Clean Development Mechanism – Grim Future (COP18 analysis)

Negotiations at COP18 on the future of the Clean Development Mechanism (CDM) started off with some good options in the negotiating text prepared by the Chair. However, throughout the sessions on the CDM, the draft negotiation text was remarkably weakened and the final version does not address the significant quality concerns recently highlighted by scientists. For example, new findings from the CDM policy research team show that large-scale power supply CDM projects (such as large hydro and coal power projects) are unlikely to be additional and therefore lead to an increase in global emissions. Despite the fact that such projects are expected to deliver more than half of all CDM credits by 2020, policy solutions that would eliminate these fake carbon credits where not even considered. Instead, the final decision allows for more flexibility and less stringent additionality testing. Other suggested improvements, such as clarity about the consequences of a Party withdrawing a letter of approval and important liability measures for auditors, were removed from the final text. Suggestions to enhance the contribution of CDM projects to sustainable development were rejected as well. One of the key decisions was the launch of the overall review of the modalities and procedures of the CDM, which will take place in the course of 2013. Against the political unwillingness to address quality issues of the CDM and the current over-supply of about 4 Gigatonnes of CO2 it is hard to imagine how this review will be able to rescue the CDM. With a carbon market price of 50 cent per tonne of CO2, it is impossible to implement projects that are additional.

Key COP18 decisions on the CDM include:

Review of the CDM rules:

  • Decision to review the modalities and procedures of the CDM. Changes may then be adopted at CMP.9;
  • Call for input from Parties and observer organizations on the CDM review until 25 March 2013;
  • Submissions from Parties and observers as well as recommendations by the CDM Executive Board on the CDM review will be considered by the Subsidiary Body for Implementation (SBI) at their June 2013 meeting;
  • A workshop with the aim of facilitating the progress of the CDM review will be organized ahead of the SBI meeting if available financial resources can be found;
  • The Board is asked to consider the recommendations from the CDM policy dialogue.

CDM governance:

  • The Board is asked to evaluate the use of the voluntary sustainable development tool during 2013;
  • The adoption of liability measures for auditors was deferred to discussions on the CDM review;
  • No decision was taken on the withdrawal or suspension of letters of approval for CDM projects. It was deferred to discussions on the CDM review;
  • No decision was taken to improve the public participation process. Parties are merely encouraged to share their experiences in relation to local stakeholder consultation processes.

Methodologies and additionality:

  • No decision was taken to review and revise current additionality testing;
  • The Board is asked to extend the simplified modalities for the demonstration of additionality, including positive lists, to a wider scope of small-scale project activities.
  • The Board is asked to continue its work on programmes of activities;
  • The Board is encouraged to work on the simplification and streamlining of methodologies, with the aim of reducing transaction costs;
  • The Board is asked to consider the use of more cost-effective approaches for forestry projects for the estimation of baseline stocks and removals, including the use of remote sensing for monitoring;
  • The eligibility of CCS in the CDM with transport or storage in more than one country and the establishment of a CER global reserve will be discussed at the 45thsession of the Subsidiary Body for Scientific and Technological Advice (SBSTA), expected to take place in 2015. It was also decided that more practical experience of CCS CDM projects would be beneficial;
    • The Board should explore the possibility of reviewing the validation process of
      CDM projects that are deemed to be automatically additional (e.g. through standardized baselines and positive lists).

The final CDM decision can be found here.

Rejected: India’s proposal to establish stabilisation fund

It is no secret that the future of the CDM looks grim. According to figures by the UNFCCC against current demand for CERs, the CDM will produce an excess of roughly 4 billion offset credits due to low ambition. This has driven the prices into the cellar and stirred creativity on how to keep the market flourishing. In the CMP opening plenary, India suggested setting up a stabilisation fund to buy up excess offset credits, something that has also been recommended by the High Level Panel on the CDM. A large chunk of the excess offset credits will come from HFC-23 destruction facilities in India and China. Credits form such HFC-23 projects have been banned by major buyers (EU, Australia and New Zealand) for their lack of environmental integrity and their lack of sustainable development benefits. With a lack of buyers, such a fund would provide a convenient new source of money!

Even if HFC-23 credits were not allowed in such a fund, there is more to worry about. New findings from the CDM Policy research team show that large-scale power supply CDM projects, which are expected to generate the majority of CDM credits until 2020, are mostly non-additional and therefore increase global emissions. This means, such a stabilization fund would largely buy up excess credits from industrial gas projects and from projects that are unlikely to be additional. Yet this seems like a terribly bad use of scarce climate finance. Certainly there are much more effective ways to spend mitigation money, such as directly supporting the implementation of renewable feed-in tariffs and other proven policy measures.

The decision to establish such a stabilization fund could have been prevented in Doha. However, it is also important that governments decide unilaterally to use scarce climate finance for this purpose. If the CDM wants to be fit for the future it needs to get rid of its excess baggage of business-as-usual projects that inflate its supply. Banning credits from project types that are highly unlikely to be additional after 2012 would get rid of 1.6 billion offset credits between now and 2020. Stopping such projects from renewing their crediting period and not allowing the registration of new projects would also go a long way. Instead of putting money into the CDM stabilization fund, developed countries should raise ambition and put money on the table to help developing countries take actions that transform their economies onto a low carbon development path.  It’s as easy as that.

Al-Shaheen Oil Field Gas Recovery and Utilization Project

Qatar did not only host COP-18 to show its commitment to climate protection, it also hosts the CDM Al-Shaheen Oil Field Gas Recovery and Utilization Project. As Parties were meeting at COP18, this project received about 3 million carbon credits. Unfortunately it provides a typical example of how additionality rules under the CDM are bent and shows why liability measures are important.

This CDM project captures and uses gas that is produced as a byproduct of oil recovery activities at the Al -Shaheen oil field, operated by Maersk Qatar Oil, in partnership with Qatar Petroleum. The project design document (PDD) states that “the CDM revenue has been considered from the early stages of the development of the project, and it is an integral part of the financial package of the project. Specifically, the project was devised, financed and executed before Qatar’s accession to the Kyoto Protocol.” In other words, the project was planned and implemented before Qatar had joined the Kyoto protocol and therefore before it was clear that Qatar will be legally entitled to host CDM projects. However, the project proponents further argued that the project was “demonstrating Qatar’s seriousness and good intent towards the Kyoto process and its willingness to address its responsibilities pro-actively and altruistically.” While these statements already raise serious doubts about the additionality of the project, the following provides further evidence: CDM additionality rules require the auditor to check if the company considered CDM revenue at the early planning stage of the project (so called prior-consideration). However, in the case of the AL-shaheen oil field project, Qatar Petroleum (the project participant) did not submit a document, or so called memo, to prove this. Hence, the auditing company requested that a memo stating that CDM was considered in the project inception phase needed to be provided. The next documented step in the process simply explained that “This memo [had] been discussed. However, a pdf version is also sent with these responses (please see attached).” Following this the auditing company concluded “Memo received, which clearly indicates that Al-Shaheen was considered for UNFCCC activities at an early stage. CL closed.” At best, the evidence for prior consideration is very poor. At worst, this may indicate that the memo was produced at the request of the auditor.

Carbon Market Watch has frequently heard that some project proponents only decide to apply for CDM well after a project has already been planned or already been implemented. It has been reported that in such cases CDM documents are falsified to prove that the CDM has been decisive for the investment decision. Unfortunately documents that would provide further evidence are not made public and we are therefore not in a position to prove with certainty whether the CDM has, or has not been taken into account when the investment decision was taken. Nevertheless, the evidence indicates that in many cases such projects are indeed not additional.