No Gas (sourced from: The U.S. National Archives)

The United Nation’s flexible mechanisms were introduced as a cost-effective and efficient method to help poorer countries develop sustainably, whilst providing developed countries another option to meet commitments under the Kyoto Protocol.

The Clean Development Mechanism (CDM) and the Joint Implementation (JI) have progressed at different rates, with different levels of engagement and varying degrees of scope in the ensuing emission reductions. One project sector has benefited more than others and recently, has come under fire for its environmental credibility. But what is the issue and why is it so politically toxic?

A Failure or Success?

The Montreal Protocol was established to regulate a certain type of gas: ones that are believed to be responsible for ozone depletion. Difluoromonochloromethane, better known as HCFC-22, is one such gas that is still used in refrigeration and air conditioning processes in many developing countries. It is a by-product of HCFC-22 in which we are interested: HFC-23 (another hydrogen-based gas also called fluoroform).

HFC-23 has a 100-year global warming potential of between 11,700 (UN) and 14,800 (Intergovernmental Panel on Climate Change), meaning that over 100 years, one metric tonne of this gas has the equivalent global warming impact of 11,700 tonnes of carbon dioxide. Its use is not currently governed by the Montreal Protocol, but the UN Framework Convention on Climate Change (UNFCCC) realised that the potential impact to the atmosphere was too significant to ignore. As a result, they chose to include the destruction of HFC-23 in the CDM and JI via the Kyoto Protocol.

Because reducing one tonne of CO₂ equivalent by a project generates one Certified Emission Reduction (CER – the currency of the CDM), destroying one tonne of HFC-23 generates 11,700 CERs. Consequently, the emission reductions generated through the CDM by destroying HFC-23 have outstripped all others: out of the 421 million CERs issued to date, HFC-23 contributes 52% from only 18 projects.

To some, CDM projects that destroy HFC-23 have been a great success, by increasing liquidity and bulking up the volume of CERs that are generated. But to others, the vast amounts of CERs which have been generated are windfall profits to polluters, and can perversely incentivise the increased production of HFC-23.

Rocking the Boat

Environmental NGO, CDM-Watch, proposed last month an amendment to the methodology which CDM HFC-23 projects conform. CDM-Watch alleged that some operators of HFC-23 projects could be “gaming” the system in order to gain more CERs (which on the secondary traded market are currently worth approximately €12).

The group questions the adequacy of the ratio of HCFC-22 to HFC-23 that is used by projects to calculate their emission reductions. Currently, the rules set the maximum ratio at 3%, so 0.03 tonnes of HFC-23 to 1 tonne of HCFC-22. But the proposal sees this reduced to a minimum of 0.2%

The CDM’s Methodology Panel, the body charged with overseeing the methodologies of the CDM, chose to ask the higher-profile CDM Executive Board (EB) to decide on the issue. There remains a good chance that the EB fails to reach a verdict and instead passes the issue up to the UNFCCC because of how politically charged this topic has become.

Indeed, CDM-Watch appears more than aware of the politically sensitivity that surrounds the HFC-23 controversy. CDM-Watch warned that EB members from China, India, Netherlands, UK, Japan and Norway should abstain from voting on the proposed methodology revision due to conflicts of interest. These countries either host the projects or have vested interest in the CER generation.

In any case, the proposal has caused a stir in the CDM and participants are looking for certainty. The EU and the US have both made suggestions that offsets generated by the destruction of HFC-23 may be banned from their respective carbon reduction plans after 2012 (if one is ever enacted in the US). So investors in HFC-23 reduction projects are right to be concerned.

If restrictions are approved, it is still unclear when they will take place. Current project contractual agreements indicate that the EB may have to wait until a project requests an extension to their crediting period (usually seven years, with the possibility of two extensions) before amending the methodology. In fact, a request to extend the crediting of a certain HFC-23 in South Korea was postponed last month by the EB until a later date, certainly until something more concrete has been decided.

It seems that the workhorse of the CDM is under threat. Just less than 50% the world’s HFC-23 is included in the CDM (since no HFC-23 projects were eligible after 2004). A proposed amendment to the Montreal Protocol could cover the rest, essentially sealing off HFC from further commercial interest. But how the CDM, JI and their participants react to its current piece-of-the-pie remains to be seen.

The Executive Board of the United Nations’ Clean Development Mechanism (CDM) assumes full responsibility for its administration. Their remit is to uphold the environmental integrity of the CDM whilst ensuring the processes remains efficient and effective so projects can deliver the emission reductions.

