Archive for the ‘CDM’ Category

Final steps towards Paris?

The last ten days have seen a rush by nations to publish their Intended Nationally Determined Contributions (INDCs), with the much anticipated INDC from India amongst those submitted. On Monday October 5th, the Co-Chairs of the ADP also released a proposal for a first draft of a new climate change agreement for Paris. So it has been a very busy few days, but are we any closer to a deal and could that deal have sufficient ambition to bend the emissions curve?

The India INDC is telling as an indicator of where the developing world really is, versus where the rapidly emerging economies such as China now find themselves. In the case of the latter group, there is thinking towards an emissions peak with China indicating that this will be around 2030 and continuing signals from the academic and research community in that country indicating that it may well be earlier. One such article appeared recently in the Guardian. But for the much poorer developing countries the story remains very different.

The submissions from India is 38 pages long, but of this some 28 pages is supporting evidence and context, explaining the reality of Indian emissions, the need to grow the economy to take hundreds of millions out of poverty and the expected use of fossil fuels to power industry, including areas such as metal smelting, petrochemicals and refining. With a focus on efficiency in particular, India expects to achieve a 33 to 35 percent reduction in CO2 intensity of the economy, but in reality that means a rise in energy related emissions to around 4 billion tonnes or more by 2030, up from some 2+ billion tonnes per annum at present (1.954 Gt in 2012, IEA). This could be tempered by a further element of their contribution which aims to increase forest sinks by some 3 billion tonnes of CO2 in total through to 2030.

There has been considerable speculation as to the renewable energy component of India’s INDC, with a hope that this would show enormous progress in solar deployment in particular. The INDC took the somewhat unusual route of talking in capacity additions, rather than generation (and therefore emissions). India aims to achieve 40% cumulative electric power capacity from non-fossil fuel based resources by 2030. This is significant, but less than it might appear. In a very simple example where 100 GW of generating capacity is comprised of 40 GW solar PV and 60 GW coal, the generation mix might be around 14% renewables and 86% coal. This is assuming a 20% capacity factor for the solar PV (maximum is 50% with day-night) and 80% capacity factor for the coal.

India has also put a considerable price tag on their INDC, with a mitigation effort of some US$ 834 billion through to 2030. In a previous post I looked at the costs assumed in the Kenyan INDC, which came to some $25 billion, but for a population of ~60 million (average through to 2030). With a projected population of some 1.5 billion by 2030, the finance side is in the same ballpark as the Kenyan INDC, albeit on the higher side.

Finally, the last few days have seen new draft text appear – shortened dramatically from some 80 pages to a manageable 20. But references to government led carbon markets, carbon pricing systems or even the use of transfer mechanisms between parties are largely missing. Article 34 of the Draft Decision does hint at the need to rescue the CDM from the Kyoto Protocol by referring to the need to build on Article 12 of the Protocol, but it will be of little use if there isn’t substantial demand for credits in developing and rapidly emerging economies. Simply creating a new crediting mechanism or even bringing the CDM into the Paris agreement won’t on its own direct the finance to the likes of Kenya and India. That demand and related finance flow will only come if the developed and emerging economies are building emissions trading systems (such as in China) and have the ability and confidence to transfer units related to it across their borders. So a great deal of work remains to be done.



Accounting isn’t enough

As the World Bank and others ramp up the discussion on carbon pricing, heads are turning towards Paris with thoughts on how the issue will be incorporated into the expected COP21 global climate deal. I have said many times in the past that unless a carbon price makes its way into the whole global energy system, then its success in bringing down emissions is far from assured. While local carbon pricing wins will appear, the global effort could be undermined by a lack of global coverage.   This is true of other policy approaches as well, but in the case of carbon pricing there is the significant benefit of economic efficiency.  For me, the signs so far aren’t great, with the text that came out of the Geneva ADP meeting showing few signs of tackling this important issue.

In recent weeks I have heard some commentators and national climate negotiators argue that the Framework Convention itself is sufficient to underpin cooperative carbon market development and that all the COP21 deal needs is a framework to ensure that accounting of carbon based trades is robust and avoids issues such as double counting (two parties each counting a particular reduction under their own emissions inventory). The underpinning language within the Convention can be found in several places (examples below), but the references are oblique and without direct recognition of carbon pricing or carbon markets;

  • Efforts to address climate change may be carried out cooperatively by interested Parties;
  • These Parties may implement such policies and measures jointly with other Parties and may assist other Parties in contributing to the achievement of the objective of the Convention;
  • Coordinate as appropriate with other such Parties, relevant economic and administrative instruments developed to achieve the objective of the Convention;

While this language could be interpreted as a mandate to develop a global carbon market and the ensuing exchange of carbon pricing instruments between Parties, or companies within the jurisdiction of those Parties, it hardly encourages this process to take place, let alone become a key activity in implementing a global deal. Similarly, if a Paris deal just addresses accounting issues, I don’t believe that this will act as the necessary catalyst for carbon market development either. It’s a bit like agreeing how to calculate the GDP and then not opening the national mint to print and issue the currency!!

