CDM Watch Durban assessment (Newsletter #18)

This is an overview of the most important carbon market-related decisions that were taken (or not taken) in Durban.

Durban has come and gone. Almost 13,000 people, including delegations from over 190 nations, civil society organisations, environmental NGOs and business representatives met in Durban, South Africa to have their say at the 17th climate negotiations (COP 17) of the UN Framework Convention on Climate Change (UNFCCC).

Durban decisions at a glance

The big picture

Clean Development Mechanism (CDM) and Joint Implementation (JI)

  • Rules for carbon capture and storage (CCS) projects under the CDM were approved
  • No agreement was reached on the CDM appeals procedure
  • New HFC-23 facilities remain ineligible
  • Strengthening rules for public participation in the CDM was dropped in the final text (again)
  • Standards on materiality were approved
  • No decision made on whether countries that do not commit to a second commitment period can buy and sell CDM and JI credits.

New market mechanisms

  • Parties decided that new bilateral or regional market mechanisms should follow a common framework of rules developed under the UNFCCC
  • A new international market mechanism under the UNFCCC was defined.

 

The big picture

The negotiations in Durban almost collapsed. COP negotiations are supposed to end on Friday evening. In Durban the negotiations dragged on for another 36 hours until early Sunday morning. The big argument was over a new deal under which all countries would have legally binding commitments starting in 2020. The poor nations were outraged. Developed country pledges are woefully inadequate. In addition, developed countries promised the poor countries money for mitigation and adaptation and launched the Green Climate Fund, but left it empty (go here for the negotiation text).

In the end, the talks did not collapse. A new body called the Ad Hoc Working Group on the Durban Platform for Enhanced Action was established to negotiate a global agreement by 2015 that will take effect in 2020 and include mitigation commitments for all countries. Parties also agreed to a second commitment period of the Kyoto Protocol but a lot of issues remain unresolved.

Durban was a partial political success because negotiations could have completely collapsed. A total collapse of the multilateral system was avoided, however Parties in Durban failed to protect the world from dangerous global warming. It is unclear if the second Kyoto commitment period will slow carbon emissions without the support of Japan, Canada, Russia and the United States, and with very weak mitigation pledges from countries willing to join. Already, current pledges are not only 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 (see our article on loopholes[AK1] ). A new framework that does not start until 2020 may simply arrive too late to avert very serious climate impacts. We are now on an emissions path that could lead to warming of 4oC or more. This level of warming could lead to severe impacts well beyond adaptation. It is with these grave climate outcomes in mind that we now discuss the implications of the Durban decisions on carbon markets.

Clean Development Mechanism (CDM)

Several important CDM issues were decided in Durban:

Rules approved for carbon capture and storage (CCS) projects under the CDM
CDM Watch and many other NGOs had worked tirelessly to prevent CCS from being included in the CDM. Nonetheless, Parties had decided in Cancun last year that CCS projects would be allowed under the CDM. Before and during Durban we tried to ensure that the CCS rules (called “modalities and procedures”) would be as stringent as possible. Some quite innovative and stringent provisions made it into the final rules (for example the kind of laws a country must have before it can allow CCS CDM projects). However, other rules are very weak (for example on monitoring) which makes us very worried. Download the final text here.

Next Steps:

  • 5 March 2012: Parties and admitted observer organisations are invited to submit to the UNFCCC Secretariat their views on the issues referred to in paragraph 4(a) (transport, trans-boundary), including a possible dispute mechanism, and for the global reserve of CERs in 4.(b) with the view of forwarding a draft-decision for consideration by CMP8
  • June 2012: These submissions will be discussed at the next sessions SBSTA36 in June 2012 in Bonn
  • December 2012: Draft decision may be considered by CMP8.

No agreement reached on the appeals procedure

There is still no way to appeal a project once it is registered or rejected. CDM Watch has been fighting for a meaningful appeals procedure that would ensure that impacted stakeholders, such as local communities could bring an appeal against a registered project. Yet many countries actively argued against such an appeal procedure by saying that this would make the CDM process even less efficient. This argument is the reason no decision was taken in Durban and the discussion was postponed. On the bright side, not passing a weak appeals procedure is a partial victory for CDM Watch and the other NGOs who have been working hard to ensure meaningful stakeholder involvement. We will continue to fight for an appeal procedure that has real teeth.

