Fair trade? Who is benefiting from the CDM?

Transcription

1 CDMWatch Fair trade? Who is benefiting from the CDM? Introduction Updated version, November Although Kyoto has still not entered into force, the carbon market has begun development in earnest. The CDM has been a source of interest to many governments and private companies, however serious purchase commitments have only been evident from two main buyers the World Bank s Prototype Carbon Fund and the Dutch CERUPT programme, while Japanese companies are becoming increasingly active. This paper challenges the assumption that the CDM is a so-called buyers market by comparing prices offered to developing countries through the CDM and price levels and forecasts in Europe. We argue that the substantial difference between these prices offers an opportunity for developing countries to demand a fairer deal by insisting on a quality driven approach. The objective of the CDM The CDM is a tool created by the Kyoto Protocol with two goals. One is to lower the costs of compliance for industrialised countries in meeting their Kyoto targets. The other is to assist developing countries develop projects and technologies consistent with their strategies for sustainable development. The success of the CDM must be measured against both of these explicit goals. Assessing benefits to buyers and sellers The benefits to a buyer country can be quickly assessed by comparing the price paid for CERs to the costs of domestic abatement. Benefits to a host country are more difficult to gauge but can be broadly split into two areas: 1. Is the project additional 2? Non-additional projects which would have occurred without carbon revenues are effectively zero benefit from the perspective of a host country. 2. Does the project assist sustainable development goals? This is a decision that the Marrakech Accords leave up to the host country. It is effectively a subjective judgement based on national conditions, the responsibility of which will be that of the Designated National Authority (DNA). The criteria of additionality and sustainability can be summed up using the term project quality. It is project quality that determines the level of benefits received by the host country. 1 This is an updated version of a paper released in September It includes a short extra section on the validity of making a cost comparison between CERs and other carbon prices, due to discussion generated by the original document. 2 Article 12.5b of the Kyoto Protocol requires that projects demonstrate reductions in emissions that are additional to those that would have occurred in the absence of the certified project activity. This means that all CDM projects have to show additionality i.e. that they would not have been carried out if the CDM did not exist. 1

2 Who is benefiting so far? Buyers An indication of the benefits to buyer countries can be gained from looking at relative prices. Recently an EU study calculated that including flexible mechanisms (the term for emissions trading, Joint Implementation and the CDM combined) would realistically reduce the costs of emissions allowances to companies under the EU emissions trading scheme from 26 to 12.4 per tonne. This represents a 50% cost saving for the industry sectors included under the scheme, worth about 3.5 billion over the Kyoto commitment period (Criqui and Kitous, 2003). The Danish government s recent analysis recommended a climate strategy based heavily on the use of the flexible mechanisms. At prices /tonne the Danes calculated a saving of million per year for all sectors resulting in a potential total saving over 2 billion over the 5 year Kyoto period for Denmark alone (Danish Government, 2003). From these two examples it is clear that EU countries in particular have identified the CDM as a major source of potential carbon credits. However there is a major discrepancy between the price that governments are considering, the price of carbon currently being traded in the EU and the price being offered to developing countries in the emerging CDM market today (see figure 1) Comparison of abatement costs, carbon credit prices and forecasts EU average national domestic marginal abatement cost Netherlands domestic marginal abatement cost EU forecast without international trading/cdm/ji 26 Danish government forecast maximum EU forecast price with unrestricted international trading Average EU trading price, August 2003 Danish government forecast midrange EU estimated average traded price to date CERUPT max price for renewables Danish government forecast minimum Max price for PCF projects Euro / tonne CO2 Sources : Criqui and Kitous (2003), Point Carbon (August ), Danish Government (2003), Prototype Carbon Fund Business Plan and Budget (April 2000), CERUPT website ( EU marginal abatement cost calculated as the average of national marginal abatement costs, weighted by reduction commitment. EU estimated average derived from Viewpoint: EU prices on the move Point Carbon (August 22, 2003) 1 = 1.1 $US. This figure illustrates the remarkable degree to which CERUPT and PCF offers undercut trades taking place within the EU and the planning forecasts of the European Commission and the Danish Government. 2

