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Stockholm Environment Institute, Project Report 2017-02
Using the Clean Development Mechanism for nationally
determined contributions and international aviation
Assessment of impacts on global GHG emissions
Lambert Schneider and Stephanie La Hoz Theuer
Using the Clean Development Mechanism for nationally determined contributions and international aviation Assessment of impacts on global GHG emissions Lambert Schneidera and Stephanie La Hoz Theuerb Study prepared for the Federal Ministry of Agriculture, Forestry, Environment and Water Management of Austria and the Office of Environment of Liechtenstein a Associate to Stockholm Environment Institute U.S. b Independent researcher
Stockholm Environment Institute Linnégatan 87D, Box 24218 104 51 Stockholm Sweden Tel: +46 8 30 80 44 Web: www.sei-international.org Director of Communications: Robert Watt Editor: Emily Yehle Cover Photo: © Labradoodleb /Flickr This publication may be reproduced in whole or in part and in any form for educational or non-profit purposes, without special permission from the copyright holder(s) provided acknowledgement of the source is made. No use of this publication may be made for resale or other commercial purpose, without the written permission of the copyright holder(s). Copyright © August 2017 by Stockholm Environment Institute
CONTENTS
Acronyms iv
Abstract v
Acknowledgments v
Summary 1
1 Introduction 10
2 Transitioning the CDM to the Paris Agreement 12
2.1 Rules and governance arrangements 12
2.2 Projects 13
2.3 Emission reductions 13
3 What is the potential CER supply? 14
3.1 Methodology to estimate the CER supply potential 14
3.2 CER supply potential 18
4 What is the potential demand for CERs? 20
4.1 Overview of potential sources of demand for CERs up to and after 2020 20
4.2 CER demand up to 2020 20
4.3 Use of CERs under CORSIA 23
4.4 Use of CERs towards NDCs 23
5 Which factors affect the global GHG emissions impact of using CERs after 2020? 25
5.1 Quality of CERs 25
5.2 Robust accounting 30
5.3 Ambition and scope of the mitigation target of the host country 40
5.4 Incentives and disincentives for further mitigation action 40
5.5 Which factors are critical for using CERs after 2020? 40
6 Scenarios and implications for using CERs after 2020 41
6.1 Full use of CERs after 2020 41
6.2 Vintage restrictions 43
6.3 Restrictions on project features 47
6.4 Restrictions to address double counting risks 48
6.5 Restrictions on countries or regions 48
6.6 Combinations of restrictions 49
6.7 Implications in the context of specific countries 50
7 Conclusions and recommendations 53
7.1 Prioritizing or limiting eligibility to specific projects 53
7.2 Ensuring robust accounting 54
8 References 55
iiiu s i n g t h e c l e a n d e v e lo p m e n t m e c h a n i s m a f t e r 2020 ACRONYMS BUR Biennial Update Report CDM Clean development mechanism CER Certified emission reduction CORSIA Carbon Offsetting and Reduction Scheme for International Aviation CPA Component project activity DOE Designated operational entity ERU Emission reduction unit ETS Emissions trading system GHG Greenhouse gas ICAO International Civil Aviation Organization IET International Emissions Trading ITL International Transaction Log JI Joint Implementation JCM Joint Crediting Mechanism LDCs Least developed countries NDCs Nationally determined contributions PAF Pilot Auction Facility for Methane and Climate Change Mitigation PoA Programme of activities RBF Results-based finance SIDS Small Island Developing States tCO2e Tonnes of carbon dioxide equivalent UNFCCC United Nations Framework Convention on Climate Change iv
s to c k h o l m e n v i r o n m e n t i n s t i t u t e
ABSTRACT
C ountries are currently considering using certi-
fied emission reductions (CERs) issued under
the Clean Development Mechanism to achieve
gramme or policy. To ensure that further emission
reductions are triggered and respective economic
incentives are provided to project developers and
targets under the Paris Agreement and the Carbon host countries, it is recommended that policy-mak-
Offsetting and Reduction Scheme for International ers (a) prioritize or limit eligibility to CERs from
Aviation (CORSIA) recently adopted by the Inter- projects that are newly developed in response to the
national Civil Aviation Organization. Using CERs programme or policy and have a high likelihood of
could lower compliance costs, support stranded additionality, and/or projects that have already been
projects and ensure sufficient supply for the imple- implemented and are at risk of discontinuing green-
mentation of CORSIA. This study, however, finds house gas abatement; and (b) ensure robust account-
that purchase programmes or policies that recognize ing, in particular by addressing the risk of double
all types of CERs for use after 2020 are unlikely to claiming with 2020 targets and appropriately ac-
trigger significant emission reductions beyond those counting for the vintage of CERs and the time frame
that would have occurred in the absence of the pro- of mitigation targets.
ACKNOWLEDGMENTS
W e thank Sven Braden, Derik Broekhoff, Martin
Cames, Thomas Day, Angela Friedrich,
Aki Kachi, Michael Lazarus, Heike Summer, and
on the model and the use of data on the implemen-
tation and operation status of CDM projects. This
report has been commissioned by the Federal Minis-
Carsten Warnecke for review comments and inputs try of Agriculture, Forestry, Environment and Water
to this report, and Emily Yehle for careful editing. Management of Austria, and the Office of Environ-
We thank NewClimate Institute for the cooperation ment of Liechtenstein.
vu s i n g t h e c l e a n d e v e lo p m e n t m e c h a n i s m a f t e r 2020 vi
s to c k h o l m e n v i r o n m e n t i n s t i t u t e
SUMMARY
T he Clean Development Mechanism (CDM) is the
world’s largest greenhouse gas (GHG) crediting
mechanism, with 1.8 billion certified emission reduc-
Supply and demand for CERs
This analysis is informed by a detailed estimate
tions (CERs) issued from about 8,000 registered CDM of the CER supply potential from 2013 to 2020. It
activities. The Paris Agreement established, through draws on a bottom-up model – co-developed with
Article 6, provisions that enable countries to use interna- NewClimate Institute – that reflects recent research
tional carbon market mechanisms to achieve mitigation on the status and operation of CDM project activi-
targets pledged in their nationally determined contribu- ties, as well as CDM regulatory requirements that
tions (NDCs). In the ongoing negotiations on Article 6, could limit the ability of projects to issue CERs
several Parties and stakeholders have proposed arrange- (Schneider, Day, La Hoz Theuer, and Warnecke,
ments to transition the CDM to the Paris Agreement. 2017; Warnecke et al., 2017; Warnecke, Day, and
Klein, 2015).
