NGOs: UN carbon-offsetting scheme ‘in urgent need of reform’

International carbon emission offsets are likely to continue to be based on the UN’s Clean Development Mechanism (CDM), as the EU’s proposal to replace it with sectoral crediting will not be feasible for years to come, Eva Filzmoser, coordinator at CDM Watch, told EURACTIV in an interview.

Eva Filzmoser coordinates CDM Watch, a project initiated by a number of international NGOs to provide an independent perspective on CDM projects.

She was speaking to Susanna Ala-Kurikka.

To read a shortened version of this interview, please click here

How is CDM Watch trying to influence the CDM process?

CDM Watch develops as it grows. The main purpose is to create a platform for civil society from CDM host countries to coordinate responses to CDM projects, collect information about concerns about specific projects and to focus on the policy process in general. The aim is to carry forward this message to policymakers.  

I’m trying to gather what has been done in CDM host countries and I am focusing on the most popular ones for the moment: India and Brazil. 

Unfortunately not China, due to the lack of a civil society movement. But for several of the problematic CDM projects, it is not necessary to go there to find out what’s wrong with them.

India is a fabulous country to work in when it comes to civil society movements. There is so much movement, so much activity, such a big civil society.

I’m also trying to focus on bodies that have not been in the focus of NGOs so far, like the CDM Executive Board. They very much welcome input, because generally when it comes to the CDM, the stakeholder environment is heavily dominated by industry.

Do you feel like policymakers are taking your comments on board?

I try to believe so. I think they are very hesitant, but yes.

Because there is not so much information about CDM projects, and they’re already concerned because they know everything’s not great. So if they get a concrete example of a concrete project which is really going badly, it’s difficult to say it’s not happening.

Moreover, as the carbon market is ever-growing, policymakers are beginning to realise that the whole range of stakeholders – that is also civil society – needs to be heard.

However, we are not satisfied with the passive role that civil society has been granted for the moment and are demanding an active role equal to the one of project participants.

What do you think are the biggest problems with the CDM in its current form?

There are a couple of big ones. First of all, it’s the design as such.

Efforts to fix the CDM within its current structure will not be successful, because project-by-project additionality testing is inherently subjective and impossible to do accurately. A big part of the problems is tied to the uncertainties within the design. 

People say that benefits overweigh this problem by having achieved technology transfer and all these thousands of CDM projects have had a good impact. But I don’t agree with this statement given the amount of non-additional projects in the pipeline.

Moreover, there are plenty of harmful projects in the pipeline. Negative impacts include environmental pollution, for example from large hydro projects that often wipe out large areas of natural resources – especially water. Other impacts relate to social concerns, such of RDF [refuse-derived fuel] waste management projects that use waste for the CDM projects and deprive thousands of waste pickers of their livelihoods, because they fail to offer an alternative income.

There are also methodologies in the pipeline that encourage perverse incentives such as projects for the destruction of industrial gases HFC and N2O. Other methodologies even support the production of coal with super-critical coal power plants.

But certainly – since it is an offsetting mechanism – the problem with additionality is huge as every non-additional project defeats its purpose. Some even argue that the large majority of CO2 projects are non-additional.

Last but not least, the whole institutional set-up and in particular governance needs urgent improvement. Currently, the members of the CDM Executive Board [EB] often play multiple roles at the same time, including UNFCCC negotiators, representing their countries’ DNA [Designated National Authority] or managers of large government CDM purchasing programmes. 

Although members should act in their personal capacity, there are severe concerns about conflicts of interest among board members. This shows, in that a conflict of interest is only noted in four out of 51 meeting reports, and membership of the country involved in the Board raises the chance of a project being approved.

Recently, the New York Times reported that some Board members abuse their role and aggressively promote projects that benefit their home countries. To address this critique, the Board has recently adopted a code of conduct that suggests that each Board member will exercise personal discretion in deciding whether s/he has a real or perceived conflict.

This means that everyone can make up their own definition of a conflict of interest. It doesn’t seem like the EB has grasped the concept of governance. The operation of the CDM in this current biased form is unacceptable. Even more so, the CDM Executive Board should rule over CDM projects and even sectors and critical technologies such as CCS [carbon capture and storage] in the future.

Could you give any concrete examples from the field?

I organised a workshop in November in New Delhi with about 70 representatives of NGOs, all of them working on CDM in India.

Participants discussed the poor environmental integrity, the problems with impossible additionality testing, the lack of contribution to sustainable development, problems with transparency about CER buyers, the insufficient stakeholder consultation process and the barriers for local communities to raise concerns about registered projects. Finally they also complained about the performance of Designated Operational Entities, which often do not take into account comments posted to CDM projects. 

At the base of the problem, participants were especially concerned about the role of the Executive Board, its poor code of conduct and the lack of transparency in the decision-making process. 

