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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, which 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 carrying out climate change projects overseas, and transferring the reduction of emissions, or "rights to emit", to contribute to ensuring the buyer's emissions target is met.
International emissions trading involves trading in emissions reduction credits. So a country which had less "rights to emit" than its actual emissions could purchase credits to overcome its shortfall.
Climate change projects are standard development projects, but with additional features:
They lead to a reduction in greenhouse gas emissions (compared to usual practice)
They can yield "carbon" credits commensurate with the level of emissions reductions.
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 lamps)
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 and needing 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)
A searchable database of current project opportunities is available.
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 greenhouse gas emission reductions accruing from a project can only be monetised if there is actually a demand for the reductions. This arises if someone needs or wants to make a reduction and doing so in another way would be more expensive. For example, common or legally required practice in one country and a particular industry may already be best practice, making further GHG reductions either technically unfeasible or extremely costly. Elsewhere in the world, adoption of the same level of best practice may result in a significant reduction in emissions at a relatively low cost.
The carbon market can currently be divided into two main markets:
The Kyoto compliance market
The Non-Kyoto 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 (for example, a verifier may accept part payment of fees in the form of credits)
The Kyoto compliance market
In the Kyoto compliance market, the carbon credits which are traded will be able to contribute to achieving the formal targets agreed in the Kyoto Protocol. The conditions for JI and CDM projects, the only means of generating such credits, are outlined in the Marrakech Accords.
The Marrakech Accords were agreed at the UNFCCC's 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, and many of the outstanding issues have since been resolved. 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 baselines are accepted and established, projects using the same baseline 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 at present are institutional buyers, like the World Bank (through its Prototype Carbon Fund), and the Dutch Government (through its CERUPT and ERUPT programmes). They are willing to take (part of) the risk that the resulting credits are not Kyoto compliant, and price their offer process accordingly. Emerging new buyers include Austria, Finland and Japan.
However, 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 2005 will significantly increase the market for project-based credits, as it will be possible to use them for compliance purposes. CDM credits can be used from 2005, and JI project credits from 2008.
The Non-Kyoto compliance market involves the buying and selling of credits that are not eligible for use in meeting national Kyoto Protocol targets.
Typical reasons for participating in this market are:
Meeting voluntary agreements/targets
Hedging against expected future commitments
Trading (speculation on price development of carbon credits)
The carbon buyers on this market are mainly private buyers (traders, utilities, etc).
The current carbon market is far from a liquid market, and there is no transparent pricing mechanism for carbon credits. It is not clear at present that the price reflects the cost of making the emissions reductions.
Kyoto compliant credits are usually more expensive than credits for the non-Kyoto compliance market. There are two reasons for this. Firstly, only Kyoto compliant credits can be used towards the national Kyoto emission reduction targets, and secondly, because of the international significance of the credits the project developer or credit owner needs to fulfil a number of requirements with regard to their validation, monitoring and verification.
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.
Up-to-date information on the price of carbon credits should be obtained from potential institutional buyers or traders.