3 Sellers In order to assess benefits to sellers and levels of project quality, the performance of proposed CDM projects on the issues of additionality and sustainable development need to be investigated. Most of the projects submitted to the Executive Board (EB), especially under the CERUPT programme fail to even consider the additionality question in project documents. In many cases it is clear that the projects would go ahead without the CDM. For example many of the projects were already under construction before being designated as potential CDM projects. In other words most of the existing proposals are non-additional and would happen anyway, and thus fail to offer any added benefits to host countries by being labeled as CDM. When the Executive Board proposed a mandatory additionality test that asked if the project would happen without the CDM, the International Emissions Trading Association (IETA) warned most of the projects in the portfolio of the World Bank and the Dutch ERUPT/CERUPT would not meet this additionality criteria 3. This assessment is consistent with the comment of SGS, the assessor of many of the CERUPT projects, who conceded that some of the CERUPT projects they had seen were blatant business as usual projects. 4 In terms of sustainability the picture is less clear. 23 of the 45 projects currently on the table are renewable energy projects which one might expect to have inherent sustainability benefits. However they are very small, accounting for only 17% of the carbon credits being claimed. Larger projects such as the PCF s Plantar project rely on monoculture plantations widely viewed as inherently unsustainable - while dams projects, such as the Esti and Bayano dams under the CERUPT tender, usually do not address the sustainability question in any detail. However host country governments with whom responsibility on this issue ultimately rests - have also for the most part failed to provide guidance to project developers as to how the sustainability issue should be addressed. Whether the CDM is truly contributing towards national sustainable development objectives is therefore very difficult to assess at this stage, because project developers are skirting the issue and host country governments have usually not yet made it clear what they mean by sustainable development. Overall in terms of project quality additionality and sustainability issues - the benefits of the CDM to host nations appear minimal at this stage. So far it is quite clear that the buyers who project massive savings in the order of billions of Euro are getting the best out of the deal. The link between carbon price and project quality The value of carbon credits provides the necessary financial resources for developers to invest in projects that achieve better outcomes in terms of climate protection and sustainable development, compared to investments without carbon finance. Project quality is therefore linked to the amount of additional investment available. A low carbon price results in: reduced chances of a project being additional because the carbon finance available to the project developer is insufficient to remove barriers to new and innovative projects. reduced chances of a project contributing towards sustainable development. Many project developers consider that sustainability testing will lead to increases in transaction costs that can not be borne if they have to deliver a low carbon price. 3 Submission by the IETA, , available from cdmwatch@indosat.net.id 4 from SGS to International Rivers Network, , available from cdmwatch@indosat.net.id 3

4 In short, whilst high carbon prices will not guarantee project quality, low carbon prices certainly reduce and in some cases completely negate project quality and benefits to host countries. It is clear therefore that the pressure by buyers to keep carbon prices low is having a major negative impact on the benefits to developing countries. Why have buyers refused to offer a fair price to developing countries for carbon? Instead of addressing the price/quality problem directly, buyers have used a range of excuses to justify their low price offers. They have used these excuses to create the illusion that the CDM is a buyers market and that developing countries have no choice but to accept the prices being offered. Upon closer inspection most of buyers market claims are not backed by hard evidence, for example: Fallacy 1: The US withdrawal has depressed carbon market prices to rock bottom levels. This is simply incorrect. The price being offered by the PCF was set in 1999, two years before the US pulled out of the Kyoto process. In addition both the EU and the Danish forecasts quoted earlier did not consider US participation and still reflect market prices of 2-4 times the value of CERUPT and PCF offers. The Danish forecast speculated that if the US did return to the trading system, then prices could be pushed up to between Euro tonne. Fallacy 2: Additionality testing is impractical and too expensive. Neither the PCF, CERUPT or IETA have ever developed or assessed the cost of a true project level additionality test. One credible additionality test currently available to project developers is contained in the CDM Gold Standard, developed for WWF by an international panel of experts. This test is not expected to significantly raise transaction costs. Fallacy 3: Competition from other countries will force prices down. Whether it s Russian hot air, Chinese power sector upgrades or Brazilian forestry projects, host countries are continually being warned about competition from other countries. Aside from the question of whether countries are being deliberately played off against each other, the availability of vast quantities of very cheap credits is usually overstated. For example the prices of sinks projects have been consistently underestimated due to huge uncertainties over project rules and in particular inaccurate baseline methodologies. For example Brazil s two plantation-based avoided fuel-switch projects - proposed by Plantar and V&M, claiming 33 Mt CO 2 - have recently had their fuel-switch baseline methodology rejected by the Executive Board because of major flaws and are now in doubt. The low future price of Russian hot air is also exaggerated; a) because of political and public resistance to purchasing massive amounts of hot air in buyer countries and; b) because Russian traders have no incentive to virtually give away carbon credits at such low prices. Why sell at 1/tonne if the EU market and CDM projects are selling carbon at much higher prices? Fallacy 4: Marginal abatement costs (MACs) are not comparable with CDM prices. It is quite true CERs carry risks and costs that are not associated with domestic abatement. However at the end of the day a tonne of carbon offset through a CER or a tonne of carbon reduced through domestic action will end up as the same product an Assigned Amount Unit in the inventory of a country with a Kyoto target. CERs and marginal abatement costs are not identical, but are quite clearly linked and can therefore be compared. As the World Bank s PCF stated in 2001, the marginal cost of domestic abatement will drive the demand for external GHG credits 5. Furthermore buyers have been comparing CER prices with MACs for years as a means of persuading investors to buy into the CDM. In 2000 in the press release announcing the launch of the PCF, Fund Manager Ken 5 Introduction to the Kyoto Protocol, CDM and the PCF, delivered at the PCF and climate change synergy workshop, Beijing,