Looking back at the Kyoto Protocol, the Clean Development Mechanism provides some valuable learning. While it isn’t a comprehensive carbon pricing instrument the Protocol nevertheless catalysed its development with a few paragraphs of text, to the extent that it eventually pushed some $100 billion (some have estimated much higher levels) in project investment into various developing country economies. This far eclipses the $10 billion that has so far been pledged to the Green Climate Fund, clearly demonstrating that market based approaches will almost always outstrip direct public financing or funding.    To meet the developed countries’ commitment to mobilize $100bn per annum by 2020, it is clear that carbon market approaches including linking will be required.  It is difficult to see how it will be met without incentivizing the private sector in this way.

This is the sort of step that I think the negotiators in Paris need to take. Rather than just elaborating on core accounting principles, I believe that they need to incorporate a means of actively encouraging carbon market expansion. Given the nationally determined contribution based architecture that is emerging, such a development will probably be a bottom up process, perhaps with heterogeneous linking between various market based systems. The Harvard Kennedy School are offering valuable insight into how this might transpire.

One organisation, IETA, has put forward a proposal for Paris along these lines. It is a light touch approach, given the opposition that a real carbon market proposal seems to foster, but hopefully it will be enough to get things started. The IETA proposal calls for the development of a “unified international transfer system”, in effect a “plug-and-play” linkage approach for national trading systems. With wording along these lines in the Paris agreement, later COP decisions could establish the modalities for such a system, thus opening up and accelerating the process that the likes of California and Quebec went through to link their respective trading systems. Such modalities would include the common accounting framework that is needed irrespective of the approach taken to encourage the development of a global market. In all cases, accounting still remains central to progress.

I won’t claim that this is the quickest and most effective way forward, but it is where we are and probably the best that can be achieved, assuming the push from above is there to encourage it. Without such a push, we are all left to hope that something may transpire on carbon markets, but wishful thinking isn’t a solution to 2°C.

Brazil is back; but are they a decade late?

  • Comments Off on Brazil is back; but are they a decade late?

COP20 in Lima ended its first full week on a mixed note, but with some positive signs for the ongoing process. The detailed discussions on the role of carbon markets under the SBSTA ended in disagreement and postponement which was disheartening, but there remains hope that this key subject will still see the light of day under the ADP during the coming days. Curiously, China (and others) opposed deepening the market discussion at SBSTA because of a lack of guidance from the ADP itself, but according to the Earth Negotiation Bulletin they stated in the ADP when reflecting on the Paris Agreement non-paper (ADP.2014.11.NonPaper) that “sections on market and non-market approaches, and new market-based mechanisms could prejudge discussions under the Subsidiary Bodies”. They seem to be setting themselves up for their own private Catch-22 there. It was also unfortunate that those who will pick up the ongoing challenge posed by carbon emissions and climate change were reported on as follows; “YOUNGOs noted that markets have not delivered what they promised and called for a moratorium on markets.” Perhaps they have been reading Naomi Klein’s book “This Changes Everything”.

One document in particular that drew attention was a paper circulated by Brazil, detailing an idea they had proposed at the October ADP meeting. Brazil have a long history of creative intervention in the process, being the country that “invented” the Clean Development Mechanism (CDM), which over the decade of its operational life has delivered tens, if not hundreds of billions of dollars (depends on your measurement definitions) of carbon finance to developing countries. It appears that Brazil is back to its creative best with a paper on “concentric differentiation”, which draws together both the concept of CBDR-RC* and the need for universal acceptance and eventual implementation of absolute targets as the route to atmospheric stabilisation of carbon dioxide.

The paper is best described by referencing a diagram included by Brazil (see below). Initially the INDCs** of various parties are scattered throughout the circles depending on their capabilities, with all developed countries starting in the middle. The crucial change to previous attempts at agreement is the inclusion of the proposal;

“developing country parties are expected to include in their respective NDC a type of economy-wide mitigation targets, leading to absolute targets over time”

This means that everyone migrates inwards as their capabilities allow, but that developing country parties at least start with an emissions goal, albeit intensity based, per capita based or based on a business-as-usual (BAU) deviation. Least developed economies start in the outer ring and are encouraged, but not required to present an INDC. Eventually all parties end up with absolute targets in the middle.

Brazil concept

This is a very encouraging proposal by Brazil and it also includes an extensive reference to markets, cap-and-trade, a reformed CDM and so on. But without wanting to take away from the importance of their thinking, it does raise the question of whether it is a decade or more too late. This is the proposal that should have come when parties were negotiating onward commitment periods of the Kyoto Protocol (KP), thereby giving that agreement new life and making it fit for purpose in the 21st Century. Almost all the necessary pieces were already in place, it simply (!! – nothing is ever that simple) required the addition of the middle ring and the provisions for promotion.

In KP language, the centre ring is the AAU (Assigned Amount Unit) world, now only home to the EU, Norway, Australia and Ukraine. Even Japan has left. The outer ring is the CDM world, which relies on financial flows from the inner ring. A renegotiation and addition to KP could have inserted the middle ring and promotion requirements and even developed a new carbon accounting unit for intensity based targets. With all three rings based on carbon units, the much needed “global carbon market” could have taken off relatively quickly. Such a design might have even brought back countries such as the USA given that its objections regarding developing country actions would have been addressed.

One aspect of the Brazil proposal that has some traction in the ADP is the idea that “backsliding” on INDCs won’t be permitted. In other words, once you have declared an INDC with an absolute target, that is where you stay.

