emission reduction benefits

TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUSPREVAILING STANDARDS

Chapter 1

Emission Reduction Benefits

1.1 Introduction

This report examines various sources of Emission Reduction Benefits which is a result of

international treaties such as the Kyoto Protocol which set quotas on the amount of

greenhouse gases countries can produce. Countries, in turn, set quotas on the emissions of

businesses. The report also looks in to various standards which are prevalent all over the

world, with special context to India.

Now as the businesses (Industrial and Commercial) which are over their quotas buy Carbon

Credits or Carbon Offsets as commonly called all over for their excess emissions, while

businesses that are below their quotas can sell their remaining credits. By allowing credits to

be bought and sold, a business for which reducing its emissions would be expensive or

prohibitive can pay another business to make the reduction for it. This creates great demand

to service providers in terms of technological and financial consultant. The role of these

parties is also looked in to the report.

Emission Reduction Benefits generated as carbon credits or carbon offset can be exchanged

between businesses or bought and sold in international markets at the prevailing market price.

There are exchanges for : the Chicago Climate Exchange and the European Climate

Exchange and in India we have Multi Commodity Exchange (MCX).


The concept of ERB came into existence as a result of increasing awareness of the need for

pollution control. It was formalized in the Kyoto Protocol, an international agreement

between 169 countries. ERB are certificates awarded to countries that are successful in

reducing emissions of greenhouse gases. ERB are a tradable permit scheme. They provide a

way to reduce greenhouse gas emissions by giving them a monetary value. A credit gives the

owner the right to emit one tonne of carbon dioxide. For trading purposes, one credit is

considered equivalent to one tonne of CO2 emissions. Such a credit can be sold in the

international market at the prevailing market price.


NATIONAL INSTITUTE OF CONSTRUCTION MANAGEMENT AND RESEARCH PAGE 3

Emission Reduction Benefit (ERB) is a financial instrument aimed at a reduction

in greenhouse gas emissions. ERB are measured in metric tons of carbon dioxide-

equivalent (CO2e) and may represent six primary categories of greenhouse gases. One carbon

offset represents the reduction of one metric ton of carbon dioxide or its equivalent in other

greenhouse gases. In other words ERB is a credit granted upon request by an emission source

who voluntarily (e.g. VCS/VER) or under regulations (e.g. CDM/CER) reduces emissions

beyond required levels of control. An Emission Reduction Benefit (ERB) represents the legal

ability to emit regulated pollutants in an amount equal to the quantity specified when

the ERB was granted. ERB in the form of CER (certified emission reduction) or VER

(verified emission reduction) can be sold, leased, banked for future use, or traded in

accordance with applicable regulations established. ERBs are intended to provide an

incentive for reducing emissions below required levels, and to establish a framework to

promote a market based approach to pollution control (main emphasis on GHGs emission).

1.2 Financial Aspect of Emission Reduction Benefit

There are two markets for ERB. In the larger, compliance market, companies, governments,

or other entities buy ERB in order to comply with caps on the total amount of carbon dioxide

they are allowed to emit. In 2006, about $5.5 billion of ERBs were purchased in the

compliance market, representing about 1.6 billion metric tons of CO2e reductions.

In the much smaller, voluntary market, individuals, companies, or governments purchase

Voluntary Emission Reduction (VER) to mitigate their own greenhouse gas emissions from

transportation, electricity use, and other sources. Many companies offer ERBs as an up-sell

during the sales process so that customers can mitigate the emissions related with their

product or service purchase. In 2008, about $705 million of ERBs were purchased in the

voluntary market, representing about 123.4 million metric tons of CO2e reductions.

ERBs are typically achieved through financial support of projects that reduce the emission of

greenhouse gases in the short or long-term. The most common project type is renewable

energy, such as wind farms, biomass energy, or hydroelectric dams. Others include energy

efficiency projects, the destruction of industrial pollutants or agricultural by-products,

destruction of landfill methane, and forestry projects.


ERB has gained appeal and momentum mainly among consumers in western countries who

have become aware and concerned about the potentially negative environmental effects of

energy-intensive lifestyles and economies. The Kyoto Protocol has sanctioned offsets as a

way for governments and private companies to earn ERB which can be traded on a

marketplace. The protocol established the Clean Development Mechanism (CDM), which

validates and measures projects to ensure they produce authentic benefits and are genuinely

"additional" activities that would not otherwise have been undertaken. Organizations that are

unable to meet their emissions quota can offset their emissions by buying CDM-approved

Certified Emissions Reductions (CERs). Obtaining CER/VER is a cheaper and more

convenient alternatives to reducing one's own fossil-fuel consumption. Offsets are viewed as

an important policy tool to maintain stable economies.

One of the hidden dangers of climate change policy is unequal prices of carbon in the

economy, which can cause economic collateral damage if production flows to regions or

industries that have a lower price of carbon - unless carbon can be purchased from that area,

which offsets effectively permit, equalizing the price.

There are several avenues through which a country can earn carbon credits and also trade

in the same.


A quick review of different ERB standard (to be covered in detail later in the report)

1.3 Introduction To Various Prevailing Standards1.3.1 Clean Development Mechanism (CDM)

This is a mechanism through which a developed country sets up a venture in developing

country reducing carbon emissions as an alternative to more expensive emission reductions in

their own country. CDMs are useful as they help the developed countries to lower the cost for

emission reduction and enable the developing countries to achieve technology transfer and

sustainable development. What is crucial to the understanding of ‘approved’ CDMs is that for

any project to be approved by the CDM executive board, the project should result in reducing

the greenhouse gas emissions not mandated by law or regulatory authority but should be able


to achieve additional emission reduction from what it would have anyways contributed to

sans the project or statutory compliance. For instance switching to unleaded petrol is not

reducing emissions voluntarily it as per the stated norms however setting up a waste heat

recovery plant that saves energy will surely earn some CERs to the factory. The cost of

technology involved in taking up such projects are humungous, thus carbon financing is

critical to the development of any CDM project. These projects are undertaken in developing

countries, which has a twin benefit a) it would reduce the cost of setting up the project in a

developing nation and b) it would provide the developing nation with technology input and

sustainable development; besides it would also earn the developed nation Certified Emission

Reductions (CERs). There is a primary CER market wherein the trades are conducted through

emission reduction purchase agreement (ERPAs) and the secondary market for CERs that

involve trades in generic issued or guaranteed delivery CERs that have been traded in

previously. CERs are in the form of certificates, just like a stock. If a project generates energy

using wind power instead of burning coal, and in the process saves (say) 25 tonnes of carbon

dioxide per year, it can claim 25 CERs (One CER is equivalent to one tonne of CO2 reduced).

1.3.2 Joint Implementation (JI)

Joint Implementation projects are expected to take place in ‘economies in transition’, where

there are caps set in for emissions. Emission reductions are awarded as Emission Reduction

Units (ERUs) which come from the host country’s pool of assigned emission credits known

as Assigned Amount Units (AAUs). In JIs the total amount of emission credits does not

change, whereas CDM projects must provide for additional emission reductions to what it

would otherwise have occurred. The Joint Implementation projects are supervised by the

Joint Implementation Supervisory Committee (JISC).

