Amusing as it is, why did these environmental advocates choose this particular stunt? The CDM, or Clean Development Mechanism, has been operational since late 2004, and has supported a wide variety of projects to reduce greenhouse gas emissions. It does this by allowing certain energy or industrial projects in developing countries to receive payments in the form of carbon credits. These payments are intended to encourage projects that reduce greenhouse gas emissions below the levels expected without the project. In theory, these carbon credits serve as a payment to the project developers for reducing the externalities associated with emitting greenhouse gases. By many measures the CDM has been successful—encouraging over 3,600 projects to date and leading the creation of private sector expertise in developing and emerging economies. The CDM has also had its share of criticisms: enabling funds to flow primarily to countries that already enjoyed a good investment environment; awarding credits to greenhouse gas reductions considered unsustainable; and not contributing to local communities, to name a few.
The reason for the chanting at Durban, however, stems from last year’s decision in Cancun, which set the stage for the inclusion carbon capture and storage (CCS) as a valid project type within the CDM. CCS involves capturing carbon dioxide, mainly from the combustion of fossil fuels like coal or natural gas, and then piping it into underground geological reservoirs. But in some situations, CCS could be usefully combined with bioenergy to create a negative-emissions technology. For example, the production of bioenergy (ethanol and electricity) from sugarcane manufacture can be coupled with CCS to capture the stream of pure carbon dioxide emitted during sugar fermentation. Nevertheless, CCS is a new technology with high current costs and somewhat uncertain risks. Proponents of CCS argue that it has the potential to avoid the emission of billions of tones of CO2 into the atmosphere. Opponents argue that it is simply a costly way to enable the continued burning of bad fuels, and funds should be spent on greener technologies. Although negotiations in Cancun signaled that CCS should be allowed within CDM, opponents and skeptics are adding provisions into the draft guidelines to slow, or even stop, any CCS projects within the CDM architecture.
These technical guidelines have been in development over the past year. In September 2011, the U.N. Framework Convention on Climate Change (UNFCCC) Secretariat organized a workshop in Abu Dhabi on the modalities and procedures of including CCS in the CDM. This workshop was mandated in previous conferences to provide the Durban delegates a formal consideration of adopting CCS in the CDM. All the parties, UNFCCC accredited, and non-accredited NGOs were invited to submit their input on how to overcome the issues previously raised about CCS. Scientific and legal research on the viability of long term storage of CCS was discussed and, as a result, an approach called as ‘mutatis mutandis’ was adopted by the UNFCCC Secretariat. This approach maintains the current procedures for CCS under CDM, and only allows rules to change when required by the idiosyncrasies of CCS technology.
During the first week of negotiations in Durban, delegates have continued the discussions on technical guidelines, focusing on provisions for long term liability, and how such provisions would be implemented. Other discussions have focused on storage aspects of CCS, drawing on previous decisions in the Kyoto Protocol.
Now, the draft text indicates additional stringency in regulating CCS projects: first, a country may only host a CCS project under CDM if the host party has specific domestic legislation in place to govern CCS technology; and second, the country must submit an agreement letter to the UNFCCC Secretariat. Moreover, it is still unclear if the host party will need to accept the allocation of liability and the transfer of liability; the potential leakage of stored carbon dioxide or any other potential damage has been considered one of the most challenging subjects related to CCS regulation. It presents new challenges to CDM project activities or any mechanism that could generate carbon credits that are sold off immediately. The main question, therefore, is how to ensure that some entity retains liability for the risk of future problems. One of the challenging tasks is to approve projects only where appropriate liability management exists.
Particular attention has been focused on possible frameworks for addressing leakage (“non-permanence”). One proposal would establish a reserve of credits for all projects, and oblige project participants to use this reserve to offset any eventual net reversal of storage. However, ultimate responsibility for leakage is not yet agreed upon. One option calls for either the host country or the buyers of the credits to be the responsible; a second option assigns the responsibility to the host country; and a third option transfers responsibility to the developed country holding the credits.
