It was seen as cause for great celebration when representatives of 175 nations met in New York to sign the historic agreement developed at the 2015 climate summit in Paris. But is the deal enough to reign in climate change? And does it stand up to scrutiny?
For many, there is cause for concern in one part of the agreement, that lays the foundation for something similar to the Kyoto Protocol’s controversial Clean Development Mechanism.
Under the 1997 Kyoto treaty, industrialised nations had until 2012 to reduce their greenhouse gas emissions by 5% compared to the level of those of 1990. Non-industrialised nations were not subject to any such constraint.
To help signatory nations reach their goals as efficiently as possible, they were allowed to buy or sell emissions allowances between themselves, and could also get carbon credits for projects in developing countries such as China, India and Brazil.
This second possibility, the Clean Development Mechanism (CDM), had two economic and environmental objectives. It allowed industrialised countries to achieve savings by reducing emissions in other countries, and it helped emerging countries get started on the path to sustainable development.
CDM: a flash in the pan?
Under the Kyoto Protocol, the UN Framework Convention on Climate Change (UNFCCC) ruled that 7,703 projects met the mechanism’s criteria. Of these, 2,291 involved transforming reported greenhouse gas reductions into carbon credits. Between 2004 and April 2016, the equivalent of 1,656 million tonnes of CO2 have been reduced and transformed into carbon credits, which is the equivalent of about 3.3 years of the total emissions of France, or three months of the emissions of the United States.
The UNFCCC estimates that between US$9.5 billion and US$13 billion in financial transfers related to carbon credits took place from 2007 to 2011. Total investments were US$215 billion with US$95 billion for projects that received carbon credits.
Despite this quantitative success, many NGOs, officials and members of the public remain doubtful.
The carbon market has also collapsed, with credit now trading below 50 US cents, compared with US$9-15 for the period 2009-12. In 2012, the European Union dropped support for the CDM. This decision is explained by the EU’s determination to reduce the number carbon allowances in circulation in its own market and numerous controversies about the integrity of the CDM.
Complexity and controversy
A number of criticisms of the CDM relate the complexity of the rules to which projects must comply. It is only after a long, costly and impenetrable process that a company can sell carbon credits. This process is required to ensure, through an independent auditor, that the proposed project will reduce greenhouse gas emissions as promised and observes the criteria of good governance and respect for environment.
Despite efforts to streamline the process, certification currently takes on average 100 days (versus 600 days in 2010), not counting the tens of thousands of dollars in consulting and auditing fees. This makes it difficult for smaller players to take part in the CDM.
The need for a project to prove that it requires carbon finance to become at least as financially attractive as a “classic” project – creates other problems. A number of studies have shown that this condition has been abused.
The CDM has even been used for some private-sector projects that were less than sustainable. These include hydroelectric dams, initiatives related to the palm-oil industry linked to deforestation, or even some “industrial” projects criticised for their excessive profitability and possible adverse effects. A project can thus generate several hundred million dollars in revenue through the sale of carbon credits with a very low initial investment.
Finally, the incentive principle of the CDM creates perverse incentives: greenhouse gas reductions are compared to a baseline scenario, and the worse the baseline is, the more reductions there need to be, and thus more profitability through the CDM.
Despite efforts to contain this intrinsic bias, there’s a built-in incentive to do as little as possible and then minimise emissions. Nothing is proposed to reward good behaviour.
Learning important lessons
Criticisms thus centre on the fact that concerns about economic efficiency are given priority over respect for the environment.
Providing incentives for investors to reduce carbon in the cheapest possible way regardless of the environmental and social quality of projects has not prompted them to change their investment practices. The classic questions of financial profitability have dominated, pushing funding towards technology (big dams, big industries) and countries where the risk of investment failure is low, profitability is high and the potential for reducing CO2 immense.
With the formal signing of the Paris Agreement, a key lesson is the need to establish standardised rules that limit data manipulation that would expose carbon finance to opportunistic and unethical behaviour.
The carbon-credit market worked to the extent that it provided strong financial incentive for thousands of projects while allowing developed countries to achieve savings. The next clean-development mechanism must benefit from past experience and a permanent reform process.
We must combine past lessons and put civil society at the heart of CDM governance. This process has just begun. With the signing of the agreement in New York, negotiations have started to design the tools necessary to limit the effects of climate change.
Featured image: Power plant in India. CC flickr: Vikramdeep Sidhu