The global carbon market has become more and more fragmented in the course of recent years, the reason being that a number of national and regional schemes have opted to develop new, alternative mechanisms and move away from the existing standard applied under the Clean Development Mechanism (CDM). Among the known examples of this new approach are the Australian Carbon Farming Initiative, the Offsetting Protocol for the emissions trading schemes to be implemented in California and Quebec, Japan’s Joint Crediting Mechanism, the Chinese Certified Emissions Reductions scheme developed for the Chinese market and perhaps also the offsetting provisions in South Korea’s planned emissions trading scheme. The development of new carbon standards outside the existing multilateral framework can lead to even greater fragmentation of the global carbon market and poses a challenge when it comes to future linking of the various emissions trading schemes. The design of new offsetting schemes can be seen as a response to the perceived weaknesses of the CDM. An evaluation of its traits could thus contribute to the debate on reconciling the CDM with other instruments in use in carbon markets operated around the world.
The aim of the research and dialogue project Linking Carbon Markets through the CDM and Other Offsetting Mechanisms was to analyse the climate change policy conditions in Australia, California, Japan and South Korea, with the main focus being placed on their offsetting policies. Preliminary results were presented at the CDM Roundtable in April 2013 and at a workshop and event held during the UNFCCC Subsidiary Bodies Session held in May 2013.
The analysis showed that there are a number of reasons for the ongoing and accelerated fragmentation of the carbon market. On the one hand, Australia, California and Japan had severely criticised the CDM with regard to its project-by-project approach when demonstrating additionality. On the other, each jurisdiction had its own reasons for wanting to deviate from the CDM and they were undoubtedly influenced both by local conditions and political considerations. In California, the initial interest shown in the CDM disappeared following the election of a new governor. As the Administration was forced to act with care on account of the highly active environmental movement there, this posed a series of new challenges in terms of California’s emissions trading and offsetting policies. In the case of Japan, the problem needs to be viewed in a broader context, because Japan largely rejects the Kyoto Protocol. South Korea is focusing purely on domestic emission reductions and has completely refused to trade in international certificates until at least 2020.
With regard to their own offsetting schemes, Australia, California and Japan have all rejected project-by-project assessment to demonstrate additionality under the CDM and are instead in favour of conducting ex-ante assessment for entire project classes. They believe this approach is not only more efficient and more cost-effective, but also more “objective”, which is why a greater degree of environmental integrity is implied.
Looking at the various schemes in more detail, it becomes clear that none of the policies were developed in isolation and that their approaches and methodologies largely borrow from the CDM. The CDM serves as a kind of open-source resource that can be altered to meet the needs of the jurisdiction involved. And the CDM itself has (slowly) followed the general trend towards more standardised baselines which can also be used to demonstrate additionality. Although the various countries and regions have put forward differing arguments to justify their respective offset policies, greater standardisation could improve acceptance of the CDM tools in respect of the schemes already assessed and those still to emerge. Its central methodology development function could thus provide scope for an additional role for the CDM. If the efforts to develop standardised baselines and criteria for automatic additionality are taken seriously, there is certainly a chance that the CDM might retain its role as the de facto standard-giver and as such help to bring cohesion to the global carbon market.
Standardisation is not a catch-all in itself. Although greater standardisation could lead to lower transaction costs within a single scheme, those costs are transferred both in terms of time and place. The bulk of transaction costs come upfront and are transferred from the project participants to those who develop the standardised metrics. Individual savings in transaction costs could be lost if the world becomes saturated with competing standards. One way of financing these efforts could be to use the significant climate finance resources which industrialised countries have pledged. The CDM is an established global standard which could be used to obtain measurable, reportable and verifiable results from the climate finance sector. Rather than using CDM certificates to achieve emission reduction targets, governments could decide to balance the costs of CDM certificates by charging them against their finance pledges. The certificates would then be set aside unused, making a net contribution to mitigating climate change.
The Clean Development Mechanism and Emerging Offset Schemes: Options for Reconciliation?
Wuppertal Institute for Climate, Environment and Energy
2011 – 2013