Transition pathways for the Clean Development Mechanism under Article 6 of the Paris Agreement. Options and implications for international negotiators

The ambitious targets under the Paris Agreement (PA) to keep global warming below 2°C and achieve a balance of emissions and sinks in the second half of the century require significant mitigation investments, already in the short term. However, the current willingness of governments to use low-cost options such as international carbon markets remains limited, and negotiations on the rules for the market mechanisms under Article 6 of the PA are dragging on. This is surprising given that the Clean Development Mechanism under the Kyoto Protocol functioned very well during the 2000s, mobilizing hundreds of billion USD for thousands of greenhouse gas mitigation projects in over 100 developing countries. Private investors in the CDM market feel “let down” by the sudden reduction of government demand for credits after 2011 which led to a fall of credit (CER) prices by 95%. While carbon pricing mechanisms (such as emission trading schemes or carbon taxes) are being implemented (or planned) in a large number of countries, in only a few of them these mechanisms are generating demand for CERs, as for instance Colombia, South Africa and South Korea. This CER demand is, however, lower than in the past, and subject to many restrictions regarding host countries, project types and eligible project developers. The CDM is the only currently available market mechanism under the UNFCCC that could be immediately used for NDC implementation and that is already operational while the new market mechanisms introduced by Article 6 will need several years to be fully operationalized. Thus, it is necessary to ensure a swift transition of the CDM to the PA in the short term, ideally already at COP 25 in Chile. Without some criteria for the transition, billions of CERs could flood the market in the near future, with very negative effects in terms of price and credibility. We therefore define a set of criteria for possible restriction of this transition, building on the key elements under discussion by international negotiators. Criteria include cutoff of the eligible CER vintage, according to the registration date of the activity, and exclusion of certain activity types or certain types of host countries. Through differentiated application of these criteria, we develop three pathways, ranging from full CDM transition to strict limitation. Under full transition, total CER volume could reach 15.6 billion until 2030. A 2013 registration cut-off date, coupled with exclusion of industrial gas and large hydro projects, would limit CER volume to 0.89 billion. A November 2016 registration cut-off and limitation to least developed countries (LDCs) and small island developing states (SIDS) would reduce the projected CER volume to just 0.13 billion. In case of a formal termination of the CDM, Article 6.2 would allow bilateral approaches that are based on existing CDM activities. Further qualitative criteria that could be considered are the eligibility of activities outside the NDC coverage, activities that are part of the unconditional part of the NDC, the applicability of standardized methodologies, the need to pass a new additionality test, and the contribution to sustainable development. We also shed light on possible key administrative requirements, such as a new letter of approval or the need for activity deregistration for the transition in order to assess the potential negative impacts these may have on the transition. The pathways’ impacts are tested on 4 specific case studies - two cookstove PoAs, one renewable energy project in an LDC and a coal power project - and provide useful insights into how specific activities can be affected by the different criteria in place. Particularly the treatment of registration cutoff for PoAs or the related CPAs would make a strong difference. Ideally, governments of large countries would start an initiative to acquire the accumulated CER surplus to allow an ambition increase of their second NDC to reduce the gap to a pathway consistent with the long-term ambition of the PA. This would require funding comparable to the first round of financing for the Green Climate Fund. Building on the successes of South Korea and Colombia, at the domestic level, governments should introduce carbon pricing mechanisms to incentivize mitigation investments, while allowing for offsetting through emission credits from international market mechanisms to reduce costs for the ambition increase