There are several ways the CDM could be incorpo-
rated under the Paris Agreement. First, CDM rules The supply potential from the 8,000 registered
and governance arrangements could be adapted to the projects and programmes of activities (PoAs) is
new mechanisms operating under Article 6. Second, estimated to be about 4.7 billion CERs from 2013
CDM projects could be transitioned to mechanisms to 2020. The supply from non-registered projects in
under Article 6, thereby allowing them to generate the pipeline – i.e. projects that initiated steps to seek
units for emission reductions achieved after 2020. And CDM status, but have not (yet) been registered – is
third, CERs issued for emission reductions up to 2020 more uncertain, as it is not known how many pro-
could be used towards achieving international miti- jects have been implemented, are operating, and are
gation targets after 2020, including NDCs under the able to comply with all CDM requirements. About
Paris Agreement and the Carbon Offsetting and Re- 4,000 projects are under various steps of the vali-
duction Scheme for International Aviation (CORSIA) dation process and about 8,000 non-registered pro-
recently adopted by the International Civil Aviation jects have secured the possibility to register under
Organization (ICAO). the CDM through official notifications to the secre-
tariat of the United Nations Framework Convention
This last option has been tied to several objectives. on Climate Change (UNFCCC). It is estimated that
Using CERs towards post-2020 targets could, for all 12,000 non-registered projects and PoAs in the
example, lower the costs of meeting targets, prevent pipeline could generate an added 1.0 billion CERs
the loss of existing mitigation efforts, ensure continuity in emission reductions from 2013 to 2020.
in the use of crediting schemes, and preserve investor
trust and confidence (Greiner, Howard, Chagas, and Together, the total CER supply potential from
Hunzai, 2017; Michaelowa et al., 2015). These are im- registered and non-registered projects in the pipe-
portant objectives, but less attention has been devoted line amounts to about 5.7 billion CERs. This is
to what this option would mean for the environment. not an estimate of the likely CER issuance under
the current market conditions, but rather an esti-
This study focuses specifically on those environmental mate of the CER supply potential, assuming that
implications, systematically analyzing how the use of project owners would have sufficient incentives
CERs for post-2020 mitigation targets would impact to proceed to issuance.
global GHG emissions. It provides recommendations
to policy-makers on how to use CERs in a manner The demand for CERs from 2013 to 2020 is esti-
that ensures environmental integrity, drawing upon a mated to be about 660 million. Consequently, about
bottom-up model to quantitatively assess the implica- 5.0 billion CERs – from both registered and non-
tions under different scenarios. In this study, environ- registered projects – could be left over for use after
mental integrity is considered safeguarded if the use 2020. This is significantly larger than the potential
of CERs towards achieving targets under NDCs or demand from CORSIA, which is estimated to amount
CORSIA does not result in higher global GHG emis- to about 2.7 billion in the period 2020 to 2035. The
sions than if the targets were achieved without CERs potential demand from countries that intend to use
or other unit transfers. CERs towards achieving NDCs is not yet known.
1u s i n g t h e c l e a n d e v e lo p m e n t m e c h a n i s m a f t e r 2020
What factors are critical for the GHG and demand, resulting in low CER prices. In recent
emissions impact? years, the supply of CERs has outstripped the demand,
leading CER prices to plummet to less than 0.50 euros
Several factors influence how international market from well above 10 euros before 2011 (ICE, 2017). If
mechanisms impact global GHG emissions, including in such a market situation projects have already been
robust accounting, the quality of transferred units, the implemented – and hence investment costs are sunk
ambition and scope of any international mitigation – a key consideration for the global GHG emissions
targets of the transferring country, and possible in- impact is whether the projects would continue to
centives or disincentives for further mitigation action reduce GHG emissions even without CER revenues,
(Schneider, Füssler, et al., 2017). This study identifies or whether they are vulnerable to (or at risk of) dis-
four factors that are particularly critical in the specific continuing GHG abatement.
context of using CERs after 2020:
For some project types, such as hydropower or wind
1. For new projects, the additionality of the power projects, ongoing revenues from electricity
projects; sales typically exceed ongoing operational expendi-
tures. Once implemented, these projects have strong
2. For already implemented projects, their economic incentives to continue GHG abatement,
vulnerability to (or risk of) discontinuing GHG with or without CER revenues, because continued
abatement; GHG abatement generates more income than discon-
tinuing GHG abatement.
3. The risk of double claiming with 2020 targets
(which include both pledges and Nationally Other projects have ongoing operational costs but
Appropriate Mitigation Actions put forward in insufficient financial benefits beyond CER revenues.
response to COP15 in Copenhagen and COP16 in For example, the abatement of N2O from nitric acid
Cancun); and production requires the regular replacement of cata-
lysts but does not save costs or generate income other
4. How the vintage of CERs is accounted for in than CER revenues. These projects have a high risk
relation to the time frame of mitigation targets. of discontinuing GHG abatement, because continu-
ing GHG abatement is only economically attractive if
These four factors are further discussed below. Other they have ongoing financial support.
aspects – such as the risk of double issuance, double
use, over-crediting, or disincentives for further miti- A project that is vulnerable to discontinuing GHG
gation action – would not have a significant impact abatement is by definition additional. However, it is
when using CERs to achieve mitigation targets after important to note that if a project is not vulnerable, it
2020. can still be additional. Rather, the lack of vulnerabil-
ity recognizes that, from today’s perspective of sunk
investment costs, the project’s ongoing revenues or
Additionality and vulnerability to cost savings – other than CER revenues – exceed its
discontinuing GHG abatement ongoing operational expenditures for the GHG abate-
ment. Projects also might continue GHG abatement
Under crediting mechanisms, the quality of credits is because policies promote or require continuation or
in principle ensured if the mitigation action is: (a) addi- because discontinuation is technically not viable.
