PANAMA CITY — An impasse in global climate talks is casting a shadow on clean energy financing in the developing world, with growing doubts over a program that has funded billions of dollars in projects.
UN-led negotiations involving nearly 200 nations are struggling to come up with a framework after 2012, when wealthy countries' commitments to cut carbon emissions blamed for climate change run out under the landmark Kyoto Protocol.
A signature feature of Kyoto is the Clean Development Mechanism -- or CDM in the talks' jargon -- which allows countries to meet their obligations by financing environmentally friendly projects in the developing world.
The European Union has supported a new round of Kyoto commitments after 2012 to avoid any gap, but other advanced economies have balked. Ramping up the pressure, developing countries have warned they would not support a continuation of the CDM without further commitments by rich nations.
"My hunch is that without having a second commitment period, there is no future for the CDM at this moment," said Naoyuki Yamagishi, who is following the issue for the environmental group WWF.
Martin Hession, the chair of the CDM executive board, acknowledged a hardening of positions during talks but said that the program had an ongoing mandate from the Kyoto Protocol that does not end in 2012.
He argued that the CDM -- which forecasts its projects will reduce 2.7 billion tons of carbon equivalent by the end of 2012 -- has made a "massive contribution" both to climate change mitigation and sustainable development.
"For me, the impact is plainly overwhelming," he told AFP in Panama City where the latest talks under the UN Framework Convention on Climate Change are underway.
"What the market would most like to see would be a clear sense of the direction we're going on mitigation," he said.
The World Bank has also urged greater clarity. In a recent study, the global lender warned that billions of dollars in private investment were at risk due to the doubts over the future.
Transactions in the CDM market have stagnated and amounted to $1.5 billion last year, less than in 2005 when the Kyoto Protocol took effect, according to the World Bank study.
The CDM has also proven attractive to investors, particularly in Europe, by creating a new unit -- Carbon Emission Reductions -- that can be put up as collateral and is not subject to whims such as currency rates.
"The CDM has provided a usefulness as a tool in financing given that it puts a price on C02. It's not clear what other mechanism would do that," said Steven Gray, the head of international and UN policy for London-based low carbon investment manager Climate Change Capital
But the CDM has been controversial among environmental groups. Some argue that it effectively subsidizes investment in dirty energy by balancing it off with credit for overseas projects that may get built anyway.
Some policymakers may privately agree. A US diplomatic cable released by the WikiLeaks website said that executives in India conceded that they would continue projects with or without CDM benefits they were seeking.
Official data shows that nearly half of projects are in China, the world's largest emitter, and that a comparatively small number are in the world's poorest countries.
China's role in green energy has been particularly controversial in the United States, where many lawmakers are skeptical about climate change and question any initiative that would fund projects in a perceived competitor.
The United States rejected the Kyoto Protocol, although California -- the largest US state which has gone its own way with an emissions reduction program -- is in early talks with the CDM board.
Adding to the controversy, Japan, with the support of India, has pressed in Panama City for the CDM to be expanded to cover nuclear energy projects.
"The CDM should be flexible and maximize possible technological contributions to sustainable development," Japanese trade ministry official Soichiro Seki said, calling for "technical neutrality."
Japan has long pushed to promote exports of its technology including nuclear power, which has come under increasing scrutiny after the Fukushima crisis following the March 11 tsunami.
Still, the WWF's Yamagishi said it was critical to avoid a lapse into a system of bilateral arrangements on climate financing that lack supervision. "We definitely prefer a multinational system because it has rules," he said.
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