A hot-blooded Spanish creature like me can get into an argument relatively easily, and I’m not afraid to argue strongly about what I know and/or believe. Can you picture Penelope Cruz in Vicky Cristina Barcelona when she argues with Javier Bardem? Yep, that’s me!
In the last four months here in the United States, I have attended quite a few conferences, gatherings, meetings, cocktails, you name it. At all of them I have found myself discussing carbon offsets, specifically the contribution of the Clean Development Mechanism (CDM)—the project-based market mechanism under the Kyoto Protocol that channels foreign investment to clean projects in the developing world in return for carbon credits—to confronting climate change.
The lack of understanding of the CDM in the United States is rather shocking. I have heard eye-rolling comments like, “It is a joke that closing a coal power plant can generate CDM credits” (well, indeed it would be, if it were true).
The good thing is that my debating skills are getting better, so irrational critics of the CDM beware!
The United States is finally committed to tackling climate change, and even though there is some discussion about the shape of climate legislation (carbon tax vs. cap-and-trade), it seems the most likely outcome is that the U.S. will end up with a cap-and-trade program. There is major debate about whether offsets should be allowed into the scheme, but it’s really the only rational outcome since offsets are an effective price-control mechanism.
So, why does the CDM matter to the United States? Because if the U.S. does not want to create false expectations in industry with regards to its real capacity to use offsets, there is no time to reinvent the wheel. Building an offset-accreditation system takes time. A long time. American industry will suffer if the supply of offsets is not sufficient to help with price control, especially in the short-term while companies roll out their internal strategies and infrastructure changes.
The truth is that the CDM has already generated a high-quality pipeline of international projects that can provide a good source of offsets to U.S. companies covered by regulation. In my six years with a project-offset development company, I have been a fiery (remember, I’m Spanish) critic of the CDM. But these criticisms are aimed at improving an emerging system, not dismantling it.
Too many critics in the United States simply want to throw the baby out with the bath water. The real opportunity is to learn from the experience and use the fantastic negotiating power of the U.S. government and economy to improve the system. I’m still wondering if criticisms here have to do with the perception that the CDM was not “made in America.” In fact, the CDM was actually born in the USA.
What are the positives and the negatives of the CDM? The negatives are that successful early projects are extraordinarily concentrated—fewer than 30 projects have generated approximately 70 percent of total credits to date. The system also is overly complicated, making it difficult for small projects to gain access, and the comparatively short period since Kyoto means the CDM has had too little time to incentivize en masse new technologies or really bring high-end technology to key developing markets.
On the positive side, a highly complex system is already up and running (this is very important), and more than 1,350 projects have already been approved by the UN to generate credits (with over 3,000 more in the pipeline). The gross current projection is 1.3 billion tons of carbon reductions through 2012, which is worth tens of billions of dollars of investment and trade flows to the developed world.
“Learning by doing” has created significant expertise and an entrepreneurial culture around emissions trading—a whole new industry and lots of jobs (my company alone has gone from 25 to 300 employees in the six years since I joined). The CDM has accelerated existing technology uptake in new markets, and one can clearly argue that the CDM has provided solid proof that markets can indeed achieve social objectives. Finally, some of the failures that my colleagues and I have railed about can be attributed to “over-success” and regulatory stress rather than fundamental flaws in the CDM.
On a project-scouting trip to Vietnam, my colleagues and I visited with officials to discuss a landfill in a city located near the Vietnamese capital. When you fly to countries like Vietnam and encounter officials from a small and poor area excited about being able to resolve the problems posed by their city’s landfill because the sale of carbon credits will provide an extra boost in revenues that will make the installation of biogas collection and flaring systems economically viable ... well, it is a difficult-to-describe feeling, but pride is certainly in there. It is even more impressive to see this knowledge cross cultures and languages.
The Vietnam example shows that the CDM is working and is worth keeping; promoting these kinds of projects and entrepreneurs throughout the world is the only way we will truly address climate change. Keeping and improving the CDM should matter to the United States, not only because it makes sense for American companies to have a good pipeline of offsets available, but also because if the U.S. is serious about its international reengagement and developing a global clean energy infrastructure, this is a mechanism worth using.
