UN'S CLEAN DEVELOPMENT MARKET MECHANISM FUTURE IN DOUBT, LARGELY SIDELINED IN LIMA

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The United Nations’ Clean Development Mechanism, a plan to use market forces to curb greenhouse gas emissions that once was hailed as among the most important and resilient parts of the UN process to confront climate change, is fighting to survive and remain relevant.

The fate of the 13-year-old mechanism could be decided in the months following the just-completed Lima climate change conference, when delegates will determine whether it will be included in the global climate agreement to be finalized a year from now in Paris.

Delegates began discussing the inclusion of market mechanisms in the 2015 agreement, but it is not clear whether that language will include a role for the once-heralded Clean Development Mechanism, which a decade ago was seen as one of the UN's most powerful tools to ratchet down worldwide greenhouse gas emissions.

The CDM enabled rich countries to fund projects that would reduce emissions in developing countries, creating jobs and developing infrastructure in poor parts of the world and receiving certified emission reduction units (CERs) that they could use as offsets against their own emissions reduction targets.

But observers point to an array of problems surrounding the plan, ranging from the U.S. rejection of the Kyoto Protocol in 2001—which dramatically reduced the size of expected carbon markets—to the European Union's 2009 decision to allow only CDM credits from projects in the poorest nations to be traded in the EU Emissions Trading System, the world's largest carbon market.

There have been criticisms for the unbalanced geographical distribution of projects, because most CDM projects are in four large developing countries: Brazil, China, India and Mexico, according to Eva Filzmoser, director of Carbon Markets Watch. The CDM also has been hurt by book-keeping and allocation scandals, starting in 2007.

Plummeting Value of Credits.

“The 2000 election in the U.S. [of President George W. Bush] was a big blow, because it led to the U.S. pulling out of the Kyoto Protocol,” Jeff Swartz, international policy director for the International Emissions Trading Association, said in an interview. “The scandals were unfortunate because there were a few bad projects, but it was enough that governments got spooked.”

The price of the certified emission reduction units fell from a high of slightly more than $20 a ton in 2008 to a historical low of 31 cents four years later. Prices remain less than $1 per ton now.

“The prices are so low that most entities don't want to sell them,” Hugh Sealy, president of the CDM Executive Board, said during a briefing at the Lima climate change conference.

Sealy, whose term expires in 2015, is working on plans to save the program. He said CDM, which costs $25 million–$30 million a year to operate, is still on solid footing financially. But it has to find new ways to stoke demand for its credits so that prices rise.

'Voluntary Cancellations.'

One idea is the use of “voluntary cancellations” that companies, organizations or individuals could purchase to reduce their carbon footprint. The 2014 World Cup soccer tournament in Brazil, for example, brought about the “cancellation” of around 545,000 tons of carbon equivalents—enough to make the event carbon neutral.

Sealy said he'd also like the European Union to agree that all certified emissions reductions the CDM produced could be traded on the EU Emissions Trading System.

But more important, Sealy said, is for the CDM to play a role in the 2015 Paris agreement.

“We are hoping the Paris agreement will include a clear signal from parties that they want to continue to use market mechanisms as a tool,” he said. “We are pushing to have the CDM play a significant role in next year's agreement.”

Limited Interest.

Delegates involved in the negotiation of the 2015 agreement have told Bloomberg BNA that while the value of market mechanisms has been debated, there seems to be only limited interest in having the CDM as a tool for the Paris treaty.

“I would think it's unlikely that the CDM would be included as is,” a senior EU negotiator who asked not to be further identified told Bloomberg BNA. “Elements of the CDM are still valuable and could be saved, but it's very likely the CDM won't be called the CDM by the time next year's agreement goes into effect in 2020.”

Swartz agreed, but stopped short of predicting the program's demise.

“We're always going to need a project-based crediting mechanism,” he said. “Without it, how would countries like Norway, Sweden or Switzerland, which already have low-impact energy mixes, do more? Norway gets 80 percent of its energy from clean hydro power. If it wants to do more, it has to look abroad.”

Support from China, India, Brazil, Mexico.

Most of the support for the CDM in negotiations comes from China, India, Brazil and Mexico—countries that have reaped the most benefits from CDM projects.

One of the most common criticisms of the CDM is that it deals with “carbon offsets”—calculated reductions in emissions compared to estimated business-as-usual trajectories that critics say make it too easy to manipulate. Most other trading schemes deal with allowances earned from direct reductions that are easier to measure and verify.

Expert observers said if the CDM survives, it would have to evolve to play a new role. Sealy said he sees it playing a part in monitoring, reporting and verifying national efforts in the 2015 agreement; the CDM also has touted itself as a way to leverage public-sector money to create low-carbon projects in developing countries.

“If it continues to be a market for offsets then why save it?” Kate Dooley, an independent climate policy consultant, said to Bloomberg BNA. “It has to play a bigger role in order to be relevant.”

More than 1,650 Projects.

All that said, there is no doubt the CDM has had successes. According to its parent organization, the United Nations Framework Convention on Climate Change, the CDM has registered more than 1,650 projects and has reduced emissions by more than 1.5 gigatons of greenhouse gas during its lifetime—around 4 percent of the world's emissions from fossil fuels last year. Sealy said that adds up to $2.8 billion in saved compliance costs.

But Swartz said the CDM's biggest impact might not be quantifiable.

“Look at the interest China has in renewable energy; that comes from the firsthand experience they had with the CDM,” Swartz said. “Many of these delegates from developing countries got their starts working in the CDM.”

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