Later this month delegations from around the world will convene in Nairobi for the United Nation’s Framework Convention on Climate Change second Meeting of the Parties, with the main objective of agreeing the next stage of the Kyoto Protocol post 2012. But a new book – Carbon Trading: A Critical Conversation on Climate Change, Privatisation and Power – claims that not only are the Kyoto Protocol and the EU emissions trading scheme ineffective and unjust, but also that they are detrimental to Africa’s interests. The book’s main concerns are directed at the Clean Development Mechanism, which it says empowers the West to profit from polluting businesses while investing in CDM projects that do not benefit poor African communities nor make appreciable progress toward sustainable alternative energy systems.
This book is not alone in questioning the benefits of Kyoto and its various mechanisms. Climate Action Network Europe (CAN Europe) has sent a letter to heads of delegations attending the Nairobi meeting, calling on them to reject the inclusion of carbon capture and storage within the CDM, arguing that it could divert investments from renewables and energy efficiency and could also compromise the sustainable development objectives of the CDM. Defending its view, CAN Europe says that CCS technology “has not yet been shown to be environmentally safe and sound”, which it says is a requirement for inclusion in the CDM according to the Marrakech Accords.
These comments come at an interesting juncture in the evolution of emission reduction programmes. Next month the European Commission will belatedly publish the first of its second phase allocation plan assessments in the knowledge that both analysts and environmentalists want lax plans either axed or significantly revised, while only 13 out of 25 plans had been submitted by October – with fifteen months to go until the start of the second phase. The UNFCCC will attempt to lay the groundwork for a second commitment period post 2012 so that it can be formalised by the tenth anniversary of Kyoto next December; and early next year EU environment commissioner Stavros Dimas will attempt to develop links between the EU ETS and the emerging regional schemes in the US.
But while there is considerable progress being made towards new trading schemes in Japan, Canada and with two schemes under development in the US – the Northwest and Mid-Atlantic Regional Greenhouse Gas Initiative (RGGI), including seven states, and the California cap and trade plan – the real momentum is in the secondary market, and in particular the CDM market.
Recent analysis by economic consultancy Oxera says that the most obvious carbon saving is taking place in the rapidly developing Certified Emission Reduction market, the trading unit of the CDM market. It says that between 0.5 and 1.0 bn tonnes of CERs are expected to be used to meet compliance targets during the first Kyoto commitment period and observes “There is little doubt that the clearest market signal being given by the EU ETS to date is that it is cheaper to undertake abatement outside the EU than in it.”
Various other reports on the state of the ETS confirm this view, and such is the growing interest in CERs that Barclays Capital has now drawn up terms and conditions to standardise and promote over the counter trading of CERs with bids and offers being quoted on London-based energy brokerage ICAP and other brokerages also known to be active in the emerging CER market. The CER market will initially trade as an index to the EUA but given the importance being attached to the CDM market some believe CERs will eventually dictate the price of EUAs.
What is becoming clear through growing interest and participation in CDM and Joint Implementation projects is that technology is increasingly being seen as the most efficient, effective and economic solution to emission reduction. Partly this is due to the failings of the ETS, which in turn has raised some questions over the effectiveness of trading per se as an efficient and effective emission reduction model.
Prominent in supporting new technology is the US-led Asia-Pacific Climate Pact (AP6), and although decried at its launch as being anti-Kyoto the AP6 is now integrating with the CDM market through the US-initiated Methane to Markets Partnership (M2M), which brings together 18 countries that capture methane from mining, landfill and agriculture and use it for fuel and power generation. One of the major beneficiaries of M2M is China, which is not only benefiting from technology projects under the AP6 but is also reaping carbon credits under the CDM. Rather than limit the progress of Kyoto as some had feared the AP6 is actually making an important contribution to clean technology transfer, mainly in emerging economies, and in turn is empowering the CDM market.
Now that China is actively addressing its energy management with respect to security and sustainability the next challenge faced by the UNFCCC is to converge emission reduction of the major seven emerging economies (E7) of China, India, Russia, Brazil, Mexico, Indonesia and Turkey with the G7 economies. Currently E7 emissions are 30% higher than G7 emissions, yet if per capita energy consumption is allowed to increase in the E7 (to support economic growth) while per capita consumption is reduced in the G7 this convergence will, according to PricewaterhouseCoopers, enable global emissions to fall by 17% by 2050.
To achieve such a convergence will require both market-based incentives and investment in new ‘clean’ technology. The challenge for the UNFCCC will be to get agreement within the E7 toward such incentives, which would effectively cap national annual emissions through the issuance of permits with countries allowed to sell excess permits, thereby providing a financial incentive to reduce emissions. The problem is that a permit/trading system has yet to prove its worth in reducing emissions, and until it does, and also proves that it does not undermine economic growth, it will be difficult to sell the concept of permits to the E7. This leaves technology as currently the only real option in addressing emission reductions in emerging economies and increases the pressure on trading to prove its value as an economic emission reduction scheme.