Emission reductions are a major fixture in the lexicon of the climate change industry. Many of today’s climate change specialists cut their teeth on the Clean Development Mechanism (CDM) and early forays into climate markets on the back of Certified Emission Reductions or Voluntary / Verified Emission Reductions. In fact, emission reductions are so ingrained in our consciousness that it has escaped our attention that the very concept should cease to exist under a post 2020 climate regime.

Emission reductions are determined by subtracting project emissions from a baseline. The baseline is built from a series of arguments to identify the technology that would provide the service in the absence of the emission reduction markets. Central to this assumption is the fact that Non-Annex 1 Governments, who hosted CDM projects, had no obligations to reduce emissions under the Kyoto Protocol. This situation was further emphasized by the CDM Executive Board who ruled that in situations where Governments implemented policies which lead to reductions in emissions (so-called E- policies) after the year 2000, project developers could ignore these policies in the construction of the baseline (CDM EB 22). This allowed project developers to argue that the baseline was a continuation of current practice, which for example, was often fossil-fueled electricity generation.

The fundamental difference between the Kyoto Protocol and the Durban Platform for Enhanced Action which is the driving force behind the CoP 21 negotiations, is that ALL PARTIES will take on some form of binding commitment to reduce emissions. Developing countries, like developed countries, must start to develop and implement low carbon policies and measures. In Kyoto parlance, Non-Annex 1 countries are now Annex 1 and therefore it is no longer credible to assume that the baseline can be determined by current practice.

This has significant implications for how Governments and International Financial Institutions (IFIs) may need to approach their climate commitments going forward:

  • A CDM-style market mechanism is no longer required. A Joint Implementation style mechanism will be sufficient with countries counting exported emission rights as emissions in their national inventory, and imports as deductions. Whether host governments choose to award the right to export units toadditional emission reducing projects or use them to subsidize social projects is entirely up to them.
  • IFIs who invest donor funds from global funds and bilateral sources can no longer report emission reductions associated with projects – these are meaningless and unhelpful. Instead they should focus on reporting information such as the lifetime emission intensity of the assets they finance – for example, building a renewable energy asset which emissions 0.001 tonnes CO2 per MWh over its entire life cycle helps Governments plan how to meet a target of generating 2 TWh while only emitting 2000 tonnes of CO2. Building an asset that reduces emissions by 2 million tonnes over its lifetime sounds good but does not particularly help anyone because the baseline against which these emissions are calculated is impossible to justify. Although, of course, both are better than building an asset which emits 0.8 T CO2 per MWh.
  • Green Bonds should measure their achievements in terms of the average lifetime emission intensity of their investments, with low emission intensity assets offering a lower risk investment on account of having a higher likelihood of operating until the end of their economic lifetime and avoiding future emission costs.

Verified and voluntary emission reduction standards face an uncertain future. Without any form of formal Government recognition and an agreement to take exported units into account in a national inventory, then voluntary emission reductions will end up being double counted – by both the host and recipient country. If they receive formal recognition from the Host Government then it implies the existence of an international market, raising a question about the legitimacy of a voluntary standard. Why would a Government assign control of a sovereign asset to a third party and why would such units remain voluntary rather than being used for compliance purposes? How would Host Country citizens benefit from these arrangements?

The good news, however, is that none of this stops Governments from implementing a wide range of market-based low carbon policies and measures at a domestic level. Governments can still use their emission rights as the basis for taxation and emission trading schemes – with auction-based allocation procedures. Both of these policies can be linked to domestic projects where baselines can be set by the Government, perhaps for shorter periods of time, and/or emission rights can simply be awarded to desirable technologies as a form of subsidy. International markets can exist on the basis of simple dual entry book-keeping and this can lead to the merger of domestic and regional markets bringing benefits of reduced competitive disadvantages and price harmonization.

The paradigm shift has already occurred; we just didn’t notice it.

Gareth Phillips is Chief Climate and Green Growth Officer at the African Development Bank. The views expressed in this article are the author’s views and not necessarily those of the African Development Bank.


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