Carbon markets after Durban : Oscar Reyes


The carbon market is in crisis, with offset prices crashing to all-time lows and carbon branded the ‘world’s worst performing commodity’. Yet, as traders withdraw from the market, climate negotiators at COP17 have agreed to expand the scope of the Clean Development Mechanism (CDM) and create ‘new market mechanisms’. This article examines the record of the CDM and the Durban decision to keep it alive in the absence of binding emissions reduction targets. It then examines the reasons behind the creation of ‘new market mechanisms’, arguing that these are locked into international negotiations by a mix of interest, ideology and institutional inertia, as well as being consistent with broader attempts to redefine the international climate regime.


International carbon trading stood on the brink of collapse at the United Nations Climate Change Conference (COP17). On the eve of the Durban talks, the markets crashed to their lowest ever level, with a massive oversupply of emissions allowances exacerbated by a worsening financial crisis in Europe, which drives the majority of the global trade in carbon. Alongside this decline in prices, investor interest had also dried up in the Clean Development Mechanism (CDM), the main UN-administered carbon offsetting scheme. In 2011 it was reported that the number of credits generated by new CDM projects had declined for a fourth successive year, with the scheme shrinking to levels not seen since the Kyoto Protocol came into force in 2005 (World Bank, 2011: 9).

At COP17 itself, however, the fact that carbon had slipped to the status of the ‘world’s worst performing commodity’ did little to deter policy-makers from deciding on various ways to further expand the carbon market (Wynn and Chestney, 2011). This paper sets out the context for these decisions and their likely impact, and is arranged in five parts.

First, it offers a brief account of the record of the CDM to date, finding that it has exacerbated inequalities in how the responsibility for addressing greenhouse gases are distributed globally while at the same time failing to reduce emissions. Second, it surveys the outcomes of COP17 in relation to existing carbon markets. The decision to keep the Kyoto Protocol alive, but in a zombie-like existence without confirmed emissions reductions targets, means that the CDM can continue. It also opened the possibility for expanding that scheme, notably through an agreement to make Carbon Capture and Storage (CCS) projects eligible for offset credits.

Progress on the creation of ‘new market-based mechanisms’ in Durban is of potentially greater long-term significance and forms the basis of the third section of this paper. It outlines plans for the creation of a new mechanism under the UNFCCC, which would allow for the continuation of the markets even if (as most industrialised countries are demanding) the Kyoto Protocol is formally superseded by any agreement resulting from the Durban Platform for Enhanced Action, the new round of negotiations for a post- 2020 treaty that was the major outcome of COP17 (UNFCCC, 2011a). If Japan, New Zealand and the USA get their way, this new mechanism would be joined by a series of bilaterally agreed carbon markets whose existence and rules (except for reporting purposes) are unchecked by the UN process. In short, the Durban agreements offer two clear paths to how the architecture of international carbon markets is likely to be redrawn in the coming years.

Fourth, the paper looks at projections on the supply of and demand for emissions allowances from existing and planned carbon market mechanisms. The evidence clearly shows that there is an oversupply of emissions allowances and that measures to expand carbon markets would worsen this problem – keeping carbon prices low for the medium to long term and so undermining the purported rationale of the scheme.

In the fifth and final section, an analysis is offered of the apparent disjunction between the Durban outcomes and the collapsing carbon market. It argues that the development of ‘new market mechanisms’ remains locked into international negotiations by a mix of interest, ideology and institutional inertia. The emergence of bilateral market mechanisms is also shown to be consistent with broader attempts to redefine the international climate regime away from globally binding targets and towards a voluntary ‘pledge and review’ system.

The CDM in perspective: unequal and ineffective

The Durban conference was billed as make or break time for the Kyoto Protocol, currently the only legally-binding international treaty on greenhouse gas emissions. That treaty, signed in 1997, set reduction targets for industrialised countries, while at the same time creating carbon markets that offered these countries an escape hatch from domestic action to reduce emissions through the creation of a system of carbon offsetting (principally through the CDM). This arrangement places inequality at the heart of the international climate regime, since it allows industrialised countries to avoid making their fair share of emissions reductions.

