Increasing Demand and Reducing Supply – A Rescue for the CDM?

FNI Climate Policy Perspectives 11, June 2013

A global strategy to reduce greenhouse gas emissions can be cost-efficient only if backed by incentives for mobilizing the lowest-cost options for emission reduction. As only a subset of nations today have country-wide emission commitments, and sector-based programmes have been slow to evolve, the project-based carbon market is a crucial element in a global mitigation strategy.

The Clean Development Mechanism (CDM) has registered over 6000 emission reduction projects in developing countries and has generated over 1.2 billion emission credits. However, it has been jeopardized by the crash in the prices for emission credits, from over EUR 10 in 2011 to a few cents. This crash is due to the economic crisis and lack of political ambition, reducing the demand for emission credits in industrialized countries.

Cost-efficient mitigation of global emissions will require stability in the carbon price in developing countries, restoration of private-sector confidence in carbon markets and preservation of human capacity on how to organize mitigation projects, inter alia. Saving the CDM could build a bridge until national and sector-wide carbon markets become operational.

Rescuing the CDM can be achieved by (1) increasing credit demand, e.g. by deeper emissionreduction targets or the inclusion of international targets in the carbon market, and (2) by cutting the credit supply, e.g. by discounting credits or excluding project types that are already business-as-usual. Such a rescue programme will also have to improve the environmental integrity and the image of the CDM.

Today¡'s low market price offers a unique opportunity for public actors to source low-cost abatement projects that fit their own strategies, as anyone paying more than the market price can decide on the type of credits to be supplied.

CDM rescue programmes can also help to strengthen environmental integrity and sustainable development, e.g. by excluding specific project types and promoting others. Such interventions could be quickly implemented by decentralized buyer actions, whereas centralized UN interventions that preserve market uniformity would take more time.