COP21 and the Clean Development Mechanism: deciding the future of international carbon credits

COP21, also known as the 2015 Paris Climate Conference, will shape the post-2020 climate regime. In that occasion, parties to the UN Framework Convention on Climate Change (UNFCCC) will be called, among other things, to determine the destiny of the Clean Development Mechanism (CDM).

Introduced by the Kyoto Protocol, CDM is a project-based flexible mechanism aimed at reducing the costs of abatement of GHG emissions. This mechanism was established with a dual objective of facilitating developed countries in fulfilling their Kyoto’s commitments and stimulating emissions reduction in developing and emerging nations. Shortly:

  • CDM allows Annex B countries to earn Certified Emission Reduction (CER) credits by implementing emission reduction projects in developing countries,
  • Each CER credit is equivalent to a ton of CO2,
  • As of 30 June 2015, 7,645 CDM project activities were registered, of which 2,587 have already issued about 1.6 billion of CERs,
  • China hosted more than 49% of total projects between 2004 and 2015, followed by India with 20.6% and Brazil with 4.4%.

Nowadays, CDM displays clear signs of weakness. After a first period characterized by relative price stability, a drastic augment in the number of projects between 2012 and 2013 increased the overall offer of Certified Emission Reduction (CER) credits.

This sudden oversupply of CERs resulted in substantially dropping their market price. Low prices discouraged further investments in emission reduction projects and put CDM under discussion. Throughout the years, additional critiques have targeted CDM’s rationale. Several opponents accused CDM of having failed in encouraging sustainable development and spurring genuine emission reductions.

UNFCCC Parties have discussed the future of CDM before the first commitment period of the Kyoto Protocol came to an end (2012). However, little progress has been achieved due to radically discordant positions on the issue. While wealthy and big-emitting countries endorsed the continuation of market-based mechanisms, developing nations adopted divergent and contrasting stands.

Two main approaches have recently dominated the scene. On the one hand, supporters of the “New Market Mechanism” (NMM), proposed at COP-17 in Durban in 2011 to complement the CDM and JI, call for the implementation of sectorial and cross-sectorial measures, thus scaling up market based mechanisms beyond project level activities. On the other hand, USA and Japan backed the “Framework for Various Approaches” (FVA). This scheme aims at ensuring flexibility for Parties to create a set of components and rules that will ensure an individual crediting systems that help fulfil internationally agreed targets.

Notwithstanding multiple discussions over the post-2020 climate regime, none of the proposals was able to gather broad consensus. Several experts continue to consider international carbon credits as the most attractive option. However, stakeholders require critical adjustments in the current system. Given the waves of scepticism surrounding CDM, rebuilding trust in the international carbon market mechanism represents a crucial step UNFCCC has to undertake. State parties are required to introduce clear international rules to coordinate regional and national frameworks.

On the same line, the inclusion of an overarching mechanism aimed at ensuring price stability would foster investor confidence. In the end, additionality tests, controls on baselines emissions and the involvement of civil society would support a global emission-trading scheme while ensuring sustainable development. Besides international carbon credits, advocacy groups have suggested other market-based approaches for the post-2020 scenario. A viable option consists in utilizing carbon market mechanisms to develop instruments for climate finance.

Finally, in recent years, some parties drew attention to a non-market GHG reduction solution, particularly in correlation to REDD+. Albeit this remains an attainable strategy, the scarce consensus gathered throughout the 2015 Bonn negotiations relegates this option to the background.

The drastic fall in price experienced by CERs during the last two years has led to question the effectiveness of CDM. Additionally, structural weaknesses of this scheme have spread distrust in market based emission reduction systems. At COP21, the future of CDM is likely to represent the big elephant in the room that state parties will have to disentangle.

 

This article was first published under ICCG International Climate Policy and Carbon Markets series, issue n.36, accessible in pdf format.

(Image: Participants at the Bonn Climate Change Conference, June 2015. Photo credit: UNEP/Flickr)