Austrian Climate Change Workshop Discusses Future of Carbon Market in EU and Globally (Wonkish)

I was at the Austrian Kommunalkredit’s annual climate change workshop last week, presenting on a new study we did with others on design options for the UNFCCC’s new market mechanism on behalf of the European Commission. All presentations can be viewed and downloaded here, the following summarises some of my personal highlights from the discussions, which covered in particular the results from Doha, the EU ETS, the future of the CDM and new market mechanisms.

Post-Doha

The workshop started with a look at what was achieved (and not achieved) in Doha (read all about it here). There were no great surprises on this agenda item, but one interesting piece of news was that the European Commission is going to publish a green paper on the way forward by the end of March. Otherwise, the Austrian government expects 2013 to be an “intermediate year” (didn’t we just have one?), with discussions in the ADP more discursive rather than political.

One thing I got wrong: The decision on post-2012 CDM participation of Japan et al. does actually allow issued CDM credits to be forwarded to their national registries. At least that’s the opinion of the Secretariat, because this initial transfer is considered to be part of the issuance process and regulated in another paragraph than other transfers.

Taken together with the new reporting tables agreed under the AWG-LCA for industrialised countries’ biannual update reports, which provide a column for recording the use of market-based mechanisms, Japan et al. thus have everything they need on the technical side to count CDM credits towards their 2020 pledges.

EU ETS

Unsurprisingly, the price crash and future of the EU ETS was one key discussion item during the whole day. Andreas Arvanitakis from PointCarbon outlined that according to their analysis the market would not come back into balance before 2022 without political action. They forecast average prices over the third trading period at 11 Euros with political intervention and 4-5 Euros without. Other presenters gave similar figures. Andrei Marcu from CEPS posited that the current “Western European hot air” was the same as the hot air in the former Eastern bloc countries – and should hence be dealt with in the same way, that is, cancelled.

Benedikt von Butler from Mercuria staked out a controversial position, arguing that the carbon price was not really an issue, the only issue to worry about was whether the cap was adequate. Instead of short-term interventions one should rather adjust the linear digression factor. He cautioned that if the currently low prices were taken as a reason to intervene in the market, this might pave the way for further interventions if at some future time others consider prices to be “too high”. In his view, the difficulty in organising a market intervention signals a very stable regulatory environment, which is positive for investors. He also claimed that the market would very well be able to survive even at very low prices since power utilities now get zero free allocation and therefore constantly need to buy allowances.

Marcu and Damien Meadows from the Commission responded that reaching the ETS’ environmental goal required a long-term signal. Meadows also argued that if the ETS did not deliver, European climate policy might fragment, with each country introducing its own instruments. Anne Boll from Statkraft noted that the market might well survive at low prices, but whether it was going to incentivise the needed investments was rather questionable. At the current coal-to-gas price differential, a price of 30 Euros was needed to incentivise coal-to-gas switch.

In the same vein, Christoph Sutter from Axpo Power argued that current framework conditions would likely squeeze out gas (which he called the “climate middle class”). The profitability of gas plants was currently close to zero and for example in Germany there was currently six times as much new coal capacity as gas capacity in the pipeline.

Future of the CDM and New Market Mechanism

Martin Cames from the Öko-Institute, who is a member of the CDM Executive Board, discussed which issues are important and which ones are not so important in the upcoming review of the CDM’s modalities and procedures. Even though the Board rejected this approach last year, he called for including CDM revenue in the demonstration of additionality. He also urged to reform the rules on crediting periods as many technologies have shorter lifetimes than they can get credited under the CDM and in many cases the CDM only advances investments that would otherwise have been made later anyway. In his view, the length of the crediting period should not be determined by the project participants but included in the methodologies. He also called for reforming rules on emission reduction (“E-“) policies, which currently do not need to be taken into account in baseline setting if they were introduced after 11 November 2001. The purpose of this rule was to avoid giving countries perverse incentives not to strengthen climate policies in order not to damage their CDM potential, but with the adoption of the Bali Action Plan and the Cancún Agreements developing countries have pledged to take stronger action. Cames suggested to introduce a rolling cut-off date, e.g. 10 years before a project’s request for registration.

In my view, if this rule is not changed, it will be necessary to somehow deduct CDM credits from countries’ emissions in 2020 as otherwise the same emission reductions will be counted twice, not only by the buyers but also by the host countries towards their own pledges.

Axel Michaelowa from Perspectives noted that the consequences of the current market collapse were loss of trust and capacity, hibernation strategies and increasing diversity. In his view there will be an increasing fragmentation of prices and quality, the UNFCCC will in the future be only one system among many. He suggested to graft the CDM experience on climate finance and develop integrated carbon finance approaches blending various public and private sources.

Incidentally, Florian Sekinger from KfW outlined that the European Commission, KfW and other partners were currently developing pilots for performance-based sectoral approaches in Indonesia and Latin America. Total EU grant funding will amount to 17 million euros.

Adrian Korthuis from ClimateFocus agreed that the future will be diversified and took a rather interesting perspective. He argued that the CDM had been doomed from the start since the potential supply was always going to be much greater than the absorption capacity of industrialised countries. Indeed, a decade ago already Chinese officials went around telling everyone that China alone was going to be able to provide as many credits as anyone could want. To save the CDM, according to Korthuis supply would need to be squeezed drastically, e.g. by restricting the CDM to certains technologies and/or regions, which hardly seems politically feasible. In addition, the CDM’s “one size fits all” approach has also failed at the sectoral level, with key sectors such as transport hardly being addressed. In Korthuis’ view one should distinguish “countries with emissions” from “countries without emissions” and sectors with easy MRV from sectors with difficult MRV. While the NMM could be a good tool for the former, PoAs, NAMAs and ODA would be more appropriate for the latter.

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