A CER discounting scheme could save climate change regime after 2012

We can generate a net global GHG emission reduction from developing countries (in an UNFCCC term, non-Annex 1 Parties) without imposing targets on them, if we discount CERs generated from CDM projects. The CER discounting scheme means that a part or all of CDM credits, i.e., CERs, made by developing countries through unilateral CDM projects will be retired rather than sold to developed countries to increase their emissions. It is not feasible to impose certain forms of target (whether sectoral or intensity targets) on non-Annex 1 whose emission trend is hard to predict and whose industrial structure is undergoing a rapid change.

Instead of imposing targets (a command and control approach), we should apply market instruments in generating a net global emission reduction from non-Annex 1. Since April 2005 when the first unilateral CDM was approved by the CDM Executive Board, CDM has been functioning as a market mechanism to provide incentives for developing countries to initiate their own emission reduction projects. As CDM is the only market mechanism engaging developing countries in the Kyoto Protocol, we should try to re-design CDM so that it can generate net global emission reductions by introducing the idea of discounting CERs. But in order to produce meaningful GHG emission reductions by discounting CERs, the project scope of CDM has to be expanded by relaxing project additionality criteria while maintaining strict technical additionality criteria. Agreeing on the CERs Discounting Scheme will have a better political chance than agreeing on imposing emission reduction targets on developing countries.     

Spain: words that succeed and climate policies that fail

Abstract

The two project-based Kyoto mechanisms, joint implementation (JI) and the clean development mechanism (CDM), require a determination of the “baseline”, the development of greenhouse gas (GHG) emissions in the absence of the project. This paper examines, whether absolute (given in tCO₂ equivalent) or relative baselines (“benchmarks”, given, e.g. in tCO₂ equivalent/MWh) should be applied for JI/CDM projects in the energy sector. Accuracy of the GHG emission reduction and manageability of GHG emission balances are used as evaluation criteria. The results show that relative baselines are a more accurate instrument for the estimation of emission reductions in JI/CDM projects in the energy sector without posing significant additional risks to the management of GHG emission balances for large entities. In comparison to absolute baselines, relative baselines indicate in a more realistic and conservative manner the amount of emission reductions obtained in the energy system and give more appropriate incentives to project sponsors. The additional risks of relative baselines are likely to be small compared to the normal deviation of the domestic/internal GHG emissions. The findings are in line with the Marrakesh Accords, which set restrictions to application of absolute baselines.     

Assessing the additionality of CDM projects: practical experiences and lessons learned

The Clean Development Mechanism (CDM) under the Kyoto Protocol allows industrialized countries to use credits from greenhouse gas (GHG) abatement projects in developing countries. A key requirement of the CDM is that the emission reductions be real, measurable and additional. This article evaluates how the additionality of CDM projects has been assessed in practice. The analysis is mainly based on a systematic evaluation of 93 registered CDM projects and comes to the conclusion that the current tools for demonstrating additionality are in need of substantial improvement. In particular, the application of the barrier analysis is highly subjective and difficult to validate in an objective and transparent manner. Key assumptions regarding additionality are often not substantiated with credible, documented evidence. In a considerable number of cases it is questionable whether the emission reductions are actually additional. Based on these findings, practical recommendations for improving the assessment of additionality are provided.     

Does the current Clean Development Mechanism (CDM) deliver its sustainable development claim? An analysis of officially registered CDM projects

This article presents an analytical framework for analyzing Clean Development Mechanism (CDM) projects in terms of their contribution to employment generation, equal distribution of CDM returns, and improvement of local air quality. It assesses 16 officially registered CDM projects with regard to whether they fulfill the two objectives required by the Kyoto Protocol: greenhouse gas emission reductions and contribution to sustainable development in the host country. While a large part (72%) of the total portfolio’s expected Certified Emission Reductions (CERs) are likely to represent real and measurable emission reductions, less than 1% are likely to contribute significantly to sustainable development in the host country. According to our analysis, there are currently no UNFCCC registered CDM projects that are likely to fulfill the Kyoto Protocol’s twofold objective of simultaneously delivering greenhouse gas (GHG) emission reduction and contributing to sustainable development.     

Trading biomass or GHG emission credits?