If such a reserve account were created, the next question is how many credits would need to be set aside, which remains a hotly disputed issue. Three options are currently under discussion: some parties argue for 2 percent of the CERs issued to be reserved, others argue for 20 percent, while a third group did not fix a number and decided to determine the amount at a later date. It is our view that it is not convincingly demonstrated that a very low percentage for the reserve will be sufficient for every geological context and, accordingly, that if one reserve number is chosen it should be sufficient to cover every context.
Given these divergent perspectives on the need for stringency in CCS regulations, the negotiations on this issue have become particularly contentious. While many people would like to omit coal from a future energy system, it is a slight misrepresentation to imply that a new CDM project under CCS would be rewarding coal in the traditional sense. The costs of CCS are still quite high, and fossil generation with CCS does have a lower climate impact than fossil generation without CCS. Therefore, its inclusion in a mechanism to realize near-term reductions of emissions is not absurd. Nevertheless, as the chanting cheerleaders demonstrated, CCS is not as obvious a choice as other methods of clean energy. One can reasonably argue that the goal of CDM should not be simply to find abundant near-term emissions reductions, but to help the development and implementation of greener technologies. With such a goal, keeping CCS out of the CDM would be ideal. But with the current CDM architecture, careful regulation should ensure that it doesn’t enjoy an unfair advantage relative to other allowable project types.
Another major question that has not been fully addressed is the financing of CCS projects. Cost estimates range from $50-100 per ton of CO2 for current-generation CCS projects. Many of these projects enjoy substantial financial support from sources outside CDM—as the vast majority are proof-of-concept or demonstration projects designed to gain experience with this new suite of technologies. A few, such as Norway’s Sleipner, earn a financial return (e.g., via avoided carbon taxes). If CCS expands, there is a risk that many of the massive capital costs for these projects will be funded out of some external source—say an enthusiastic government. And, that once paid for, there will be incentive for the hosting firm to sell credits close to (low) marginal cost. This would potentially severely undercut the “fair” market prices for other credits, and greatly crimp the utility and viability of CDM as a technology and capacity-building tool. Negotiators should guarantee that this scenario cannot occur by ensuring that capital costs will be paid off at market or near-market rates.
Despite these risks, CCS should have the ability to tap into an appropriately designed market mechanism for three reasons. First, CCS is a technology that may be helpful in the transition away from a high-carbon energy system, and removing it completely could make hitting even minimum climate targets less likely. Second, from a political perspective, CCS is an essential technology to some important countries—namely, those with high coal reserves and those in the Persian Gulf. Engaging these blocs in international negotiations will be a key element to ensure global norms on climate protection reach all parts of the world — particularly parts that will both contribute to emissions, but can also be sources of innovative capital and financing for new technologies. Third, CCS is a low-carbon technology and currently, the CDM is a mechanism designed to encourage low-carbon technologies.
Nevertheless, it is important that CCS projects under CDM are not able to sell carbon credits substantially below average costs. This can be ensured by requiring proposed CCS projects to report capital cost data in the process of applying for CDM credits, and by confirming that credits would indeed be required to make the project financially viable. However, because this concept of “financial additionality” is subject to judgment and therefore open to disagreement, a less optimal solution may be necessary. As such, in the initial years of CCS operations under CDM, it is appropriate to impose some limits on the number of CCS-related credits that can be issued relative to other technologies. If experience with CCS projects indicates that they are being sold near market rates, such rules might be relaxed. But without careful reporting and initial limits on CCS credit supplies, it is possible that large quantities of low-cost credits, financed primarily by external funding, would undermine the market principle of this mechanism. The CDM should help the market identify low-cost emissions reduction opportunities, not just ones paid for by deep-pocketed funders.
The above piece is one of several that Nathan Hultman, an attendee at the 2011 United Nations Climate Change Conference in Durban, South Africa, has written about topics discussed at the conference. Topics include the low-emissions development and the Kyoto Protocols.