1.3.3 Emissions Trading

Kyoto Protocol introduced the concept of ‘cap and trade’ system. Simply put carbon dioxide

emissions would be capped and the right to emit could be traded. For instance, for Country A


required reduction in carbon emission are 10 units and can generate 20 units of carbon

emission at price P (which is the affordable price), whereas Country B has required reduction

in carbon emissions as 10 units but at price P it can only reduce 5 units. CDM provides

Country B with an opportunity to generate 5 units of carbon emissions in the country and will

trade the rest 5 units from Country A. Thus the net cost of financing emission reductions

would come down considerably leaving both the countries in the win-win position. EU

Greenhouse Gas Emission Trading System (EU-ETS) is an offspring of the cap and trade

system, others being UK Emissions Trading Group (ETG), Chicago Climate Exchange

(CCX), and the New South Wales Greenhouse Gas Reduction Scheme. The EU-ETS is the

largest greenhouse gas emissions trading scheme in the world. It implements a mandatory

"cap and trade" system in 27 EU member countries. The EU carbon market is estimated to be

worth Euro 90 billion – approximately $131 billion a year and the cap and trade system has

been reasonably able to meet its objective of carbon emission reduction whereas the emission

levels have gone up for the rest of the world. As per a Bloomberg report the global carbon

market is expected to reach US$2trillion by 2025. Apart from the primary market of trading

in carbon credits, there are two other markets prevalent.

1.3.4 Gold Standard (GS CDM/VER)

The Gold Standard is the world’s highest quality standard for carbon emission reduction

projects with added sustainable development benefits and guaranteed environmental integrity.

The Gold Standard label certifies projects under the Clean Development Mechanism (GS

CER credits) as well as for the voluntary offset market (GS VER credits). GS projects

employ renewable energy or energy efficiency technologies and actively seek local

participation in project design, resulting in demonstrable sustainable development

benefits.The Gold Standard established a registry in March 2008 to create, track and enable

trade of GS VERs and CERs. numerous publicly accessible reports create utmost

transparency on more than 200 GS projects in over 30 countries. The Gold Standard is

officially endorsed by 42 non-govrnmental organizations, including WWF and Greenpeace.

GS projects generate premium prices in the market and developers profit from a fair priced


niche market with substantial demand currently growing. Buyers of GS credits reduce CDM-

specific and reputational risks.

1.3.5 Voluntary Carbon Standard (VCS)

Launched in November 2007, the VCS marks the end of a two year consultation with the

industry, NGOs and carbon market specialists. Led by The Climate Group, the International

Emissions Trading Association (IETA) and the World Business Council for Sustainable

Development (WBCSD), the VCS provides a robust, global standard for voluntary offset

projects. It ensures that carbon offsets can be trusted and have real environmental benefits.

The VCS is leading the efforts for a market-wide voluntary registry. Unless a credit is

registered in one of the four VCS registries, it does not meet the VCS definition of a

Voluntary Carbon Unit (VCU). This creates a robu system of transparent voluntary offset

credits and provides a clear chain of ownership.

1.3.6 VER+ Standard

VER+ is the TÜV SÜD standard for VER projects, which is in line with the requirements of

Kyoto Protocol for CDM or JI projects. The catalogue of the VER+ Standard criteria includes

eligibility, additionality, permanence, exclusivity, avoidance of double-counting,

environmental and social criteria, a defined ex-post crediting period and a conservative

methodological calculation approach.

TÜV SÜD, a UN accredited independent verifier, is one of First Climate’s technical

partners. In 2007, TÜV SÜD established the BlueRegistry, a robust database for VER+

credits. To date, BlueRegistry has incorporated 18 carbon projects and has issued almost 1.8

million VER+ credits.


1.3.7 Social Carbon Methodology

Social Carbon is a methodology developed by the Brazilian non-profit Instituto Ecológica

based on seven years of fieldwork in the Amazon region by a multidisciplinary team of

researchers. The social carbon concept arose from the need to ensure that reducing emissions

of greenhouse gases makes a substantial contribution to sustainable development. It is

founded on the principle that transparent assessment and monitoring of the social and

environmental performance of projects can improve their long-term effectiveness, and thus

add value to the VERs generated.

This progressive methodology directly involves the local population in the project design and

assessment processes, supporting the community in the achievement of its own goals and

aspirations. Furthermore, the Social Carbon methodology requires continuous monitoring of

social and environmental benefits over the project lifetime.

1.3.8 Climate, Community and Biodiversity (CCBS)

The CCB standard developed by the CCBA (Climate, Community & Biodiversity

Alliance) is a global partnership between leading companies, NGOs and research institutes

seeking to promote integrated solutions to land management around the world and

develop voluntary standards for multiple-benefit land and forestry projects. These projects

deliver compelling benefits for the climate, biodiversity and the community.

The standard evaluates land-based carbon mitigation projects in the early stages of

development and fosters the integration of best-practice and multiple-benefit approaches into

project design and evolution. The projects simultaneously address climate change, support

local communities and conserve biodiversity and therefore promote excellence and

innovation in project design. The CCBS is the highest quality standard for land management

and forestry projects and therefore part of First Climate’s portfolio.



1.4 A Note On Voluntary MarketsA voluntary carbon market exists outside the compliance market that is outside the Kyoto

compliant mechanism.. The carbon credits generated outside the compliance mechanism are

verified and traded in the global over the counter market for greenhouse gas emissions and

are called verified emission reductions.

1.5 A Note On Secondary MarketThe secondary market for carbon credits is a very active market. At present the secondary

market of carbon credits involves European Union Emission Trading System (EU ETS),

Chicago Climate Exchange, European Climate Exchange, Nord Pool (Norway, Denmark,

Sweden, Finland) etc. The two prime categories of carbon instruments that can be traded in

the marketplace will be 1) carbon allowances or the offset credits and 2) allowance

derivatives. Carbon derivatives would be mainly swaps, options & futures that would allow

companies to lock in pricing on carbon units. While the idea of trading the emissions rights

and having trade is carbon derivatives is the basic intention of price discovery and liquidity,

the hostility with regard to the term derivatives itself is very visible and prominent, more so

after the financial crisis of 2008-09. While in the several bills passed on the derivatives issue,

demanding more regulatory requirements and shunning few of the derivatives, the idea of

carbon derivatives is not at all welcomed, including stalwarts like George Soros who called

the emissions trading for climate control as ‘ineffective.’

1.6 ERB Exchange Market

In 2009, 8.2 billion metric tons of carbon dioxide equivalent changed hands worldwide, up

68% from 2008, according to the study by carbon-market research firm Point Carbon, of

Washington and Oslo. But at EUR94 billion, or about $135 billion, the market's value was

nearly unchanged compared with 2008, with world carbon prices averaging EUR11.40 a ton,

down about 40% from the previous year, according to the study The global carbon market is

dominated by Europe, where companies that emit greenhouse gases are required to cut their

emissions or buy pollution allowances or ERB from the market. Europe, which has seen

volatile carbon prices due to fluctuations in energy prices and supply and demand, will

continue to dominate the global carbon market for another few years, as the U.S. and China--

the world's top polluters--have yet to establish national emission-reduction policies.



The first mandatory, market-based cap-and-trade program to cut CO2 in the U.S., called the

Regional Greenhouse Gas Initiative, kicked into gear in northeastern states in 2009, growing

nearly tenfold to $2.5 billion, according to Point Carbon. California plans to start a cap-and-

trade program in 2011, but on the whole, the U.S. carbon market is largely a voluntary market

dominated by financial players and companies that want to hedge their exposure to potential

future emission-reduction rules.

