About a decade ago, the market for Certified Emissions Reductions (CERs) was ploughing a furrow either side of €12.50, daily trading volume on ICE Futures occasionally topped 1 million tonnes, and EU installations were busy accumulating their full quota of UN offsets for compliance use in the EU ETS.
Today, we’re counting down the days – around 35 – until the last futures contract rolls off ICE and we’re left with a month or so of spot trading before the boom finally comes down on the story of CERs in the EU ETS.
The spot price today is €0.38, just 1.5% of the heady levels of 2008.
To be sure, there are still a few compliance markets where you can use CERs: Colombia and South Africa’s carbon tax regimes will accept some CERs as payment, the new CORSIA market will accept certain CERs, but in general there’s not much of a market out there compared to the potential size of the CDM.
A lot of Clean Development Mechanism projects have de-registered from the CDM and are now supplying Chinese CERs, or voluntary offsets under Verra or the Gold Standard. Others simply have stopped monitoring, reporting and verifying their reductions and are not seeking issuance of CERs.
In short, the CDM is a bit of a zombie market. UNFCCC data shows that just 2.054 billion CERs have been issued, but analysts suggest that as many as four times as much *could* have been issued had demand not fallen away.
The problem is that the future of the CDM has been uncertain for many, many years. At the 2012 COP in Doha, the UNFCCC agreed to extend the Kyoto Protocol for a second commitment period from 2013 to 2020.
But even as early as then it was already becoming clear that whatever followed Kyoto would have to be more encompassing, and that Kyoto's extension to 2020 was really just a holding exercise, waiting for countries to reach a larger deal.
Ratification of the Doha Amendment to the Kyoto Protocol by countries was a slow business, and it wasn’t until October 2020 (!) that 147 countries formally ratified it and Kyoto’s second period took effect. (Remember, the Paris Agreement took less than a year to enter into force.)
This means – at least technically – that Kyoto Annex I Parties will have to account for their emissions over the period 2013-2020, Assigned Amount Units (AAUs) will be issued and Parties will have to surrender AAUs (or CERs and Emission Reduction Units) covering their total emissions.
However, any CER that would be used for “Kyoto 2” compliance would have to have been issued before the end of 2020, so that all reductions would have happened “in-phase”.
The other significant unknown is the Paris Agreement. I’m sure you know that under Article 6 of the 2015 treaty, there is a possibility that the CDM, or at least parts of it, could be transferred into a new Article 6.4 “mechanism”.
Article 6 has proven to be a thorny issue, with countries sharply divided on how the various trading mechanisms should be constructed. I won’t go into those here, since there are very insightful analyses to be found elsewhere.
The CDM hasn’t escaped the Article 6 politics either. There are disagreements over whether CERs issued prior to 2020 should be eligible under Paris, and there will probably be differences of opinion over which project types will be allowed.
And all of this means that the CDM and all its stakeholders do not know whether the mechanism will even officially exist after 2020.
These decisions were meant to have been taken in Glasgow at last year’s postponed COP. They will be on the agenda for this year’s COP, for sure. But we’re already in 2021, the Paris era, and the CDM has no political instructions from the UNFCCC’s supreme decision-making body.
Strictly speaking, this means the CDM executive board and secretariat can’t register new projects, can’t approve re-registration of projects for a subsequent crediting period, and can’t issue CERs that represent reductions made after January 1, 2021.
There have been efforts by the executive board to find “work-arounds” that let it at least make provisional approvals and issuances, but this still doesn’t put CERs in anyone’s account.
And there’s also a larger issue at stake as well. As long as the CDM doesn’t have a clear future under Paris, then countries around the world don’t know whether they’ll have an off-the-peg crediting mechanism that will allow them to swiftly generate climate finance.
In fact, the CDM probably represents the UNFCCC’s best chance to implement a proper “mechanism” under Article 6.4. For sure, whatever supervisory body is placed in charge of the CDM would probably be some technical changes to it, but the entire structure of the Kyoto mechanism – the hundreds of methodologies, the registries, all the intellectual property that’s represented in the Secretariat and in the many private and public stakeholders – would make an Article 6.4 mechanism so much more easy to build.
By November, the CDM’s future will either have been mapped out or brought to an end.