China and Brazil threaten to block carbon offset trade


DURBAN 2011:CHINA AND Brazil have warned that one of the world’s biggest carbon markets will be under threat if wealthy countries reject their demands for a new phase of the Kyoto protocol.

It was “inconceivable” that the $20 billion (€14.9 billion) UN- backed carbon offset market could continue unless countries agreed a second round of pledges under the Kyoto climate treaty after the first round expired in 12 months, China’s chief negotiator said.

“The issue now is to avoid countries getting away with murder,” said Andre Correa do Lago, Brazil’s chief envoy, in a separate interview. “You cannot think you can have the instruments of the Kyoto protocol without belonging to the Kyoto protocol.”

Bankers and investors have long feared the UN-backed carbon offset market – the second biggest after the European Union’s emissions trading scheme – would become a political football in the fraught negotiations at the Durban summit, given its proximity to the December 2012 Kyoto expiry deadline.

The market grew out of a programme called the Clean Development Mechanism (CDM), which is written into the 1997 Kyoto climate pact, the world’s only treaty obliging countries to curb their carbon pollution.

The CDM allows companies in wealthy countries to offset emissions by buying credits generated from carbon-cutting projects in developing countries. It has become popular among companies and investors in industrialised countries because it offers a cheaper way to meet carbon targets – and generates profits for the new breed of companies that finance the system.

But its popularity has made it an inviting negotiating pawn for developing countries, which were never legally bound to cut their carbon emissions under Kyoto and instead want reluctant rich countries to continue leading the climate change fight.

Legal opinions differ on whether the CDM can technically be killed off if there is no extension of Kyoto commitments.

But the carbon industry worries that threats to end the offset market make investors nervous, which in turn raises the cost of capital for CDM projects in developing countries. “It’s like someone waving an empty gun around in a coffee shop,” said Miles Austin, director of the Climate Markets Investment Association.

“It scares off customers even though there are no bullets.”

Trevor Sikorski, of Barclays Capital, said if countries withdrew from the CDM, the supply of credits in the market would be “significantly reduced”, which some would welcome given that the market is suffering from oversupply, which has helped prices fall. But it would reduce the benefits from emissions cuts, he said.

Artur Runge-Metzger, the EU’s chief envoy, believes the CDM programme would continue because the Kyoto protocol itself would continue to exist beyond the end of next year, even without a new phase of legally binding commitments. But others say countries may have to give a directive for it to survive, which nations such as China and Brazil may block.

China and Brazil’s warnings about the CDM are notable because the first of the 3,500 projects registered under the programme is in Brazil and about 46 per cent of all projects are in China.

A flagship green climate fund aimed at channelling billions of dollars to help poor countries tackle global warming has been put on ice at the summit as countries bicker over how it should work.

Wealthy countries have promised to mobilise up to $100 billion a year by 2020 to help developing countries tackle climate change. A significant portion is expected to flow through the fund but there have been tensions from the start over how much control donors and recipients should have.

Before the summit, the US and Saudi Arabia said they would not sign off on a report setting out a blueprint for the fund. Now some Latin American countries have also said they are unhappy with the planned design of the fund.

– Copyright The Financial Times Limited 2011