US Policy Developments: Implications for the CDM

US Policy Developments: Implications for the CDM

Santiago, Chile. 18 June, 2009

Marc Stuart, Co-Founder and Director, New Business Development

© 2008 ECOSECURITIES GROUP PLC

Five Reasons (most of) the United States Hates the CDM


1. CDM is a Subsidy for China

Response: • China is 50% of the developing world’s emissions and growing at

an astonishing rate• China has also created a stable CDM regulatory environment

and strongly promoted the CDM to its domestic firms• Nonetheless, it is impossible to argue terribly convincingly that

the CDM has done anything to China’s emissions trajectory except at the extreme margin (gross emissions 2-3x at time of Kyoto)


2. CDM is a Windfall to One Class of Assets (Chemical Plants, Especially in China)

Response: • Markets by nature first seek out highest

return assets• In the absence of regulation or other funding mechanisms, the

markets proved very able to identify and execute ERs• All that said, were there socially cheaper ways to reduce

emissions from this asset class – most emphatically, YES!!


3. Phase 1 of EU ETS was a Fiasco as Prices Went to Zero (So Emissions Trading Must Be Nonsense)

Response: • It is not the fault of the CDM that the EU ETS was over-allocated• Most studies do show that real emission reductions were

achieved in Europe during the period of Phase 1 when prices were higher

• Project based mechanisms and allocations are of course related, but different issues entirely

• Phase 2 was allocated properly and the pricing mechanisms are engendering reductions again (though productivity impacts from the financial crisis may again put out of balance)


– The Voluntary Carbon Market is Rife with Fraud

Response: • Again, there is some truth, but making this would be like condemning the

Internet in 1998• Only “market” available for direct observation in the US for the last

decade – gained outsized importance in peoples’ minds• Tiny fraction of the size of CDM• As voluntary market has grown in in importance, industry has addressed

quality issue by embracing the WWF Gold Standard, VCS, etc.


1. Questions Around How “Additional” Many Renewable Energy Projects Really Are (Stanford University Studies)

Response: • May be some truth - depending how you view additionality • Bottom-up additionally is a challenge, and may be impossible to

implement effectively and consistently in certain asset classes on a project by project basis

• However, we also need to appreciate the overall benefits of scaling up RE technology into new markets (e.g. wind turbine production in China)

• As RE/EE is a core need in a global decarbonization strategy, the CDM must re-address how to provide incentives to this asset class effectively


Overall Perspectives

• At the outset of US re-engagement in climate in latter 2006, the outlook for international credits was exceedingly poor

• Environmental groups – particularly from local environmental justice community – has seized on offsets as basically evil and the “buy the right to pollute” or “papal indulgences” argument

• Great suspicion of the UN and the fidelity of any UN processes that actually claim to create economic value

• California – which had picked up the mantle of climate leadership in the US prior to Obama – was a particularly easy place for international offset critics to get and maintain traction


So, Where Do we Stand Now?


Basics of Waxman-Markey Bill (H.R. 2454)Start date: • 2012 for Electricity and Fuel• 2014 for Industrial Sources; • 2016 for Natural Gas Local Distribution CompaniesCoverage: • 85% of U.S. emissions (EU ETS is approximately 50%)• Represents a 6 billion tonne market at the outset• Upstream for fuel producers/ importers • Downstream for electricity generators and large industrial sources (> 25,00tco2e/yr)Offsets: • Up to 2 billion tons per years allowed (50% international)• No eligible list of accepted project types• For political reasons, strong emphasis on domestic opportunities – substantial

alteration from the current Kyoto countries (and likely to be replicated in Australia and Canada)


US Legislation: A Plausible Timeline

• Summer ‘09: Waxman-Markey Bill reported out of Subcommittee to full Energy & Commerce Committee; then to the full House of Representatives. On Senate side, Boxer has established 5 “Committees” to go through W-M line by line in preparation for eventual uptake in the Senate

• Summer/Fall ‘09: W-M passed by the House. Probably hearings of Senate version in Subcommittee; Senate unable to pass bill before adjournment in late Fall

• December ‘09: US State Department negotiators head to Copenhagen with uncertain domestic mandate; negotiate basic structure to be fleshed out later

• Winter ‘10: 111th Congress, 2nd Session convenes, Senate passes bill by mid to late spring; conferenced bill passed and signed by president by summer 2010; COP 15 bis commence to flesh out details.


