Supply of CDM carbon credits under pressure

The supply of tradable emission reduction credits from the UN’s Clean Development Mechanism is getting tighter as a result of corrected emission reduction estimates and tougher rules to ensure projects deliver environmental benefits.

Up to 40% of greenhouse gas emission reduction projects awaiting registration for funding under the United Nation’s Clean Development Mechanism (CDM) may be rejected as a result of tighter rules to ensure its integrity, a report by analysts Point Carbon has found.1 The CDM was established by the UN under the Kyoto Protocol to help fund emission reduction projects in developing countries through generating tradable certified emissions reductions (CERs). To be eligible for support all projects must prove the emissions reductions they expect to produce are ‘additional’, meaning they would not have been achieved without the mechanism’s support.

But the CDM’s executive board has come under fire for perceived weaknesses in its checks on additionality, according to the report. A growing number of projects have applied for support despite already being in development, some for as long as four years.

Point Carbon says many of these projects are commercially attractive and are likely to be viable without support. Project developers are "jumping on the CDM bandwagon", trying to earn a windfall from selling CERs. Projects in areas such as energy efficiency, hydropower, wind energy and cement blending are among those seeking to abuse the scheme, it says.

As a result of criticism, Point Carbon says the executive board is taking a tougher line on additionality, including introducing a one- or two-year cut-off point from the project’s start date to its application for support.

There is a total volume of 750 million tonnes of CERs awaiting registration. Of these, 528 million tonnes suffer additionality problems. Point Carbon estimates that 175-300 million tonnes will be rejected - up to 40% of the total - depending on the length of cut-off period introduced.

Point Carbon concludes that a lower than expected supply of CERs is likely to increase prices.

A UN spokeswoman said the executive board is assessing the need to provide additional guidance on demonstrating additionality but has not proposed a specific cut-off period.

A second report, by the newly launched Carbon Rating Agency, finds that many CDM projects only deliver 70% of the emissions reductions predicted by developers.2 The CRA, part of the Idea Carbon company, aims to bring greater transparency to the burgeoning carbon market by introducing a ratings service similar to those used by investors to assess a company’s creditworthiness.

The CRA assesses the risks of each CDM project and awards a rating to reflect the likelihood it will deliver the predicted emissions reductions. The ratings run from AAA for those most likely to deliver to C and D for the least. The service does not assess the financial attractiveness of a project or its additionality.

The CRA assessed a representative sample of 25 CDM projects across a range of technologies and countries. The report reveals few achieve high ratings and many are liable to underperform.

Overall performance of CDM projects looks good - 96% of CDM projects deliver the predicted reductions. But this result is skewed by 20 large greenhouse gas abatement projects such as for hydrofluorocarbons and nitrous oxide which account for more 100 million tonnes of CERs - 75% of all credits issued to date. Without them, the remaining 300 projects only deliver 70% of the predicted reductions.

In general, renewable energy and energy efficiency projects perform best delivering 80-100% of expected reductions, while others such as landfill gas projects do much less well at 40%.

But considerable variation exists between projects of the same type, suggesting other factors are at play. The CRA says experience of the project developers, conditions in the host country, economic performance of the industrial facility or sector where the project is based, and degree to which the industrial process depends on running the project at full capacity are all important factors in the projects’ success.

The combination of the issues identified in the two reports - the tougher line on additionality and overestimates of emissions reductions - is likely to have contributed to recent big falls in the share prices of companies that finance emissions reductions projects such as Agcert, Camco, Econergy and Ecosecurities. They also helped lead to a reduced official forecast in May of the total CDM delivery of CERs before 2013 from 2.5 to 1.5 billion tonnes. ?????

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