The goal of ERB market is to allow market mechanisms to drive industrial and commercial

processes in the direction of low emissions or less carbon intensive approaches than those

used when there is no cost to emitting carbon dioxide and other GHGs into the atmosphere.

Since GHG mitigation projects generate credits, this approach can be used to finance carbon

reduction schemes between trading partners and around the world.

There are also many companies that sell ERB to commercial and individual customers who

are interested in lowering their carbon footprint on a voluntary basis. These carbon off

setters purchase the credits from an investment fund or a carbon development company that

has aggregated the credits from individual projects. The quality of the credits is based in part

on the validation process and sophistication of the fund or development company that acted

as the sponsor to the carbon project. This is reflected in their price; voluntary units typically

have less value than the units sold through the rigorously-validated Clean Development

Mechanism.

With the commencement of the European Union Emission Trading Scheme (EU ETS), the

earliest derivatives markets on over-the-counter (OTC) and exchange-traded carbon emission

credits took off in Europe in 2003 and early 2005 respectively, with trading mainly of

products on European Union Allowances (EUAs) under the EU ETS. Trading of CER

derivatives started later because Clean Development projects under the CDM of the Kyoto

Protocol needed time to develop. The earliest exchange-traded CER derivatives were

launched in mid-2007 in Europe. Later on we can see Indian counterpart as Multi Commodity

Exchange (MCX) and National Commodity and Derivative Exchange (NCDEX) playing

there role from 2008. A chart is being shown depicting the trading growth.


1.7 ERB allowances

Under the Kyoto Protocol, the 'caps' or quotas for Greenhouse gases for the developed Annex

1 countries are known as Assigned Amounts and are listed in Annex B.

In turn, these countries set quotas on the emissions of installations run by local business and

other organizations, generically termed 'operators'. Countries manage this through their own

national 'registries', which are required to be validated and monitored for compliance by

the UNFCCC. Each operator has an allowance of credits, where each unit gives the owner the

right to emit one metric tonne of carbon dioxide or other equivalent greenhouse gas.

Operators that have not used up their quotas can sell their unused allowances as ERB, while

businesses that are about to exceed their quotas can buy the extra allowances as credits,

privately or on the open market. As demand for energy grows over time, the total emissions

must still stay within the cap, but it allows industry some flexibility and predictability in its

planning to accommodate this.



By permitting allowances to be bought and sold, an operator can seek out the most cost-

effective way of reducing its emissions, either by investing in 'cleaner' machinery and

practices or by purchasing emissions from another operator who already has excess 'capacity'.

Since 2005, the Kyoto mechanism has been adopted for CO2 trading by all the countries

within the European Union under its European Trading Scheme (EU ETS) with the European

Commission as its validating authority. From 2008, EU participants must link with the other

developed countries who ratified Annex I of the protocol, and trade the six most significant

anthropogenic greenhouse gases. In the United States, which has not ratified Kyoto,

and Australia, whose ratification came into force in March 2008, similar schemes are being

considered.

1.8 Kyoto's 'Flexible Mechanisms'

A credit can be an emissions allowance which was originally allocated or auctioned by the

national administrators of a cap-and-trade program, or it can be an offset of emissions. Such

offsetting and mitigating activities can occur in any developing country which has ratified the

Kyoto Protocol, and has a national agreement in place to validate its carbon project through

one of the UNFCCC's approved mechanisms. Once approved, these units are ermed Certified

Emission Reductions, or CERs. The Protocol allows these projects to be constructed and

credited in advance of the Kyoto trading period.

The Kyoto Protocol provides for three mechanisms that enable countries or operators in

developed countries to acquire greenhouse gas reduction credits.

§ Under Joint Implementation (JI) a developed country with relatively high costs of

domestic greenhouse reduction would set up a project in another developed country.

§ Under the Clean Development Mechanism (CDM) a developed country can 'sponsor' a

greenhouse gas reduction project in a developing country where the cost of greenhouse

gas reduction project activities is usually much lower, but the atmospheric effect is

globally equivalent. The developed country would be given credits for meeting its

emission reduction targets, while the developing country would receive the capital

investment and clean technology or beneficial change in land use. However, geologists

from Cass Business School are skeptical on this program, arguing that the introduction of

ERB does little to encourage companies to reduce emissions and instead allows the

existence of 'carbon cowboys'.



§ Under International Emissions Trading (IET) countries can trade in the international

carbon credit market to cover their shortfall in allowances. Countries with surplus credits

can sell them to countries with capped emission commitments under the Kyoto Protocol.

These carbon projects can be created by a national government or by an operator within the

country. In reality, most of the transactions are not performed by national governments

directly, but by operators who have been set quotas by their country.

1.9 Emission Trading

For trading purposes, one allowance or CER is considered equivalent to one metric tonne of

CO2 emissions. These allowances can be sold privately or in the international market at the

prevailing market price. These trade and settle internationally and hence allow allowances to

be transferred between countries. Each international transfer is validated by the UNFCCC.

Each transfer of ownership within the European Union is additionally validated by the

European Commission.

Climate exchanges have been established to provide a spot market in allowances, as well

as futures and options market to help discover a market price and maintain liquidity. Carbon

prices are normally quoted in Euros per tonne of carbon dioxide or its equivalent (CO2e).

Other greenhouse gasses can also be traded, but are quoted as standard multiples of carbon

dioxide with respect to their global warming potential. These features reduce the quota's

financial impact on business, while ensuring that the quotas are met at a national and

international level.

Currently there are five exchanges trading in carbon allowances: the Chicago Climate

Exchange, European Climate Exchange, Nord Pool, PowerNext and the European Energy

Exchange. Recently, NordPool listed a contract to trade offsets generated by a CDM carbon

project called Certified Emission Reductions (CERs). Many companies now engage in

emissions abatement, offsetting, and sequestration programs to generate credits that can be

sold on one of the exchanges

Managing emissions is one of the fastest-growing segments in financial services in the City

of London with a market estimated to be worth about €30 billion in 2007. Louis Redshaw,

head of environmental markets at Barclays Capital predicts that "Carbon will be the world's

biggest commodity market, and it could become the world's biggest market overall.



1.10 Setting A Market Price For Carbon

Unchecked, energy use and hence emission levels are predicted to keep rising over time.

Thus the number of companies needing to buy credits will increase, and the rules of supply

and demand will push up the market price, encouraging more groups to undertake

environmentally friendly activities that create ERB to sell.

An individual allowance, such as a Kyoto Assigned Amount Unit (AAU) or its near-

equivalent European Union Allowance (EUA), may have a different market value to an offset

such as a CER. This is due to the lack of a developed secondary market for CERs, a lack of

homogeneity between projects which causes difficulty in pricing, as well as questions due to

the principle of supplementary and its lifetime. Additionally, offsets generated by a carbon

project under the Clean Development Mechanism are potentially limited in value because

operators in the EU ETS are restricted as to what percentage of their allowance can be met

through these flexible mechanisms.

Yale University economics professor William Nordhaus argues that the price of carbon needs

to be high enough to motivate the changes in behavior and changes in economic production

systems necessary to effectively limit emissions of greenhouse gases.