5 Newcombe states: There are many opportunities to reduce emissions of greenhouse gases in developing countries at a cost of between $5 and $15 dollars a ton of carbon. This compares with a marginal abatement cost of upwards of $50 a ton of carbon in advanced economies 6. The World Bank is far from alone both the EU and Danish government climate strategies quoted earlier in this paper involved calculations comparing expected prices of CERs with domestic MACs, as part of the overall calculation of cost savings offered by the flexible mechanisms. Fallacy 5: Kyoto has not entered into force, therefore the market is too uncertain for buyers to pay a reasonable price. For smaller learning by doing trades buyers are already paying much higher prices, as the current EU market trading at 9/ tonne demonstrates. But for much larger trades the question to sellers is why not simply wait until Kyoto enters into force and then claim a fair price? Without Kyoto the CERs are worthless in any case. Conclusions and suggested host country response The balance of benefits observed to-date lies clearly with buyers rather than with sellers, but we dispute the claim that carbon is a buyers market for the reasons outlined above. It is difficult to avoid the conclusion that this claim is little more than gaming by buyers attempting to mislead sellers about the state of the carbon market. Such claims are being used by buyers to justify offering reduced prices to developing countries through the CDM. Host countries and their private sectors need to recognise that participating in the CDM means participating in a commodity market for carbon. And, as the EU s analysis indicates, there is a lot of money at stake. In order to safeguard host country interests some of the following steps could be taken: Insist on quality driven methodologies which explicitly provide information to the DNA about project additionality and sustainability issues. In this regard governments could review the CDM Gold Standard - an off-the-shelf methodology developed for WWF and freely available to all at The CDM Gold Standard is designed to deliver on project quality objectives without incurring major additional transaction costs. Develop clear, practical guidance on sustainable development priorities for project developers at the national level. Treat discussions with buyers as commercial transactions. Demand estimates of industrialised country abatement costs when discussing price with buyers. Seek independent advice. Utilise free information services such as that offered by CDMWatch ( or Point Carbon ( Hire independent consultants or work with NGOs to gain intelligence on what buyers are really prepared to pay. Network with other sellers and host countries. If buyers continue to insist on setting apparently arbitrary maximum carbon prices, sellers should consider responding with minimum prices to support project quality. 6 World Bank launches market-based carbon fund, , 5

6 References Proposal for a climate strategy for Denmark. Danish Government, Feb 2003 Impacts of introducing CDM and JI credits to the European Emission Allowance Trading Scheme. Criqui and Kitous, European Commission DG Environment, May 2003 Carbon Prices, Market Comment, Viewpoint: EU Prices on the Move?. Carbon Market Europe. Point Carbon. August 22 nd 2003 Clean Development or Development Jeopardy? Third World Network/CDM Watch. Undated. The Gold Standard Clean Development Mechanism Project Design Document. Developed by Gold Standard Advisory Board for WWF. 12/7/03. For more information contact: Liam Salter Co-ordinator Ben Pearson Asia Pacific Climate and Energy Programme CDM Watch WWF International, Thailand Indonesia Tel: Tel: liam@wwfthai.org cdmwatch@indosat.net.id 6