The Brazil proposal is for the ADP and not for the KP; which means that parties will have to reinvent everything from scratch. But at least Brazil is there with its creative input leading the way. On to Week 2 in Lima where the Parties are at least into the process of negotiating text, rather than negotiating the procedures under which they would even consider text.


* Common but differentiated responsibilities and respective capabilities

**Intended nationally determined contributions


A recent story in The Guardian expressed some optimism that “humans will rise to the challenge of climate change”. Ten reasons were given to be hopeful, but not one of them mentioned the climate basics such as a carbon price or carbon capture and storage. Rather, the offerings were largely tangential to the reality of rising CO2 emissions, with the hope that because European homes are using less energy and solar prices are dropping, then ipso facto, atmospheric CO2 levels would somehow stabilize (i.e. annual CO2 emissions falling to zero).  Without wanting to be pessimistic, but rather realistic, it may not be the case that emissions just fall and here are ten reasons why not. For those who visit this blog more regularly, sorry for the repetition, but hopefully this is a useful summary anyway.

1. There is still no carbon price

Although discussions about carbon pricing are widespread and there are large systems in place in the EU and California, pervasive robust pricing will take decades to implement if the current pace is maintained. Yet carbon pricing is pivotal to resolving the issue, as discussed here. The recent Carbon Pricing Statement from the World Bank also makes this point and calls on governments, amongst others, to work towards the goal of a global approach.

2. Legacy infrastructure almost gets us there

The legacy energy system that currently powers the world is built and will more than likely continue to run, with some parts for decades. This includes everything from domestic appliances to cars to huge chemical plants, coal mines and power stations. I have added up what I think is the minimum realistic impact of this legacy and it takes us to something over 800 billion tonnes carbon emitted to the atmosphere, from the current level of about 580 billion tonnes since 1750. Remember that 2°C is roughly equivalent to one trillion tonnes of carbon.

3. Efficiency drives growth and energy use, not the reverse

The proposition that energy efficiency reduces emissions seems to ignore the cumulative nature of carbon emissions and is apparently based on the notion that energy efficiency is somehow separate to growth and economic activity. What is wrong with this is that the counterfactual, i.e. that the economy would have used more energy but grown by the same amount, probably doesn’t exist. Rather, had efficiency measures not been taken then growth would have been lower and energy consumption would have been less as a result. Because efficiency drives economic growth, you have to account for Jevons Paradox (rebound). After all, economies have been getting more efficient since the start of the industrial revolution and emissions have only risen. Why would we now think that being even more efficient would somehow throw this engine into reverse?

4. We still need a global industrial system

In a modern city such as London, surrounded by towns and idyllic countryside with hardly a factory in sight, it’s easy to forget that an industrial behemoth lurks around the corner producing everything we buy, eat, use and trade. This behemoth runs on fossil fuels, both for the energy it needs and the feedstock it requires.

5. Solar optimism

There’s little doubt that solar PV is here to stay, will be very big and will probably be cheap, even with the necessary storage or backup priced in. But it’s going to take a while, perhaps most of this century for that to happen. During that time a great deal of energy will be needed for the global economy and it will come from fossil fuels. We will need to deal with the emissions from this.

6. Developing countries need coal to industrialize

I talked about this in a very recent post – developing countries are likely to employ coal to industrialize, which then locks the economy into this fuel. One way to avoid this is to see much wider use of instruments such as the Clean Development Mechanism, but at prices that make some sense. This then comes back to point 1 above.

7. We focus on what we can do, but that doesn’t mean it’s the best thing to do

Methane emissions are currently attracting a great deal of attention. But cutting methane today and not making similar reductions in CO2 as well means we could still end up at the same level of peak warming later this century. It’s important to cut methane emissions, but not as a proxy for acting on CO2.

8. It’s about cumulative carbon, not emissions in 2050

Much of the misconception about how to solve the climate issue stems from a lack of knowledge about the issue itself. CO2 emissions are talked about on a local basis as we might talk about city air pollution or sulphur emissions from a power plant. These are flow problems in that the issue is solved by reducing the local flow of the pollutant. By contrast, the release of carbon to the atmosphere is a stock problem and the eventual stock in the atmosphere is linked more to the economics of resource extraction rather than it is to local actions in cities and homes. Thinking about the problem from the stock perspective changes the nature of the solution and the approach. One technology in particular becomes pivotal to the issue, carbon capture and storage (CCS).

9. Don’t mention CCS, we’re talking about climate change

Following on from the point above, it’s proving difficult for CCS to gain traction and acceptance. This is not helped by the UN process itself, where CCS doesn’t get much air time. One example was the Abu Dhabi Ascent, a pre-meeting for the upcoming UN Climate Summit. CCS wasn’t even on the agenda.

10. We just aren’t trying hard enough

A new report out from the MIT Joint Program on the Science and Policy of Global Change argues that the expected global agreement on climate change coming from the Paris COP21 in 2015 is unlikely to deliver anything close to a 2°C solution. At best, they see the “contributions” process that is now underway as usefully bending the global trajectory.

The analysis shows that an agreement likely achievable at COP-21 will succeed in a useful bending the curve of global emissions. The likely agreement will not, however, produce global emissions within the window of paths to 2050 that are consistent with frequently proposed climate goals, raising questions about follow-up steps in the development of a climate regime.