Raising the price of carbon will achieve four goals. First, it will provide signals to consumers

about what goods and services are high-carbon ones and should therefore be used more

sparingly. Second, it will provide signals to producers about which inputs use more carbon

(such as coal and oil) and which use less or none (such as natural gas or nuclear power),

thereby inducing firms to substitute low-carbon inputs. Third, it will give market incentives

for inventors and innovators to develop and introduce low-carbon products and processes that

can replace the current generation of technologies. Fourth, and most important, a high carbon

price will economize on the information that is required to do all three of these tasks.

Through the market mechanism, a high carbon price will raise the price of products according

to their carbon content. Ethical consumers today, hoping to minimize their “carbon

footprint,” have little chance of making an accurate calculation of the relative carbon use in,

say, driving 250 miles as compared with flying 250 miles. A harmonized carbon tax would

raise the price of a good proportionately to exactly the amount of CO2 that is emitted in all

the stages of production that are involved in producing that good. If 0.01 of a ton of carbon

emissions results from the wheat growing and the milling and the trucking and the baking of

a loaf of bread, then a tax of $30 per ton carbon will raise the price of bread by $0.30. The


“carbon footprint” is automatically calculated by the price system. Consumers would still not

know how much of the price is due to carbon emissions, but they could make their decisions

confident that they are paying for the social cost of their carbon footprint.

The social cost of carbon is the additional damage caused by an additional ton of carbon

emissions. ... The optimal carbon price, or optimal carbon tax, is the market price (or carbon

tax) on carbon emissions that balance the incremental costs of reducing carbon emissions

with the incremental benefits of reducing climate damages. ... [I]f a country wished to impose

a carbon tax of $30 per ton of carbon, this would involve a tax on gasoline of about 9 cents

per gallon. Similarly, the tax on coal-generated electricity would be about 1 cent per kWh, or

10 percent of the current retail price. At current levels of carbon emissions in the United

States, a tax of $30 per ton of carbon would generate $50 billion of revenue per year.

1.11 How Buying ERB Can Reduce Emissions

ERB create a market for reducing greenhouse emissions by giving a monetary value to

the cost of polluting the air. Emissions become an internal cost of doing business and

are visible on the balance sheet alongside raw materials and other liabilities or assets.

For example, consider a business that owns a factory putting out 100,000 tonnes of

greenhouse gas emissions in a year. Its government is an Annex I country that enacts a

law to limit the emissions that the business can produce. So the factory is given a quota

of say 80,000 tonnes per year. The factory either reduces its emissions to 80,000 tonnes



or is required to purchase ERB to offset the excess. After costing up alternatives the

business may decide that it is uneconomical or infeasible to invest in new machinery

for that year. Instead it may choose to buy ERB on the open market from organizations

that have been approved as being able to sell legitimate ERB.

We should consider the impact of manufacturing alternative energy sources. For example, the

energy consumed and the Carbon emitted in the manufacture and transportation of a large

wind turbine would prohibit a credit being issued for a predetermined period of time.

§ One seller might be a company that will offer to offset emissions through a project in the

developing world, such as recovering methane from a swine farm to feed a power station

that previously would use fossil fuel. So although the factory continues to emit gases, it

would pay another group to reduce the equivalent of 20,000 tonnes of carbon dioxide

emissions from the atmosphere for that year.

§ Another seller may have already invested in new low-emission machinery and have a

surplus of allowances as a result. The factory could make up for its emissions by buying

20,000 tonnes of allowances from them. The cost of the seller's new machinery would be

subsidized by the sale of allowances. Both the buyer and the seller would submit accounts

for their emissions to prove that their allowances were met correctly.

1.12 Creating Real ERB

The principle of Supplementary within the Kyoto Protocol means that internal abatement of

emissions should take precedence before a country buys in ERB. However it also established

the Clean Development Mechanism as a Flexible Mechanism by which capped entities could

develop real, measurable, permanent emissions reductions voluntarily in sectors outside the

cap. Many criticisms of ERB stem from the fact that establishing that an emission of CO2-

equivalent greenhouse gas has truly been reduced involves a complex process. This process

has evolved as the concept of a carbon project has been refined over the past 10 years.

The first step in determining whether or not a carbon project has legitimately led to the

reduction of real, measurable, permanent emissions, is understanding the CDM methodology

process. This is the process by which project sponsors submit, through a Designated

Operational Entity (DOE), their concepts for emissions reduction creation. The CDM

Executive Board, with the CDM Methodology Panel and their expert advisors, review each

project and decide how and if they do indeed result in reductions that are additional.


1.13 Different Role Players for ERB Implementation

There are opportunities created for different business like Risk Management

(Corporate/Banks/Insurance Companies), Project Financing Companies, Portfolio

Management and IT Players are depicted by the table below.



1.13.1 Risk Management for Companies

Companies must realize that CO2 risk management will emerge as an important factor in

their decision-making. For individual companies the most important risk Categories resulting

from emission reduction targets are as follows:

• Cash flow risks such as increased expenditure on measures aimed at reducing CO2 or

the purchase of emission allowances.

• Market perception risks which may influence market capitalization.

• Capital cost risks such as more stringent credit conditions as a result of altered credit

risk ratings.

• The drawing up of emission inventories and measures taken to increase energy

efficiency in future, play important roles in the financial rating process.

To understand the potential carbon risks, companies should have in place a robust and

accurate GHG inventory which details past, current, and projected future emissions. They

should understand the marginal abatement cost options available from different GHG

mitigation strategies and the tools that are available to achieve compliance within different

GHG regulatory regimes.

1.13.2 Risk Management from Bank’s Perspective

Offering new products and services to reduce the risk of emissions trading for corporate

customers is a new business challenge for banks. Furthermore, banks hold stakes in the

companies affected by trading. Consequently, the risks and opportunities for those companies

are also risks and opportunities for the banks. The complexity of emissions trading requires a

wide range of products and services that effectively hedge against risks emerging from the

Kyoto Protocol and the European trading scheme.

1.13.3 Portfolio Management Perspective

Banks can offer the service of Emission Allowances portfolio management while taking over

the responsibility of their clients’ emission allowance accounts. The most striking advantage



of such a service is that it is not necessary to set up internal expertise in the affected

companies, thus resulting in lower transaction costs. This can be a part of Derivatives desk as

the products they can offer are derivative instruments such as Futures, Options and Swaps

and any other structured products.

• Futures: The purchase of emission allowances to be supplied in the future at a fixed

price – currently the most common type of market-traded allowance.

• Options: A guarantee of the right to purchase or sell allowances at a fixed price within

a defined period of time.

• Swaps: The exchange of payment obligations so that different allowance currencies

can be exchanged.

Structured products: It can be a combination of any of the above linked to insurance products

or interest rates or basket of currencies and so on.

1.13.4 Project Finance Perspective

An emission trading also offers potential business in the field of project finance – providing

project developers with the chance to generate additional income sources by investing in

energy-efficient technology. This applies to JI and CDM projects, where the inclusion of

emission credits in the analysis of a project’s credit quality could become imperative. In

principle, the securitisation of these cash flows could either help to reduce the financing

needs of a project developer or reduce the re-financing costs by embedding them into interest

rate derivatives. Accordingly, emission certificates could help plant developers with new

financing mechanisms, thereby leading to more sophisticated structures as the market

expands.

