The 1997 Kyoto Protocol is an agreement made under the United Nations Framework Convention on Climate Change (UNFCCC). Countries that ratify the Protocol commit to reduce their emissions of carbon dioxide and five other greenhouse gases (GHG), or engage in emissions trading if they maintain or increase emissions of these gases. The convention established the Conference of Parties (COP) as its supreme body. During COP3 in Kyoto, Japan, the parties agreed to a legally binding set of obligations for 38 industrialized countries and 11 countries in Central and Eastern Europe, to reduce their GHG emission by 5.2% below their 1990 levels over the period 2008-2012. This scheme is called the Kyoto Protocol to the Convention.

The Kyoto Protocol broke new ground by defining three innovative "flexible mechanisms" to lower the overall costs of achieving emission targets. The main rationale is that though the cost of limiting emissions varies considerably from region to region, the effect on the atmosphere for limiting emissions is the same, no matter where the action is taken. The major emphasis is that such mechanisms do not confer a "right to emit" on Annex I parties or lead to exchanges of fictitious credits which could undermine the Protocol's environmental goals. Thus these mechanisms are clear on environmental integrity and equity grounds.

The purpose of the Clean Development Mechanism (CDM) is thus resumed in Article 12 of the Kyoto Protocol:

"To assist Parties not included in Annex I in achieving sustainable development and in contributing to the ultimate objective of the Convention ,and to assist parties included in Annex I in achieving compliance with their emission limitation and reduction commitments under Article 3." 

The CDM was introduced during the Kyoto Protocol conference in December 1997. It is a market-based mechanism that allows more flexibility for Annex I Parties to meet their greenhouse gases emission targets. Carbon being a tradable commodity, parties subject to emission targets can purchase the carbon credits -or certified emission reductions (CERs)- produced at lower costs in countries that do not have the same emission restrictions, or can directly invest in CDM projects in these countries in return for carbon credits. The principle behind is simple: the global benefit of reducing carbon emissions is the same no matter where the action is taken. Thus it makes economic sense to reduce emissions where it is the least expensive. The CDM is the only mechanism of the Kyoto Protocol that involves the developing countries.

While investors profit from the Clean Development Mechanism by meeting their GHG emission reduction targets in a cost-effective manner, CDM projects also benefit developing countries as they result in additional revenue, technology transfers, and a step forward towards sustainable development in the project host countries.

Typical CDM projects categories are: renewable energy, fuel switching, (in industries, transports, the residential sector etc), solid waste management, advance coal based power generation technologies, renovation and modernization, demand-side management and Industrial energy efficiency projects. All projects must result in net GHG emission reductions. Small-scale CDM projects (renewable energy <15MW, energy savings of <15 MW per year, projects with annual emissions <15000 tones CO2) are eligible for fast track clearance.