The CDM: Rip-offsets or real reductions?

I have written a lot of posts critical of international and domestic offsets.  And I’d love to see the climate bill sunset the rip-offsets.   George Monbiot argues “large scale carbon offsets can’t work.”  More recently, I have spent a lot of time talking to leading experts and analyzing the international market, which has led me to realize that large-scale, inexpensive international offsets don’t exist nor will they (see “Do the 2 billion offsets allowed in Waxman-Markey gut the emissions targets?“) — whereas large-scale inexpensive domestic emissions reductions strategies do (see “the 2020 Waxman-Markey target is so damn easy and cheap to meet“).  Certainly, offsets haven’t gutted the Europe’s Kyoto targets under their trading system (see “Europe poised to meet Kyoto target: Does this mean the much-maligned European Trading System is a success?“).  Since this is such an important subject, I asked Elizabeth Zelljadt, an analyst at Point Carbon, for her perspective on the subject.  Point Carbon is a leading provider of information and analysis on the international carbon market.

The Clean Development Mechanism (CDM) has gotten a lot of attention after the recent release of a report by two environmental groups which argued that the CDM and the entire idea of offsets should be abandoned because offset projects can’t be proven additional to business-as-usual. The report also objected to offsetting as an easy way out for emitters.

While some criticism of the CDM is well-grounded, much of the debate around this international offset program would definitely benefit from better information. As the leading carbon market intelligence provider and the proprietors of the largest database of CDM projects, we at Point Carbon offer some data-driven insights as a contribution to the discussion.

First off, let’s make sure we define the CDM, as it is often confused with other groups or firms selling credits to offset your latest plane flight or a portion of some large company’s carbon footprint. Those are voluntary offsets, whereas the CDM is part of the Kyoto Protocol, an international agreement under which countries have taken on binding emission reduction commitments. Offsets used for compliance to this mandatory global program are vetted by the UN. They are called CERs (certified emissions reductions) and represent tradable units companies and countries can use to fulfill their requirements under the treaty. CDM projects “generate” CERs when they reduce emissions compared to a baseline: 1 CER = 1 metric ton of CO2-equivalent reduced. Currently, CERs cost in the range of $15-17 – at least twice as much as your average voluntary offset.

Just a year ago, CER prices were even higher – as the chart below shows, they went down considerably with the slumping economy. Large emitters in the countries that buy CERs (mostly Europe and Japan) saw decreasing industrial production and therefore lower CO2 output, in turn decreasing their need for offsets and thus bringing down the CERs price. Given that the economy is expected to pick up over the next few years, CER prices could get back into the ‚¬18-20 ($25-28) range.

[Note: More recently the board that grants offset projects their credits has been very stingy, as it does not want to be accused of letting through any non-additional or questionable projects. Therefore, very little of the potential volume of CERs is getting approved or made available to offset buyers.]

The CDM was established as one component of the global program to address climate change, with two objectives in mind: cut the cost of reducing emissions for the countries that have binding reduction targets, and help developing countries get on a pathway to sustainable development by channeling funds into clean technology and energy projects. Globally, any amount of greenhouse gas not entering the atmosphere is a good thing – whether it would have been emitted in Belgium or Bolivia. From an economic perspective, taking advantage of the most cost-efficient reductions also means more money is left for other societal and policy priorities (did someone say “healthcare”?). But others argue that the CDM allows industrialized countries to shun their responsibility and avoid needed ‘domestic’ reductions.

A middle-of-the-road argument is that offsets are a useful transition tool: they minimize the cost of reducing emissions at the global level by capturing the cheapest reductions (those that can be achieved with existing technologies) first, while expensive new carbon-cutting methods are in the works. Countries and companies will invest in long-term expensive solutions if they know the supply of offsets won’t be there forever, and if they know global carbon caps will continue to get tighter. The CDM was thus designed to evolve with a tightening global carbon cap to which an increasing number of countries is subject. “Advanced” developing nations like China, Mexico, Korea and Brazil were expected to take on binding targets in future years when the CDM was established under Kyoto.

