A coal train, or a load of CDM carbon credits?

In a decision criticized as “unfortunate” and even “insane” by onlookers, the United Nations has decided that new coal plants are eligible for carbon credits under the Clean Development Mechanism (CDM).

The CDM is a trading platform set up by the UN that allows developed countries to obtain verified emissions reduction credits through renewable energy, energy efficiency, power plant fuel switching, and sustainable transportation projects in developing countries in order to meet Kyoto Protocol targets.

Now the UN has added coal to the list of eligible projects. Again.

At a CDM Executive Board meeting last week, the organization approved new rules that allow more efficient supercritical coal plants built in developing countries to obtain carbon credits. So theoretically, a coal-fired power plant in Europe could be “offset” by carbon credits not through renewable energy, but through another carbon-burning coal power plant in India.

“This destroys the sense that there is some sanity and rationale to this mechanism,” said Justin Guay, head of the international climate program at the Sierra Club. “The fact that we are defending coal plants as part of low-carbon finance is crazy.”

The Sierra Club and the watchdog group CDM Watch say there are 40 plants in China and India waiting for CDM approval.

It’s uncertain how many coal plants in that queue will qualify. The current system will only be in place until the end of 2012, when the first commitment period of the Kyoto Protocol comes to a close. With only a few months left before the transition of the CDM, there is limited time for plant operators to qualify and sell credits into the largest markets.

“We’ll have to see if these plants rush to meet the deadline. That’s unclear. But the real issue is about how this market sets standards long-term. We now have all these regional carbon market in development, and they’re all going to look somewhere for these standards,” said Guay.

This isn’t the first time the UN has added coal to the list of eligible technologies under the CDM. In November of 2011, the Sierra Club reported on coal plants that were receiving millions of credits through the mechanism — all of which would have likely been built without CDM funding.

The UN board overseeing the mechanism even warned at the time that emissions reductions from coal plants were overestimated by up to 50 percent, possibly resulting in a net emissions increase.

The methodology was eventually suspended at the COP 17 climate conference in Durban. But the board approved a new standard last week, again allowing higher-efficiency coal plants to gain certification through January 1st.

Supporters of using CDM to encourage higher-efficiency coal plants say the method is no different than encouraging efficiency in any other sector: The end goal is realizing emissions reductions where ever possible. If the mechanism encourages more efficient supercritical coal plants over older subcritical technologies, then it is performing as designed.

But critics say that argument is dangerously flawed for a variety of reasons.

The most obvious concern is the promotion of coal at all. Echoing the view of the world’s climate scientists, Fatih Birol, chief economist at the International Energy Agency, warned in 2011 that the world’s chances of combating dangerous climate change would be “lost forever” if countries fail to quickly reduce reliance on fossil fuels :  “If we don’t change direction now on how we use energy, we will end up beyond what scientists tell us is the minimum [for safety]. The door will be closed forever.”

The other flaws are more specific to the CDM mechanism itself.

One revolves around the concept of “additionality” — a problem that has plagued the CDM in a variety of sectors. In order for a credit to have an impact on emissions, it must prove to bring a new project on line. But in the case of large infrastructure projects — specifically coal, hydro, and industrial gas — a large number would get built even without credits.

In 2011, the Stockholm Environment Institute looked at whether decisions to build supercritical coal plants in China and India were based on CDM credits. It found that most of the projects were going ahead anyway, largely due to new technology standards within the countries:

Faced with persistent coal shortages, rising prices and the need to address major power supply deficits, the Indian government has placed a high priority on coal plant efficiency and has mandated the use of super-critical technology for the largest (“ultra mega”) projects. Within a few years, almost no new large Indian new coal plants will come on line using subcritical technology…Despite this shift to supercritical technology, all coal projects in the CDM pipeline still claim subcritical to be the baseline technology, even for projects not expected to be commissioned until 2015. Furthermore, nearly all of the supercritical plants operating or under construction have applied for CDM funding, or indicated they that intend to do so.

Most of China’s new ultra-supercritical plants are applying for CDM funding. Eight of 13 Chinese project documents claim that a subcritical plant would have been built without CDM support. However…no large subcritical unit has been commissioned since 2008. In addition, 11 of 13 Chinese coal projects in the CDM pipeline are expected to be operational by the end of 2011, and only one has been registered as of October 2011. Therefore, it would seem rather unlikely that the CDM was instrumental in technology decisions.

The report estimated that Chinese and Indian projects in the pipeline could result in a 250% over-crediting — flooding the market with coal-based credits, and thus reducing the environmental integrity of the system while pushing down prices further.

Along with general concerns over financing coal in the first place, this over-crediting issue is one of the biggest worries for groups watching the market.

According to a recent report from Thomson Reuters Point Carbon, there is currently a supply glut of credits worth 13.1 billion tons of CO2 for the Kyoto period through 2012. This is due to low demand for credits during the recent economic crisis and lenient rules on the use of offsets. In the next Kyoto period, the surplus could be between 16.2 billion tons and 17.2 billion tons, depending on if Australia and New Zealand decide to participate.

That’s more CO2 than the European Union is expected to emit over the next five years, according to the report.

Adding more coal plants to the mix will only make the problem worse, say onlookers.

“It’s unfortunate that the executive board has made this decision given that carbon markets are collapsing right now because of an oversupply of credits,” said Anja Kollmuss, a carbon markets expert with CDM Watch.

After the UN executive board approved new CDM rules for coal, prices for certified emission reduction credits fell to an all-time low of $2.01 per metric ton of CO2 equivalent.

“It’s really kind of a mystery as to why they approved this,” said Kollmuss.

While the decision may seem nonsensical to those pushing for real emissions reductions, it is not inconsistent with the standards set by other international institutions working in climate finance.

The World Bank has come under fire in recent years for financing large coal plants — most famously providing a $3.75 billion loan for one of the world’s largest coal plants, located in South Africa. The Bank, which ironically says lack of action could make climate change “unmanageable,” is also being criticized for pushing a 600-MW coal plant in Kosovo.

Two large U.S. development agencies, US AID and the Export-Import Bank, have raised the ire of some groups for their support for large, carbon-intensive projects. US AID, an organization that calls climate change “one of the greatest global challenges” is also backing the Kosovo coal project. And the Ex-Im Bank is facing a potential legal battle with environmental groups for considering assisting coal and gas export projects that would ship fossil fuels across the Great Barrier Reef World Heritage Area.

Even the UN’s new Sustainability For All Initiative, an international public-private partnership designed to help 1.5 billion people gain access to modern energy services, is being criticized by some entrepreneurs for focusing too much on large, centralized projects — some of them fossil-based.

Across a range of development institutions — even those with strong stated missions to combat climate change — fossil fuels are still a major part of the mix.

“When you look at the contradictory standards set by these organizations, it shows how insane the framework for discussion has become,” says the Sierra Club’s Guay.