Sourced from UNFCCC

This week marked a significant milestone of the United Nations’ Clean Development Mechanism (CDM). A wind power project in Inner Mongolia, China, has become the 3,000th project registered under the world’s largest international offsetting mechanism.

There is no doubt that the process is speeding up: it took 18 months to register the first 1,000 projects; the second thousand took 22 months, but the last thousand only 16 months. So is the CDM able to further build capacity to help countries meet their Kyoto Protocol compliance by 2013?

Improved Updates

Initially conceived out of the Kyoto Protocol to aid global carbon reductions, the CDM has become the international standard in carbon offsetting. This is where developed countries can fund projects to abate carbon in developing countries and in return receive Certified Emission Reductions (CERs) – the currency of the CDM.

The last few years have been somewhat unsettling in the CDM space. The governing body of the CDM, the Executive Board (EB), has been under pressure (see previous Climatico post) to increase administrative speeds whilst reducing backlogs in order to allow more and more projects to deliver carbon reductions in more and more developing countries. Under new leadership, the EB has listened to its participants and the UNFCCC (UN Framework Convention on Climate Change) and made some significant improvements with respect to appeals processes and approval systems.

Foreseeing Growth?

Now in 71 developing countries, the CDM has issued over 600 million CERs in reductions from over 1,000 of the now 3,000 registered projects.

To put this into context, the first five months of 2011 has issued over 100 million CERs (half of this in January), versus only 132 million for the whole of 2010, 123 million in 2009 and 138 million in 2008.

Analysts have been quick to increase issuance forecasts to the end of 2012, when developed countries’ compliance under the Kyoto Protocol ends. In 2006, total pre-2013 issuance volumes were placed around two biillion CERs. This has since been updated many times by the majority of analysts.

According to Thomson Reuters Point Carbon, they predict just under 1.1 billion CERs issued by 2013, compared with 1 billion CERs from UNEP’s Risø Centre and 965 million from IDEAcarbon.

Importantly, 2013 also marks the start of the so-called Third Phase in the European Union’s Emissions Trading Scheme (ETS), the largest demand source for CERs currently. After 2012, the EU carbon market regulator, the European Commission, has decided to ban all CERs originating from the destruction of industrial gases for compliance under the EU ETS (HFC or N2O projects – see previous Climatico stories here and here).

Keeping Ahead of the Regulation

Any EU ETS compliant participant who has vested interest in these projects, which have contributed over 70% of all CERs issued, thus may be incentivised to use the offsets generated while they are still eligible as is discussed below. This is supported by the large increase in CER use for compliance in the EU ETS during 2010. Results from the European Commission show that the number of international offsets (CERs and the Joint Implementation Emission Reduction Units – ERUs) used for compliance under the EU ETS increased by some 68% from 2009 to 2010.

Details of the process, called surrendering, will not be fully published until May 16 2011, but reports (ENDS Europe, Point Carbon) suggest that participants may be eager to offload credits while they still can. Current figures indicate that 117 million CERs and 20 million ERUs were surrendered in 2010, accounting for some 7% of emissions under the ETS.

The impact of such a ban has been immediate and wide-ranging. It is clear that the linkages between the CDM and the EU ETS are as strong as ever. Until more emissions trading schemes that allow the use of offsets are rolled out throughout the world (one of many outcomes from the international climate negotiations), this connection may continue for the next few years at least.

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