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UN panel meets to shape the future of the CDM

Source: Thomson Reuters Foundation - Mon, 28 Jan 2013 17:15 GMT
Author: Reuters Point Carbon
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LONDON, Jan 28 (Reuters Point Carbon) - A U.N. panel will this week discuss a range of ideas targeting the survival of its ailing $215 billion carbon offset scheme for developing countries, amid record low offset prices and ballooning over-supply of permits.

The U.N.’s executive board, which oversees the Clean Development Mechanism (CDM), will on Thursday meet in Bonn, Germany to discuss suggestions gathered from stakeholders on expanding its role, according to the meeting’s agenda published on the UNFCCC website.

The aim of the meeting is to ensure the CDM has a future in the face of new carbon-cutting initiatives and dwindling demand among the industrialised nations that use the offsets to help meet their emission targets.

One of the key issues is whether developing countries hosting CDM projects should be allowed to use offsets they have generated towards their own voluntary emission reduction goals.

A submission from industry group the Project Developers Forum said giving all countries CDM access would “increase demand for Certified Emission Reductions (CERs) and increase investment in CDM projects,” while also ensuring that countries use environmentally sound offsets to help meet targets.

China, which has accounted for more than 60 percent of all CERs issued, is developing its own regional carbon markets.

Analysts believe that if the country were to use all the offsets it generates to meet its own targets, international offset supply could be cut by about 2 billion by 2020.

CERs have lost around 95 percent of their value over the last 18 months to trade below 40 cents, as demand for credits has dried up from recession hit companies covered by the EU Emission Trading Scheme – the main source of demand - while supply has soared.

NEW MARKETS

In 2011, U.N. climate negotiations opened the door for new carbon market mechanisms in a successor treaty to the Kyoto Protocol.

These markets have yet to be developed but the CDM Executive Board will this week also discuss a business and management plan for 2013-2014 to see if and how the CDM could fit into new schemes.

“The CDM’s relevance to, and acceptance in, new carbon markets will depend on how well it meets the expectations of parties and other stakeholders,” the CDM secretariat said in the plan, published alongside the meeting agenda.

Increased simplicity and predictability in the mechanism, getting more countries to host CDM projects, safeguarding the reputation of the CDM and making sure the sustainable benefits of projects are better communicated were identified in the plan as four key objectives for the next two years.

Part of the simplification process includes standardising baselines that are used to assess how many emission reductions have been made at projects, theoretically making it easier for developers to get credits.

FEE CUT

Under U.N. rules, developers receiving more than 20,000 CERs a year must pay 20 cents per credit issued, more than half the current market value, to help pay for the costs of the U.N. running the scheme.

In its input to the U.N., the International Emission Trading Association (IETA) said these fees should be suspended to provide respite for beleaguered project developers.

The U.N. secretariat had amassed a surplus of almost $150 million by the end of 2012, according to the plan, meaning it could comfortably operate for the next three years even if revenues fell to zero.

“This is a far better financial situation than many companies involved in CDM - which have had to exit or come close to completely exiting the carbon market,” IETA said.

Even if fees are kept at current levels, the secretariat estimates its revenues will fall dramatically this year to $35 million from a peak of $120 million in 2012, and will hit $25 million in 2014 as fewer project developers seek registration.

To combat dwindling revenues, the secretariat has proposed a $4.2 million year-on-year budget cut for 2013 to $38.3 million and a further cut to $36.5 million for 2014.

It expects to save money by paying less to external consultants, which were brought in last year to help clear a backlog of project registrations.

The Board will use this week’s discussions to develop a draft paper on possible changes to the CDM to be agreed at its next meeting in March.

By Susanna Twidale – susanna.twidale@thomsonreuters.com

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