CDM for GHG Emission Reduction – Lessons Learnt & Future Direction

Multicountry Observational Study Mission on Greenhouse Gas Emission ReductionTaipei, Republic of China, 1-5 October 2012

Team Lead, Project & Entity Assessment Unit, SDM Programme, UNFCCC Secretariat Dhirendra Kumar

Overview

1. Context

2. The UN carbon market mechanisms

3. Lessons Learnt

4. Durban and future prospects

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FIRST MOVER

The United Nations has overseen the development and operation of the world’s first large-scale carbon offset mechanism for more than a decade.

Background

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THE EXPERIENCE OF THE CDMMAKES CLEAR THAT THERE ARE NO EASY SOLUTIONS

There is no reason to believe that any new offset programmes will find the going easier. Other offset mechanisms would have to overcome the same hurdles that the United Nations has had to overcome, unless of course they learn from what has gone before.

Background

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Background

Marrakesh Accords

Agreed in 2001

Operationalized the market-based mechanisms

Framework Convention

Agreed in 1992 (entry into force in 1994)

Near universal ratification

Kyoto Protocol

Agreed in 1997 (entry into force in 2005)

All Convention signatories except Afghanistan, Canada, USA

Established three market-based mechanisms

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The three mechanisms

Clean Development Mechanism (CDM)Offsetting mechanism

Issues credits for emission reductions indeveloping countries

Also promotes sustainable development

Other two mechanismsJoint implementation and internationalemissions trading

Have attracted significantly less investment

Allow developed countries to reallocate theirmitigation targets among each other

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CDM around the world

Over 5,600 projects in the pipeline

>4,600 registered projects in 75 countries

>2.7 billion CERs estimated in pipeline;

1 billion CERs issued

… with 1.7 billion more by 2020

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Registration and issuance

Preparation of project proposal

Validation of project

proposal

Consideration of request for registration

By project participants

By third-party auditor

By Executive Board

Monitoring of emissions

Verification of emissions

Consideration of request for

issuance

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Basis for issuing credits

Baseline

Cumulative emissions

Time

Actual emissions

Credits issued(ex post)

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Types of CDM projects

• Over 100 methodologies are currently in use• Most project types are eligible, including CCS• Exceptions:

a) Nuclearb) Most land-use, land-use-change, and forestry

projects• Geographically diffuse activities (e.g. household

lighting, cook stoves etc.) can be considered as a single project programme of activities / programmatic CDM

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Distribution of credits to date

45%

23%

8%

7%

5%

12%

HFC23N2OHydroWindEEOther

Project types have to date been dominated by industrial gas destruction.

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Distribution of all credits in pipeline

17%

9%

16%

11%7%

38%

HFC23N2OHydroWindEEOther

Project types are expected to become more balanced over time.

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Household biogasdigesters

CDM Project 121Karnataka, India

Examples of CDM projects (1)

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Rapid and reliable bus transport

CDM Project 672Bogotá, Colombia

Examples of CDM projects (2)

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Solar cookers

CDM Project 2307China

Examples of CDM projects (3)

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Primary design principle

ENVIRONMENTAL INTEGRITYPRIMARY DESIGN PRINCIPLE

Need to ensure that offsets are high-quality and additional.

The CDM itself is a carbon ‘standard’ because it sets out its own standard procedures for assuring the quality of projects.

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Additionality

• Broad range of tools for the project-based approach

Investment analysis

Barrier analysis

Common practice analysis

• Time-bound crediting periods, revisions to baselines

Cumulative emissions

Time

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Additionality: beyond the project-based approach

• Strengths of the project-based approach:

Individualized assessments

Generation of rich and voluminous data

• Weaknesses of the project-based approach:

X Extremely resource-intensive

X Potential for inconsistency across projects

• Alternatives:

Positive lists

Standardized baselines

Conservative estimates

Performance benchmarks

Sector-based crediting?

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ACCESSIBILITYSECONDARY DESIGN PRINCIPLE (1)

Secondary design principle (1)

• Streamlining of operational processes

• Clarity of guidance

• Stakeholder engagement and consultation

• Capacity-building for potential offset providers

• Risk-based assessment

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• Avoid patchwork of standards

• Common rules for measurement, reporting and verification

• Opportunities fortrade, export, and commercial ties

Secondary design principle (2)

AN INTERCONNECTED CARBON MARKET IS MORE EFFICIENT

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• New domestic and regional emissions trading systems are emerging

• Several proposed emissions trading systems will accept CDM credits (CERs) for compliance purposes

• Supply of CERs is expected to meet demand

SIGNS THAT THE GLOBAL CARBON MARKETWILL CONTINUE TO GROW AND EVOLVE

Looking forward

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Affirmation of market-based mechanisms

• Parties acknowledged the role of market-based mechanisms in helping to meet the climate change challenge

Future of the CDM is guaranteed

• Agreement to adopt a second commitment period (starting in 2013 and running until 2017 or 2020)

• Agreement to maintain and build upon the existing market-based mechanisms

Durban Conf. Decisions

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New Market Based Mechanism• New common market based mechanism under UNFCCC • Important element in the EU package for agreeing CP2• Procedures and modalities in 2012

• EU proposed in earlier submissions a Sectoral Crediting Mechanism to:

• Move from projects towards mitigationin sectors, regions/cities, economies

• Improve governance and efficiency

• Other parties may have different views

• Parties still to agree on the features of the mechanism

Durban Conf. Decisions: New MBM (1)

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Close climate finance gap• Align climate finance

needs with private sector investment requirements

• Leverage scarce public funds via private funds

Build on CDM experience• CDM reform goes ahead

at pace• Reduced transaction

costs• Move beyond project

boundaries

A global market• NMBM , NAMA´s

improved CDM could be the stepping stone for a global carbon market

Scale up emission reductions• Sector transformation

instead of individual projects

• Achieve systematic host country involvement

Durban Conf. Decisions: New MBM (2)

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www.cdmpolicydialogue.org

• High level panel - distinguished persons not connected to CDM• Independent from UNFCCC and CDM EB

• Recommend actions to best position CDM in the future• Focus on 3 research areas: Impact, Governance, Context

• Report presented at EB69 (Sep) & ready for CMP 8

CDM Policy Dialogue

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• What is the role of CDM and JI in the future?

• How can CDM remain relevant and competitive

in a fragmented market? (harmonizing agent)

• Are the new mechanisms and ETSs going to

strengthen or compete with CDM/JI?

• Will credited NAMAs be integrated in the carbon market?

• When are the new mechanisms going to be operationalized?

• How is the global carbon market going to look like in 2015/2020?

• Which KP units will be eligible under the new ETSs?

Some “burning” questions

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• Much has been invested in the CDM – in intellectual, institutional and monetary terms.

• The CDM has demonstrated itself to be an effective tool for incentivizing low carbon development.

• A central tenet of the Board’s work in its last year of the first commitment period is to ensure that the CDM is “fit for the future”.

However………Fit for the future

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1. Carbon mechanisms - broad agreement in Doha to continue & expand

2. CDM - learning-by-doing instrument; on-going improvements (PD)

3. National/regional markets - means to engage private sector financing

4. UNFCCC - linking future international carbon mechanisms/markets

5. Intense negotiations - global agreement by 2015

6. Carbon market - critical period of maturation;

still can enable low-cost mitigation

7. “Interesting times” ahead! - domestic andregional developments in 2012-2015

Conclusions

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www.unfccc.int

“Credible offset mechanism for a low greenhouse gas future promoting sustainable development’’

[Vision of CDM Business Plan 2012- 2013 ]

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