Global biomass potentials are considerable but unequally distributed over the world. Countries with Kyoto targets could import biomass to substitute for fossil fuels or invest in bio-energy projects in the country of biomass origin and buy the credits (Clean Development Mechanism (CDM) and Joint Implementation (JI)). This study analyzes which of those options is optimal for transportation fuels and looks for the key variables that influence the result. In two case studies (Mozambique and Brazil), the two trading systems are compared for the amount of credits generated, land-use and associated costs. We found costs of 17–30 euro per ton of carbon for the Brazilian case and economic benefits of 11 to 60 euros per ton of carbon avoided in the Mozambique case. The impact of carbon changes related to direct land-use changes was found to be very significant (both positive and negative) and can currently only be included in emission credit trading, which can largely influence the results. In order to avoid indirect land-use changes (leakage) and consequent GHG emissions, it is crucial that bioenergy crop production is done in balance with improvements of management of agriculture and livestock management. Whatever trading option is economically most attractive depends mainly on the emission baseline in the exporting (emission credit trading) or importing (physical trading) country since both bio- and fossil fuel prices are world market prices in large scale trading systems where transportation costs are low. Physical trading could be preferential since besides the GHG reduction one could also benefit from the energy. It could also generate considerable income sources for exporting countries. This study could contribute to the development of a methodology to deal with bio fuels for transport, in Emission Trading (ET), CDM and the certification of traded bio fuels.     

Perverse incentives under the CDM: an evaluation of HFC-23 destruction projects

The clean development mechanism (CDM) under the Kyoto Protocol allows industrialized countries to use credits from greenhouse gas (GHG) abatement projects in developing countries. A key requirement of the CDM is that the emission reductions be real, measurable and additional. This article uses data from registered projects to evaluate the extent to which these objectives are met by projects that reduce hydrofluorocarbon-23 (HFC-23) emissions in the production of hydrochlorofluorocarbon-22 (HCFC-22). The data show that HCFC-22 plants produced significantly less HFC-23 during periods when no emission credits could be claimed compared with periods when HFC-23 destruction could be credited under the CDM. Moreover, the total amount of HCFC-22 produced appears to be determined mainly by CDM rules. This suggests that the claimed emission reductions may partly not be real and that the CDM provides perverse incentives to generate more HFC-23. The accelerated phase-out of HCFCs under the Montreal Protocol on Substances that Deplete the Ozone Layer could worsen this situation. To address these issues an ambitious emission benchmark for the baseline HFC-23 emissions is proposed.     

Linking the CDM with domestic carbon markets

Certified emission reductions (CERs) from Clean Development Mechanism (CDM) projects have traditionally served as an indirect link between cap and trade systems around the world. However, since 2010, import restrictions have increased. Reasons for import limitations include the supplementarity principle, genuine concerns about the environmental integrity of CERs and social benefits of CDM projects, pressure from domestic emissions mitigation industries, concerns about competition in the industries in which reductions take place, as well as the attempt to pressure advanced developing countries to accept national emissions commitments under a future international climate policy regime. It is shown that import limitations lead to a decrease in CER prices and a race to generate CERs as quickly as possible. Such effects are visible in the CDM market after the EU announced its import limitations. The exclusion of CERs from specific project types will distort the CDM supply curve and increase the CER price unless the marginal abatement costs of the excluded project type are above the CER world market price. Similarly, exclusion of CERs from specific host countries will increase the price. Substantial differences are found in CER access to national carbon markets around the world.Policy relevanceCDM regulators could try to improve access of CERs to cap and trade schemes through improvements to additionality testing, standardizing baseline and monitoring methodologies and stakeholder consultation. However, regulators should be aware that standardization is no panacea, and controversies may resurface if standardized additionality determination (e.g. through benchmarks or positive lists) are applied for a certain period and found to be problematic. However, domestic policy concerns such as an unwillingness to send money abroad to buy credits, an inability to control market prices, and competitiveness impacts cannot be resolved by CDM reforms. If, despite such reforms of the CDM, blatant protectionism continues, a challenge before the World Trade Organisation (WTO) could be launched to stop discrimination of service exports from specific countries.     

