The future of project-based mechanisms in Durban: the European Union has a role to play

With some 4,000 initiatives registered to date, the Clean Development Mechanism (CDM) and Joint Implementation (JI) have proved their usefulness for reducing emissions and attracting investments. However, this success could be called into question in the absence of a clear international framework beyond 2012.

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On the supply side, the “new international mechanisms” will not be operational for a few years. On the demand side, demand for CDM and JI credits within a multilateral framework is not guaranteed. Moreover, demand from the EU ETS will be drastically reduced, as credits generated by projects registered after 2012 will no longer be accepted, except if they are generated by the least developed countries, while the quantitative restriction of some 1.6 billion allowances will rapidly become restrictive. Meanwhile, none of the other developing markets is sizeable enough to take over as the driver for CDM and JI initiatives.

In Durban, the European Union (EU) may stand up for two proposals in order to revive investors’ interest in project-based mechanisms.

1. Confirming that the Kyoto Protocol project-based mechanisms will continue beyond 2012, independently of a second commitment period.
It seems possible to generate CDM credits without an end-date, while JI credits could continue to be generated at least until 2015, the final date for making Governments compliant under the terms of the first Kyoto Protocol commitment period.
This proposal would enable three pitfalls to be avoided:
-losing the experience built up over the past 10 years. The experience of the regulatory bodies, of the governments and of the private players involved (investors, project developers and auditors) has enabled the mechanisms to be reformed and improved, especially over the past two years;
-discouraging the private sector. Once bitten, twice shy: it will be difficult to encourage the private sector to play a role in implementing developed countries’ financing commitments if the CDM and JI fall short;
-market fragmentation. Beyond 2012, the ties between national or regional markets will be guaranteed by project-based mechanisms. The UN mechanisms will be useful as part of a long-term approach that aims to bring the various systems closer together. In this context, their supervisory bodies could play the role of “service suppliers” to the various CO2 markets that want to set up international or domestic initiative mechanisms, which is what they have done for the EU ETS up until now.

In addition, this kind of continuity would allow time to implement the following proposal.

2. Encouraging additional bilateral agreements with governments or regional blocs.
The EU has allowed for the possibility of accepting allowances through bilateral agreements with third-party countries. These agreements would be of particular interest to countries that set reduction targets for their industrial companies, or for close partners of the EU, e.g. the non-EU Mediterranean countries. The acceptance of credits generated by intermediate countries would reconcile the EU’s desire to maintain its role as a leading player in the combat against climate change, and to develop an industrial policy focused on the export of low-emission technologies, with its desire to maintain its requirement levels regarding the acceptable amount of credits within the European market.
Is this a stab in the back for the multilateral process? Not in the slightest. In the short term, the credits generated by bilateral agreements could be supported by the UN infrastructure, which would enhance the multilateral process’ legitimacy. In the medium term, the bilateral agreements implemented by the EU could provide a trial run for the “new mechanisms” of the future, as envisaged as part of international negotiations, which are finding it hard to get off the ground from an operational standpoint. In the event that the trial run is successful, the EU would be making a substantial contribution to the multilateral process.

Benoît Leguet November 2011

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