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Davis LLP Web Logs or "Blogs" are intended to provide general comments on developments in the law. They are not intended to be a comprehensive review nor are they intended to provide legal advice. Readers should not act on information in the blogs without seeking specific advice on the particular matter. Please contact a lawyer listed on the blog pages for additional details, or to discuss how blog information is relevant to a specific situation.

Climate Change Law Practice Group Blog

» Certified Emission Reductions (CERs)

A Changing Climate Position in China?

A couple of weeks ago, we reported that a number of US Senators had written a letter to President Obama urging (insisting?) that U.S. climate legislation include a "border adjustment mechanism". In an article for Point Carbon , we also noted that China and India, both of which are classified by the UN as developing nations, were not going to be especially pleased with what really amounts to a US tariff on imports. We also predicted that if one country was to eventually capitulate to international pressure on its climate change policy, it would be China.

Are we going to start to see signs of that?

Back on August 5, China's Climate Change Ambassador (seems like everyone has one of these positions now), Yu Qingtai, said that China is looking to halt its emissions as soon as possible, although not at the expense of pulling its tens of millions of people out of poverty. If this seems like a similar tune the Indian government has been singing, that's because it is. You'll recall that the Indian Environment Minister said basically the same thing on July 31.

However, the Chinese position may be slightly softer. According to Reuters, Yu Qingtai also said that "China was willing to thrash out emissions-cutting targets for rich nations at U.N.-led talks later this year, dropping an earlier demand for a reduction of at least 40 percent". Although China is one of the nations advocating for climate funds from developed nations, according to Yu Qingtai, "there is no one in the world who is more keen than us to see China reach its emissions peak as early as possible".

Last week, a study published by some of China's top climate policy advisors concluded that it was feasible for China to peak its emissions by 2030. Although the report does not represent official Chinese policy, it is among several reports out of China which estimate emissions reductions in China in the next 20 years. An article from the Centre for American Progress, the D.C. based think tank headed by John Podesta is optimistic that China's position on climate change is moving in the general direction of the developed world.

Julian Wong from the CAP, reports:

China may announce its next five-year plan as early as this year, and many expect that it will contain even stronger commitments and perhaps incorporate some measure of carbon reductions in the form of benchmarks for reducing carbon intensity. China's State Council, led by Premier Wen Jiabao, last week laid down the objective of incorporating climate change considerations into "the medium and long-term development strategies and plans of government at every level." Also, Sun Qin, the vice chief of the National Energy Administration said he expects the government to complete a comprehensive plan for new and low-carbon energy development by the end of the year. A low-carbon strategy will be a central thread in China's ongoing economic development strategy.

China is also hinting at increased flexibility in the negotiation process. Su Wei, director-general of the climate change office within the National Development and Reform Commission, China's main economic planning agency, has signaled a change in tone, saying, "China will not continue growing emissions without limit or insist that all nations must have the same per-capita emissions. If we did that, this earth would be ruined." China maintains its hard line that developed countries are historically responsible for climate change, but climate envoy Yu has also backed off somewhat from China's previous demands that all developed countries commit to 40 percent reductions in carbon emissions by 2020, saying that, "[a] concrete figure has to be decided by the negotiations; we will get a result in Copenhagen."

This doesn't mean that China is all of a sudden going to abandon its domestic policy and international position on emissions reductions, but it does seem to signal that China may be more flexible than other developing nations. With the world's second highest greenhouse gas emissions, it should be.

WCI Draft Cap and Trade Design Prioritizes Forestry, Agriculture and Waste Management Offsets

Submitted by Grant Boyle

WCI’s July 2008 draft design recommendations suggest capped emitters will be able to use offset credits to meet 10% of compliance obligations.

Project types under “priority” consideration include: Agriculture (soil sequestration and manure management); Forestry (afforestation/reforestation, forest management, forest preservation/conservation, forest products); and Waste management (landfill gas and wastewater management).

According to the proposal, project types that reduce emissions covered by the cap-and-trade system ( such as electricity projects) would not be eligible to create offsets.

Starting in 2009 WCI Partners will coordinate to develop and approve standard protocols for the project types.

WCI Partners may approve and certify offset projects located throughout Canada, the United States, and Mexico, where projects are subject to comparably rigorous oversight, validation, verification and enforcement as those located within the WCI jurisdictions.

In the case of offset credits under the Kyoto Protocol's Clean Development Mechanism (CDM) and Joint Implementation (JI), the WCI Partners may establish “added criteria to ensure similar rigor to WCI approved/certified offset projects or other requirements”. The WCI Partners are also considering a method that restricts the use of offsets from projects located outside WCI jurisdictions for compliance purposes in the WCI.

Canada back on track with its Kyoto registry

Canada appears to be on track to launch a Kyoto-compliant registry for tracking transactions of greenhosue gas emission reduction credits. Recall from a previous posting that the UNFCCC's Compliance Committee had concluded in April that Canada had not established a registry system as required by the Kyoto Protocol.

Canada subsequently provided additional information about the progress of the registry to the UNFCCC's Enforcement Branch. An independent assessment report deemed the registry to be "sufficiently compliant with the registry requirements." As a result the Enforcement Branch decided to halt its investigation and no longer plans to impose sanctions for non-compliance.

With Canada's registry again on track, regulated entities in Canada may eventually be able to purchase Certified Emissions Reductions ("CERs") from Clean Development Mechanism ("CDM") projects. The federal government's emissions reduction plan contemplates allowing companies to satisfy up to 10% of their reduction obilgations by purchasing CERs.