Finally, the overarching principle of the CDM, sustainable development, is completely lacking. Different from other provisions under the CDM, the assessment of whether a CDM project contributes to sustainable development is the prerogative of the host country government and not under the supervision of the CDM Executive Board. 

However, the current market mechanism only gives monetary value to emission reductions. This has resulted in a trade-off between the two objectives, with cheap emission reductions being preferred over projects with high sustainable development benefits.

Under the current scheme, host countries do not have incentives to reject projects with fewer sustainable development benefits, as this lowers their revenues and overall market share.

Overall, among the thousands of projects, maybe one has been rejected for the lack of sustainable development so far. I’m not 100% sure if it’s one or three, but it’s not a lot.

As you can see, it is not just me being critical. In fact I found the Indian NGOs much more critical than NGOs from Annex I countries, that is countries that invest in CDM projects. I sincerely hope that the demands by NGOs in a CDM host country are listened to.

You also have the rules on how to proceed in the whole CDM process from when the project developer gives his design document which then goes through a public consultation period. Before that he already had to meet the people on the ground.

So there are certain rules like that and people who are affected are upset and frustrated that everybody pretends to comply with these criteria. But in the end, even if they know how it works – which is already a big achievement – they write a comment and the DOE [Designated Operational Entity] ignores it completely.

Why is this happening? Why are there no penalties? Why is there not more incentive to have more pressure to take them into account? 

There are easy things you could do to change those things in the setup and they have a lot of good side effects. For example, they were asking why they can only make comments at the very beginning of a CDM project because at the very beginning they tell us it’s great; it gives employment, new schools and so on, so why wouldn’t we want it? 

But then at the moment it’s implemented, they see that the implementation will end up destroying their house and the promises made at the beginning are not fulfilled. Once this is happening and the project is actually registered, you’re getting credits issued, there is no room anymore for comments. 

If you want an honest comment on something, if you want to know how it’s really implemented, you need to give an opportunity for input at the beginning of the project – like it is being done, but with stricter principles, penalties, longer timelines and translated documents, and during the monitoring period.

I think there are some easy changes that can make a big difference. If you add a commenting period in the monitoring phase of a project, you get real assessment and an incentive for developers to implement it correctly in the first place.

As the CDM is now being reformed as part of the new international climate agreement, what form would you like it to take?

Do we want it in the first place? I think if you talk about the form of the CDM, you first have to talk about its purpose. 

The discussion about the CDM has to be seen in the context of the political discussions about emission reduction targets. If targets are not ambitious enough – and they are not at the moment – and include more than 50% of offsetting, no offsetting mechanism is acceptable. 

As regards the CDM reform, we must distinguish between two debates that are currently happening in parallel: first, there are current discussions on the reform of the current CDM which sees minor changes in the mechanism, for example including the use of a standardised baseline and additionality benchmarks in certain sectors for CDM project activities, and a positive list of project types of which compliance with the additionality criteria can be assessed through the use of conservative criteria, for example a checklist. There are also other aspects under consideration, including an appeal procedure against decisions of the Board. 

Second, there is the current debate on a mechanism post-2012 that should in the long run replace the current form of the CDM. Obviously, these two discussions are interlinked.

As regards my wish list, I have some basic demands that have to be fulfilled in order to ensure minimum environmental integrity of any future mechanism.

Regarding the current CDM reform, my main demand is to improve governance in the institutional set-up, especially of the CDM Executive Board. As long as conflicts of interest are not declared, decisions being taken in the dark and meetings kept secret, I don’t see how the mechanism can be improved.

All in all, the concern about the high number of non-additional projects needs to be addressed. As this is trying to be achieved with a new post-2012 mechanism, it is of particular importance to base any measures on a sectoral crediting mechanism on strong language, especially when it comes to the eligibility of sectors, the reference levels and the level at which credits start to be generated. 

These basic demands must be taken into account during any kind of agreement that is going to be agreed upon in Copenhagen. While it will probably be not more than a framework agreement, it is still of utmost importance that the basics are set right so to pave the way for future work.

What concrete changes would you make?

Transparency. It all comes back to having an incentive to do it right. If there was more transparency on where credits are moving and who is involved, there is more pressure to do it well because it’s not so easy anymore to greenwash your company with a nice little project that fulfils 1% of your obligations on industrial emissions.

Another big demand would be to make transparent which buyer buys credits from which project in a centralised database.

It could be on different levels. I think the easiest thing would be to start with the EU setting up the first example.

It could be integrated in the CITL, the Community Independent Transaction Log, which is a centralised registry of emissions surrendered under the Emissions Trading Scheme. At the moment, it takes forever to find the data for one project – but the data is there! That’s why I think it would be a good place to start bringing this transparency.

