CDM after 2012
The carbon trading sector has flourished specially in China over the last few years but investors are now concerned that the bubble might burst amid general economic gloom as well as regulatory uncertainties both here and overseas
With the Kyoto Protocol also set to expire in 2012, the industry also needs to start looking at other options.
A new global climate change deal needs to be unveiled after the disaster summit in Copenhagen in late 2009.
It will determine whether the clean development mechanism (CDM) - the lynchpin of the global carbon trading industry - will exist after 2012
The negotiations are providing some positive signals, But it isn't clear what the CDM will look like in four years time." Others are hoping that domestic and international regulators can come out with a "plan B" that will enable the carbon business to survive. In China or anywhereelse, it could involve a domestic emissions trading platform, or even a voluntary arrangement.
The hot money that has been sustaining the sector for so long could easily flow away. With as much as 80 pct of Silicon Valley venture funds now focusing on renewable energy projects, including the CDM, overall sector risks and concerns about the global economy as a whole could also precipitate a mass migration of capital,
2012 remains the key issue. No other commodity needs to consider whether it will exist after 2012.
Such has been the conflict that has run through the sector from the very beginning. Bringing the muscle and innovative flair of the world finance markets to bear on the problems of anthropogenic, or human caused, global warming was regarded as critical. From this came the clean development mechanism, a way of making sustainable projects in the developing world profitable for investors in developed countries.
The CDM allows a country like China,India and other developing countries to draw on funds from the West to pay for projects that lead to verifiable decreases in greenhouse gas emissions.
A nationwide emissions trading scheme in the developed countries would have no serious detrimental impact on the economy and add less than one cent in the dollar to households bills, according to analysis by the CSC B.V.
There is growing support in industrialized nations for such trade support to protect the competitiveness of their import-competing industries by imposing duties on goods coming from developing nations without similar emissions restraints.
This is done through the creation of "certified emission reductions." The mechanism is essentially a trading platform for a hypothetical commodity, and it requires high levels of bureaucratic support.
Naturally, traders are worried that if Kyoto expires and the bureaucracy withers, there will be nothing left to trade. In order to prevent valuable funds from reaching projects that would have been built in any event, the CDM forces investors to choose marginal projects that depend on the sale of carbon credits in order to make a profit.
This concept - known as "additionality" - is perhaps the most controversial aspect of the CDM.
The lack of sufficient market information" was also affecting the way carbon dioxide reductions are measured, and therefore undermined the whole purpose of the clean development mechanism. The UN has been looking into these problems, and an army of assessors and verifiers has already been established in order to make sure that "additionality" is achieved for each and every project
But if the calculations depend on putative emission cuts that take place after 2012, the additionality concept might create fresh problems. "Project owners will now struggle to find additionality unless they can prove that something will exist beyond 2012.
China has been dominant in the sector so far, providing as much as 73 pct of global emission reductions last year. Its nearest rival, India, provided just 6 pct. and rest of the developing countries 20pct.
The reason why China has been so appealing is obvious? "The marginal cost of (carbon) abatement in China is much lower than in other parts of the world.
China had completed carbon credit transactions covering 900 mln. metric tons of greenhouse gases and worth more than 10 bln USD by the end of 2007. Many of the projects have been less than successful, experts have said. In China, the best performing sector has been HFC abatement projects, which have delivered 100 pct of the cuts specified in the original project documents. Some have complained that in the early days of the CDM.
Some have complained that in the early days of the CDM, refrigerant producers actually scaled up HFC output in order to earn more credits from the abatement process.
A loophole in an important part of the Kyoto Protocol and has cost nearly $6 billion to developed countries taxpayers.
HFC 23 emitters can earn almost twice as much from the CDM credits as they can from selling refrigerant gases –
It would cost only $100 million to pay producers to capture and destroy HFC 23 compared with $6 billion in CDM credits almost 30% of projects in the CDM pipeline( 80 % are from china ) were for destroying HFC 23. The obvious solution we should limit the CDM to carbon dioxide, rather than the six greenhouse gases covered by the UN's Kyoto Protocol.,
The controversy centers around the inclusion of refrigerant-producing factories that generate the powerful greenhouse gas HFC 23 as a by-product. Many of these factories are in China, where investors can get CDM credits for destroying HFC 23, a relatively cheap process. It is very wasteful to use the CDM to ensure destruction of HFC 23, when it would be far cheaper to simply give the factories the money to install the equipment to destroy the gas.
The worst performing sector has been biomass, which has delivered only 20 pct of the expected CERs so far, and landfill gas utilization has done only slightly better. It is the sectors with the lowest risks rather than the highest profits that are growing the most quickly
China has already slapped a 65 pct tax on carbon credit revenues earned through HFC abatement, with the aim of encouraging investment in other sectors, but that might prove difficult in the current climate.
China's dominant role in the sector has been one of the main worries. China has been playing such a big role that the CDM was originally referred to as the China development mechanism.
There are enduring concerns in the US and Japan that the country - which as a developing country has not itself been forced to make mandatory carbon cuts - has been getting a free ride out of the arrangement. Many reckon that it will be next to impossible to bring the US into any new arrangement without forcing countries like China to commit to targets.
But China remains vehemently opposed to the idea of implementing mandatory carbon reductions as part of any new deal.
Furthermore, it is also trying to press its advantage in the current round of negotiations, hoping to use "CDM II" to facilitate greater levels of technological transfer from the west to the east.
The impasse might not be broken soon. A complete market collapse might seem unlikely. The question doesn't merely perturb investors and project owners. It also involves the world's most powerful governments all anxious to demonstrate that they are doing something in the fight against global warming.
it would be difficult to come to an agreement capable of satisfying the different objectives of the EU, Japan, the US, India and China, We expects something to survive after 2012. It will be great to have a CDM II, but let's have a plan B and a plan C as well..
That "Plan B" would be a "VER" or "voluntary emission reduction" scheme, and would build on existing markets. It could be just as effective, . In the end, there was far too much at stake to let the CDM disappear completely, Even if the Kyoto Protocol dies - andwe cannot imagine that happening – the CDM can survive…