By Climatico Contributor: Roddy Boyd

Indian CDM biomass (Source: UNFCCC)

The world’s largest carbon offset instrument made wholesome, if not stunning or substantive, progress at Durban’s 17^th Conference of the Parties. While Canada still faces considerable backlash from the hype surrounding its potential exit from 1997’s Kyoto Protocol, the EU has (at the time of writing) gathered more than 130 countries to sign on to its ‘roadmap’ to sign a new legal treaty by 2015. 

Participants of the UN’s Clean Development Mechanism have been following the negotiations closely as they expect any post-2012 uncertainties to be cleared up. As the COP continues into the weekend, the EU’s negotiating text outlines that a legal (non-binding) compliance period would start in 2020, but was deemed unacceptable to US, India and China: the latter refusing to accept the implied death of the KP. With several negotiators explaining that the CDM will die if the KP does, will wholesome progress alone save the CDM for 2012?

Post-2012 Supplementarity

New market mechanisms have been a point of attrition for many days of negotiations, as some view the CDM as a success that can be built upon, instead of replaced. In the AWG-LCA, negotiation texts for market mechanisms have been bogged down in procedural divides between countries that feel it is too early for new mechanism substance discussions (e.g. US), to those who feel they are necessary before gaining any second commitment period (e.g. EU). It appears that this discussion will continue throughout 2012 sessions.

Two important reasons for arguing against the CDM without a second commitment period have been suggested by law firm Baker & McKenzie: the politics behind developing countries wanting developed countries to sign up to further targets, in opposition to the latter wanting some of the former to do the same; and hints that the value of the CDM to these large developing economies is perhaps becoming clearer.

In its truest form, the CDM enabled developed countries to seek out emission reductions from other countries to be used against their targets – a process called supplementarity. The process automatically sought out the ‘lowest hanging fruit’; the cheapest and easiest reductions. Over time, this may become a stumbling point when the host country wants to undertake some emission reductions themselves, since the CDM has already brought to market the easiest reductions at the lowest cost. This means that Brazil, China and India (who have the most vested interest in the CDM) may have to undertake more costly abatement options at their own expense: an idea that has presented itself with the difficulty in extending the CDM without the KP. However, when these three countries host approximately 70% of all projects with US$160 billion total investment, many others have not had the same opportunities.

Food for Thought

One of the technological successes to come out of Durban has been the inclusion of CCS in the CDM, a discussion that has continued for some six years and not without controversy. The largely untested technology is seen by many to be against the principle of the CDM, by allowing carbon intensive industry and power sectors to continue without alternatives. Negotiations in Cancun at last year’s COP accepted CCS into the CDM, on the condition that a ‘shopping list’ of modalities and implementation issues are addressed. One of which forces project developers to hold back 5% of the offsets for ‘leakage’ purposes. An expert from Greenpeace explained that this agreement “is the weakest possible” since they were pushing for 20%.

Meanwhile, EU negotiators have been vocal on eligibility of offsets from the CDM and JI. Firstly, the EU asked the UN to officially review whether large-scale projects such as large hydro and ‘clean’ coal power plants should be able to benefit from the CDM – more expected on this next year. Secondly, Russia failed to negotiate an assurance that JI projects registered after 2012 will still be eligible to generate ERU offsets. Point Carbon quoted an anonymous source that explained this would give the EU an opportunity to impose further post-2012 EU ETS quality restrictions that they already have in place.

The End

With only one Kyoto year left, the Executive Board leaves with an ambitious work plan – an appeals process for both positive and negative decisions, stakeholder consultations at global and local levels, and the formalities to set up an independent review panel. Some are viewing the length of the list to be positive sentiment to the continuation of the CDM. But because of references implying the CDM in a post-2012 world, the COP was unable to move forward on the EB guidance document, and instead has left the decision to the next informal negotiations taking place in the first quarter of 2012.

As we move towards the end of COP17, Durban appears to have built on unexceptional operational successes from the modest Cancun and Copenhagen negotiations, especially with regards to the CDM. The fate of the CDM, however, still remains cloudy due to legal repercussions if the KP ends with no replacement commitment period: uncertainties which have been remarkably consistent throughout the two weeks.

