Where next for the world’s biggest carbon market?

The UN-convened high-level panel charged with assessing the effectiveness of the Clean Development Mechanism (CDM) has urged countries to “forcefully intervene to address the crisis in the carbon market and substantially increase their level of ambition when it comes to reducing greenhouse gas emissions”.

The panel’s findings and recommendations come as the first four-year commitment period of the Kyoto protocol comes to a close and countries prepare for UN-sponsored climate negotiations in Doha towards the end of 2012.

They follow a collapse in the price of UN carbon credits from around $15 in 2010 to $3 today, a result of the economic crisis and a lack of demand in Europe. The price drop has led some to suggest that the world’s biggest carbon trading market has all but collapsed. 

At such low prices, new projects are not economically viable and large European businesses regulated under the EU’s emissions trading scheme (EU ETS) have, in theory, less incentive to drive down their CO₂ emissions. The EU ETS represents the main source of demand for CDM-certified emissions reductions credits.

Recommendations made by the panel address a number of the criticisms levelled at the CDM in the past two years. They include the need for more systematic reporting, monitoring, and verification of the sustainable development impacts of CDM projects, as well as the need to introduce standardised methods for addressing additionality.

“The CDM board will be unpacking the findings and recommendations in due course,” says Martin Hession, chair of the CDM executive board. “There are some areas where the CDM is already making progress, such as the implementation of a baseline standard for additionality. Others are larger questions for political decision-makers.”

The issue of additionality – likewise the lack of verification of sustainable development benefits in CDM projects – remain problematic for CDM critics. “The majority of credits issued so far have come from industrial gas projects that have no sustainable development benefits. Also, a large fraction of credits come from big infrastructure projects such as power plants that would have gone ahead anyway,” says Anja Kollmuss of CDM Watch.

The CDM recently adopted a voluntary reporting template, which guides member countries on how to evaluate the sustainable development benefits of projects. There are, however, according to Hession, currently no plans to implement compulsory independent verification. “Judgments on the interpretation of sustainable development are made by the member countries, not the CDM board.”

Political commitment  

Whether the CDM – the only truly global carbon market of any significance – survives will depend, to some degree, on the ambition of political leaders meeting in Doha. The negotiations will provide countries with an opportunity to reaffirm their commitment to the system. 

“I don’t think all the CDM’s problems will be resolved at Doha, but the reality is that for this to work you need more people with bigger commitments,” says Hession.  “The alternative would be to transform the mechanism in ways that can support the objectives of other market-based carbon instruments.”

For Kollmuss of CDM Watch, the effects of a CDM collapse would be negligible. “In our opinion most of those projects would have gone ahead anyway. But we will have gained invaluable experience in terms of methodologies, governance structures and technical expertise. Those positive lessons should be preserved.”