Archive for clean development mechanism

Project-based carbon offsetting is like a lottery with no prizes

Posted in Climate Change with tags , , , , , , , , , on December 7, 2009 by Dan

At Carbon Retirement, we have just published a short piece of research into the efficiency of carbon offsetting through the Clean Development Mechanism, covered today by the BBC. It shows that for every £1 spent on CERs by voluntary buyers, 28p goes to the project’s capital expenditure and maintenance costs.

The chart below, from the report, summarises the costs per CER, with the grey chunks representing project expenditure. Project costs total £3.78 per CER, or 28% of the price paid by the final buyer.

Costs in the CDM market, per CER

Costs in the CDM market, per CER

This isn’t a study of profitability for any of these actors and the costs at each stage might be reasonable. The big chunk taken by the pCER buyer in our model, for example, may be a fair reflection of the risk it holds that the project will not deliver CERs.

However, the research shows that the efficiency of the overall system is very poor. While some transactional costs are inevitable and you could never expect 100% of your money to go to project funding, 28% seems far too low. Imagine if a development charity told you that 72% of your donation went to middlemen and admin fees!

Co-incidentally, 28% is also the proportion of UK national lottery revenue that goes to charity. So, buying carbon offsets to mitigate climate change is like buying lottery tickets to give money to charity. With carbon offsetting, you don’t even win a prize!

Is it possible to rate pre-issue CDM projects?

Posted in Carbon markets with tags , , , , on June 26, 2008 by Dan

Someone along the line in the CDM process has to accept the risk that the CDM board might not award CERs to projects in time or at all. Last autumn Ecosecurities lost almost half its share price as the CDM process could not keep up with applications.

IDEACarbon yesterday launched the Carbon Ratings Agency to help investors separate investment grade and sub-prime projects. It will award instruments backed by pre-issue projects with grades from AAA to D. AAA means that it is highly likely a project will deliver its promised emission reductions and be awarded carbon reduction credits (primarily CERs, but also voluntary offsets).

Carbon Rating Agency may make allocation of capital in carbon markets more efficient and reduce volatility in CER prices (an event like the Ecosecurities crash causes sudden supply concerns). The important thing to remember is that it will not address environmental concerns – particularly around additionality – within the CDM and other offset quality regimes. It assesses the risk of a projects successfully getting through the regimes.

And on what basis should investors trust the ratings? CERs are not a tested product and no-one really knows where the CDM is going long term. Plus – look where our AAA-rated mortgage backed securities ended up.

World Service on additionality

Posted in Carbon markets with tags , , , , on June 13, 2008 by Dan

I just got round to listening to the programme on the World Service last week about the CDM. It contains some gems on additionality:

An Indian company that has set up a biomass generator that runs on rice husks.

World Service: “The carbon credits, then, were they important for your decision to go ahead with the project?”

Interviewee: “Not really, basically. Six months after starting the project we applied for the CDM.”

WS: “So this is a project you would have done anyway, but now the numbers are a just a little bit more favourable?”

I: “Yes, the numbers are more favourable”

WS: “So you would have done it anyway”

I: “Yes”

WS: “So if the authorities at the CDM are silly enough to give you a million dollars extra for it, you’ll take the money?”

I: “Why not.”

Or a spokesman for SRF, an Indian company eligible for 3.8m CERs per year from HFC destruction,

Interviewee: “We were already sensitised to the greenhouse effect of HFC23 and the board gave us approval [to destroy the gas] irrespective of the ratification status of the Kyoto Protocol.”

World Service: “This is something you might well have done anyway?”

I: “Yes, we would have done it anyway.”

WS: “You would have done it anyway, even if the CDM scheme hadn’t been set up.”

I: “That’s right.”

Additionality cannot be taken out of the CDM, even if it is impossible to administer

Posted in Carbon markets, Offsetting with tags , , , , on May 8, 2008 by Dan

Ken Newcombe, who founded the World Bank’s Carbon Finance Unit, yesterday described the concept of additionality in the Clean Development Mechanism as “impossible”.

A reduction in emissions is ‘additional’ if it would not have happened without the funding provided by selling carbon offsets through the CDM (mainly as Certified Emission Reductions in the EU ETS).

He rightly points out that additionality is very difficult to measure and has added significantly to the administrative costs of verifying CDM projects. Instead, he proposes a ‘benchmarking’ approach, in which activities that ‘emit below the benchmark’ are allowed to sell offsets.

The thing is, additionality is the basic premise of offsetting. To claim that an investment will reduce emissions by a specific quantity, you must measure the baseline (what would have happened without intervention).

If the CDM is not necessarily additional (which it is not now, but at least it aims to be), emissions will leak out of statutory cap-and-trade schemes like the EU ETS in unknown quantities. Not only that: unknown quantities of money will leak out too as projects that would have happened anyway are given unnecessary funding.

Perhaps the CDM is not the right way to transfer clean technology to the developing world. In fact, CDM is a misnomer – it is not primarily designed to foster clean development, but to reduce the costs imposed on the developed world by the Kyoto Protocol.

CDM is growing and maturing – but remember that it delivers cost reduction, not lower emissions

Posted in Carbon markets, Offsetting with tags , , , , on April 23, 2008 by Dan

The Clean Development Mechanism is two and half years old and has just registered its 1,000th project (press release – pdf).

They’ve got a nice map, which shows that projects are concentrated in India, China and Brazil, and that Chinese projects tend to be larger scale. Between them, the projects have delivered 136 million CERs to date and are expected to deliver 2.7 billion by 2012 (a CDM project earns a CER when it prevents one tonne of CO2e – carbon dioxide or equivalent greenhouse gas – from being released into the atmosphere). By comparison, companies regulated in the EU ETS (which are the main market for CERs) will be allowed to produce just over 8 billion tonnes of CO2e between 2008 and 2012.

CERs are essentially offsets. Companies participating in the EU ETS are allowed to buy a limited number of CERs to offset emissions for which they do not have allowances (EUAs). In the UK, companies may use CERs to offset up to 8% of their emissions.

Like voluntary offsets, CDM projects have been subject to a lot of criticism. Some of the problems are intrinsic to offsetting, such as the difficultly of establishing whether the CDM project would have happened without the additional funding provided by selling CERs. Some say that the scheme has not applied its environmental criteria strictly enough. The project developers complain about a backlog of applications.

It is important to remember that CDM projects do not produce any net reduction in emissions. They make it cheaper for compliance markets such as the EU ETS to meet their cap. In the absence of CDM, companies in the EU ETS would simply have to make more cuts themselves – and arguably make more clearly measurable reductions and investments in clean technology that last longer.