Copenhagen still "golden opportunity" for CO2 market

LONDON (Reuters) - A U.N. summit in Copenhagen next month is unlikely to agree on a new global climate treaty, but carbon market players are urging delegates to seize the opportunity to agree reforms to the $33 billion trade in carbon offsets.

There is a growing global consensus that talks in the Danish capital to forge a successor to the Kyoto Protocol will lead to only a political agreement including emissions cuts by rich countries, with agreement on a full binding treaty in 2010.

As Kyoto is due to expire in 2012, next year is later than the December 2009 deadline some had hoped for. But market players say this presents delegates with a chance to address some key issues surrounding the carbon offset market.

“If everyone is pragmatic and asks ‘what can we fix while we’re here?’, this could be a golden opportunity for addressing all the institutional and architectural reforms which don’t require any targets to be undertaken by the U.S.,” said Miles Austin of clean energy project developers EcoSecurities.

“This could be a very clear win for Copenhagen.”

The summit could agree in principle on major reforms, both scaling up an existing Kyoto scheme which rewards clean energy projects in developing nations and a new deal to pay tropical countries tens of billions of dollars to preserve their forests.

Although major developments on these issues could alter the landscape of the global offset market, observers remain skeptical about the ease of progress for complex trading schemes which may take years to fine tune.

“Even if they go to Copenhagen saying ‘we are not going to get a binding agreement but we can put as many bricks into place as possible’, delegates still have a lot of work to do,” said Alessandro Vitelli, director at advisory firm IDEAcarbon.

A full treaty has been delayed as the U.S. hesitates over committing to 2020 emissions targets, after failing to pass a domestic climate law ahead of the 190-nation Copenhagen summit.

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Observers cite reform of the Clean Development Mechanism (CDM), worth $6.5 billion to developing countries, as an area that should be addressed next month.

Under the CDM, companies can invest in clean energy projects in emerging nations, and in return get offsets from the U.N. which can be used toward emissions targets or sold for profit.

But the scheme is dominated by China and India, and the CDM’s executive board - which vets the projects - is blamed for bottlenecks which investors say create long waits for carbon offsets called Certified Emissions Reductions (CERs).

The CDM’s board on November 4 submitted recommendations ahead of the U.N. summit which would see reforestation recognized as a project type, push a “more equitable” geographic distribution of projects and streamline approval and issuance processes.

“Success in reforming the CDM would mean the pace of automatic registrations and CER issuances would rise, but these are only things that could be quantified afterwards,” said Vitelli, adding that it might be months before results are seen.

Austin suggested examining a sector-based approach, which could scale-up investment by rewarding entire industries like power or steel if they surpass set energy efficiency baselines.

Although details are thin so far on how that European Union-supported idea would work, the CDM board’s also recommends it as a way of promoting more investment in the poorest nations.

History shows further talks may be needed to iron out details. Although the Kyoto Protocol was signed in 1997, which set the stage for the CDM, it was not until U.N. talks in Marrakech in 2001 that the CDM’s operating rules were set out.

Austin said success in Copenhagen could also be defined by a commitment to regulatory reform, through the introduction of three independent bodies, rather than a single one, to split the handling of the CDM’s policy and rulemaking, its day-to-day workings and any appeals from stakeholders.

“These are vital first steps to help keep investors from leaving and possibly bring some back,” he added.

Approving CDM funding for projects that bury emissions underground, so-called carbon capture and storage (CCS), is another area where a decision has been delayed for years.

“CCS is a tennis ball that’s been batted back and forth between the CDM’s executive board and policymakers for the past 3-4 years,” Vitelli said.

While countries like Saudi Arabia are keen supporters, sensing rewards for burying emissions in disused oil fields, the CDM’s board recommended that it should not consider CCS for the scheme “until further guidance is provided.”

Editing by Sue Thomas