The CDM Board decided to renew calls for public and private sector buyers to voluntarily purchase and cancel CDM carbon credits. The move comes in response to continued weak demand that has led to CDM offset credits suffering from a low price below €1.  Carbon Market Watch has criticised the failure to provide quality standards to promote purchase of credits from only the greenest and most sustainable projects.

The initiative that allows everyone to buy and then “cancel” CDM offset credits from the UN’s CDM registry account was adopted in 2012 as a new source of demand for emissions reductions before a possible future climate treaty will kick-off in 2020. Other than under the traditional rules set up under the Kyoto Protocol where only countries with emissions reduction targets could buy credits, the concept of voluntary cancellation of offset credits allows anyone – developed or developing countries but also companies and even private individuals – to purchase and then cancel carbon offsets. The idea is to encourage the expanded use of carbon credits for voluntary emission reduction, such as by companies using credits as part of social responsibility programmes, by event organizers wanting to offset their emissions, or individuals wishing to reduce their carbon footprint.

In principle, this is a good initiative, because CDM projects that do need a high carbon price to operate cannot survive with the current price for offset credits below 1 Euro. However, as with any type of offsetting, environmental integrity is also important for voluntary cancellation purposes. Yet, research shows that because of the lenient rules used for CDM projects, up to 60% of carbon credits, representing the share of credits coming from large scale power projects, may not represent real emissions reduction. This is because these projects would be built and operating anyway, regardless of the carbon revenue.

However, buying and cancelling emission reductions that are not additional means that climate finance is diverted from truly additional emissions reductions. It also means that more money will need to be spent in the long run to close the mitigation gap. UN data shows that more than 10% of all CDM offsets purchased for voluntary purposes comes from industrial gas offset projects. Other top ranking project types are large hydropower projects. Both of these project types have very questionable environmental benefits.

Voluntary cancellation only makes sense with incentives for projects that actually require the finance to go forward. Only if the voluntary buyer pays prices well above current market prices will they enable truly additional projects to continue. If the CDM Board wants to boost demand in good quality credits, it must provide guidance on the quality of credits and insist that only carbon credits that are truly additional and provide a significant, measurable contribution to sustainable development, can be cancelled.

The initiative will only have very modest effects in any case. That’s because the total volume of permissible voluntary cancellation in the CDM is less than 0.5% of the total issuance under the CDM. While it may be possible to rescue individual CDM projects in this way, a massive increase of voluntary cancellations would be needed for a significant impact on the price of credits. Given the limited financial resources and the lack of quality criteria, this might not be a smart move. As ever, the key to success will be ambitious carbon reduction targets that act as a major driver for demand.