Demand for carbon credits certified under the Clean Development Mechanism (CDM) has been on the increase over the past few days, sources told S&P Global Platts over Nov. 1 and 2, as some market participants appear to believe that a continuation of the CDM crediting scheme under the Paris Agreement will be agreed on at the ongoing UN Climate Conference in Glasgow.
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"We are starting to see some movement on the CDM side, a trader said during the Nov. 1 morning trading session.
"Lots of enquiries [for CDM credits] are coming through," a second trader said on the morning of Nov. 2.
According to a third source on morning of Nov. 2, "there definitely is increased interest...since last week."
Sources believe that some players in the market think that the UN Climate Conference may end with an agreement about extending the validity of the UN CDM crediting mechanism under the Paris Agreement.
"That will be the key item to look for," the first source said.
"I don't see any indicators yet at COP...but possibly some of the larger aggregators have some inside feelers," the third source said.
The UN Clean Development Mechanism was implemented in 2006 under the Kyoto Protocol and represents the first crediting scheme in history. It allows countries with an emission reduction commitment under the Kyoto Protocol to implement an emission reduction project in developing countries. The credits issued by these projects are known as CERs. Each CER is equivalent to one mt of CO2e and can be counted against the Kyoto targets.
The is no set expiration date for the CDM mechanism but it can be discontinued if the parties to the Kyoto Protocol decide to do so.
Negotiating parties at the UN Climate Conference have historically had opposing views.
For some, the continuity of previous mechanisms should be guaranteed to create a stable and inviting regulatory environment. Developing countries that host CDM certified carbon projects have historically been in favor of a continuation of this scheme.
For others, the CDM mechanism scheme should be discontinued as it wouldn't be efficient to have it running in parallel to a new scheme envisaged under Article 6 of the Paris Agreement that is yet to be implemented, but also because many of the projects certified under CDM may no longer comply with one of the core principles of carbon finance -- additionality.
Under the additionality principle, to be eligible for credits issuance, a carbon project needs to prove that it would not be able to operate without the additional revenue generated from the sale of carbon credits.
However, with many carbon projects certified under CDM being renewable energy projects, this principle may no longer be respected. The cost of renewable energy technology has decreased over the past few years, meaning that even renewable projects in developing countries are now profitable even in the absence of carbon credits issuance.
It is still not clear if a similar deal will be reached.
"There is now a much better understanding of the volume of CERs that could in theory transition under different vintage restrictions," a source close to the negotiations said. "This means negotiators go into COP26 better informed than they were two years ago, but whether that helps them reach a compromise is still to be seen."