Project developers operating under the Kyoto Protocol’s Clean Development Mechanism (CDM) now face additional scrutiny after several major organizations agreed to adopt a new voluntary verification standard. Eligibility for the CDM is premised on the requirement that a project will not proceed without the financial incentives provided by the creation of salable emission reduction credits. In other words, if a project is financially viable without generating emission credits, it is not eligible for CDM participation. This concept is known as additionality - the benefits generated by CDM projects must be additional to any that would have occurred without CDM support.

Organizations that verify emissions reductions for CDM projects, known as Designated Operational Entities (DOEs), have expressed concerns over their ability to reject ineligible projects, as a means of protecting the integrity of the CDM. As a result, a group of major DOEs recently agreed to criteria that may significantly impact the approval process for projects that wish to issue Certified Emission Reduction (CER) credits. The criteria will be considered for official inclusion into the CDM process by the Executive Board of the CDM, likely later this year. Until then, it is a voluntary agreement between many of the major DOEs, but still impacts projects being proposed from July forward.

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The Government today released its much-discussed green paper on the design features of its newly branded “Carbon Pollution Reduction Scheme” for commencement in 2010.  This follows Professor Garnaut’s release of his draft report on the scheme earlier this month, and the Government’s commitment to unveil the key features of the scheme by the end of this year.  It proposes the introduction of a broad-based cap and trade scheme with the following features:

Broad coverage: petrol in, reforestation opt-in

Broad coverage to include stationary energy, transport, industrial processes, fugitive emissions, waste and forestry, with agriculture likely to be incorporated by 2015.  The points of liability primarily fall on large facilities and upstream fuel suppliers.  The proposed threshold for direct obligations is 25,000 t CO2-e or more a year, which will capture approximately 1,000 Australian companies.  The impact of the inclusion of the transport sector, a highly sensitive issue, has been softened by a transitional measure of fuel tax cuts on a cent for cent basis, to be reviewed three years after the scheme starts.  There was also a question mark around forestry: the Government has dealt with this by proposing that reforestation be included on a voluntary “opt-in” basis while deforestation is not.

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Emissions trading is a mechanism that provides countries, companies, and environmentally-conscious individuals with flexible cost-efficient means to meet greenhouse gas emission reduction goals. Emissions trading operates similarly to commodities markets, with purchase and sale contracts defining the rights and obligations of the parties and allocating risk. In a series of articles, ClimateIntel will discuss significant issues arising under these emission reduction purchase agreements.

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Last week, the World Bank priced the first bond linked to prices of certified emissions reductions (CERs), known as the World CO2L Bond, with Japanese stock brokerage firm Daiwa Securities Group serving as lead manager. The Uridashi bonds will be offered to individual Japanese investors during the period June 9-24, with June 26 as the issue date, and will mature on September 30, 2013. The total amount of the bond issuance is US$25 million with a minimum denomination of US$100,000. After an initial 15-month period with a fixed coupon of 3%, the interest rate will be linked to the future performance of CER market prices, and specifically to the price of CERs from a hydroelectric power plant project in the Guizhou province in China.

The project has been registered with the United Nations’ Clean Development Mechanism (CDM) Executive Board in April 2008 and is being jointly implemented by China’s Guizhou Sanhe Hydro Power Development Co., Ltd. and Daiwa Securities SMBC Principal Investment Co., the investment arm of Daiwa Securities Group. The project is expected to reduce greenhouse gas emissions by over 23,000 tonnes CO2-equivalent per year.

Daiwa Securities Group expects that sales of the World CO2L Bond will help support demand for greenhouse gas emissions trading because investors will be indirectly participating in the market for greenhouse gas reductions. Trade in CERs more than doubled to $13 billion last year, according to a World Bank report published in May.

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The UNFCCC Compliance Committee recently suspended Greece from trading carbon credits under the Kyoto Protocol. The Committee determined that Greece does not reliably observe and measure greenhouse gas (GHG) emissions, as required by Kyoto. This marks the first time that a country has been sanctioned under the UN system for inadequate GHG reporting.

Greece is now ineligible to participate in the Kyoto Protocol’s flexibility mechanisms, meaning it cannot buy credits to meet its own emissions targets or sell credits from domestic projects that generate excess emissions allowances.

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The European Climate Exchange (ECX) opened trading yesterday for emissions credits that extend beyond the Kyoto compliance period. The Kyoto Protocol, which went into force in 2005, will sunset in 2012. International negotiations are currently underway for a successor agreement that will run from 2013-2020.

ECX opened the futures markets for the December 2013 and 2014 settlement periods, with credits for 10,000 tons of carbon emissions being purchased by an undisclosed party for 27.7 Euros (approximately $42) per ton. These credits may be used in the European Union Emissions Trading System (EU-ETS) for compliance with future emission reduction obligations to which the European Union is expected to commit. The European Commission recently issued proposed Directives for governing the next phase (Phase III) of the EU-ETS, beginning in 2013, with the intent that the market will continue even if there were no post-Kyoto agreement in place.

London is, in many respects, the center of the carbon trading market. As recently as six weeks ago, publications such as the Financial Times and the Times of London published articles expressing doubts about the market. Two of the most critical problems facing the carbon market relate to the process for issuing credits under the United Nations process and uncertainties over the structure of the post-Kyoto regulatory system. While the inefficiencies of the Clean Development Mechanism certification process remain, this trade reflects confidence that, at least in the EU, there will likely be a functional carbon market beyond the expiration of the Kyoto Protocol.

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China has taken an aggressive posture on technology transfer in its comments on the Bali Action Plan - the “roadmap” for guiding the next round of discussions on a post-Kyoto global climate change regime.

The UNFCCC Secretariat posted comments from 26 countries earlier this week, in advance of the first session of the Ad hoc Working Group on Long-term Cooperative Action under the Convention that will convene in Bangkok from March 31 to April 4, 2008. While most countries’ positions reiterate statements made during the Bali Climate Change Conference, China’s submission is notable for its stance on intellectual property rights (IPR), clean technology financing, and transfer. China made it explicitly clear that it has uniquely high expectations for the United States, noting that special consideration in the negotiations should be given to ensuring “quantified emission reduction targets [25%-40% of 1990 levels by 2020] for the Annex I Parties to the Convention that are not Party to the Kyoto Protocol.”

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Subcommittee on Energy and Air Quality: The Subcommittee will hold a hearing on “Administration Perspectives on United Nations Climate Change Conference in Bali” on Thursday, January 17, 2008, at 10:00 a.m. in room 2123 Rayburn House Office Building. White House chief environmental adviser James Connaughton will serve as the witness for the hearing. The event will be available via webcast.

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The UN Climate Change Convention Bali, Indonesia, launched “a new negotiation process, designed to tackle climate change,” with the aim of reaching consensus on a successor climate change agreement by the end of 2009.

The timetables set forth in the Bali Action Plan and in related documents call for two major actions in the first quarter of 2008: (1) Parties may provide comments on the work program of the Bali Action Plan by February 22 and (2) “Parties and relevant organizations” may submit comments to support a comprehensive review of the Kyoto Protocol by March 7.

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As the 2007 United Nations Climate Change Conference draws to a close, I would like to share comments on some of the major topics arising from the talks. Mitigating climate change and adapting to its impacts formed the basis for the majority of the talks at Bali, with technology transfer and new financing mechanisms proposed as the leading methods for facilitating global cooperation. Read the rest of this entry »

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