Can CERs serve as a credible currency for

Can CERs serve as a credible currency for linking emissions trading system? Experience from performance of current CDM COP 13 Side Event: Linkages among Emissions Trading Schemes and with offset projects, 4 December 2007 Axel Michaelowa axel. michaelowa@pw. uzh. ch

Structure of presentation • Requirements for credible reserve currencies • Can CERs fulfil these requirements? • Empirical evidence regarding CDM performance • Recommendations for the CDM and emissions trading regulators

Requirements for reserve currencies • Historically, currencies have served as reserves if - they were issued by a credible regulator - they were available in a sufficient volume to cover demand without creating an oversupply - they could be used without any constraints • This required constant surveillance by the regulator • Otherwise, currency areas will split up • Do CERs fulfil these requirements?

CERs as reserve currency? • CERs are issued by the CDM EB which is so far seen as credible by ETS regulators - EU Commission (grudgingly) accepted CER imports, but not AAU imports - CERs are seen as benchmark currency for voluntary market • CER volume increases rapidly and thus is able to satisfy demand • CERs are backed by Kyoto Protocol and thus valuable compliance tools

Can CERs lose their status? • Additionality debate - EB is walking tightrope between frightening business away and opening the floodgates - Formal rules are good, implementation is sloppy - Lieberman/Warner bill excludes CER imports • CER oversupply? - Supply could become inflationary under lenient additionality interpretation - Performance rates of projects come under increasing scrutiny • Sustainable development worries? - Host countries do not manage SD credibly • Role of CERs post 2012 unclear

Are CDM projects additional? Sample of 50 projects registered before May 2006 • Substantial share has problems with additionality determination • Several case studies also show that the CDM EB is not applying consistent criteria in rejecting projects due to lack of additionality, especially regarding large ones • Results corroborated by Schneider (2007) for 93 projects Analysis of 24 rejected and withdrawn projects • All projects rejected due to additionality performed just a barrier analysis, • Most rejected projects are lacking or provide insufficient independent sources of information for substantiating additionality

Generic underperformance Analysis of 203 CDM projects with issued CERs 100% 83% 71%

Performance: project types Variability among projects of the same type is very large, showing the importance of a good project management

Performance: validators

Performance: developers

CER supply Scenario name Business-asusual Strict additionality Hangover Accele-ration Inflow of new projects (billion CERs) Probability of validation (%) Probability of rejection (%) Performance rate (%) Total CER volume (billion) CER overhang? 3 2 1. 5 5 75 50 75 90 4 10 4 0 85 85 75 80 3. 1 1. 9 2. 0 4. 4 yes no no yes

Recommendations for regulators • CDM EB should become stricter regarding additionality • CDM regulators should communicate more with ETS regulators to avoid misunderstandings • Host country DNAs should not ignore sustainability issues • Role of CERs in post-2012 regime should be clarified as quickly as possible