Discussion paper: Marginal cost of CER supply and implications of demand sources

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In this discussion paper we estimate the marginal cost of supplying certified emissions reduction units (CERs) from projects that are currently registered under the Clean Development Mechanism (CDM). We develop a supply curve using data on the individual ability of projects to potentially supply CERs over the period up to 2020. We analyse changes to the supply curve based on a number of scenarios which restrict the eligibility of CERs based on the timing of emission reductions, the timing of project investment decisions and registration under the CDM, as well as an assessment of the extent to which projects are vulnerable to the risk of discontinuing abatement activities without CER revenues.

We find that, in the absence of any eligibility restrictions, there is a large pool of CERs available to supply the market at prices below € 1 per unit. Much of this potential supply is from projects that are likely to continue delivering emission reductions regardless of any further revenues derived from the sale of CERs. Our analysis is relevant to the ongoing policy negotiations related to the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), amongst other sources of demand. The results indicate that, if CERs are accepted as eligible units of compliance under CORSIA without any restrictions, the demand for offset credits from international aviation to 2035 is unlikely to either materially impact the current price level for CERs or alter the overall level of greenhouse gas abatement undertaken. An effective way for CORSIA, and other schemes, to incentivise emission reductions beyond those that are likely to occur anyway would be to ensure that demand is targeted at projects that are at risk of discontinuing abatement activities and to encourage the development of new projects that deliver additional emission reductions.

Contacts for further information: Harry Fearnehough, Thomas Day or Carsten Warnecke