CDM in danger of stalling, warns World Bank
19 May, 2008
The Clean Development Mechanism (CDM) market is at risk of grinding to a
halt, the World Bank has warned, presenting its annual State and Trends of
the Carbon Market report. Volumes of primary certified emission reduction
(CER) transactions reached a “plateau” last year, with the Bank
warning of a demand gap this year as the window of opportunity closes to get a
CDM project off the ground before the end of the first commitment period of the
Kyoto Protocol.
European Commission proposals to severely
restrict the use of CERs in the EU Emissions Trading Scheme after 2012 will
contribute to this stalling, added the Bank.
In 2007, 551 million tonnes (Mt) of carbon dioxide equivalent of primary CERs were transacted, up just 14 Mt from 2006.
Karan Capoor, senior carbon markets expert at the Bank, called on governments with emission reduction targets after 2012, such as those in the EU, to help prevent plummeting demand between now and 2012 by “front-loading” CER purchases.
“Presuming 2008 is as active in contracting [CERs], the residual demand for compliance will be taken up,” he said, explaining that the market could see a fall-off in CER demand from next year. Demand is unlikely to pick up until 2013–15, unless governments start buying CERs to help them meet new emission reduction committments.
Henry Derwent, president of the International Emissions Trading Association (IETA), added that there is no “safety net” under the CDM. He noted that few respondents to the industry body’s latest market sentiment survey believe CER trading will grow significantly.
But Andy Ertel, CEO of environmental products brokerage Evolution Markets, which helped the Bank with its study, added that the market is “underestimating the role that Japan is going to play”. And a future US cap-and-trade regime will also boost CER demand, he said, citing an analysis by the US Environmental Protection Agency which projected a 70% fall in US carbon allowance prices in 2030 (from a forecasted $85/t) if international credits are allowed.
“Anyone who thinks that a US programme in 2012, 2013 is not going to have an international link is kidding themselves,” Ertel said.
Jack Cogen, IETA chairman and president of New York-based carbon asset manager Natsource, said that the bearish sentiment towards the CDM market, as reflected in the latest IETA survey, is due to the exhaustion of large-scale projects, such as HFC destruction. “We’re moving from low-hanging fruit to planting fruit trees,” he said.
Capoor noted that the “overwhelming response to the CDM surprised all of us”, meaning that the private-sector firms which verify and validate CDM projects are so “deluged with work” that it can take up to six months to get a project reviewed.
Capoor also voiced concerns about the environmental quality of some projects coming forward: “Several companies are so obsessed with locking up the deal ... there’s a disconnect from the environmental focus which could damage the integrity of the projects.”
“A lot of what people are signing may not be any good ... which makes our job harder, as we don’t know what percentage is decent,” he told Carbon Finance.
Capoor’s statements follow a downwards revision of CER yields by the UNEP Risø Centre at the start of this month. The research centre is now forecasting 1.5 billion CERs to be generated by the end of 2012, down from 1.8 billion. This follows a submission last month from five of the more active Designated Operational Entities, the independent private sector firms which verify CDM projects, to the CDM Executive Board. They said that only 92 of the 341 projects classed as “at validation” can be justifiably categorised this way (see The full picture). The rest of the projects, hitherto assumed to be at an early stage of development, are unlikely ever to progress.
- For more analysis of the World Bank’s report, see Carbon market value doubled in 2007 – World Bank
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