Saving the CDM

Throughout the middle of May, the Parties to the Paris Agreement met in Bonn to continue negotiations relating to its implementation. Of particular interest to me were the discussions pertaining to Article 6, which contains the slightly opaque wording on transfers and mechanisms that could usher in a global carbon market.

While there was considerable emphasis on the respective roles of Article 6.2 (transferable mitigation outcomes) and 6.4 (a new emissions mitigation mechanism), quite some time was also spent on a legacy of the previous global deal, that being the Clean Development Mechanism of the Kyoto Protocol (CDM). It has now been twenty years since the CDM was first described and it has been operating in earnest for about half that time. Over 8000 CDM projects have been registered, representing some $300 billion of clean energy and emissions reduction investment, leading to the issuance of about 1.6 billion CERs so far (Certified Emission Reduction units). One estimate claims that the CDM has had a material impact on global emissions, with reductions of nearly 500 million tonnes CO2e in 2014, or 1% of global emissions – i.e. without the CDM global emissions would be 1% higher.

But the CDM has been fraught with problems, the most dramatic being a substantial fall in demand for the emission reductions that it offers; hence CERs now trade for just a few pennies per tonne of CO2. This is because of the failure of nations to seriously engage in the Kyoto Protocol and for those that did, such as the EU, the end result was the eventual cessation of imports of CERs into their economies. This led to the collapse of many project developers, the failure of hundreds of projects and a backlog of CERs that could still be issued for further trading. A great deal of time, money and political capital has been invested in getting the CDM to where it stands today, so not surprisingly there is some ill feeling over its demise and some attempts to recoup losses before moving on to something new.

So in Bonn, as negotiators pondered new arrangements under the Paris Agreement, questions were also raised about the CDM. For example;

• Would it continue under the Paris Agreement?
• Could the CERs it produced be carried forward as reductions under the Paris Agreement?
• What would happen if existing projects continued to generate CERs yet sat within a Nationally Determined Contribution (NDC)?
• Could the CDM be incorporated under Article 6.4?
• Should Article 6.4 simply be a continuation of the CDM?

These are all valid questions, but there is also a risk that attempting to answer them and accommodate all Parties that have either invested in or received investment from CDM activities, might actually hamper the development of Article 6 itself. A broad solution for the CDM is needed.

Perhaps it is first worth considering whether demand will ever materialise for project based reductions? The initial concept of credits flowing into an emissions trading system and easing the local hunt for reductions has been severely challenged by the experience in the EU. In that system, the CDM added to an already growing allowance surplus, resulting in a depressed carbon price and triggering efforts to correct the system. Although domestically produced offsets feature in systems such as the California cap-and-trade, the unchecked flow of credits into large systems is unlikely to be the design model of the future. That leaves demand for credits coming from uncapped offset systems such as aviation’s CORSIA, but these are unlikely to be large enough to absorb the potential global supply of reductions. The global shipping industry may also establish a similar system at some point. In the longer term, international demand for reductions, but particularly those involving removal of carbon either directly or indirectly from the atmosphere, ought to materialize. It is highly unlikely that the end goal of net-zero emissions can be realized across the entire energy system without some form of carbon unit trading.

Long term credit demand around the net zero emissions goal points to the need for Article 6.4 as a means of generating such units, as well as Article 6.2 to introduce the necessary accounting behind their transfer. But there is some distance to travel between the CDM as it is today and such an end point. A first step perhaps lies within 6.2 which will establish the accounting procedure for cross border transfers of mitigation outcomes. That procedure will require an adjustment to both the NDC supplying the units and the NDC receiving them. Although the CDM was not devised along such lines, the only real possibility for allowing it to continue (or potentially wind down but still generating remaining units) will be to invoke such an accounting procedure. This would bring rigour to the origination of the units and give recipient countries the confidence that a global reduction in emissions had taken place. It would also encourage many developing countries to move rapidly towards quantification of their NDCs, which would then encourage further investment and trade around mitigation.

But the real salvation for the CDM lies with the Parties and their desire to create real demand and trade by invoking the full spirit of the Paris Agreement. Without a concerted effort to reduce global emissions through real policy implementation, there will be no market for such instruments.