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UN weakens CDM green credentials, sparks new CER oversupply fears

14 Sep 2012 18:04:01 | edcm

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Project developers currently registering clean development mechanism (CDM) projects in the hope of avoiding quality restrictions are too late. However, the supply of offsets may still rise, since the mechanism's environmental credentials weakened this week, putting even more pressure on already bearish prices.

Certified emission reductions (CERs) from CDM projects in emerging economies will be ineligible for use in the EU's Emissions Trading System (ETS) unless the projects are registered with the UN Framework Convention on Climate Change (UNFCCC) secretariat before the end of this year, or are based in least developed countries (LDCs).

"If you start right now, the chances that you get it ready before the end of the year are practically zero," said Soren Lütten, senior advisor at the UN's UNEP Risoe research body on Friday. "It's too complex, and the demand right now for validation services is too high. I would assume no one can fit that into their calendar right now," he said. "Normally it will take you half a year."

Coal plant methodology controversy

While the LDC restriction may help curb the glut that depresses CER prices, a move by the UNFCCC's Executive Board (EB) to reinstate a controversial offset project methodology for coal-burning power plants is expected to yield millions of CERs per year, meaning the supply could continue to balloon and the green credentials of these credits weaken.

The coal plant methodology adopted by the EB this week awards tradable CER credits for each tonne of CO2 eliminated by building a cleaner coal-fired plant that, hypothetically, may have been built had no CDM finance been available.

"Revised rules will allow new, heavily polluting coal power plants to receive carbon credits under the CDM, helping to subsidise the construction of new coal power plants," non-governmental organisation CDM Watch said in a statement on Thursday. "Potentially, hundreds of millions of euros could flow to more than 40 coal power plants in India and China currently seeking approval."

While new coal projects would now miss the deadline, even those projects already in the pipeline may not qualify in time. The representative body for carbon offset project developers has already voiced concern over around 400 projects waiting to get through some of the final steps before a crucial deadline on 31 December (see EDCM 8 August 2012). CERs from coal projects would only qualify after 2012 if these were based in LDCs.

However, experts consider this an improbable development. As coal is the dirtiest fossil fuel, such projects can only fall under the CDM if an existing plant is made "cleaner" through efficiency improvements, or a new one is built using supercritical technology, rendering them cleaner than traditional coal plants, Lütten said.

"They are unlikely to be built in LDCs, as the supercritical technology requires power plants so large you would not require them in most LDCs," he said. Most LDCs are based in Africa, where hydropower projects are more likely to be built, he added, and a trend in coal-based CDM projects has not only been absent in the region, but is also unlikely to develop.

Currently, high-efficiency coal power plants in the CDM pipeline are located in Brazil, China, India, Iran and Thailand, he said, while supercritical coal plant projects are based in China and India. None of these countries are listed as LDCs by the UN.

Coal in the programmes of activities

While chances may be slim that new coal-related CDM projects would be registered and verified for the EU market before the deadline, a loophole introduced by the EB may this week may allow developers circumvent the EU law banning the use of carbon credits from new projects in non-LDCs after 2012.

The EB has said that coal projects can be included in programmes of activities (PoA), also under the CDM, which are designed to give CERs to projects that achieve minor cuts in emissions, but at many sites. While PoAs only make up around 1% of projects in the CDM pipeline for "normal" developing countries, this type of project is ten times more prevalent as a share of CDM projects in LDCs, Lütten said on Friday. The move may thus further undermine the environmental integrity of the mechanism, even for EU-authorised CERs in phase III.

Another factor jeopardising the green credentials of the CDM is the issue of additionality, which the EB failed to address this week. Additionality measures how many tonnes of CO2 are avoided by implementing the projects, and decides how many credits it can earn. The board disregarded this issue in the rules adopted this week.

"[By] lifting the suspension of coal projects and at the same time refusing to strengthen additionality rules, the board may have accelerated the end of the CDM," CDM Watch's carbon expert Anja Kollmuss said.

Asked if she thought that the very low CER price would at least help discourage the building of such environmentally unsound coal plants under the CDM, Kollmuss said, "No, because in our opinion, all these coal power plants are not additional: they would have been built anyway. So low prices just mean slightly lower profits, but these coal plants will be built regardless of the CDM."

Price impact

While the European Commission cannot freeze CER issuance, it can strangle supply in the world's largest CER market, the EU ETS. If EU buyers are blocked from using a certain CER, the seller is likely to struggle to find another market. The EU has already blocked CERs from certain large-scale industrial gas projects, and its laws allow it to introduce new restrictions at any time until 2020.

However, a spokeswoman did not comment by presstime on whether the EU would introduce further restrictions to CERs in light of the UNs' move as a way of safeguarding the environmental integrity of the offset it allows within its ETS. MLDB

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