Monthly Archives: November 2010

cdm

A Closer Look at the CDM: Changes Ahead

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The Clean Development Mechanism (CDM) is a market-based mechanism written into the Kyoto Protocol as a measure aimed at achieving the dual goals of reducing greenhouse gas emissions while encouraging the transfer of technology and expertise to developing countries. The carbon credits generated by CDM projects, called Certified Emissions Reductions (CERs), have become a multi-billion dollar component of the global carbon market. But questions abound about the future of the CDM, and smart carbon shoppers would be wise to prepare.

Expiration Date: 2012
The Kyoto Protocol, including the CDM, is set to expire at the end of 2012. International negotiations are ongoing, culminating this December in Copenhagen, to hammer out a successor agreement that would take effect beginning in 2013. Whether this framework will contain a provision for CDM, and whether and how the CDM might change, remain open questions.

Here is what we do know. While reaction to the CDM has been mixed at best, much of the criticism levied at the CDM has been addressed. For example, after it was revealed that project developers were making windfall profits off of hydrofluorocarbon destruction projects, the CDM Executive Board which evaluates new projects and methodologies no longer accepted projects of that type.

And though some issues remain (notably the backlog of projects waiting to be approved by the Executive Board), the CDM has largely functioned as intended, allowing developing countries to leapfrog many polluting technologies while serving as a cost-containment mechanism for European and Japanese companies looking to reduce their emissions at least cost.

As of now, most industry observers believe that the CDM will continue to function in much the same way after 2012 namely, as a means for more sustainable development and providing cost containment and flexibility in meeting emissions reduction requirements. Indeed, the continuation of the CDM is implied in the most recent outline released by the UN to be discussed at the next round of talks leading up to Copenhagen.

All Eyes on China
That said, however, the CDM landscape could change markedly depending on which countries agree to binding emissions reductions in Copenhagen. China, which is host to more CDM projects than any other country, appears to be inching closer to setting an emissions cap in the foreseeable future. This would end its eligibility as a CDM host country, thereby dramatically reducing the supply of CERs.

Other countries that currently host CDM projects such as South Korea, Mexico, and Brazil could agree to national or sectoral binding emissions caps beginning in 2013, further altering the CDM landscape. By reducing CER supply, such a realignment could significantly increase the cost of meeting reduction requirements in all countries likely to have an emissions cap in place by 2013 including the US.

Yet this uncertainty also represents an opportunity for companies in the US and Europe facing the need to reduce or offset emissions. European firms with compliance obligations can take advantage of comparatively cheap post-2012 CERs, knowing that it is highly likely they will be accepted in a post-Kyoto climate framework.

In the US, although the details have yet to be finalized, the draft version of the Waxman-Markey bill under debate in the House of Representatives would allow up to one billion offsets from international projects, likely including CERs. Savvy buyers would be well-served to explore post-2012 CERs as a cost-effective way to meet emissions reduction requirements.

What to Watch for:
Whether the CDM, or a similar measure, is included in any agreement reached in Copenhagen; if so, post-2012 CER demand (and prices) will likely go up.

Whether China, Brazil, India, and other large developing countries agree to binding emissions caps in Copenhagen; if so, the projected supply of post-2012 CERs will decrease, thereby adding to the potential for CER price increases.

Read more: http://www.articlesbase.com/business-articles/a-closer-look-at-the-cdm-changes-ahead-1441924.html Under Creative Commons License: Attribution

cdm2

Carbon Emission Trading, The Basics Explained – Part 2

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On January 1, 2005, the EU-ETS came online with the cap-and-trade program covering approximately 12,000 installations including electricity production and some heavy industry.  These 27 member countries of the European Union represents roughly 45 percent of total European CO2 emissions.

Now three years later, amid a flurry of expectations and public controversy, the European Union has credible results to back up its claim of success. Recently, a Massachusetts Institute of Technology analysis of the EU Emissions Trading Scheme (ETS) affirms that despite rather unstable beginnings, the system has been an unprecedented success.  More importantly, it opens the door for skeptical countries like the United States to follow suit.

The United States would have been required to reduce its emissions 7 percent below 1990 levels had it accepted ratification of Kyoto. Instead, U.S. emissions have now risen more than 16 percent between 1990 and 2005.

The Bush administration and Republican lawmakers opposed to emission caps have been touting the Asia-Pacific Partnership on Clean Development and Climate, which consists of Australia, China, India, Japan, South Korea, and the United States. The aim of the initiative, which began in 2005, is to foster cooperation on ways to improve clean energy development and lower emissions without global mandates. But since the initiative started, the United States, India, and China have come under increased domestic pressure to move toward mandatory emission controls. California is among several U.S. states that have entered into partnerships or passed laws for controlling greenhouse gas ahead of the federal government, leading to a showdown with congressional lawmakers. Major U.S. cities have also instituted a host of policies designed to cut greenhouse gases.

Without the United States entering into a binding commitment, it is feared that several developing countries which have not yet signed plus some Kyoto signatories may be unwilling to agree to additional international commitments.

The Writer is Dwayne Strocen a registered Commodity Trading Advisor specializing in analyzing and hedging Market and Operational Risk using exchange traded and OTC derivatives. Website: http://www.genuinecta.com

cdm

Carbon Emission Trading, The Basics Explained – Part 1

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The Kyoto Protocol is a UN-led international agreement reached in 1997 in Kyoto Japan to address the problems of climate change and the reduction greenhouse gas emissions. The Kyoto Protocol went into force on February 2005.

Signatory countries are committed to moving away from fossil fuel energy sources – oil, gas, and coal, to renewable sources of energy such as hydro, wind and solar power, and to less environmentally harmful ways of burning fossil fuels. Greenhouse gases such as carbon dioxide, methane and nitrous oxide are mainly generated by burning fossil fuels. Higher levels of greenhouse gas emissions cause global warming and climate change.

The Protocol commits 38 industrialized countries to cut greenhouse gas emissions by 2008-2012 to overall levels that are 5.2 percent below 1990 levels. Targets for greenhouse gas emissions reduction were established for each industrialized country. Developing countries including China and India were asked to set voluntary targets for greenhouse gas emissions.

The Canadian target for Kyoto is to reduce by 2012, greenhouse gas emissions by six percent below their 1990. The United States did not ratify the Kyoto Protocol, and in February 2002 introduced the Clean Skies and Global Climate Change initiatives, in which targets for reduction in greenhouse gas emissions are linked directly to GDP and the size of the U.S. economy.

Trading of carbon emissions is linked to a program called Cap-and-Trade. Understanding this concept is necessary to begin effective trading. A central authority (usually a government or international body) sets a limit or cap on the amount of emissions discharged into the atmosphere. Companies that exceed the cap may be subject to fine or regulatory sanction. Therefore, those who find they cannot meet the conditions of the cap will look to buy credits from those who pollute less.

Many older established companies are forced to spend considerable sums of money modernizing plants. In many instances this takes time, usually years to achieve. In contrast to new generation technologies which are not faced with up-grading facilities to comply with 1990 emission standards. Trading emission credits is a way for low emission companies such as wind farms to sell credits to benefit higher emitting companies. Cap-and-trade programs ultimately aid in being a net benefit to the host country by enabling it to meet it’s commitment to the Kyoto Protocol Agreement.

From the very beginning, this first phase of the European Union Emissions Trading Scheme, or EU-ETS, was intended to be a learning period to work out the kinks and entice major greenhouse gas emitters on board.

End of part 1