The collapse of carbon credit prices and the expiration of the Kyoto Protocol could hurt efforts to promote cleaner growth in the developing world
As climate change delegates meet in Doha for the United Nations climate change conference (COP18) they are facing a unique crisis: The developing countries’ most important pillar in the fight against climate change – and one the Kyoto Protocol’s biggest successes - is crumbling.
The Clean Development Mechanism (CDM) is the only tool many developing economies have to help reduce carbon emissions worldwide. The mechanism allows projects in these countries to reduce emissions and sell those reductions as carbon credits - Certified Emission Reductions (CERs) - to industrialized countries, who buy them to help meet their reduction goals.
In so doing, they’ve cut 1 billion tons of greenhouse gases since 2001, according to the United Nations. The CDM has also generated more than $215 billion in investments for the developing world.
But prices for the CER carbon credits have collapsed since June 2011 from 12 euros to less than 1 euro per ton. That places the whole mechanism at risk, and could sideline around 90 developing countries from the fight against global warming at the very moment when CDM projects are blooming.
The Clean Development Mechanism has its roots back in 1997 when the Kyoto Protocol assigned greenhouse gas reduction goals to industrialized countries. Industrialized countries could either cut emissions directly, or, if they couldn’t reduce emissions themselves, buy carbon credits from other countries that did.
Under the deal, developing countries do not have to reduce carbon emissions, something many feared could become a barrier to their economic growth.
As emissions produce impacts on a global scale, it doesn’t really matter where they are reduced. Under the CDM, industrialized countries look for emissions-reducing projects in developing countries and buy carbon credits from them to meet reduction quotas. Besides emission reduction, CDM aims to drive investment, allow technology and knowledge transfer and create sustainable grow for developing countries.
The Clean Development Mechanism was one mechanism of the Kyoto Protocol that took off, even as other efforts seemed to stall on many other fronts, experts say.
“We thought it might be a success if we get 50 projects a year - if everything works really well, 70 projects a year',” recalls Axel Michaelowa, senior founding partner of Perspectives GmbH, a consulting firm based in Zurich that specializes in carbon markets.
In 2011 alone, however, 2,740 projects were registered as CDM projects. Altogether, there have been more than 5,000 projects registered in the CDM in close to 90 developing countries, with China winning the majority of the funding and projects.
But in the last two years, the economics of this system have fallen apart. As Europe’s economy slows, power consumption is dropping and generating fewer greenhouse gas emissions.
This means that industrialized countries need fewer CERs to cover their emission quotas, and so the carbon credits produced by developing countries, are less in demand and less valuable, says Martin Gauss, from KommunalKredit Public Consulting GmbH, the institution in charge of managing the Austrian CDM programme. The uncertainty of future commitments has also affected demand, with the first period of the Kyoto Protocol set to expire at the end of December.
As the value of CERs fall, investments in clean projects in the developing world are likely to slow, Michaelowa says. Investors are less willing to back CDM projects that will generate CERs if those carbon credits are less valuable, he says.
With carbon credit prices below one euro, it is very difficult for a small project to even cover the transactions and registration costs required to be part of the Clean Development Mechanism, he says.
Many projects are also funded directly by revenue from the sale of CERs. In many cases, the carbon income is what allows these projects to be feasible and to be able to compete against other more attractive carbon-intensive alternatives.
In a report released in September 2012, the CDM Policy Dialogue, an independent high-level panel of climate and environmental policy experts, identified the current demand crisis as the greatest menace to the CDM.
The report calls for immediate action to stabilize the current supply and demand imbalance in the carbon market. The authors propose to improve demand by having larger emission reduction goals for industrialized (and also developing) countries, which besides saving the CDM would work toward more aggressive action against climate change.
Agreeing on that kind of course, however, could take years – as could developing a whole new market-based tool to replace the Clean Development Mechanism. By that time, the current mechanism could be dead, experts say.
In the shorter term, the CDM Policy Dialogue report says, the international community should prop up the market by buying CERs using resources from international climate funds to avoid a collapse.
Regardless of the outcome of Doha, experts believe the CDM must continue to exist. “It clearly has outperformed the other mechanisms by far” says Michaelowa. What is needed, he says, is certainty that the CDM “is not falling into a black hole, but that it has a long term future”.
Santiago Ortega Arango is a Colombian engineer and freelance journalist interested in climate change and renewable power issues. He is an associate professor at the Escuela de Ingeniería de Antioquia and a Fellow in Global Journalism at the Munk School of Global Affairs at the University of Toronto.
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