To date, 42 developed countries (Annex 1) have submitted pledges. Fulfilment of the developed country pledges is projected to reduce emissions by up to 4 billion tons (Gt) CO2e in 2020 from “business as usual” (UNEP 2010). This is about one third of the estimated 12 GtCO2e of emissions reductions that would be needed to remain on a path consistent with keeping warming below 2°C (UNEP 2011). Unfortunately, weaknesses in international emissions accounting could substantially weaken these already insufficient pledges, negating much if not all of their intended emissions benefits. In this paper, we address the following five “loopholes” in the existing negotiation framework, examine their impact, and list possible policy solutions to close them:

* Hot Air – surplus allowances (AAUs) from the first commitment period.
* LULUCF weak accounting rules
* CDM credits that do not represent real emissions reductions.
* Double counting of emissions reductions
* Emissions from International aviation and shipping

WikiLeaks reveals that most Indian claims are ineligible.

As the world gears up for the next round of United Nations climate-change negotiations in Durban, South Africa, in November, evidence has emerged that a cornerstone of the existing global climate agreement, the international greenhouse-gas emissions-trading system, is seriously flawed.

Critics have long questioned the usefulness of the Clean Development Mechanism (CDM), which was established under the Kyoto Protocol. It allows rich countries to offset some of their carbon emissions by investing in climate-friendly projects, such as hydroelectric power and wind farms, in developing countries. Verified projects earn certified emission reductions (CERs) — carbon credits that can be bought and sold, and count towards meeting rich nations’ carbon-reduction targets.

The group questions the adequacy of the ratio of HCFC-22 to HFC-23 that is used by projects to calculate their emission reductions. Currently, the rules set the maximum ratio at 3%, so 0.03 tonnes of HFC-23 to 1 tonne of HCFC-22. But the proposal sees this reduced to a minimum of 0.2%

The CDM’s Methodology Panel, the body charged with overseeing the methodologies of the CDM, chose to ask the higher-profile CDM Executive Board (EB) to decide on the issue. There remains a good chance that the EB fails to reach a verdict and instead passes the issue up to the UNFCCC because of how politically charged this topic has become.

Indeed, CDM-Watch appears more than aware of the politically sensitivity that surrounds the HFC-23 controversy. CDM-Watch warned that EB members from China, India, Netherlands, UK, Japan and Norway should abstain from voting on the proposed methodology revision due to conflicts of interest. These countries either host the projects or have vested interest in the CER generation.

In any case, the proposal has caused a stir in the CDM and participants are looking for certainty. The EU and the US have both made suggestions that offsets generated by the destruction of HFC-23 may be banned from their respective carbon reduction plans after 2012 (if one is ever enacted in the US). So investors in HFC-23 reduction projects are right to be concerned.

If restrictions are approved, it is still unclear when they will take place. Current project contractual agreements indicate that the EB may have to wait until a project requests an extension to their crediting period (usually seven years, with the possibility of two extensions) before amending the methodology. In fact, a request to extend the crediting of a certain HFC-23 in South Korea was postponed last month by the EB until a later date, certainly until something more concrete has been decided.”

…

Other questions are even less tractable. Whose money, and how much, might flow through the new conduits for finance, which have yet to be established? What sort of commitments, if any, will the various less developed countries make in return for some of that money? The LCA’s sister negotiations, the Kyoto protocol (KP) track, show how much more vexed things get when commitments actually look as if they might cost money. Two technical problems bedevil the KP track. One is “land use, land-use change and forestry”, known to its friends as LULUCF. It could become a loophole for wriggling out of emission cuts—if, among other things, the baselines for forests are set too low, or if the rules allow the growth of a forest to be counted as a credit while its later felling does not constitute a debit.

The other problem is “hot air”, meaning the emission credits that have accrued to countries, such as Russia, that have seen their emissions fall below the Kyoto baseline year of 1990 simply because of economic contraction. Like a lax attitude to LULUCF, hot-air credits could allow developed countries that have pledged “emissions cuts” under the Copenhagen accord to meet those commitments without actually cutting emissions by much. According to analysis by the Dutch environmental-assessment agency, pledges which under one set of hot air and LULUCF rules would require a 12% cut on 1990 levels, would demand only a 4% reduction under a different set of rules. These are the sort of things that matter at negotiations—and on which they founder.

Used credits are worthless on European carbon exchanges. The European Union argues that one credit must equal one tonne of carbon dioxide for its Emissions Trading Scheme, the largest emissions market, to be effective. Since the whole point of the credits is to cut carbon, double-counting them makes a mockery of the system. “

Among Dr Stohl’s conclusions is the positive one that China now seems to be emitting less HFC-23, a powerful greenhouse gas produced by the refrigeration industry, than it did in 2005. This suggests that the large amounts of money invested through carbon markets in reducing such emissions may be having an effect. More detailed studies might show precisely which industrial regions the gases are coming from, and thus reveal what is going on with specific HFC-23-mitigation projects. “

I draw three major lessons from the report.

1. Keep trading transparent. Ownership of RGGI permits are registered in a public tracking system. Futures and options are exchange-traded on the Chicago Climate Futures Exchange and the Green Exchange. Smart, because:

Public exchanges are attractive to firms that need a simple way to trade standard products. Moreover, public exchanges effectively eliminate the risk of default by counter-parties, since the exchange constantly monitors the account holdings of each participant to ensure that they have posted sufficient financial security to meet their obligations.

RGGI does allow over-the-counter (OTC) trades (trades between two private parties) for futures, options, and other derivative products. While OTC markets do provide some benefits for certain firms, they are murkier than public exchanges. And even the public exchanges may not require all the details that are important to understanding a transaction. (Potomac identified one instance in which a small quantity of allowances was traded at a price that seems too high—and though there are a number of perfectly reasonable explanations for the trade, the exchanges did not require sufficient information from the trading parties to allow the market monitor to draw conclusions.)

2. Keep a level playing field. RGGI publicly announces the “clearing price” of its auction at a pre-specified time so that all participants have access to the same information and the same time. Similarly, the U.S. Commodity Futures Trading Commission publishes a weekly report documenting the positions, both long and short, of firms trading futures and options on the commodity exchanges. Once again, market participants operate with shared information, which curbs manipulation.

3. Keep an eye on the ball. Frequent analytical reports, like this one from Potomac, are key to ensuring that the carbon markets are well-functioning and fair. Good market monitoring can enable government regulators and administrators to act in a timely fashion if something goes awry. And they can fine-tune their policies and procedures based on good information.

The projections are based on new baseline scenarios out to 2050. The new global HFC emission projections are significantly higher than previous estimates especially after 2025 in developing countries. By 2050, the emissions are equivalent to 9-19% (CO2 eq. basis) of the projected global CO2 emissions in a business-as-usual (BAU scenario and contribute a radiative forcing in the range of 0.25-0.40W/M2, which is about a factor of 3 larger than previous estimates. By 2050, the HFC radiative forcing fraction is projected to be 7-12% of that for CO2.