tional – that is, it would not occur in the absence of the
incentives from the crediting mechanism; and (b) the This implies that in the current market situation, the
emission reductions are not overestimated. Additional- impact of new demand for CERs on global GHG
ity is assessed when a new project is developed and emissions differs between already implemented and
the decision is made on whether to proceed with the new projects. For new projects, the additionality and
investment. The consideration of additionality is thus the quantification of emission reductions determine
relevant when new projects are developed in response the GHG emissions impact, whereas for already im-
to a carbon market price and respective demand. plemented projects the risk that projects discontinue
GHG abatement and the quantification of emission re-
The direct emissions impact from using CERs beyond ductions matter. A new programme or policy – such as
2020 is more complex. The CDM market is currently CORSIA – that creates new demand for CERs would
characterized by a strong imbalance between supply only trigger emissions reductions to the extent that:
2s to c k h o l m e n v i r o n m e n t i n s t i t u t e
1. The implementation of new GHG abatement Drawing on previous research, the study finds that the
projects that are additional is triggered through risk of over-estimating emission reductions is limited
the programme or policy, and their emission (Cames et al., 2016). However, the likelihood that a
reductions are not over-estimated; or project is additional or at risk of discontinuing GHG
abatement depends on the project type and, to some
2. Already implemented projects that are at risk extent, project-specific circumstances. Figure 1 shows
of discontinuing GHG abatement are spurred to the CER supply potential from registered projects,
continue GHG abatement, and their emission differentiated by the vulnerability of project types to
reductions are not over-estimated. discontinue GHG abatement, as assessed in recent re-
search (Schneider, Day, et al., 2017; Warnecke et al.,
This situation would only change if the current imbal- 2017; Warnecke, Day, and Klein, 2015).
ance between supply and demand ceases, i.e. if the
overall demand from new programmes and policies About 3.8 billion CERs, or 82% of the total CER
exceeded the potential CER supply from already im- supply potential from registered projects, stem from
plemented and operating projects. project types that typically have a low vulnerability to
Biomass energy -
agricultural & forest
EE households -
residues in IN
cookstoves
0.03 bn, 1% HFCs - others
0.04 bn, 1%
0.01 bn, 0%
N2O - others Others
0.09 bn, 2% 0.01 bn, 0%
High
vulnera-
bility:
Variable vulnerability: 0.2 bn,
0.6 bn, 13% 4%
Hydro 1.50
4.7 bn CERs bn 32%
Low vulnerability:
3.8 bn, 82%
Wind
1.32 bn, 28%
Figure 1: CER supply potential from registered projects for the period 2013 to 2020, differentiated
by the vulnerability of project types to discontinue GHG abatement
Source: Adapted from Schneider, Day, et al. (2017)
3u s i n g t h e c l e a n d e v e lo p m e n t m e c h a n i s m a f t e r 2020
discontinuing GHG abatement. While many of these mechanisms”, but this is to be done for
projects currently do not issue CERs, most could information which Parties “consider suitable and
resume CER issuance if they had enough incentives relevant for reporting”. An evaluation of the most
to do so. For another 13%, the vulnerability is typical- recent BURs of key CDM host countries found
ly variable, depending on the specific circumstances that none reported on or accounted for emission
of the project. reductions from CERs claimed by other countries.
Only about 170 million CERs, or 4% of the CER The risk of double claiming applies not only to using
supply potential, are from project types that typi- CERs after 2020, but also to using CERs under the
cally have a high vulnerability to discontinuing GHG Kyoto Protocol, and to using units from other GHG
abatement. The CER supply potential from vul- offsetting programmes. Double claiming with 2020
nerable projects is relatively low because (a) many targets does not always increase global GHG emis-
vulnerable projects have already discontinued GHG sions; the impact depends on whether host countries
abatement or monitoring and can either not resume overachieve their 2020 targets. If a host country overa-
abatement or are temporarily not eligible for issuing chieves its 2020 target by an amount greater than the
CERs, (b) some methodologies for vulnerable project emission reductions issued and transferred under the
types use rather conservative approaches to quantify CDM, then global GHG emissions would not increase,
emission reductions, and (c) some countries have double claiming notwithstanding. This is because in
introduced domestic policies that ensure contin- this case the host country does not effectively make
ued GHG abatement. use of the reductions to achieve its 2020 target.
While the risk of double claiming is material, the po-
Double claiming litical context of 2020 targets is an important consid-
eration. Developing countries put forward mitigation
Double claiming is one form of double counting. It targets for the first time – despite their lower capacity,
occurs if the same emission reductions are counted capability, and historical responsibility for climate
twice towards fulfilling mitigation targets: once by change. Some developing countries have argued that
the country or entity where the reductions occur, they submitted their targets assuming international
through reporting of its emissions in its GHG inven- support from developed countries – including through
tory, and again by the country or entity using CERs. the use of mechanisms – and should therefore be able
Double claiming could thereby lead to an increase in to use the emission reductions from CERs to achieve
global GHG emissions. their targets. Moreover, countries approved CDM
projects before communicating 2020 targets and
The risk of double claiming is material for two were possibly unaware of any double claiming con-
reasons: sequences. Lastly, 2020 targets do not have the same
legal status as NDC targets or commitments under the
1. A large share of the CER supply potential is from Kyoto Protocol. For these reasons, countries could
countries with 2020 targets. About 77% of the have different expectations with respect to avoiding
CERs would originate from emission sources double claiming in the context of 2020 targets.
covered by a 2020 target, and only 18% would
originate either from countries without a target However, one could also argue that the political
or from sectors or GHGs not covered by a target context is different if CERs issued for emission reduc-
(Figure 2). tions up to 2020 are used after 2020, towards NDCs or
CORSIA. Both the Paris Agreement and the CORSIA
2. Although the decision adopting the Paris resolution require the avoidance of double count-
Agreement and decisions under UNFCCC ing, and the decision adopting the Paris Agreement
emphasize the need to avoid double counting emphasizes the need to avoid double counting also
in the context of international transfers in the with regard to pre-2020 mitigation action. If double
period up to 2020, this principle has never claiming is addressed for units issued under the Paris
been effectively integrated into an accounting Agreement – but not for CERs – that could potentially
framework. Developing countries submitting distort the carbon market. Avoiding double claiming
Biennial Update Reports (BURs) “shall” with 2020 targets may thus be important for ensuring
provide “information on international market environmental integrity in the post-2020 period.
