Dwindling CDM may affect Carbon Offset Supply

Over 8 million tonnes of carbon dioxide equivalent (CO2-e) were listed on COAS (Carbon Offset Administration System) for the 2019 and 2020 tax periods, with 7.4 million tonnes CO2-e retired and commercialised as offsets for tax compliance.

Of the 26 carbon tax projects eligible under the local Carbon Tax Offset (CTO) scheme, 7 fall under the Verified Carbon Standard (VCS) and 19 under the Clean Development Mechanism (CDM).

EcoMetrix Africa carbon market analysis shows that 59% of the CTOs listed originated from the CDM in 2020, 18% more than the 41% listed under VCS. However, offset listings under VCS increased by 12%, while CDM offsets decreased by 12% compared to the 2019 tax period. The EcoMetrix team identified two primary reasons.

Firstly, the supply of historic credits from existing industrial Nitrous Oxide (N2O) Abatement Projects under the CDM are almost depleted and these projects won’t be eligible to generate carbon credits going forward, as these industries are now inside of the carbon tax net.

“The decline of CDM sourced offsets could disrupt the local offset supply. With fewer sources, coupled with the massive uptake in CTOs demand for the 2019 and 2020 tax year and the expected increase in compliance buyers as the carbon tax rate increases, the growing demand for CTOs will not be met,” says Henk Sa, Partner, EcoMetrix Africa.

Secondly, the decision whether the CDM itself will continue beyond 2021 has been postponed until COP26 UN negotiations. The delay has caused uncertainty among investors and project developers regarding the future of projects under the CDM.

With the exclusion of renewables from the scope of the standard, the VCS – as it currently stands – cannot meet the overall local CTO demand. It is therefore incumbent on the South African government to lobby at COP26 to extend the CDM until a new market mechanism, is agreed and fully operational under the Paris agreement.

To speak to one of our partners about Carbon Tax Offsets, email Lodewijk.Nell@ecometrix.co.za or Henk.Sa@ecometrix.co.za.