Opportunities
We at the CCPO are here to help those UK businesses which are interested in carrying out greenhouse gas emission reduction projects under the Kyoto Protocol. 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.
Complying with Kyoto Protocol targets
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
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)
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
Greenhouse gases as tradable assets
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 market for carbon credits
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
The Kyoto compliance market
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 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.
The Non-Kyoto compliance market
There is still a Non-Kyoto compliance market for voluntary initiatives around the world.
The UK Government does not promote the non-Kyoto compliance market however Defra are developing a Code of Best Practice for Carbon Offsetting. The Code in voluntary and offset providers can choose whether to seek accreditation for all, or some of their offsetting products. The Code initially covers only Certified Emissions Reductions (CERs), that are compliant with the Kyoto Protocol. The Secretary of State for Defra has also challenged industry to develop a standard for Voluntary Emissions REduction credits (VERs) which could be included in the Code in teh future, subject to verification of their robustness.
And at what price?
The price for a credit will depend on which stage the buyer purchases it. For example if the buying is taking a risk by investing before a credit has been issued, the price will be lower than for an issued credit.
For up-to-date information on the price of carbon credits should be obtained from potential institutional buyers or traders