May 2015 - The role of market mechanisms in the current transition period of the international climate policy regime is characterized by an increasing supply of available carbon credits as well as weak demand for these credits due to generally low mitigation ambition among Annex-I countries. This has resulted in a price depression for UNFCCC-backed carbon credits which potentially jeopardizes recent improvements in the Clean Development Mechanism’s regulatory and methodological framework. Still, carbon markets are expected to continue to play an important role in persuading countries to make ambitious ‘contributions’ to global mitigation efforts, as offsets can provide the flexibility that is a precondition for binding commitments to deep emission reductions.
However, in the future climate regime, it is expected that all countries will need to contribute to global mitigation efforts. It is highly likely that a more differentiated spectrum of national contributions by developing countries will also result in a more strongly differentiated eligibility of CDM project types and host countries. In response to criticisms of the CDM, the EU Emissions Trading System has already restricted the use of CERs from CDM projects outside LDCs registered after 2012 as well as CERs from industrial gas projects. Further proactive reform of carbon markets and smart limitations of offset flows may be able to contribute to CER price stabilization as well as achieving the political objectives of the climate regime.
These include both a more equitable distribution of the benefits of the CDM as well as a more ambitious greenhouse gas (GHG) mitigation efforts by more advanced developing countries. Therefore, instead of relying on a simplistic distinction between LDCs and non-LDCs, or quantitative limitations to CER imports, more sophisticated eligibility criteria linked to country or project type characteristic may better reflect the evolving political context. In addition, they may succeed in driving investment to high-quality CDM activities, and steering more advanced developing countries to more ambitious mitigation contributions beyond offsetting.
The study "Methodology for CDM eligibility criteria definition" shows that options exist to set strong incentives that strengthen the positive developments in the CDM, and to further align the mechanism with the political objectives of the UNFCCC process. Such measures could contribute to unlocking the CDM’s full potential, through smart eligibility restrictions, adjusted uses of the CDM through innovative uses of offset credits, as well as through new applications of its methodological toolkit.