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Preventing a collapse in clean energy investment across the developing world

Despite environmental wake-up calls like Hurricane Sandy, developed economies are so “locked in” to dirty energy sources that their leaders shrink from the pursuit of dramatic emission reductions. Ugly scenes emerged in New York after Mayor Bloomberg announced number-plate based petrol rationing. Politicians are too scared of flickering lights and long unemployment lines to dramatically curb their economies’ addiction to dirty fuel.

The developing world is not yet hooked, or at least not to the same extent. Developing countries are less dependent on fossil fuels, giving them a chance to “leapfrog” unclean energy sources and heavily invest instead in truly sustainable energy sources.

However, clean energy can struggle to attract investments in the short term, with investors and entrepreneurs favouring the certainty of fossil fuels, egged on by generous subsidies for either the production of fossil fuels, use of fossil fuels or both. This is where the Kyoto Protocol’s Clean Development Mechanism (CDM) comes into play.

The CDM gives international investors an incentive to provide financial support for clean energy projects across the developing world – ranging from renewable energy power generation through to industrial efficiency programs. The way it does this is relatively straightforward.

After stringent third-party validations, The CDM’s Executive Board makes an assessment of the emission reductions a particular project will achieve, and translates these into “Certified Emissions Reductions” (or CERs).  Emitters from developed nations then purchase these emission reductions and use them to pay down what could be seen as their carbon debt: the quantity of harmful greenhouse gases they are emitting over and above their targets. Under this scheme, a factory in Germany can meet its emissions targets by funding a waste to energy project in China – allowing it time to transition to cleaner production methods without retiring operational plant, firing staff or facing bankruptcy.

Over little more than a decade, the CDM has enabled the investment of $215 billion in clean energy projects - reducing global greenhouse gas emissions by more than 1 billion tonnes and delivering large sustainable development benefits to millions of people. What’s more, it has encouraged developing economies’ governments to follow the CDM’s lead and further invest in clean energy.

However, because of market forces set in train by the global economic crisis, and exacerbated by flaws in the design of the Kyoto Protocol and the European Union Emissions Trading Scheme, the system is grinding to a halt. The central reason for this is the plummeting value of CERs - the all-important carbon credits which sit at the heart of the system and set the value of investment in clean energy projects.

A fundamental imbalance of demand and supply is responsible for this sharp drop in price. The global economic crisis has reduced levels of output in developed countries, leading to a sharp drop in demand for carbon credits. At the same time, the CDM’s success has encouraged a wave of new clean energy projects and growing supplies of CERs. As it stands, a CER’s value is at near zero.

Failing to use the tools at our disposal to increase CER prices is equivalent to letting the CDM die. If CERs are worth nothing, there is no incentive for investing in clean energy projects in developing nations, and clean energy’s largest and most important international funding stream would disappear.

Letting the CDM die will not only cause the world to lose a valuable, successful and large-scale environmental market mechanism. It would also cause a spate of bankruptcies in the developing world’s clean energy sector. Clean energy projects have been built in developing countries on the promise of CDM support throughout the project’s life - if that support is withdrawn many projects will no longer be financially viable.  Such a breach of trust would send a message that global environmental mechanisms are not for the private sector.

We do not have time to reinvent the wheel and create another mechanism to encourage clean energy investment in the developing world. It has taken many years of reform and refinement to create the high-functioning system the CDM is today, complete with significant host-country institutional infrastructure and boasting the world’s most rigorous process to assess the emissions reduction value of clean energy projects.

A variety of solutions have been mooted for restoring CERs’ value, all of which must be carefully considered if the problem is to be resolved. These include developed economies taking more demanding targets and re-setting the limits on the use of CERs; advanced developing countries taking and paying for a share of CERs as a contribution towards their own efforts to reduce emissions; increasing CERs’ worth through Government mandated schemes to increase value; and continuing the work of the CDM Executive board to further improve the environmental integrity of the CDM.

Whatever solutions are put in place, however, we must act quickly. The CDM is the principal engine of clean energy investment in the developing world. Letting it sputter to a halt would be a catastrophic loss in the fight against climate change.

Assaad Razzouk is Group Chief Executive of Sindicatum Sustainable Resources.

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