Back to the greenhouse

The world's leaders have done more than just create embarrassment for themselves from the stalemate of the Copenhagen climate talks: they've managed to hobble the one market mechanism from the Kyoto Protocol that was actually delivering substantial emission reductions.

That's bad news not just for the handful of Australian companies that specialise in this area – and the several dozen that were looking at such investments – it also poses a problem for the Australian government as it decides on a voluntary reduction target by the end of January and tries to estimate the portion of that target which could be sourced from overseas.

The Clean Development Mechanism was created under the Kyoto Protocol to allow investors and developers the opportunity to generate carbon credits from emission reduction projects (such as energy efficiency and renewable energy installations) made in developing countries.

The CDM has grown to be a $6 billion market, despite being stymied by suffocating bureaucracy and often ill-defined criteria. But it now seems destined to come to a crashing halt because of the lack of ambition – and legally binding targets – produced in the Copenhagen Accord.

Negotiations on the CDM and the proposed REDD-plus forest-based mechanism (Reducing Emissions from Deforestation and Degradation) had been one of the few bright spots of the Copenhagen talks, right up until those chaotic last 24 hours when the politicians finally got involved.

What followed is a confusing mess that lawyers and analysts say will take several weeks to digest – another way of saying it will probably take that long to find anything positive.

The immediate market response was not good. The price of carbon credits in the main European market slumped nearly 10 per cent, taking the CERs (Certified Emission Reduction) units created by the CDM down with them.

Mark Lewis, the Paris-based carbon analyst at Deutsche Bank, says the tenuous nature of the Copenhagen Accord, and the fact that it was not even approved, only noted, by the broader constituency, means the future of the CDM mechanism is uncertain, at least in its current form.

"We think the development of new CDM projects is likely to slow over the course of next year, and perhaps significantly so,” he wrote in a pre-Christmas analysis.

That's bad news for the likes of Nic Frances, the CEO of Cool NRG, who had been hoping a positive lead from Copenhagen would lead to numerous opportunities to repeat a ground-breaking energy efficiency project in Mexico.

Frances says many CDM projects have been on hold in the past 12-18 months as developers looked for signs of certainty. Cool NRG only undertook the Mexico project – the world's first scaleable CDM project – just to show it could be done.

"Where we go to now, I'm not too sure,” Frances says. "If you don't have targets, there is no incentive to buy credits.”

Much will depend on the nature of the targets produced by individual countries by the deadline at the end of January. But these are not expected to be ambitious, with Europe already signalling it will likely produce a 20 per cent target, rather than a 30 per cent cut that had been discussed at Copenhagen, and the US and Australian governments hamstrung by their lack of domestic mechanisms and dissident law-makers.

One of the major points of contention around the CDM had been what could and could not be included in the mechanism. Brazil wanted forests included – as a more immediate precursor to the forest-focused REDD-plus mechanism, which is likely to take years to finalise – while Saudi Arabia opposed this unless carbon capture and storage was included.

The Saudis, of course, have plenty of empty oil wells to bury carbon and want the support of any financing mechanism they can find to make it financially appealing. Australia has an abiding interest in this as it wants to continue exporting the stuff that creates most of these emissions – namely, coal – even if CCS has not yet met the burden of proof on a commercial scale.

The other sticking point in these talks is the idea that developed countries should be using a mechanism such as CDM at all, or to what extent. There is some resistance to the idea that nations such as Australia and the US should seek to be exporting so much of their emission reduction endeavours to developing nations where such abatement is cheaper.  

Australia had proposed under its ill-fated CPRS that all its reductions could be sourced overseas through such mechanisms as the CDM and REDD-plus. The US proposed that up to half its reductions would come from such sources, but given the size of its task that would have created huge demand for such projects.

The bitter irony is that even simple and easily achieved reductions from energy efficiency measures are likely to be put on hold, at least in many developing countries, because there is no incentive to act.

There is an incentive to delay action because any move now would mean that such projects would not meet the criteria of "additionality”, which means only those projects that would not have gone ahead without the mechanism can qualify for credits.

It's the sort of mind-blowing chicken and egg situation that typifies the carbon abatement industry. We're right back to square one.