EU 20-20-20 energy policy as a model for global climate mitigation

The EU has established an aggressive portfolio with explicit near-term targets for 2020 – to reduce GHG emissions by 20%, rising to 30% if the conditions are right, to increase the share of renewable energy to 20%, and to make a 20% improvement in energy efficiency – intended to be the first step in a long-term strategy to limit climate forcing. The effectiveness and cost of extending these measures in time are considered along with the ambition and propagation to the rest of the world. Numerical results are reported and analysed for the contribution of the portfolio's various elements through a set of sensitivity experiments. It is found that the hypothetical programme leads to very substantial reductions in GHG emissions, dramatic increases in use of electricity, and substantial changes in land-use including reduced deforestation, but at the expense of higher food prices. The GHG emissions reductions are driven primarily by the direct limits. Although the carbon price is lower under the hypothetical protocol than it would be under the emissions cap alone, the economic cost of the portfolio is higher, between 13% and 22%.     

Past as prologue: an innovation-diffusion approach to additionality

The ‘additionality’ criterion for the Clean Development Mechanism (CDM) (which is key to ensuring that CDM projects lead to real and additional emission reductions) has been a topic of much analysis and discussion. A number of different approaches, including those based on financial, barrier and market-penetration criteria, have been suggested as a test for additionality. A simple test for additionality is proposed that draws on the framework of the diffusion of innovations, especially the risk profile of adopters of new technologies or innovations. This approach has the potential to streamline the assessment for additionality, although it will require data on the rate of implementation of specific technologies or innovations.     

Estimating the CDM market under the Marrakech Accords

The agreement on implementation of the Kyoto Protocol achieved at COP7 in Marrakech has important implications for investment in greenhouse gas emission reduction projects in developing countries through the Clean Development Mechanism (CDM). The required actual emission reductions for participating Annex B countries overall will be relatively small, as the United States do not intend to ratify the protocol and significant amounts of carbon sequestered in domestic sinks can be credited. In addition, the potential supply of surplus emission permits (hot air) from Russia and other economies in transition may be as high as total demand in the first commitment period. Thus, even under restraint of hot air sellers, CDM demand will be limited, and a low demand, low price carbon market scenario appears likely.The magnitude of the CDM will be influenced by a host of factors both on the demand and the supply-side. We analyse these using a quantitative model of the global carbon market, based on marginal abatement cost curves. Implementation and transaction costs, as well as baseline and additionality rules affect the CDM’s share in the carbon market. Demand for the CDM is sensitive to changes in business-as-usual emissions growth in participating Annex B countries, and also to crediting for additional sinks. Permit supply from Russia and other economies in transition is possibly the most crucial factor in the carbon market.     

CDM and national policy: Synergy or conflict? Evidence from the wind power sector in China

This study assesses the effectiveness of a mix of policy instruments including the Clean Development Mechanism (CDM) and the Feed-in Tariff (FIT) to induce wind technology diffusion in China. Relying on a panel dataset consisting of information from 1207 CDM wind projects in thirty provinces over the period 2004–2011, the empirical analysis indicates that: first, wind energy deployment responds primarily to those counterfactual emissions which would have occurred in the absence of the wind projects; second, the dynamic efficiency of the FIT subsidy shows a potential incompatibility with the CDM incentive; third, the leverage of the CDM on wind investment is supported by the industry and technology policy package, which explains in large part the decrease in the FIT subsidy. Given these findings, suggestions are made regarding the design of a future carbon offset scheme and its link with mitigation action in developing countries.     

The future of the CDM: same same,but differentiated?

Policy-makers and scientists have raised concerns about the functioning of the Clean Development Mechanism (CDM), in particular regarding its low contribution to sustainable development, unbalanced regional and sectoral distribution of projects, and its limited contribution to global emission reductions. Differentiation between countries or project types has been proposed as a possible way forward to address these problems. An overview is provided of the different ways in which CDM differentiation could be implemented. The implications for the actors involved in the CDM are analysed, along with a quantitative assessment of the impacts on the carbon market, using bottom-up marginal abatement cost curves. The discounting of CDM credits, quota systems, or differentiated eligibility of countries could help to address several of the concerns raised. Preferential treatment may also make a limited contribution to achieving the aims of CDM differentiation by increasing opportunities for under-represented host countries. The impact on the carbon market appears to be limited for most options.     

