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Crisis Confirmed, Reform Postponed

Report on the Flexible Mechanisms Talks at the Warsaw Conference

Four people looking at a laptop computer
(Photo: IISD/ENB)

December 2013 - The Warsaw Climate Change Conference was dubbed by many as the ‘Finance COP’. While some steps were taken in both this respect and in other fields, the advancement of new carbon markets and reforming the existing flexible mechanisms proved difficult.

Brazilian proposal

The conference started off with an unexpected proposal by Brazil, suggesting to enable countries to count pre-2020 mitigation actions as well as credits stemming from the Kyoto mechanisms towards the commitments of the post-2020 agreement. In terms of the Kyoto mechanisms, Brazil proposed promoting voluntary cancellation of CERs, among other things, by private sector entities, civil society, and even individuals. It also suggested that Parties to the UN Climate Convention could voluntarily cancel CERs and ERUs, which would then be recognized and “added to [the Party’s] contribution under the new instrument”. This caused raised eyebrows, with many observers pointing to the vast amounts of surplus AAUs that exist in Eastern Europe, which have already caused problems in relation to the transition from one Kyoto commitment period to the other. Others referred to the carbon market crisis and acknowledged the potential to stabilize CER prices. The proposal text failed, however, to attract adequate support among the Parties and was not pursued further. The final decision on further advancing the Durban Platform, however, contains a general call for Parties “to promote the voluntary cancellation of certified emission reductions, without double counting, as a means of closing the pre-2020 ambition gap”.

The stony road towards new market mechanisms

Establishing new market-based mitigation instruments has been on the agenda of the climate talks for several years. Views on this matter differ greatly, with the EU promoting the top-down ‘new market mechanism’ (NMM) as defined by the Durban conference, while Japan, the US and other industrialised countries are in favour of a bottom-up ‘framework for various approaches’ (FVA) that should accommodate national offsetting schemes like the Japanese Crediting Mechanism (JCM), with nationally defined (and less stringent) accounting rules. Last not least, a number of Latin American countries which oppose market mechanisms in general have introduced the notion of non market-based approaches (NMA) into the negotiations.

As for the new market mechanism, COP 18 in Doha had decided that the Warsaw conference was to develop modalities and procedures for the NMM. The situation has changed somewhat since last year’s conference – something that was mirrored in the slow pace of the negotiations at the intersessional meeting in Bonn last June (see CMR 02-2013). Developing countries are less and less willing to accept the necessity of new market-based instruments given the low level of ambition that developed countries show. A workshop in October that was to pave the way to decision-making in Warsaw was unable to foster any convergence of views.

Thus, the negotiations in Warsaw were characterised by the same dilemma concerning fulfilling the Doha mandate and completely rejecting market-based mitigation measures. As a result, the negotiation text debated shortly before consideration of this agenda item was closed contained two options:
(1) putting a moratorium on the new market mechanism, and (2) a listing of elements that the NMM modalities and procedures should cover. This included clarifying the role of the COP, setting standards to achieve a net decrease of greenhouse gas emissions, developing safeguards for environmental integrity, and stipulating the use of conservative methods for the establishment and periodic adjustment of ambitious reference levels.

This gap proved too wide to bridge, and the negotiations broke down. Even the COP presidency, who was asked to take over after the talks led by the UNFCCC’s Subsidiary Body for Scientific and Technological Advice (SBSTA) had failed could not resolve the impasse. The NMM negotiations will be taken up again by the next SBSTA meeting in June 2014.

Recognizing bottom-up initiatives

In the FVA negotiations, agreement on the basics of the FVA, such as common accounting rules and an adequate level of transparency, proved difficult. Therefore, the talks focussed on launching a platform for exchange on existing bottom-up initiatives as a first step. An early text proposal mentions aspects for inclusion in the platform, such as methodologies to determine baselines and targets, rules and procedures to ensure environmental integrity, arrangements to avoid double counting, and MRV issues. Non-market-based approaches were also to be included in the platform.

However, as in the NMM talks, neither the co-chairs of the spin off group nor the COP presidency were able to reach consensus. The talks will be continued in June next year. While the idea of the information sharing platform later appeared in a text suggested for decision by the Ad Hoc Working Group on the Durban Platform, the wording was not included in the final decision.

Reforming the existing flexible mechanisms

The discussions on reforming the modalities and procedures of the CDM were even more difficult, starting under difficult circumstances as the talks on this agenda item of the Subsidiary Body for Implementation (SBI) should have started at this summer’s negotiations in Bonn. However, contentious issues concerning procedural matters prevented adoption of the SBI agenda and, as a result, only an informal workshop outside the SBI agenda took place.

In Warsaw, the Parties discussed a list of possible changes that partly drew on the above discussions. This list included changing the terms of reference for CDM Executive Board (EB) members, adding further provisions for voluntary net emission reductions, strengthening the role of the host country DNA, excluding certain project types such as industrial gas projects, improving stakeholder consultations, clarifying the requirements for demonstrating additionality, and shortening the length of crediting periods.