Next Steps:

  • June 2012: The UNFCCC Secretariat will assess the possible impact of an extension of the scope of appeals
  • June 2012: Parties will discuss governance issues and arrangements for appeals at the next SBI36 session
  • Throughout 2012: The CDM policy dialogue may focus on this issue.

Strengthening stakeholder rules once again dropped in the final text

European countries supported the inclusion of wording that would have required the CDM Executive Board to establish clearer guidelines for stakeholder consultations. However this was strongly opposed by developing countries that feared that such guidelines would impede their sovereignty. In the final version, the wording was completely dropped. CDM Watch has been working for years to get improved rules passed and we will continue working on this important issue. Such improvements could also be initiated by the CDM Executive Board (CDM EB) but so far they have done nothing.

Next Steps:

  • Throughout 2012: The CDM EB may initiate an improvement of guidance for local stakeholder consultation (We will continue to put pressure on the CDM EB to improve rules and guidance)
  • Throughout 2012: The CDM policy dialogue may focus on this issue
  • December 2012: It is likely that this issue will be raised again by the EU (and possibly other Parties) at COP18.

Improved additionality requirements of large scale projects

Project that are clearly non-additional (would have been built anyway) not only undermine mitigation goals, they seriously hamper the credibility of the CDM. Having strong rules that exclude free-riders also ensures that prices are not artificially low because of extra non-additional credits.

The EU had proposed wording that would have required the CDM EB to reassess the rules of additionality of very large projects. Project proponents and some countries (Ecuador, Bhutan) lobbied very strongly against this. In the end the paragraph remained in the final text. However, it was watered down significantly and does not include a specific mandate to the CDM EB to prepare a new way to test additionality of very large scale projects. It now reads:

Requests the Executive Board to continue ensuring environmental integrity when developing and revising baseline and monitoring methodologies and methodological tools, in particular by considering possible ways of improving the current approach to the assessment of additionality, in order to provide clarity to encourage project activities in the private sector and the public sector;

The sentence: “to encourage project activities in the private sector and the public sector” may make it hard for the CDM EB to pass more stringent more appropriate additionality tests for such projects.

 Next Steps:

  • Throughout 2012: The CDM policy dialogue may focus on this issue
  • December 2012: The CDM EB will consider possible ways for improvement of the current approach for assessment of additionality and will present a proposal at COP-18.

New HFC-23 facilities remain ineligible

Parties briefly discussed whether new HCFC-22 facilities should be eligible under the CDM to destroy their HFC-23. As most buyers (such as the EU and Australia) pointed out that these credits will not be eligible in their carbon trading schemes, it was suggested that this item be removed from discussions altogether. Not surprisingly, the big HCFC producers China and India, supported by their well known HFC-23 friend PNG didn’t agree, so a decision was once again postponed. CDM Watch has long argued that these emissions should be dealt with through non-market-based mechanisms under the Montreal Protocol.

Next Steps:

  • December 2012: This issue will be discussed again at the SBSTA37 session.

Standards on materiality were approved

Materiality standards define which errors have to be corrected and which can be ignored because they are too insignificant when calculating the amount of offset credits a project receives. We agree in principle with having rules on materiality because it does not make sense for projects to spend lots of money paying their auditor to rectify an error that is truly insignificant. Truly additional projects may not be able to afford such stringency. However, non-additional projects will on average have an easier time absorbing such costs. In that sense, having materiality rules may support truly additional projects. The question is, at what point is an error irrelevant? The thresholds approved in Durban are too lenient, in our opinion. They were defined as the following percentages of the emission reductions or removals of a project:

  • 0.5% for projects getting over 500,000 offsets per year
  • 1% for projects getting 300,000 – 500,000 offsets per year
  • 2% for large-scale project activities getting (up to) 300,000 offsets per year
  • 5% for small-scale project activities
  • 10% for micro-scale project activities.
  • Throughout 2012: The CDM EB will also increase interaction with DOEs on materiality over 2012
  • December 2012: The CDM EB will now implement the concept of materiality and report to CMP8 on the experiences.

Next Steps:

Joint Implementation

Joint Implementation is CDM’s little brother: it is the mechanism for offset projects located in Annex 1 countries. Unfortunately, JI has come under criticism for its lack of transparency and quality. This is especially so for projects that come from so called track 1 projects which can be approved by the country itself, without international scrutiny. All the thorny issues were left undecided in Durban. Here the final text on JI.