EB at COP17, Durban. Source: UNFCCC

By Climatico Contributor: Roddy Boyd

The fate of the Clean Development Mechanism, the most robust and successful United Nations’ instrument to fight climate change, hangs in the balance at the 17^th Conference of the Parties. It risks being used as a negotiating ‘chip’ in the penultimate COP before the Kyoto Protocol’s (KP’s) first commitment period ends. A leading climate change NGO explained that the KP is expected to ‘emerge alive from the conference, but it will be on life support.”

Along with Japan, Russia and the United States who have all said that extending the commitments after 2012 is not possible without industrialised countries taking targets, it surfaced that Canada may even withdraw their ratification and participation in the KP before the end of this year: an accusation that they are yet to refute. If it is true, it could have wide ranging consequences for future negotiations.

Hurdles from ‘Further Commitments’

As we covered before Durban began, expectations of any successes with respect to the KP’s CDM and Joint Implementation were low. Even an acknowledgment that they may continue to live without the KP would be seen as an achievement.

It seemed, however, that whenever the Ad-hoc Working Group for the KP (AWG-KP) discussed ‘Further Commitments’, the rift between Annex I, emerging economies and non-Annex I countries was ever present.

Almost as a warning, many developing countries are pushing for another commitment period and highlighting that the CDM would not be possible without one, with the vulnerable Small Island States demanding a new commitment period within a year.

Even though the KP has no clear termination clause, any extension to its bodies and mechanisms will need UNFCCC COP approval. China and Brazil therefore stepped up to explain that it is ‘inconceivable’ to have the CDM [and JI] without the KP, and that they would vote to block such an extension. It was suggested that developing countries could end up ‘restricting access’ to CDM offsets if a second commitment period is not reached.

Because China represents around 60% of the total offsets issued so far and to some extent drives the price with its floor price for CERs, this move would worry investors in the CDM by facing large degrees of uncertainty on its future. Already, record low market prices and risks from limitations on what CERs are accepted for compliance under the EU ETS are driving interest elsewhere.

The EU has also been involved with discussing potential ‘new’ market mechanisms for offsetting emissions, by using ‘national policy baselines’ as a means to standardise and measure offsets from national emission trajectories. In doing so, Japan’s case for a non-UNFCCC mechanism could become possible.

Executive Board Reports

Meanwhile, the COP listened to an update on progress from the CDM regulatory body, the Executive Board. As well as explaining the EB’s successful efforts to streamline approval processes, generate simpler additionality guidelines, and continue work on standardised baselines for methodologies, the EB chair reiterated that uncertainty surrounding the CDM post-2012 is potentially a crippling factor to progress.

In an effort to encourage deployment of the CDM to the Least Developed Countries (LDCs), a CDM loan scheme was launched this week, expected to be operational within a few months. It was first discussed in Copenhagen COP15 negotiations, and now has a fund around $4.4 million (USD). For countries that have less than 10 registered projects registered in the CDM, loans can be provided to projects in order to cover their feasibility studies, validation and registration expenses which can sometimes lead into the tens of thousands of USD.

The move can be seen as a positive one, in that it could kick start many new CDM projects. The EU is a strong supporter of LDC CERs. After 2012, strict limitations will mean only certain types of CERs will be allowed for compliance in the emissions trading scheme – those from LDCs being eligible until 2020.

As the CDM moves slowly forward, negotiations look like the KP is having a smaller and smaller impact. As Point Carbon points out, if the US had ratified the KP in the first place, the KP may have covered half of the world’s emissions. Without the US, and adding other Annex I countries like Japan, Russia and Canada along with many non-Annex I followers to the list of non-KP supporters, a second commitment period could potentially see only 15% of the world’s emissions. This means that the scope of the CDM could reduce dramatically.

If the CDM is seen in isolation from the KP, further work on its life post-2012 could be possible. At the moment, further commitments (nevertheless) bring the COP to a standstill.

Smoke stacks (Source: UNFCCC)

By Climatico Contributor: Roddy Boyd

As the 17^th Conference of the Parties (COP) to the UNFCCC kicks off in Durban this week, negotiators hope to build upon progress made during 2011 to govern the Clean Development Mechanism (CDM) and Joint Implementation (JI) more effectively. Coupled with the positive sentiment that has been seeping from recent negotiations en route to Durban via largely pre-negotiated texts, progress is expected but expectations remain low.