Then, much stronger penalties on DOEs [Designated Operational Entities] for anything that is wrong it needed, especially concerning comments. So if they ask for a comment, they really have to take it into account.

Professionalisation of the Executive Board is also not a minor demand because good governance is the basis of every methodology, regulation and ultimately registration of a project. As long as they cannot decide independently but are directed by the interests of their home countries, the CDM cannot become objective.

It’s very much needed that they get a proper code of conduct by the COP [Conference of the Parties] instead of their own assigned code and move to being a professional board.

There is also a need to review a few of the methodologies as already mentioned. And I cannot emphasise enough that the role of civil society in the process needs to be strengthened. This would reflect on all phases of the CDM project cycle and would ultimately make it stronger.

For example it is not acceptable that once a project is registered, you can’t do anything about it, or once you have a methodology it will be there and only a new project developer can change it. If you can prove it’s not working, you should change it and not to get stuck on rules that were made on a flexible basis.

There are a couple of methodologies that absolutely need review, for example HFC23, a refrigerant gas that is 27 times more dangerous than CO2. There are twenty projects in the pipeline that generate CERs [Certified Emissions Reductions] – like, thirty times as many as anything else – of course because it’s 27 times more dangerous so you get the multiplying effect.

It could be handled differently because they don’t deserve these credits. There are suggestions which the Executive Board is not taking into account because they don’t come from the industry, and that’s very frustrating.

What do you think about the EU’s suggestion to move from CDM to sectoral crediting for more advanced developing countries?

In principle I doubt it: if it is already not working with projects, how can you make sure that it works in a whole sector? I think this really has to be explored and [we need to] take into account all the mistakes of the project-based CDM.

There are a couple of major concerns that have to be pointed out as a matter of principle: although sectoral, it would still be a baseline-and-credit approach which can cause similar concerns as pointed out with the current CDM. Moreover, such an approach is likely to cause perverse incentives in delaying voluntary action in developing countries in order to keep the baseline up – and hence, earn credits.

I also think that the EU’s communication on this issue might have caused misconceptions related to when such an approach would be feasible. The possibility that there will be no CDM after 2012 is just completely unrealistic in my view. On the contrary, it is very likely that there will be project-based CDM much much longer – and even more, given the recent interest by the US in the CDM.

Sectoral crediting on the other hand is an idea that would need at least a decade to be implemented, given that the current projects that have crediting periods for up to 10 years will still stay in the pipeline until their crediting period will expire. 

Then there is the question of which sectors in which countries. We understand that we are talking about up to five sectors in three countries. But there are more than five thousand CDM projects in the pipeline and they will not all be replaced from one day to another by sectoral crediting.

In principle it would solve the additionality problem. However, there are a couple of important issues that need to be set right: the business-as-usual baseline (reference levels), the crediting threshold (the level at which credits start to be generated) and eligibility of sectors. As we know, in the last hours of negotiations, these things are often watered down.

We are a bit concerned about this proposal because it does not yet clarify how it would look in detail. In particular, we believe that there are a couple of critical issues that have to be taken into account: as regards the eligibility of sectors, we belive that sectors in developing countries can only become eligible to participate in a sectoral mechanism if the monitoring, reporting and verification of emissions is on a par with the provisions under the Kyoto protocol. If this is not the case, mistakes in emission estimates or reports risk to destabilise the carbon market and carbon price.

As such sectors with large industrial point sources seem to be the prime candidate to enter a sectoral mechanism. Moreover, the sectors must have nation-wide coverage. It should also be possible to exclude a part of a sector from a sectoral crediting mechanism for installations below a certain emission threshold.

In general a sector which is participating in a sectoral crediting mechanism cannot be  eligible for the project based CDM in that country. 

As regards reference levels, we believe that there must be common and legally binding methodologies and rules for establishing reference levels for sectors under a sectoral crediting mechanism. Moreover, the proposed reference levels must be assessed and approved by an independent authority under the COP. 

Crediting thresholds that are the level at which credits start to be generated must prevent low-hanging fruits from being used as offsets. Therefore, the crediting threshold for the sectors must be set well below the reference level (e.g. 15-30).

But there are still risks involved. Therefore, in order to prevent the issuance of credits in case the crediting threshold has not been achieved or, in case of sectoral trading mechanism, if the cap is surpassed, a compliance mechanism has to be put in place.

Concluding I would say that it is of utmost importance to focus on both: the current CDM reform for the project-based CDM that will continue for the years to come, as well as on the discussions on the post-2012 mechanism that must avoid any mistakes of the project-based CDM. 

There’s an urgent need to make improvements of the current CDM now because every single project is offsetting thousands of CERs equivalent to tonnes of emission reductions. It’s a matter of environmental integrity to make those changes now.

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