CDM ISSUES AND WAY FORWARD: WHAT NEXT AFTER 2012? ( Lecture for the CDM technical session of 3rd Renewable Energy India 2009 Expo. August 11, 2009)

Ladies and Gentlemen, this is my pleasure to address you today on an issue; which is extremely important in the contemporary time; and perhaps, which is also an issue of global interest, interest for the entire mankind-and that is- ‘Mitigation of Climate Change!’ I agreed to take on this role because it is now so very clear that the challenges presented by climate change will not be solved without the focus, engagement, resources and strategic thinking of business.

Kyoto Protocol has gifted us a market mechanism-CDM to adopt mitigation measures against Climate change, which is incentivized- flexible in nature, and of course administered through a massive rules and regulation of an institution, i.e., UNFCCC.
In article 2 of the Kyoto protocol it is categorically marked that ‘…Each Party included in Annex I, in achieving its quantified emission limitation and reduction commitments under Article 3, in order to promote sustainable development, shall:.. Go for enhancement of energy efficiency in relevant sectors of the national economy, .. Promotion of sustainable forms in light of climate change considerations.’ .

The other important features of this article are: “Protection and enhancement of sinks and reservoirs of greenhouse gases not controlled by the Montreal Protocol, taking into account its commitments, research on, and promotion, development and increased use of, new and renewable forms of energy, of carbon dioxide sequestration technologies and of advanced and innovative environmentally sound technologies; progressive reduction or phasing out of market imperfections, fiscal incentives, cooperate with other such parties to enhance the individual and combined effectiveness of their policies and measures.’

To this end, these parties shall take steps to share their experience and exchange information on such policies and measures, including developing ways of improving their comparability, transparency and effectiveness.

With these basic intentions, United Nations Framework Convention on Climate Change (UNFCCC) made this provision under the Article 12 of Kyoto Protocol, in which assistance will be provided to parties not included in Annex I in achieving sustainable development and in contributing to the ultimate objective of the convention, and to assist parties included in Annex I in achieving compliance with their quantified emission limitation and reduction commitments in the first commitment period. Based on this flexible-market mechanism, Non-Annex I countries are getting benefits from project activities resulting in Certified Emission Reductions (CERs) and eventually presenting ‘real, measurable, and long-term benefits related to the mitigation of climate change’ which are ‘additional’.

Operational since the beginning of 2006, the mechanism has already registered more than 1,752 projects (93 numbers of projects are in requesting registration stage) and is anticipated to produce CERs amounting to more than 3 billion tonnes of CO2 equivalent in the first commitment period of the Kyoto Protocol, 2008–2012.

UNFCCC, the international body of rules with an unprecedented transparency and independent control has been implementing this mechanism consistently. Till date 37 Designated Operational Entities (DOEs) are accredited under various sectoral scopes and 137 Designated National Authorities (DNAs) have been set up, out of which 35 DNAs are from Asia and Pacific Region. Applications for new baseline and monitoring methodologies (small and large) are increasing and till the last Executive Body (EB) Meeting. 48, 167 methodologies have been approved.

The type of projects that are also shared in the registered project lists interestingly depicts a scenario which is dominated by energy industries (renewable and non-renewable:59%). The other representation is from Waste handling and disposal (18.18%), Fugitive emissions from fuels (6.96%).

In the recent time, CDM has taken an impressive shape with more than 2780 projects entered in to the validation phase, 132 projects are in review, 93 projects are in requesting registration phase, 17 projects are under review and 87 projects are rejected after the rigorous process of review. However, out of the 1423 registered projects only 565 projects have obtained issuances. The efficacy of this mechanism is presenting a stimulating investment in green growth in developing countries, engaging the private sector in climate change action, and giving countries some flexibility in how they meet their emission reduction targets. As the Chair of CDM –EB states ‘it’s time to scale up and enhance the mechanism to release its full potential’. Perhaps, there is a challenge involved in it; the Chair marked this challenge as the ‘success of CDM’.

The argument, which is noted here is his remark -‘The CDM has suffered from its own success- the number of projects that have come forward for vetting and approval is well above what was envisaged by countries when they designed and launched the mechanism. The result is that the Board spends a great deal of its time focused on ensuring the environmental quality of individual projects, and too little time is left to consider enhancements that might scale up the mechanism, speed up the regulatory process, and extend the mechanism’s reach to more developing countries’ .