Seeking clarity

The CDM has been in transition for some time. While it has grown substantially since 2005, with 3,600 projects in 81 countries now registered and some 780 million tonnes of carbon mitigation generated, a cloud of uncertainty looms as only 13 months remain until the end of the first commitment period for the Kyoto Protocol (KP).

The CDM and JI will continue so long as the KP remains legally binding, but there is a lack of clarity in the KP’s legal provisions for the mechanisms beyond the first commitment period.  Fortunately, the KP has no specific mention of a ‘termination’ clause, and therefore its mechanisms and bodies cannot simply (legally) disappear after 2012, but uncertainties make for difficult market conditions for investors and other stakeholders.

The head of the UNFCCC, Christiana Figueres, has spent a good part of the year since COP16 in Cancun remaining optimistic about the future of the CDM and JI. “It is evident that there is uncertainty with respect to the future of the [CDM] market or markets for one very simple reason: the carbon market stems from a political agreement… the CDM has been improved, reinforced and enhanced constantly since its birth and that process will continue. The CDM will not drop off a cliff.”

Alternative mechanisms?

While the flexibility mechanisms may be able to survive, some are considering the potential to fill in current and pending gaps with the introduction of alternative mechanisms to the CDM and JI. These alternatives may garner some attention during the conference in Durban, including a proposal from Japan for a new carbon offset mechanism that does not contain the political nature of the CDM.

Initially launched in South East Asia, Japan’s bilateral offset carbon mechanism turns attention toward African countries where only 2% of all projects registered are currently based (see Climatico article for more information), and pays particular attention to 12 countries with little or no development in offset projects. Although the lack of CDM projects based in Africa has received little attention during negotiations thus far, with an African country hosting this year’s COP, it may be the right time to make much needed progress.

Expectations for Durban

Any negotiating time left for the Parties to put together a meaningful plan for post-2012 considerations of Kyoto’s flexibility mechanisms is quickly slipping away. However, major breakthroughs regarding extending, or more crucially not extending, the Kyoto Protocol and its commitments are not expected to take place in Durban. Many developed countries remain staunchly against extending a commitment period without similar emission targets for the major developing economies (India, China, etc.) who themselves are arguing for a new and additional binding agreement that is inclusive of the United States.

This sentiment was further concreted after the Guardian this week revealed that ‘rich nations’, led by the EU, have quietly admitted that no new global deal would be reached by 2012, a target date established two years ago at the COP conference in Copenhagen. Instead they aim for a roadmap to be developed in Durban that now targets 2015 for a deal.

It is likely then that there will be a gap of some sort between the KP and Long-term Cooperative Action (LCA) tracks. Even if an extension (or otherwise) to the KP is agreed upon in Durban, UNFCCC processes will take more than one year to complete. Previous negotiations focused largely on a second commitment period, taken up first by the AWG-KP, then largely by the LCA (because it is here that the US attends who are viewed by many, including China, as a ‘must have’ for any further commitments). The negotiations will once again take up this point of view, but the flexibility mechanisms may be relegated to a bystander position within the discussions.

Negotiations surrounding the flexibility mechanisms in Durban will therefore likely include: clarification of the roles for the mechanisms, discussion of whether other less prescriptive and legally demanding mechanisms to reduce emissions may exist, and identifying where the CDM and JI fit in with other operational mechanisms such as REDD+, National Appropriate Mitigation Actions, and Climate Finance.

Breakthroughs for the flexible mechanisms in Durban may not be expected, but progress will remain an important ingredient in any outcomes from the COP. As Figueres affirms, “Let’s work hard to find a common, effective way forward, and let’s recognize and build on our successes as they come. The CDM is an important success that Parties need to build on in Durban, with text that reaffirms the mechanism’s continuing usefulness in the international response to climate change.” 

Carbon time bomb (source: GuenterHH)

The carbon markets have had a troubled few weeks. While the price of the world’s most popular and valuable carbon product, the European Union Emissions Trading Scheme allowance, shed some 22% in one week, the Australian government has finally announced a potential path for the country to join the small group of emissions trading nations.

At the same time, the United Nations’ Clean Development Mechanism (CDM) is in a period of transition (see Climatico post): policy decisions made by its regulators could have significant impacts on the ability of the mechanism to deliver useable and robust offsets (called Certified Emission Reductions – CERs).

Superseded supercritical?

