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Storm in a teacup? How a gap between Kyoto commitment periods could affect CDM and JI

In a recent document, the UNFCCC Secretariat outlines how a gap between the first and second Kyoto commitment period can emerge, the implications for CDM and JI, and ways to bridge the gap. But how real is the risk? We think the risk for a gap is clear, that the CDM has a fairly sound legal basis post-2012 despite this, and that demand for CERs is based just as much on domestic legislation as the Kyoto Protocol. However, the Secretariat note’s unclear wording on CDM has given countries on the demand side a negotiation chip they seem increasingly intent to use.

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Latest analyst updates

Two of the large EU member states face important elections within the next two weeks that can and probably will have an impact on traded markets. This analysis provides an overview on the timing of the presidential elections in France as well as the inner-German state elections and the potential implications for the carbon market.

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POINT CARBON ANALYSIS – The UN climate negotiations are stuck with seemingly irreconcilable stances on key issues, mainly along the developing-industrialized country divide. The upcoming negotiating session on Cancun may offer some limited progress toward breaking stalemates over i) financing and MRV, and ii) market mechanisms for avoided deforestation. The overriding question of what form an international climate agreement should take, will be punted to next year’s COP in Johannesburg.

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The EU environment ministers decided to postpone the discussion on the 30% reduction target at the Environment Council meeting in Luxembourg on 14 October. The discussion might resurface when the EU leaders meet for the European Council in March 2011, but it seems more likely that a final decision will be taken in 2012.

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POINT CARBON ANALYSIS – Last week’s climate negotiations in Tianjin, China, saw little progress toward potential concrete outcomes at the high-level round of talks taking place in Mexico in two months The entrenched positions – and even the negotiating texts to be discussed in Cancun – have not changed. However, rules on accounting for emissions from land use change may emerge in December, and this may facilitate progress on REDD. Parties also gained momentum on finance.

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POINT CARBON ANALYSIS – Expectations are low for the upcoming round of climate negotiations in Tianjin, China. We see the section of negotiating text on finance as most likely to progress in the six days available, while options on mitigation will likely remain foggy and bogged down in brackets. The Tianjin talks will be successful to the extent that they result in a shorter, less ambiguous negotiating text with clear options for the higher-level diplomats to decide on in Cancun.

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"Short seven" still need to act on Kyoto deficits

POINT CARBON ANALYSIS –The updated Kyoto balance shows seven countries being short, the same as in June, with Spain, Italy and Japan displaying the greatest projected Kyoto unit deficits. The deficits of the seven countries total 332 Mt over the 2008-12 period. This is up from 283 Mt in June. The main reason for the increase is that Italy has reduced its governmental purchasing plan for CERs, ERUs and AAUs.

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Kyoto period credit balance shows CER/ERU surplus

POINT CARBON ANALYSIS – Our updated CER/ERU balance shows an estimated surplus of 313 million CERs and ERUs over the 2008-12 period. This is the first surplus since Point Carbon began tracking the balance between the supply and demand of CERs and ERUs. The change in our forecast is mainly due to the fact that we have given AAU purchases a more prominent role in our calculations. Notably, we expect a large share of residual credit demand – the expected emissions that will not be covered by current credit purchasing plans – to be filled using AAUs.

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POINT CARBON ANALYSIS: All Member States have since July 2009 used the EU Commission’s harmonised guidelines when approving large hydro CDM projects. These guidelines have made it clearer what is required for a large hydro project to comply with the WCD criteria and the buyers do no longer have to consider which country to seek investor country approval from. The introduction of the guidelines has, however, not led to more large hydro projects entering the EU ETS, primary CER prices are still lower than for other project types and the exchanges have yet to allow for trading of sCERs from large hydro projects.

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POINT CARBON ANALYSIS – Japanese Prime Minister Naoto Kan won yesterday’s scheduled leadership vote in the Democratic Party of Japan (DPJ). Kan’s clear victory removes an important potential hurdle on the way toward passing the Basic Law on Global Warming in the Diet. Passing the Basic Law would pave the way for the introduction of a Japanese ETS starting 1 April 2013, although legislative congestion could lead to a postponement until 2014.

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POINT CARBON ANALYSIS – Recently published clarifications on post-2012 on the CDM EB webpages brush aside any doubt about the role of CDM. This is a surprising u-turn, as the Secretariat issued a note in June on the implications of a gap between commitment periods that signalled a much more uncertain future for CDM. The message is crystal clear: All aspects of CDM will continue post-2012, regardless of whether Annex I countries inscribe post-2012 reduction targets in the Kyoto Protocol or not.

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