The Parties, however, got bogged down once more on the matter of lack of demand. No agreement was reached, and the review of the modalities and procedures was postponed to next year’s climate conference. The final decision sets out a narrowed-down list of possible elements of a reform, including EB membership issues, DOE liability, the PoA framework, length of crediting periods, provisions for demonstrating additionality, the role of DNAs, and streamlining the project cycle for certain project categories. The UNFCCC Secretariat has been asked to prepare a technical paper by March 2014 on the implications of possible changes in the aforementioned areas. The Parties are invited to provide their views on the paper by April 2014, so that these can feed into the discussions at the intersessional meetinginJune2014andultimatelyassist decision-making at CMP10 in December 2014.

Minor technical steps for CDM reform

Apart from the overall reform discussions, the CMP also discussed its annual guidance documents for the two existing mechanisms. On CDM, the debate revolved, among other things, around further streamlining the project cycle. The use of standardised baselines (SBs) is of particular interest for African countries, which have been neglected by the CDM so far. They hope that further standardisation will bring lowered transaction costs, facilitating projects in their region. This was supported by the EU, which sees standardised baselines as a tool for up-scaling and broadening the mechanism. These attempts were, however, met with opposition by Brazil, which insisted that SBs must be used voluntarily and upon host country request.

Negotiators also debated ways to stabilize the CER market. While a proposal to introduce a floor price for Certified Emission Reductions (CERs) failed at an early juncture, the delegates held intense discussions about broadening and refining the options for voluntarily cancelling of CERs. While Brazil and a number of developed countries were in favour of these options, many Least Developed Country negotiators reiterated their concern that this would shift the focus away from the lacking demand from Annex I countries.

In the light of the failed new market mechanisms negotiations, the EU suggested letting the EB analyse how net mitigation of greenhouse gas emissions might be achieved via the CDM. Other proposals included inviting the Green Climate Fund to use the CDM methodologies, and broadening the scope of afforestation/reforestation project activities. The latter was popular with largely with African countries who believe their potential in this sector remains unexploited.

The debate on the technical details of voluntary compensation in particular was extremely long and drawn-out, so that in the end, there was no agreement on several topics under consideration. Hence, most controversial issues were left out of the final compromise text: there is neither a reference to voluntary cancellation, nor to standardised baselines or net mitigation options. On the market situation, the Parties merely note “concern”. This is despite the fact that the decision on future climate action under the Durban Platform invites the Parties to “promote the voluntary cancellation of certified emission reductions, without double counting, as a means of closing the pre-2020 ambition gap”.

Instead, the CDM guidance focuses on technical improvements, such as rules for projects that are conducted in the same physical location as a completed project. Also, the EB is to evaluate the sustainable development tool and to develop ‘guiding tools’ that can help DNAs monitor the sustainable development benefits. On PoAs, the EB has been asked to analyse the thresholds for component project activities and to further improve the regulations for programmes taking place in more than one host country. The annual debate on additionality has led to the repetition of the request to “examine alternative approaches to the demonstration and assessment of additionality”.

The CMP also welcomed progress made in establishing the regional collaboration centres set up by the EB to foster CDM project activities in under-represented regions. Last not least, the EB is to collect information on practices for local stakeholder consultations in order to assist DNAs in developing guidelines for the consultation process.

JI Reform in limbo

The level of ambition in reforming JI seems to reflect the dwindling significance of the mechanism itself. The review of the Joint Implemenation guidelines suffered the same fate as the review of the CDM modalities and procedures – it was postponed until the June intersessional meeting. The annual guidance text on JI underlines the need to improve the mechanism. The Joint Implementation Supervisory Committee is to further define its proposals to align the JI accreditation system with that of the CDM.

Conclusion

The crisis concerning the existing mechanisms, meaning the CDM and to a minor extent JI, mainly involves the lack of demand from industrialised developed countries and makes the necessity for new market-based schemes difficult to explain: one of the ideas behind developing an NMM covering "broad segments “broad segments of the economy” was to trigger higher mitigation engagement among developing countries. Nonetheless, these activities do actually take place, be it in the form of NAMAs or, as emissions trading schemes in China, Mexico, South Korea and elsewhere.

Thus, a major argument in favour of the NMM has lost its meaning. Given the Warsaw outcome, there are growing signs that there will be neither a top-down NMM nor a framework for bottom-up approaches in the future, and that the only market-based instrument in the 2015 framework could well be the CDM. Whether or not this is scenario will evolve depends to a large extent on the upcoming negotiations on the 2015 agreement and on the definition of “ambition” and how to achieve it (see opinion article ‘Future carbon market opportunities not yet ruled out’ elsewhere in this issue).

What counts in all of this is that the CDM reform must continue and be taken much further. The long overdue revision of the additionality requirement, along with top-down development of standardised baselines and refinement of their guidelines, are just two of many outstanding issues. Also, if voluntary cancellations of CERs are to be promoted, then the non-mitigation-related benefits of projects must be highlighted, as buyers of these credits will rightly want to showcase their engagement. The chances of a complete overhaul of the CDM mechanism should not be dismissed: in the countdown to the new climate agreement, the window of opportunity will only be open for a limited period.

 

This article was published first in Carbon Mechanisms Review 4-2013