One particularly interesting issue has been focussed on the CDM Methodology Panel, who is charged (among other tasks) with maintaining the methods that are used to calculate how many equivalent tonnes of CO₂ (CERs) are mitigated from projects. The panel recommended to the CDM’s regulatory body, the Executive Board, that one methodology based on supercritical coal plants should be placed on hold since it could potentially overestimate emission reductions/CER generation by some 25% on average (pdf here).

Green groups have long argued that fossil fuel based projects breach CDM criteria. On the other hand, the EB consider that since supercritical coal plants are more efficient, and thus emit less carbon, they should be able to qualify for CERs.

Following the panel’s recommendation to pause the methodology, the EB was split on how to proceed with the decision. Despite uncertainties, the EB registered another supercritical coal project and eventually decided not to follow through with a suspension, yet.

Blast from the past

While none of the five registered supercritical coal projects have yet issued any credits, the situation is reminiscent of other methodological problems.

Only recently have CDM methodologies been centre of a controversial debate: doubts surrounding CDM projects based on the destruction of industrial gases (HFC and N₂O) (see Climatico post) shook the CDM community. One of the results of the debate was that the largest demand source of CERs, the EU ETS, placed a ban from 2013 on the use of CERs from these projects for compliance.

With 39 supercritical coal projects within the CDM pipeline at various stages of development, a decision to reject the suspension request could become the next controversy in the CDM. One of the main groups scrutinising the announcements from the EB has been European NGO, CDM-Watch, who expressed fears that the new decision was politically motivated.

Green groups had successes in the HFC/N₂O debate. Even if the EB continues to allow supercritical coal projects in the CDM, there is a risk that the issue could grow into something bigger and out of their control. Instead of targeting the supply of CERs, groups may want to aim for changes in the demand side, which is equally important in the development of the CDM.

Following some poor 2010 growth results, the EB will want to decide carefully if they mean to prolong the longevity of the world’s largest international offset mechanism.

Wind farm (Source: Axel Bruns)

Following the spectacular milestone of 3,000 projects registered into the world’s largest carbon offset mechanism, this month marked a time for reflection for those involved in the United Nations’ Clean Development Mechanism.

With over one-third of the registered projects now issuing Certified Emissions Reductions (CERs – the currency of the CDM, each equal to one tonne of CO₂ equivalent), the last four weeks have seen over 23 million issued, taking the overall total since 2005 to almost 650 million.

On the surface, the CDM has managed to clear some dead wood from last year, when only 132 million CERs were issued; 2011-to-date has seen past this already, with 50 million issued in January. So why is investment in the CDM falling?

The ‘Gap’

It became clear to negotiators at the recent Bonn climate change conference that a ‘gap’ in the Kyoto Protocol may be unavoidable. The CDM is widely regarded to be the most significant outcome from the KP, but they are intrinsically linked: the former depending on the regulatory and legal framework that is generated by the latter.

When the KP’s binding emission reduction targets finish at the end of 2012, investors, participants and UN policy-makers have been mulling over what happens to the CDM. The number of applications for new entrants has been dwindling for instance, suggesting a slowing demand for investment in the primary CDM market – where CDM projects are still under development and not yet at a stage to generate offsets.

Moreover, the World Bank’s State and Trends of the Carbon Market 2011 (issued earlier this month – pdf), suggested that the global carbon market stalled in 2010 with overall value declining slightly compared with 2009 (the global carbon market including the EU Emissions Trading Scheme, CDM, Joint Implementation and the controversial Assigned Amount Units – so-called ‘hot-air’).

Value Erosion

One of the major upsets in 2010 was that value of the primary CDM market fell some 48% to $1.5 billion, bringing it lower in value than 2005 when the CDM was in its inception year. On the other hand, the overall value in the carbon market remained somewhat stagnate at $142 billion compared with $144 billion in 2009.

The continuing lack of clarity in the carbon markets after 2012 and the loss of political momentum on setting up new ETSs were given as the primary reasons for the sideways movement in growth. Despite the EU ETS being legally extended to 2020, regulatory decisions in Europe have major impacts on all other carbon markets. The high profile decision to ban CERs generated from the destruction of industrial gases (HFC and N₂O) after 2012 has placed a lot of pressure on the CDM to deliver offsets to the EU by other project types (see Climatico post).

What the Future Holds

If new investment in the CDM seems a little risky for investors, the chair of the CDM regulatory body, the Executive Board, remains positive: “I’m quite confident that the CDM has a future, and we need to make sure that it’s going to fit for a more ambitious [climate] agreement”.