4s to c k h o l m e n v i r o n m e n t i n s t i t u t e
Not assessed
(actions) 5%
3.587 77.1%
0.844 18.1% No target 11%
0.222 4.8%
3.59 Gt 77.1% Not covered
0.34 Gt 7.3% by a target
0.50 Gt 10.8% 7%
0.22 Gt 4.8%
4.7 bn CERs
4.65
0.00
0.00
0.50
3.93
wide, covered 3.59
wide, not covered 0.34
0.00
, covered 0.00 Covered by a target
, not covered 0.00 77%
0.00
overed 0.00
ot covered Figure
0.00 2: CER supply potential from registered projects in the period 2013 to 2020, differentiated by
ot assessed 0.22 coverage of 2020 targets
the
Accounting for the vintage of CERs and the a CDM project with a technical lifetime of eight
time frame of mitigation targets years – from 2013 to 2020 – and transfers the as-
sociated CERs to Country B, which uses them to
Appropriately accounting for the vintage of CERs achieve its target in 2030. The CDM project lowers
and the time frame of mitigation targets is an impor- the GHG emissions in Country A (dark green area),
tant and complex issue for ensuring robust account- leading to lower actual emissions (black line)
ing. In theory, using CERs from emission reductions than would occur without the CDM project (red
up to 2020 towards achieving post-2020 mitigation line). Country B uses the CERs from Country A
targets only affects the timing of emission reduc- to achieve its single-year emissions target in 2030
tions but not the cumulative GHG emissions levels: (light green area).
emissions are reduced by an entity or a country at
an earlier point in time, which enables the same In Figure 3, Country B offsets the 2030 emissions
or another entity or country to emit more at a later above its target with the emission reductions from
stage. In practice, however, using CERs towards CERs created in Country A from 2013 to 2020. But
achieving future targets could also increase the cu- the ability to use all CERs in a single year enables
mulative emissions paths of the countries involved. Country B to pursue a higher emissions path in the
The risk of this depends on the specific context. period up to 2030. This could thereby significantly
increase the aggregated cumulative GHG emissions
Accounting rules for the Paris Agreement have not from both countries (by the grey area).
yet been determined, and it is unclear how the rules
will account for the vintage of mitigation outcomes This environmental integrity risk decreases if CERs
and the time frame of mitigation targets. Figure 3 were instead used towards achieving multi-year emis-
illustrates the potential implications for two hypo- sions targets or trajectories (e.g. from 2021 to 2030).
thetical countries that both have a single-year NDC In this case, the emission reductions from CERs
target of stabilizing their emissions in 2030 at their would be spread over more years, mitigating pos-
2010 level. In this example, Country A implements sible implications on pre-2020 emissions pathways.
5u s i n g t h e c l e a n d e v e lo p m e n t m e c h a n i s m a f t e r 2020
Country A
Emissions without 2030 single-
Emissions
the CDM Actual emissions year target
CDM emission reductions
Country A
2010 1 Jan 1 Jan 2030
2013 2021
Country B
CERs used towards NDC target
Actual emissions
Emissions
Cumulative emissions
increase due to using CERs
2030 single-
Emissions without
year target
acquiring CERs
2010 1 Jan 1 Jan 2030
2013 2021
Figure 3: Implications of using CERs towards a single-year target in 2030
Implications of using all types of CERs two reasons. First, under current CDM market condi-
tions, new demand for CERs would mostly be served
A key question for policy-makers is how to address the by projects that have already been implemented and
risks for environmental integrity discussed above. Here would continue GHG abatement even without CER
we first assess the implications of using all types of revenues. While purchasing CERs from projects that
CERs and then discuss possible restrictions to address continue GHG abatement would financially support
critical environmental integrity risks. them (e.g. by helping investors recoup costs or increase
profits), it would not impact their GHG abatement.
The study finds that purchase programmes or policies Second, robust accounting for the transfer of CERs is
that recognize all types of CERs for use after 2020 not ensured under the current international framework.
are unlikely to trigger significant emission reductions The use of CERs after 2020 could lead to double claim-
beyond those that would have occurred in the absence ing or lead to higher emissions pathways in pre-target
of the programme or policy. This is largely owed to years, in particular if used towards single-year targets.
6s to c k h o l m e n v i r o n m e n t i n s t i t u t e
While this study focuses on the environmental im- • The registration date – the date on which a
plications, it is important to note that recognizing all project is formally accepted under the CDM – is
types of CERs would not only fail to trigger signifi- inadequate to differentiate new from already
cant further emission reductions but could also have implemented projects, due to the large number
adverse economic implications for project devel- of non-registered projects in the pipeline. Many
opers and host countries. CER prices would likely of these projects were likely implemented before
remain low, and thus might not generate sufficient 2013, but could still register under the CDM if they
incentives to develop new projects or continue GHG had the economic incentive to do so. These projects
abatement in vulnerable projects. Moreover, a con- are estimated to be able to issue about 1 billion
siderable part of the funding dedicated to purchas- CERs in the period up to 2020.
ing CERs might be used to cover transaction costs,
and only a small part might remain with the project • The start date of the crediting period – the
owners. For these reasons, recognizing all types of date from which emission reductions can be
CERs may not maintain investor trust and confi- issued as CERs – is also inadequate, because it
dence or spur new investments. is not necessarily related to when the emission
reductions begin. Moreover, CDM rules allow
Policy-makers may thus carefully consider whether projects to change the date after registration,
and how they use CERs after 2020. To promote new and projects could thus change the date in
or continued mitigation action, they could consider order to become eligible under a CER purchase
prioritizing or limiting the eligibility of CERs. Most programme or policy.
