New publication: The Clean Development Mechanism as Glue for the International Carbon Market?

Cross-post from the Wuppertal Institute website.

Discussion paper analyses new systems and evaluates problems of the CDM

During the first Kyoto commitment period, the Clean Development Mechanisms (CDM) emerged to be the global currency for emissions trading. However, the CDM has not been without its critics, who have raised questions with regard to the additionality of projects, the mechanism’s bureaucracy and transaction costs, and the unequal regional distribution of projects. Efforts to reform the CDM are underway, but at the same time the global carbon market faces a prospect of fragmentation as other domestic and international offset systems are developed by various jurisdictions. Prominent examples include Japan’s development of a Joint Crediting Mechanism / Bilateral Offset Credit Mechanism (JCM/BOCM) and the development of offset protocols in the framework of the emission trading systems (ETS) that are being established by California and Québec. Australia is also developing its own domestic offset mechanism in addition to allowing the use of Kyoto units in its domestic ETS starting in 2014.

The design of new systems can, among other aspects, be considered as a reaction to the perceived failings of the CDM and an evaluation of their characteristics may therefore contribute to discussions on how to reform the CDM to help continue its “glue” role in international carbon markets. A new paper by Wolfgang Sterk (Wuppertal Institute), Aki Kachi and Dennis Tänzler (adelphi) therefore explores perceived issues with the CDM as reflected in statements on CDM reform from these jurisdictions and the decisions they have made in establishing their own systems.

Key findings from the research are:

In developing their offset systems, Australia, California and Japan all explicitly rejected the project-by-project approach to additionality that the CDM has taken so far. Instead, they all promote an ex-ante additionality assessment approach for entire classes of projects and consider this to be not only more efficient and cost-effective but also to be more “objective”, implying a higher degree of environmental integrity. Moving towards greater standardisation of additionality testing and baselines in the CDM might therefore enhance its chances of being allowed to be used for compliance in new systems and continue being allowed to be used in existing systems.

However, while standardisation may lower overall transaction costs in the system, it also frontloads transaction costs and shifts them from project participants to those who develop the standardised metrics. The experience of Australia, California, and Japan underlines this argument as in all three jurisdictions the public sector needed to invest significant effort to establish the data basis necessary to standardise baselines and performance standards. Without substantial support from industrialised countries, standardisation may therefore be beyond the capacity of most developing countries.

Though the transaction costs of an individual scheme may be lower than those of the CDM, a multitude of standards from different schemes may overburden developing countries, which are already struggling with the current CDM/UNFCCC system.

Forests, land use, and sinks have always been a controversial issue in the CDM. Current rules only allow afforestation and reforestation projects, but even those are not accepted in the EU ETS due to fundamental concerns about the integrity and permanence of forestry projects. By contrast, Australia, California and Japan all include forestry in their systems. One key point of the controversy is whether or not it is appropriate to address forestry on a project basis. A resolution might perhaps be possible through a sector-based approach as is foreseen in the emerging system to reduce emissions from deforestation and forest degradation (REDD+).

The paper can be downloaded here.

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