Warning by SorbyRock

Since climate policy is a relatively immature, fast moving arena, the Executive Board (EB) needs to keep up and alter its actions accordingly. In December 2009, the UN’s climate change body provided the EB with orders to reform the CDM; guaranteeing its credibility and maximising its generation of emission reductions. Just last week, the 54^th meeting of the EB took place, but has progress been made in reforming the CDM?

EB and flow

Led by chair, Clifford Mahlung (see previous post), the recent meeting of the EB was a busy affair. Mahlung was charged with overhauling the CDM in what could be viewed as the most significant of its existence.

With the end of the Kyoto Protocol at the end of 2012, the supportive framework on which the CDM is based ceases to legally exist as we know it. The ongoing UNFCCC negotiations are quite literally paving the way to a new internationally binding agreement – including the extension of the flexible mechanisms, where the CDM fits in.

Until then however, the EB has to make do with what it has available: a project-based mechanism with the ability to potentially deliver almost one billion tonnes of carbon reductions by the end of 2012. But the CDM may be capable of more as it is currently plagued with teething problems. If it was made a simpler, cheaper and ultimately more efficient process, Mahlung could see vast improvements in the output from the CDM.

Streamlining Reform

Positively, the EB managed to adopt new procedures for project registration and issuance of Certified Emission Reductions (the currency of the CDM where one CER equates to a one tonne reduction in carbon). Essentially, these changes would help streamline regulatory processes and, in return, allow for an improvement of the timescales involved for a project to issue CERs.

One of the key measures for checking if a project meets the criteria set out by the EB is known as additionality. Essentially, for a project to be registered under the CDM, it needs to prove that it could not go ahead without the income generated from CERs.

Regardless of the physical size of a project, each has to undergo the same criteria testing. Small-scale projects, usually micro-level renewables, have usually suffered because the timings and costs involved can cripple a project. In an effort to mitigate this barrier, the EB has decided that these projects will automatically pass additionality testing, subject to certain factors: geographical (remote locations) and beneficiaries (community not connected to an electricity grid).

Secondly, with regards to the costs involved, the EB is considering a loan system to help poorer countries to adopt projects more easily. The money will originate from interest accrued on the CDM’s reserve funds, currently in the millions of dollars.

It is hoped that these changes will kick start a range of reforms which will extend the scope of the CDM to regions that are currently not able to take advantage of the CDM, such as sub-Saharan Africa (see previous post), and increase the number of registered/issuing projects.

A Warning

In a recent keynote address, the incoming head of the UNFCCC Christiana Figueres, made it clear that the EB was no longer the only blockade to CDM productivity. Instead, Figueres placed emphasis on the auditors of the CDM who are required to validate and verify the projects and emission reductions respectively.

With the EB announcing that it will carry out an additional management restructure and hire 28 people for the secretariat to deal with the CDM, the auditors may need to undertake some similar efficiency improvements if they are to take advantage of a new wave of projects.

Put simply, some progress of reforming the CDM has been made. However, it is far from over. The EB has a lot of work still to do if it is to overhaul the CDM and relive the heights of the expectations when it was first conceived.

Industrial Gas - by Shahram Sharif

The Clean Development Mechanism (CDM) seeks to deliver emission reductions in developing countries whilst providing sustainable development, training, technology and finances.

In return, developed countries are able to offset their own emissions by receiving Certified Emission Reductions (CERs): the currency of the CDM. But, recent developments concerning the largest demand source for CERs, the European Union Emissions Trading Scheme (EU ETS) might see certain offset credits being preferred.

Super Gases?

Since economic theory tells us that the easiest and cheapest emission reduction projects will be used first, this say a vast movement of investment to China and India; specifically utilising projects which reduce emissions by the destruction of the so-called industrial gases – HFC-23 and N­₂O.

What we have seen already is that since 2005, these projects have delivered approximately75% of the 414 million tonnes of CO₂ (equivalent) reductions. Any changes to the demand favourability of such credits will have a clear and immediate impact on price.

The EU ETS currently is the main driver for CER demand, where any one of the 12,500 participants can use a certain amount of CERs for use under their compliance target to reduce emission. Because of this, CER price is invariably set using their worth for compliance in the EU ETS.