Perhaps of even greater concern is the potential that the UNFCCC process has for creating lock-in to a less than adequate policy regime. They note:

Nevertheless, if an agreement is reached in 2015, going into effect by 2020, the earliest review of performance along the way might not be before 2025. In this case, an effort to formulate the next agreement under the Climate Convention, or a tightening of COP-21 agreements, would not start until 2025 or after, with new targets set for a decade or more after that. If this expectation is correct, then global emissions as far out as 2045 or 2050 will be heavily influenced by achievements in the negotiations over the next 18 months.



While all fossil fuels are contributing to the accumulation of carbon dioxide in the atmosphere, coal stands apart as really problematic, not just because of its CO2 emissions today (see chart, global emissions in millions of tonnes CO2 vs. time), but because of the vast reserves waiting to be used and the tendency for an emerging economy to lock its energy system into it.

Global energy emissions

Global emissions, million tonnes CO2 from 1971 to 2010

I recently came across data relating to the potential coal resource base in just one country, Botswana, which is estimated at some 200 billion tonnes. Current recoverable reserves are of course a fraction of this amount, but just for some perspective, 200 billion tonnes of coal once used would add well over 100 billion tonnes of carbon to the atmosphere and therefore shift the cumulative total from the current 580 billion tonnes carbon to nearly 700 billion tonnes carbon; and that is just from Botswana. Fortunately Botswana has quite a small population and a relatively high GDP per capita so it is unlikely to use vast amounts of this coal for itself, but its emerging neighbours, countries like Zimbabwe, may certainly benefit. This much coal would also take a very long time to extract – even on a global basis it represents over 25 years of use at current levels of production.

This raises the question of whether a country can develop without an accessible resource base of some description, but particularly an energy resource base. A few have done so, notably Japan and perhaps the Netherlands, but many economies have developed by themselves on the back of coal or developed when others arrived and extracted more difficult resources for them, notably oil, gas and minerals. The coal examples are numerous, but start with the likes of Germany, Great Britain, the United States and Australia and include more recent examples such as China, South Africa and India. Of course strong governance and institutional capacity are also required to ensure widespread societal benefit as the resource is extracted.

Coal is a relatively easy resource to tap into and make use of. It requires little technology to get going but offers a great deal, such as electricity, railways (in the early days), heating, industry and very importantly, smelting (e.g. steel making). In the case of Great Britain and the United States coal provided the impetus for the Industrial Revolution. In the case of the latter, very easy to access oil soon followed and mobility flourished, which added enormously to the development of the continent.

But the legacy that this leaves, apart from a wealthy society, is a lock-in of the resource on which the society was built. So much infrastructure is constructed on the back of the resource that it becomes almost impossible to replace or do without, particularly if the resource is still providing value.

As developing economies emerge they too look at resources such as coal. Although natural gas is cleaner and may offer many environmental benefits over coal (including lower CO2 emissions), it requires a much higher level of infrastructure and technology to access and use, so it may not be a natural starting point. It often comes later, but in many instances it has been as well as the coal rather than instead of it. Even in the USA, the recent natural gas boom has not displaced its energy equivalent in coal extraction, rather some of the coal has shifted to the export market.

Enter the Clean Development Mechanism (CDM). The idea here was to jump the coal era and move directly to cleaner fuels or renewable energy by providing the value that the coal would have delivered as a subsidy for more advanced infrastructure. But it hasn’t quite worked that way. With limited buyers of CERs (Certified Emission Reduction units) and therefore limited provision of the necessary subsidy, the focus shifted to smaller scale projects such as rural electricity provision. These are laudable projects, but this doesn’t represent the necessary investment in large scale industrial infrastructure that the country actually needs to develop. Rooftop solar PV won’t build roads, bridges and hospitals or run steel mills and cement plants. So the economy turns to coal anyway.

This is one of the puzzles that will need to be solved for a Paris 2015 agreement to actually start to make a difference. If we can rescue a mechanism such as the CDM and have it feature in a future international agreement, it’s focus, or at least a major part of it, has to shift from small scale development projects to large scale industrial and power generation projects, but still with an emphasis on least developed economies where coal lock-in has yet to occur or is just starting.

Emissions Trading via Direct Action in Australia

  • Comments Off on Emissions Trading via Direct Action in Australia

The Australian Government recently released a Green Paper describing in more detail its proposal for an Emission Reduction Fund (ERF), the principle component of its Direct Action climate policy. The ERF will sit alongside renewable energy and reforestation policies, but is designed to do the bulk of the heavy lifting as the Government looks for some 430 million tonnes of cumulative reductions (see below) over the period 2014 to 2020. The ERF will have initial funding of about AU$ 1.55 billion over the forward period, with the money being used to buy project reductions (as Australian Carbon Credit Units or ACCUs) from the agriculture and industrial sectors of the economy by reverse auction. These reductions will be similar to those that are created through the Clean Development Mechanism (CDM) available under the Kyoto Protocol.

