eCO2market’s resident world traveler and carbon analyst Alexis Poullain went to Durban to observe the COP17/CMP7 conference. Below is his Durban Platform review and assorted pictures from the event:
The agreement reached in Durban is, without contest, a political success. Nonetheless, it is
a dismal economic failure because the lack of investor visibility has neither been tackled nor even considered.
Indeed, genuine advances can be reported after COP17, with, above all, the extension of the Kyoto Protocol and the strengthening of CDM. Against the odds, Parties found an agreement to extend Kyoto Protocol in a new Commitment Period that begins in 2013 and expires at the end of 2017. Provided that each country manages to implement this new commitment on time, the institutional gap should be avoided. The European Union already has a compliance framework that binds industries until 2020, and thus will have to find a legal arrangement between 2018 and 2020.
Thus, Kyoto Protocol is extended, and CDM is reinforced as the preferred market tool to curb emissions and fight climate change. Indeed, new technologies will be accepted within the flexible mechanism, namely carbon capture and storage along with REDD projects. As shown in the opposite graph, 32 carbon capture projects are already in the UNFCCC pipeline, waiting for a methodology clarification that would enable them to issue credits. It had been agreed in Durban that 5% of the credits generated will have to be put in a reserve, and would be awarded if it is proved that no leak appeared 20 years after the beginning of the crediting period. REDD projects should also attract investors since the Parties have agreed to redesign a methodologies in order to finally issue credits.
In addition, red tape in CDM should be lessened, with the adoption of “materiality rule”: minor errors won’t be considered as necessarily invalidating, as it used to be.
And, to top it all off, the fact that market instruments were set aside reinforces CDM. Actually, JI perspectives are bleak due to the fact that not any agreements were found onhow to merge track 1 and track 2, a dynamic that could lead JI investors to redirect their investments toward CDM projects. On the same topic, no significant progress was recorded concerning alternative schemes (Japanese Bilateral Scheme or NAMA crediting).
Concerning the final agreement, having China, India, the USA and EU in the same boat can be considered a victory. Nonetheless, where the boat is going is not clear. A 36-hour marathon negotiation was not enough to conciliate opposite views, and the trade-off is a tribute to indecision. Countries are committing to a “new protocol, another legal instrument or an agreed outcome with legal force”. Whether this type of involvement is legally binding or not is at the discretion of countries…. On top of that, the only element agreed is to decide by 2015 on a plan to curb emissions by 2020.
A political agreement was found for sure, but there is no good news on the front of economic visibility. Investors were hoping that after Durban they would have a better vision of what would be the climate constraints supported by each country and each industry. As no emission cap has been decided, there is not any foreseeable sign of what will be the demand for carbon credits, who will be long or short, etc. That explains why the CER market was not bullish despite the agreement in Durban. Without any relevant political signal on what should be the volume of CO2 to be emitted, how can a market fix a significant price signal for carbon? Hopefully, in the beginning of 2012, several countries will announce their commitments. In particular, Europe will decide if it should adopt a 20 or 30% emission reduction target. That should be a silver lining in the currently clouded carbon markets.
See below for our images and videos from COP17 in Durban.