The Kyoto Protocol's Clean Development Mechanism (CDM) raises funds by charging fees to developers for registering projects and issuing credits
By Susanna Twidale and Ben Garside
LONDON, April 25 (Reuters) - The U.N. body tasked with channelling hundreds of billions of dollars to cutting emissions is under growing scrutiny as its once booming investment programme dries up, leaving most of its funds unspent while other climate initiatives are short of cash.
The Kyoto Protocol's Clean Development Mechanism (CDM) has helped funnel almost $400 billion into emission-cutting projects in developing countries by allowing investors to earn carbon credits they can sell to companies and governments of richer nations that use them to meet emission targets.
From 2003, developers flocked to register projects such as destroying heat-trapping waste gases at Chinese chemical plants or installing hydroelectric power stations in Brazil, and made huge profits by selling the resulting carbon credits for up to 22 euros ($30.40) a tonne in 2008.
But interest has waned while countries wrangled over setting new emission goals under the United Nation's Framework Convention on Climate Change (UNFCCC), hammering credit prices down to unprofitable levels below 0.20 euros.
The board appointed to oversee the CDM insists work should continue to improve the system to ensure it is ready when demand returns, yet analysts and governments see almost no prospect of a price recovery until 2020, when a new UNFCCC deal is due.
"We hope countries will come forward with ambitious reduction pledges but at the moment it is hard to see where demand for international offsets will come from (post-2020)," said Jacob Werksman, a senior official at the European Commission who negotiates on behalf of EU nations at U.N. talks.
The latest U.N. financial statements show the CDM has operating cash of $148 million, on top of a separate reserve of $45 million, meaning the system's administrators could continue at current levels almost until the end of the decade.
But with such a bleak outlook, some observers are calling on the CDM to drastically scale back its Bonn-based operations and want much of its near-$200 million of cash pile spent elsewhere.
"Having staff sit in Bonn and slowly draw down the surplus in salary is not a good use of these human and financial resources," said Anne Arquit Niederberger, a consultant who has worked on CDM projects and was a Swiss negotiator at U.N. climate talks when the mechanism was drawn up in the 1990s.
The CDM raises funds by charging fees to developers for registering projects and issuing credits, a relatively unique mechanism which helped it grow from a handful of staff in 2003 to more than 160 in 2013 as the number of projects mounted.
Its accounts show almost half of the current annual budget of $32.9 million is to pay staff, which still number around 150 despite a massive drop-off in new projects seeking registration.
U.N. data shows just 3 projects a month were registered on average this year, against 268 a month at the peak of activity in 2012. This means a staff of 10-20 people would be sufficient, said Axel Michaelowa, a University of Zurich climate policy academic and founding partner of consultancy Perspectives.
Michaelowa, who was seconded to the CDM during its busier periods, said surplus cash could be used to prop up the market by buying credits or develop new carbon market mechanisms earmarked to feature in a new climate deal
A CDM spokesman said the board had no current plans to cut employees but was conducting regular reviews of its operations.
The board is also trying to drum up demand for the credits by promoting them for uses other than meeting Kyoto targets.
While the CDM has enough money to see it through several years, a separate Kyoto Protocol programme, the Adaptation Fund, is struggling to fulfil its aims of helping the world's poorest nations cope with the effects of climate change.
Governments agreed to help finance the fund with a 2 percent levy on CDM credits issued for projects such as building sea defences or developing drought resistant farming techniques.
But the plummeting value of the credits has hit the Fund's coffers, with projects only getting the go-ahead last year after several west European nations donated 54 million euros.
"We were desperate for funding and we were successful in getting donations but it is not sufficient and we continue to look for ways to get stable sources of funding," said Laura Dzelzyte, vice-chair of the Adaptation Fund.
Officials and observers say scaling back the CDM or redeploying its cash will be difficult because of rigid rules that require almost 200 nations to agree.
"Institutions created internationally are difficult to reform and even harder to put to sleep, especially if they have a stockpile of revenue that allows them to continue regardless of the demand," said the European Commission's Werksman.
The CDM was created in 1997 under the Kyoto Protocol to help industrialised nations meet greenhouse gas targets more cheaply and promote sustainable development in poorer countries not bound under the pact to limit their emissions.
Its rules were crafted over years of U.N. negotiations and CDM credits have been used mainly by European countries and Japan after the United States failed to ratify Kyoto.
Alpha Oumar Kaloga of environmental campaign group Germanwatch said developing countries would not support a downscaled CDM because of a perception it may "distract from the finance commitment wealthy nations have under the UNFCCC."
Developed countries have agreed to mobilise $100 billion a year by 2020 to poorer nations, but the Green Climate Fund launched to help meet that goal had received donations of just $34 million by the end of 2013.
($1 = 0.7236 euros) (Reporting by Susanna Twidale and Ben Garside in London, editing by David Evans)
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