 Australia Reduction Task to 2020

Although the fund and reverse auction process are discussed in some detail and appear as central to the policy framework, this may not be the case as the system is rolled out and the full framework developed. The issue that comes from such an approach to emissions reduction is that despite buying project reductions from the economy, the overall emissions pathway for the economy as a whole still does not follow the expected trajectory. The ERF may also encounter a number of issues seen with the CDM, all of which are some form of additionality;

  1. Determining if there would have been higher emissions had the project not happened. Perhaps the reduction is something that would have happened anyway or the counterfactual position of higher emissions would never have actually happened. For example, an energy efficiency gain is claimed in terms of a CO2 reduction but the efficiency gain is subject to some amount of rebound due to increased use of the more efficient service, therefore negating a real reduction in emissions. Further, the counterfactual of higher emissions might never have existed as the original less efficient process would not have operated at the higher level.
  2. Double counting – the project presumes a reduction that is already being counted by somebody else within the economy as a whole. For example, an energy efficiency gain in a certain part of the supply chain is claimed as an emissions reduction, but this is already intrinsic to the overall emissions outcome for another process.
  3. Rent seeking – project proponents seek government money for actions already underway or even construct an apparent reduction.

The Australian emissions inventory will be measured bottom up based on fuel consumption, changes in forest cover and land use and established estimates / protocols for agriculture, coal mine fugitive emissions, landfill etc. It will not be possible to simply subtract the ERF driven reductions from such a total unless they are separate sequestration based reductions, e.g. soil carbon. This is because the ERF reductions are themselves part of the overall emissions of the economy.

The Green Paper clearly recognizes theses issues and proposes that the overall emissions pathway through to 2020 must be safeguarded. In Section 4 it discusses the need for “An effectively designed framework to discourage emissions growth above historical levels . . . “, with associated terminology including phrases such as “covered entities”, “baseline emission levels”, “action required from businesses” and “compliance”.  The safeguarding mechanism, rather than being a supplementary element of Direct Action, could end up becoming the main policy measure for decarbonisation if significant CO2 reductions are not achieved under the ERF. While this may not be the objective that the Government seeks, it does mean that the implementation of the safeguard mechanism needs to incorporate the design thinking that would otherwise be applied to the development of intended emission trading systems, such as the Alberta Specified Gas Emitters Regulation.

As currently described, the safeguarding mechanism looks like a baseline-and-credit system, with the baseline established at facility level either on an intensity or absolute emissions basis (both are referred to in the Green Paper). Should a facility exceed the baseline it could still achieve compliance by purchasing ACCUs from the market, either from project developers or other facilities that have over performed against their own baselines. Although the Government have made it very clear that they will not be establishing a system such as cap-and-trade that collects revenue from the market, facilities will nevertheless face compliance obligations and may have to purchase reduction units at the prevailing market price.

The level of trade and the need for facilities to purchase ACCUs will of course depend on the stringency of the baselines and this remains to be seen, however in setting these the Government will need to be mindful of the overall national goal and its need to comply with that. The development of a full baseline and credit trading system also raises the prospect of the market out-bidding the Government for ACCUs, particularly if the Government sets its own benchmark price for purchase, as is indicated in the Green Paper.

As Australia moves from a cap-and trade system under the Carbon pricing Mechanism (CPM) to the ERF and its associated safeguarding mechanism, the main change for the economy will be distributional in nature, given that a 5% reduction must still be achieved and the same types of projects should eventually appear. However, the biggest challenge facing any system in Australia could be around speedy design and implementation, given that the time remaining before 2020 is now very limited and the emission reduction projects being encouraged will themselves take time to deliver.

While there was plenty of talk at COP 19 about financing, national ambition, increasing pre-2020 ambition and adaptation, another core subject that struggled for high-level attention (the other one being CCS) was the idea of carbon pricing, specifically delivered through carbon markets. This is one of those subjects that an observer of the process would expect to see appearing in almost every discussion, yet it didn’t make it out of the SBSTA working group meetings. This meant that the high level discussions towards the end of the COP (when the national delegations are typically bolstered by the presence of a Minister) didn’t get to hear about carbon pricing at all (or CCS).

There is no doubt that carbon pricing appears on many national agendas, with of course the EU leading that trend through the 2005 start of the EU ETS. Parts of the US and Canada, New Zealand, Kazakhstan (pilot phase) and a few others have already incorporated carbon pricing within parts of their energy systems and China, South Africa and others are in various stages of preparing for it. These are positive developments, but carbon pricing really only works at its most efficient when coverage is both widespread and coordinated, otherwise leakage (in various forms), arbitrage and rent-seeking can undermine local implementation. Further to this and as I have discussed in previous postings, if carbon pricing isn’t a core element of the eventual climate policy framework, then emissions may not go down at the necessary rate or if they do decline it will likely be at a much higher cost than would otherwise have been necessary.

Carbon pricing is also the potential lever for large scale financing of mitigation projects, as has been seen to some extent with the CDM. By far the largest flow of finance to projects in developing countries has come through the application of the CDM and subsequent sale of CERs on international markets, not through public financing of projects through funds, development aid and the like. While these latter approaches are also important, they will never be sufficiently large or aggressive enough to underpin the scale of global mitigation required. Well over a billion CERs have been created since the start of the CDM, which equates to some $10 billion in carbon financing and possibly $30-$70 billion in underlying project financing.  But even discussions on the CDM in Warsaw were lacklustre, with some CDM negotiators continuing to think and operate as if the year was 2006 and demand for CERs was on an rise. At the beginning of the Warsaw talks, there was some discussion amongst negotiators about having the Green Climate Fund (GCF) utilise the CDM as a results-based financing tool, and allowing the CDM to become a ‘net mitigation tool’ for non-Annex 1 countries to utilise as they prepare for tabling contributions next year and in 2015. In the end, no such language emerged from Warsaw, which raises the prospect of even this mechanism struggling to survive in the post 2015 world.

