CDM and the zero-sum game

The realities of the international carbon markets have caught up with both developing and developed countries. Would Mother Earth be pleased, or not?

It seems that the reality of the Clean Development Mechanism (CDM) has finally caught up with many Kyoto parties at COP17 last week in Durban. Concerns around the CDM are no longer just the isolated, extreme views of the likes of Bolivia, reflected so poetically in the draft long-term cooperative action (LCA) negotiating text released last Friday. Recognising the rights of Mother Earth to ensure harmony between humanity and nature, the proposed text demands that: "there will be no commodification of the functions of nature, therefore no carbon market will be developed for that purpose... no offsetting or market mechanisms shall be applied or developed." Period.

It is in this context of offsetting that many developing countries were heard, in their plenary and contact group interventions, questioning the role of mechanisms like the CDM in the post-2012 regime.

It all comes back to the old Kyoto concept of supplementarity – the idea that developed countries should be achieving the majority of their emission reductions at home and not through offsetting under mechanisms such as the CDM.

But why this new-found interest in a concept that never achieved any level of specificity during the Kyoto negotiations (primarily because the divergence of views was so great, everyone could only agree on vague and general language, and preambular language at that)? The answer is twofold: first, the politics around a second commitment period under the Kyoto Protocol, and second, the growing realisation among the likes of developing countries China and India, that the CDM – as with other market-based mechanisms being put forward for the post-2012 period – is ultimately a zero-sum game.

On the first point – and as illustrated so clearly through the articulation of the rights of Mother Earth – it has been clear from the negotiations this week that a number of developing countries believe that access to market mechanisms such as the CDM should not be allowed unless there is agreement on targets for developed countries under a second Kyoto commitment period. Text proposed in the LCA negotiations have clearly articulated this position: no second commitment period, no access to the CDM. Developed countries, meanwhile, are sticking to their position: no second commitment period unless large developing country emitters sign up too; even the European Union, which has a history of caving in the final days of negotiations, appears to be sticking to its guns.

(Speaking of guns, another mitigation measure included in the draft LCA text exhorts us to make love, not war – not surprisingly because conflict-related activities emit significant greenhouse gas emissions to the atmosphere. The proposal recommends diverting “associated financial resources and investments into the shared global effort to combat a common enemy: climate change.")

But it is the second point which is perhaps the more significant – and it is one that a different set of developing countries are quietly making. The big developing country emitters – China, India and Brazil, who have been host to the vast majority of CDM projects to date – now see that prolonged exposure of their countries to CDM projects only makes things more difficult for them as they move towards putting in place their own mitigation policies and measures; which, in the case of China, will be some form of emissions trading in the next three to four years.

The more CDM projects a developing country approves, the more lower-cost abatement that will get shipped offshore to assist developed countries meet their own targets – whether Kyoto-style or not. In theory, this will increase the costs for the Chinas and Indias to implement their own schemes to reduce emissions, as they cannot double count the reductions achieved by CDM projects within their borders, as these will already have been counted by developed countries.

So politics and practicalities have been at play behind some interesting interventions by developing countries at COP17 so far – albeit with very different drivers – that CDM might not be in the longer-term interest of the post-2012 regime.

Private sector market participants who have funded most of the almost $160 billion in CDM investment to date would, of course, disagree. And on the margins of the Durban COP, industry groups have been vocal in reiterating the importance of these market mechanisms going forward.

And of course there are also the hundreds of other developing countries – particularly middle-income and least-developed countries across Africa and south-east Asia – which have seen enough of the sustainable development benefits that flow from hosting CDM projects to turn their backs on the CDM.

Fortunately for public and private sector market participants, the legal structure of the Kyoto Protocol means that, in the absence of any agreement on a second commitment period at COP17 and beyond, the Protocol continues – as do all the institutional architecture and rules around the CDM. And through the 2 per cent levy on CERs, the Executive Board has sufficient funding to continue its functions after 2012.

Looking through the politics on the CDM at this COP, one can perhaps almost visualise a time when the CDM is unhinged from the political negotiations around long-term cooperative action to become a sort of global compliance standard. Under this approach, rules and procedures on technical aspects would still be set through the UNFCCC, but policy decisions around the eligibility and validity of CERs would be a unilateral (sovereign) choice of countries – both for buyers and sellers. Buying countries could elect to restrict the quantum and quality of credits that can be used in domestic trading schemes (as the European Union has already done for Phase III of its emissions trading scheme), while developing countries could refuse to host projects and the sale of credits to countries that have not signed up to a second commitment period target or deemed equivalent.

Given the current political stand-off, this would seem like the most reasonable approach. But, of course, the international climate negotiations don’t work as neatly as that. So it will be interesting to see in this second week here in Durban whether the negotiating parties can find enough common ground on these issues to give at least a little more clarity around the CDM in the post-Kyoto world.

Paul Curnow is a Partner with law firm Baker & McKenzie, specialising in environmental markets