Clouds on the horizon: The legal status of the Kyoto Protocol’s Clean Development Mechanism

In sunny springtime Bonn at the climate talks, discussions are intensifying about the future of the Clean Development Mechanism (CDM).

The CDM was established in 1997 by the Kyoto Protocol on climate change. The Protocol set caps on the carbon pollution of more than 30 industrialized countries for the years 2008-2012, and the caps were amended to extend them to 2020.

The Protocol provides that when industrialized countries invest in projects that cut carbon pollution in developing countries, the CDM can issue carbon credits – called Certified Emission Reductions (CERs). The Protocol then authorizes industrialized countries to increase their emissions above their commitment levels and use the credits to comply with their emissions commitments by claiming them as offsets against pollution growth.

Since its launch over 20 years ago, the CDM has been analyzed extensively – from the transparency of its institutions, to the geographic distribution of its projects, the marginal costs of CDM investments, the environmental effectiveness of these investments, their vulnerability to fraud and deregistration, and the future potential of the CDM in the context of the 2015 Paris Agreement, whose new frameworks for addressing climate change supplant the Kyoto commitments starting in 2020.

Legal status of CDM

One topic that has received little attention, however, is the legal status of the CDM and of the carbon credits issued by it.

Is there a legal basis for the CDM’s institutions to continue after the Kyoto Protocol’s commitments expire in 2020? If so, is there a legal basis for the CDM to issue carbon credits after 2020? And is there a legal basis for using CDM credits to meet emissions reduction obligations after 2020?

There’s a legal uncertainty hovering over any prospective post-2020 use of Certified Emission Reductions (CERs) to meet emissions obligations.

Initial legal analysis indicates that while the Kyoto Protocol may provide a legal basis for the CDM’s institutions to continue, there is no legal basis for using CERs to meet any other emissions reduction obligations after 2020. Article 12.3(b) of the Kyoto Protocol authorizes one use, and only one use, for the CDM’s carbon credits: it provides that industrialized countries may use CERs to contribute to part of their compliance with their emissions commitments under the Protocol.

That means there’s a legal uncertainty hovering over any prospective post-2020 use of CERs to meet emissions obligations, whether in the context of the Paris Agreement or the market based mechanism known as the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), which was adopted by the International Civil Aviation Organization (ICAO) in 2016.

This legal uncertainty has many practical implications. One is that as nations move to implement their emissions reduction commitments (known as “nationally determined contributions," or NDCs) under the Paris Agreement, some hope that the CDM’s institutions and tools could unleash investment in emission reductions in sectors not covered by NDC pledges.

The volume of emissions in those “non-NDC” sectors may be quite significant: a new analysis indicates that up to one-third of the greenhouse gas emissions of the Paris Parties might lie outside the NDCs. Failure to adopt rigorous rules for monitoring and accounting for carbon credits in these sectors could create perverse incentives to let non-NDC pollution balloon. Whether the CDM is up to this task remains unclear.

What would clarify the situation is the following: If Parties to the Paris Agreement – and the Parties to the Kyoto Protocol – want the CDM and its carbon credits to serve new purposes after 2020, the Parties will need to take key legal steps before 2020 to adapt them to the new realities of the Paris Agreement.

The good news is that these legal steps – which may include amending the Kyoto Protocol – are fully within the authority of the Conference of the Parties serving as the Meeting of the Parties to the Protocol (CMP) and the authority of the Conference of the Parties serving as the Meeting of the Parties to the Paris Agreement (CMA) to undertake. But if the CMP and CMA fail to act, then the future of the CDM, from a legal perspective, will remain a cloudy one.

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