Durban - above and beyond all expectations
Rachel Mountain, from EcoSecurities, reflects on the unpredicted developments agreed in Durban and what they mean for the global carbon market
Post Christmas and the start of a new year is definitely a time for contemplation and reflection, and for those people who work in the environmental sphere, and particularly the carbon markets, 2011 was definitely poignant.
The year culminated with the United Nations Framework Convention on Climate Change’s (UNFCCC) international climate change negotiations in Durban and marked a dramatic turn of events in what already had been a pretty dynamic year.
From the perspective of the carbon market, and more specifically the Kyoto Protocol’s Clean Development Mechanism (CDM), the system for generating carbon credits had never performed as effectively and efficiently as it did during 2011. It helped to mitigate more than 320 million tones of CO2 and leveraging millions of dollars worth of climate finance in the process.
In addition to the success of the CDM in 2011 came the widely-reported economic slowdown in Europe and potential fears of a Eurozone implosion, the main impact of which was to reduce demand for carbon credits and allowances in the EU Emissions Trading Scheme (EU ETS) and depress carbon prices to some of the lowest levels seen in Phase II.
So with rhetoric in the run up to Durban being particularly pragmatic, if not pessimistic, many people were not expecting much to materialize from the international climate change conference. How wrong were we!
So what did Durban achieve for the climate, the carbon markets and the private sector?
The Durban Platform of Enhanced Action (DPEA) provides a roadmap for all countries to sign up to a deal to cut greenhouse gas (GHG) emissions from 2020. This covers all major emitters including; China, the US, India and the EU, however, no tangible targets were discussed and so the battle is still to be had over the depth of cuts.
The EU also agreed to a second commitment period under the Kyoto Protocol which removed any doubt about the continuation of the CDM and its credits in Phase III of the EU ETS. It is still unclear, however, as to the length of the second commitment period, as provisions were made for it to end either in 2017 or 2020. However, agreement to a second commitment period was critical in order to get agreement on the DPEA.
With regards to the CDM specifically, that a second commitment period has been agreed post 2012 is unequivocal. In addition, there were developments with regards to the introduction of the concept of materiality (something that had taken three years to get approved) alongside transparency, consistency of decisions and improvements in waiting times. Further development was also made around the increased use of standardised baselines and on the issue of suppressed demand for Least Developed Countries. Furthermore, after six years of trying, carbon capture and storage also made it in to the CDM.
New market mechanisms also saw movement, with negotiators agreeing language that will see various inputs from parties and stakeholders (including the private sector) as to how these mechanisms can be best designed to have the most impact from a climate change perspective.
Finally, progress was also seen with respect to the Green Climate Fund (GCF) – with the launch agreed in Durban. Although capitalisation of the fund was held over for discussion at the end of 2012, the various structures and institutions need to create the GCF were established and the role of the private sector as a contributor to the fund was confirmed – albeit lacking the necessary detail to really start and move anything forwards.
So, was Durban good or bad for the carbon markets and the investment community?
Well from a medium to long-term perspective, the outcomes were very good. They definitely reaffirmed the continued use of market mechanisms as an effective tool to mitigate climate change, as well as presenting a number of new opportunities for the investment community to get involved in, such as new market mechanisms and the GCF.
However on the more pragmatic side, little new effort with respect to cutting GHG emissions will begin until 2020 at the earliest. The discussions also didn’t really address any of the demand side issues which are currently affecting carbon prices.
In the short term, the carbon markets and the investment community will need to sit tight and weather the storm, but the sun is clearly shining out on the horizon.
Rachel Mountain is head of global marketing at carbon trading firm EcoSecurities