Recently, the European Commission, the executive body of the EU, detailed draft plans should the EU wish to adopt a target of a 30% emission reduction on 1990 levels by 2020 rather than the current 20% target. It was hinted that the EC may choose to limit the compliance value of CERs from industrial gas projects after 2012.

In other words, offsetting one tonne of your company’s emissions with reductions from an industrial gas project may require two CERs, instead of one. This would effectively half the worth of such CERs for compliance. Interestingly, it may also bring down the value of other offsets because of the uncertainty surrounding compliance.

This is despite the fact that any project officially registered before 2012 (when the Kyoto Protocol framework legally finishes), then any CERs generated will be eligible for compliance purposes until 2015, regardless of the location or type of emission reduction. This means that the EC may choose to restrict use of industrial gas projects when they are still valid under Kyoto compliance.

Market Impact

What this means is that a two-tiered system could develop where CERs originating from industrial gas projects are traded separately to those coming from non-industrial gas projects. The latter would also be costed at a premium over the former.

The current market feeling is that industrial gas projects are known to be ‘environmentally tainted’. The generation in revenue from producing CERs from industrial gas destruction projects could encourage the use of HFC-23 or N₂O as bi-products of refrigeration in developing countries.

Most CDM investors are specifically looking away from controversial projects because there is a risk that any CERs that are generated may be worth less because of any quality restrictions placed by governments/legislators.

Slowly, the CDM is filtering into countries other than China, India and Brazil (where emission reduction opportunities were cheap and plentiful). Next on the list are countries in South East Asia and Latin America, with the largely untouched African countries receiving interest last.

In terms of project types that are least likely to face restrictions, wind farms, small hydroelectric schemes and other renewable energy initiatives remain relatively safe.

Although the announcement made by the EC created quite a stir in the market, participants were confident that the CDM allows for a wide choice in offset projects, that any impact on the non-industrial gas side would be minimal.

So this could mark the first steps towards what a post-2012 CDM would look like. Because of its relative immaturity as a market-based mechanism, it was always expected to take a few years to gain momentum and iron out any issues. The industrial gas projects, although beneficial for the early success of the CDM, may be killed off to save its future.

Retreating Lake (image by: suburbanbloke)

Just last week, the United Nations’ Clean Development Mechanism (CDM) reached a monumental milestone of delivering reductions of 400 million tonnes of CO₂ (equivalent) sourced from developing countries all over the world.

Critically, market participants are disappointed by the progress of the CDM so far, but should we be dejected by what we have seen?

Stunted Growth

It should not come as a surprise that the mechanism is receiving some questionable commentary.  The main direction of criticism comes predominately from the numbers of the emission reductions made through the project-based mechanism.  The main unit of currency for the CDM is the Certified Emission Reduction (CER) where one CER equates to the reduction of one tonne of CO₂(e).

Initial forecasts by analysts expected the CDM to generate at least 1.4 billion tonnes of emission reductions up to the end of 2012.  Since CERs are the main source of income for most emission reduction projects, they are important for the whole operation of mechanism.

Projects have been issuing CERs from sometime in October 2005, this meant that at the beginning, the CDM was anticipated to generate at least approximately 200 million per year.  So why has it only generated 90 million per year on average and what is now expected going forward?

Complex Simplicity

The beauty of the CDM, when it was born out of the flexible mechanisms in the Kyoto Protocol (KP), was that it brought a new direction to reducing emissions.  Simply, it allowed rich, developed countries to offset their emissions whilst ensuring that poorer, developing countries took a sustainable path to development and additionally received a flow of cash from rich to poor.

However with its simplistic basis, it was essentially a unique and complex creation that bridged political, regulatory, development and economic ideologies.

All bases had to be covered, and all parties involved had to benefit equally which brought with it a host of teething problems:  procedural delays by the administration of the CDM; projects under-delivering on their expected emission reductions; poor market prices for CERs discouraging project owners from issuing CERs; the recession limiting CDM output and other issues relating to auditors and developers lacking knowledge coupled with a steep learning curve.

Importantly, the official link between the project proponents (developers, owners, etc.), the auditors and the body charged with oversight of the CDM requires a great deal of attention.  Fortunately, looking ahead, this reform is beginning to receive the consideration it needs- see previous blogs on this subject.

Timing is Crucial

Since the CDM began, over 2,100 projects have been registered.  This is perhaps the most crucial stage on the project timeline – it means that the project can begin to keep track of its carbon reductions.