programmes or policies deliberating the purchase or
recognition of CERs use some type of eligibility crite- • The start date of the project – the date on
ria. For example, the assembly resolution adopting the which the investment decision to proceed with
CORSIA refers to an “eligible vintage and timeframe” implementation is made – is best suited to
of units and the World Bank’s Pilot Auction Facility differentiate new from already implemented
focuses on project types that are at risk of discontinu- projects. It enables policy-makers to effectively
ing GHG abatement. ensure that only projects implemented after
the adoption of a CER purchase programme or
Restrictions could be implemented to achieve one or policy are eligible. Another advantage is that this
more policy objectives, such as incentivizing the im- date cannot be changed or influenced by project
plementation of new and additional GHG abatement participants once the investment decision has
projects, supporting already implemented projects at been made. Under the current market conditions,
risk of discontinuing GHG abatement, avoiding double however, few new projects are being developed.
claiming with 2020 targets, and promoting projects The CER supply potential from recent projects
from specific host countries. in the pipeline is therefore limited, and new
projects would have to be developed in response to
such a vintage restriction.
Restrictions to promote new and additional
projects and to support vulnerable ones To identify new projects that have a high likelihood
of additionality, policy-makers could establish a list
Restrictions on project features could be used to pri- of eligible project types. This poses several challenges,
oritize or limit the eligibility of CERs to new projects however, because additionality assessments are un-
that have a high likelihood of additionality and to certain and depend on predictions of future develop-
already implemented projects that are at risk of discon- ments, such as future energy prices. Project-specific
tinuing GHG abatement. This would require a method circumstances also can play an important role. Existing
to (a) differentiate “new” from “already implemented” analyses of the likelihood of additionality of different
projects; (b) identify which new projects have a high project types, and project categories considered auto-
likelihood of being additional; and (c) identify which matically as additional under the CDM, could inform
already implemented projects are likely be to at risk of the prioritization of project types.
discontinuing GHG abatement.
To identify projects that are vulnerable to discon-
Vintage restrictions based on documented project tinuing GHG abatement, policy-makers could also
development milestones could be used to differentiate establish a list of eligible project types, based on
new from already implemented projects. Several mile- the typical cost and revenue structure of the project
stones could be considered: type. Alternately, they could establish a methodo-
7u s i n g t h e c l e a n d e v e lo p m e n t m e c h a n i s m a f t e r 2020
logical tool and a dedicated process to assess project ing principles under the UNFCCC have failed. Ap-
vulnerability, under which individual projects would plying the accounting rules agreed under the Paris
have to demonstrate that they would discontinue Agreement to the pre-2020 period would ensure that
GHG abatement without continued CER revenues. a consistent accounting framework is used for both
Both options may require further research, build- emission reductions from CDM projects in the period
ing on previous assessments of project vulnerabil- up to 2020 and any international transfers after 2020.
ity. Project types that are typically highly vulner- It would also help ensure that all carbon market units
able have a supply potential of about 170 million used under the Paris Agreement towards achieving
CERs, while project types with a typically variable NDC targets comply with the same requirements. A
vulnerability have a supply potential of another 600 further, practical challenge of Approach 2 is applying
million CERs. corresponding adjustments in light of the diversity of
2020 targets, including their expression as single-year
targets for 2020.
Restrictions to address double claiming with
2020 targets
Restrictions to promote projects in specific
To mitigate the risks arising from double claiming with host countries
2020 targets, two approaches could be pursued:
Policy-makers could also limit the eligibility of CERs
1. Prioritizing or limiting eligibility to CERs to specific host countries or regions, notably Least De-
issued for emission reductions that are not veloped Countries (LDCs) and Small Island Develop-
covered by 2020 targets. This would apply to: ing States (SIDS). Limiting CER eligibility to LDCs
and SIDS could promote emission reductions in those
• CERs from host countries without any 2020 countries and possibly improve regional distribution of
target (corresponding to a supply potential CDM projects, potentially facilitating a more balanced
from registered projects of about 500 million regional distribution in the period after 2020 if the
for the period 2013 to 2020); and projects were transitioned and continued under Article
6. The CER supply potential of registered projects
• CERs from host countries with a 2020 target hosted in LDCs and SIDS lies at around 150 million
but for which the emission reductions are CERs, corresponding to about 3% of the potential
not covered by the target (corresponding to from all countries.
a supply potential from registered projects
of about 340 million for the period 2013 to
2020). Combinations of restrictions
2. Prioritizing or limiting eligibility to CERs Policy-makers could also pursue combinations of the
from host countries that commit to avoiding restrictions discussed above. Figure 4 shows the impli-
double counting. Host countries could, for cations for the CER supply potential if different types
example, account for CERs by applying of restrictions are combined. About 300 million CERs
“corresponding adjustments” to their GHG are from projects with a variable or high vulnerability
emissions reported under the UNFCCC. Once an and for which the emission reductions are not covered
accounting framework has been agreed to under by 2020 targets. If eligibility would in addition be
the Paris Agreement, host countries might also limited to LDCs or SIDS, only about 40 million CERs
apply this framework mutatis mutandis to the would be eligible, corresponding to about 1% of the
context of 2020 targets. overall CER supply potential.
Both approaches could in principle address the risk of
double claiming and are not mutually exclusive. Ap- Recommendations
proach 1 would be relatively simple to implement, but
could penalize countries that put forward 2020 targets Countries are currently considering using CERs to
and provide an advantage to countries that were not achieve targets under CORSIA and the Paris Agree-
ready to do so. Approach 2 would enable all countries ment. Using CERs could lower compliance costs,
to benefit from the opportunity of selling CERs for support stranded projects and ensure sufficient supply
use after 2020, but could be politically challenging. for the implementation of CORSIA. This study,
Past efforts to gain agreement on common account- however, finds that CER purchase programmes or poli-
8s to c k h o l m e n v i r o n m e n t i n s t i t u t e
All CERs
4.7 bn
Variable
or high
vulnerability
0.78 bn
Not
LDCs+
covered by SIDS
2020 targets 0.15 bn
0.84 bn
Figure 4: Implications of combinations of restrictions on the CER supply potential from registered
projects in the period 2013 to 2020
cies that recognize all types of CERs for use after 2020 • Already implemented projects that are
are unlikely to trigger significant emission reductions at risk of discontinuing GHG abatement,
beyond those that would have occurred in the absence e.g. by limiting CER eligibility of already
of the programme or policy. Recognizing all types of implemented projects to a list of project types
CERs could also lead to low CER prices and may not that are typically at risk of discontinuing GHG
maintain or restore investor trust and spur new invest- abatement.
ments.