But beyond the overall debate on allowing international offsets as a compliance option, there is the more specific issue of the quality of the projects, and whether they are good enough to be used in place of reductions in industrialized countries. That’s where arguments about “additionality” come in: it’s hard to determine what would have happened in a counterfactual scenario, so it’s hard to prove whether emissions reductions achieved by CDM projects are additional to what would have happened otherwise. As the debate rages, here are some facts and data that can offer insights on the bigger picture:

1. The CDM has gotten a big start in a short time.

There are currently over 1,600 registered CDM projects in over 100 countries, and over 7,000 projects at some stage of consideration to be eligible for generating emission reduction credits. If the projects currently in the pipeline were to reduce emissions by the amount their developers estimate, they would cut over 2.7 billion tons of carbon dioxide equivalent (CO2e) through 2012, according to the UN. If we account for various risks – risk that the project falls apart, is not approved, or does not deliver all the emission reductions forecasted – Point Carbon estimates the collective reductions through 2012 will eventually be about 1.5 billion tons CO2e. That’s a lot of reduction: more emissions than Japan (the world’s 5th highest-emitting nation) puts into the atmosphere each year.

Pipeline of GHG reductions generated by CDM projects, risk-adjusted, by project type (in thousand metric tons CO2-equivalent). Source: Point Carbon

The CDM has channeled a lot of investment to developing countries. The World Bank estimates that CDM leveraged over $100 billion in clean energy investment to the developing world through 2008, with another $41 billion in 2008 alone [link to WB’s 2009 ‘state and trends of the carbon market’ report]. For comparison, governments’ official development aid to clean energy policy and projects totaled about $20 billion cumulatively from 200-2006.

2. The CDM project quality assessment process is rigorous, arguably transparent, and therefore slow.

Before a project can generate credits, it goes through a lengthy approval process in the host country, with external auditors, and with the UN. This involves evaluating the methodology by which project developers propose to cut emissions, and assessing whether the baseline used (what would have happened in the absence of the project) is plausible. The project is also evaluated to see if it would have been undertaken in the absence of expected revenue from selling the resulting offsets, and more.

The approval process is governed by a rotating Executive Board of experts from developing and developed countries, whose meetings are webcast and whose decisions are made public. Because these are extremely contentious issues, the approval and crediting process takes a long time, and the Executive Board’s decisions are often criticized. It can take well over a year before projects are issued credits, which leaves investors dangling. The board is extremely strict: about half the projects that have received a positive evaluation from third party verifiers and were approved by their host countries’ authorities are still rejected or turned back for corrections. The grounds for rejection almost always center around concerns that the project is not ‘additional.’ On the other hand, some of the projects the board has approved involve emission reduction methods many would not put in the “clean” or “sustainable” category, such as supercritical coal technology or large dams for hydropower.

3. There is a broad diversity of project types.

Since the CDM got started, project developers have come up with many ways to reduce emissions. There are over 100 different approved methodologies – or ways to reduce emissions compared to a baseline – from recovering waste heat at cement plants and using it for power generation to displacing fossil-fueled heating through use of geothermal energy systems. The lure of earning saleable credits for such innovation has gotten some high-powered companies – most of them with US offices – involved in greenhouse gas-cutting action in the developing world.

One CDM trend some environmental advocates find disturbing is that most of the program’s GHG reduction volume comes from projects involving industrial facilities, rather than renewables or energy efficiency. Projects that destroy greenhouse gases known as hydrofluorocarbons (HFCs) were popular and caused the bulk of the reduction volume the CDM has produced so far. This is because a small amount of investment (changing processes in a refrigeration plant to use different gases) can produce a huge amount reduction compared to the baseline scenario in which that process change is not made. The controversy over the legitimacy of these “HFC projects” has gotten a lot of media attention.

However, the HFC project opportunities are now largely tapped out: our data shows that most of the refrigerant plants and other facilities that could be changed to lower-GHG alternatives have been, with few such projects in the pipeline. Smaller-scale, less profitable projects are growing in number and volume. They reduce emissions through expanded use of renewable energy and increased efficiency. While the volume of emission reduced is smaller than industrial gas capture, those projects contribute more long-term sustainable solutions and can come with benefits for the local population. Currently, a large portion of the volume of CERs being issued comes from HFC destruction, but as projects of this type dwindle, more of the world’s CER supply will hail from projects involving renewable energy and other sectors.

This evidence is corroborated by the World Bank, which states that “transactions of HFC destruction projects are now virtually absent from the primary market.” So the “low-hanging fruit” of the CDM has been picked.

