Carbon Market Watch

For fair and effective climate protection.

Reform Panel ignores inherent flaws of the CDM (Watch this! #3)

31 Oct 2012

See Watch This! #3, October 2012

By Eva Filzmoser, Director, CDM Watch

In September, the High-Level Panel on the Clean Development Mechanism (CDM) Policy Dialogue presented its final report with recommendations on how to improve the CDM. Overall, the report fails to address fundamental flaws of the CDM, is strongly based on political opinions and ignores important research. It does however include important recommendations about improving accountability, establishing a grievance mechanism and stresses the importance for the CDM to go beyond offsetting. Nevertheless, decision-makers need to be careful with some of the recommendations of the Panel that simply aim at saving the CDM for its own sake because of the impending collapse of carbon markets.

Over the past eight months, the High-Level Panel on the CDM Policy Dialogue has carried out stakeholder consultations and commissioned a number of reports to draw conclusions about the CDM and to develop recommendations to make the CDM “fit for the future”. On the basis of a combination of stakeholder meetings and a research programme, a final report was presented to the CDM Executive Board in September. Policy Dialogue members are expected to be peddling at the COP-18 in Doha with the hope that their recommendations be adopted in the final negotiations texts. While their positive recommendations should definitely be adopted, CDM Watch will be making sure to warn delegates about recommendations that ignore inherent flaws of the CDM and initiatives that only attempt to fix the carbon market for its own sake.

Oversupply is caused by fake emissions reductions

The Panel’s report rightly points to the lack of ambition in climate targets and the lack of demand for CDM credits which has contributed to the current price crash. However, the report fails to acknowledge that part of the problem has been created by CDM’s own rules. CDM rules have caused the market to flood with fake credits from projects that would have been built anyway and with questionable industrial gas projects. Such credits have significantly contributed to what is now an over-supply of credits at incredibly low prices and, most importantly, a serious undermining of the environmental integrity of the CDM. If credits from non-additional projects are used to comply with emission reduction targets, the result is increased global emissions

Many research studies and investigative media reports provide solid evidence that a significant number of CDM projects are unlikely to be additional, a fact which is disregarded by the Panel. “By-and-large projects do meet the additionality tests because that is what the research has indicated,” said Mohammed Valli Moosa, chair of the Panel, at his presentation to the Board.

The recent carbon market collapse underlines once more that many CDM projects don’t rely on the additional CDM financial support to be viable. With credit prices being so low it is difficult to see how new projects can be additional. Additionality rules need to be fundamentally reformed. However, without ambitious climate targets, there is no need for an offset mechanism.

Green Climate Fund must not finance windfall profits

The Panel recommends establishing a fund that would purchase and thereby cancel part of the current oversupply of CDM credits. This could provide huge windfall profits to industrial gas and large infrastructure projects which deliver the vast majority of credits but have very limited environmental integrity and only few or no sustainability benefits. In the absence of strict rules that ensure truly additional and sustainable projects it does not make sense to save the CDM for its own sake and potentially at the expense of tax-payers. Much larger emission reductions can be achieved by directly supporting new and effective climate policies.

REDD must not be included in the CDM

The Panel recommends to allow Reducing Emissions from Deforestation and Forest Degradation (REDD) and other forest management pilot activities in the CDM, despite the fact that REDD has long been identified as unsuitable in this project-based mechanism. The Panel’s report identifies only a very limited set of risks associated with such projects and ignores key issues and risks discussed in the UNFCCC and in relevant literature, such as non-permanence of emission reductions, establishing crediting baselines, carbon leakage, and demonstrating additionality or potential impacts on biodiversity and livelihoods. In Doha UNFCCC delegates must remain firm and keep REDD out of the CDM.

Thumbs up for verification and monitoring of sustainability benefits

The Panel recommends that sustainable development impacts be reported, monitored, and verified throughout the lifetime of a CDM project and that safeguards against negative impacts on sustainable development be enhanced. The Panel also recommends strong guidelines for adequate local consultation procedures, which were long awaited. CDM Watch very much welcomes these suggestions, however, not so for the CDM Executive Board. In the meeting following the presentation of the Panel’s report, the Board, decided to adopt a voluntary set of reporting guidelines that will do little to improve sustainability benefits of CDM projects.

Moving the CDM beyond offsetting

Although the Panel recommends moving the CDM beyond offsetting, the report lacks a comparative assessment of the CDM with other policy instruments, such as emissions trading schemes (ETS), carbon taxes and other domestic policies. Given the urgency to reduce global greenhouse gas (GHG) emissions, the future of the CDM and other market mechanisms can only be based on net emissions reductions and ambitious binding climate targets, not offsetting alone.

The Panel’s report can be downloaded here: http://www.cdmpolicydialogue.org/

What is additionality and why is it important?

The Clean Development Mechanism (CDM) as such does not reduce net global greenhouse gas emissions. For every tonne of emissions reduced in a host country, an investor is allowed to emit one tonne more at home. If a CDM project does not reduce emissions compared to what would happen anyway (“business as usual scenario”), then the net effect is an increase of global emissions. Therefore business-as-usual CDM projects actually increase global emissions. The additionality principle is therefore fundamental for the CDM and any offsetting mechanism that works under a cap.

There have been estimates that 20-70% of all CDM projects are non-additional. Very large infrastructure projects, where revenues from carbon credits make up only a tiny fraction of profits, are particularly unlikely to be additional. For example, large hydro power and coal power projects have repeatedly been shown to be business-as-usual.