2. Ensure robust accounting, in particular:
To ensure that further emission reductions are trig-
gered and respective economic incentives are provided • Address the risk of double claiming with
to project developers and host countries, it is recom- 2020 targets, e.g. by requiring that CDM host
mended that policy-makers: countries apply corresponding adjustments for
CERs used after 2020; and
1. Prioritize or limit eligibility to CERs from:
• Appropriately account for the vintage of CERs
• Projects that are newly developed in response and the time frame of mitigation targets, e.g.
to the programme or policy and have a high by using CERs in the context of multi-year
likelihood of additionality, e.g. by restricting emissions targets or trajectories.
eligibility to projects with a start date on or
after the adoption or implementation of the
CER purchase programme or policy, and by
prioritizing project types that are more likely
to be additional; and
9u s i n g t h e c l e a n d e v e lo p m e n t m e c h a n i s m a f t e r 2020
1 INTRODUCTION
T he Clean Development Mechanism (CDM) has
been an important international carbon market
mechanism for many years. It is the world’s largest
could be (partially) adapted to the new mechanisms
operating under Article 6.
greenhouse gas (GHG) crediting mechanism, with 1.8 2. Projects that could be transitioned to mechanisms
billion certified emission reductions (CERs) issued under Article 6, thereby allowing them to generate
from about 8,000 registered project activities and pro- units for emission reductions achieved after 2020.
grammes of activities (PoAs). Yet demand for CERs This could be subject to specific requirements.
has dwindled considerably in recent years – largely
due to the global economic crisis, a stronger focus on 3. CERs issued for emission reductions in the period
domestic mitigation action, and the limited participa- up to 2020 that could be used towards achieving
tion of Annex I countries under the Kyoto Protocol international mitigation targets after 2020. This
and the ambition level of their targets. Due to these could also be subject to specific requirements.
developments, the supply of CERs has outstripped
the demand, leading CER prices to plummet to less This study explores the last aspect: using CERs from
than 0.50 euros from well above 10 euros before 2011 emission reductions up to 2020 towards achieving in-
(ICE, 2017). ternational mitigation targets after 2020. Using CERs
towards post-2020 targets could, for example, lower
The adoption of the Paris Agreement further changes the costs of meeting targets, prevent the loss of ex-
the context under which the CDM operates. The Paris isting mitigation efforts, ensure continuity in the use
Agreement established, through Article 6, provisions of crediting schemes, and preserve investor trust and
that enable countries to use international carbon market confidence (Greiner et al., 2017; Michaelowa et al.,
mechanisms to achieve mitigation targets pledged in 2015). These are important objectives, but less at-
their nationally determined contributions (NDCs). tention has been devoted to what this option would
Article 6.2 is commonly understood to allow Parties mean for the environment.
to transfer mitigation outcomes across borders – be
it through international linking of emission trading This study focuses specifically on those environmen-
schemes, international crediting mechanisms, or direct tal implications. The study aims to comprehensively
bilateral transfers – and to account those outcomes assess the global GHG emissions impact of using
towards their NDCs. Article 6.4 of the Paris Agree- CERs to achieve international mitigation targets after
ment establishes a new crediting mechanism under 2020. It systematically analyzes what aspects and vari-
the authority and guidance of the Conference of the ables impact global GHG emissions, providing recom-
Parties serving as the meeting of the Parties to the Paris mendations to policy-makers on how environmental
Agreement. The provisions of Article 6.4 strongly re- integrity could be ensured. Towards this end, the study
semble those of the CDM, and many Parties propose uses a bottom-up model that determines the potential
that the new mechanism should replace or incorporate CER supply and assesses the GHG emissions impli-
the CDM, although the purpose and scope of Article cations from using CERs under a range of scenarios,
6.4 may be broader. Moreover, the Kyoto Protocol will including the type of CERs used.
not have a third commitment period, and Parties could
decide to end the Kyoto Protocol – including its insti- The use of CERs after 2020 has been proposed and is
tutional arrangements – once the books of its second mainly being considered for two purposes, which are
commitment period have been closed. This would specifically explored in this study:
imply that CERs will not be issued for emission reduc-
tions occurring after 2020. • Under the Paris Agreement, more than 190
countries have submitted NDCs which specify
Parties are currently considering whether and how ele- their proposed mitigation targets or actions after
ments of the CDM should transition to the framework 2020. In negotiations under the United Nations
of the Paris Agreement, including (Greiner et al., 2017): Framework Convention on Climate Change
(UNFCCC), some Parties have proposed that
1. Rules and governance arrangements – such CERs from emission reductions up to 2020 be
as baseline and monitoring methodologies, recognized towards meeting NDC targets under the
procedures for project registration and CERs Paris Agreement; however, no agreement has been
issuance, and the CDM accreditation system – that achieved on this matter so far.
10s to c k h o l m e n v i r o n m e n t i n s t i t u t e
• At its 39th assembly in October 2016, the tions on whether and how policy-makers could ensure
International Civil Aviation Organization (ICAO) environmental integrity if pursing the recognition of
adopted the Carbon Offsetting and Reduction CERs after 2020 (section 7).
Scheme for International Aviation (CORSIA). The
scheme allows using emissions units generated This study employs specific terminology and makes
from mechanisms established under the UNFCCC several assumptions. It focuses on CERs issued for the
and the Paris Agreement, provided that “they Kyoto Protocol’s second commitment period, i.e. CERs
align with future decisions, including on avoiding that generate emission reductions in the period 2013 to
double counting”. Whether and which CERs from 2020. Although the CDM still allows issuing CERs for
emission reductions up to 2020 will be eligible the first commitment period from 2008 to 2012, Annex
under the scheme is currently being negotiated. I countries can no longer use such units and this study
does not consider that they will be used after 2020.
