Technical Brief: Kick-Starting the Clean Development Mechanism, Part 2
Extend the concept of supplementarity such that both the use and the generation of emission reductions are supplemental to domestic action
By Gareth Brydon Phillips
In an article dated of 24June 2013 entitled ‘Kick-starting the Clean Development Mechanism to resume investments”, my colleague Assaad W. Razzouk and I proposed the creation of a Net Mitigation Fee (NFee, also known as a mitigation share of proceeds) as a means of ensuring that the Clean Development Mechanism starts to contribute to host country mitigation as well as to the supply of emission reductions units for use as offsets in developed countries.
Discussions around the agreement to define and implement the Durban Platform have focused on the three new terms, one of which is called the New Market Mechanism or NMM. It is widely agreed that the NMM should learn from the experiences of the CDM and use some of its infrastructure. For example, we could use existing CDM baseline methodologies and standardized baselines to allocate allowances to facilities participating in a sectoral Emissions Trading Schemes under the NMM. If the allowances were held on a registry, and cancelled against annual verified emissions, the remaining allowances would be available for international transfer. This approach combines the best aspects of the CDM and Joint Implementation (JI) and, depending on the allocation process, would deliver real permanent and additional emission reductions.
However, the problem is how to ensure that the allocation process goes beyond “business as usual” and helps host countries deliver on net mitigation. If we leave it to individual countries to set their own levels of ambition then we cannot ensure that efforts will reflect common but differentiated responsibilities. On the other hand, if we try to set conservative allocation processes in a top down manner, we will be bogged down in literally hundreds of different baseline methodologies and there will be little or no transparency in the process i.e. it will not be easy to quantify, transparently, the contribution to net mitigation. The result will be that buying countries will inevitably start to pick and choose what they want to buy whilst selling countries jockey for the most favourable allocation process.
To address this issue, we propose an extension to the concept of “supplementarity”.
Supplementarity was introduced in Articles 6 (Joint implementation) and 17 (International Emissions Trading) of the Kyoto Protocol and was used to ensure that developed countries’ use of emission reduction units acquired from other countries was supplemental to domestic action i.e. countries should not simply buy their way into compliance with their caps but should act domestically to mitigate GHG emissions.
We now propose to extend the concept of supplementarity such that not only the use of emission reductions should be supplemental to domestic action, but also the generation of emission reductions should be supplemental to domestic action i.e. countries which produce emission reductions for international transfer from any mechanism should also use that mechanism to contribute to host country mitigation.
We would propose to implement this concept through a “Supplementarity Filter” which would operate in the same manner as the Net Mitigation Fee – in fact, the net mitigation fee applied to CDM projects could be rolled into the Supplementarity Filter to ensure that all mechanisms are treated equally and there are no incentives to use one mechanism over another.
The Supplementarity Filter would direct a proportion of issued emission reductions towards host country mitigation and a proportion to the market for international transfer. Guidelines on the definition of the filter would be issued by the Conference of Parties and elaborated and implemented in the meantime by the CDM Executive Board. The Supplementarity Filter would reflect common but differentiated responsibilities between developing countries such that, for example, advanced developing countries would direct a larger proportion of emission reductions to mitigation and smaller proportion to the market, whilst least developed countries would direct the vast majority of their emission reductions to the international markets. Host countries would have a degree of flexibility around the guidelines that would reflect host country policies such as feed in tariffs and E- policies; inclusion of activities in Nationally Appropriate Mitigation Actions (NAMAs) and location of activities in under-developed regions. Designated National Authorities (DNA) would be required to publish the details of their Supplementarity Filters on the UNFCCC website and apply and lock-down the Filter to projects or New Market Mechanism activities via the Host Country Letter of Approval.
There are some precedents: the CDM Executive Board oversees the Additionality Tool and the benchmark interest rates which determine whether or not projects are considered to be additional and therefore eligible to generate CERs in the first place. DNAs are asked to define the parameters for forests on the UNFCCC webpage which are then used in the design of afforestation and reforestation projects. DNAs have the authority to submit standardized baselines to the CDM EB for approval. The definition and application of Supplementarity Filter is consistent with these activities.
It has been proposed that other approaches such as discounting CERs could achieve the same result, however, the implications of Supplementarity Filter are much more far reaching. For example:
The CDM has suffered from a very uneven distribution of project activities and resulting investment – the UNEP RISOE CDM project pipeline lists investment in CDM projects at approx USD 500 billion (registered and under validation projects, July 2013 data); Only USD 17 billion of this is attributed to African projects. One of the principle reasons for this is that private sector investors find it increasingly easier to do business in advanced developing countries including Brazil, South Africa, China and India. The CDM is a one-size fits all mechanism but things have changed; investing in some developing countries is much easier than investing in others and funds flow as a result. There is a real danger that the New Market Mechanism will perpetuate this situation and once formed, selected advanced developing countries will once again dominate the picture. The Conference of the Parties need to take steps to level the playing field so that all developing countries can have a fair share of the international finance which these mechanisms can mobilize. We propose that the Supplementarity Filter can do just that.
Two more considerations:
– Post-Supplementarity Filter (PSF) units must be bankable in perpetuity so that the private sector can start to bank and speculate on their future value; and
– Buying nations must stop implementing unilateral qualitative restrictions on PSF units – they will have already met internationally defined qualitative criteria.
We believe that this is the kind of solution which the private sector needs to see in order to kick-start serious interest in this space once again.