To examine the aptness of this argument the facts which shall be cross checked and supportive in nature are the key challenges, lined in the EB.45; Annex-71 ; Viz.,

a. Predicting and processing an ever-increasing workload remains a major challenge;
b. Capacity constraints throughout the CDM market, including the numbers of designated national authorities (DNAs) and DOEs and expanding the understanding of CDM rules/methodologies by all stakeholders, and lastly,
c. CDM governance structure needs to change from its pioneering and “learning-by doing” phase into a more responsive and mature phase

Off course, these are the prudent concerns of CDM, which need immediate attention and demand rejuvenation to continue to ensure that the regulatory framework is sufficiently robust and flexible to respond to the needs of parties and to facilitate the implementation of the mechanism in a manner that maximizes its contribution to the aims of the Convention and its Kyoto Protocol. Nevertheless, it is most

important to make a ‘real’ and ‘measurable’ impacts in sustainable development, promoting more efficient technologies and portraying benefits to adaptation funds which is financed from the share of proceeds on the clean development mechanism project activities and other sources of funding .

And here persists the real challenges for Clean Development Mechanism! At the cross road of COP-15, global citizens expect ‘a mature-effective and fast’ avatar of CDM, coming out of the most awaited negotiation and agreement from Copenhagen!

I often quote the famous European proverb in CDM and COP-15 context: “If you want to go far, go together, and if you want to quickly, go alone”. But, in case of CDM as well as the macro picture of climate change mitigation, we must have to go ‘together and quickly’. !

Here, the question for us is: how should we ‘re-engineer this mechanism then!? And what the global consensus says about it? I think, it is pertinent here to examine these issues.

A common and broad understanding of the issues associated with potential post 2012, could be emerged as four strategic objectives:
• need to ensure sustainable economic development;
• effective development and penetration of clean technologies;
• establishment of an effective international carbon market over the long term; and
• integration of adaptation in development and natural resource management decision-making.

And the critical design features of a post-2012 regime that achieves deep emission reductions while fostering growth and development could be:

Broad participation: Broader the participation of countries in any international climate regime, the stronger the regime, even if the roles of different countries differ according to national circumstances. The final impacts of broad participation, however, depend heavily on the depth of the commitments, particularly from key emitting countries. The ideal climate change solution would be to both broaden and deepen commitments, but the politics of reaching that result are currently difficult.

Consideration of national circumstances: Broad participation does not imply a one-size-fits-all approach, and would need to respect the established principle of common but differentiated responsibilities. Different states will have different capacities for action and different vulnerabilities to competitiveness impacts. There are a number of possible bases for differentiation of target-type commitments, including:
per capita emissions; total emissions; population; per capita income; human development (as measured by the Human Development Index, for example); and regulatory capacity (as measured by the World Bank’s governance index, for example).

Environmental effectiveness: A key guiding criterion for any post-2012 international regime on climate change is the extent to which it contributes to the basic objective of the UNFCCC, by stabilizing greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system. Some states have defined this threshold in concrete terms, as a specific target for average temperature rise, or as a maximum atmospheric concentration of CO2 equivalent. At the end of the day, any effective approach will boil down to a focus on global emissions of GHGs in specific crucial time periods.

Another concern about the post Kyoto mechanism is Quantitative commitments: One of the most fundamental questions to address is whether some countries will adopt quantitative commitments. These could take any of a number of forms, but three of the most commonly discussed are absolute (fixed) national emissions targets (as in the current regime), dynamic intensity targets (e.g., expressed as a ratio of emissions to GDP) and per capita emissions targets. Fixed emissions targets offer the benefit of more direct linkage to any final objective, but are inflexible in the face of potentially high costs of action. Dynamic intensity targets, conversely, are more sensitive to cost factors, but have weak linkages to any final objective expressed in terms of atmospheric concentration or warming (which could easily worsen in the context of economic growth). Moreover, uncertainties in and potentially wide fluctuations in GDP, and disconnections between these and GHG emissions, can make this form of target unworkable in practice. This is especially a concern for developing countries. Per capita targets are fundamentally more appealing on equity grounds, and allow greater space for economic growth in developing countries. However, they fail to effectively address the principle of differentiated national circumstances. They would, for example, place inappropriately heavy burdens on those countries that rely heavily on fossil fuel exports for their economic well-being.

