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928CDM - Clean Development Mechanism - critical analysis

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  • Thanks to Lee Schipper for the heads-up
    Dec 2 1:48 AM

      Thanks to  Lee Schipper for the heads-up






      A Realistic Policy on International Carbon Offsets

      Michael W. Wara and David G. Victor1




      As the United States designs its strategy for regulating emissions of greenhouse gases, two

      central issues have emerged. One is how to limit the cost of compliance while still maintaining

      environmental integrity. The other is how to “engage” developing countries in serious efforts to limit

      emissions. Industry and economists are rightly concerned about cost control yet have found it difficult

      to mobilize adequate political support for control mechanisms such as a “safety valve;” they also

      rightly caution that currently popular ideas such as a Fed-like Carbon Board are not sufficiently fleshed

      out to reliably play a role akin to a safety valve. Many environmental groups have understandably

      feared that a safety valve would undercut the environmental effectiveness of any program to limit

      emissions of greenhouse gases. These politics are, logically, drawing attention to the possibility of

      international offsets as a possible cost control mechanism. Indeed, the design of the emission trading

      system in the northeastern U.S. states (RGGI) and in California (the recommendations of California’s

      AB32 Market Advisory Committee) point in this direction, and the debate in Congress is exploring

      designs for a cap and trade system that would allow a prominent role for international offsets.


      This article reviews the actual experience in the world’s largest offset market—the Kyoto

      Protocol Clean Development Mechanism (CDM)—and finds an urgent need for reform. Welldesigned

      offsets markets can play a role in engaging developing countries and encouraging sound

      investment in low-cost strategies for controlling emissions. However, in practice, much of the current

      CDM market does not reflect actual reductions in emissions, and that trend is poised to get worse. Nor

      are CDM-like offsets likely to be effective cost control mechanisms. The demand for these credits in

      emission trading systems is likely to be out of phase with the CDM supply. Also, the rate at which

      CDM credits are being issued today—at a time when demand for such offsets from the European ETS

      is extremely high—is only one-twentieth to one-fortieth the rate needed just for the current CDM

      system to keep pace with the projects it has already registered. If the CDM system is reformed so that

      it does a much better job of ensuring that emission credits represent genuine reductions then its ability

      to dampen reliably the price of emission permits will be even further diminished.


      We argue that the U.S., which is in the midst of designing a national regulatory system, should

      not to rely on offsets to provide a reliable ceiling on compliance costs. More explicit cost control

      mechanisms, such as “safety valves,” would be much more effective. We also counsel against many of

      the popular “solutions” to problems with offsets such as imposing caps on their use. Offset caps as

      envisioned in the Lieberman-Warner draft legislation, for example, do little to fix the underlying

      problem of poor quality emission offsets because the cap will simply fill first with the lowest quality

      offsets and with offsets laundered through other trading systems such as the European scheme. Finally,

      we suggest that the actual experience under the CDM has had perverse effects in developing

      countries—rather than draw them into substantial limits on emissions it has, by contrast, rewarded

      them for avoiding exactly those commitments.


      Offsets can play a role in engaging developing countries, but only as one small element in a

      portfolio of strategies. We lay out two additional elements that should be included in an overall

      strategy for engaging developing countries on the problem of climate change. First, the U.S., in

      collaboration with other developed countries, should invest in a Climate Fund intended to finance

      critical changes in developing country policies that will lead to near-term reductions. Second, the U.S.

      should actively pursue a series of infrastructure deals with key developing countries with the aim of

      shifting their longer-term development trajectories in directions that are both consistent with their own

      interests but also produce large greenhouse gas emissions reductions.