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Trading Carbon : December - January 2011
and CER purchase destinations in the post-2012 period. Effectively, this means that South African CDM projects registered after December 31 run the risk of finding only a limited number of potential purchasers for their CERs. A factor that is likely to have grave consequences for the liquidity and size of the market and the value of the South African-originated UN carbon offsets. Therefore, South Africa stands to lose out on hundreds of millions of euros worth of revenues derived from CDM projects. The EU policy decision on acceptance of CERs into the EU ETS is entrenched in legislation, and it is not without risks. EU policymakers face uncertainty over whether their Energy Efficiency Directive will result in the volume of emissions reductions that would realistically permit the EU to limit its purchases of carbon offsets to LDCs. The ban, for use as offsets in the EU ETS, of CERs generated from the mitigation of some industrial gases commences on January 1 and has been estimated as having the potential to remove from eligibility for EU ETS utilisation up to a half of the current CER pipeline. The possibility exists that these policy positions might contribute to scarcity of CERs available to the EU, at a time when there is a potential increase in carbon emissions from the proposed phase out of nuclear power in Germany. Certainly, European nations seem to be angling to mitigate cost containment to engineer a higher cost for carbon -- and potentially encourage domestic emission reduction efforts. The corresponding impact on South Africa, however, will be acute, and CDM project developers are currently facing a triple-dilemma. Many are r ushing ahead with project development in South Africa in the hope that they achieve registration prior to December 31. This factor is already causing a bottleneck of work within the various operations of the professional service providers concerned. Alternatively, project developers may choose to have faith in the robustness of the post-2012 carbon market, notwithstanding the current policy environment. And, therefore, proceed towards registration at a more considered pace at which, in the context of a process that is already fraught with difficulty, errors are less likely to arise. Without clarity on the eligibility of South African CERs in the EU ETS in the post-2012 period -- and uncertainty on new sources of demand in Australia -- this route has a number of inherent commercial and operational risks. Others may forego project development altogether. While this route is the most likely solution for a number of potential project developers, it also negates the possible benefits, including sustainable development benefits and flows of foreign capital investment into the country. South Africa's continued faith in the CDM is evidenced by the reference -- in October's South Africa's National Climate Change Response White Paper -- to the CDM as a market-based mechanism that has been the beneficiary of an income tax incentive. This reflects ongoing opportunities for cost effective investment in projects to reduce carbon from its power sector and industries. To their credit, South African officials have also stepped up to propose a broader, national approach to reducing carbon emissions than is afforded by the CDM. As abovementioned, and immediately prior to the negotiation of the Copenhagen Accord in 2009, South Africa was the sole African country to express a GHG emissions reduction ambition. The country's pledge compares favorably with other advanced developing countries, such as Brazil (36 percent to 38 percent reduction below BAU). Such an ambitious goal will require considerable investment in the South African economy, and the focus is now on mechanisms to enable this flow of capital. The UN's proposed Green Climate Fund (GCF), which is intended as a future mechanism for funnelling climate finance to developing countries, is one such tool. South African government ministers have expressed 17 COVER STORY Dec 2011/Jan 2012 REUTERS/MIKE HUTCHINGS