Climate talks timeline: From 350 to Kyoto to Copenhagen and beyond
Comments
View as Flat
Jake Schmidt Posted 9:11 am
14 Apr 2009
Permalink
Sonia Medina Posted 1:31 pm
16 Apr 2009
thank you for your comment. I am also a fan of sectoral approaches, and I
welcome their inclusion in the Waxman-Markey bill, although one needs to be
careful. I am also a fan of CDM reform, EcoSecurities has been very vocal in
what we see it needs to change in the CDM to make it bigger and better. With regards
to sectoral approaches, though, I think there is major confusion as to what
sectoral really mean. I have heard many different definitions by many different
people. They are definitely no silver bullet, though. I would welcome a
sectoral global approach for sectors that have been completely left out of the
CDM for the impossibility of defining ownership of the emission reductions. For
example, this is the case for aviation and maritime, which should be tackled by
sectoral global agreements. Further, avoided deforestation (REDD) may also be
tackled through a sectoral global approach, as suggested by the Waxman-Markey
draft. The CDM may
also evolve to incorporate some aspects of sectoral approaches – they do not
need to be separate approaches. This is definitely the intention with the
approval of the first sectoral benchmarking methodology in the CDM: AM0070 is a
sector benchmark methodology approved recently for energy efficient
refrigerators. The WBCSD Cement Sustainability Initiative has submitted for
approval a sector benchmarking methodology for the cement sector after seven
years of research and data gathering. Further, the Brazilian government
established a national emission factor for renewable energy projects that
facilitated tremendously the calculation of emission reductions by this asset
class in Brazil, in a way emulating a national sectoral approach applicable to
CDM. Finally, the Programmatic Approach of the CDM strives (although still
lacks more definition) to bring the sectoral approach closer to small-scale
projects in order to facilitate their inclusion in the CDM. I am hopeful that
this approach to methodologies can be further expanded in the CDM world. My main
concern with a national sectoral approach imposed on a top-down approach on
governments is that we may lose the clarity that projects developers in the
private sector would need to invest in new technology required to fight climate
change. Another concern is that in order to draft national baselines, you need
an enormous amount of data, that will make the assessment of additionality on a
project-by-project basis look like a child puzzle. Again, I
welcome sectoral approaches and we have advocated for simplication of baseline
calculations for a long time. But, let’s recognize that sectoral approaches are
only helpful in a handful of cases and will similarly take some time to get
right. They are also not immune from the
perverse incentive and system gaming accusations. Importantly, a lot of work
needs to be done to make sure that private sector have clear incentives on a
sectoral scheme. Finally, CDM, sectoral and other approaches are not mutually
exclusive, so let’s try to be creative and learn from what we have already
built.
Permalink
Max8806 Posted 10:32 am
14 Apr 2009
On that issue of monitoring, I have this basic problem. Most sectors that are discussed as offsets are in the "offset" category because their emissions are too hard to measure directly to make them liable under the cap. Take agriculture for example. If we really had a handle on agriculture emissions, we wouldn't propose these offset projects, we would just assign a compliance obligation to each farmer that cleared new cropland, etc.Its also easier to measure emissions than to measure not-emissions. So if we really wanted to take advantage of all this wonderful low-hanging fruit of ag and small landfill emissions, we could just regulate that they be done a certain way, and then reimburse for the costs of compliance. By reimbursing costs, instead of allowing it to be done for a high markup by trading on par for allowances, we reduce the profit and so the incentive for fraud (this could also be done with a reverse auction soliciting bids, which would drive down price to around marginal cost). I'm by no means against profit in general, just that when you have a system that is already as prone to monitoring error as measuring true "additionality" of emissions reductions, you need to be really careful of introducing extra burdens on that system such as the inevitable attempts at fraud that any profitable endeavor brings.Finally, I don't disagree about the positive investment that flows into developing countries from CDM. But there are better ways we could offer economic assistance, without requiring us to undermine the integrity of our GHG emissions reductions programs.
Permalink
Sonia Medina Posted 1:32 pm
16 Apr 2009
The tenor of your argument is that every emissions source should be directly regulated. Globally, to say that I find that unrealistic would be an understatement. Right now, the differences amongst countries emissions and development profiles are so extreme that asking all developing countries to take on an economic burden of regulating the emissions sources that they are counting on for economic growth is not only impossible, but immoral. We can incent that by using markets and create cultures of emissions value via this process of the CDM, and over time, bring more and more parts of the global economy into emissions regulation. But we have to walk before we run.
Permalink
Max8806 Posted 2:03 am
17 Apr 2009
regulated under a comparable cap/trade to developed countries. I said directly that we should be encouraging clean development by funding it directly, not imposing a high carbon price on developing countries. But to allow offset projects to trade for expensive carbon allowances leaves too much incentive for fraud.
But to get to your main point, because I believe there are important reasons to doubt the integrity of the offset projects you highlight - renewable electricity that offsets local grid, and HFC gas reduction. First, renewable electricity projects don't offset "the grid," they offset mainly the non-baseload sources that are used to balance supply and demand in the real-time market, depending on the variability of demand and output from those renewable sources. So a grid that is 75% coal still will burn virtually the same amount of coal if you install a new wind farm, because as the wind goes up and down its natural gas and hydro --the cleanest parts of the grid-- that move around to keep the system in balance (and so that would produce less when the wind/renewables produces more). So even a "conservative estimate of the carbon-intensity of the grid" is probably overshooting actual CO2 reductions you're getting.
