Should the CDM stop funding large power projects?

The policy brief – Transitioning away from large-scale power projects: A simple and effective fix for the CDM? – builds on an analysis conducted by SEI-US senior scientists Michael Lazarus and Peter Erickson for the United Nations Framework Convention on Climate Change (UNFCCC) CDM Policy Dialogue, which was published in late October in the report Assessing the Impact of the CDM.

Lazarus and Erickson, together with report co-author Randall Spalding-Fecher, of Carbon Limits in Cape Town, South Africa, returned to the topic of large-scale power supply after seeing proposals for addressing the roughly 1.25 billion ton over-supply of Certified Emission Reductions (CERs) forecast through 2020, such as the CDM Policy Dialogue High Level Panel’s recommendation to create a fund to purchase surplus CERs.

“It occurred to us there could be a simpler and potentially more effective fix to the oversupply: cease issuance of CERs from large-scale power supply projects,” says Lazarus, who has actively supported the CDM and other market mechanisms for over a decade, including in the development of the methodology that underlies most of these power sector projects.

A major source of CERs
Lazarus and Erickson estimate that large power supply projects, such as coal, natural gas, wind, and hydro plants, could yield over 1.6 billion tons of CERs between 2013 and 2020. That is roughly two-thirds of the total 2.5 million CERs that the High Level Panel estimates will be generated in that period.

“Based on our research, we cannot say with confidence that CDM has been an instrumental factor for most large-scale power supply projects,” says Lazarus. Developing countries do urgently need new energy infrastructure to support livelihoods and economic growth, he and his co-authors stress; the CDM may just not the best way to finance it.

“There are many other options that are potentially more effective,” Erickson says. “For example, countries can support and advance nationally appropriate policies and measures such as renewable energy standards, feed-in tariffs, efficiency programs and standards, as well as domestic emission trading systems and carbon taxes, to promote new investment in low-carbon power supply.”

Multiple benefits, no extra cost
Unlike creating a new fund to purchase and cancel CERs, the authors note, transitioning away from large-scale power projects in the CDM would not require new sources of finance, and it would yield multiple benefits.

“While this may not be a very popular suggestion among the CDM community, transitioning away from these project types could not only address the existing over-supply but also improve the overall environmental integrity of the CDM,” Spalding-Fecher says.

Given the high share of large-scale power projects in the CDM pipeline and in many project developers’ portfolios, the transition would be challenging, the authors acknowledge – but it is feasible. The policy brief reviews several options that could be implemented either by CDM administrators (Executive Board or Meeting of the Parties) or through a coordinated effort among major buyer countries.

All would leave in play CERs that have already been issued, and could allow for continued issuance of CERs from registered projects through their current crediting periods. The future of the CDM will be on the agenda at the United Nations Climate Change Conference (COP18) in Doha, Qatar, next month, so this is a timely discussion, the authors note.

“The CDM Policy Dialogue’s High Level Panel suggested that some CDM project types may be ready to ‘graduate’ from the CDM,” Erickson says. “We agree, and believe that time has come for large power supply projects.”

Read the policy brief, Transitioning away from large-scale power projects: A simple and effective fix for the CDM? »

Read the report on which the brief is based, Assessing the Impact of the CDM »