Tokyo Night (sourced from Doronko)

Following the minor operational successes from Cancun in December (see Climatico’s comprehensive report – PDF), the United Nations’ Clean Development Mechanism (CDM) has undergone something of a resurrection: issuing the 550 millionth offset almost five and a half years after the first, and surviving a period of undeniable uncertainty over the future of the mechanism.

The CDM coming of age has not been without controversy however, as industrial gas projects take centre stage in the discussions while other groups propose replacement schemes. Industrial gas projects (those that destroy HFC-23 and N2O) helped the CDM abate hundreds of millions of tons of CO2-equivalent. Rather pertinently, industrial gas projects accounted for 60% of the volume of issuances since Cancun, accounting for only 11% of the number of issuances.

Controversy

The European Commission’s proposal to ban offsets from industrial gas projects being used for compliance in the European Union Emissions Trading Scheme (EU ETS) from May 2013 was somewhat unsurprising.

Commissioner for Climate Change Action, Connie Hedegaard (from Copenhagen negotiations infamy), had made inferences beforehand that these offsets had a shorter shelve life than others, especially within the EU. The Commission said its decision was due in part to “absence of sufficient progress towards CDM reform and the establishment of sectoral market mechanisms at UN level”.

As the largest demand source for Certified Emission Reductions (CERs – the currency of the CDM), the future of the CDM is, and always has been, inherently linked to the EU ETS with over 10,000 potentially buyers.

A ban in Phase III of the EU ETS (2013-2020), when the majority of participants no longer receive free allowances and total offset use is capped at 1.7 billion tons, could alter the playing field enormously. Should the European Parliament pass this proposal into law, the number of buyers may be limited to the UNFCCC developed countries outside of the EU. Even then, it is likely that some will choose not to buy them considering concerns over environmental integrity.

Competition

Climate policy is a young and evolving arena; the mere suggestion that some CERs may be ‘environmentally tainted’ has far reaching consequences for the CDM’s longevity. As a result, it was not long before alternatives were investigated.

Since the beginning, Japan has been major buyers of CERs (including those from industrial gas projects): supporting the various carbon funds or being directly involved in project development. In addition, the private sector has enthusiastically taken part in acquiring CERs for voluntary emission reduction compliance, in turn being passed to the government who can use them for Kyoto targets.

Despite this clear interest in the CDM, on-going delays and uncertainties compelled the world’s fifth biggest emitter last year to begin several offsetting projects in South Asia. The difference being that they were non-CDM, bilaterally agreed with governments, use existing Japanese technologies and allow offsets from nuclear and forest management.

Only this week did Japan build on the idea. It submitted to the UNFCCC a proposal for a new international offsetting mechanism to sit alongside existing ones – see below for Reuter’s summary of the proposal. Establishing a complementary mechanism that has a similar objective function will upset the CDM community.

It is unlikely that the UNFCCC will consider additional offsetting mechanisms to be included into an international agreement. The CDM was designed to deliver quality offsets. But nevertheless the stringency of its processes has been matched by its degree of complexity. Many lessons have been learned since its inception and in this environment experience is almost everything.

The CDM may still be experiencing some teething troubles. If the CDM Executive Board can build on the progress that has been made in the last six months and defend the CDM against competition, they may not be far from the streamlined, efficient and fair mechanism that was envisaged in 1997’s Kyoto Protocol. With the potential to generate perhaps many billions of offsets for many more years to come, watch this space, because undoubtedly everyone else is.

Summary points of Japan’s proposal for a new international offset mechanism from Reuters:

  • Market-based mechanisms are cost-efficient, and some of the funds raised from them can be used to finance efforts by developing countries.
  • New mechanisms should allow a variety of approaches, including a project-based one like the CDM and a sector-based one that the European Union is working on.
  • New mechanisms should promote transfer and use of low carbon technologies, products and services to developing countries, including least-developed countries.
  • New mechanisms need to be efficient and facilitative to help drive emission reduction efforts by a growing number of players and to enlarge the scale of market-based mechanisms as a whole.
  • New mechanisms should mobilise all available technologies and not preclude such large-scale emission-cutting technologies as nuclear power or carbon dioxide captures and storage (CCS).
  • To ensure the transparency and credibility of new mechanisms, countries should apply principles agreed at U.N. meetings in their measurement, reporting and verification (MRV) of emissions cuts and report regularly to the UNFCCC secretariat on how the mechanisms are used.
  • Measures are needed to avoid double counting between different mechanisms.
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