EDITORIAL: With all the talk about PACM and Article 6 what of the future of the CDM?

Quantum Commodity Intelligence - The focus on operationalising the Paris Agreement's Article 6 carbon trading mechanisms, and in recent weeks the news that the EU will consider a small percentage of UN credits counting towards the 27-member bloc's 2040 climate goals, has more than overshadowed talks on the future of a long-established UN carbon market.

At the UN Framework Convention on Climate Change 'intersessional' talks that took place over a two week period last month, a draft text on the future of the Kyoto Protocol's Clean Development Mechanism (CDM) was tabled.

The long-time moribund CDM has come back into focus in recent times as many projects aim to try and transition to Article 6.4's Paris Agreement Crediting Mechanism (PACM).

The draft shows developed and developing countries said to be differing markedly on how long credits and proceeds from the scheme should continue to overlap with the Paris Agreement's carbon markets.

The draft text sets out various timelines on key functions of the CDM, from which large numbers of credits and methodologies, in modified form, will be 'transitioned' to PACM. One proposal even eyes a phaseout as early as the end of next year.

The proposals are intended to help frame discussions on the matter at the COP30 UN climate talks in Belem in Brazil later this year, and an eventual decision, if it comes, could have a major bearing on how the PACM is funded going forward, according to some market observers.

"The decision to allow Parties to use of CERs [the credits generated from the CDM] to meet their first NDC [Nationally Determined Contribution] was the most contested elements of the deal reached at COP26 in Glasgow," said Andrea Bonzanni, international policy analyst with carbon trading lobby group IETA.

"So I would not be surprised if some Parties still tried to use operational rules and deadlines to restrict their use," he said. "For the private sector, the priority is to know rules and deadlines with sufficient notice and avoid frequent changes," he added.

Priorities

The proposals are said to largely reflect the priorities of developing countries keen to ensure that the structures of the CDM are retained until key functions of the Paris Agreement's Article 6.4 are fully in operation, such as new or modified methodologies, and a registry.

Whether the CDM should finally be killed off has been a tug of war between countries who distrust the rapid operationalisation of the PACM and want to retain the CDM as an insurance policy, and those countries that want to get rid of the Kyoto mechanism as quickly as possible and transfer its remaining surplus to the PACM, Axel Michaelowa, co-founder of Switzerland-based carbon markets consultancy Perspectives.

The four-page document presented at SB62 climate talks in Bonn splits various types of proposals into two options, some with varying timelines for the phase-out of key functions for the CDM, either end-2026 or end-2027 such as issuance of credits and registry transactions. The document also includes a proposal that unused revenues from the CDM are transferred to PACM.

The CDM came into force in 2005, over seven years after the signing of the Kyoto Protocol, and was a major source of offsets used by companies covered by the EU Emissions Trading Scheme. The offsets were also eligible for use by developed countries with targets under the 1997 climate agreement, with Japan and many European countries big buyers.

However, the CDM came under intense scrutiny from climate policy experts, NGOs and EU policymakers for various integrity issues, such as lack of additionality, and accusations that revenues from some project types were 'hot air' that provided big windfalls of revenue for major polluters.

COP26 climate talks in Glasgow in 2021 decided that CDM credits could be transitioned into PACM, but the methodologies and baselines are likely to mean much fewer credits compared with their broadly-equivalent projects in the CDM.

This is all the more pertinent as the EU considers the use of Article 6 credits, albeit a small percentage, to meet its 2040 climate goals. If this goes ahead then the debates that were had over the integrity of the CDM are likely to resurface once again for Article 6.