[Again, I think this is a key point.  There simply is no limitless supply of cheap international offsets.  If the U.S. enters this market looking for large amounts of offsets, the price will rise accordingly.]

4. Countries benefiting most from the CDM are not the ones who ‘need’ the most help.

The country with by far the most CDM projects, and the largest expected reduction volume from its projects, is China. Other CDM host countries with large numbers of projects include Brazil, South Korea, Mexico and Chile, while the entire continent of Africa hosts a few dozen projects, mostly in South Africa.

Volumes of proposed CDM project emissions reductions, through 2012, by host country. Source: Point Carbon

This is largely due to the fact that the poorest countries have very few emissions to start with, so there isn’t much to reduce.

However, reform is on the table: the CDM Executive Board, supported by European countries as buyers of CDM credits, is trying to make it easier for project developers to claim credit for aggregated quantities of small-scale reductions, at the household level. Examples of projects that this new acceptance of “programmes of activities” would promote include lighting projects in Africa, where several villages are supplied with solar-charged LED lighting to displace propane-fired lamps. The emissions avoided would be aggregated and counted as one project. Other examples include distributing hundreds of small cookers that use methane from household cattle as natural gas for families, thereby reducing the amount of the GHG that enters the atmosphere while also offering rural families an alternative to wood fuel.

Whether such proposed reforms will really go through remains to be seen – negotiators are looking at new ways of configuring the global climate regime in Copenhagen this December, and may incorporate a sectoral approach designed to get “advanced developing countries” like China to take on emission reduction commitments. Countries would commit to quantitative GHG reductions in certain high-emitting sectors of the economy (metals production, for instance) rather than on a national basis. If this is done, CDM wouldn’t work the same way it does now, and many of the project types receiving critique would not exist beyond 2012.

The CDM is not perfect, but it has generated some good projects and a non-negligible volume of reductions. Whether or not it survives the next round of negotiations in its current state, the agreement in Copenhagen this December will build on the lessons learned from the CDM so far.

[The CDM market will not go away no matter what the United States does, but I do think it important that the market gets reformed, perhaps along the lines of the quality assurance and oversight provisions in Waxman-Markey.]

13 Responses to The CDM: Rip-offsets or real reductions?

  1. danl says:

    Great overview. Three points worth mentioning:
    1) From a global perspective, offsets do not reduce emissions below a pre-set cap. They simply match the reduction in one country to an increase (or lack of decrease) in the other.
    2) While I understand that int’l offsets are currently expensive, the introduction of REDD and LULUCF offsets will probably depress the price. I’ve seen estimates that avoided deforestation will clock in at $5-10 / ton.
    3) While the CDM may help hyper-developing countries establish a framework for future emissions caps, the point made above should be remade: this program does not aid development for those who need it most. I think this is why international assistance, technology transfer, and a ‘programmatic’ CDM are important.

  2. Leland Palmer says:

    Wow, I didn’t know that the oversight of this process was this credible.

    I’ve always been skeptical of offsets, because of the difficulty in ensuring that carbon reductions are real and verifiable.

    But we do have the satellite imaging and other scientific resources to track things like land use. The projects mentioned seem like good projects.

    I am not convinced that things like carbon capture and sequestration at the source of generation, such as coal fired power plants, are as expensive as the industry and the industry supported think tanks (such as the McKinsey Global Institute, which is after all industry funded) make them out to be, however. The coal industry does not want to change, and they have the money and political influence to make their problem appear to be harder to solve than it actually is.

    Combining oxyfuel combustion with a topping cycle, and so increasing the heat transfer and raising the Carnot efficiency of existing coal fired power plants would be rather straightforward, IMO, as work by the Jupiter Oxygen Corporation and NETL has confirmed. Gains in efficiency could pay for carbon capture and sequestration. Rather than dumping the CO2 into the atmosphere and then hoping that some cheap way to get it back out again exists, I would prefer that it be controlled at the source and the true cost of doing this be reflected in the price of these energy sources.

    We should seize the coal fired power plants, and convert them to oxyfuel combustion, an external topping cycle using an air powered gas turbine (HIPPS) and then deep injection of the resulting nearly pure stream of CO2 into the earth, for storage or chemical reaction to form carbonates. The extra efficiency of the conversion would pay for the cost of the CCS, IMO.

    Very interesting, about the offsets. Thank you, Joe.