The study is structured as follows. It first provides When referring to “CERs”, the study therefore refers
a brief overview of key issues for transitioning the to CERs issued for the second commitment period.
CDM to the Paris Agreement (section 2). It then as- The term “environmental integrity” is used in the Paris
sesses how many CERs could be issued for the period Agreement and the UNFCCC, but it has not yet been
up to 2020 (section 3), and compares the potential defined. This study assumes that “environmental integ-
CER supply with the demand that could arise before rity” is safeguarded if the use of CERs towards achiev-
and after 2020 (section 4). Section 5 investigates and ing targets under NDCs or CORSIA does not result
discusses which factors affect the global GHG emis- in higher global GHG emissions than if the targets
sions impact of using CERs to achieve post-2020 were achieved without CERs or other unit transfers.
mitigation targets. Section 6 discusses the GHG When analyzing the GHG emissions impact, this study
emissions implications of using CERs, considering a assumes that international mitigation targets – com-
range of scenarios for the types of CERs to be used prising commitments under the Kyoto Protocol, 2020
and the conditions under which CERs may be used. targets in the context of the Cancun Agreements, NDC
This analysis informs conclusions and recommenda- targets, and targets under ICAO – will be achieved.
11u s i n g t h e c l e a n d e v e lo p m e n t m e c h a n i s m a f t e r 2020
2 TRANSITIONING THE CDM TO THE PARIS AGREEMENT
T he Paris Agreement does not contain provisions for
the transition of the Kyoto Protocol mechanisms
and their components into the post 2020 period, al-
2.1 Rules and governance arrangements
The Article 6.4 mechanism has several similari-
though this was part of the negotiations. In the ongoing ties with the CDM. Both mechanisms are credit-
negotiations on Article 6, several Parties have proposed ing schemes, are under centralized governance, and
arrangements to transition the CDM to the Paris Agree- require emission reductions to be additional. Some
ment. Calls for transitional provisions by some Parties1 countries see the CDM as the basis for the Article
and stakeholders are rooted in the desire to: 6.4 mechanism, or even propose to incorporate the
CDM modalities and procedures into the rules, mo-
• Maintain private sector trust and confidence by dalities and procedures for the Article 6.4 mechanism.
recognizing past investments and incentivizing Yet key differences in both design and context also
continued engagement with international markets; exist. Importantly, the Article 6.4 mechanisms is ap-
plicable to all Parties and crediting takes place in the
• Prevent the loss of ongoing mitigation activities; context of the NDC targets of host countries, while
CDM activities can only be hosted in countries with
• Enhance pre- and post-2020 ambition by spurring no targets under the Kyoto Protocol.2 Moreover, the
new investments in mitigation actions; CDM is applicable to individual projects and to pro-
grammes, which could be narrower than the scope
• Build on the experience gained and lessons learned of the Article 6.4 mechanism. Some Parties, for
from the CDM; and example, have called for the Article 6.4 mechanism
to enable the crediting of sectors and policies; others
• Ensure an orderly transition across regimes and have proposed allowing other international mecha-
quickly serve new demand, among others. nisms to generate emission reductions under the
Article 6.4 mechanism. Another important difference
Transitional arrangements, including the use of CERs is that the Article 6.4 mechanism aims to deliver an
towards achieving mitigation targets after 2020, are “overall mitigation in global emissions”, which is not
also explored in the literature (Greiner et al., 2017; Mi- contemplated by the CDM.
chaelowa et al., 2015; Schneider and Ahonen, 2015).
Understanding the commonalities and differences
In their discussions about transitioning towards Paris between the CDM and the Article 6.4 mechanism is
mechanisms, most Parties have focused on the CDM, important for assessing which CDM rules and gov-
while a small number of Parties has called for transi- ernance arrangements might be applicable – and
tional provisions of Joint Implementation (JI) and In- which would have to be adapted – to the Article 6.4
ternational Emissions Trading (IET). The proposals on mechanism. Key areas include, among others:
the CDM are also more concrete than on JI and IET.
The overview here is limited to the CDM. • Institutional arrangements: Some Parties
propose that institutional arrangements under
The proposals by Parties for transitioning the CDM the CDM – such as the Executive Board and
relate to three areas: using CDM rules and governance its panels, designated national authorities
arrangements under the Article 6.4 mechanism, contin- (DNAs), and the CDM accreditation system –
uing CDM projects under Articles 6.2 or 6.4, and using be the basis for the governance arrangements
emission reductions achieved through CDM projects of the Article 6.4 mechanism. Other Parties
in the period up to 2020 towards achieving NDCs after propose to depart from the CDM, including
2020. While this study focuses on the latter question, establishing different rules for the composition
the following sections provide a brief overview of key and responsibilities of the body supervising the
issues for all three aspects. mechanism. This also reflects the possibly broader
scope of the mechanism.
2 For a detailed analysis of the commonalities and differ-
ences across Kyoto and Paris mechanisms refer to Sch-
1 See Party submissions under UNFCCC (2017d) neider, Broekhoff, Cames, Healy, et al. (2016)
12s to c k h o l m e n v i r o n m e n t i n s t i t u t e
• Standards for quantifying emission 2.2 Projects
reductions: A key feature of the CDM is that
it enables crediting only in countries that do Transitioning CDM projects into the Paris Agreement
not have mitigation targets under the Kyoto involves their migration to the Article 6.4 mechanism,
Protocol. Standards for the establishment of or to other crediting schemes under Article 6.2 – thereby
crediting baselines and for the demonstration of allowing the activities to continue issuing credits under
additionality may have to be adapted to the new the Paris Agreement after 2020 (Greiner et al., 2017).
context of the Paris Agreement, in which host Arrangements for the transition of projects could
countries have mitigation targets. This could depend on the extent to which rules and governance
include considering how domestic mitigation provisions under the Article 6.4 mechanism differ from
policies and progressively more ambitious NDC the CDM. Some countries suggest that CDM activities
targets impact additionality, baselines, and the be subject to filters and to re-assessments, with some
length of crediting periods. New standards may Parties proposing to focus on projects that are at risk
also have to be developed for the quantification of of discontinuing abatement in the absence of carbon
emission reductions from actions at the level of market revenues. Other Parties indicate that all CDM
sectors or policies. Different methodological and activities could be grandfathered into the Paris context.
