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Carbon investors anxiously eye UN climate talks

PARIS — More and more economies are looking to create carbon markets to cut greenhouse-gas emissions, but development is being stymied by uncertainty in climate politics.

Experts hope that talks opening next week under the UN Framework Convention on Climate Change (UNFCCC) will deliver a dose of clarity to this vital part of the fight against global warming.

Concern has focused on a tool under the Kyoto Protocol which aims to enlist market forces in a carbon cleanup.

The Clean Development Mechanism (CDM) allots rich countries bound by Kyoto a ‘credit’ for every tonne of greenhouse gas that is averted if they invest in cleaner-energy schemes in the developing world.

These credits can then be traded to help meet a country’s emissions quotas under the Protocol.

Since its inception in 2005, the CDM has channelled tens of billions of dollars into such projects.

It has not been without criticism. Complaints include lopsided investment in China, approval for low-carbon initiatives that would have been built anyhow, and lax monitoring against corruption.

Even so, ‘no other mechanism has been as successful at attracting billions of dollars of private-sector capital into projects that reduce emissions in the developing world,’ said James Cameron of Climate Change Capital, a low-carbon investment fund.

‘What we learned with the CDMs is that they work — we succeed in reducing emissions when we put a signal price on CO2,’ said Benoit Leguet of CDC Climat, a division of France’s state-owned bank Caisse des Depots.

But Kyoto’s first commitment period ends next year, and many rich parties say they are not willing to take on a second round of binding carbon cuts so long as the world’s biggest polluters, China and the United States, remain exempt from any legal constraints.

Only the European Union is ready to renew its Kyoto vows, and only under one condition: that all major emitters back the completion of a comprehensive global climate pact by decade’s close.

The CDM exists independently of commitment periods because it comes under the overarching Kyoto treaty, which has no time limit. That means the mechanism will still exist beyond 2012.

But Daniel Bodansky, a climate law expert at Arizona State University, questioned how projects would be funded if rich countries no longer had Kyoto targets.

It would also require changes in methods and procedures, such as fixes to rules about forestry projects and use of carbon credits, he added.

Sapped by uncertainty, capital flowing into CDM projects has fallen from a high of 7.4 billion dollars in 2007 to only 1.5 billion in 2010. The figure for 2011 may be even lower. In trading, the price of CDM credits has fallen to a record low.

Traders are looking to the November 28-December 9 talks in Durban, South Africa, for stop-gap measures to ensure that low-carbon investment in poor nations has a future.

They are also hoping for clues on what will tie together national or regional cap-and-trade markets that are emerging around the globe.

In these markets, corporations that are below quotas set for carbon emissions sell their surplus to firms that have fulfilled them.

California and Australia have adopted plans for emissions trading; China is working on pilot schemes; and South Korea has unveiled plans for a market for facilities that produce more than 25,000 tonnes of carbon dioxide (CO2) or its equivalent each year.

Despite such developments, emissions trading is fighting to make headway against a backdrop of political bickering at the global level and the buffeting effect on carbon prices caused by economic downturn.

The turnover of the worldwide market was some 142 billion dollars in 2010, the first drop in five years. The EU’s Emissions Trading Scheme (ETS), launched in 2005 just before Kyoto was implemented, accounted for almost all of this.

‘The global carbon market is at a crossroads. If we take the wrong turn we risk losing billions of lower cost private investment and new technology solutions in developing countries,’ the World Bank’s Andrew Steer said earlier this year.

One proposal at Durban is for a centralised mechanism to link up a network of sectoral emissions or credit-swapping systems, said Jennifer Morgan, director of the climate and energy programmme at the World Resource Institute (WRI), a Washington think-tank.

‘That, combined with the future of the CDM, are the two places to watch to see whether or not there is going to be an international set of rules for the carbon market,’ she told journalists in a phone briefing.

The alternative would be a host of ‘linking agreements and bilateral offset schemes’.