  3. Anandi says:

    Please see G77 and China suggestion that Annex 1 countries set two separate targets – say 100% cuts by 2020 against 1990 levels for themselves, plus say 200% cuts by 2020 against their own 1990 levels for financing cuts in developing countries through enhanced CDM that can include nationally appropriate actions. Additional Funding under the Bali Action Plan for long-term cooperative action for mitigation, adaptation, and technology may also provide the necessary up front fund to ensure all projects are additional: a simple solution to additionality issues. There is nothing that new and additional funding cannot solve.

  4. Anandi says:

    P.S. Americans are totally incapable of supporting the UNFCCC. See for example the following position taken by Resources for the Future:

    “Existing federal agencies are ill equipped to manage new programs in ways that produce genuine climate change benefits, reduce the cost of climate action for the United States, and advance other foreign policy objectives, including poverty alleviation and economic development. As part of new climate change legislation, Congress and the Obama administration should create the International Forest Conservation Corporation (IFCC), a specialized agency with the unique mandate, authority, and expertise needed to effectively manage this funding.”
    (Resources for the Future 2009)

    The developing countries suggest the Adaptation Fund as a suitable vehicle. Funds under the UNFCCC are climate debt. Therefore they must be managed by developing country majority Fund structures.

    Also there is in that report the suggestions that as a result of new climate change policies, by 2015 the U.S. government and U.S. companies may be spending up to a combined $11.5 billion per year to help developing nations reduce tropical deforestation.

    These kinds of amounts are thoroughly inadequate in the context of what is required, and specifically, what is owed as climate debt. Also, as a last point, India has mentioned many times that we need not only avoided deforestation but reforestation. CDM has not been useful however much we were hoping it would be (from 2003 onwards).

    Kindly think up some better ways of funding ecosystem services, as quickly as possible. Our suggestion is 300% cuts by 2020 as a starting point (see previous comment) followed by the USA’s balance of payments deficit which will be responsible for 120 billion tCO2e by 2050, to paid back into the Adaptation Fund.

    PS Ideally the USA will collapse like Russia even before 2020. What you are doing is just totally unsustainable. 646 billion USD military budget = 5 times UNEPs estimate of total renewable energy funding internainoally for 2008.

    The USA is so unsustainable one just wishes it would get real. it simply is not responding to the depth of the emergency.

    it really is so terribly sad.

  5. This piece is still not responsive to the serious critique that has been made of the CMD. Stanford law professor Michael Wara took a close look at the Kyoto Protocol’s Clean Development Mechanism, which allows industrial nations to claim they are cutting carbon emissions when they buy offsets from developing nations. A large number of the approved projects are to capture and destroy a potent greenhouse gas released in manufacturing certain refrigerants and Teflon.  Selling offset credits through the Clean Development Mechanism for destruction of the greenhouse gas was so profitable, Wara concludes, that many producers, all in developing countries, gamed the system by ramping up production in order to have more of the evil greenhouse gas to destroy. Wara also looked at China’s efforts to switch some of its electricity production from dirty coal to cleaner natural gas. Although the projects were under way so would have been built anyway, China still claimed carbon offset subsidies through the mechanism for all of them, despite its rule that it will finance only new projects that are additional to business as usual. Otherwise, the offsets bring no real reduction of carbon. Wara’s Stanford colleague, political scientist David Victor, has estimated that “between a third and two thirds” of Clean Development Mechanism offsets do not represent actual emission cuts. 

    [JR: Actually it is responsive to the HFC discussion. And, as noted, the CER issuers look to be much tougher than even the CDM overseers on additionality. Finally, if you think the people involved in the program — and the governments of the UNFCCC process — are unaware of the problems in CDM, then you are certainly wrong. The CDM isn’t going away, but I am certainly hopeful that its provisions will be toughened in Copenhagen. And I am certain that the United States can play a positive role here. Finally, I have said it many times, we can’t possibly solve the climate problem if China doesn’t get a serious target off BAU soon and then a shrinking cap that starts no later than 2020-2025. Once they have that cap, they will be a net buyer of offsets not a not seller.]

  6. Ted Getzel says:

    Anandi said
    “PS Ideally the USA will collapse like Russia even before 2020. What you are doing is just totally unsustainable. 646 billion USD military budget = 5 times UNEPs estimate of total renewable energy funding internainoally for 2008. “

    You see “climate change “ as a weapon to destroy the United States, which you obviously hate. Your attitude and wishful thinking will accomplish nothing. How does the following apocalyptic scenario make you feel.

