Clean Development Mechanism Set for Revamp Next Year

The Clean Development Mechanism, the United Nations-overseen carbon market beset by record low prices, is set for revamps next year as initial commitments under the Kyoto Protocol expire.

“Everything is on the table” for making the program more effective, Niclas Svenningsen, manager of strategy and policy development at the UN Framework Convention on Climate Change, said today at an emissions conference in Bangkok.

Many investors don’t realize the CDM is due for automatic review as the first commitment period of the Kyoto treaty, which runs from 2008 through 2012, comes to an end, he said. The program, intended to give richer countries an incentive to fund emission-abatement projects in developing countries such as China and India, may face low prices through 2015, according to analysts including Orbeo.

The review of the CDM will include whether certain technologies need to be banned, Svenningsen said. At last year’s meeting in Marrakech, Morocco, the UNFCCC deferred a proposal to prohibit UN emission credits linked to hydrofluorocarbon-23 and other industrial gases, even though the EU will ban such offsets starting in May 2013. While HFC-23 traps thousands of times more heat than carbon dioxide, the EU decided to stop allowing these credits in its emissions trading system, the world’s largest, and is urging an outright ban on HFCs.

‘Very Important’

Svenningsen said he hopes there will be a push for countries to agree to a so-called second commitment period of Kyoto, or Kyoto 2, at this year’s climate summit in Doha, Qatar. That would mean developed nations would commit to binding cuts in emissions starting in 2013. So far, Europe is alone in its pledge to adopt new mandatory targets.

“Kyoto is still very important because it is still the only legally binding agreement that exists,” Svenningsen said. While nations including Japan, Russia and Canada ruled out new commitments under the treaty at last year’s climate summit in Durban, South Africa, Svenningsen said he would like to see them sign up for additional emissions caps at the Doha meeting.

Developing nations have doubts about the long-term value of UN credits that won’t disappear even with new commitments to Kyoto, Lu Xuedu, an adviser at the Asia Development Bank, said at today’s conference. He predicted a shakeout of investors participating in emissions trading.

‘Dumping CERs’

UN emission credits may drop close to zero this year before a possible rebound after 2015, according to Orbeo.

Projects and investors with UN greenhouse-gas credits known as Certified Emission Reductions are selling them as quickly as possible, said Dorothy Denis, senior manager at Orbeo, also known as Solvay Energy Services.

“We see people are dumping CERs,” Denis said today at a conference in Bangkok. “It may be bad by the end of the year. We think prices may fall close to zero.”

The price of CERs for December has plunged 85 percent in the past year because of an oversupply of credits. It’s possible that prices could rise to 10 or even 20 euros ($13 to $26) a metric ton after 2015 if some carbon markets are linked as part of a global agreement, Denis said.

“The key to reviving CDM prices is increasing demand,” Sung-Woo Kim, regional head of Climate Change and Sustainability in Asia Pacific for KPMG LLP, said at the conference. Prices may recover as more trading systems are put in place around the world, he said. Australia, which started charging its largest emitters a price of A$23 a ton in July, is scheduled to begin a cap-and-trade system in 2015. South Korea’s legislature agreed to start its carbon-trading market the same year.

“Right now, prices are low and may stay that way until the new systems are established by around 2015,” he said.

(Corrects UNFCCC stance on Kyoto 2 in fifth paragraph of story published Oct. 30.)
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