Will UN Carbon Trading Find Its Feet Again?

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UN carbon trading mechanisms originally set up to help achieve the greenhouse gas targets under the Kyoto Protocol have proved ineffective, but can they serve as ready-made instruments to make good on future climate targets? Many observers have given up on the Joint Implementation (JI) program, which facilitates investments in certain countries, such as Russia and Ukraine, but potential may still exist for the Clean Development Mechanism (CDM), which is focused on less-developed nations. JI, one of the UN's flagship Kyoto Protocol projects, was delivered a blow this week with the release of a report from the respected Stockholm Environment Institute (SEI), which indicates that JI may have resulted in an extra 600 million CO2 emissions, rather than cutting them. The SEI says three-quarters of JI credits have lacked environmental integrity -- with abuses cited from Russia and Ukraine, which are the biggest financial beneficiaries as the market's leading suppliers. But some weren't surprised. "Everyone kind of knew," one observer said, pointing to the compromises the EU had to make -- after the US disengaged from Kyoto -- in trying to convince enough countries with sufficient emissions to participate in Kyoto, a legal prerequisite for the Protocol to officially come into effect in the first place. However, with the new SEI report, "I really think the JI has lost all credibility," said Eva Filzmoser, the director of Carbon Market Watch. Despite some conceptual faults, and whatever its failings, Energy Aspects analyst Trevor Sikorski commended JI for at least trying to get the private sector involved in financing emission reductions around the world. The mounting evidence of JI's failures could jeopardize its own future, but the fallout from that developing scandal also runs the risk of throwing the baby out with the bath water if the CDM's future becomes similarly threatened. Despite failings such as problems with demand, and at times the quality of credits, the CDM may still merit preserving -- even if measures to bolster such international carbon markets are slipping down the agenda of more Paris climate negotiators (NE Jul.30'15). At first glance, the CDM has not fared much better than its JI twin. Credits are now just worth pennies and trading has all but ceased, according to the London Brokers Association (LBA), with the EU having stopped taking CDM credits from end-March -- with none traded that month versus 18 million traded in 2014, according to the LBA (see graph). The CDM could perhaps still be re-imagined -- countries could use it to engage in offsetting without reinventing the wheel with new market mechanisms. Some of the CDM's past administrative problems seem sorted to an extent -- it is now stamping down on abuses such as gaming of industrial gas, and the CDM credits, known as Certificated Emission Reductions (CERs), look more environmentally robust now -- plus they've seen a small improvement in prices recently. The big problem for the CDM market -- through much of its existence -- has been a lack of demand. The US was expected to be a big buyer, but the administration of George W. Bush pulled the US out of Kyoto. Although the EU continued to buy CERs, its market alone could only absorb so much -- a factor that helped depress prices generally on its emissions trading system (ETS). Since March, the EU no longer accepts such international credits in the ETS, while few others seem keen on them either -- although airlines from 2020, and shipping later, could prove reliable buyers, perhaps preferring a broad, aligned system under the UN due to the international nature of their businesses (NE Aug.20'15). The CDM can claim some successes so far. According to the UN, the CDM helped facilitate 8,000 projects in 107 countries since it started in 2004, avoiding 1.5 billion tons of emissions and mobilizing investment of at least $400 million in developing countries -- China hosted around half of total projects, followed by India with 20.6% and Brazil, 4.4%. This may be a potential source of continued funding that could help the world get closer to the $100 billion yearly by 2020 that has been listed by many developing countries as a prerequisite for their agreement to a Paris climate pact. Although it might be considered comatose, the CDM still shows some signs of life -- with the announcement recently of a new CDM collaboration center for the Asia-Pacific region to help support countries in identifying and designing low-carbon projects. And in September a conference of the Latin American and Caribbean carbon forum is expected to examine the potential of the CDM -- and offsetting generally -- to leverage investments in low carbon projects, showcasing the positive experiences to date of schemes in the region. In another recent bit of encouraging news, the World Bank held a successful, inaugural carbon credit pilot auction in July for flaring -- which has helped in providing "a welcome boost" to the troubled CDM market, according to IETA. "This innovation offers a fresh approach to public-private partnerships as well as providing a lift to the CDM, helping to keep emissions-reducing projects [moving] forward in choppy economic times,” said Dirk Forrister, IETA’s CEO and President. It also shows a practical way that targeted government funds can leverage larger amounts of private money -- by reducing risks, it boosts investor confidence and mobilizes much needed capital, he added (NE Jun.18'15). Ronan Kavanagh, London

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