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Doha Dispatches: Carbon market collapse creates another fine mess

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If ministers at the climate change talks want to understand the inadequacy of global efforts to date, they could choose to review the latest scientific assessments, or the spate of extreme weather events. Or, if they wanted a direct result of their inability to act decisively, they could take a look at the state of the carbon markets.

This week, the price for the Certified Emissions Reductions, the currency of the one truly international carbon market, the Clean Development Mechanism, fell to a record low of just €0.52. It has fallen 90 per cent in little over a year, and traders suggest it’s just a matter of time before it effectively falls to zero.

That might be a good thing for Australian emitters who can meet at least part of their liabilities at negligible cost, but the collapse of the market is bad for bankers and project developers, bad for the poorest countries that use it as finance to attract projects, build renewables, and reduce emissions, ultimately will be bad for emitters looking for cheap abatement, and pretty lousy for the planet.

There are numerous specific reasons why this has come to pass. The biggest, though, is the lack of ambition by global governments, who have over-promised (“we’ll limit global warming to 2°C”) and under-delivered (it’s heading for 6°C). A whole infrastructure built up with banking, trading, investment, verification and methodologies has been left high and dry, and is at risk of falling apart.

Ken Newcombe, an Australian who heads project developer C-Quest Capital, and who founded the first carbon fund which he managed for the World Bank, said participants were exiting the market in droves, leaving a huge knowledge gap that could be difficult to fill.

“With very few exceptions, investment banks, commercial banks, commodity based hedge funds and specialised carbon funds with exposure to the CDM have either closed shop and laid off their deal teams or appointed caretakers to manage portfolios of assets with residual value,” Newcombe told RenewEconomy.

“Those business still active in the CDM are the ‘walking dead’ of the carbon market,” he said. “They are living on deals done at higher prices years back and are living on borrowed time, if not borrowed money.”

A market worth saving?

A study prepared by Australian-based project developer Climate Bridge and released at the Doha climate change negotiations this week says the CDM has been an effective tool – generating more than 1 billion credits, underpinning more than $200 billion in projects completed, and another $250 billion in the pipeline.

It had also pioneered new technologies such as coal mine methane capture projects, fuel-efficient cooking stoves and solar-based water purification systems, as well as laid the foundation of the pilot emissions trading schemes in China and other emerging economies, and saved the developed world $3.6 billion in abatement costs (because they didn’t have to be done at home).

Now, Climate Bridge says, project owners are at risk of going bankrupt, hardly any new projects are being developed, and the trust from energy firms and entrepreneurs in the developing world that international finance mechanisms will deliver real, long-term funding in the future, is being eroded. And if the market collapses, other mechanisms will take too long to deal with the climate crisis.

“The CDM took 14 years to mature to the scale it is today after significant teething problems, particularly in the early years,” it said. If it was lost, any new institutions could take too long to be established, and too slow to tackle required emission reductions, “which requires drastic action now.”

Can ship-jumping nations have their cake and eat it too?

The collapse of the CDM has become one of the key points of friction at the Doha talks, not so much because of the collapse in the price of the mechanism, but over who should take part.

Several countries that have opted out of the Kyoto Protocol still want to access cheap credits in the market, particularly New Zealand and Japan. But many developing countries are insisting – as a matter of principle – that these “ship-jumpers” should not be allowed to have their cake and eat it too, and want to deprive them of access.

It’s a circular argument. Depriving no- Kyoto participants will reduce demand for credits, further eroding the price. Depriving them of access will likely result in countries such as New Zealand reacting by simply reigning in the ambition of its emissions reduction target, modest as it already is.

Australia is effectively sitting on the fence on the issue, expressing its in-principle support for allowing access to Kyoto carbon markets because it is good to create demand. But it will largely be unaffected, because it has signed up for the second commitment period. It just means that credits will be even cheaper if others are excluded, and Australian companies can buy cheaper abatement for the 12.5 per cent of their liabilities that they are allowed to access through the market.

Australia wants a market

But Australia has no interest in the collapse of a truly global market, because it will want one day to be a seller of ideas to generate credits, and not just a buyer. That much was made clear by Mark Dreyfus, the parliamentary secretary for climate change, when he made a demonstration about the impact of savanna burning projects in the Northern Territory.

It’s a methodology that Australia is keen to export overseas to similar geographic areas in South America, sub-Sahara Africa and parts of Asia, and to ramp up in its domestic market. He said Australia envisages projects like this across the world generating credits to be sold into carbon markets. At the moment, the only buyer is the voluntary market, although Australia has also created the Carbon Farming Initiative to allow these credits to be used in its domestic scheme.

The idea of savanna burning must be counter-intuitive to most people. The idea is to replicate traditional land management practices and encourage early season burning of savanna grasslands, rather than allowing the fuel to accumulate and result in fiercer, more damaging, and more heavily emitting, wildfires later in the season.

One project in west Arnhem Land has been going for five years, and has reduced emissions by around 20 per cent. According to the UN, some 10 per cent of global emissions are caused by wild-fires, and traditional land management practices have been abandoned in numerous countries. At the briefing, representatives of several countries in Africa and South America expressed interest in Australia’s methodology.

Broken promises, hard solutions

Back at the CDM, among the measures being considered to save the market – or at least prevent its total collapse while a new market is created under the new treaty planned to come into force from 2020 – include the establishment of a fund to soak up excess credits and give some traction to the market.