There are two further, damaging distributional effects. First, the CDM is designed to make the cheapest cuts in emissions first, rather than those that are most socially just or environmentally effective. This has led to a series of well documented inequalities and, in some cases, human rights abuses. In one notorious recent example, a project developer in Honduras is reported to have killed 23 farmers who tried to recover land which they say was illegally sold to a palm oil plantation that was seeking to join the CDM project (Neslen, 2011). These concerns were brought to the CDM Executive Board, which decides on whether to register projects, but no action was taken on the grounds that the issues had not been raised by the time of the ‘stakeholder consultation’, which took place three years before the ‘Aguan Biogas’ project was eventually registered. With such weak and poorly applied rules, it is perhaps unsurprising that no project has ever been rejected on the grounds of human rights violations.

Second, the global distribution of offset projects under the CDM is highly skewed towards more industrialised developing countries. As of October 2011, 45 per cent of projects (generating 57 per cent of credits) were in China, compared to 0.9 per cent of projects (and 0.005 per cent of credits issued) in sub-Saharan Africa (excluding South Africa) (UNEP Risoe, 2011). The imbalances are mainly explained by economies of scale favouring large industries and power stations and the fact that poorer countries already tend to have low emissions levels, and are a problem inherent to leaving the market to decide the priorities and direction of climate financing.

The record of the CDM in terms of its effect on greenhouse gas emissions is similarly woeful. Offsetting via the CDM was designed to offer industrialised countries (and companies based in them) greater flexibility in meeting their new commitments, while theoretically keeping the same net benefit. As the World Bank puts it, ‘greenhouse gases mix uniformly in the atmosphere, which makes it possible to reduce carbon emissions at any point on Earth and have the same effect’ (World Bank, 2005: 5). An emissions reduction in one place came to be viewed as ‘equivalent’ to, and thus exchangeable with, a cut or a compensatory measure elsewhere.

As should be clear from this description, the system of offsetting does not actually reduce emissions, but merely moves reductions to where it is cheapest to make them, which normally means a shift from Northern to Southern countries. But even the accounting firms, financial analysts, brokers and carbon consultants involved in devising these projects often admit privately that no ways exist to demonstrate that it is carbon finance that makes the project possible (Lohmann, 2005). Researcher Dan Welch sums up the difficulty: ‘Offsets are an imaginary commodity created by deducting what you hope happens from what you guess would have happened’ (Welch, 2007).

Since carbon offsets replace a requirement to verify emissions reductions in one location with a set of stories about what would have happened in an imagined future elsewhere, the net result tends to be an increase in greenhouse gas emissions. It has been shown, for example, that projects claiming to destroy refrigerant gases (HFC-23) have actually encouraged more of these gases to be produced, only to then destroy them again and accrue the profit from the surplus credits (Schneider, 2011). HFC-23 projects account for around half of the CDM credits issued to date.

A recently leaked US cable reported from a meeting in Delhi that ‘all interlocutors conceded that all Indian projects fail to meet the additionality in investment criteria and none should qualify for carbon credits’ (US Consulate Mumbai, 2008). These interlocutors included the Chair of the national CDM authority, as well as some of the country’s largest project developers and ‘verifiers’ (private consultants who are meant to check these claims).

The CDM has also been accused of locking in fossil fuel dependency, with a large and growing number of offset credits being granted for building coal-fired power stations on the grounds that these would pollute at a slightly slower rate than those they are replacing. For example, just five ‘supercritical’ coal plants registered under the CDM could receive over seven times the number of credits issued across the whole of Africa (based on October 2011 figures). Coal mines, oil fields and refineries, Liquified Natural Gas (LNG) production and gas power stations are also major beneficiaries of a scheme that locks in fossil-fuel dependency.

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