Implementing CDM for the Indian dairy sector: prospects and issues

What is the potential for developing small-scale CDM projects in India to reduce enteric methane emissions from cattle and buffaloes? The issue of baseline setting for prospective CDM projects is a complex one in the Indian context. The baselines constructed on the basis of aggregate emission rates at the national level are unlikely to be precise as methane emission rates are influenced by the livestock and feed characteristics, which vary widely across regions in an agro-climatically diverse country like India. This calls for establishing a project specific baseline underpinned with regional methane emission rates. The various aspects of sustainable development that merit consideration in formulating a CDM project in the Indian dairy sector include; increasing the productivity of animals, increasing the net income of producers, decreasing the cost of milk production and the transfer of safe technologies. The projects in the sector would be able to meet the ‘additionality’ conditions of the CDM. However, there are a number of constraints in implementing the enteric methane mitigation strategies through a CDM project at the field level. The article discusses these technical, financial, socio-cultural and institutional barriers along with possible responses to these constraints.     

Which policy instruments attract foreign direct investments in renewable energy?

Reducing GHG emissions and mitigating climate change would require significant investments in renewable energy technologies. Foreign direct investments (FDI) in renewable energy (RE) have increased over the last years, contributing to the diffusion of RE globally. In the field of climate policy, there are multiple policy instruments aimed at attracting investments in renewable energy. This article aims to map the FDI flows globally including source and destination countries. Furthermore, the article investigates which policy instruments attract more FDI in RE sectors such as solar, wind and biomass, based on an econometric analysis of 137 Organisation for Economic Co-operation and Development (OECD) and non-OECD countries. The results show that Feed in Tariffs (FIT) followed by Fiscal Measures (FM), such as tax incentives and Renewable Portfolio Standards (RPS), are the most significant policy instrument that attract FDI in the RE sector globally. Regarding carbon pricing instruments, based on our analysis, carbon tax proved to be correlated with high attraction of FDI in OECD countries, whereas Emissions Trading Schemes (ETS) proved to be correlated with high attraction of FDI mainly in non-OECD countries.

Key policy insights

• Feed in Tariffs is the most significant policy instrument that attracts FDI in the Renewable Energy sector globally.

• Fiscal Measures (FM), such as tax incentives, show a significant and positive impact on renewable energy projects by foreign investors, and particularly on solar energy.

• Carbon pricing instruments, such as carbon taxation and emissions trading, proved to attract FDI in OECD and non-OECD countries respectively.

• Public investments, such as government funds for renewable energy projects, proved not as attractive to foreign private investors, perhaps because public funds are not perceived as stable in the long run.

     

Estimating the CDM market under the Marrakech Accords

Abstract

The agreement on implementation of the Kyoto Protocol achieved at COP7 in Marrakech has important implications for investment in greenhouse gas emission reduction projects in developing countries through the Clean Development Mechanism (CDM). The required actual emission reductions for participating Annex B countries overall will be relatively small, as the United States do not intend to ratify the protocol and significant amounts of carbon sequestered in domestic sinks can be credited. In addition, the potential supply of surplus emission permits (hot air) from Russia and other economies in transition may be as high as total demand in the first commitment period. Thus, even under restraint of hot air sellers, CDM demand will be limited, and a low demand, low price carbon market scenario appears likely.

The magnitude of the CDM will be influenced by a host of factors both on the demand and the supply-side. We analyse these using a quantitative model of the global carbon market, based on marginal abatement cost curves. Implementation and transaction costs, as well as baseline and additionality rules affect the CDM's share in the carbon market. Demand for the CDM is sensitive to changes in business-as-usual emissions growth in participating Annex B countries, and also to crediting for additional sinks. Permit supply from Russia and other economies in transition is possibly the most crucial factor in the carbon market.     

Technology transfer by CDM projects

Abstract

Technology development and transfer is an important feature of both the United Nations Framework Convention on Climate Change (UNFCCC) and its Kyoto Protocol. Although the Clean Development Mechanism (CDM) does not have an explicit technology transfer mandate, it may contribute to technology transfer by financing emission reduction projects using technologies currently not available in the host countries. This article analyses the claims about technology transfer made by CDM project participants in their project design documents. Roughly one-third of all CDM projects, accounting for almost two-thirds of the annual emission reductions, involve technology transfer. Technology transfer varies widely across project types and is more common for larger projects and projects with foreign participants. Equipment transfer is more common for larger projects, while smaller projects involve transfers of both equipment and knowledge or of knowledge alone. Technology transfer does not appear to be closely related to country size or per-capita GDP, but a host country can influence the extent of technology transfer involved in its CDM projects.     

