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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
© 2008 ECOSECURITIES GROUP PLC
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)
© 2008 ECOSECURITIES GROUP PLC
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!!
© 2008 ECOSECURITIES GROUP PLC
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)
© 2008 ECOSECURITIES GROUP PLC
– 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.
© 2008 ECOSECURITIES GROUP PLC
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
© 2008 ECOSECURITIES GROUP PLC
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
© 2008 ECOSECURITIES GROUP PLC
So, Where Do we Stand Now?
© 2008 ECOSECURITIES GROUP PLC
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)
© 2008 ECOSECURITIES GROUP PLC
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.
© 2008 ECOSECURITIES GROUP PLC
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%
© 2008 ECOSECURITIES GROUP PLC
© 2008 ECOSECURITIES GROUP PLC
Implications for the Post-2012 Market with US
engagement
© 2008 ECOSECURITIES GROUP PLC
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
© 2008 ECOSECURITIES GROUP PLC
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?
© 2008 ECOSECURITIES GROUP PLC
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
© 2008 ECOSECURITIES GROUP PLC
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
© 2008 ECOSECURITIES GROUP PLC
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
© 2008 ECOSECURITIES GROUP PLC
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
© 2008 ECOSECURITIES GROUP PLC
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