Carbon Market Watch

For fair and effective climate protection.

Getting hot in Doha (Watch this! #3)

31 Oct 2012

See Watch This! #3, October 2012

By Anja Kollmuss, Carbon Market Expert, CDM Watch

Carbon markets are in the dumps and the future for these so called “flexible mechanisms” is grim. It’s no wonder carbon markets are collapsing; we don’t need them because weak pledges and the economic crisis are reducing emissions for us. The next international climate negotiations (COP 18) are held at the end of November in Doha, Qatar. For two weeks delegates from close to 200 countries will negotiate the future of the planet. Our message is simple and clear: countries must dramatically increase their pledges to reduce emissions immediately, otherwise we will not stand a chance to prevent catastrophic effects of climate change.

It’s getting hot in here

Prices for offsets from the Clean Development Mechanism (CDM) and Joint Implementation (JI) projects have collapsed to below 1 EUR per tonne while 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. The main reason for this collapse is the very weak emission reduction targets that 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. To give an illustrative example:

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! This leads to the accumulation of “hot air”: leftover emission reduction permits due to very weak pledges.

Plus, instead of creating jobs through renewable energy and energy efficiency measures, we are losing jobs and people are struggling to make ends meet in many countries. Our message is therefore simple and clear: countries must dramatically increase their pledges to reduce emissions now, otherwise we will not stand a chance to prevent catastrophic effects of climate change.

Why a second commitment period matters

Parties have yet to decide if there will be a second commitment period under the Kyoto Protocol (KP-CP2). So far only the EU and a few other small countries have publically stated they will join KP-CP2. Australia and New Zealand are still on the fence. The US, Canada, Japan and Russia have already announced they will not join. If we do get KP-CP2 it will exclude the major emitters and be based on woefully insufficient pledges. Nevertheless it would be better to have a weak KP-CP2 than to let the multilateral process completely disintegrate. Such an outcome would play into the hands of those countries refusing to take any action.

The Clean Development Mechanism (CDM) and Joint Implementation (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. CDM Watch believes that only countries that are joining KP-CP2 should be able to buy or sell such offset credits. This may provide an incentive for countries to take on binding climate target. Parties will also discuss rules for carbon capture and storage, forestry projects and an appeals procedure. We will follow this closely and publish recommendations ahead of the talks in Doha.

JI is the CDMs naughty little brother: it 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 issued 18 million JI credits). JI projects need to be strictly limited to countries that have taken emission reduction pledges below their 2012 emissions.

New Market Mechanisms

Last year at COP17 in South Africa, Parties decided to establish a “new market-based mechanism” and a “framework for various approaches” to create minimum requirements for internationally traded credits from regional systems. On both issues this year’s meetings saw little progress. Parties strongly disagree about how much oversight and quality control new market mechanisms need. It is highly unlikely they will reach agreement on detailed rules in Doha. It is a puzzling 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 when the EU does not manage to reform its own EU-ETS. Nevertheless, numerous national or regional trading systems are being developed independently of the UNFCCC. It will be difficult to address the risks of double counting and weak quality standards in such regional and national systems. To ensure a minimum level of integrity, it is important to establish common core standards set at the UNFCCC level for such mechanisms.

13 billion Kyoto surplus permits – the phantom menace

Assigned Amount Units (AAUs) are tradable emission permits under the Kyoto Protocol. One AAU allows a country to emit 1 tonne of carbon dioxide equivalent (CO2eq). Current Protocol rules allow countries to carry over all unused emission allowances into its next commitment period. The surplus from the first commitment period (2008-2012: KP-CP1) is estimated to be 13.1 billion tonnes of CO2. Russia (5.8 tonnes), 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). The surplus is over a thousand times higher than the estimated demand. At the recent climate talks in Bangkok (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. At the end of KP-CP2 all left over surplus would need to be cancelled. We support this proposal and advocate the EU and other key stakeholders to actively support the elimination of the surplus. It is essential that countries increase their reduction targets and close allowance loopholes before any new market mechanisms get operationalised.