The Role of CDM and Offsets as Part of Future Carbon Markets

  • Project no.2269
  • Duration 10/2011 - 08/2013

While the Clean Development Mechanism (CDM) used to be the global currency for emissions trading, the global carbon market is nowadays increasingly fragmented as several jurisdictions have in recent years developed new market instruments outside the Kyoto system. Prominent examples include Japan's development of a Joint Crediting Mechanism / Bilateral Offset Credit Mechanism (JCM/BOCM) and the development of new project mechanisms in the framework of the emission trading systems (ETS) that are being established by California and Québec. Australia is also developing its own domestic project mechanism.

The design of new systems can, among other aspects, be considered as a reaction to the perceived failings of the CDM and an evaluation of their characteristics may therefore contribute to discussions on how to reform the CDM to help continue its "glue" role in the international carbon market. This project therefore analysed perceived issues with the CDM as reflected in statements on CDM reform from these jurisdictions and the decisions they have made in establishing their own systems.

Key findings from the research are:

In developing their offset systems, Australia, California and Japan all explicitly rejected the project-by-project approach to additionality that the CDM has taken so far. Instead, they all promote an ex-ante additionality assessment approach for entire classes of projects and consider this to be not only more efficient and cost-effective but also to be more "objective", implying a higher degree of environmental integrity. Moving towards greater standardisation of additionality testing and baselines in the CDM might therefore enhance its chances of being allowed to be used for compliance in new systems and continue being allowed to be used in existing systems.

However, while standardisation may lower overall transaction costs in the system, it also frontloads transaction costs and shifts them from project participants to those who develop the standardised metrics. The experience of Australia, California, and Japan underlines this argument. Without substantial support from industrialised countries, standardisation may be beyond the capacity of most developing countries.

Looking at the emerging systems in detail it becomes apparent that their approaches and methodologies often borrow from the CDM. The CDM's bottom-up approach has therefore to a great extent facilitated the primarily top-down development of new systems. However, the centre of innovation is increasingly shifting away from the CDM as other schemes are able to move faster than the multilateral system.

As the CDM fades away and its capacity is lost, given the lack of current market demand, its role as methodology developer and de facto standard setter is also disappearing and the various systems will probably increasingly diverge. The remaining Kyoto parties could slow this trend by investing efforts to maintain the CDM as an instrument, including in particular its methodology development function, until increased mitigation ambition provides new demand for credits. For the interim, this would require public sector funding of new projects and the development of new methodological approaches. One option may be to use the scale-up of climate finance that has been pledged by industrialised countries. The CDM presents a readily available method to achieve measurable, reportable and verifiable results. To count investments in new CDM projects towards climate finance, the generated credits should not simultaneously be counted towards that countries' emission commitments, but would have to be cancelled, otherwise this approach would constitute double counting.

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