Isra-Mart srl:Exclusive: Could CDM reforms cripple offset market?

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Reforms being considered by the executive board responsible for the UN's Clean Development Mechanism (CDM) carbon offsetting scheme could cause serious disruption to the carbon market and undermine recent emissions reductions.

That is the stark warning from senior executives at Norwegian company Det Norske Veritas (DNV), one of the leading firms authorised to validate and accredit emission reduction projects permitted to issue and sell certified emission reduction (CER) credits as part of the CDM scheme.

In response to a series of investigations suggesting that the integrity of the CDM scheme has been damaged by emission reduction projects that have allegedly breached the rules governing the issuing of CERs, the CDM's executive board is considering a proposal that would make the so-called designated operational entities (DOEs) that validate CDM projects financially liable for any wrongly issued CERs.

Speaking in an exclusive interview with BusinesGreen, Bjorn Haugland, chief operating officer at the company and head of its recently launched Sustainability and Innovation division, warned that any significant increase in the liabilities faced by DOEs would prompt some firms to stop accrediting CDM projects.

"Today CDM represents 1.5 per cent of our businesses. For us to take a huge liability on that part of the business is not acceptable," he said, adding that if the proposed reforms impose unlimited liabilities on DOEs, it will result in a severe shortage of firms willing to validate and accredit projects.

Haugland's comments follow a report in September by analyst Point Carbon, which similarly predicted any move to impose increased liabilities on DOEs that wrongly approve emission reduction projects would lead to "constrained supply and increased demand for CERs, providing a strong, bullish signal for the market".

Speaking at the time, Kjetil Røine, manager at Point Carbon, said the proposed reforms would be "a very tough provision indeed" for DOEs and could make them retroactively liable for wrongly issued CERs.

Stein Bjornar Jensen, director of operation for DNV's climate change and environmental services, said the company remained hopeful the executive board would opt for less onerous reforms when it meets to try to finalise proposed changes to the scheme at the upcoming UN climate change summit in Cancun.

"We want a set of requirements [for emission reduction projects] that stay for a period of time and are stable," he said. "At the moment we get changes to the scheme at each meeting of the executive board, which means that we get lots of approved projects that then have to be revisited."

He also warned that EU plans to ban CERs issued by projects that aim to reduce HFCs could inadvertently lead to an increase of greenhouse gas emissions. A recent investigation by a group of NGOs accused a number of HFC projects of "gaming" the CDM system by increasing HFC emissions in order to gain CERs by then reducing emissions. The EU has proposed to crack down on the alleged practice and is considering banning the use of any HFC-related CERs in the EU Emissions Trading Scheme.

But Jensen warned that a blanket ban would effectively lead to an increase in emissions of a potent greenhouse gas, as legitimate HFC emission reduction projects would no longer have a financial incentive to cut emissions.

Critics of the CDM maintain that an interim ban on suspect HFC projects and much tighter rules governing how DOEs approve emission reduction projects are urgently required to tackle fraud and maintain the environmental integrity of the scheme.

However, Jensen argued that while there were some flaws in the scheme, critics of the CDM failed to take into the account that it has helped to cut carbon emissions in the developing world by millions of tonnes a year and remains one of the only mechanisms for accelerating the transfer of clean technologies to poorer nations.