Of these registered projects, almost 700 have actually issued CERs.  It is from these projects that the 400 million tonnes of emission reductions have originated.  We are waiting for around two-thirds of the registered projects to issue, which potentially leaves a lot of reductions in the pipeline.

Positively, the future is bright for the CDM.  So far, almost 40 developing countries are benefiting from transfers of technology, expertise and the sustainable development criteria that all projects have to meet, not to mention monetary flows.  Secondly, the carbon market is also immature relative to other, more established markets and problems in its operation are likely to occur but can be fixed.

A point to mention is that presently, around 75% of the emission reductions in the CDM originate from only two project types: the industrial gas projects.  This is because these projects were the cheapest and easiest to carry out, with the largest return – the so-called ‘low-hanging fruit’.  What this means is that the rest of the projects are going to deliver relatively smaller reductions, hence limiting the potential output of the CDM in the long-term.

In addition, an overarching issue with the CDM is that it is directly linked to the Kyoto Protocol.  Unfortunately the KP is only technically valid until the end of 2012; the first commitment period being 2008-2012.  Consequently, the CDM is also only technically valid until the end of 2012 bringing with it a wide range of uncertainties that could stifle any prolonged investment.

Should we see 500 million before the end of 2010, it will mark a significant response of the CDM to the challenges mentioned above.  The extension of the flexible mechanisms beyond 2012 is a major concern that current UNFCCC negotiations are aiming to tackle among other things.  Watch this space.

The body charged with the administrative oversight of the United Nations’ Clean Development Mechanism (CDM) is showing signs that a critical transition in the technical framework may be coming.

The CDM Executive Board (EB); currently the judge, juror and executioner of the Kyoto Protocol’s cornerstone carbon offsetting mechanism, could receive a much needed shake up, and not a minute too soon.

CDM-EB Meeting

Pressure Points

The demands from the mechanism until the end of 2012 are sure to be intense as the UN (and its climate policy body, the UNFCCC) are placed under pressure to deliver on international climate policy.

Providing the framework to extend the life of the CDM beyond 2012 is one of the crucial outcomes required from UNFCCC negotiations.  The lack of any concrete resolutions on this matter from Copenhagen in December did little to allay the vast uncertainty that currently resides in the CDM.

Without the Kyoto framework, which technically ceases to exist from 2013, the CDM is in danger of failing simply because of regulatory and political uncertainties.  In order to survive, the challenges in the next few years need to dealt with head on if expectations are to be met, and criticism subdued.

Meeting the Challenge

The EB’s recent 52nd meeting (taking place approximately every six weeks) was the first one following December’s negotiations.

Among the usual list of actions which required their attention (project approvals, issuance reviews, methodology considerations, etc.) were a wide range of important topics that had to be considered; including appointing a new chair and vice-chair and establishing an independent committee to assume technical responsibility for project approvals et al.

The EB was also urged to speed up processes and to increase the volume of emission reductions delivered from projects.  The daunting task to improve the overall time it takes projects to enter the pipeline and issue the all-important Certified Emission Reductions (CERs) falls to one person.

Clifford Mahlung, lead climate negotiator for Jamaica, was promoted from vice-chair to resume control of the EB during what will arguably be the most important two years of its existence.

The proposed improvements are anticipated to increase the scope and scale of the CDM, especially in terms of volumes of CERs issued and the regional distribution of the projects to countries that are yet to benefit from the CDM.

Balancing Point

Mahlung is expected to steer the CDM towards equilibrium of the three central inputs to any project-based mechanism: quality, time and cost, whilst ensuring the emission reductions in the CDM remain environmentally credible and uphold the integrity of the mechanism.

In an effort to reduce the time it takes projects to move through the milestones in the CDM pipeline, which has been the main drawback experienced to date, Mahlung is hoping to adopt a more automatic approach to project approvals.  However, the detrimental impact this may have on the quality of emission reductions and cost of projects needs to be accounted for.

The EB has so far been overwhelmed by the administrative demands on its members.  So the introduction of a Project Assessment Committee (PAC), a group of 12 technical experts, is expected to lighten the load on the EB from its technical approvals and reviews.

Whether this proposal aids processes, or merely increases the depth of bureaucracy in the CDM by adding another committee into the mix, remains to be seen.

In any case, signals of technical improvements could be just what potential participants are looking for.  There was a danger that a lack of clarity surrounding the CDM after 2012 was severely stifling potential investment.  After all, when the outlook for a healthy return on investment is uncertain, investors will be understandably discouraged.

