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We at the CCPO are here to help those UK businesses which are interested in carrying out greenhouse gas emission reduction projects abroad. Here we describe the type of projects that may qualify as international Climate Change projects and introduce the concepts of carbon credits and emissions trading. We recommend you also look at Developing a project for more information on the processes involved in establishing and running the projects, and Country information for information on potential host countries.
Developed countries that have ratified the Kyoto Protocol and accepted their emissions reduction target, termed Annex I countries, may meet their targets through domestic climate change policy activity and the use of the Kyoto Mechanisms. There are three Kyoto Mechanisms:
Joint Implementation (JI)
Clean Development Mechanism (CDM)
International Emissions Trading (IET)
Both JI and CDM are "project based mechanisms" and involve participation in climate change projects overseas, and repatriating the reduction of emissions, or "rights to emit" which can be used to meet allowances and the buyer's emissions target.
International emissions trading involves trading emissions reduction credits. So a country which had less "rights to emit" than its actual emissions could purchase credits to overcome its shortfall and thus comply with the Kyoto commitment.
Climate change projects are standard development projects, that meet the additional criteria for CDM and JI projects. Critically, they should:
lead to a reduction in greenhouse gas emissions that are real and measurable
yield "carbon" credits commensurate with the level of emissions reductions achieved by the project
Typical examples of climate change projects are:
Use of renewable energy rather than fossil fuels for electricity generation (e.g. a wind farm)
Use of a lower carbon intensive form of fossil fuel energy (e.g. installation of a combined cycle gas power station where coal-fired power stations are usual)
More efficient use of energy (e.g. the use of more energy efficient motors, etc.)
Management of biodegradable waste (e.g. the capture and use of landfill gas to generate electricity, rather than allowing it to vent to the atmosphere thus replacing the need to use fossil fuels to generate electricity)
A change to an industrial process to reduce the release of greenhouse gases (e.g. a change in the way cement is manufactured)
Long term storage of carbon (e.g. by sequestering it in trees, or storing it underground, for example in cavities left after oil extraction)
Those businesses undertaking or participating in the kind of projects outlined above are likely to include:
project developer
technology and equipment manufacturers and suppliers
companies providing expertise (technical, services and trading)
companies which seek to reduce their greenhouse gas emissions through management of their operations - e.g. manufacturing, property portfolios, transport investors
The economic viability of climate change projects can be enhanced through monetising the greenhouse gas emission reduction benefits as carbon credits. The potential amount of carbon credits accrued is dependent on the emission reductions resulting from the implementation of the project.
The carbon market can currently be divided into two main markets:
The compliance market for Kyoto and the EU ETS
The voluntary compliance market
In either type of market, another issue is the way in which a project developer decides to benefit from the carbon credits. The carbon credits can form:
A future income stream
A way of demonstrating improved financial security
A means of payment
In the compliance market, the carbon credits which are traded will be able to contribute to achieving the formal targets agreed in the Kyoto Protocol and with certain restrictions the EU ETS. The conditions for JI and CDM projects, the only means of generating such credits, are elaborated in the Marrakech Accords.
The Marrakech Accords were agreed at the UNFCCC's 7th Conference of the Parties (CoP 7) in Marrakech, Morocco 2001. They give guidance on the requirements for projects in the areas of validation, verification, monitoring, etc in order to generate eligible emissions reduction credits. In June 2003, the CDM Executive Board (CDM EB), the body overseeing the CDM process, received its first recommendations from the CDM Methodology Panel. These concerned acceptable methodologies for determining baseline emissions for the business-as-usual case. Once methodologies are approved, projects using the same approach can be much more certain of receiving project approval. For more information, see our business guides or go to http://cdm.unfccc.int/methodologies.
The most significant buyers of Kyoto compliant carbon credits to date have been institutional buyers, like the World Bank (through its Prototype Carbon Fund), and the Dutch Government (through its CERUPT and ERUPT programmes). They were willing to take (part of) the risk that the resulting credits are not Kyoto compliant or that the Kyoto Protocol would not come into force and this was reflected in the price they offered. Emerging new buyers include the governments of Austria, Finland and Japan.
But, significantly, more private buyers are entering the market, mainly to speculate on price development, and to hedge against expected future Kyoto commitments.
The introduction of the EU Emissions Trading Scheme (the EU ETS) in January 2005 significantly increased the market for project-based credits. CDM credits can be used for compliance from 2005, and JI project credits from 2008.
There is still a Non-Kyoto compliance market for voluntary initiatives around the world. This market is primarily based in the USA and Australia, neither of whom have ratified the Kyoto Protocol. This means the buyers in the market are primarily the private sector.
Despite a significant increase in activity, the current carbon market is far from a liquid market, and there is no transparent pricing mechanism for carbon credits. It is still uncertain that the price reflects the abatement cost of emissions reductions.
Kyoto compliant credits attract a higher price than credits for the non-Kyoto compliance market.
Typical prices on the non-Kyoto market range from £0.5 to £2 per tonne CO2e (small quantities of credits from small-scale projects can attain a higher price).
For a Kyoto compliant carbon credit, the World Bank's Prototype Carbon Fund pays about £2 per tonne CO2 but,via its Community Development Carbon Fund (CDCF), it will pay more for credits which demonstrate a high level of community benefit as well. The maximum price that can be offered to the Dutch Government's CERUPT tender is about £3.30 for a renewable energy project or about £2 for a landfill gas project.
There is still an element of volatility in the market. Therefore, for up-to-date information on the price of carbon credits should be obtained from potential institutional buyers or traders.