Emissions trading at the crossroads

Thanks to the CDM, investors from industrialised countries can have climate protection projects in developing countries credited towards their obligations to reduce greenhouse gases under the Kyoto Protocol. To make this kind of commitment possible, the emissions that are saved are traded in the form of certificates. CO2 emissions were worth €10 per tonne on this market in 2007, and the price is expected to rise to an average of € 13 this year.

CDM projects are supposed to contribute to poor countries’ development by making investments from industrialised nations more lucrative. Project-based transactions totalled $ 13.9 billion in 2007, almost twice as much as in 2006. Thanks to such schemes, greenhouse emissions were reduced by 791 million tonnes of carbon dioxide. In comparison, the EU Emission Trading Scheme (ETS) reached a market value of $ 50 billion in 2007. Under this scheme, a certificate for one tonne of saved emissions already fetched around € 23.

Approximately seventy CDM projects were on offer at the Carbon Expo, an international trade fair which took place in Cologne this time – however none were entered into. Demand has come to a standstill. Market participants are unsure whether the fragile CDM mechanism will still exist after 2012. The CDM was a subject of negotiation at the Climate Change Conference in Bali, and now uncertainty will reign until the follow-up conference in Copenhagen late next year. In comparison, the EU Commission leaves no doubt that they also want to cut back their allocation of certificates in future and therefore strengthen the ETS independently of what arrangements other countries make.

The Europeans hope that the CDM and climate protection measures implemented jointly by rich and poor countries will go on. However, if it becomes evident that emerging economies and developing countries are no longer pulling their weight, the EU no longer wants to provide financial support for such projects. The World Bank maintains this would backfire, as the EU’s stance is contributing to investors’ feelings of insecurity.

To a certain extent, the EU is inadvertently justifying the restraint exercised by major power companies such as EON or Vattenfall, which have shown little interest in the CDM so far. At the same time, others, such as RWE, which has been active in India and China above all since 2005, feel punished. In conjunction with OSRAM, for example, RWE is distributing energy-saving light bulbs as part of an energy efficiency project in the Indian region Vishakhapatnam – achieving a reduction of 400,000 tonnes of CO2 annually. The discarded light bulbs are recycled according to up-to-date standards. This project is funded exclusively by means of CDM certificates, which can be traded internationally. RWE has spent a total of €150 million to date.

The complicated CDM rules do not exactly make the transfer of technology and know-how easy for investors. Up to two years may pass from the time an idea is submitted until it is approved. The German Emissions Trading Authority in the Federal Environment Agency is responsible for granting approval in Germany. According to RWE, each application costs an average of € 50,000. Among other things, partner countries have to prove they have established a computer-based national emissions register, submit annual inventories and meet other reporting obligations.

The global asymmetry is another problem. In 2007, three out of four CDM projects were carried out in China; Africa received only five percent of the transacted volume, while India and Brazil each received six percent. The World Bank explains the trend by citing the growing interest of international companies in China as a future market. According to the Bank, companies test their market entry in newly industrialising countries with feasible CDM projects; and interest in the People’s Republic is especially high. The architects of the Kyoto Protocol overlooked this effect and now countermeasures need to be taken.

The CDM is at a crossroads, concludes the World Bank report. The challenge now is to set “science-based” emission reduction targets and meet them in “cost-effective” ways.

Marcel Seyppel