While 2010 has been seen as a bit of a disaster for carbon markets around the world, legislation failing to materialise in the US, Japan and Australia, the CDM has ramped up to end the KP 2008-2012 period on a high note.

What this life after 2012 looks like is still up in the air. Reassuringly, CERs issued after 2012 from projects registered before 2013 will remain eligible for use as compliance instruments under a replacement international agreement. The things that CDM participants should be looking out for are what this international agreement will look like, if it will contain binding emissions targets that CERs can be used with, and critically, if it will all happen before 2013.

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 3,000^th 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.

Cylinders (sourced from Tony Spencer)

In 1989, the Montreal Protocol laid out an extensive set of environmental rules that regulate and phase-out gases which contribute to the depletion of the ozone layer: including hydrochlorofluorocarbons (HCFCs), chlorofluorocarbons (CFCs) and halons.

Coming only 10 years later, the United Nations’ were able to build on that success when the Kyoto Protocol (KP) provided a legal basis on which developed countries could actively pursue reductions in greenhouse gases (GHGs) economically and sustainably. One such GHG was a group called hydrofluorocarbons (HFCs): a set of gases that have global warming potentials many thousand times the potency of carbon dioxide and were excluded from the MP (HFCs can be direct bi-products from HCFC productions).

This time however, Parties under the KP were able to take advantage of the Clean Development Mechanism (CDM) to receive many millions of Euros in exchange for destroying HFCs. As a result, projects that generate offsets from destroying HFC (specifically HFC-23 from HCFC-22 productions) have sat uneasily in the CDM.

A Fluorinated EU?

The HFC sector in the CDM has been the target of much criticism (see previous Climatico blog) that questions the underlying environmental credibility of HFC Certified Emission Reductions (CERs – the currency of the CDM).

Since each avoided ton of HFC-23 generates 14,800 CERs (worth €170,000 at current prices), the recent announcement that the EU Emission Trading Scheme (ETS) will no longer accept HFC CERs for compliance from May 2013 to some extent highlights the EU’s position on discouraging HFC tolerance despite its worth.

In an effort to curb HFC use further, several countries (US, Canada, Mexico and Micronesia) proposed extending the MP to also cover HFCs, paving the way for rapid de-fluorinisation.

Replacements

Some environmental groups including CDM-Watch and Greenpeace, however, feel that the political inertia could place the wider realm of fluorinated gases (a set of potent GHGs that include HFCs, perfluorocarbons – PFCs, and sulphur hexafluoride – SF₆) under heavier regulation.

After the success of the Montreal Protocol to ban HCFCs and CFCs, the so-called F-gases were widely applied to fill the void of various industrial uses such as refrigeration, air conditioning and electrical transmission.

Despite their low toxicity, low flammability and non-ozone depleting properties, F-gases have global warming potentials many times that of carbon dioxide meaning they contribute to anthropogenic climate change. Moreover, the climate effect of these gases is relatively short-lived compared to carbon dioxide; meaning that action can return prompt benefits, helping to reduce atmospheric temperature increases.

A Low-Carbon Future

Since 2006, EU legislators have implemented a set of regulations and one directive to ensure the so-called F-gases remain subject to strict controls. These regulations only resulted from a conciliation procedure since the European Parliament and the Council of Ministers were unable to reach an agreement on two separate occasions.

Only last week did the European Commission publish a proposal to take the EU on a track to reduce emissions 80-95% by 2050 from 1990 levels (Roadmap 2050). To reach the target, the report recommends that comprehensive economy-wide policy changes should be required.

For instance, emissions in the industrial sector will need to be reduced by some 40% by 2030 and then 80% by 2050. The power sector will need to undertake a major and rapid change: at least 60% reduction in sector emissions by 2030 with almost full decarbonisation by 2050.

The Council is expected to debate the Roadmap today (March 14). While the scope of the proposal and effort required to implement the recommendations is colossal, some groups believe that addressing the EU’s use of F-gases cannot be underestimated and should not be overlooked as the EU lawmakers discuss potentially momentous proposals.

While F-gases account for approximately 4% of EU annual carbon dioxide equivalent emissions, their potential climate change toxicity means that their future regulation in the EU, or under a suitable international treaty, remains an important part of the solution in a move to a low-carbon and sustainable economy.

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.

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.