As climate change concerns rose globally in 2007, a pioneering market-based effort to regulate and reduce greenhouse gases had its best year ever - some US$64 billion in trades. But this success masked a looming challenge: how to ensure developing countries as well as wealthy ones benefit from the carbon market? “At a time that global cooperation to reduce the risk of climate change is more important than ever before, the prospects for developing countries benefiting from the carbon market are in question,” says World Bank Senior Carbon Market Specialist Karan Capoor, co-author of the “State and Trends of the Carbon Market 2008,” released last week at Carbon Expo in Cologne, Germany.

Capoor and Philippe Ambrosi of the World Bank’s Climate Change Team say developing countries are running out of time to start greenhouse gas reduction projects that can earn money in the carbon market by selling pollution-reduction credits. Such projects are referred to as CDM projects because they are approved under the Clean Development Mechanism of the Kyoto Protocol agreement to reduce global greenhouse emissions.

Developing countries have sought approval for more than 3,000 projects ranging from wind farms to landfill gas capture projects, but the system has been unable to handle this “extraordinary response,” says Capoor. Some 2,000 projects are still waiting to be accredited, and many are facing a two-year delay, says Capoor.

That’s a serious problem, he adds, because the Kyoto Protocol agreement that allows such trading is up for renewal in 2012. To recoup costs, projects in developing countries should be getting underway in 2008.

“A two-year delay for a project that’s supposed to start in 2008 amounts to 40 percent of the revenue that they would have gotten from carbon trading,” he says. “So that poses a real risk. Those countries and projects are losing money. We don’t know exactly when they’re going to come out of the pipeline, and when they do, will there still be time for them to make it from a financial perspective?”

Bottlenecks

Bottlenecks include a shortage of qualified “verifiers” - people who ascertain whether greenhouses gases have been reduced before a project is allowed to sell credits on the market. Accredited firms have had trouble retaining trained verifiers in the hot carbon market and have not been able to fill the gap, says Capoor.

At the same time, regulators have become more vigilant, he adds. The combination has meant a two or three year approval process is common, he adds.

Projects in China make up 73 percent of the CDM market, and other regions have been showing strong interest in CDM projects in the last couple of years.

“Unfortunately, African countries are just beginning to come into the mechanism,” says Capoor. “And when they come in they find they can’t get through the system because it’s blocked up.”

Report co-author Ambrosi adds: “Projects for renewable energy and energy efficiency, as well as investments in poorer developing countries, make up the bulk of the projects this year and it is these projects that are losing out as a result of procedural delays and bottlenecks in the CDM, putting their eventual implementation in question. “

Clear Signal Needed

To keep the momentum going, governments need to send a clear signal that greenhouse gas reduction projects in developing countries will continue to be able to sell credits on the carbon market under the climate change agreement that follows the Kyoto Protocol, say State and Trends of the Carbon Market authors and others.

“In order to continue market growth and investment in clean energy, policy-makers need to send the project development and buying sectors a clear signal that these mechanisms will continue to be an important policy tool in the post 2012 policy framework to address climate change and improve their performance,” says Jack Cogen, CEO of Natsource LLC, a leading emissions and renewable energy investment bank.

The European Commission, however, has proposed freezing new demand for projects from developing countries, creating uncertainty about the continuation of the CDM program.

Capoor says failing to capitalize on the current momentum toward CDM would be a “missed opportunity” to help jumpstart clean technology in the developing world.

“This is all momentum for projects that are in effect the kinds of things you want to encourage more of. You don’t want to lose all that momentum. You want to be able to accommodate that momentum and build on it. That’s really the challenge.”