Market remedy to climate change stalls

The world’s biggest source of private sector investment to fight climate change in the developing world has stalled pending complex global climate talks and uncertain demand.

The $13-billion trade in carbon offsets has also come under withering attack over profiteering and scam projects to cut greenhouse gas emissions.

Carbon offsets allow people and businesses to pay others to cut emissions of planet-warming gases on their behalf, and is meant to cut the cost of fighting climate change.

New UN data shows in the past three months UN approvers registered a third fewer projects compared to the same period last year, under a Kyoto Protocol scheme. New project applications, for example backing wind power or energy efficiency, hit a peak last July.

“We have to continue to invest in it and that means more hard work on the design as well as the operation of the system, what it doesn’t mean is giving up on it,” said James Cameron, vice-chairperson at Climate Change Capital, which specialises in climate-friendly investments.

Offsets have become a major plank of European Union climate policy, allowing polluters to meet limits on greenhouse gases by funding emissions cuts in developing nations such as China and India, under Kyoto’s Clean Development Mechanism (CDM).

But EU officials say such imports will in future depend on similar compatibility with United States climate targets under a new administration, amid much US scepticism.

That has added to uncertainty over whether offsets have a place in the global fight against climate change, under UN rules slated for agreement next year and to come into force in 2013.

“This means a project has to pay for itself and turn a profit by 2012 to be worth doing at all,” said Miles Austin, at project developers EcoSecurities.

Media criticism has focused on carbon deals which have earned speculators 10 times or more their investment, and on claims for emissions cuts from projects which were already profitable.

A report for WWF earlier this month said that wind and hydropower in China—the bulk of new Kyoto projects there—were profitable anyway, making it inconclusive whether offsets were driving emissions cuts. But it identified more subtle benefits such as improving transparency for foreign investors.

“We’ve got to believe we have enough wit and ingenuity to come up with something better,” said Patrick McCully, director at the NGO International Rivers, advocating non-market approaches such as a multilateral climate change fund.

The criticism has resonated with policymakers, helping brake the market. UN officials are poring over project plans more carefully, industry experts say.

“[There] has been a flight to quality, the rules have gotten stricter, leading to a reduction in eligible projects,” said James Graham, commercial director at project developer Camco, referring to increased UN scrutiny.

Meanwhile the EU has cut offsetting within its emissions trading scheme (ETS), which sets carbon caps on industry.

“We’d rather the CDM wasn’t a weak link. There are public concerns, having an impact on the EU ETS as a whole,” said a European Commission official who declined to be named.

In January the EU Commission proposed to freeze offset supply from 2013 to 2020, and last month a key EU lawmaker proposed to allow only “gold standard” projects, in a debate expected to end in a deal in December.

A broader European concern is to link its emissions trading scheme with expected US and Japanese initiatives which may launch after 2010, to level industry costs.

But to link they must have similar rules, including the use of offsets which are the butt of some US criticism partly because they transfer wealth to major developing economies.

“This is one of the issues which can be critical in making the schemes linkable,” said a second EU official.

A future US climate Bill would likely allow limited intake of international offsets, said Vicki Arroyo, director of policy analysis at the Pew Centre on Climate Change, a US think tank.

But Europe isn’t convinced. “We’re seeing a negative attitude towards CDM in the US,” said the first EU official, adding that made a tighter EU approach preferable pending more clarity on US legislation.

On the upside, a new climate deal agreed next year could boost trade again. Tropical countries, for example, want to sell emissions cuts equivalent to the carbon locked up in their threatened forests, by avoiding deforestation.

The EU is working on an approach where developing countries can monetise a certain fraction of their extra emissions cuts, although not all of these as at present. - Reuters

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