The clean development mechanism and emerging offset schemes: options for reconciliation?

During the first Kyoto commitment period, the Clean Development Mechanism (CDM) emerged to be a global standard for the global carbon market. Linking developing and industrialized countries in an international cooperation mechanism, it provided a governance and accounting framework for emission reduction efforts around the world. Not without its own problems, and now suffering from a severe lack of market demand, the mechanism has been subject to substantial criticism from various stakeholders and has made great reform efforts in response. This report shows that, despite these reform efforts, potential sources of new demand such as emerging emissions trading systems have distanced themselves from the European approach of supporting the mechanism through use of its credits as offsets in its trading system. Australia had planned to accept CDM credits, but not exclusively, and distanced itself from the CDM model in the development of its own domestic offset system. California originally considered but ultimately rejected the CDM, instead also electing to launch its own offset system concentrating on North America. Japan, which had been the second largest source of demand for Kyoto units after Europe, has elected to start its own bilateral system, explicitly departing from the multilateral approach. South Korea has made it clear it will not accept international offsets into its system until at least 2020. Despite efforts made to reform the CDM, as its market fades, the international climate regime stands to lose the benefits of the CDM including its input role vis-à-vis the design of new offset policies. This report examines the political context and reasoning of these sources of potential demand to depart from the established system and offers suggestions for further reforms or measures to take to preserve some of the benefits of the erstwhile framework.