European nations pledge limited support to ailing UN carbon scheme

by Ben Garside and Susanna Twidale | Reuters Point Carbon
Thursday, 26 September 2013 08:39 GMT

A Tibetan monk makes lunch with a simple solar energy stove at Longwu monastery in Tongren, Qinghai province, China, Oct. 22, 2009. REUTERS/Jason Lee

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LONDON, Sept 25 (Reuters Point Carbon) - A handful of European governments have thrown the U.N.’s main market to cut greenhouse gas emissions a lifeline by pledging to finance emission reduction projects that are viewed by the private sector as unprofitable.

Great Britain, Germany, Sweden, Norway and Belgium plan to pay more than current market prices for carbon credits known as Certified Emission Reductions (CERs) from emission reductions projects registered under the Clean Development Mechanism (CDM) in the world's least developed countries.

Such projects include distributing clean cookstoves to households and installing renewable power to electrify rural areas.

The aim is to keep the scheme alive until credit prices that have crashed to 70 cents from over 20 euros in four years recover enough to attract private sector investment.

Government officials and observers say the cash is not enough to dent the current surplus of over 1 billion U.N. carbon credits that caused the price collapse, dashing hopes of fully reviving the system that has raised over $215 billion for developing nations.

“There are still governments that believe in the CDM, and are looking to use it more as a tool for development aid rather than a way to get the cheapest CO2 reductions possible,” said Alexander Savelkoul, of consultancy Panorama Energy, which manages the CDM project portfolio of Germany-based trading house Mabanaft.


The CDM allows investors in emission reduction projects located in poor nations to earn carbon credits that can then be used by governments and companies to offset their emissions and make it cheaper to meet curbs.

Historically the largest source of demand for CERs has come from the EU’s Emissions Trading Scheme, although to encourage companies to cut their own emissions instead of offsetting them the EU has limited the number they can use.

And with no new global treaty forcing nations to cut emissions likely before the next decade, prices for offsets will likely remain below the 5 euros that the private investors say is needed for them to build new projects.

Sweden is actively investing in these types of projects, said Ola Hansen, an official at the Swedish Energy Agency, though he refused to reveal the prices paid.

“We are looking at projects where there is a clear positive impact on a household level,” he said.

Sweden expects to buy around 21 million carbon credits by 2020 to help meet a voluntary emission target that also involves domestic CO2-cutting measures.


Britain plans to buy and cancel CERs from 10-15 projects, favouring newer types of schemes called Programmes of Activities (PoAs), which bunch together multiple smaller projects – such as handing out efficient light bulbs.

An official at Belgium’s federal government said the country was also funding a PoA in Rwanda though U.N. registration but had not yet agreed to buy the resulting CERs.

Meanwhile, Germany expects to set up deals with developers of two PoAs this year to give funding in return for CERs that will be subsequently cancelled, according to a spokeswoman for the country’s development bank KfW, which is advising on the process.

In May, Norway said it would pay higher prices for credits that matched its need for “greater environmental integrity”, ruling out buying more credits from wind and hydro projects that could get additional revenue from selling the resulting electricity.


It is unclear how many credits the governments are willing to pay a premium for, though a June study by consultancy Vivid Economics suggested a fund of 200 million euros would be enough to keep the scheme alive until a treaty forcing nations to cut emissions emerges in 2020.

“Without support, the haemorrhage of capacity (human and financial) from the market will continue. Once lost, that will not readily be brought back,” said Joan MacNaughton, who co-authored the report.

With fresh demand from companies via deeper national emission targets off the political agenda before 2020, the funding could prove crucial as other nations that previously relied heavily on the CDM seek alternatives.

Austria, Denmark, Switzerland and Spain plan to focus on more costly domestic offsets, and Japan is developing its own offsetting scheme.

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