Carbon Market Watch

For fair and effective climate protection.

Doha – Negotiating the Future (Newsletter #1)

16 Nov 2012

See Newsletter #1, November 2012

For two weeks delegates from close to 200 countries will negotiate the future of the planet at COP18 starting on 26 November in Doha, Qatar. Carbon markets will be an important topic in Doha. Decisions on the future of the CDM, the JI, AAU surplus and New Market Mechanisms are at stake.

Carbon markets are in the dumps and the future for the so called “flexible mechanisms” is grim.  Prices for offsets from the Clean Development Mechanism (CDM) and from Joint Implementation (JI) have collapsed to below 1 EUR per tonne. The European cap-and-trade system (EU-ETS), the largest such trading mechanism, is so severely oversupplied that — if the EU does not intervene — it is unclear if the EU-ETS will survive in any meaningful way. The main reason for this carbon market collapse are the very weak emission reduction targets rich countries have committed to. The targets are higher than emissions are predicted to be if countries just continue on their business-as-usual emissions path. This will create a lot of new “hot air” until 2020.

No wonder carbon markets are collapsing: We don’t need them because weak pledges and the economic crisis are reducing emissions for us. But instead of creating employment through renewable energy growth and energy efficiency measures, we are losing jobs and people are struggling to make ends meet in many countries.

Our main message for the climate negotiators In Doha is therefore simple and clear. First and foremost countries must dramatically increase their pledges now to reduce emissions. Otherwise we will not stand a chance to prevent catastrophic effects of climate change.

What will be negotiated in Doha

Parties have yet to decide if there will be a second commitment period (CP2) under the Kyoto Protocol. Many of the technical details still have to be worked out. So far only the EU and a few other small countries have publically stated that they will join CP2. The emissions of those countries accounts for around 11% of global emissions. Australia is still on the fence and New Zealand just recently stated that it will not join CP2. The US, Canada, Japan and Russia have already publically stated that they will not join CP2. If we do get CP2 it will exclude the major emitters and be based on woefully insufficient pledges. It is nevertheless vital that CP2 comes into effect. Otherwise the multilateral process will completely disintegrate which would play into the hands of those countries who are refusing to take any binding action.

The 13 billion Kyoto surplus

The surplus of emissions reduction permits from the first Kyoto commitment period (2008-2012: CP1) is estimated to be 13.1 billion tonnes of CO2. Russia (5.8), Ukraine (2.6) and Poland (0.8) are the largest surplus holders, followed by Romania (0.7), the UK (0.5) and Germany (0.5).

How Hot Air is created:

A country has an emissions reduction target for 2020 of minus 10% below its 1990 emissions levels. Yet its emissions are projected to be 15% below its 1990 emissions in 2020. This means the country is committing to being allowed to emit more than it actually will! And this leads to the accumulation of “hot air”: left over emission reduction permits due to very weak pledges.

At the recent negotiations in Bangkok in August 2012 the G-77 and China presented a promising proposal on how to deal with the surplus. It allows for only limited domestic use of the surplus and does not allow for trading. All left over surplus would need to be cancelled by the end of CP2.

Carbon Market Watch supports the G-77 proposal and is advocating for the EU and other key stakeholders to actively support the elimination of the surplus. (More details in the article “The Phantom Menace”). Above all and more than anything, it is essential to raise ambition and to close loopholes before any new market mechanisms get operationalized in the future.

CDM and JI

Carbon market issues will be negotiated in several of the negotiating tracks in Doha. Parties will give their recommendations about how to continue and reform the CDM and JI.

Countries have not yet decided who should be able to use CDM and JI credits in the next commitment period. Carbon Market Watch advocates that only countries that are joining CP2 should be able to buy or sell such offset credits.

Parties must also take bold and immediate steps to improve the environmental integrity of the CDM. The CDM is projected to generate at least twice as many offset credits than will be needed until 2020. Many of those offset credits will come from projects that would have happened anyway. These non-additional projects not only depress prices, they also fundamentally undermine climate goals. A recent study1 shows that until 2020 up to 3.6 billion credits could come from such climate damaging projects. Parties will also discuss other important CDM issues, such as rules for carbon capture and storage, forestry projects and an appeals procedure. For Carbon Market Watch’s detailed recommendations on the CDM, see this link.

JI allows for offsetting projects in countries that have a reduction obligation under the Kyoto Protocol. JI unfortunately is known for its hundreds of millions of credits from projects that have been implemented anyway, even without JI. JI rules are weak and host countries can issue as many credits as they want. (Ukraine, for example just recently issued another 18 million JI credits). Carbon Market Watch therefore advocates for strictly limiting JI to countries that have taken emissions reduction pledges that are below their 2012 emissions.

New Market Mechanisms

At COP 17 in Durban, South Africa last year, Parties decided to establish a “new market-based mechanism” (NMM) and a “framework for various approaches,” (FVA) to create minimum requirements for internationally traded credits from regional systems. On both issues the meetings that took place in the course of 2012 saw little progress.  Because Parties strongly disagree about how much oversight and quality control new market mechanisms need, it is highly unlikely that Parties will reach agreement on detailed rules for either issue in Doha.

Carbon Market Watch is a bit puzzled why the EU and some other countries are so keen on establishing new market-based mechanisms when there is no demand for such credits and the EU does not manage to reform its own EU-ETS. Yet, in addition to NMM under the UNFCCC framework  numerous national or regional trading systems are being developed independently of the UNFCCC. Parallel mechanisms that can generate and trade carbon credits are problematic because of the risks of double counting and potentially weak quality standards in regional and national systems. To ensure a minimum level of integrity, it is important to establish common FVA standards set at the UNFCCC level for such mechanisms.

Carbon Market Watch will be in Doha to advocate for fair and ambitious climate solutions.