Fate of CDM post 2020

Legal assistance paper

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Date produced: 26/06/2019

Will the Clean Development Mechanism (‘CDM’) continue to function post 2020 (i.e. can parties submit new projects after 2020) or will it cease to exist?

Advice:

  • Executive summary

There is much uncertainty about the future activities of the CDM. It appears that the CDM will continue to function after 2020, but the scope of its activities after that time (and whether parties will be able to submit new projects) is not clear.

The most likely scenario would appear to be that the CDM will function as normal for a period between 2020 and 2023, whilst the new climate market mechanism under Article 6 of the Paris Agreement (which is referred to as the ‘Sustainable Development Mechanism’ (the ‘SDM’)) is being established. However, the future of the CDM is unclear and subject to decisions by the parties to the Kyoto Protocol and the Paris Agreement over the coming months and years.

Therefore, the question of whether the CDM will function after 2020 is less of a legal question and more of a factual matter of what may happen in the future. From a legal perspective, the key point is, as described below, that there may not be a legal basis for the CDM to issue Certified Emission Reductions (‘CERs’) after 2020. However, this legal position is also subject to change, depending on decisions taken in future by the parties to the climate change treaties.

  • Background

The CDM is established by Article 12.1 of the Kyoto Protocol. Article 12.3 of the Kyoto Protocol allows parties to use CERs to meet their emission limitation and reduction commitments under Article 3. There is no provision in the Kyoto Protocol terminating the CDM.[1] Theoretically, it could operate indefinitely.[2]

Article 6.4 of the Paris Agreement establishes a ‘mechanism to contribute to the mitigation of greenhouse gas emissions and support sustainable development’.

It has been suggested that although the CDM could theoretically continue after 2020, there will be no legal basis for using the CERs which are issued by the CDM.[3] The logic of this argument is that since CERs are used to comply with obligations under Article 3 of the Kyoto Protocol, and since the second Kyoto Protocol commitment period ends in 2020, after that time there will no longer be any legal basis for using CDM-issued CERS.[4] Therefore, arguably there would be no purpose for parties to submit new projects to the CDM if the CERs that it issued had no purpose or value. Presently there is no clear legal framework addressing either this situation or the interplay between the CDM and the SDM.

  • COP Guidance

The most recent guidance issued to the CDM by the Conference of the Parties to the Kyoto Protocol[5] requested that the CDM Executive Board and secretariat “ensure the efficient and prudent use of resources of the Trust Fund for the Clean Development Mechanism to the end of the true-up period for the second commitment period of the Kyoto Protocol”, and asked that they present a comprehensive report to the Conference of the Parties serving as the meeting of the Parties to the Kyoto Protocol at its fifteenth session (December 2019) on the present financial situation of the clean development mechanism and the foreseen budgets for activities until the end of 2023” (emphasis added).

Therefore, it would appear that the Conference of the Parties envisages that at least some of the activities of the CDM will continue until 2023 (which is expected to be the end of any “true-up” period for the Kyoto Protocol second commitment period). During that time, the CDM could continue to function as normal and perform all of its functions,[6] which would theoretically allow for new projects to be registered.

  • Impact of the SDM

The alternative to and/or possible replacement for the CDM is the new SDM under Article 6.4 of the Paris Agreement. Once the SDM is established, the CDM may no longer have a role to play.

In broad terms, some options for the pathway forward for the two mechanisms are:

  • the CDM will continue alongside the SDM, either as normal or with altered activities; or
  • there will be a transition away from the CDM, with its activities being migrated to the SDM.[7]

Certain countries, like Brazil, have voiced support for the CDM. Others, like some EU member states, have called for the CDM to end.[8]

Although the SDM is touted as the replacement for the CDM, it is unclear when the SDM will become operational. At COP24 in Poland, the parties did not reach consensus on Article 6 and the issues were deferred for discussion at COP25 in Chile at the end of 2019. The interplay and transition between the CDM and the SDM have, therefore, not yet been determined.[9] This uncertainty may mean that the broader scope of the CDM’s activities (including potentially new projects) continues for longer than otherwise might have been the case, if there is no operational alternative.

  • Conclusion

The scope of the CDM’s functions after 2020 are very uncertain. It appears to be at least clear that the SDM will have the effect of reducing or changing the activities of the CDM, and may well mean that the CDM will cease to function. However, since the operations of the SDM and the timing of its inception are still being determined, the CDM will likely continue to function to some extent after 2020, until at least 2023. The specifics of its activities, including whether parties will be able to register new projects after 2020, are not clear.

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[1]           Environmental Defense Fund, What is the Legal Basis for the Use of Certified Emission Reductions after 2020?, May 2018, available at https://www.edf.org/sites/default/files/documents/Legal_Basis_CDM_post2020.pdf, see page 2;

[2]           ClimateFocus, What is the future of the CDM? Questions and Answers, June 2017, available at https://climatefocus.com/sites/default/files/Post-2020%20CDM%20QA%20Briefing%20Note.pdf.

[3]           Environmental Defense Fund, Clouds on the horizon: The legal status of the Kyoto Protocol’s Clean Development Mechanism, May 2018, available at http://blogs.edf.org/climatetalks/2018/05/01/clouds-on-the-horizon-the-legal-status-of-the-kyoto-protocols-clean-development-mechanism/.

[4]           Environmental Defense Fund, What is the Legal Basis for the Use of Certified Emission Reductions after 2020?, May 2018, available at https://www.edf.org/sites/default/files/documents/Legal_Basis_CDM_post2020.pdf, see page 2.

[5]           ‘Guidance relating to the clean development mechanism’ see FCCC/KP/CMP/2018/8/Add.1, Decision 4/CMP.14 at page 6, available at https://unfccc.int/sites/default/files/resource/08a1e.pdf#page=6.

[6]           ClimateFocus, What is the future of the CDM? Questions and Answers, June 2017, available at https://climatefocus.com/sites/default/files/Post-2020%20CDM%20QA%20Briefing%20Note.pdf, page 3.

[7]           ClimateFocus, What is the future of the CDM? Questions and Answers, June 2017, available at https://climatefocus.com/sites/default/files/Post-2020%20CDM%20QA%20Briefing%20Note.pdf.

[8]           Carbon Market Watch, ‘UN market negotiations: Will we learn from the past?’, September 2017, available at https://carbonmarketwatch.org/2018/09/14/un-market-negotiations-will-we-learn-from-the-past/.

[9]           Carbon Brief, COP24: Key outcomes agreed at the UN climate talks in Katowice, available at https://www.carbonbrief.org/cop24-key-outcomes-agreed-at-the-un-climate-talks-in-katowice#article6.