1.13.5 Risk Management from Insurance Perspective

Insurance Products cover the legal obligation to reduce greenhouse emissions resulting in

new liabilities, fines and penalties resulting from a breach of law would not be covered under

Insurance policy. Inappropriate or inadequate management of climate risks, resulting in a

failure to protect a company’s interests would affect the decision of the Insurance Company.



1.13.6 IT Players

Setting up emission data management systems, Trading, and clearing systems, research and

development activities which can deliver end to end solutions for emission management

Emission Exchanges: A platform to be built to facilitate faster and transparent carbon trading

system along with margining and risk management tools in place.

a) Traders/Brokers/Investment Banks: Carbon trading dash boards can be created for

Front office where it is traded, Mid office where risk mitigating tools are implemented

along with reporting for senior management at regular intervals and for back office

where trade confirmations/ affirmations and reconciliations are done .

b) Registries: They maintain data of all debits and credits in the book entry form and act

as custodians for Carbon credits. Bigger opportunity is towards setting up local

registries, national registries, and international registries.

c) Clearing Registries: They maintain data of all the transactions traded on the exchange

and act as counterparty for both sell and buy, thereby mitigating counterparty risks to

ensure smooth settlement system, which helps to build the investors confidence in the

entire carbon trading system.

d) Banks for carbon settlement: They maintain various types of accounts on behalf of

investors and brokers (House Accounts and Non-house accounts) and facilitate

smooth transfer of book entries across banks, which are specifically designated for

carbon settlement. Apart from the above, an effective and efficient emission

measuring system to calculate emissions resulting from variables such as soil

cultivation, fire management, fertilizer application, climate, different plant is the need

of the hour. Further it is required to set up research and development activities on

sustainable technologies to result in carbon reduction.


Chapter 2

Sources of Emission Reduction Benefits

2.1 Introduction to The Sources of ERBFollowing are the sources which will fetch the Emission Reduction Benefits and can be

formulated by either CDM or VCS or any other assistance to get a feasible project.

• Renewable energy - wind, solar, biomass, biofuel, hydel and tidal

• Methane capture from landfill

• Fuel switching - coal to natural gas

• Industrial gases - modification of production process

• Agricultural - methane reduction from animal waste)

• Energy efficiency - buildings, industrial, CFL

• Forestry - afforestation and reforestation

• Transport - biodiesel, improved fuel efficiency

Following is a graph showing different sources of earning ERBs



It is learnt that ERB create a market for reducing greenhouse emissions by giving a monetary

value to the cost of polluting the air. This means that carbon becomes a cost of business and

is seen like other inputs such as raw materials or labor.

By way of example, assume a factory produces 100,000 tonnes of greenhouse emissions in a

year. The government then enacts a law that limits the maximum emissions a business can

have. So the factory is given a quota of say 80,000 tonnes. The factory either reduces its

emissions to 80,000 tonnes or is required to purchase carbon credits to offset the excess.

A business would buy the carbon credits on an open market from organisations that have

been approved as being able to sell legitimate carbon credits. One seller might be a company

that will plant so many trees for every carbon credit you buy from them. So, for this factory it

might pollute a tonne, but is essentially now paying another group to go out and plant trees,

which will, say, draw a tonne of carbon dioxide from the atmosphere.

As emission levels are predicted to keep rising over time, it is envisioned that the number of

companies wanting to buy more credits will increase, which will push the market price up

and encourage more groups to undertake environmentally friendly activities that create for

them carbon credits to sell. Another model is that companies that use below their quota can

sell their excess as ‘carbon credits.’

The possibilities are endless; hence making it an open market.

2.2 Description Of Sources Of ERB

What we need next is various means of reducing green house gasses and covering them into

carbon credit/carbon offsets and finally gain emission reduction benefits.

A brief introduction of various means to attain ERB is given below:

2.2.1 Renewable Energy : commonly include wind power, solar power,

hydroelectric power and bio-fuel. Some of these offsets are used to reduce the cost

differential between renewable and conventional energy production, increasing the

commercial viability of a choice to use renewable energy sources.


RENEWABLE SOURCE CATEGORISATION INENERGY INDUSTRY

Energy Industries

EnergyEfficiencyRenewables Recovery from

wastes

ZeroEmissions Hydropower

SolarWind Biomass Tidal ,Geothermal etc.

2.2.2 Cogeneration plants generate both electricity and heat from the same

power source, thus improving upon the energy efficiency of most power plants which

waste the energy.

Following is the table which shows the targeted benefit from cogeneration thus enabling

carbon credits thus ERBs.

Table Showing Typical Cogeneration Performance Parameters.



2.2.3 Fuel efficiency and Energy Efficiency ( EE) projectsreplace a combustion device with one which uses less fuel per unit of energy provided.

Assuming energy demand does not change, this reduces the carbon dioxide emitted. A

table is shown below which shows different ways in which we can implement fuel

efficiency projects so as to claim for ERBs.

In developing countries, there exist many EE improvement opportunities in the

current and future economies These opportunities could potentially be fully realized

by making use of the CDM mechanism, as CDM is evolving in the direction to better

accommodate EE projects. Inthis section, we propose potential end-use EE options

that are suitable, or have the potential for PoAs. EE options for bundled CDM and

stand-alone CDM projects are also discussed for comparison purposes. The examples

discussed in this section, including end-use EE options for the household, service,

industrial, and transportation sectors, are common projects and are technologically

available. They are suited for new installations or for retrofits. Options for household,

services, industrial, and transportation end-use energy efficiency are discussed

respectively. The options presented in this section do not mean to be an exhaustive list

of all energy efficiency options that have CDM potential, as many new technologies,

innovative ideas, and EE projects specifically fitting local needs could also be well-

qualified for CDM. It is up to the CDM project and methodology developers to come

up with energy efficiency projects suitedfor local conditions and future development

needs. In general, EE can be improved through changes in three different categories:

a) Process and design change. A complete or partial change to the elemental

processes may result in less energy-intensive products. Examples include

changing the recipe of a cement blend so it requires less heat per output unit, or

changing the orientation and natural ventilation of a building in order to very

significantly reduce its energy intensity. Technological change. This includes

equipment upgrade and installation of new hardware based on more efficient

technologies (e.g., better insulation for buildings, more efficient household

appliances, replacing old boilers, changing burners, better isolated furnaces,

steam/heat recirculation systems, etc.).



b) Fuel-switching, distributed generation, and renewables. Fuel-switching,

renewables, and distributed generation are not typically considered EE measures,

nor are they part of demand-side management. They are sometimes even

considered as supply-side projects; however, use of these technologies does

reduce requirement for fossil fuels and does improve overall efficiency. For

instance, switching from coal or residual fuel oil to NG or biomass generally

increases the combustion process efficiency.

c) Cogeneration units, with distributed generation, reduce energy waste and improve

the utilization of heat production. As well, small applications for renewables

reduce the need for fossil fuel combustion. Most decisions for fuel-switching,

installation of cogeneration kits in the industrial sector, and small applications for

renewable energy in the household and service sectors depend on end-user

actions, and are often considered as part of EE upgrade projects. These projects

carry de facto characteristics of end-use EE and are suitable for ERB.