Therefore, we shall have a market mechanism (in continuation of the current flexible mechanism) that allows for environmental goals to be achieved at the lowest cost, by providing flexibility in how reductions can best be achieved. They can also provide an international framework to help mobilize finance for clean technologies in major infrastructure investments. The challenge in adopting such approaches will be to design regimes to which they are amenable.

As an alternative to, or complement to, quantitative commitments, countries could pursue technology agreements. Such an approach could be pursued by groups of countries—perhaps relying on those few that would cover a large share of global use of a given technology. The agreements would spell out coordinated international approaches to funding research and development, support for market development (such as subsidies, assured market shares), regulatory reform to facilitate uptake and demonstration projects in sectors that have high potential for low-cost, high-impact solutions. Candidate sectors include hydrogen, fuel cells, nuclear fusion, large-scale solar-based generation, biomass fuels and carbon sequestration. Another approach to technology agreements would see countries commit to technology-related sectoral targets (e.g., zero-emission power generation by a certain date), and then cooperate toward such goals in the ways described sometimes back.

At this same length, another most relevant concern is ‘sectoral approach’. Contrary to the present sectoral scope of CDM, attempts are on air to examine the aptness of different dynamics of this approach, which could be ranging from “policy based sectoral scope to ‘categorization based on specific industries”.

With this background, it is understood that CDM needs a re-incarnation to cope with these wide range of expectations/visions on policies and regulation. CDM also needs a more specific roadmap for technology upgradation and penetration of those in different sectors, starting from energy to LULUCF. Indeed, the Programme of Activity (POA) and its strategic proliferation is an encouraging development; which could cover the SME as well as community based CDM projects. Similarly, we need a well-defined regulation to stop ‘pouring’ ‘non-CDM projects’ to the ‘CDM approval mechanism’. This could save precious time of UNFCCC-EB, DOEs. There is no doubt that CDM is an effective mechanism but it must be stopped at the project proponent level in making attempt to develop/manipulate non-eligible projects. At this same length, there shall be also higher level of accountability of DOEs/project developer and DNA.

What can we expect from the COP-15? As per the contemporary consensus, the UN climate conference in Copenhagen in December this year may not yield a new global climate treaty with every minor detail in place. But hopefully it will close with agreements on four political essentials, thereby creating clarity the world – not least the financially struck business world – needs. The four essentials calling for an international agreement in Copenhagen are:
1. How much are the industrialized countries willing to reduce their emissions of greenhouse gases?

2. How much are major developing countries such as China and India willing to do to limit the growth of their emissions?
3. How is the help needed by developing countries to engage in reducing their emissions and adapting to the impacts of climate change going to be financed?, and
4. How is that money going to be managed?

If Copenhagen can deliver on those four points, we feel that the parties could get something to sign and agree in Copenhagen, but it will be very difficult to get every final, small detail of a whole new treaty done.
Another great concern is about participation of US and to see the US back in the international climate change process and that the US is also engaging domestically in the process. There could be reasonable hope in this front as the government delegation that represents the United States is in close touch with the Senate, with the elected officials on what’s acceptable and what’s not.
Indeed, it is believed that previously, Kyoto Protocol was rejected by the US for mainly two reasons. Firstly, because it did not involve action on the part of major developing countries. Secondly, because it was felt by the Bush administration that Kyoto would be harmful to the US economy. However, the
Copenhagen will be a whole different scenario, as President Barack Obama has been trying to engage China and India and convince them to sign the next treaty.

Notably, the memorandum of understanding signed by China and the US in end of July might sound like “feel-good diplo-speak”, but it is a positive step towards agreement in Copenhagen. The American newspaper refers to the memorandum signed by China and the US at the end of July, committing the two “to respond vigorously to the challenges of energy security, climate change and environmental protection through ambitious domestic action and international cooperation.” The justification for this observation could be due to 42 percent of the world’s greenhouse gas emissions together by the two nations and therefore, their discussions will play an enormous role in the success or failure of Copenhagen.

In September, UN Secretary General Ban Ki-moon will host a day of climate talks. President Obama and Chinese President Hu Jintao will both join the G20 summit in Pittsburgh a few days later, and the two leaders have scheduled a meeting in Beijing in November. The hope is that these meetings will fill in many of the blanks with definitive, concrete actions and decisions. There’s still a long way to go, but at least China and the United States are finally working together.

