The future of the UN’s Clean Development Mechanism offset program lies in Africa as the European Union’s sharpened focus shifts to least developed countries and away from projects in China, India and Brazil. But market players say the continent needs to take control of its own destiny in upcoming climate negotiations.
11 July 2013 | ABIDJAN| Ivory Coast | Africa has traditionally been overshadowed as a potential host of carbon offset projects under the Kyoto Protocol’s Clean Development Mechanism (CDM) program. Instead, project activity and investment have been focused on least-cost emission reductions in Asia and Latin America.
But the European Union recently instituted a ban on CDM offsets (CERs) from non-LDCs (least developed countries) that are registered post-2012, a move that has pushed some traditional CDM heavyweights out of the market. That leaves the door open for Africa, which is in a good position right now because most of the LDCs are located on the continent and because the price of CDM offsets could recover, says Marie-Claude Bourgie, Climate Change and Finance Expert for Quebec City-based consultancy and project developer ÉcoRessources.
“It’s a good idea to really take advantage of that position,” she said at the Africa Carbon Forum in Abidjan, Cí´te d’Ivoire last week. “We do believe that CDM has not reached its full potential in Africa.”
Of the 8,866 projects in the CDM pipeline, 81.3% of them are located in the Asia and Pacific region, followed by 13.5% in Latin America. In contrast, only 260, or 2.9%, of CDM projects are based in Africa, according to the latest data from the UNEP Risoe CDM/JI Pipeline Analysis and Database. There has, however, been a roughly 90% increase in CDM projects in Africa since 2011 – building from a small base, of course – amid progressive economic development, increased technical capacity and growing interest in the CDM.
“The common notion is that the CDM is not meant for Africa,” says Kurt Lonsway, African Development Bank’s Environment and Climate Change Division manager. “However, considering achievements in other parts of the world, including China, India and Latin America, it may be truer to say that Africa was not prepared for the CDM. It’s also clear that the so-called new market-based mechanisms whose design will be based on the CDM will be targeted especially for middle-income countries,” he says.
The Africa Carbon Forum took place against the backdrop of a struggling CDM market, with certified emissions reductions (CER) prices hovering around the $0.40/tCO2e mark. The primary market for offsets in the CDM was valued at nearly $1.05 billion in 2012 compared to $4.31 billion in 2011, according to Bloomberg New Energy Finance data reported in Forest Trends’ Ecosystem Marketplace’s State of the Voluntary Carbon Markets 2013 report.
“The current international market situation is less than desirable, but we do see some strong domestic market activity,” Lonsway says. “But our hope and expectations are that the carbon market will improve.”
Peer Stiansen, Chair of the CDM Executive Board, says he believes that CDM prices will rise again because the fundamentals mandate decisive action to address climate change. “I trust that countries in Africa and elsewhere do see the necessity to respond to climate change,” he says.
The participating countries will come to a legally binding agreement at COP21 in Paris in 2015, an agreement that will include the use of market mechanisms, he predicts, which will instigate a pricing rebound if the response is adequate.
“The prices are ridiculous (at) $0.40/tCO2e (ton of carbon dioxide equivalent), which proves that the market works unfortunately in a way,” Stiansen says. “Personally, I want to believe that prices will pick up. When? I don’t know. I think we can be quite confident that they will because we will have to respond to climate change.”
The CDM has “faced some hard knocks to investor confidence” at an unfortunate time because Africa was at an inflection point where a number of initiatives it was engaged in were starting to bear fruit and leading to growth in CDM investments on the continent, says Glenn Hodes, Senior Advisor, UNEP Risoe Centre. “To the extent CDM has a future, it’s very clear that that future is in Africa,” he says.
The interest being shown in the CDM in Africa is not misplaced because the mechanism has a great future, says John Kilani, Director, Sustainable Development Mechanisms, UNFCCC. “Africa has great potential in showing that CDM does indeed contribute to sustainable development,” he says.
Where’s the CDM demand?
The CDM is currently at a crossroads because the bottom has dropped out of the market, says Dirk Forrister, President and CEO of the International Emissions Trading Association (IETA). “Pricing is not very attractive right now and it’s hard to see exactly where the demand is going to come from,” he says.
But an encouraging sign came in the form of last week’s EU Parliament vote to approve the backloading amendment by a 344-311 margin, a first step at improving the European Union Emissions Trading System by allowing the altering of auction schedules, he says.
“It was a good, sizeable margin, but it was a lot harder to get that increase in interest and increase in ambition than many of us thought because of the challenges of the European economy, the challenges of exactly what are other countries doing, the realization that the international policy community is on a negotiating track that won’t settle all of this until 2015,” he says. “It really makes you wonder exactly how the market is going to meander through the next couple of years, unless it does get a burst of energy from some new places.”
