UN crackdown to force up price of carbon credits

Attempts by the UN to restore confidence in its beleaguered Clean Development Mechanism (CDM) carbon offsetting scheme will drive up the cost of carbon credits, according to a new report released today.

The study from analyst firm Point Carbon estimates that new rules from the CDM Executive Board requiring that projects entering the scheme provide clearer evidence that they are "additional ", and would only have gone ahead as a result of revenue raised through the sale of CDM-approved Carbon Emission Reduction (CER) credits will have a major impact on the supply of CERs.

Last month, Point Carbon said that bottlenecks in the approval process for new CDM projects had led it to reduce its estimate on the supply of CERs through to 2012 by 92 million tonnes, but now it has again revised the estimate downwards by a further 30 million tonnes as a result of the UN's crackdown on " non-additional" projects. The company now expects just 1.9 gigatonnes worth of CERs to be issued by the end of 2012.

Report author Kjetil Røine said that the drop off in the expected supply of credits should lead to an increase in the CERs in the long term. However, he warned that in the shorter term, prices for credits from those projects now at risk of not being granted CDM-approval are likely to fall "as the risk of non-delivery has increased".

Under the new rules, projects that were started before they submitted an official Project Design Document to the UN Framework Convention on Climate Change (UNFCCC) will now have to provide more extensive proof that there was " serious consideration" given to attaining CDM approval at an early stage of the project activity.

The changes follow a wave of reports claiming that some carbon reduction projects had only applied for approval to issue CERs after the projects are al ready up and running, indicating that the initiatives would have gone ahead any way and as such they have not delivered any additional carbon reductions in return for the CER credits they sell.

An investigation last year by the WWF concluded that as many as a fifth of CERs were flawed in this way and as a result a large number of industrial projects in the developing world were generating windfall profits through the scheme. It was followed by a similar study from environmental group International Rivers, which claimed that many of the hydro electric dam projects approved by the UN as CDM projects would have gone ahead without the income guaranteed by CERs.

Røine said that a significant number of projects were likely to be affected by the crackdown. “Some projects have general additionality problems, which mean they were planned for reasons other than CDM," he explained. "Many of these were built primarily for commercial reasons and should, according to the rules set by the Executive Board, not be accepted as CDM projects that can generate CERs."

He argued that in the changes should help build greater confidence in the global carbon market. "Some [critics] were claiming that registering a project under the CDM had become a means for some [projects] to print money, in the shape of CERs," he said. "By ensuring a stricter practice on the additionality rule, it should be harder for detractors of the CDM to claim this, making the market more robust."