2.2.4 Energy-efficient buildings reduce the amount of energy wasted in

buildings through efficient heating, cooling or lighting systems. In particular, the

replacement of incandescent light bulbs with compact fluorescent lamps can have a

drastic effect on energy consumption. New buildings can also be constructed using

less carbon-intensive input materials.

Green buildings in India have increased from 20,000 square feet area in 2004 to 275

million square feet in 2009. In total, there are 315 buildings that are registered as

green buildings in India. The Indian market has witnessed more investments for

commercial buildings to go green. These buildings include IT parks, hospitals,

airports, and educational institutions.

The total number of green buildings in India is expected to be more than 2,000 by

2012. An average investment for a green building is around $10.7 million, and the

total investment in green buildings is expected to be around $42.6 billion by 2012.


Interest benefits on loan by banks for green projects, more incentives and regulations

are likely to push the acceptance of green buildings in India. Bureau of Energy

Efficiency (BEE) is introducing an energy performance index for the rating of

buildings. The parameter for ratings will be energy consumption in kilo watt per hour

per square meter per year. Ratings will vary for different climatic conditions. BEE is

also making it illegal to sell any electric appliance without energy star marks by

January 7, 2010.

The market potential for green building materials is estimated to be about $40 billion

by 2012.

The cost of green buildings is 3 to 8 percent more than a conventional building, but

the cost recovery is high and breakeven can be achieved in a period of three to five

years. Reduction in operational costs is very high and benefits are enormous from

breakeven.


Some of the commercial green buildings in the country are Sapient, Accenture, Nokia

Siemens Network, Pearson, ITC Building, Wipro Campus, Patni Campus in Gurgaon,

Green Boulevard, knowledge Boulevard at Noida and Hiranandani BG Building, K.

Raheja group, and Enercon India Pvt Ltd Kalpataru building in Mumbai. Chennai also

has a good number of green buildings.

The end users are willing to pay more for green buildings. A greener flat has become

a high-class symbol. Tenants are ready to pay more, due to low operational costs and

societal values.

Indian carbon offsets are very sensitive to the fluctuation of prices. With China and

Vietnam offering CERs at lower, more fixed prices, the threat of India getting

outpriced intensify. Project rejection rate is high for India. Even after getting the

approval from government, around 50 percent of the cases get rejected from the CDM

executive board.

MCX is the exchange dealing with carbon trading in India. It provides price signals

for carbon delivery in the next five years. The exchange is only for Indians and Indian

companies. People who have bought or sold carbon will have to give or take delivery

in the month of December, because that is the time to meet the norms in Europe. Spot,

Plain Forward, and Forward with advanced payment are three types of deal structure

followed for carbon trading.


Offsets adhering to standards contribute to the positive mindset of buyers. A number

of standards exist for carbon offsets, including the VCS, Green-e, and the Gold

Standard. In India, two green building rating systems are followed, LEED by IGBC

and GRIHA by TERI. LEED is famous among the ratings, and the credits earned

through LEED ratings can be traded in the carbon market.

Big sellers in the Indian market are Public Sector Units (PSUs) such as the National

Thermal Power Corporation (NTPC), Indian Oil Company (IOC), Railways, and

private sector companies such as the Reliance group and the Tata Group. Different tax

is levied in different states for CDM.

2.2.4.1 Carbon Credits through Green Buildings

Buildings are a major source of CO2 emissions, and contribute around one-third of

the same. With an increase in the number of green buildings, there is an expected rise

in the opportunities for carbon credits, offsets, and profits offered by these buildings.

The use of solar water heating systems, glass panels to allow natural light inside the

building, rainwater harvesting, environment-friendly building materials and

specifications, waste minimization, maximizing energy use in buildings, water

conservation and efficient measures, and energy-efficient equipment can the help real

estate developers and owners earn a good amount of carbon credits.

A single project does not account to a considerable number of emission reductions,

which makes it difficult for the real estate developers to register and earn profits. The

following options are available for real estate developers to trade carbon profits.


Technopolis is India's first green building in information technology, is helping the

developers earn up to €1 35,000 per year. SBI is seeking advice on the usage of

energy-efficient devices in its buildings. SBI also wants to improve its bottom-line by

revenue through carbon credits. In the hotel industry, orchid group of hotels at

Mumbai and New Delhi are referred as green hotels. ITC Sonar registered 1886

tonnes of CERs at the time of inauguration and was verified by UNFCCC to be

eligible for carbon trading and it earned the hotel revenue of RS. 1.47 million.

Currently, with modification, the hotel is expecting a saving of about Rs. 8.3 million

per year through the project. Olympia Technology Park in Chennai is earning

immensely from carbon trading. Common wealth games will help organizers earn

revenues by sale of carbon credits.

Down the Road

In order to make the bottom line more attractive through carbon trading, the Indian

real estate developers are likely to shift toward green buildings. Benefits such as low

interest rates, low operational cost, and higher rental value are expected to drive this

market.

More number of innovations is expected in the voluntary markets. Newer models will

be developed to accommodate the carbon credits earned by green buildings. Major

activities to go green are taking place in Indian metros. This trend is expected to

continue, due to the growth in energy consumption and changing lifestyle. A major

shift will be witnessed, with the real estate developers moving toward rural areas.

Land availability and abundant natural resources will push the real estate developers

to start greener building projects in rural areas and earn carbon credits.



The green building offsets are expected to gain more importance in the future. CII-

IGBC has come up with a Rs. 4 billion green fund to support the development of

green buildings. Steps are being taken to include green buildings into the federal cap-

and-trade system. California has adopted standards that require benchmarking and

disclosure of energy consumption in commercial buildings. Other developed countries

will adopt similar standards. The global carbon demand will increase the carbon offset

prices. More global standards are expected to be set, in order to eliminate problems

such as double counting (for example, utility companies and real estate developers

asking for credits for reduction in electricity usage). More transparency in procedures

will build confidence in the market. Many new financial instruments will be derived

for making profits. Some countries might up with bilateral carbon trade agreements.

Real estate developers will see their active counterparts improving bottom-line and

are expected to go green.

Wake up call (Nation Planners & Developers):

Go Green, Garner Greenbacks

Green buildings help to reduce carbon dioxide emissions through low consumption of

energy. The global carbon offset trading market stood at around US $100 billion in

2008. Globally, buildings account for 39% of total energy usage and 38% of the

carbon dioxide emissions. Green buildings use 30% lesser energy than the

conventional buildings and thus help to reduce CO2 emissions. Reduction of each ton

of CO2 will lead to generation of one Certified Emission Reduction (CER) valued at

around US $16 in the United States and around US $22 in Europe.

2.2.5 Destruction of industrial pollutants: Industrial pollutants such

as hydrofluorocarbons (HFCs) and perfluorocarbons (PFCs) have a GWP many

thousands of times greater than carbon dioxide by volume, because these pollutants

are easily captured and destroyed at their source, they present a large and low-cost

source of carbon offsets. As a category, HFCs, PFCs, and N2O reductions represent

71% of offsets issued under the CDM.


