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Why the voluntary carbon market is the only carbon market that matters

A new report out from Environmental Defense (pdf) lays out a critique of the UN’s Clean Development Mechanism (CDM), suggesting it does nothing incrementally positive for the environment beyond the caps set out under the Kyoto Protocol.

We’re fans of mandatory caps. And we’re also fans of offsets as a mechanism to achieve the same environmental benefits at a lower cost. The CDM is a prime example of a mechanism whereby companies and countries can meet their meet their emissions targets by sponsoring reductions in the developing world.

So recent claims from the UN on the success of the program, including the number of projects, and total tons, should give us something (anything! please!) to celebrate in the continued fight against climate change, right?

Well, as the authors of the ED paper correctly point out, no. Every reduction generated by CDM is just an offset for an increase under the caps in the developed world. No net progress is achieved over and above the limits imposed by Kyoto. The report shows this graphically quite clearly. First, the UN divides the world into developed countries (subject to a cap) and developing countries (with no obligation).

Even though they are under a firm cap, developed countries can locate an emissions reducing project in the developing world.

And, once approved by the UN, this can be used to satisfy their obligations.

To experienced climate observers, this is nothing new. After all, CDM and its developed world sister program JI, are called “flexibility mechanisms,” and are designed to make it easier and more cost effective for Kyoto signatories to meet their commitments. Of course, the CDM does serve as a technology transfer institution and is allowing some nations to leapfrog to cleaner solutions. But, for the atmosphere, incremental progress on CDM simply means it is cheaper and easier for Kyoto signatories to hit their targets.

And yet this somewhat obvious conclusion is also somehow startling.

The logical extension of this argument is my somewhat comment-baiting headline — that the only incremental progress on climate change is coming from the voluntary market, where market demand for carbon offsets signals *new* commitments on the part of firms or individuals to address their climate impact.

In short, if you were the earth sensing an oncoming fever, you’d want strict credibility from the UN’s CDM program to make sure these projects were indeed balancing out a rise in emissions from the west, but you’d be looking from incremental progress on the fever from the voluntary emissions market.

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