    “ Ideally nuclear war will break out between India and Pakistan followed by bloody civil wars in India and Bangladesh between Muslims and Hindus which will reduce the population of the subcontinent to a more ecologically sustainable level.”

    Try to keep your psychotic hatred of America in check. All Americans are not profligate. Many of us care. You will need this exceptional nation intact to help solve the climate crisis. The US military budget will not shrink if hostile attitudes like yours persist.

  7. Leland Palmer says:

    As an American, born and bred, I can really sympathize with Anandi’s comments.

    For the U.S. to be spending at least a trillion dollar per year on weapons, even while we claim we don’t have the money to adequately fight runaway global warming, is tragically, desperately sad.

    Our business elites have become pathological, while the population has stared mesmerized into their television tubes, tuned in to “Happy Days” and lately, Fox News.

    While we slept, our financial elites have been busy radicalizing themselves into something scarcely human, IMO. Any group of people who would look upon the melting Arctic as a business opportunity, rather than as a hugely risky experiment in geoengineering, certain to lead to tragic consequences, should not be allowed off the leash, ever.

    Psychotic hatred of America is not necessary, just eyes and a brain, IMO.

    America, more than any other country, led the world into our current state of probable runaway global warming. More than any other country, we have the resources to stop it. More than any other country, under the Bush administration. we ignored it and allowed it to accelerate out of control.

    You break it, you buy it.

    We broke it.

    Now we need to fix it.

  8. Pat Richards says:

    There’s stuff in Ms. Zelljadt’s article that seems self-contradictory. For instance, she says…

    “Just a year ago, CER offset prices were even higher. They went down considerably with the slumping economy.” But in the very next paragraph she says:

    “More recently the Board that grants offset projects their credits has been very stingy, as it does not want to be accused of letting through any non-additional or questionable projects.”

    Now wait… the market prices of offsets have dropped about 50% because of a slumping economy… but that’s not the reason the UN has been stingy about approving more offsets? Instead, it is because they don’t want to be accused of approving questionable projects? How about we apply the same analysis standards to both paragraphs? Since this stinginess is “recent” isn’t it more likely that the reason is the same for both effects? That the Board has cut back on approvals because the economy has slumped and the price of existing CERs have got too low and they don’t want add a lot of new offset credits to an already flooded market right now?

    If markets prices of offsets go up isn’t it likely the Board will become less “stingy” in approving more offsets? Any trading market thrives upon the creation of new supply… that’s economics 101.

    Zelljadt says the approval and monitoring of offset credit project is very stringent, but she doesn’t explain how they manage this. It’s an important point. There is no mention of what kind of in-the-field “police force” the UN’s Executive Board of Experts has at its disposal. And yet there’s huge potential for abuse and fraud right there, at the point where new offsets are created.

    Doesn’t the Board have to rely primarily on what those who are proposing new offset projects tell them? Does the Board have the huge amount of manpower required to make their own thorough investigations of those claims before they grant the approval? I don’t see any indication of that… it would be an incredibly costly “police force” to maintain and keep free from bribery in the field. So where precisely is this stringent accountability and verification coming from?

    You can have all the rules and regulations you want to prevent fraud and abuse, but as we have seen in the banking and securities trading industries over the past year, those rules are only as good as your in-the-field investigation and enforcement. What is the UN’s record on accurate accounting, enforcement and fraud prevention within its own organization? Not good.

    Just exactly how is the UN going to be able to carefully ride herd on all this? As far as I can discover, the answer is that they can’t. They are going to have to rely on reports from the managers of the offset projects. But, hey… no manager of a project would ever mis-report their data to their supervisor, would they? No, of course not… So I guess all this concern about the creating, monitoring and trading carbon offsets is just groundless paranoia on the part of silly, ignorant people who “don’t really understand how the system works”.

    Look at the sheer numbers. Ms. Zelljadt points out that “There are currently over 1,600 registered CDM projects in over 100 countries and over 7,000 projects at some stage of consideration.” So, in the next 10 years there will be more than 10,000 offset projects to authorize and keep track of? All over the world?