2.2.6. Land use, land-use change and forestry: Land use, land-use

change and forestry (LULUCF) projects focus on natural carbon sinks such as forests

and soil. Deforestation, particularly in Brazil, Indonesia and parts of Africa, account

for about 20% of greenhouse gas emission. Deforestation can be avoided either by

paying directly for forest preservation, or by using offset funds to provide substitutes

for forest-based products. There is a class of mechanisms referred to as REDD

schemes (Reducing emissions from deforestation and forest degradation), which may

be included in a post-Kyoto agreement. REDD credits provide carbon offsets for the

protection of forests, and provide a possible mechanism to allow funding from

developed nations to assist in the protection of native forests in developing nations.


2.2.6.1 Forest carbon services and their markets

The carbon services provided by all different forestry activities, provided the

calculations are sound, can be marketed. Under the CDM however, as of yet, only two

project activities are eligible: afforestation and reforestation. Carbon services

provided by other forestry activities can thus not result in Certified Emission

Reductions (CERs) issued by the UNFCCC. The official market developed as

instrument of the Kyoto Protocol, is however only a part of the entire carbon market.

There are many concerned companies, organisations and citizens that want to

compensate for their greenhouse gas emissions voluntarily, without being bound

under the Kyoto Protocol. All these actors buy on the voluntary carbon market.

Sellers on the voluntary market are projects in forestry and renewable energy that as

of yet are not eligible in their CDM category. The Kyoto Protocol (and also the CDM)

is further developed through continuous negotiations of its parties. Many project

activities that have shown to result in reliable greenhouse gas reductions on the

voluntary market will in future be included in the official regulations. The voluntary

market can be seen as an experimental garden for the official market.

Suitability of Land Categories, Potential Area, and Activities Under CDM



2.2.6.2 Additionality of Forest as ERB project activities

One of the most difficult aspects of the CDM is often said to be the additionality

criterion. This means that only forest carbon services resulting from a project that is

additional to any that would occur in the absence of the certified project activity can

be claimed. An example of not meeting the additionality criterion would be to claim

carbon credits for a reforestation activity that has long been planned and has sufficient

budget to be implemented. Through a financial, technological or other barrier analysis

the project has to proof it that the project activity would not happen without the use of

the CDM.

2.2.6.3 Criteria and carbon quantification methodologies

It is important to realise that this program is foremost a reforestation program that has to meet

all the technical criteria, like budgeting, mapping, site-species matching, nursery set-up and

market analysis of sound Vietnamese reforestation planning. Developing a CDM component

for the program, will add international criteria to fulfill during program planning and

implementation: financial transparency, clarification of land-rights, environmental impact

assessment and carbon calculations and monitoring. In the end of course there will be an

additional product to sell: the Certified Emission Reductions (CER). In order to reach that

point at which the program can start to sell, an extensive approval and registration process in

the host country and at the UNFCCC has to be completed. Logically additional criteria and

the registration and approval process bring additional stakeholders to the reforestation

program.

2.3 Some more ERB sources shall be discussed as follow:

2.3.1 BIO DIESEL - CARBON TRADING POTENTIAL

• Reduction in GHG (CO2)

• 1 Ton bio-diesel avoids Appx 3 ton CO2e

• Certified Emission reduction (CER) 1 ton of CO2e

• 1 CER @ US $ 5

• 75 p/ liter additional revenue


[B20/B100- types of bio diesel developed from Jatropa]

2.3.2 SOLID WASTE MANAGEMENT- CARBON TRADING POTENTIAL

There are definite linkages between sanitation and climate change. All human activities

including defecation release green house gases (GHGs) and are causing to global warming

and climate change. The Climate Change Market Based Mechanisms allow developed

countries to invest in carbon emission reduction (CER) projects in developing countries and

these credits can be traded and sold. This is the first environment investment and credit

scheme. The present focus is largely on “toilets” and “safe disposal of excreta”. Little or no

attention is being paid to liquid and solid waste management. There has also been very

limited focus on “recycling and reuse” and on extraction of the economic value of waste.

2.3.3 BIO- GAS - CARBON TRADING POTENTIAL

Types of Biomass Projects

Collection of generated methane

Methane Reduction

Effluent Treatment

Direct Combustion (Bagasse, etc.)

Liquid Fuel

Roughly, 1 mwh of power is generated using 1-1.5 tonnes of biomass. Thus, a 7.5 mw

plant, operating at 100 per cent capacity, would need 65,700-98,550 tonnes of biomass

per annum. If the raw material is purchased at Rs 800 per tonne, the plant spends Rs 0.80



per k Wh on it. If bought at Rs 1,200 per tonne, the plant will spend Rs 1.20 per k Wh on

its raw material. Thus, the economics and sustainability of these plants are determined

by the price of biomass used. It comes out to be worth ERB consideration.

There are a variety of biomass projects to generate electricity from agricultural residues

like rice husk, cotton sticks, chilli waste, mustard sticks and wood of 24 such projects

are in the process of being validated/registered with the CDM Board. They constitute

about 44 per cent of Indian CDM projects, 57-odd in all, listed on the UNFCCC website

as on September 9, 2005. But projects are small, and add up to only nine per cent of

CERs India could sell through its projects.

If all the 24 biomass projects are cleared, India could sell roughly 700,000 CERs, earn

Rs 16 crore per year (at US $5 per CER). Privately owned, these would generate 3-12

megawatt (mw) of power, selling it mostly to state electricity boards. The Indian

government has been promoting these projects through its Union ministry of non-

conventional energy sources (MoNES), and many states now have a power purchase

policy under which they will buy biomass-generated power at rates varying from Rs 2.25

in Uttar Pradesh to Rs 3.32 in Rajasthan per unit generated. The CDM credit, roughly Rs

14-15 lakh per mw per year, gives additional benefits for plants to operate.

The first registered project is in Rajasthan, by privately-owned Kalpataru Power

Transmission Ltd. It will sell the Netherlands government a total of 313,743 CER s over

7-10 years. At US $5 per CER, the company will get roughly Rs 1 crore per year for

carbon credits sold. It sources raw material from farmers mustard sticks, agricultural

residues like rice husk or even saw dust. It sells power to the Rajasthan state electricity

board. The project design document does not specify the rate, but the state purchase

policy for biomass-generated power is Rs 3.32 per unit. In this way, the state uses

electricity from renewable sources, replacing coal and so saving carbon dioxide

emissions.


Following is a graph comparing Biomass & Biogas projects and other ERB projects.

Some more pictorial views of generation of ERB are shown for easy reference:


Some more ERB sources-Its Project Type, Description, Co-Benefits and more


Chapter 3

Study of Prevailing Standards

3.1 CARBON MARKET STANDARDS

There are several types of carbon markets operating throughout the world, and the differences

may be confusing. The markets can be divided into two basic types:

1. Compliance markets (associated with countries that have ratified the Kyoto treaty)

2. Voluntary markets (operating in countries that have not ratified the Kyoto treaty, such as

the U.S.).

There are significant differences in these markets, both in terms of how they operate and

market prices for carbon credits. In this report the following standards have been discussed in

detail.

Compliance or Regulated or market standard

1.) CDM

2.) JI

Voluntary market standard

1.) VCS

2.) VGS



3.) VER+

4.) World Bank Carbon Finance Funds

The standards have been discussed on following grounds:

1. History and purpose

2. Project process

i.Outline of the project process

ii.Establishing additionality

iii.Establishing a baseline

iv.Methodologies

3. Financial issues

3.2 CLEAN DEVELOPMENT MECHANISM

3.2.1 History and purposeThe CDM was an important feature of the negotiations leading up to the Kyoto Protocol.

Some governments desired flexibility in the way that emission reductions could be achieved

and proposed international emissions trading as a way of achieving cost-effective emission

reductions. At the time it was considered a controversial element and was opposed by

environmental NGOs and, initially, by developing countries who felt that industrialised

countries should put their own house in order first and feared the environmental integrity of

the mechanism would be too hard to guarantee (see Environmental Concerns below).

