Trends of the Clean Development Mechanism and Japan’s Approach
In 1997 when the Third Conference of Parties to the U.N. Framework Convention on Climate Change (COP3) was held in Kyoto, the Clean Development Mechanism (CDM) was called a great surprise because advanced countries supported the Greenhouse-gas Reduction Projects of developing countries and in return for it, emissions reductions of the developing countries could be gained in the form of a credit and be utilized as targets achieved by the developed counties’ own. This paper will discuss the present conditions of this CDM, in particular supply, demand and prices of credits, kinds of projects, and approaches of the Japanese Government and Japanese companies. Problems and evaluation of the system are described as well.
Supply and Demand of Credit
As of October, 2008, more than one thousand CDM items have already passed the examination of the United Nations and been registered. It is predicted that the amount of credit issues will exceed 12 billion tons of CO2 by 2012. Furthermore, it is likely that both the number of potential items certain to be registered, and new credit issues will be more than twice as compared with those in 2008.
The general view is that, until about 2006 before item development and United Nations registration began in earnest, supply exceeded demand wholly concerning the Kyoto Credit. At the same time Certified Emission Reduction (CER) supply from CDM become considerably smaller than the amount demanded. Afterwards, the number of the CDM item registrations increased greatly in 2007 combined with the fact that the U.S.A. and Canada were no longer carbon credit buyers, it was widely recognized that the CER supply would not be as little as assumed at first.
However, in 2008, the severity of the examination by the CDM Executive Board resulted in a decrease in the CER supply. Therefore, it is very difficult to predict the final supply and demand relationship in 2012 or 2013 when the Kyoto Protocol’s first commitment period will end.
As of 2005 when it became possible for CDM projects to be registered, CERs were traded at a range of 4 - 8US$/t-CO2, while the European Union Allowances (EUA), credits that were traded in EU ETS (The EU Emissions Trading Scheme), stood at more than 20 US$/t-CO2. Recently, this divergence has been getting smaller and the CER price itself is rising. As of October, 2008, according to the marketers, the prices of risk-free credits for CER are traded at 20 - 30US$/t-CO2.
The recent trend is toward a lower price as the supply has expanded in 2008. However, the price is rising again because the examination by the CDM board of directors became severe in the latter half of 2008 as stated above. The CER price, however, is likely to plummet if Russia and the Middle and Eastern European countries that have many surplus shares of assigned amount units (AAU) sell them on the market because of an easy reduction target that was imposed by the Kyoto Protocol (Fig. 1)
Kinds of projects
About 2005 when the CDM project started to be registered, the total investment costs for things such as Freon destruction or methane recovery were small and there were many projects which had a large decrease in emissions. “Recently, however, as these simple and cheap measures are exhausted the focus has turned to energy saving and renewable energy projects. For example, from the latter half of 2007, small waterpower dam items have increased rapidly. On the other hand, there are very few items concerning, carbon sink projects such as planting or forest management because the methodology has not yet been established.
Since Japan did not have a compulsory domestic emissions trading scheme, the incentive that companies purchase credits positively from foreign countries was smaller than for EU companies. However, purchases by the Japanese government started in 2007 and enforcement of the Emissions Trading Scheme will start in October, 2008 so participation will begin to increase. Some companies participating in the Federation of Economic Organizations (Keidanren) have difficulties in accomplishing the Keidanren Voluntary Action Plan. It is assumed that both the government and private companies (especially, steelmakers and electric power companies) will become the positive buyers in the future. Eventually it is expected that the purchase volume of industries such as mainly transport and manufacturing will reach at least 200-300 million tons-CO2. These 200-300 million tons-CO2 as unattained volume of target should be offered to the government at no cost.
However, what the market is currently concerned with is the possibility of a credit plummet, starting from Japan. Namely, it is a scenario where the Japanese Government and Japanese companies purchase AAUs at a low price and sell a large quantity of the CERs they own in the market. (This is called “filtering of credit”.)
Generally, both Japan and the whole global community are still strongly allergic to AAUs, called “hot air”. Therefore, it seems that the probability that such a scenario will occur is likely.
Evaluation as a system
Some of the developed countries are dissatisfied with the CDM because it is a system that has only carrots and no sticks. On the other hand, developing countries that have few CDM items insist that the system is unfair. There is also a criticism that few items contribute to sustainable development.
The system has many problems as mentioned above, however, a system that satisfies all the people concerned is impossible. (In both the developing countries which are sellers and the developed countries which are buyers, they have their own opinions and viewpoints.) In other words, it is needed to be recognized that there are no perfect projects and systems in the first place.
The author thinks that this system is an epoch-making structure and a mechanism in which technology and funds can be transferred., Because in many previous cases the ‘so called’ mechanisms for the transfer of technology and funds, were only the slogans of developed countries, and were established simply as half-duty systems for developed countries to achieve the Kyoto Protocol target. The international community has finally given a secure method of evaluation for the CDM, and many people concerned anticipate that this CDM system will be continued in one way or another even after 2012.
The codicil: Even if the expected CER supply is equivalent to the total demand amount, CERs may not be sold immediately to the market. There are some demands from Canada and the U.S.A. for credits for voluntary carbon offsets of individuals and companies. (The demand from Japan is likely to be larger.) Furthermore, it is thought that the supply side forms a substantial cartel and inflates the price. In addition, this figure made by the Ministry of Economy, Trade and Industry has a strategic meaning that dispatches signals to the market, as well.
Reference: Ministry of Economy, Trade and Industry, Government of Japan “Supply and Demand of Kyoto Mechanism”, Dec. 2007