One could argue that carbon pricing is simply part of national implementation and therefore shouldn’t feature at the UNFCCC level, but as noted above, that is not an efficient approach. There is a potential role for the UNFCCC to create a framework which both encourages the use of carbon pricing and coordinates its implementation through linkage, leading eventually to the much desired “global carbon market”. Within the current negotiations, the only place a UNFCCC role might be created is through the New Market Mechanism (NMM) within the Framework for Various Approaches (FVA). Some thoughts on this can be found here (Carbon Pricing, the FVA and the NMM), where the FVA/NMM is proposed to include a linking framework for all countries to use.

 NMM and FVA

There is also a second argument that linkage can be achieved bilaterally, such as California and Quebec have negotiated and Australia had proposed with the EU (presumably now defunct given the repeal of carbon legislation now underway in Australia). But bilateral linkage runs its course very quickly before multilateral discussions are required. For example, if Quebec now reached out to another party to link to, California would have to be involved given the existing link, so a trilateral discussion would be needed. This would quickly get very complex and large potential linking partners such as the EU would have to shift to a multilateral approach of some description.

So what happened to carbon markets in Warsaw? The short answer is not much.

The FVA and NMM discussions ground to a standstill in the first week. Concerns about basic form and function of the FVA dogged the discussion, compounded by other concerns relating to whether these were pre or post 2020 mechanisms. In the end, the FVA and NMM discussions were postponed until the regular SBSTA meetings in June. The UNFCCC posting on the FVA and NMM in Warsaw shows nothing more than the input documents that were available prior to the COP, with no conclusions whatsoever.

On a positive note this delay at least offers more time to develop FVA and NMM thinking along the “carbon market” lines outlined above, rather than have a weak agreement that precludes such a possibility and leaves them languishing as information sharing bodies – an entirely possibly outcome from this process. But the lack of attention to carbon pricing and carbon markets in the context of a global deal that is meant to rapidly drive down global emissions is worrying. There remains of course the sterling efforts of the World Bank and their Partnership for Market Readiness, but initiatives such as these won’t be sufficient without some overarching policy action to create the markets in the first place.

Linking discussions continue

  • Comments Off on Linking discussions continue

With the election of a new government in Australia and their promise to discontinue the “carbon tax”, the much discussed link between the Australian ETS and the EU ETS looks to be in doubt. As this is the highest profile example of bilateral linking, one might then think that the subject would die. Quite the contrary if you attended Carbon Forum North America last week, where linking continues to be a major preoccupation with carbon market aficionados.

The scene was set at CFNA when the Quebec Environment Minister used the conference to officially announce the link between cap-and-trade systems in California and Quebec. Although this has clearly been in the works for a while, the deal is now done. There were various other discussions about linking, but a particularly interesting panel session involved the World Bank where they tabled a completely new idea that could either be impossibly difficult to implement or could revolutionise the global carbon market – at this stage it is hard to assess which end of the spectrum we might be at. Nevertheless, it is an idea with real merit and worth thinking about or even piloting.

The World Bank takes the view that despite the best of intentions, market based emissions management systems (such as cap-and-trade or baseline-and-credit) will only rarely be close enough in design and underlying ambition to cleanly link and that as countries with existing bilateral links try to link with others (and therefore link the system that they are already linked with to another one by default), progress will grind to a standstill. Therefore, something else is needed. Their idea is to introduce a ratings system into the mix, with individual market based instruments being rated in a similar way to sovereign ratings by the likes of Standard and Poor’s.

For example, a tight cap-and-trade system with limited offset use and high ambition (i.e. a sharply declining cap) might have its allowances rated at 0.9 (like a national AAA  or AA+ rating), compared with a baseline-and-credit system with credits rated at 0.3 because such a system is not as environmentally tight due to its inherent intensity basis. Trade between the two would be possible, but three external credits would be needed for compliance instead of one internal allowance in the cap-and-trade system. Many different systems could then link without the need for perfect design alignment. Ratings applied in this way could solve the problem that the EU Commission has had with its on / off approach to CERs from the Clean Development Mechanism.

In the World Bank model the ratings would be handled by a private agency and the decision to use them would be a sovereign one, both by the country hosting a market based system that wishes to import other instruments for compliance and by any country that creates carbon instruments deciding that they can be exported for external use.

The World Bank proposed two other legs to a three part system, a settlement platform and an international carbon reserve. The latter would be a pool of carbon instruments that could be drawn on by any participating nation and would be created by a standardised contribution by all participants. This latter point is important in that if a nation’s carbon market compliance instrument is downgraded, they would need to contribute more of them to the pool to maintain the same standardised amount within it.

This idea was proposed as something that could commence today, outside the UNFCCC process. The alternative of waiting for some 190 countries to agree a common methodology when some don’t even recognise the idea of a market based approach has a high risk of failure (at least to the extent that it would deliver the infrastructure required for a global carbon market).

