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.
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.
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.]