Attempt to Loan Money Against UN Emission Credits Hit by Defaults

REPORT SHORT:
Oct. 2, 2020 — London — More money in a small United Nations loan program to encourage renewable energy in developing nations was written off than repaid.

The Clean Development Mechanism Loan Scheme was launched in April 2012. About $1.6 million was written off, while $1.3 million was repaid, according to a report being considered through Monday at a meeting of administrators of the CDM, the UN carbon offsetting market.

A fundamental assumption underpinning the program was that once the CDM projects had achieved registration, the loans would be repaid using the proceeds from selling Certified Emission Reduction credits generated under the CDM by the supported project — the CERs were both the collateral and the source of repayment income.

But there’s barely any market for the CERs. Prices are near zero because global carbon trading rules aren’t set and countries have not adopted ambitious emissions targets, so this strategy didn’t go well.

With the collapse of the CER price in 2012, the assumption that CERs would repay the loans “became invalid, and the business case for many CDM projects also became invalid. This is probably the foremost reason why 40% of the loans had to be written off. The design of the Loan Scheme did not consider any possibility of the market for CERs not being as buoyant as it was when the scheme was designed. In addition, the overly detailed CMP (UN climate talks) decisions on exactly how the loan scheme operated prevented the implementing agency or the secretariat from adapting to these severe market changes in any material way.”

While the program was a first-of-its kind initiative, its problems were not only the result of its design and operation, but were “even more affected by the changing fates of the CDM itself and the markets within which it is operating.”

It provided a much-needed financial life-line to allow project developers to engage experts to help move their CDM projects forward, “but did not in itself improve the conditions for CDM projects in these countries. Considering this, the fact that more than 50% of the approved loans resulted in new CDM project registrations must be seen as a success.”

Related government agencies in each nation should have been underpinned, which could have made the program more successful.

“Mostly due to the difficult conditions in the project countries, a majority of the projects supported by approved loans were delayed, and loan agreements had to be amended repeatedly to avoid breach of the loan contracts. Partly contributing to this were the loan conditions set at CMP level, which reduced the administrative flexibility of the Loan Scheme. A lesson learned in this regard is that development of CDM projects in countries with less favourable conditions typically requires more time than such projects would need in other countries. This could have been foreseen and built into the loan conditions from the outset to avoid the extra administrative burden associated with the delays and contract amendments.”

For the full report, technology types, countries, click:

https://cdm.unfccc.int/filestorage/e/x/t/extfile-20200907202320702-EB107_propan09_CDM_Loan_Scheme.pdf/EB107_propan09_CDM%20Loan%20Scheme.pdf?t=ZHF8cWhsMzU1fDDdOWwOqIZjMt8HcSnCheC5

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