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Carbon Volume up, but Reform Needed to Ensure Enviro Benefits: World Bank

Steve Zwick

Anyone looking to earn carbon credits by funding clean development projects has to prove that the carbon income made the project possible. This is “addititionality” in a nutshell, and it's a cornerstone of carbon finance. The World Bank's State and Trends of the Carbon Market 2009, however, says that existing tools for proving additionality are clunky and counterproductive.

Anyone looking to earn carbon credits by funding clean development projects has to prove that the carbon income made the project possible. This is “addititionality” in a nutshell, and it's a cornerstone of carbon finance. The World Bank's State and Trends of the Carbon Market 2009, however, says that existing tools for proving additionality are clunky and counterproductive. 27 May 2009 | BARCELONA, Spain | The World Bank's latest annual survey of the carbon markets, State and Trends of the Carbon Market 2009 shows that a surge in secondary trading led to a doubling of trading volume in 2008 even as the number of new clean development projects launched under the Kyoto Protocol's Clean Development Mechanism decreased. “The biggest growth has been in the secondary market, which encompasses a whole bunch of activities but doesn't really involve any additional reductions,” said World Bank Senior Finance Specialist Karan Capoor, who co-authors the report. “The project-based market, on the other hand, actually reduces emissions.” The World Bank report was released in a joint press conference at the Global Carbon Expo hosted by the World Bank and the International Emissions Trading Association (IETA), which issued its own GHG Market Sentiment Survey. The World Bank report shows a production pipeline filled with projects capable of generating roughly three billion tons of reduction offsets, but Capoor expects only half of those to be approved by the time the Kyoto Protocol expires at the end of 2012 – largely due to a continuing backlog in the CDM approval process flowing from a shortage of qualified project auditors. He says that annual demand for offsets could increase to 600 million tons of reduction per year if the recently-introduced Waxmanm-Markey Bill passes into law in the United States and the European Union raises its 2020 reduction target to 30% below 1990 levels – a figure the EU Commission has proposed offering if a global agreement is reached. Demand could increase fivefold if a global agreement emerges that slashes emissions to a level 40% below 1990 levels, as many scientists have called for. Only one third of the respondents to the IETA survey, however, said they expect to see the EU raise its reduction target to 30%, while a growing number expect to see the developing world begin making significant reductions as time goes on.

The Additionality Debate

The CDM Executive Board has begun efforts to streamline the approval process, but scores of project developers have called for an overhaul of existing tests for “additionality”, which are designed to determine whether funding from carbon finance actually caused a reduction to take place or whether the reduction would have taken place even without the carbon money. In its new report, the World Bank joined the chorus of those calling for a reform to the CDM process in general and additionality tests specifically. “The CDM is to be commended for trying to streamline its process, but most important question is how we define additionality,” says Capoor. “The concept of additionality is critical for the environmental integrity of process, but when we look at what's become stuck in the process, it usually has to do with the current definition.” He was adamant, however, that the bank is not questioning the principle of additionality itself. “The question is not whether projects should be additional or not,” he said. “The question is how we can best demonstrate that additionality.” The report suggests the use of “technology benchmarks, deemed savings, and a positive list of specific desired activities” as means of “avoiding endless debates on baselines and additionality that have plagued the regulatory process.”

The UNFCCC Process

The UNFCCC secretariat has, at different points in the negotiations, established groups to tackle discrete issues outside of the chaotic setting of the Conferences of the Parties (COPs). Two such working groups met formally at the March/April Bonn meetings.

Ad Hoc Working Group on Further Commitments for Annex 1 Parties under the Kyoto Protocol (AWG-KP)

This working group is primarily charged with negotiating future commitments from industrialized nations in the Kyoto Protocol.

Ad Hoc Working Group on Long Term Cooperative Action under the Convention (AWG-LCA)

This group focuses on developing a plan of long-term cooperation between developing and industrialized countries, focusing on the following issues: mitigation, adaptation, technology transfer and financial provision.

Currently, REDD policy is being discussed within both of these groups simultaneously, while a third group, the Subsidiary Body for Scientific and Technological Advice (SBSTA), discusses the technical aspects of REDD.

You'll find a detailed analysis of how these groups work here.

That issue is on the agenda of the 9th meeting of the so-called “Ad Hoc Working Group on Further Commitments for Annex I Parties under the Kyoto Protocol” (AWG-KP), a United Nations body charged with updating the Kyoto Protocol (see The UNFCCC Process, right). The meeting takes place in Bonn, Germany, from 1-12 June, and will be followed by at least three more before climate negotiations come to a head in Copenhagen in December.

Regulatory Uncertainty

Henry Derwent, President and CEO of IETA, says that respondents to his organization's survey identified two sets of major concerns: the functioning of the CDM Executive Board, which includes the additionality debate, and longer-term uncertainty over which caps will be set and how they will be enforced. “The market has two sets of glasses here: one for short vision and one for long vision,” he says. “The short vision is still dominated by worries about the transparency and consistency of the CDM Executive Board, while the long-distance glasses give you real worries about the uncertainty of regulation post-2012.” Indeed, a whopping 51.7% of respondents to the IETA survey expect the Copenhagen summit to wrap up by postponing a final agreement to 2010 – but only 1.1% expect negotiations to break down with no agreement whatsoever, and most expect an agreement by the end of 2010. EM examines the provisions of the bill impacting forestry. Steve Zwick is Managing Editor of Ecosystem Marketplace. He can be reached at SZwick (at) ecosystemmarketplace.com. Please see our Reprint Guidelines for details on republishing our articles.

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