Implications of different climate protection regimes for the EU-27 and its member states through 2050

It is a broadly accepted fact that a clear reduction of global GHG emissions is required to limit the increase of global warming to a tolerable level. A key issue in this context is the optimal breakdown of reduction targets among different world regions or even countries. Using the European Commission-funded PLANETS project, cost-optimal global burden sharing to reach global GHG reduction targets was analysed, and an optimal allocation of GHG reductions was identified, relative to the global target, to the commitments of different world regions and the trade possibilities for emission certificates. Specifically, it is evaluated how Europe can contribute in a cost-optimal way to keeping the global concentration of GHGs in the atmosphere below 530 parts per million equivalent (ppme) or below a stricter global reduction target of 500 ppme. Based on the energy system model TIMES PanEU, the potentials for emissions reduction in the different energy sectors and EU Member States and the role of key technologies are analysed. The most cost-effective potentials for GHG reductions in Europe are in the conversion/production, residential and industrial sectors. Substantial reductions in the transport sector occur only under very stringent reduction targets. Achieving ambitious reduction targets requires considerable contributions from all EU Member States until 2050.     

Waste energy recovery CDM projects in China: status,challenges and suggestions

The recovery potential for waste energy from major Chinese industries is significant. For example, the estimated waste energy recovery potential is 40 million tons of coal equivalent in the iron and steel industry, accounting for ～10% of the total energy use in the industry. A detailed overview is presented of existing waste energy recovery Clean Development Mechanism (CDM) projects in China. These projects have been developed predominantly in large enterprises and rarely in small or medium-sized companies. The chance of waste energy projects being reviewed or rejected by the Executive Board is slightly higher and delivery rates of certified emission reductions are generally lower than other types of CDM projects. Several major barriers that inhibit project development are identified, such as the lack of CDM awareness or development capacity among many small or medium enterprises, low internal rates of return of the projects, increasing review risk and long delays in the registration process, the varying quality of intermediary buyers, a lack of local Chinese Designated Operational Entities, and policy implementation inconsistency at different levels. Suggestions are put forward to address these problems and such critical issues as additionality are also discussed.     

CDM and international technology transfer: empirical evidence on wind power

This article examines the effect of the Kyoto Protocol's Clean Development Mechanism (CDM) on the international transfer of wind power technologies. The analysis is conducted using patent data from over 100 countries during the period 1988–2008. It is found that transfers from Annex I countries to non-Annex I countries are significantly affected by the contemporaneous establishment of projects under the CDM. However, when taking into account the cumulative effect of CDM projects, the effect is negative. Finally, the effect of domestic absorptive capacity in the host country is positive and significant. Because involvement with the CDM may increase the latter, this is an important area for further research.     

Carbon accounting for sinks in the CDM after CoP-9

Abstract

The role of sinks in the clean development mechanism (CDM) has been a subject of controversy for several reasons; one being that temporary carbon storage in forests appeared to prevent any opportunity to use them as an option to reduce permanent greenhouse gas (GHG) emissions. In Milan (December 2003), the Conference of the Parties (CoP) decided to address this problem by introducing two types of expiring units: temporary CERs (tCERs) and long-term CERs (lCERs). Countries committed to emission reductions may acquire these units to temporarily offset their emissions and thus to postpone permanent emission reductions. As further decided by the CoP, baseline emissions of GHGs and the enhancement of sinks outside the project boundary will not be accounted for in the calculation of tCERs or lCERs. The contribution of CDM-sink projects to GHG emissions abatement will therefore be greater than what will be credited to them. On the other hand, permanent GHG emissions that may result as a consequence of the implementation of sink project activities are treated as non-permanent. If these emissions are above avoided baseline emissions, CDM-sinks will result in net increases of GHG emissions into the atmosphere. After briefly reassessing the non-permanence problem, this article explains how tCERs and lCERs should be quantified according to Decision 19/CP.9 of CoP-9 and how calculations are implemented in the forthcoming software CO₂ Land. Using a simple numerical example, it illustrates how the GHG accounting rule adopted at CoP-9 may result in net increases of GHG emissions. In the conclusion, a possible solution to this problem is proposed.