Clean Development Mechanism (CDM) is a mechanism in the Kyoto protocol to ensure deployment of greenhouse gas (GHG) emission reducing projects in developing countries. The objective of CDM is to contribute to a sustainable development in developing countries and ensure that GHG emission reductions take place at the lowest possible cost.

The Kyoto protocol was established in 1997 as an international agreement on emission reduction of greenhouse gases (GHG). The protocol defines mandatory GHG emission targets for industrialized countries (Annex I countries), and voluntary participation for developing countries (Non-Annex I countries). The Kyoto protocol has 175 member countries, and 36 of these countries have committed to reduce their GHG emissions by five percent in the period from 2008 to 2012 compared to emissions in 1990, with the exception of Norway which is allowed to increase its emissions by one percent. The rest of the countries have no legal binding emission targets.

The Kyoto protocol has defined three mechanisms to ensure flexibility and cost effectiveness:

  1. Emission quota trading: Annex I countries are allowed to trade emission quotas. Example: The European Trading System (ETS).
  2. Joint Implementation (JI): Annex I countries are allowed to invest in emission reduction projects in other Annex I countries as an alternative to emission reduction in their own country.
  3. Clean Development Mechanism (CDM): Annex I countries are allowed to invest in emission reduction projects in Non- Annex I countries as an alternative to emission reduction projects in their own country.

CDM is a mechanism to ensure that Annex I countries can meet their emission reduction target in a cost effective way by financing GHG emission reduction in developing countries. If an Annex I country finance an emission reduction project in a Non-Annex I country, the project participants will be granted "Certified Emission Reductions" (CERs), also called carbon credits. The number of CERs granted reflects the emission reduction; an emission reduction equal to one metric ton of CO2 gives one CER. The CERs are tradable, and they can be used to supplement national GHG emission reductions.

Annex I countries can not base all their emission reductions on CERs. The ETS limits emission reductions covered by CERs to 10 to 30 percents; the rest must be real emission reductions in the home country. There are two reasons for this limit:

(1) to ensure that there are not too many CERs on the market and

(2) to ensure that Annex I countries do not base all their emission reduction on buying CERs without reducing emissions at home.

Only projects that contribute to sustainable development in developing countries are accepted as CDM projects.