A high–level UN panel has proposed a hard-hitting package to reform the centrepiece of the carbon market established by the Kyoto Protocol, the Clean Development Mechanism (CDM).
The panel recommends establishing a new fund to buy and cancel some of the carbon credit glut that has depressed prices. It also suggests phasing out the issuance of credits to controversial industrial gas projects altogether.
But the panel’s non-binding recommendations will do little to immediately drain the bloated market for Kyoto's Certified Emissions Reduction units – CERs – or ease uncertainty over their future when the Kyoto deal expires at the end of 2012.
“Nations must, as a high priority, restore faith in global carbon markets generally and in the CDM specifically,” the independent panel’s chair, Valli Moosa, said in a statement.
The one billionth offsetting credit of the Kyoto scheme was sold last week, but CER prices for delivery in December have fallen to just €2.30 a tonne, raising doubts about the ‘additionality’ of any emissions reductions they inspire.
Prices on the EU’s Emissions Trading System (ETS) have also sunk under the weight of over-supply, political uncertainty and recession.
The UNFCCC probe urges nations “to intervene forcefully to address the crisis in the carbon market and substantially increase their level of ambition when it comes to reducing greenhouse gas emissions.”
For its part, the panel’s package proposes:
- Strengthening UNFCCC emissions reduction pledges;
- Exploring the set-up of a new fund allowing host countries and investors alike to buy and cancel surplus carbon credits;
- Phasing out carbon credits for new projects covering the controversial industrial gases HFC-23 and N20, which account for around half of all CERs to date;
- Standardisation of methods such as benchmarking and positive lists for assessing additionality, so that, for example, the EU’s ETS can link with similar schemes in California and Australia;
- More systematic reporting, monitoring and verification of sustainable development impacts throughout the lifetime of a CDM project;
- Making activities under the Reducing Emissions from Deforestation and Forest Degradation (REDD) programme eligible for CDM credits.
Snap business responses to the proposals were cautiously upbeat.
Jørund Buen, the co-founder and director of Point Carbon market analyst firm, said the proposed new CER fund would only raise prices “if it is significant enough and becomes operational quickly, purchasing a large portion of CERs.”
“Frankly I don’t think that will be possible,” he told EURACTIV.
But the sectoral approach to funding REDD projects might help build middle ground between industrialised nations and a developing world traditionally reluctant to take on such responsibilities, he added.
Jeff Swartz of the International Emissions Trading Association (IETA) said the carbon market “still hasn’t digested fully” the panel’s recommendations on CERs, but was broadly supportive.
“We agree with a lot of the recommendations that will help alleviate the immediate crisis of demand,” he told EURACTIV over the phone from Beijing.
Responses from environmental campaigners were lukewarm with one group, CDM Watch, welcoming some measures but complaining about a systemic tendency to offer windfall profits to big polluters.
“In the absence of strict rules that ensure truly additional and sustainable projects it does not make sense to save the CDM for its own sake and potentially at the expense of tax-payers,” said CDM Watch’s director Eva Filzmoser.
“Much larger emission reductions can be achieved by directly supporting new and effective climate policies,” she said.
In November 2011, the Stockholm Environment Institute reported that new coal plants in developing countries were receiving billions of euros in CERs for CDM projects with little, if any, emission-reduction value.
The CDM was set up under the Kyoto Protocol in 1997 to encourage investment in emissions reduction programmes in the developing world by 37 industrialised nations and the EU.
On average, these nations were obliged to reduce their emissions by 5% on 1990 levels over the five-year period between 2008-2012.
Hopes for the scheme’s future now hinge on an anticipated ad-hoc alliance between the EU’s ETS with planned carbon markets in California, Australia, Quebec, China, South Korea and Japan.
EURACTIV understands that next month, international governments plan to hold a pre-summit meeting in South Korea to thrash out an amendment allowing a second commitment period of the Kyoto Protocol to be agreed at the Doha Climate Change Summit in December.
Under the Kyoto Protocol, industrialised countries can meet part of their climate targets by investing in carbon reduction projects in developing countries.
The arrangement, called the Clean Development Mechanism (CDM), operates on the condition that projects generating credits have to ensure 'additionality', or the principle that the reductions they achieve would not have occurred without the incentive of foreign finance.
The CDM has attracted criticism, however, as the additionality criterion has been abused. Credits granted for projects that should not have qualified in the first place have allowed developed countries to dodge their climate commitments, critics say.
In January 2009, the European Commission presented a proposal for a global agreement to replace the Kyoto Protocol. The blueprint proposed an overhaul of the CDM to ensure that only projects delivering additional reductions and targeting more costly cuts receive credits.
- Autumn 2012: EU to bring forward long-term proposals for a structural fix of the ETS
- December 2012: UN Climate Change Summit in Doha
- 2013: Third phase of EU ETS trading scheduled to begin, and continue until 2020
- 2015: UNFCCC nations slated to agree a successor deal to Kyoto
- 2020: New Climate treaty due to come into effect