    Even granting the UN the best of intentions, Zelljadt does acknowledge that “If the projects currently in the pipeline were to reduce emissions by the amount their developers estimate, they would cut over 2.7 billion tons of CO2 through 2012.” snip… but… “If we account for various risks – risk that the project falls apart, is not approved, or does not deliver all the emission reductions forecasted – the collective reductions through 2012 will be about 1.5 billion tons CO2.”

    Huh? Even a proponent of offsets admits that they may only deliver 56% of the emission reductions they are supposed to produce? But those offsets will get FULL CREDIT in the trading market for 100% of the amount they were supposed to produce?

    So, they are going to price and trade something at 100% of its theoretical value when in fact its true underlying value may only be about half of its theoretical value!? That’s an EXACT description of what the banking industry did with trading derivatives based sub-prime mortgages.

    This is voodoo economics folks… and blind trust in the ability of the UN to successfully analyze and monitor a huge global system and trading market. Maybe as a political reality we don’t have any choice but to go with a smoke and mirrors system like this, but let’s not kid ourselves about what a bucket of worms it really is.

    And let’s at least put on a pricing mechanisms which adjusts the market price of offsets in real-time against the real-world emission reductions those offset projects actually produce, not price and trade them on some theoretical emissions reduction which they never actually deliver.

    Or am I just being stupid and naive again?

  9. Hello Pat, I’ll try to clear up some of the points you cited as contradictions in the article:

    Joe inserted the comment about the stinginess of the CDM Executive Board (that’s why it’s in brackets] in response to some data I sent him showing the recent low rates of CER issuance. I should have pointed out that CER issuance varies widely, mostly as a function of how many projects the board is able to approve in any given week, and the volume of CERs those approved projects have. In fact issuance was up in late June, when sixteen projects (each responsible for a large amount of reductions) were issued their CERs. What the Board IS being “stingy” about, however, is the approval rate for CDM project methodologies. A separate Methodology Panel goes through all the projects’ design documents detailing how (by what methodology) they plan to cut emissions relative to a baseline, and not until that panel ok’s the overall methodology does the rest of the Board even consider the project. The methodology question is a totally separate process from CER issuance, which happens when a project (whose methodology has long been approved) is issued the credits it has been generating since its crediting period started. So the board is not altering its “strictness” according to offset prices in the market and in fact could not do so, as methodology approval and credit issuance are often months (sometimes years) apart.

    As for the monitoring of CDM projects, the Board does NOT “have to rely primarily on what those who are proposing new offset projects tell them.” In fact the project approval process cannot even get started until those proposing the project get themselves a third party verifier who has, in turn, been approved by the Board to assess legitimacy of the type of project in question. The verifiers, known in UN-lingo as Designated Operational Entities (DOEs), play a crucial role in the CDM process because they monitor and verify continuously through a project’s credit generating process to ensure that what you describe does not happen. That said, these are private companies (usually engineering firms which specialize in verification services) and you point out that anyone can be bribed. The Executive Board is wary of this, too: earlier this year, it suspended a DOE from carrying out its verification work because of uncertainties surrounding the DOEs internal auditing procedures. Buyers waiting for CERs from projects this DOE would have verified were out of luck.

    As for the numbers, there ARE over 7000 projects at some stage of consideration – but not nearly all of these will pass and therefore be able to generate CERs. As mentioned above, they are out if their metholodology doesn’t fly. They are also out if they can’t get the requisite approvals from their home government or if their DOE reports that their monitoring and verification is not up to snuff. Projects get rejected all the time – often to revise the objections and re-apply later. Also, remember that every project has only a certain crediting period or time within which it may generate CERs. Although a wind farm in China may claim credit for the amount of emissions it saves relative to what the electricity it generates would otherwise come from (probably a coal plant), it will not be issued those credits indefinitely. The CDM allows 7-year crediting periods, so if the farm gets credits for reductions it achieved starting in 2003, it cannot receive any more after the end of this year.

    As for the risk adjusted volume you commented on, the risk adjustment itself is precisely the act of ensuring that 100% of the CERs issued are in fact for reductions that took place. The 2.7 billion ton volume figure is what all projects would collectively reduce if they all passed the UN’s evaluation process and also were given credit for every unit ton of CO2e they claim to reduce. Our 1.5 billion ton estimate is an educated guess of total remaining CER volume after having subtracted the tonnage from projects that get rejected, and after readjusting the amount that projects can claim credit for after their methodologies have been reviewed (and corrected) by the Executive Board. So an individual CER always represents one ton of carbon dioxide equivalent reduced – but our data estimates how many of the projects, that developers propose to get emission reduction credit for, will actually get that credit.