A lot of water will pass under the bridge before something like this gets going, but it was good to see new and original thinking in this area.

Expectations for COP 18 in Doha

This week sees the start of the 18th Conference of the Parties of the UNFCCC, or COP18 for short, in Doha, Qatar. This should be a busy transitional COP, with much on the agenda to resolve and important steps forward being taken toward a long term international agreement. But procedural issues, agenda disagreements and fundamental sticking points could still dominate, leading to a two week impasse. Let’s hope not.

At the core of the process lie three work streams which have evolved over many years.

The oldest of these is the discussion on the Kyoto Protocol (KP), which has now been running in one form or another for most of the twenty year history of the UNFCCC. Discussion on a second commitment period (KP2) over the past years have embodied the toughest issues in the climate negotiations, such as the role of developing countries in reducing emissions, engagement with North America (neither Canada or the United States will participate going forward) and the need to put a robust price on CO2 emissions. I am a big fan of KP, despite its shortcomings. It was designed with carbon pricing as its central theme, allowed countries to trade to find lowest cost abatement pathways and through its architecture encouraged signatories to implement cap-and-trade based policy frameworks within their respective economies. The simple but clever ideas within it have not been matched since in terms of effectiveness and efficiency despite years of negotiations. Given sufficient willingness, there are clearly routes forward by which KP could evolve to become the much sought after “21st Century global agreement”, but instead it is reaching the end of its shelf life. There seems to be no resolution with North America under this banner, developing countries appear reluctant to let it be the approach to govern their much needed actions and even the country of its namesake city is unwilling to sign again on the dotted line. Australia and the EU remain as the KP bedrock, if for no other reason than to rescue the CDM and consummate their carbon market linkage with a common approach to accounting, offsets and single market currency (AAUs and CERs). The parties do need to agree on KP2, despite the lack of critical mass, and then roll forward its inherent carbon market architecture into the new grand design.

Next comes the discussion on long term cooperative action, or LCA, a workstream which appeared in 2007 at the Bali COP and is home to a broad range of developments from the Green Climate Fund (GCF), the Nationally Appropriate Mitigation Action (NAMA), the much discussed New Market Mechanism (NMM) and more recently the Framework for Various Approaches (FVA). It was meant to deliver the grand deal at Copenhagen in 2009 but didn’t and now labours on with many loose ends and partially thought through ideas which have not been implemented or even fully negotiated. Nevertheless it has been a useful testing ground for new thinking, but has not yet delivered any real mitigation action. It needs to stop now, but difficult issues remain such as the funding of the Green Climate Fund and the modalities for actually spending any money that may arrive in its coffers. These spinoffs from the LCA will need to continue under one of the Subsidiary Bodies or within the ADP (see below) discussions, but the parent discussion should be put to rest in Doha.

Now comes “the new hope”, the Durban Platform for Enhanced Action. For some, the parties at COP17 simply kicked the can 9 years down the road knowing that little new progress would be made, but for many this represents a much needed and major reboot of the process after years of making almost no progress at all on the respective roles of developed, emerging and developing economies. As Harvard’s Rob Stavins noted in his blog of January 2012;

Now, the COP-17 decision for “Enhanced Action” completely eliminates the Annex I/non-Annex I (or industrialized/developing country) distinction.  It focuses instead on the (admittedly non-binding) pledge to create a system of greenhouse gas reductions including all Parties (that is, all key countries) by 2015 that will come into force (after ratification) by 2020.  Nowhere in the text of the decision will one find phrases such as “Annex I,” “common but differentiated responsibilities,” or “distributional equity,” which have – in recent years – become code words for targets for the richest countries and a blank check for all others.

We should not over-estimate the importance of a “non-binding agreement to reach a future agreement,” but this is a real departure from the past, and marks a significant advance along the treacherous, uphill path of climate negotiations.

Although there have been some opening salvos fired in the ADP (Ad-Hoc Working Group on the Durban Platform for Enhanced Action) in various inter-sessional meetings this year, the heavy lifting for this work stream needs to start at COP18. In recent months the IEA, the World Bank, PWC and others have all made it abundantly clear that unless some truly meaningful progress is made in the sort term, the 2 deg.C goal will pass us by (it may already have) and that before we know it we will be looking at a 4 deg.C outcome, along with all its consequences. Even the timetable for the ADP, which seeks to reach agreement by 2015 for implementation in 2020 is problematic in terms of the need for immediate action, but it is what it is.

The ADP needs to define a work programme that embraces the five primary strands of action coming out of the KP and LCA, namely;

  • National action defined through specific targets, goals and actions, but aligned with the overarching mitigation objective. This would also include REDD.
  • An underlying carbon market infrastructure as currently embodied by the KP but adapted to the applicable framework for mitigation action. Without an evolving price on carbon in the international energy markets, mitigation action will stall. This work stream should also pick up the NMM discussion.
  • A funding mechanism that can leverage private sector finance for kickstarting technologies and helping less developed economies invest in a low carbon pathway forward. This is the GCF.
  • A continuation of the work of the TEC and CTCN to share knowledge and best practice arising from technology implementation.
  • A robust approach to adaptation.

Recently the World Business Council for Sustainable Development resurfaced work that it undertook back at the start of the LCA, but which is highly relevant to the first of the two prospective work areas above. “Establishing a Global Carbon Market” looks at how the substance of the KP carbon market can be applied much more broadly to an evolving world of various approaches.