On reducing HFC's, I'm a bit surprised you mention those because those projects were the poster-children for CDM fraud. Since HFC's are High-Global-Warming-Potential gases, reduction projects are worth a ton of money (since CER's are awarded based on carbon-equivalency). More, it turned out, than the underlying product's investment (refrigeration plants) were. So there was a huge perverse incentive to construct more polluting HFC sources, just to be able to turn around and sell the rights to clean them up. This is one of many problems Michael Wara and David Victor of Standord identified in the CDM market in a paper they wrote.http://www.ucei.berkeley.edu/PDF/seminar20090213.pdfIf we want to encourage sustainable development in developing countries, lets just fund it upfront. But the monitoring is too tricky and prone to fraud, which makes it 1) a waste of money that could be spend on additional clean development, and it 2) underines the integrity/credibility of our count of emissions reduced by any trading system that incorporates them.I believe those of us in America looking for a way around offsets in our own domestic cap/trade have not-misplaced fears about them.
Permalink
kyan Posted 12:58 pm
14 Apr 2009
Here are a few more "negatives" that you seem to have left out:
1. Key problem with CDM is additionality testing:
Estimates of non-additional projects by researchers range from 40% to a large majority of projects. The investment analysis, barrier analysis and common practice tools used to test additionality are inherently subjective. How can you stomach the fact that we may be generating false carbon reductions when scientists are telling us that we need REAL reductions now, in order to avoid the Australian-drought syndrome on a global scale? In addition, a recent NY Times article described how conflicts of interest in the CDM Executive Board is leading to serious abuses by board members who are supposed to make unbiased decisions regarding companies they regulate.
2. CDM fails to meet sustainable development goals:
First off, SD is defined by the host country, which means leaving an already fuzzy term to be defined by some countries with poor environmental and human rights records (ex. China). The majority of projects currently in the CDM pipeline are also hydropower (26%, see here), many of which cannot be defined as sustainable. Large hydropower in particular is a risky and destructive business, carrying a host of environmental, financial and social concerns, not to mention often having a large carbon footprint itself (see here).In response to your glowing example from Vietnam, here are a couple other CDM projects to consider. The Xiaoxi Dam in China led to forced evictions of 7500 people. The Allain Duhangan project in India threatens to displace tens of thousands of people whose vocal objections to the project have not been answered. I have no doubt there are groups currently benefiting, at least in the short-term, from CDM revenue. Why not include the whole picture and then think outside the box for better, alternative approaches to supporting clean tech in the Global South?
3. Other problems:
The CDM is inefficient and ineffective at reducing emissions, because there are simply cheaper ways. If the US is going to adopt an int'l program, why not adopt a sectoral approach or funds-based approach as mentioned above? The CalEPA is exploring creative approaches to partnering with countries like China to promote clean development. Why not support creative new approaches rather than the status quo, esp one that might be phased out post 2012 (because its problems are incurable)?The CDM also encourages perverse incentives by postponing climate-friendly policies. For instance, it has increased the production of the chemical HCFC-22 in order to produce more waste gase (HFC23) for more CDM credits. It also supports the least best solutions, such as "clean coal," over better solutions like solar, which currently only forms 1% of all CDM projects in the pipeline (see here for more info). It also encourages projects largely in countries like China (36%), India (27%) and Brazil (8%) at last count (numbers are of CDM pipeline projects). China is definitely not in need of additional CDM revenue for development, esp for hydropower (pretty safe to say they've got megadams down).The outcry against the CDM comes from a broad range of groups, affected communities, and academicians. I'd hardly call it irrational.
Permalink
Sonia Medina Posted 1:33 pm
16 Apr 2009
1. Additionality – could you please reference what researchers you are quoting? I can quote researchers that say completely the contrary. I am arguing what I have seen, which is that I have witnessed a tremendous interest across the world in developing cleaner projects. I strongly believe that developing countries are better prepared today to deal with climate change regulations since they have been exposed to a price of carbon. Moreover, creating the psychology that clean energy sources are worth more than dirty is a qualitative value that should not be underestimated.
2. Hydro power does not contribute to sustainable development – I do not think many people would agree with you that imposing UN top-down definitions on sustainable development is a good idea. Currently, there are 1,572 registered projects with the CDM in 55 countries, as diverse as Nigeria, Fiji, Israel, Laos, China, India, Chile, amongst many others. Could you come up with a definition that would fit them all? Further, there are many other ways by which the CDM and the market impose checks and balances. The CDM allows up to four times for public comments before credits are issued, without including their own internal checks, which are pretty onerous. Further, buyers may also impose their own restrictions. For example, European buyers that wish to purchase CERs from hydro projects larger than 20MW for use in the EU ETS have to submit additional information to the European Commission. They require that a project complies with the World Commission on Dams Guidelines, which is on top of any CDM requirement.