accounting approaches could also be needed for
emission reductions within and outside the scope If CDM projects are transitioned to the Paris Agree-
of NDC targets. ment, the Agreement’s provisions for avoiding double
counting apply. If emission reductions from transitioned
• Sustainable development provisions: One CDM projects were used by other countries to achieve
of the purposes of the CDM and the Article their NDC targets, this could affect the ability of host
6.4 mechanism is to assist or support Parties countries to meet their own NDC targets. Parties could
in achieving sustainable development. Under therefore consider that host countries must approve the
the CDM, host countries are responsible for transition of projects to the Paris Agreement.
determining whether a project or programme
contributes to achieving sustainable development.
The CDM Executive Board adopted a tool that 2.3 Emission reductions
project developers can use to voluntarily report on
sustainable development benefits. Some Parties Some Parties have proposed that emission reduc-
would like to pursue a similar approach under tions achieved through CDM projects in the period
the Article 6.4 mechanism, while others propose up to 2020 be eligible towards achieving NDC targets
enhanced provisions that build, for example, on after 2020. Using CERs for post-2020 targets could
the 2030 Agenda for Sustainable Development. be subject to restrictions that consider, among other
things, the type of projects or the vintage of reductions.
• CDM registry and ITL: Some of the Kyoto
Protocol unit-tracking infrastructure, such as the Emission reductions achieved through CDM projects
CDM registry and the International Transaction in the period up to 2020 could be used in two different
Log (ITL), could serve as a basis for relevant ways towards achieving NDC targets in the post-2020
infrastructure under the Paris Agreement. period: (a) CERs issued for emission reductions up to
Definitions on metrics and accounting rules under 2020 could be directly used towards achieving NDC
the Paris Agreement could have implications on targets after 2020, or (b) CDM projects could first be
what is tracked, and how. transitioned to Article 6 of the Paris Agreement and
then be eligible to issue credits for emission reductions
in the period up to 2020 (Greiner et al., 2017). This
report focuses on approach (a); however, the findings
largely also hold if approach (b) were pursued.
13u s i n g t h e c l e a n d e v e lo p m e n t m e c h a n i s m a f t e r 2020
3 WHAT IS THE POTENTIAL CER SUPPLY?
T his section estimates the CER supply potential for
the period 2013 to 2020, using a bottom-up model
developed in cooperation with NewClimate Institute
vided by UNFCCC (2017b), with the latest available
research on the implementation and operation status of
projects from specific sectors. This includes a survey
(Schneider, Day, et al., 2017) and further amended as by NewClimate Institute to determine whether projects
part of this research project. have been implemented, continue GHG abatement, and
continuously monitor emission reductions (Warnecke,
CERs could be generated from projects that are at dif- Day, and Klein, 2015), as well as detailed estimates
ferent stages of development, including: of the CER supply potential for industrial gas pro-
jects (Schneider and Cames, 2014). Second, this study
• Registered projects; considers in detail the regulatory requirements of the
CDM that could facilitate or limit the ability of project
• Non-registered projects in the pipeline, i.e. owners to issue CERs. And third, the analysis employs
projects that initiated steps to seek CDM status, but the bottom-up model to assess, for each project, key
have not (yet) been registered; features that affect environmental integrity – such as
whether double counting of emission reductions could
• New projects, i.e. projects that have not yet taken occur or whether the project is at risk of discontinuing
any steps to seek CDM status and that could be GHG abatement in the absence of CER revenues.
developed in response to new demand.
The analysis does not aim to estimate the likely
This study focuses on the CER supply potential actual CER issuance under the current conditions,
from registered projects. The CER supply potential which depends on CER demand and prices; rather, it
from non-registered projects in the pipeline is also aims to estimate the CER supply potential, assuming
estimated, but the estimates are more uncertain, as that project owners would have sufficient incentives
less information is available on the implementation to proceed to issuance. The sections below describe
status of these projects and as it is unclear how many the methodology used to estimate the CER supply
of these projects would be able to meet all CDM (section 3.1) and present the results (section 3.2).
requirements. The CER supply potential from new
projects is even more uncertain and not estimated
here. Among the mitigation activities currently 3.1 Methodology to estimate the CER supply
being implemented in non-Annex I countries, many potential
may potentially qualify as CDM projects. However,
the CDM limits the possibility to retroactively reg- 3.1.1 Registered projects
ister a CDM project. New projects must notify the To estimate the CER supply potential for registered
UNFCCC secretariat and the DNA of the host country projects and PoAs, this study draws upon the bottom-
of their intent to seek CDM status within 180 days up model co-developed with NewClimate Institute.
of when the project owners commit expenditures for This section provides a summary of the methodology
the main equipment or facility. The registration of employed; a detailed description of the methodology
new projects is thus limited to projects where the in- can be found in (2017).
vestment decision has not yet been made or where it
has been made recently and the UNFCCC secretariat The model assesses for each project how many CERs
and the DNA have been notified. can be issued for which time period. The analysis
employs the most recent, available information to eval-
The CER supply potential has been estimated by uate for each individual project the technical status and
several other studies (Bailis, Broekhoff, and Lee, 2016; the impact of relevant CDM requirements, including
Cames, 2015; IGES, 2017; Schneider, Day, et al., major revisions of key regulatory documents adopted
2017; UNFCCC, 2017b; Warnecke, Day, and Tewari, by the CDM Executive Board in February 2017. Four
2015; World Bank, Ecofys, and Vivid Economics, key aspects affect the amount of CERs and the period
2016). This analysis draws upon and further amends for which they can be issued from registered projects:
the bottom-up model co-developed with NewClimate
Institute (Schneider, Day, et al., 2017). The model 1. The technical implementation and operation status
differs from previous studies in three ways. First, it of projects, including the likelihood that the project
combines official information on CDM projects pro- was implemented and continues GHG abatement;
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