As the United Nations prepares to host the 26th Conference of Parties (COP26) in Glasgow, Scotland, in November, one question that is expected to dominate negotiations is what to do with the hundreds of millions of unused carbon credits created under the Clean Development Mechanism (CDM).
The CDM is a project-based greenhouse gas (GHG) offset system established under the 1997 Kyoto Protocol.
It helped rich nations meet parts of their binding Kyoto targets by implementing projects in developing countries while also generating tradable Certified Emission Reductions (CERs) credits for the latter.
A key feature of the CDM is "additionality," meaning the GHG mitigation would not have occurred in the absence of the project.
The program led to the creation of more than 8,000 projects in 111 countries, and generated over 2 billion CERs, according to the UN Framework Convention on Climate Change (UNFCCC).
Over the years, however, the CDM has come under intense scrutiny, with the demand for CERs plummeting and many studies questioning the very integrity of the program.
The Kyoto Protocol has been superseded by the 2015 Paris Agreement, which seeks to set up its own carbon trading mechanisms.
Ahead of COP26, rescheduled from 2020, countries are debating whether the CERs should be transitioned to a mechanism under Article 6 of the Paris Agreement.
"Right now, the CDM is very much in limbo," said Randall Spalding-Fecher, senior adviser at the Scandinavian consultancy Carbon Limits. "The (CDM) Executive Board is trying to keep things going, but they can't. They don't have a lot of power. It is ultimately up to the Conference of the Parties to make a decision," he told OPIS in an interview.
Spalding-Fecher has been deeply involved in CDM research. He has served as a consultant to the UNFCCC and co-authored a 2016 study conducted for the European Union (EU) by Germany's Oeko-Institute on the additionality of the mechanism.
The Oeko analysis, How additional is the Clean Development Mechanism?, concluded that 85% of the CDM projects covered in the study failed to reduce emissions. It said just 2% of the projects had a high likelihood of ensuring that emissions reductions are additional and not over-estimated.
In December 2020, just days before the second commitment period of the Kyoto Protocol came to an end, the CDM executive board agreed not to approve any new projects until it receives guidance from COP26.
That conference is just months away, and it will once again focus on finalizing the rulebook of the Paris Agreement, an issue the pervious COPs had been unable to tackle.
And at the center of it all is Article 6, the only section in the Paris Agreement that has yet to be settled.
Article 6 spells out three mechanisms, two of them based on markets and one on a non-market approach, to help countries achieve their emissions reduction goals, or nationally determined contributions (NDCs).
--Under Article 6.2, member countries will pursue a cooperative approach that involves the use of internationally transferred mitigation outcomes (ITMOs) to promote sustainable development and ensure environmental integrity and transparency.
--Under Article 6.4, a mechanism will be established to contribute to the mitigation of GHG. It shall be supervised by a body designated by member countries.
--And under Article 6.8, parties will set up an integrated non-market approach in pursuit of their climate goals.
The most contentious of the three is Article 6.4, which aims to replace the CDM. So, would negotiators agree to transition the CERs to the new mechanism?
"I think there are significant risks with allowing already issued CERs to be used via Article 6 for compliance with Paris Agreement pledges," said Spalding-Fecher.
He said many of the underlying projects have high risks that they are not additional and might not represent real mitigation.
Another reason, Spalding-Fecher said, is that even for those projects that were additional when they were registered, it is not clear whether purchasing already issued CERs today will contribute to mitigation.
Pedro Martins Barata, a former vice-chair of the CDM Executive Board and currently senior EU climate director at the Environmental Defense Fund (EDF), also believes that including CDM credits in the new mechanism would be risky because of their questionable integrity.
"The current pipeline of CDM projects and units would quickly overwhelm the entire demand coming from the existing commitments by all countries under the UNFCCC," Barata said in an email to OPIS. "In turn, this would have a dampening effect on prices and quickly be a huge disincentive for any new carbon reduction project."
Propping up existing CDM projects would not be the most appropriate use of new carbon finance, Barata added.
Spalding-Fecher said most analyses show that, right now, there are more sellers than buyers in the potential markets related to Article 6.
"So, allowing countries to use units that were issued prior to 2020 risks leading to more oversupply and very low prices, which then limits the mitigation impact of these markets and purchases," he said.
Spalding-Fecher, however, thinks it might be better to focus on credits from projects that are vulnerable to discontinuing mitigation and/or projects in the poorest countries to limit the potential for carrying over CERs into the new system and causing an oversupply of units.
Barata said credits from projects classified as "vulnerable" could be considered for the next phase if they are again scrutinized for their additionality and vulnerability.
He said restrictions should be made on volumes of such credits to guarantee that they don't impact the overall carbon price.
"These conditions are indeed a tall order, and the priority must be to ensure that the new Article 6 market mechanisms function in a more environmentally effective way and are fit for the priorities of countries in their NDCs," Barata added.
OECD Weighs In
In May 2021, the Organisation for Economic Co-operation and Development (OECD) published a study on the options and implications of CDM activity transition to the new mechanism.
The paper said that a lot of work and coordination are needed at various decision-making levels and by multiple actors across both regimes before the possible transition of eligible CDM activities to the Article 6.4 mechanism can happen.
It warned that any time lag in implementing the new mechanism could have knock-on effects on the costs to parties meeting current and future emission reduction commitments in their NDCs.
"This could potentially also affect the ambition of future climate commitments, which many countries are currently in the process of developing," the OECD said.
When the last climate change summit ended in Madrid in December 2019 without anything to show for nearly two weeks of intense negotiations, UN Secretary-General Antonio Guterres issued a statement saying he was disappointed with the results of COP25.
He said the international community lost an important opportunity to show increased ambition on mitigation, adaptation and finance to tackle the climate crisis.
But Guterres also declared that "We must not give up, and I will not give up."
COP26 is less than 100 days away, but there are no signs that that the negotiations will be any smoother, or the international community is ready to finalize Article 6 of the Paris Agreement.
After the COP25 debacle, Guterres said he was more determined than ever to work for an agreement, but it remains to be seen whether all parties are ready to make that happen at COP26.