After a two week marathon negotiation, COP17 of the United Nations Framework Convention on Climate Change (UNFCCC), including CMP7 of the Kyoto Protocol, came to an end in the early morning hours of Sunday, 11 December 2011 in Durban, South Africa – nearly thirty-six hours after its scheduled conclusion. Governments, including most developed countries, agreed to a second commitment period of the Kyoto Protocol starting from 1 January 2013 and to a legal framework for a comprehensive global agreement for responding to climate change – to be negotiated by end of 2015 and signed by end of 2020.

Unlike in the first Kyoto period, the second period’s emissions reduction targets are to be determined in a “bottom-up” manner with those countries that have committed themselves to economy-wide quantified emission reduction or limitation objectives (QELROs) having until 1 May 2012 to make submissions to the UNFCCC secretariat in this regard.

CCS inclusion under the CDM – an important step forward

Among the list of successes notched-up by COP 17 is the formal inclusion of CCS in the Clean Development Mechanism (CDM) of the Kyoto Protocol. International negotiations lasting some seven years came to a positive conclusion with the adoption of modalities and procedures which seek to ensure appropriate and safe implementation of CCS projects as CDM project activities while making provision inter alia for the prevention of leakage, relevant ownership rights and long term liability.

This brings ever closer the potential for CCS projects to be implemented according to the rules of the CDM and to earn certified emissions reductions (CERs – the species of carbon credit generated by a CDM project), which have a commercial value on the international carbon market.

The modalities, currently, only apply to the capture, transport and storage of carbon dioxide in geological formations within the boundaries of one nation, although the issue of transboundary movement of carbon dioxide for the purposes of storage is expressly indicated as being on the agenda of the next CMP (Qatar, December 2012). The combination of storage of carbon dioxide and Enhanced Oil or Gas Recovery (EOR/EGR), as a CDM project activity, is not finally dealt with. It will be important, in the future, to obtain clarity on EOR/EGR enhanced CCS projects for the reason that this combination could facilitate early implementation because of the upside of higher volumes of oil and gas produced.

Permanence

Permanence (of removal of emissions from the atmosphere) is a particularly thorny issue for sequestration projects, e.g., CCS and forestry. CDM afforestation and reforestation projects use the device of temporary and long-term CERs (respectively tCERs and lCERs) with tCERs being required to be replaced with lCERs after the elapse of a specific period of time.

This solution to the permanence issue is not optimal. Fortunately this route has not been taken in the CCS context. Instead a more robust solution is found by combining a long term monitoring requirement of at least twenty years with a project based CER reserve account for the purpose of accounting for any net reversal of storage. The project based reserve account will hold five per cent of the CERs issued in respect of the CCS CDM project activity for the purpose of offsetting any net reversal of stored emissions.

Only after long term monitoring of the geological storage site has been terminated, a request can be made to forward any remaining CERs in the reserve account to the registry accounts of the Parties and project participants. Monitoring shall not be terminated earlier than twenty years after the end of the last crediting period of the CDM project activity or after the issuance of CERs has ceased, whichever occurs first.

Moreover, monitoring can only be terminated if no seepage (leakage of carbon dioxide outside of the confines of the storage site) has been observed at any time in the previous ten years and if all available evidence from observations and modelling indicates that the stored carbon dioxide will be completely isolated from the atmosphere in the long term.

In addition to the project based reserve the establishment of a global reserve of CERs for carbon dioxide capture and storage project activities has been proposed for consideration. The idea of a “global reserve” hints at aggregating the risks of individual projects and providing overall assurance for the coverage of any potential non-permanence problems in one of the projects.

This is in line with global general insurance practices and could be an appropriate addition to the project based reserve. Parties and admitted observer organizations are invited to submit to the secretariat, by 5 March 2012, their views on the issues regarding a global reserve and the previously mentioned outstanding issue of multinational CCS project activities.

Please refer to the table opposite for an indication of the select characteristics of the CCS modalities.

Markets

Although the inclusion of CCS in the CDM is an important step forward from a regulatory point of view, it does not mean that developing countries will automatically be able to tap into international markets by selling carbon credits from CCS projects. The position of the European Union, the largest and most willing buyer of CERs appears to remain unchanged with respect to the exclusion of non-LDC projects registered after 2012. Although it is rightfully so stated by IETA1 that the market will eagerly await clarification from the Commission of how, if at all, Durban has changed anything here. Pending that, it would seem unwise for developers to assume the EU is back in the demand game, outside LDCs.

With the aforementioned post-2012 exclusion of non-LDCs by the European Union in place, there is practically no real future market in sight at the moment for credits from CCS projects in developing countries. One could however debate whether alternative markets, for example the Australian cap and trade scheme envisaged commencing by 1 July 2015, could provide relief in this regard.

1. IETA, the International Emissions Trading Association, “The consequences of the Durban COP for the carbon market and climate finance”, December 2011.