Last week the EU carbon price fell below €5 a tonne – a record low. This is the latest in the series of signals suggesting global emissions trading schemes are in trouble.
New markets are opening around the world, but their future requires strong policy signals from governments, which in turn can be a catalyst for investor certainty.
What could world leaders offer at the forthcoming World Economic Forum in Davos to rescue this vital but ailing part of the global climate framework?
As world leaders meet in Davos, they should make time to consider what they can do to rescue the collapsing global carbon market and one of its most useful tools – the Clean Development Mechanism (CDM) of the Kyoto Protocol.
The need for huge investment – $10 trillion to 2030 in the energy sector alone, according to the UN – to tackle climate change shouldn’t need to be spelled out.
Nor should the fact that the private sector will have to provide the bulk of such funds, and will have the major role in developing and delivering projects which will result in reduced greenhouse gas emissions. And surely it is unnecessary to reiterate why all of this is urgent.
In Copenhagen, Cancun and Durban, world leaders took far-reaching decisions on the need to limit GHG emissions, and supported a broad agenda of transition towards low carbon and resource efficient economies.
In Doha, they inched further towards the actions needed but have yet to commit to targets commensurate with the scale of emissions reductions required to avoid potentially unmanageable consequences.
As a result, the carbon price which is intended to incentivise private sector flows is languishing. It has collapsed from €12/tCO2e in 2010 to less than €0.40/tCO2e currently. At these levels few existing projects can survive and few if any new projects will be financeable. And inevitably, the market is losing capacity as firms and expertise depart for other more attractive investment opportunities.
Without early and vigorous action, this important mitigation tool risks being squandered, and with it will go some valuable co-benefits such as sustainable development, North-South technology transfer and broadening access to energy. The CDM Policy Dialogue Report says that the CDM alone has mobilised some $215 billion in investment while delivering 1 billion tonnes of emissions reduction.
What can be done?
Along with a programme of reforms to tackle the acknowledged shortcomings of the CDM mechanism (covering both operations and governance) the UN High Level Panel on the CDM Policy Dialogue urged governments to scale up their ambitions and set out some actions which could be taken meantime to tackle the imbalance of supply and demand.
Among these was the case for a fund to purchase CERs (emission reduction credits issued to projects under the mechanism).
I urge global leaders at Davos to voice support for such action. They should back calls for a fund or facility to help underpin the carbon market and within it the CDM. Such a facility could invest in CDM projects and programmes, with a view both to maintaining capacity and to continuing the provision of low cost mitigation, and could operate by purchasing and cancelling CERs.
Another possibility would be for the facility to purchase CERs on behalf of contributors who could in the future exercise the option to use them towards compliance with their own targets or commitments.
Who should pay?
Potentially, contributors to such a facility could include governments for whom domestic mitigation action might be more costly than investment through the global market, or sectors where the technology is not yet fully available to enable them to take effective large scale mitigation action – such as the aviation industry.
Why not allow concerned individuals to make contributions, perhaps with the incentive of a partial tax relief (perhaps one falling due in the future, such as inheritance tax) – thus spreading the financial hit on stretched government balance sheets?
Perhaps some existing or planned environmental finance facilities or international development assistance could be redirected into the facility, the rationale being that the gearing here would be extremely attractive – for a partial contribution to the cost of raising the carbon price would restore confidence sufficiently for private sector flows to restart – boosted also by the implication that carbon markets, and the validity of CERs, are here to stay.
And bear in mind too that the CDM itself is geared; one estimate suggests that each dollar of international carbon finance managed to leverage $10 of investment in climate mitigation in the last three years.
The detailed design of such a facility needs much further thought and work. But it needs to happen, and within the next year or so, if we are to retain the one mechanism which has mobilised significant private sector funds in the cause of identifying mitigation opportunities and taking advantage of them.
Without such action, the credibility and capacity built up around market mechanisms over the last several years will be lost – and will not easily be regained. That would be a huge blow to efforts to tackle climate change – and to the work under way to reform the CDM.
Joan Macnaughton is Vice Chair of the UN High Level Panel on the CDM and Executive Chair, World Energy Council Trilemma