Carbon markets boom

Posted by Andrew Lord

The voluntary market for carbon credits more than tripled in 2007 to USD $331 million, while the much larger regulated market more than doubled to USD $64 billion. Those are the conclusions of two significant carbon reports released last week.

Ecosystem Marketplace and New Carbon Finance released State of the Voluntary Carbon Markets 2008 last week. The report notes that the volume of credits traded increased from 25 million tonnes CO2 equivalent (tCO2e) in 2006 to 65 million tCO2e in 2007. The average price of a tonne of CO2 jumped by $2 to $6.10. However the price remained very volatile in 2007, ranging from $1.62 per tCO2e to about $300 per tCO2e. That volatility is a reflection of the perceived problems with the quality of some credits, a perception that the market tried to address by introducing a number of voluntary credit standards during the year.

Also released last week was the World Bank's State and Trends of the Carbon Market 2008. This report focuses on the regulated carbon market, particularly the allowance market under the EU Emissions Trading Scheme and the project market under the Kyoto flexibility mechansms (Clean Development Mechanism and Joint Implementation). The value EU ETS trades, which comprised 78% of the overall regulated market, more than doubled to $50.4 billion, with the average price creeping up from just over $22 per tCO2e in 2006 to around $24.30 in 2007. In the project market, the big story in 2007 was the emergence of a strong secondary market for CERs. The value of trades in the secondary market increased by a factor of over 10 to $7.4 billion. The secondary market was largely occupied by aggregators who purchased a portfolio of CERs and sold guaranteed CERs backed by the portfolio and, in some case, credit-enhanced through the aggregators' banks. At about 28%, growth in the value of trades in the primary CDM market was strong, but not as vibrant as that in the secondary market.

US cap-and-trade inevitable - market could be worth $1 trillion

Submitted by Andrew Lord

Economic researchers at New Carbon Finance released a report this week estimating that the US will be home to a carbon market will be worth $1 trillion by 2020. The forecast assumes that the US will implement an economy-wide cap-and trade system within 4-5 years and that the system will be confined to domestic trading only.

Currently, the US House of Representatives and Senate are discussing 13 different climate change bills, most of which propose a market-based solution such a cap-and-trade system. It is likely that some version of one of these bills will be passed after the US presidential election. All three front-runners in the presidential race have declared their support for a mandatory cap-and-trade system. Both Hillary Clinton and Barack Obama would like to see emissions reduced by 80% from 1990 levels by 2050. John McCain, who sponsored the McCain-Lieberman Climate Stewardship Act introduced in 2003, hopes to achieves a more modest reduction of 60% over the same period.

The impact of a cap-and-trade system is forecasted to be enormous. Researchers expect the carbon trading market to be worth about $1 trillion by 2020, more than twice the size of the EU ETS. This forecast is based on an estimated carbon price of $40 per tonne as early as 2015. A price of $40 per tonne is expected to raise the cost of electricity by 20%, of gasoline by 12%, and of natural gas by 10%.

The researchers noted however that the impact need not be so severe. All 13 bills currently under consideration share a common feature: they would limit the trading of emissions to the US only. They all restrict trading with other cap-and-trade systems, such as the EU ETS, and forbid participation in the Kyoto Protocol's Clean Development Mechanism (CDM) and Joint Implementation (JI) projects. If the system permitted international trading and participation in CDM and JI projects, the price of carbon would be closer to $15 per tonne. A price of $15 per tonne would only raise the cost of electricity by 7%, of gasoline by 4%, and of natural gas by 5%.

The increasing likelihood that the US federal government will implement a cap-and-trade system will have repercussions both domestically and abroad. Domestically, a federal system could displace many initiatives that are already under way. For example, several states have already committed to participate in regional cap-and-trade systems, most notably the Regional Greenhouse Gas Initiative (RGGI) in the Northeast and the Western Climate Initiative in the West. Some states are also taking local action. For example, California intends to implement a cap-and-trade system for its electricity market.

Internationally, the leadership of the US could prompt other jurisdictions to implement similar programs. For example, Japan announced this week that it would study the feasibility of a cap-and-trade system, an idea that it had vehemently opposed in the past. US leadership abroad may not just be by good example: there is already talk of imposing trade sanctions on imports from countries unwilling to participate in mandatory emission caps.

It is almost certain that Canada will follow the lead of its neighbour to the south. The question is one of timing. The federal government may sit tight until the US makes its move. However, some provinces seem more restless. BC, for example, just announced a new carbon tax (see below) and is already a member of the Western Climate Initiative. Regardless of when the government makes its move, pro-active Canadian businesses should start planning for change now.

New Carbon Marketplace Established by UN

Submitted by Andrew Lord.

The UNFCCC and URC just launched CDM Bazaar, a free information exchange service that aims to make the Clean Development Mechanism market more efficient. The portal connects CDM market participants (but does not provide an electronic marketplace for actual CER transactions). The site is divided into three major sections.

(1) Sellers area: profiles sellers, describes their current and planned CDM projects, and lists CERs available for purchase;

(2) Buyers area: profiles potential buyers; indicates how many CERs they want to purchase, and lists from what countries, project types and methodologies they would consider buying; and

(3) Service Providers area: offers a directory of carbon market technology and service providers.

Anybody can browse the site, but companies must register (at no cost) to be listed in one of the above areas. At the time of posting, the CDM Bazaar had 35 registered users, the majority of them in the Service Providers area. Hopefully this number will grow quickly.

The CDM Bazaar, which focuses on market participants, complements the existing CDM/JI Pipeline site, which focuses on projects. The CDM Pipeline not only lists projects that have been sent for validation/determination, but also provides links to approved methodologies, Designated Operational Entities, Accredited Independent Entities, and other project-related information.