Positively, what Mahlung has quickly accepted is that until the ‘post-2012 problem’ is figured out on the international arena, his immediate responsibility lies with improving the CDM now.  The opportunity for underlying growth in the CDM before the 2013 Kyoto deadline is considerable, but is matched in size by the challenges ahead.

As ever, time will tell whether Mahlung is up to the task.

Wind farm in Africa (Image by: lollie pop)

The United Nations’ Clean Development Mechanism (CDM) adopted a novel project approach to countering or offsetting developed countries’ emissions.  The most visible and controversial component of the Kyoto Protocol has made large political and regional advances since its inception.

However, when it comes to global distribution of the projects that are actually generating carbon offsets, it falls short.  Nowhere has this been felt more, than on the African continent.  But why should this be the case when the CDM was designed to be a means to transfer technology, finances and development to the poorest and most vulnerable countries on the planet?

Reasoning a Failure?

The barriers of CDM expansion in Africa surround emission reduction potential, financing and institutional stability.

Africa’s contribution to global emissions is minimal; UN data estimate that Africa accounts for only 4% (1,500 million tonnes of CO₂ equivalent) of annual world emissions.  Stunningly, 75% of Africa’s emissions originate from just four countries (Algeria, Egypt, South Africa and Nigeria).

Consequently, the carbon mitigation potential in the remaining 49 countries is clearly small.  Per capita emissions in sub-Saharan Africa are the lowest in the world at 0.77 tCO₂(e).  Relatively speaking, the financial costs that accompany these potential mitigations are more expensive than anywhere else, so why would a project developer choose an African country to invest in when better and faster returns can be sought elsewhere?

Potential From Nothing

In spite of the obvious low attribution to Certified Emission Reduction (CER) volumes generated so far in CDM projects on the continent, there is a potential for substantial growth.

A study commissioned by the World Bank, detailed the possible emission reductions which could be actualised by a mechanism such as the CDM.

Key areas include: fuel shifting, improved agricultural processes and industrial energy efficiency schemes.  Importantly, the CDM can accommodate these reduction areas – with small-scale renewable schemes and process changes being effectively undertaken within the CDM.

As it stands, only 120 projects are hosted in Africa; of that, only 65 are in 20 sub-Saharan countries.  It has been estimated that up to 3,000 CDM projects can be hosted in Africa – there is a great deal of development left to be done.

One setback is that a country must have a Designated National Authority (DNA) before any CDM project can be contemplated.  This body is responsible for the regulation of CDM projects in their country.  Unfortunately for most sub-Saharan Africa, there are only 21 DNAs, meaning that many reduction opportunities are missed.

Overarching responsibility for tackling this dilemma ultimately lies with the CDM’s administrative body, the Executive Board (EB) and the UNFCCC.  Only recently has any real progress been made with respect to this.

Delivering the Mechanism

The difficulty is that the CDM has been poorly refined for the special considerations that African countries require.

What progress they made was acknowledged at the UNFCCC negotiations in Copenhagen in December 2009.  Regional distribution was only briefly discussed (mainly due to limitations of actual negotiating time) but it was agreed that the DNA registration requirements would be reduced in countries that have difficulty hosting projects.  The reforms are expected to come into force sometime in the second half of 2010.

A CDM concept that is expected to benefit Africa received little negotiating time also.  It is thought that the programmatic CDM (pCDM), or sometimes known as a programme of activities (PoA), could unlock the delivery potential of the CDM in Africa.

In an effort to reduce transaction costs and generating bigger revenues by facilitating larger economies of scale, the pCDM approach would gather a group of similar emission reduction schemes under the umbrella of one project.  Consequently, this could provide an opportunity to tackle small-scale project barriers.

The number of pCDM projects that have progressed is small, but there are some that have the opportunity to generate substantial emission savings in other developing countries.

The same opportunity exists in Africa.  The pCDM concept could resolve some challenges that currently bedevil the African CDM.  However, a large set of barriers still exist before the pCDM can really live up to expectations – including risks associated to the lack of administrative clarity of the pCDM, high upfront costs and lack of successful experience implementing these unique schemes.

So Africa’s CDM potential categorically exists, but toil is required before it can compete with the emission reductions that are possible in the cheaper and more accessible countries such as Brazil, India or China.   Once unlocked though, the CDM could evolve into the flexible mechanism that was anticipated from the very beginning.