At the climate negotiations in Durban last November, countries agreed to establish a new market based mechanism and to come up with a framework that new bilateral or regional market mechanisms would have to comply with. Now they are working hard on coming up with rules and governance systems for these new market based systems. At the same time, the two largest market based mechanisms, the European Emissions Trading System (EU-ETS) and the CDM are on the brink of collapse.
The economic crisis in Europe has lead to a dramatic decline in CO2 emissions. As a result, the demand for allowances has fallen and prices have dropped. In 2011, the price for EU-ETS allowances fell by about half, to around €7. Because the EU is also the largest buyer of CDM offsets (CERs), the prices of CERs have also dropped significantly to around €4.
At the last CDM Executive Board meeting the UNFCCC Secretariat made a strangely upbeat presentation on the state of carbon markets. There was no mention of the price collapse of EU-ETS allowances and CDM credits. It is unclear why the Secretariat and the CDM Board are avoiding a frank discussion about the current market situation and its implications for the CDM. Given the severe drop in carbon prices experienced last year and the projected large oversupply of offsets, we don’t think the future of the CDM looks all that rosy. Some analysts are predicting a total collapse of carbon markets (see for example, Tomas Wyns’ presentation on Demand versus Supply – The future of Carbon Markets.)
The reason there is no demand for credits is that most countries have made very weak mitigation pledges. They simply will not need many credits to meet their commitments. So who will buy credits from new market based mechanisms, if there is no demand for the existing ones? Some people argue that having new market based mechanisms will motivate countries to take on more stringent pledges because they will be able to meet those pledges with cost-efficient market-based credits. But if there is already an oversupply of cheap credits, why aren’t countries upping their pledges now? Also, it will take years to get these new systems up and running. If we wait until 2020 to ramp up mitigation action it may simply be too late to avoid disaster.
The window of opportunity to prevent catastrophic climate change is rapidly closing. Several studies show that current pledges are not only woefully insufficient to keep warming below 2oC; loopholes, such as the surplus allowances (AAUs) from the first Kyoto commitment period (commonly referred to as ‘hot air’) could negate all current pledges and enable developed countries to meet mitigation targets while continuing with business-as-usual. We are now on an emissions path that could lead to warming of 4oC or more. In addition, impacts associated with even a 2oC rise have been revised upwards and are now considered ‘dangerous’ and ‘extremely dangerous’. Maintaining a reasonable likelihood of limiting temperature increases to within 2°C will require commitments in the next few years to considerably higher levels of ambition by all nations.
Countries seem to be in denial about the severe threat of climate change if inaction continues. Fundamentally, rich countries have to significantly increase their mitigation commitments – right now.