EU wants talks that could end new CER supply

The EU has attempted to start negotiations to shut down the UN's clean development mechanism (CDM), a move that could cut off the supply of new certified emissions reduction (CER) credits entering the market.

EU negotiators proposed starting talks on closing the CDM during the latest round of UN climate negotiations in Bonn, Germany, which concluded last week.

Negotiators from other countries opposed the move. The talks in Bonn were about the UN's Paris climate agreement. But the CDM was set up under the Kyoto protocol, an older UN climate treaty, and some parties argued that discussions to end the CDM should take place in negotiations on Kyoto, not Paris.

The CDM is a system that allows emissions-reducing projects to generate and sell CER credits. The Paris agreement will set up a new sustainable development mechanism (SDM) to replace the CDM. But negotiators have not yet decided if CDM projects will be able to take part in the new system.

If the CDM is closed down, and its projects cannot transition to the new system, this could cut off the flow of new CER supply.

The CDM cannot continue to operate beyond the end of the Kyoto protocol's second commitment period (2013-20), the EU said at the end of the Bonn talks.

"The time has now come to consider winding it up," it said.

Project transition

Some countries want CDM projects to be transferred to the new mechanism, so they can keep issuing emissions reduction credits. But negotiators have not decided if projects registered under the new SDM will be able to issue CERs, or if they will produce another type of credit.

If projects issue a new type of credit under the new mechanism, then no fresh CER supply would enter the market after the CDM was shut down.

"If the CDM closes down then that is the end of CERs. Even if the projects are transitioned, they would not be issuing CERs," non-governmental organisation Carbon Market Watch policy officer Gilles Dufrasne said.

UN negotiators are hoping to reach a decision on these issues at the UN climate summit (Cop 25) in Santiago, Chile, in December. Parties to the Kyoto protocol will also hold talks at Cop 25.

CDM problems

The transition from the CDM to the SDM has become a politically charged issue in the UN talks. The CDM has been clouded by problems, and negotiators are keen to avoid repeating past mistakes when setting up the new mechanism.

Most large carbon markets, including the EU's, have restricted the use of CDM credits for compliance, partly because of concerns over the environmental integrity of credit-issuing projects.

As a result, CER demand is very low and the market is heavily oversupplied. A CER credit currently trades for around €0.20/t of CO2 equivalent.

Even if the CDM is closed down, "the existing surplus [of CER credits] could linger on for a while without additional measures", Dufrasne said. Environmental groups have warned that CER supply could swell to 4.6bn credits by 2020.

Given the low price of the credits, some CDM projects would be likely to continue cutting CO2 even if they stopped selling CERs. Critics of the system say that buying CERs from these projects does not support "additional" emissions cuts.

"It is important to be blunt here — the CDM delivered investment, but it did not work for everyone, particularly in terms of additionality, distribution and sustained demand," EU climate commissioner Miguel Arias Canete said last month.