3. CDM encourages perverse incentives (e.g., HFC) – The CDM learned and adapted quickly in this case. What you mention was rectified years ago. HFC projects were the first one to get done and it was quickly realized that they were so profitable that there may be an incentive to invest in HFC plants simply to destroy the gas. The CDM Executive Board realized that and none of those plants were ever allowed to get carbon credits, by including a provision in the methodology that only facilities with an operating history of at least three years between 2000 and 2004 and have been in operation from 2005 can claim offsets. Further, at its Eleventh meeting (October 16-17, 2003) the CDM Executive Board provided guidance that, additionality of a project should be assessed taking into account relevant national and/or sectoral policies, in a way that developing countries do not have a perverse incentive not to implement groundbreaking policies to reduce emissions in their countries.
Permalink
kyan Posted 2:39 pm
16 Apr 2009
quoting?" “Stanford Study May Stir Debate On Limiting Costs In Climate Bills,” Carbon Control News (carboncontrolnews.com), 7 March, 2008. Schneider, L. (2007) “Is the CDM Fulfilling its Environmental and Sustainable Development Objectives? An Evaluation of the CDM and Options for Improvement.” Michaelowa, A. and K. Michaelowa (2007) “Does climate policy promote development?” Climatic Change, p.84. I'd be surprised if there weren't contrary studies, which is why it's important to acknowledge both sides."2. Hydro power does not contribute to sustainable development – I do
not think many people would agree with you that imposing UN top-down
definitions on sustainable development is a good idea." If that were my claim, I would disagree with myself as well. SD is notoriously difficult to define, which is why it's easy to corrupt. Honestly, I have no ideal solution, but it seems that a host country's own definition should not stand alone if it doesn't meet some basic criteria, such as real and informed public participation, and public acceptance of decisions."For example, European buyers that wish
to purchase CERs from hydro projects larger than 20MW for use in the EU
ETS have to submit additional information to the European Commission.
They require that a project complies with the World Commission on Dams
Guidelines, which is on top of any CDM requirement." Often these WCD compliance reports (and I've read plenty) are just copy-and-paste versions of each other, and do not accurately reflect the real impacts (see a field report on one such project)."3. CDM encourages perverse incentives (e.g., HFC) – The CDM learned and
adapted quickly in this case. What you mention was rectified years ago." You are absolutely right about this, and I'm humbled by your knowledge. However, it seems that hydropower has taken the lead away as the largest number of projects in the CDM pipeline. Maybe on your next site visit, you could talk to the people displaced by some of these hydro projects in Ecuador, India, China, Bhutan, Panama, etc., and see whether their lost voices (and livelihoods) were worth the additional CDM revenue and displacement of more renewable sources of energy like solar or wind (which receive little CDM support because the cost of such a large, unwieldy system excludes smaller, more cutting-edge projects that need more support). Just a thought.
Permalink
Jesse Jenkins Posted 2:52 pm
14 Apr 2009
Permalink
Sonia Medina Posted 1:33 pm
16 Apr 2009
To be fair, we may not be talking about 2 billion annual limit, it may be less than that given other provisions in the legislation, and the actual limit may be between 1.7 billion in the early years and 800 million in the late years. Even those numbers I think will be difficult to reach given all the other limitations to qualify offsets and other global demand.
Permalink
Jesse Jenkins Posted 1:39 pm
16 Apr 2009
carbon cap-and-trade scheme that has relied on offsets. Between
2008-2012, it is expected that 300 million tons of offsets will be
needed to supply the demand each year, but most observers acknowledge
that even that number of real offsets will be hard to find. The
Waxman-Markey bill would create an eightfold demand on top of the
existing market whose offset quality is already of questionable value. High quality credits means a cumbersome bureaucracy to weed out all
the business-as-usual projects, which means few credits entering the
market. If the market were to meet potential U.S. demand, however, it
would mean a speedy approvals process and a relatively open door for
the cheats. "We tried to be even-handed, but somebody has got to point out there
are huge holes in the bill," Brune said. "And it will delay investments
in the clean energy economy that the Obama administration wants."" It seems that even if, in principle, offsets can be legitimate, there is essentially no hope of creating a market that guarantees legitimacy of the reductions at the scales being considered by current legislation - e.g. the scales required to have much of an ability to control the costs of cap and trade programs (which is the point of including them in the legislation). When used as a cost-containment mechanism, offsets are just a bunch of hot air, it would seem, and they siphon off critical auction revenue that can and should be reinvested in clean energy technology to accelerate the transition to a clean energy economy in capped sectors.
Permalink