Newcombe says that increased sovereign buying could create a lifeline for high development impact CDM projects, and only a few hundred million dollars would be needed to be spent a year. He said CER prices need to be between $6.50 and $7 to ensure investment. He also suggested various mechanisms such as sovereign guarantee facilities that create floor prices in the market and pay the difference between spot at issuance and the guarantee, and to allow hedging of positions and on-selling of guarantees to leverage sovereign commitments. And he noted Australia’s decision to drop its allowance of CERs from 50 per cent to 12.5 per cent – a decision required of its decision to join the EU scheme – was also a serious blow.

The Project Developer Forum, which commissioned the report from Climate Bridge, also suggested a CDM Fund or reserve facility to purchase CERs from the existing facility. The most obvious solution, to increase demand, however, is for developed nations to adopt tougher emission caps. But that won’t happen anytime soon.

Matt Gray, an analyst at London-based Jeffries, dismissed the idea of artificial intervention. “Whether this buying will come from sovereigns (nations) – who cannot even agree on offset use post-KP – or institutional investors – who rightfully refuse to invest in lofty promises from politicians – the idea of a fund saving the CDM is beyond far-fetched,” Gray wrote.

“Sadly, those who invested in UN offset projects invested on two promises: (1) politicians would act to contain global warming below two degrees; and (2) offsetting will play a significant role in the international climate policy. Unfortunately, due to the great recession of 2008, these promises are broken.”

Finally, a rapprochement? 

Ministers have been standing up at plenary sessions these past two days giving set piece speeches about the importance of action, and giving very little evidence of actually doing so. But three key comments suggest that things are finally starting to move. The first two were recognition by both the US and China that they needed to do more.

US envoy Todd Stern, for the first time it seems, said explicitly that the US was prepared to discuss the issue of ““common but differentiated responsibilities”, which seeks to treat nations on the historical responsibility on emissions and their ability to act. It has long been a sticking point of climate change negotiations, and is being considered as a potentially significant breakthrough. China also said that it would make its “due contribution”, but said developed countries must do more.

The third piece in a potentially promising jigsaw puzzle came from UN secretary general Ban Ki-moon, who called for a summit in 2014 of country heads who thrash out emission pledges in a new treaty that must be agreed by 2015. This could a decisive move, putting leaders on the spot a full 12-15 months before a treaty must be put together, rather than counting on a last-minute train crash that derailed Copenhagen.

Barring last-minute hitches, this conference may actually achieve what it set out to do, which was to clean up the mess of the past and pave the way for a new attempt at agreement. Dreyfus told the Australian delegation at an alcohol free function that he expected a satisfactory outcome. Which is more than the attendees could expect from being invited to spend the evening sipping coca cola and orange squash.

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  • Alan Pears

    Maybe part of the solution is this:

    Poland and others are opposing stronger policies because they have a lot of ‘hot air’ permits they want to sell, to profit from. Why don’t EU and other countries buy up the excess of CERs at a very low price to cut the glut. Then Poland can sell its hot air at a better price while the total global quantity of permits is reduced. The side benefit of this is to increase CER prices for everyone, to stabilise abatement investment.

  • http://scef.org.uk Mike Haseler

    After 15years of no warming, even with the greatest green propaganda machine in the world, the carbon bubble was going to burst.

    The whole carbon market is based on the premise climate researchers had a sure-fire way to predict the climate and it was a safe bet that they were right.

    Their models have not worked. The proof of the pudding is in the eating. It doesn’t matter if 3000 of the best cooks in the world swear that it will taste just wonderful – if you taste it and it is foul – then it is foul.

    • suthnsun

      Mike, a good number of the last 15 years have been the warmest on record, and sub-records of every conceivable type are being broken every year in every continent. The Artic ice cap is going to entirely melt in Summer within the next few years – a disaster for the planet. If you have not noticed this, perhaps you could take a closer look at the facts.

      • Concerned

        Suthsun,”a good number of the last 15 years have been the warmest on record”
        I believe from my readings the average temperature has not increased in the last 15 years. If I am wrong please reference.
        Regards

      • Roy Everett

        I was recruited by UEA to help, in as small way, to perpetuate the Anthropogenic Global Warming Fraud. It was an obvious racket and its demise was inevitable, although, at eight to ten years of screaming, it took a long time to collapse.

    • Neil Talty

      Wow Mike! You mean Anthropogenic Climate Change is a myth? And the thousands of scientists who have spent their entire careers researching the link between carbon dioxide emissions and climate are all part of a global conspiracy to gain funding for research? PHEW! What a relief! Now I can go back to watching the X factor on my 65″ plasma with my 14Kw Air conditioner running flat out safe in the knowledge nothing humans ever do could possibly affect the environment. Thanks for your incredibly well researched and referenced comment. You’ve really taken a load off my mind!

  • suthnsun

    It sounds like all the participants in the CDM scheme should just agree to a mandatory ratcheting up of their commitments – then buy up the CERs for a song to meet their new commitments, and proceed from there. Keeping the mechanism going is a good idea, if the cost of the additional commitments is minimal, no harm can come of it can it?

  • Chris Fraser

    The CDM was rorted by dangerous climate gases. We should have stopped their entry into the market like we did with anti-ozone gases.

    http://www.climatespectator.com.au/commentary/how-labor-can-improve-carbon-pricing-scheme.

    When that is fixed (and after that is fixed) another way of boosting the value of CERs may be to make deeper legislated cuts into emissions.