?Carbon markets on verge of collapse; require immediate rescue by nations, suggests UN Panel

by Dr. Prodipto Ghosh/Ritika Tiwari (TERI) | The Energy and Resources Institute
Wednesday, 10 October 2012 11:14 GMT

* Any views expressed in this article are those of the author and not of Thomson Reuters Foundation.

Carbon markets have proved instrumental for integrating the business community into the global effort to combat climate change through mitigation and in sensitizing the general public and nations alike about the issue. However, these markets are on the verge of collapse at present. The Clean Development Mechanism (CDM), a flexibility instrument created by the Kyoto Protocol in 1997, has been a key victim of such disintegration.  The carbon prices have fallen by 70% in the last one year and seem likely to fall further. Additionally, the world is moving away from multilateral market schemes to regional/national systems, without much thought of integration and harmonisation between them. To assess the impacts of the CDM, address the crisis in international carbon markets, and adapt the CDM to the future political and market conditions, a High Level Policy Dialogue was launched by the CDM Executive Board (EB) in 2011. Comprising of 11 distinguished panel members, the Policy Dialogue recently presented its findings to EB in Bangkok, in the form of 51 recommendations in 12 areas. To arrive at the recommendations, the Policy Dialogue followed a twin approach of reaching out to the CDM stakeholders and undertaking a targeted research. 28 official consultations and several informal meetings were conducted and a global call for input through the Policy Dialogue website was open throughout the process. This was augmented by a structured enquiry on 22 priority issues under three umbrella themes, namely Impact of the CDM, Governance and operations of the CDM, and Future Context in which the CDM could operate. Unlike the prevalent negative perceptions about the CDM, the panel’s research found that the CDM has had several positive impacts.  The instrument has resulted in issuance of over a billion CERs till date. It has led to US$ 3.6 billion savings for nations with mitigation targets under the Kyoto Protocol. In developing countries, the CDM has built capacity to realize the potential for mitigation in nationally appropriate ways. The current and upcoming domestic and regional Emission Trading Schemes (ETS) and Market Mechanisms in several countries such as South Korea, China, Brazil, etc., are an example of the growing interest and awareness among countries. Further, the CDM has helped incorporate the business community and general public into the global climate change mitigation effort. The skills developed in the form of verification agencies and consultants have helped in creating new job markets. The knowledge generated through the CDM, the vast volume of methodologies and standards set during the last decade, and the experience gained through the learning-by-doing architecture of the CDM will be extremely valuable in designing effective climate instruments in future. Thus, saving carbon markets in general and the CDM in particular is vital. The panel’s findings highlight that lack of demand due to lower mitigation ambition levels of countries is leading to corrosion of carbon markets. The mitigation targets taken up by developed countries no longer create strong incentives for private international investment and local action in developing nations. The collapse of carbon markets will lead to loss of the huge capacity that has been built in the last decade in developing countries. Hence, the panel strongly suggests that nations should come forward to stabilize carbon markets. To this effect, the panel has suggested Parties to investigate the possibility of formation of a new fund or enable existing or emerging funds to purchase and cancel part of the current overhang of CERs. They also proposed that the CDM EB could be authorized to use a portion of the financial reserves of the CDM to establish and commence the operations of this fund. Further, they recommended considering the establishment of an institution to serve as a reserve bank for CERs, charged with stabilizing the market. The panel has chalked down concrete measures for adapting the CDM to the changing landscape of climate change mitigation through linking with emerging mechanisms by common standards and rules that result in fungibility of credits issued by various schemes while avoiding double counting. Newer approaches like sectoral and REDD+ could also be piloted under the CDM to understand their impacts. Additionally, it suggests and defines the key operational and governance changes that are required in the present CDM to address the short term crisis in carbon markets and lay the foundation for effective operation of market mechanisms to contribute to addressing the issue of climate change. (The final report by the Panel can be accessed at www.cdmpolicydialogue.org) About the Authors: Dr. Prodipto Ghosh is a Distinguished Fellow at The Energy and Resources Institute (TERI) and former Secretary, MOEF and was one of the distinguished members of the CDM Policy Dialogue Panel. Ms. Ritika Tewari is a Research Associate at TERI and served as an Advisor to Dr. Ghosh in the Policy Dialogue process.