Next Steps:

  • Parties, intergovernmental organisations and admitted observer organisations are invited to submit to the Secretariat, by 16 April 2012, their views on the revision of the JI guidelines.
  • The UNFCCC Secretariat will then prepare a synthesis report in July 2012
  • The JI Steering Committee will then draft a revised set of key attributes and transitional measures with possible changes of the JI guidelines for discussion at CMP8
  • In 2013, the CMP will initiate the first review of the JI guidelines.

No decision on who can buy and sell CDM and JI credits

COP17 did not decide whether countries that do not commit to a second commitment period under the Kyoto protocol can buy or sell CERs and offsets from JI. Venezuela and Bolivia strongly advocated for limiting access. They were supported by many other developed countries. A decision was postponed until COP18.

New Market Mechanisms

Issues related to new market-based mechanisms were negotiated by the Ad-hoc Working Group on Long-term Cooperative Action under the Convention (AWG-LCA). Two main issues were discussed:

1. To what extent new bilateral or regional market mechanisms should follow a common framework of rules developed under the UNFCCC. (See final texts here, paragraphs 79-82)

2. If a new international market mechanism that would complement the CDM and JI should be established under the UNFCCC. (See final texts here, paragraphs 83-86).

Common framework of rules

Having an international framework raises the likelihood of preserving a minimum level of environmental integrity by reducing the risks of double counting and over-crediting due to lenient baseline and additionality requirements. Although many countries were in favour of creating such a framework, countries could not agree to what extent the UNFCCC should set common standards and rules. The final text only states “to consider a framework” to be decided at COP18, a year from now. Unfortunately the text does not mention what the aim and stringency of such a framework would be. But it does include the language that new market based mechanism  “must meet standards that deliver real, permanent, additional and verified mitigation outcomes, avoid double counting of effort, and achieve a net decrease and/or avoidance of greenhouse gas emissions” (Para 79). It remains to be seen if regional market mechanisms such as the ones planned for California and Japan, will have to follow minimum standards that ensure with reasonable certainty that emission reductions are achieved.

A new international market mechanism

The AWG-LCA also discussed if a new international market based mechanism should be established under the UNFCCC to complement CDM and JI. The EU and many Latin American countries pushed for such new markets. The countries that opposed the use of the CDM by Parties unwilling to ratify a second Kyoto commitment period were equally reluctant to agree to new market mechanisms and insisted that existing market mechanisms have to be evaluated first.

A compromise was reached in the final hours of the negotiations. The AWG-LCA text now “defines a new market-based mechanism”. A previous version of the draft decision text used the stronger word ‘establishes’.  It is unclear what the legal implications of the two different words are. ‘Defined’ may not be substantially weaker and has a precedent: The CDM was initiated under Article 12 of the Kyoto Protocol which stated: “A clean development mechanism is hereby defined.”

The language describing how the details should be developed was left intentionally vague. This helped Parties reach a decision in Durban. However, it has just postponed the difficult task on reaching consensus on both issues: an overarching framework that links different markets and a new market mechanism.

Next Steps:

  • A work programme will be established for each of the two issues with the view to recommending a decision to COP 18 in December 2012
  • 5 March 2012: The final text invites Parties and admitted observer organisations to submit comments on their views and experience with both the proposed ‘framework’ and the new market mechanism
  • June 2012: Workshops for each topic will be held for Parties, experts and other stakeholders at the intercessional meeting in Bonn to consider the submissions and discuss both issues.

A few final words about the future of carbon markets

Carbon markets can only deliver economically efficient mitigation if demand and supply can ensure a stable market and if there are clear rules that ensure the environmental integrity of tradable units. However it remains to be seen if the demand from Europe, Australia and New Zealand for CERs will ensure a viable market for CERs. The recent collapse in carbon markets’ prices caused mainly by the economic downturn, post 2012 uncertainties, and the potential glut of ‘hot air’ credits from JI (ERUs), shows what can happen if adequate safeguards are not built into the system. With weak pledges and massive loopholes, and the proliferation of a potentially competing and inconsistent bilateral offset system, the future of global carbon markets is uncertain.

For more information about CDM Watch activities during Durban, please see our CDM Watch COP-17 Booklet.