UN CO2 Rule Change May Shift Investors From China to Africa

The United Nations may ease rules for carbon-cutting projects such as water heaters and efficient cookstoves in countries including Uganda and Sudan, helping to shift investors away from China.

The UN Clean Development Mechanism’s Executive Board, regulator of the world’s second-biggest carbon market by traded volume, agreed last week to consider ways to quicken the approval procedure for some emission-reduction activities. The new process would help ease difficulties facing projects that produce fewer emission reductions than others, including those that create usable fuel from animal dung and renewable energy initiatives small enough to power a light-bulb.

“It’s definitely a good thing,” Gareth Phillips, chief climate change officer at Sindicatum Sustainable Resources Group Ltd., a Singapore-based developer of carbon offset projects, said in a phone interview from Jakarta yesterday.

“Small-scale projects sometimes end up being more complex and harder to do than normal-scale projects, because the methodologies are shorter and sometimes didn’t address questions that the auditors and regulators had, so they were left hanging,” he said. Small-scale projects are defined by the UN as those generating fewer than 15,000 tons of credits.

Favored-Activities List

UN Certified Emission Reduction credits for delivery in December have slumped 71 percent in the past year to 3.66 euros ($4.68) a metric ton. The price plunged as a rush of investments boosted supplies while a failure of nations to agree on a global climate deal left the Europe Union, where CERs can be used for compliance with the bloc’s emissions trading system, as the main market for UN credits. They traded at a record low of 3.27 euros last month. China produces almost two-thirds of all credits, the first were issued in 2005.

The Executive Board wants to consider expanding a list of favored activities to include those that produce fewer offsets, according to a May 11 statement. The list identifies projects that are automatically deemed to require emission credits to make them financially viable, or “additional.”

Sindicatum said expanding the favored-activities list may make it quicker, easier and probably cheaper for some projects to get through the approval process. The list would allow the Executive Board to automatically deem some projects as additional, rather than seeking proof from each one that extra revenue from offsets is needed to make it viable.

Challenging Process

CF Partners, a London-based fund that invests in emissions-cutting projects and matches credits to buyers, said it has funded rural biogas projects, which can be more difficult to develop despite the emissions savings and improvement in quality of life for communities they bring.

“The validation process is challenging when compared with more proven methodologies,” David Crowe, primary portfolio manager at CF Partners, said by e-mail. “Streamlining this process would encourage us to increase our investment in similar projects.”

The CDM Executive Board, which met to discuss new regulations last week in Bonn, said it may consider skipping the so-called validation stage, an early check to ensure a project will actually cut emissions and so may be approved to win credits.

Risk of Uncertainty

“The purpose of validation is to show that a project meets the rules and that emissions reductions are calculated and monitored in the correct way,” Tom Morton, a director and co-founder at ClimateCare Ltd., said by telephone from Nairobi. “If you drop it altogether that might lead to some uncertainty. We need to see what they are proposing to put in its place.”

About a quarter of the world’s population doesn’t have access to modern cooking fuels or electricity, forcing people to use kerosene-burning lamps for light, and wood and charcoal to cook food and boil water to make it safe for drinking, according to UN Environment Program figures.

The panel also approved a standardized way to measure emission reductions associated with reducing demand for firewood and charcoal in less-developed countries. The new approach, which sets so-called default values for each country, will give investors an early signal as to where the most emission reductions can be made, according to ClimateCare.

‘Exciting Initiative’

The changes may tempt investors to back projects previously bypassed in favor of industrial investments that generate more credits, such as those in China and India linked to hydro-fluorocarbons and adipic acid which make up 62 percent of all credits issued so far.

“This is an exciting initiative because it could spur a great many, very beneficial projects in regions that have yet to fully benefit from the CDM,” Maosheng Duan, chairman of the Executive Board, said in the e-mailed statement. “The next step is to come up with a workable proposal, one that reduces transaction costs yet ensures that the emission reductions produced are real, measurable and additional.”

Since the carbon offset program started accepting applications in 2003, it has taken more than a year on average for projects to complete the so-called validation stage. That period has shrunk to about 250 days on average for projects, according to figures for April based on analysis from the UN Environment Program’s Risoe Center.

The UN’s carbon market was created by the 1997 Kyoto Protocol, an agreement ratified by 191 countries, excluding the U.S., that set emissions limits for developed countries in the eight years through to 2012. The market is governed by rules agreed under the Marrakech Accords in 2001. Nations are meeting this week in Bonn, to continue negotiations on climate protection agreements after 2012.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE