potentially repeating the CDM pattern. We must avoid a focus on volume. The CDM's over 70% share was not a victory; it was a rope tying a single country to the supply-demand curve of a single buyer. Today, we need "high-quality volume," not "global share." The first question should be: "Who pays?" CBAM, SAF, and green premiums are new "purchase lists." We must calculate carefully: are they paying for our reductions, or are we using our energy and food to buy their green credits? The core of carbon market design should be "meeting our own needs first." For mechanisms like CCER, the national ETS, and regional carbon markets, the logic is simple: prioritize reducing domestic decarbonization costs before considering export premiums. We must avoid "methodology competition." The CDM's complex OM/BM and additionality arguments were designed to prevent "false reductions." Today, Article 6.4 should guard against methodologies becoming barriers that only major players can navigate, which would exclude those who can actually make reductions.
In Conclusion
From CDM to Article 6.4, two decades have come full circle. The first wave of competition was over methodologies, the second over project volume, and the third collapsed the market. We now have a new tool, but tools are never the answer. In ancient China, Qi used "silk brocade" to exchange for Lu's grain fields. In today's decarbonization game, we must be skilled at selling emission reductions while also protecting our energy autonomy. I leave you with a question that I will explore in my next series of articles: when you accept an international carbon mechanism order, ask yourself: is this project's emission reduction helping us reduce carbon, or is it helping us exchange our "grain fields" for "mulberry trees"? In my next article, I will discuss how China went from being "needed by the international market" to "abandoned by it" during the CDM era, and whether history is about to repeat itself in a different form.