Waxman-Markey Bill: TargetsYear Emissions

Budget (Offsets + Allowances) in mmt

% Reduction

% Offsets Allowed

Emission-to-cap (E-t-C) Gap in mmt (no comp policies)

Emission-to-cap (E-t-C) Gap in mmt (comp policies)

2012 6627 3% 29% 205 87

2020 7056 17% 28% 1363 761

2030 5533 42% 35% 3138

2050 3035 83% 63%



Implications for the Post-2012 Market with US

engagement


CDM 2.0 – The W-M PerspectiveSectoral International Offset Crediting • EPA/State Department to identify sectors/countries where sectoral

crediting is appropriate, and in those instances credit offsets ONLY on a sectoral basis

• Identification of sectors guided by considerations, e.g. host country GDP, absolute emissions, comparable treatment of sector in US, heterogeneity of sector emissions, competitiveness concerns, leakage risks, MRV, etc.

Non-Sectoral International Credits (CDM/CDM 2.0)• EPA may issue “US international offsets” in exchange for CERs, IF

EPA determines CDM EB requirements provide equal or greater integrity to domestic program


How will Sectoral Work?• What do countries need to do to engage in sectoral crediting?

1. Qualify as a “developing country” in the eyes of US2. Prove ability to monitor, report, and verify (MRV) emissions to

satisfaction of US EPA/OAB/State Department3. Undertake some subset of other actions – either demonstrate

some level of “comparable” effort, or prove that country circumstances are so disadvantageous as to justify investment/ linkages in the absence of effort (least developed countries)

4. Potentially, demonstrate willingness to transition towards more binding reduction targets over time

• Major question – will sectoral agreements with the US be attractive to developing countries and, if so, why?


Non-sectoral?• 2 years after enactment (2012-ish), EPA/State/ USAID/Offset Advisory

Board to promulgate regulations for international offsets if the US is a party to bi/multilateral arrangement that includes the host country • Kyoto/Copenhagen not necessarily sufficient• Host country must be a developing country• No international offsets for black carbon or HFC destruction activities

Limiting Factors for International Offsets• Eligible Project Type List

• Certainly a very restrictive asset class base for domestic offsets• May apply to international offsets, so CERs developed in US capped

sectors in US potentially ineligible• CERs also ineligible in countries/sectors where U.S is crediting sectorally• Projects receiving funds from Int’l Clean Tech Fund ineligible for offsets


REDD• EPA may issue credits against a historical baseline for REDD activities,

discounted for uncertainty, country-specific circumstances, etc.• National Level: Baselines shall consider ≥5 years average annual historical

deforestation rates, establish trajectory to no deforestation in ≤20 years, and account for all significant deforestation sources

• State/Provincial REDD: EPA may credit against state/provincial baselines (phase out by 2017) subject to same reqs for national DD baselines for states/provinces in countries with:

• No country-wide eligible baseline but an eligible state/regional one, major REDD emissions

• REDD at the Project/Program Level: EPA/USAID/State to make list of countries responsible for ≤1% total global GHGs and <3% total forest emissions making good faith efforts to develop strategic LULUCF plans. EPA may issue project-based credits against a baseline consistent with NAMAs, accounting for historical deforestation rates over the past 5 years, etc., phase out by 2017; 2025 at the latest


So, Where Do We Stand?• One the one hand, an incredibly powerful source of demand is entering the market

• There is no way that the US can meet its emission reduction objectives using only domestic policy and domestic offset assets

• On the other hand, the US is clearly looking to change the rules of the game to address its concerns with CDM 1.0• US wants a “made in the USA” stamp on any international crediting mechanism—

generally suspicious of anything UN-led• The degree to which the world can push back and get some middle ground

agreement is paramount—goodwill about being back at the negotiating table only goes so far

• US should not be allowed to pretend its decade of inaction simply never happened • Improvements to CDM are paramount – however, moving a fully clean sheet of

paper as many US policy suggestions seem to imply, is stupid


What should countries do to prepare?• Understand implications of (and motivations for) U.S. policy directions for

existing and future offset projects and carbon markets• Decide the extent to which developing US framework for international

engagement, esp. sectoral, will or won’t work, and why• Engage on areas of concern not only at international level but US

domestic policymaking level as well• Provide international context, remind U.S. policymakers of broader

responsibilities, issues, history of negotiations, etc.• If interested in U.S. market opportunities, proactively begin “getting

the house in order” – start setting up MRV systems, developing domestic ER policies, Policies & Measures, etc.

• Work with private sector to understand liabilities/opportunities created by these policies


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