    I hope this helps – thanks for reading the article with such a sharp eye. Your comments have highlighted many of the concerns around this process, which is indeed a bureaucratic one.

  10. First of all, Joe, thanks for publishing this article. I often think of writing you a long note about offsets as you are usually so critical of them. But, here you went and got one without me, thanks.

    Offsets and CDM have issues – no doubt, but so does pretty much every other mechanism –whether political (e.g., impact on coal states), social (e.g., population), economic (e.g., short term investment requirements versus long term net economic gains), technical (e.g., sequestration), etc. And, some mechanisms may just support ultimately dead end approaches. Certainly in the long term there is no place for offsets, it is a transition mechanism and hopefully market transforming mechanism, for in order to make the necessary GHG reductions, reductions must take place everywhere not just in capped sectors.

    Efficiency in particular needs mechanisms outside of conventional cap and trade as price signals alone will not bring forth the appropriate level of efficiency (see Schiller et. al. Efficiency and Climate Change Mitigation Policy.

    But as one of my colleagues describes it with the story of the Road Runner and the Coyote – “That coyote, you ever notice how whenever he tries something it fails and he never tries to correct what failed, but just goes off and tries something new” – to me that is why I have gotten involved in CDM. CDM, as pointed out in your article, is designed to combine emission reductions and sustainable development. I thought I had reached the Third Noble Truth of Buddhism (web link that one!!) – this was the basic principle I had learned as a young engineer – why not support sustainable, stabilizing exports to developing countries – instead of say nuclear power plants or huge damns?

    So, I have been appointed to one of those committees of the CDM Executive Board and have been essentially charged with getting more efficiency into the CDM – the obvious GHG reduction and sustainable technology option. As the one American on any of these groups, I am bringing my 30 years of experience (and patience – well, some patience) in getting things done with efficiency/renewables (EERE). And yes we are making progress in developing approaches and tools that balance integrity and action for EERE – in part because many of us see the needs and the constraints of CDM. Furthermore, this American continues to not only advance ideas and approaches, but also be re-taught the lessons of why the developing world does not just do what Americans think they should do (usually fortunately).

    There are really two real CDM questions – “how good is good enough?” and then to answer that question, one really needs to ask “as compared to what?” These questions are really the fundamental ones of not only offset efforts, but all climate change mitigation (and adaptation) options. To me, the big one is the ‘as compared to what’, which is essentially what do we do compared to catastrophic climate change (which you remind us of each day) and given that as a possible (probable) outcome – I want to keep working with the international community on this CDM and see if we can get more efficiency and renewables into the developing world – one way or another. The lessons learned not only reduce emissions but show us barriers and paths to orders of magnitude growth in efficiency and renewables, which whether through a post-Kyoto CDM, Nationally Appropriate Mitigation Actions (NAMA), and/or some other mechanism – just needs to happen.

  11. NFJM says:

    Let me also add some comments on the CDM:

    * Crediting (answer to Pat):
    The issuance of the CDM currency (CERs) is done on an ex-post basis, based mostly on monitored parameters or conservative assumptions. There is still an ex-ante estimation of the amount of CERs a project would yield. This is however only an indicator of what is in the pipeline for the market supply. In the case of renewable energy projects, the CERs are for example based on the monitored amount of electricity metered and measured by neutral third parties (validator). Such procedures include double check with the billing, sealed meters, calibration, standards, procedures, etc.

    In turn, there are projects delivering more CERs than expected after their registration (over-performance) and some others devlivering less (under-performance). Typical examples of under performers are manure methane projects.

    * Industrial gases: It is very easy to establish that such projects are additional as there is no economic incentive for their destruction other than climate protection. Such gases are for example N2O, PFCs and HFCs. As mentionned, such cheap abatement projects have been exhausted.
    There might be baseline projects with some having scaled up the production. With the right provision, it is very likely that such problems no longer occur as the CDM is in the process of becoming a mature mechanism. An interesting question is: “would these emissions really have stopped without the CDM?”. I personnally doubt it. Also remember that their baseline will be re-evaluated at the end of their first crediting period and it is not likely that their CERs generation continues.