However, this development could jeopardize the recent interest of India and might create a necessity to revisit its position. During the recent visit of US secretary of state, it was forcefully urged India to contribute to carbon emission reductions to combat global warming. India responded that emission caps would not cut ice in India. This attempt of US reflects a switch in the US policy towards climate change under President Obama. Specifically, the House of Representatives recently passed the American Clean Energy and Security (ACES) Bill of 2009, which provides for a “cap and trade” program that would place an annual cap on the overall carbon emissions in the US. The cap would progressively tighten to 80% of 2005 emissions in 2020, 58% in 2030 and 17% in 2050. Each year, the government would issue tradable permits matching the amount of the carbon cap. Companies would be required to acquire permits for every tonne of carbon they emit either from the government or the marketplace. To become law, Senate must also pass the ACES Bill.

While “cap and trade” programs have existed in Europe as a part of the Kyoto Protocol, an international treaty negotiated under the auspices of the United Nations Framework Convention on Climate Change (UNFCCC), the proposed US program differs from them in one key respect: beginning in 2020, it requires the US President to impose tariffs on selected carbon intensive goods from countries that do not introduce caps on carbon emissions. It specifically targets India and China by requiring the US Trade Representative to annually certify that these countries are adopting emission standards at least as vigorous as those prevailing in the US. According to legal opinion, the import tariff is likely to violate some key World Trade Organisation (WTO) provisions. Even President Obama who has actively sought the passage of the ACES Bill has expressed disappointment with the insertion of the import duty provision. Nevertheless, if the Bill does become law, India will have to eventually challenge any carbon tariffs the US imposes on it in the WTO dispute settlement body and be willing to retaliate in a WTO-consistent manner.

But a more immediate and perhaps bigger battle on climate change looms in Copenhagen in December. The US, which had refused to ratify the Kyoto Protocol but is now keen on a post-Kyoto climate change treaty, insists, however, that China and India undertake binding mitigation commitments. It reasons that these countries are among the world’s four largest emitters in absolute terms. But beyond this size-based argument, there is little else on which the US case can be pegged, especially against India. Given India has the second largest population in the world with the US being a very distant third, it is hardly surprising that India is among the top four emitters in absolute terms. But in per-capita terms, it ranks a low 137th. Forty percent of the households in the country are even without an electricity connection. And there are 300 million people living in abject poverty. If India were to agree to even cap its emissions at current levels, let alone mitigate, its growth process will be crippled. And with it, the country would lose any hope of bringing electricity to all households or of eliminating poverty.

Therefore, from the viewpoint of its own citizenry, India has every reason to refuse mitigation commitments for some decades to come. It also has a good moral case. Rich countries have been responsible for more than 70% of the emissions between 1850 and 2000. India’s contribution to emissions during these same years was a paltry 2%. Even setting aside this history, Canada, US, Europe, and Japan together account for more than 50% of the current emissions and India only 4.4%. If environment were to be viewed as a common resource, which it is, almost any principle of moral philosophy would say that developed countries must bring their emissions down very substantially before they demand similar reductions from the poor countries.

The fact that they have emitted a lot in the past and they continue to do so today ought to give them rights to less, not more, future emissions than the poor countries.

The exemption to the developing countries from mitigation commitments unless they choose to voluntarily undertake them is also enshrined in the UNFCCC to which developed countries are signatory. In its preamble, the convention explicitly recognises that “the largest share of historical and current global emissions of greenhouse gases has originated in developed countries, that per capita emissions in developing countries are still relatively low and that the share of global emissions originating in developing countries will grow to meet their social and development needs.” The UNFCCC requires mitigation commitments only from developed countries.

The US knows that it is on thin ice when it insists on mitigation commitments from India in the near future. The principal reason it targets India is that it is ill-at-ease targeting China alone. It can be scarcely unaware that mitigation by India from its current low emission levels would do little to alleviate global warming problem. At Copenhagen, therefore, India should clearly indicate its position that it would need rational justification to sign the ‘treaty’, which appears now as ‘unjust and inequitable’. At the same time, India should also closely examine the move of China.

But, what we know after talking to business people in the past few months that they still want clarity from Copenhagen. The concern of the business is that If they are making investments in this mechanism, for example in the energy sector, in power plants that are going to be around for the next 30 to 50 years, you can’t really afford to keep waiting and waiting and waiting for governments to say where they’re going to go on this issue.

And, therefore, here persists the real challenge!

Thank You Very Much!

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