Questioning its future role, the CDM continues to scour for demand lifelines

Published 02:33 on March 16, 2016  /  Last updated at 08:05 on March 16, 2016  /  Africa, Asia Pacific, Aviation, EMEA, EU ETS, International, Kyoto Mechanisms, New Market Mechanisms, South Korea  /  No Comments

The CDM’s Executive Board is monitoring post-Paris developments to see how the Kyoto Protocol scheme could fit into a new international carbon market regime, while continuing to scour the global landscape for new sources of demand.

The CDM’s Executive Board is monitoring post-Paris developments to see how the Kyoto Protocol scheme could fit into a new international carbon market regime, while continuing to scour the global landscape for new sources of demand.

In its first meeting since countries agreed in December a new global pact to tackle climate change, the 20-member board, under the leadership of new chairs, agreed to monitor the development of the Paris Agreement’s Article 6, under which new international carbon markets will be born.

The board also considered new options to use the CDM as a “tool for other uses”, including tapping potential demand from South Korea’s ETS and non-carbon market sources including the Green Climate Fund and green bonds.

Demand for the CDM’s offsets has dried up in the wake of the global economic slowdown and as buyers in the EU ETS, the scheme’s largest source of demand, exhaust their usage limits up to 2020.

This has caused CER prices to collapse to around €0.40 each, threatening the viability of many of the thousands of GHG-cutting projects approved under the CDM, and prompting its executive to attempt to find new buyers and uses for the scheme in the run-up to 2020 in order to keep it alive.

“[It] basically means turning over all stones to identify possible new demand … [but] under current tough market conditions and lack of certainty over the CDM even short-term, the board’s assurance in the ‘immortality’ of the CDM seems bold,” said analysts at Thomson Reuters Point Carbon.

They added that the board has shortlisted a number of potential sources of new buyers including South Korea’s nascent ETS, which features annual demand of around 19 million tonnes and is leading to more and more CDM project developers cancelling their CERs in order to import the credits into that market, where offsets fetch exponentially more.

The board is also looking at existing and planned markets and offset regimes in the EU, Mexico, and South Africa, though annual demand in each is forecast to be lower than South Korea.

OTHER SOURCES

In addition, demand sourced through international organisations, such as the GCF or the World Bank’s Pilot Auction Facility (PAF), is being examined by the CDM EB, which has requested further analysis on the matter from the UN’s climate secretariat.

The GCF has received more than half of the over $10 billion pledged to it by developed nations, and is starting to select its first recipient projects.

“So far no finances have been forwarded to CDM projects, [but] since the CDM is quite in line with the GCF requirements for the projects applying for the fund’s financing, we consider it rather likely that some CDM projects could also benefit from the GCF support,” the Point Carbon analysts said.

They added that the board may consider how it can collaborate with the GCF to direct funding towards CDM projects in exchange for providing methodologies for MRV and mitigation activities.

“The CDM EB also considered it a medium-high possibility that results-based financing using CERs from Australia’s Emission Reduction Fund and Safeguard Mechanism, the German Nitric Acid Climate Action Group, the Nordic Environment Finance Corporation, the Swedish Energy Agency and the World Bank’s Carbon Initiative for Development and Pilot Auction Facility could drive demand of some 30-40 Mt of CERs per year,” the analysts said, adding that green bonds could be another potential non-market based source of demand.

Observers are also expecting the UN’s civil aviation body ICAO to this year agree a post-2020 international offsetting mechanism for the global sector that could tap the CDM for supply.

“If ICAO agrees on a market mechanism, we find it very likely that CDM will be part of this and assume that the aviation sector could start using CERs for complying with its emission reduction obligations set to start after 2020,” Point Carbon said.

However, the board last week declined to approve an airline-based CDM methodology that would have helped the sector earn CERs by using solar panels to generate energy for airport at-gate operations. The matter will be re-evaluated at a future meeting.

The aviation industry wants more CDM methodologies to be developed and approved in order to keep and reinvest offset revenues in the sector.

AUDITORS

The report following last week’s CDM EB meeting listed five emissions auditors, also known as DOEs, that have asked to partially or completely withdraw from the scheme.

SGS, ERM and SIRIM are still accredited to validate and verify projects in certain sectors, whereas DNV and NAC have withdrawn from all sectoral scopes. A number have announced in recent years that they will no longer participate in the scheme due to low CER prices and declining registration and verification activities.

“It is worth noticing that while the CDM EB works on improving conditions for the DOEs, several are leaving the market, due to the low demand for their services,” Point Carbon said.

The board also gave an update on the CDM’s voluntary offset cancellation platform, which has seen some 15,000 CERs cancelled via the online portal – around 90% of which were done by US-based buyers.

By Mike Szabo – mike@carbon-pulse.com

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