Developing a project
This section is directed at those who believe they may want to develop a climate change project outside of the UK, it provides a brief overview of the factors to be considered.
For more information on typical eligible climate change projects, and the concepts of carbon credits and emissions trading, please refer to the Opportunities section. Our Country information has information on potential host countries.
For project enquiries, the CCPO offers a bespoke service of free initial advice for UK businesses. If you are interested in this service, please go to How the CCPO can help .
Project development
The increase in the Initial Rate of Return (IRR) from the sale of emissions reductions credits is generally between 2 and 7%. This percentage is dependent on a number of factors including the terms in the credit purchasing contract; the technology used; the amount and type of the greenhouse gas reductions; the country where the project is implemented (and any perceived financing risks); the capital costs; and the costs to ensure eligibility (initial project validation, on-going monitoring and third party verification of the reductions). For CDM projects, a registration fee will also be payable, and some host countries are considering levying a tax on the carbon credits as well.
The project cycle
The specific processes involved in developing a CDM or JI project are outlined in our Business guides. This may seem somewhat daunting, and we recommend that once you have read the guides and have an initial understanding of the processes involved, you carry out a quick assessment of the potential financial benefits that could accrue from carbon credits associated with the project. This will enable you to assess whether or not you should invest more time in developing the project as a climate change project. We are happy to assist in this 'back of the envelope' calculation.
Initial assessment of viable projects
The first step is to make a quick calculation of the number of carbon credits accruing from your project, to see if the potential impact of the carbon credits on your project finance justifies any further action.
Additionality
It is essential that your project goes beyond normal practice from a greenhouse gas emissions point of view. If this is not the case, the project will be ineligible. So it is vital to determine whether your project will emit less greenhouse gases than the normal practice in the country/area in which you are planning to implement it. This condition or test is referred to as additionality. The extent to which a project performs better than the normal practice determines the amount of carbon credits that can be attributed to it. This normal practice i.e. what would have happened in absence of your project, is called the project 'baseline'. In some cases, there will be reasonably good information on the baseline emissions, and for other countries and sectors, establishing the baseline will be the responsibility of the project developer.Bear in mind, the baseline methodology and assumptions will be subject to third party assessment if and when the project is validated, prior to international approval as a CDM or JI project.
Potential volume of carbon credits
We can suggest tools you might want to use for an initial assessment of the potential contribution of carbon financing to a project.
Type of projects
To host a Kyoto compliant project the country must have ratified the KP. CDM projects are in developing countries and JI in developed countries, i.e. those which have a commitment under the Kyoto Protocol. For JI projects there is a two track arrangement. For track 1 projects, the host country needs to have met certain criteria. Track 2 projects are approved by the supervising committee, the JI equivalent to the CDM executive board. The current status of a country can be confirmed via the UNFCCC web site.
CDM projects need to be approved and monitored by the executive board of the CDM.
Project uncertainties
Setting up and implementing any project in a developing country can be difficult, and climate change projects are no different. However, the potential income stream from carbon credits can help to improve the long-term economics. There are risks and uncertainties associated with project development and some are specific to CDM and JI projects.
Project uncertainties include:
- Capability and willingness of countries to host climate change projects, and the nature and duration of obtaining the necessary approvals
- Determination of the project baseline, and hence the amount of emissions reduction credits which can be assigned to the project - improvements are easier to quantify than new projects which adopt an alternative course of action
- The market price for carbon credits
Proceeding with your project
Every project is different - the financial benefits of turning it into a climate change project, and the potential hurdles, will be specific to your project. These are dictated by the host country, current practice, the technology to be applied etc.
We are available to assist you in the initial evaluation of some of these issues. For more detailed assistance we would refer you to the many UK companies with particular expertise to assist you through the full process. At the CCPO, we can continue to assist you with the Government relations required as a project progresses.
UK companies that can help
The UK has a broad range of experienced companies who can offer climate change related services to UK and overseas project developers and other clients.
