Industry fears US offset demand can’t be met

Reforming and scaling up the CDM may not be enough to meet potential US offset demand, sources say.

The Waxman-Markey bill, the leading climate legislation in Congress, will create such huge demand for offsets in the US that project developers will struggle to meet it.

Even with plans to scale up the UN's clean development mechanism (CDM) beyond 2012 as part of a global climate pact to succeed the Kyoto protocol, many believe potential for the mechanism is limited, especially with huge demand coming from the US.

“It’s virtually impossible to go that way, which is why the US is choosing another way,” said Lex de Jonge, chairman of the executive board which oversees the UN project-based scheme to generate carbon credits in the developing world.

“Simply because supply is not big enough,” he added.

The Waxman-Markey bill, which aims to reduce US greenhouse gas (GHG) emissions 17 per cent below 2005 levels by 2020 through a comprehensive emissions trading system, allows for up to 2 billion carbon offset credits to be used for compliance each year from 2012.

US lawmakers are likely to allow up to 1.5 billion of these to come from foreign projects -- if there is a shortfall of domestic offsets -- to meet the GHG reduction targets.

The UN predicts around 1.6 billion CDM credits will be generated by the end of 2012.

The CDM has generated a total of 289 million credits to date since projects started coming through the system in 2006.

“I’m concerned that in the early years (of a US cap-and-trade system) those offsets just aren’t going to be there,” said George Frampton, a lawyer for US firm Covington and Burling.

US approvals

Despite running to over 900 pages, the Waxman-Markey bill makes no specific reference to the CDM.

It says any foreign offsets allowed into the US scheme must first be approved by the country’s Environmental Protection Agency.

Far from excluding the CDM, such wide drafting could open the door for an approach which could quickly wave through CDM credits, said Kim Carnahan, policy adviser for the International Emissions Trading Association (Ieta), a trade body.

Using an existing system such as the CDM could prove attractive alternative to starting from scratch when the US considers how much funding it would need to give a national agency to oversee the offsets effectively.

“We’re talking about an awful lot of credits here, and it’s not clear how quickly a US programme would be able to ramp up or how much funding would be given,” she added.

Finding forestry

The Waxman-Markey bill suggests offsets generated from forestry projects could meet a significant part of the supply required to meet its cap.

Despite deforestation accounting for almost 20 per cent of the planet’s GHG emissions, the development of forestry offset credits has stalled due to the immense complexity involved in setting up a fair and verifiable system.

“It’s not going to be easy. But avoided deforestation is one of the likely options (for generating enough offsets) and that is going to become an enormous business,” said Covington's Frampton.

But the Waxman-Markey bill favours developing a nation-based system of rewarding not cutting down trees in poor countries, and this would likely exclude involvement from the private sector, explained Ieta’s Carnahan.

“The revised bill is still very government-based (on forestry offsetting) even though there is more scope for involvement at a sub-national level,” she said.