“If the international policy community is serious about limiting warming to two degrees and if they’re serious about holding atmospheric concentrations in that 450 parts per million range, then you’re going to need a revitalized CDM, you’re going to need a new market mechanism that works for more advanced economies more efficiently than what we’ve been utilizing and you’re going to need a system of linked emissions trading markets,” Forrister continues.
Demand could increase as the European economies rebound and industrial and energy production rises, Forrister says. A survey of IETA members released in May found that they expected the average price between now and 2020 to be about €10/t (US $13)for allowances and €5/t (US $6) for CERs in anticipation of additional demand. Europe has also been a leader in terms of national programs purchasing CDM offsets and that type of activity could rebound again as the European economies recover. “I think sovereign purchases are still ones that could matter,” he says. “It’s obviously going to be tempered by government budgets. Many of those are under stress and strain right now, but still I think it’s an area to keep an eye on.”
In terms of new demand, new projects in LDCs in Africa still have a home in the EU market whereas projects from other jurisdictions that have not already registered are “kind of in trouble,” Forrister says. “They need a new market mechanism, I suspect, to meet their future needs,” he says. “That side is not clear. CDM is clear so there may be one ray of hope there that (Africa) can take advantage of.”
In addition, the Australian compliance market can be a source of new demand for CDM credits, Forrister says. Australian suppliers transacted 90% of Oceania’s offset volume in 2012, partly in anticipation of Australia’s $23/tCO2e federal fixed price carbon scheme, which launched in July 2012 and will transition to a market-set price after three years, according to the Ecosystem Marketplace report. But new Prime Minister Kevin Rudd is considering potential changes to the system, including a quicker shift to an emissions trading scheme from the current system.
The voluntary carbon markets grew last year and can be a source of new demand as companies try to show leadership in corporate social responsibility, Forrister says. In 2012, voluntary actors contracted 101 million tonnes of carbon offsets (MtCO2e) globally – 4% more than in 2011, according to the Ecosystem Marketplace report.
The primary voluntary emissions reductions market was valued at $184 million in 2012, about 18% of the size of the primary CER market, and only half that value was relevant to CDM developers, according to the report. “It is not large enough to absorb all of the CDM credits, but it’s an area where projects that have particularly attractive side benefits can often find a home,” he says.
In Africa specifically, offsets benefitted from intensifying buyer interest in supporting projects with strong additional benefits to the region’s ecology and communities, according to the report. In 2012, African project offset transactions were valued at $66 million as the average price for the region’s record activity (8 MtCO2e transacted) rose 6% to $8.30/tCO2e.
The World Bank’s Partnership for Market Readiness (PMR) program is particularly encouraging for IETA members, with the PMR assisting a number of countries interested in and exploring building emissions markets with the technical capacity to do so. “That may ultimately produce additional demand for CDM credits, but I think particularly for the larger, more advanced economies, that program is of vital importance in helping us understand what new markets are going to look like in the future,” Forrister says.
Controlling your own destiny
But Africa must take control over its own destiny when it comes to the negotiations on a new international climate agreement, says Andrei Marcu, Senior Advisor at the Center for European Policy Studies and Advisor to Poland, which is hosting the UN climate negotiations this year.
“I think it’s important that Africa is ensured that it has access to any mechanism it wants to use,” he says. “What mechanism you use for whatever contribution African countries are going to make to the 2020 agreement is going to have to be the choice of African countries. I don’t think they should be imposed on you and I don’t think you should be limited in your choice.”
African countries should negotiate in a bloc to ensure that its collective voice is heard, Bourgie says.
“We encourage African countries to participate in the negotiations,” she says. “Often we see that countries don’t step up to speak during the negotiations. I think it’s a good platform for Africa to have a voice.”
The CDM currently offers very limited access to markets, Marcu notes. In Africa, there are enough LDCs that will continue to have access to the European market, but at current CER prices, “that is not a great price that you get for your natural resources.” African countries will have to ensure they have access to more markets, including those not necessarily inside the Kyoto Protocol, he says.
Africa will have to make sure there will be an international crediting mechanism, whether a continuation of the CDM or a successor to the CDM/JI, that this mechanism is widely available to African countries – unlike the current EU ETS, which is not accessible throughout Africa – and that it is competitive to other mechanisms that are emerging around the world, Marcu says. The mechanism must also provide an incentive to the host country, perhaps in the form of a portion of funds that could be directed to adaptation initiatives, he says.
“Africa is not indifferent to this framework,” Marcu says. “It is not something for a bunch of people who sit in Bonn or in Brussels. It is important for you.”
The new market mechanism will most likely build on the CDM so Africa should leverage its existing infrastructure and engage in its own analysis to determine which sectors offer the best reduction potential so that its countries know where to focus when the markets come into play, Bourgie says.
“It’s a good idea to keep looking into developing more CDM projects,” she advises.