The plight of the international carbon market sector, already made dire by the financial crisis in Europe, appears to have been further compounded by uncertainties surrounding fallouts from the recently-held United Nations (UN) climate change conference in Durban, South Africa.
According to observers, the sectoral ship has been tilting as prices are falling to unprecedented lows following the European Union (EU) economic imbroglio and an increasing issuance of credits. In this situation, they add, CDM (Clean Development Mechanism) project developers now more than ever want to get their projects in the safe EU harbour before the end of 2012, a development that is resulting in skyrocketing project inflow.
A major feature of the Kyoto Protocol (KP), the CDM rewards “clean” project developed in emerging countries. Every emission reduction compared to a baseline can be turned into a CER (certified emission reduction credit) issued by the UN.
Signed in 1997 and entered into force in 2005, the KP requires developed countries to reduce their GHG (greenhouse gas emissions) below levels specified for each of them in the Treaty. These targets must be met within a five-year time frame between 2008 and 2012, and add up to a total cut in GHG emissions of at least 5 percent against the baseline of 1990.
The targets are: -8 percent for EU, -7 percent for the US; -6 percent for Canada and Japan; and 0 percent for New Zealand, Russian Federation and Ukraine.
But Canada jumped the unsteady ship recently, stunning the world when it announced its withdrawal from the KP effective from the end of this year, when it’s (the KP’s) first commitment period expires.
The “Durban Platform,” a two-page document that summarises the outcome of the COP 17 negotiations, seems not to have helped matters either. It features an agreement to establish a second commitment period of the KP as well as the management – but not the source – of the Green Climate Fund (GCF), a fund for climate aid to poor countries. The agreement requires that countries begin in 2012 to negotiate a new global regime for climate change. The new legal framework must be in place by 2015, and will be implemented from 2020.
CDM experts, Friedel Sehlleier (GIZ) and Axel Michaelowa (Perspectives GmbH), believe that, after braving turbulent waters in autumn in 2011, the international climate policy as well as the carbon market faces a stormy sea in 2012. They disclose that, in order to steady the CDM boat and make it brave the angry seas, the Executive Board had previously held a landmark meeting and had the courage to decide on several highly contested issues that had been deferred for years.
“So, with no political land in sight, uncertainty for market actors prevails, but we see the regulator willing to navigate the CDM ship through the Scylla of oversupply and Charybdis of flagging demand. But, in order to prevail, we should prepare ourselves to face the storm. All hands are needed on deck.
“The price for EUAs fell to 8.4 Euro on the spot market. The spread to issued CERs was 2.7 Euro. The still uncertain development of the EU financial crisis has larger impacts on the carbon market than initially thought, with the threat of another economic downturn weighing heavy on the demand for credits and a steadily increasing number of issued CERs flooding the market being a crunch situation for the prices.”
In Nigeria, Head of the Department of Climate Change (DCC), Samuel Adejuwon, says the possibility of a second commitment period for the KP is a plus because, according to him, it allows the country’s participation in CDM projects and hence will help in curbing local gas flaring and boost electricity generation.
His words: “Invariably, more energy implies increased socio-economic development. Financially, Nigeria stands to benefit through project implementation. The Durban Platform provides us with the opportunity to continue to engage our partners in future negotiations towards enhancing cc activities implementation.”
Registered CDM projects in the country include: Recovery of Associated Gas that would otherwise be flared at Kwale Oil-Gas Processing Plant, owned by AGIP; Pan Ocean Gas Utilisation Project in Ovade-Ogharafe; Asuokpu-Umutu Marginal Field Gas Recovery Facility, owned by Platform Petroleum; the SAVE80 fuel efficient wood stove which aims to reduce by 80 per cent the amount of wood needed for cooking, thereby slowing the rate of desertification in the northern part of the country; and Municipal Solid Waste (MSW) Composting Project in Ikorodu, Lagos State, registered on December 15 2010 and owned by EarthCare Nigeria Limited.
According to Adejuwon, the three gas gathering projects are capable of cutting emissions by an estimated four million tons of carbon dioxide annually.
He lists CDM prospects in Nigeria to include renewable energy (solar, photo voltaic cells, wind, hydro, bio-energy, energy efficiency), transport sector (mass transit, LPG vehicles), and municipal waste (waste-to-wealth, recycling, methane capture, energy-from-waste).
In the US, the California Air Resources Board finally adopted the detailed rules of California’s emission trading scheme, with the following key features:
- A pilot phase will start from 2013, with a scope covering 360 firms representing 600 facilities, from all major industrial sources along with electricity utilities.
- A second phase starting in 2015 additionally covers distributors of transportation fuels, natural gas and other fuels.
- Eight percent of a company’s emissions can be covered using credits from US offset projects eligible under the scheme, from the sectors forestry, dairy methane and ozone depleting substances. CERs are so far not allowed. Offset credits can be invalidated by the regulators ex post; this buyer liability has been heavily criticised by project developers.
- Linking to the Western Climate Initiative is provided as an option.
Similarly, US held carbon exchanges ICE and GreenX have excluded CERs originating from countries under US economic sanctions from trading on their platforms. The ban so far only applies to Cuban credits, but may extend to North Korean, Syrian and Iranian projects once they generate credits.