    *CER prices and additionality:

    One important element for many projects is the demonstration of additionality. The most transparent way for this demonstration of the additionality is the financial additionality (to show that the project would otherwise not have been profitable enough for the entity to be implemented).
    This is where I agree with Joe that it is very unlikely that “rip-offsets” selling at less than $5 per tonne CO2e can provide really a significant financing to the project and turn clearly non profitable projects which reduce emissions into clearly profitable projects to reduce emissions. You need a strong price signal to be able to bridge the financial gap and be able to clearly attribute the implementation of the carbon project to the additional financing from carbon markets.

    * Also note that there is an increase in the stringency of the CDM with more methodology rejections, more rejections of projects as well as the use of more conservative approaches.

    * Please also note that the EU has for example the idea on the table of a reserved share of CDM projects in the least developed countries in order to clearly enhance the “D” (which stands for development) in the CDM. This is must one of many of the ideas to improve the geographic distribution of the CDM

    * Many ideas are on the table to improve the mechanism and criticism is extremely welcome as long as it is well founded. There is however unfortunately much criticism based on the lack of knowledge about the mechanism or based on fallacies. What is really needed is more valuable imput for major improvements. Many papers have already been written on possible ways to reform the CDM.

    Finally, just a note for the rant message: do not forget that divided not only do we all fail as a world, but we also bring our own common failure on the next 50 generations. There is no other path but education, action and collaboration.

  12. Pat Richards says:

    I want to thank Elizabeth Zelljadt and “NFJM” for their detailed explanations. I feel much better about the UN verification and monitoring process now. This is the kind of plain-written yet detailed explanations people need to see in order understand and perhaps support the Cap & Trade process.

    I remain unsure on the details of how the new U.S. carbon trading market will address the complex issues of monitoring and verification. Will the UN or some identical process be verifying, creating and monitoring the carbon offset projects in the U.S.? It seems to me that the W-M Climate Bill will simply create a massive amount of the initial credits “out of whole cloth” at the stroke of the President’s pen when he signs the bill into law.

    Can anyone explain to us why the U.S. offset credits will be as real and reliable (as actual verified reductions of the full amount of CO2 reduction they represent on paper) as those which the UN has been issuing on its CDM projects?

    This is important because if we don’t have rock-solid verified 100% reduction of the CO2 reductions claimed on paper for every credit traded on the market, then what the market will end up doing is trading “sub-prime emission credits” for full price (i.e., buying and selling something that is supposed to represent 100% of X amount of CO2 reduction but which actually only provides 70% or 50% of X amount of reductions in the real world).

  13. NFJM says:

    Thank you Richard for your very interesting questions.

    * You go right to the point of what is called the “zero sum” game:

    Offsets represent an emission reduction at cheaper cost outside the scope of the emission trading scheme. They DO NOT represent any additional emission reductions under the cap of the emission trading. They are only supposed to be the same emission reduction at a lower cost.
    So yes, if offsets are of a bad quality (e.g. non additional), it is possible that only 80% of the certificates represent a real emission reduction compared as business as usual. This jeopardizes the environmental integrity of the system.

    * Mistakes from the past should be used by the US to implement better approaches.

    For one thing, data collection and availability in the US is one of the best in the world. This makes the assessment of any domestic project much easier.

    Secondly, the whole learning phase of the CDM can be used by the US to directly use mature approaches in the project validation and verification.

    For projects which are interesting on the paper but are difficult to evaluate, a certain discounting could be applied to increase the certainty (e.g. one tonne of CO2 emission reduction will only generate 0.x tonne of offset). This would restablish the “zero sum game”.

    The US is also trying to import more carbon credits from “sectoral approaches”. In such sectoral approaches, there is a higher amount of integrity.

    – In the case of “no-lose” approaches, if the country/sector does not beat its target, it will have implemented emission reduction measures which will not be credited as they fall short of the target above which further emission reductions are credited: the worst case that can happen is a “Business As Usual” scenario in which there is no participation to carbon markets.
    – In the case of “sectoral trading” also, sufficient provisions ensure a liability of either companies or the country in case of a non achieved goal.

    I would be extremely surprised if the US would not implement a system to ensure the integrity of offsets at least as good as what the UNFCCC after a long iterative process has come to.