The above represents a tall order for two weeks work, but with some 10,000 people in tow there is certainly enough labour at hand to get this heavy lifting done. A refined single track approach will bring much needed focus back to the discussions which then paves the way for at least some hope that the 2015 goal for a new agreement can be met. In summary, the big asks for this COP are:

  1. Agreeing a continuation of the Kyoto Protocol through to 2020 and then politely ushering this Grand Dame of the UNFCCC off the stage with some reverence and applause.
  2. Bringing closure to the LCA work programme and shifting some key components (e.g. GCF, TEC) into the formulation of the ADP.
  3. Establishing a clear work programme for the ADP, which incorporates as a priority, the foundations for a continuing and evolving global carbon market.

Good luck and success to all the delegates.

In search of a new home for CERs

Two recent publications highlight the challenges ahead in the multilateral process that continues to seek an equitable global approach to the issue of growing CO2 emissions. But comparing and contrasting them illustrates the contradictions that exist as negotiators attempt to maintain existing structures and work within the spirit of the Durban agreements.

Two weeks ago, a major report issued by the High Level Panel on the CDM Policy Dialogue recommended a very broad range of actions for stabilizing and reversing the ongoing price collapse in the CER market (Certified Emission Reduction, the carbon unit within the CDM), with a view of re-establishing the CDM as the cornerstone of the global carbon market and thereby kicking off a further round of emissions mitigation action.

This week, the Harvard Project on Climate Agreements issued a policy brief  which outlines the shape of the new paradigm that the UNFCCC process has hopefully entered following the creation of the Durban Platform for Enhanced Action at COP 17 last December. Their ambitious interpretation of the agreement sees the Berlin Mandate effectively consigned to history (which enshrined the notion that emission reduction was effectively the responsibility of developed countries and which led to the 95-0 vote on the Byrd-Hagel Resolution in the United States Senate) and a new order emerging which results in all countries acting to manage emissions. There is no doubt that the latter interpretation is the only one that makes sense, but only time will tell if this represents the new reality. The Harvard think piece ends with the challenge;

Having broken the old mold, a new one must be formed. A mandate for change exists. Governments around the world now need fresh, outside-of-the-box ideas, and they need those ideas over the next two to three years. This is a time for fundamentally new proposals for future international climate-policy architecture, not for incremental adjustments to the old pathway.  We trust that this call will be heard by a diverse set of universities, think tanks, and advocacy and interest groups around the world.

Rescuing the CDM as recommended by the Policy Dialogue is a laudable ambition, but perhaps falls into the category of “incremental adjustments to the old pathway” rather than “outside of the box ideas”. Conversely, the Policy Dialogue proposal is attempting to stave off the collapse of the very idea of “carbon markets” by rescuing the one global example of their application. While “out of the box” thinking is certainly welcome, it is also hard to argue that we are done with carbon pricing/markets and now need something new. In fact, carbon pricing remains core to the solution.

As such, we end up with the dichotomy of needing new ideas but not wanting to see the structures of the past slip through our fingers; but should we mind that they institutionalize some of the ideas within the Berlin Mandate?

The CDM was a bold idea when conceptualized in the Kyoto Protocol, starting with the simple phrase;

A clean development mechanism is hereby defined.

But has it reached its use-by date and should it be consigned to the dustbin along with the Berlin Mandate? Unfortunately the answer is both “yes” and “no”. It does represent an era of action and financing being the responsibility of developed countries only, which is no longer a tenable paradigm within which to operate. It was designed to help developed countries meet their mitigation goals and to channel funding from developed to developing countries for the purpose of sustainable development. Yet it did demonstrate a mechanism which allowed a broader range of actors to get involved in the carbon market than those immediately impacted by the cap on allowances. This has become a design feature of more recent cap-and -trade systems, albeit with home grown offset systems.

The solution for the CDM, both to rescue the market today and to prepare it for the “out of the box” solution of tomorrow, must be to disentangle it from the Kyoto Protocol and make it available as a general offset resource under the UNFCCC, perhaps even one that any nation could use when it wants to involve part of its economy in the market without actually applying a cap to it (such as the farming sector in Australia).

Considerable resource is required to establish an offset mechanism, both in design and operation. Reinventing this multiple times around the world hardly seems like the best use of government resources, but that is what is happening. Unshackling the CDM wasn’t discussed in the Policy Dialogue report, perhaps because it then enters into the complex realm of Kyoto Protocol politics. The closest it got to this was a proposal to broaden the use of CERs.

To unlock the full potential of the CDM, all countries should be enabled to use CERs, not only those with mitigation targets under the Kyoto Protocol.

But the Kyoto Protocol represents the Berlin Mandate and, according to the Harvard Project, the new paradigm is a world without such a legacy. It also makes little sense under the accounting rules of the Kyoto Protocol to have other parties dipping into that market when their compliance obligation may be governed by another system. This leaves only the more radical approach of decoupling the CDM from the Kyoto Protocol, but then following the recommendations of the Policy Dialogue to broaden its scope and expand its use.

This also takes the CDM into the world of another discussion, that of the New Market Mechanism. Under such an approach, the CDM could migrate to become the NMM, but for all nations to use within the design of their emission trading systems.