Eventually, and largely on US insistence, the CDM and two other flexible mechanisms were

written into the Kyoto Protocol.

The purpose of the CDM was defined under Article 12 of the Kyoto Protocol. Apart from

helping Annex 1 countries comply with their emission reduction commitments, it must assist

developing countries in achieving sustainable development, while also contributing to

stabilization of greenhouse gas concentrations in the atmosphere.

To prevent industrialised countries from making unlimited use of CDM, the framework has a

provision that use of CDM be ‘supplemental’ to domestic actions to reduce emissions. This



wording has led to a wide range of interpretations - the Netherlands for example aims to

achieve half of its required emission reductions (from a BAU baseline) by CDM .

3.2.2 Project Process

i.Outline of the project process

An industrialised country that wishes to get credits from a CDM project must obtain the

consent of the developing country hosting the project that the project will contribute to

sustainable development. Then, using methodologies approved by the CDM Executive Board

(EB), the applicant (the industrialised country) must make the case that the carbon project

would not have happened anyway (establishing additionality), and must establish a baseline

estimating the future emissions in absence of the registered project. The case is then validated

by a third party agency, called a Designated Operational Entity (DOE), to ensure the project

results in real, measurable, and long-term emission reductions. The EB then decides whether

or not to register (approve) the project. If a project is registered and implemented, the EB

issues credits, called Certified Emission Reductions (CERs, commonly known as carbon

credits, where each unit is equivalent to the reduction of one metric tonne of CO2e, e.g. CO2

or its equivalent), to project participants based on the monitored difference between the

baseline and the actual emissions, verified by the DOE.


To avoid giving credits to projects that would have happened anyway ("freeriders"), rules

have been specified to ensure additionality of the project, that is, to ensure the project reduces

emissions more than would have occurred in the absence of the project. At present, the CDM

Executive Board deems a project additional if its proponents can document that realistic

alternative scenarios to the proposed project would be more economically attractive or that

the project faces barriers that CDM helps it overcome. Current Guidance from the EB is

available at the UNFCCC website.

Additionality is a much contested. There are many rival interpretations of additionality:

1. What is often labelled ‘environmental additionality’ has that a project is additional if

the emissions from the project are lower than the baseline. It generally looks at what

would have happened without the project.



2. Another interpretation, sometimes termed ‘project additionality’, the project must not

have happened without the CDM.

A number of terms for different kinds of additionality have been discussed, leading to some

confusion, particularly over the terms 'financial additionality' and 'investment additionality'

which are sometimes used as synonyms. 'Investment additionality', however, was a concept

discussed and ultimately rejected during negotiation of the Marrakech Accords. Investment

additionality carried the idea that any project that surpasses a certain risk-adjusted

profitability threshold would automatically be deemed non-additional. 'Financial

additionality' is often defined as an economically non-viable project becoming viable as a

direct result of CDM revenues.

Many investors argue that the environmental additionality interpretation would make the

CDM simpler. Environmental NGOs have argued that this interpretation would open the

CDM to free-riders, permitting developing countries to emit more CO2e, while failing to

produce emission reductions in the CDM host countries. WWF have undertaken a study of

additionality in 2007, finding that for about 40% of projects the additionality is questionable

(p.44) and in one survey 86% of the participants affirmed that “in many cases, carbon

revenues are the icing on the cake, but are not decisive for the investment decision”.

It is never possible to establish with certainty what would have happened without the CDM

or in absence of a particular project, which is one common objection to the CDM.

Nevertheless, official guidelines have been designed to facilitate uniform assessment, set by

the CDM Executive Board for assessing additionality.


The amount of emission reduction, obviously, depends on the emissions that would have

occurred without the project minus the emissions of the project. The construction of such a

hypothetical scenario is known as the baseline of the project. The baseline may be estimated

through reference to emissions from similar activities and technologies in the same country or

other countries, or to actual emissions prior to project implementation. The partners involved

in the project could have an interest in establishing a baseline with high emissions, which

would yield a risk of awarding spurious credits. Independent third party verification is meant

to avoid this potential problem.



iv.Methodologies

Any proposed CDM project has to use an approved baseline and monitoring methodology to

be validated, approved and registered. Baseline Methodology will set steps to determine the

baseline within certain applicability conditions whilst monitoring methodology will set

specific steps to determine monitoring parameters, quality assurance, equipment to be used,

in order to obtain datas to calculate the emission reductions. Those approved methodologies

are all coded. "AM" stands for "Approved Methodology," "ACM" stands for "Approved

Consolidated Methodology," "AMS" stands for "Approved Methodology for Small Scale

Projects" and so on. All the approved methodology are listed in the UNFCCC home page. If a

project developer can not find an approved methodology that fits in his/her particular case,

the project developer may submit a new methodology to the Meth Panel, and if approved the

new methodology will be converted to an Approved Methodology.

3.2.3 Financial Issues

With costs of emission reduction typically much lower in developing countries than in

industrialised countries, industrialised countries can comply with their emission reduction

targets at much lower cost by receiving credits for emissions reduced in developing countries

as long as administration costs are low.

The IPCC has projected GDP losses for OECD Europe with full use of CDM and Joint

Implementation to between 0.13 and 0.81% of GDP versus 0.31 to 1.50 Climate Change 2001

- Synthesis report.

The price depends on the distribution of risk between seller and buyer. The seller could get a

very good price if it agrees to bear the risk that the project's baseline and monitoring

methodology is rejected; that the host country rejects the project; that the CDM Executive

Board rejects the project; that the project for some reason produces fewer credits than

planned; or that the buyer doesn't get CERs at the agreed time if the international transaction

log (the technical infrastructure ensuring international transfer of carbon credits) is not in

place by then. The seller can usually only take these risks if the counterparty is deemed very

reliable, as rated by international rating agencies.



3 JOINT IMPLEMENTATION

3.3.1 History and purposeJoint Implementation (JI) enables a country with a Kyoto Protocol emission reduction target

(i.e. industrialised nations and those in transition to a market economy listed in Annex I to the

Kyoto Protocol) (Annex I Parties) to meet part of its emissions reduction target by carrying

out or financing sustainable development project activities to reduce greenhouse gas

emissions in another Annex 1 country (Host Country). It is one of the "flexibility

mechanisms" established under the Kyoto Protocol.

JI is effected by the transfer of emission reduction units (ERUs) equal to the emission

reductions made by JI project activities in the Host Country, from the Host Country to the

other Annex I Party (Investor Country). Under JI, an Investor Country may authorise legal

entities (e.g. companies) to participate in JI projects on its behalf. If an Annex 1 country

wishes to participate in a JI project (as a Host Country or a Non-Host Country) it must inform

the United Nations Framework Convention on Climate Change (UNFCCC) Secretariat of (i)

its designated focal point for approving JI Projects (its JI Focal Point); and (ii) its national

guidelines and procedures for approving JI projects.

There are two tracks for getting approval for a JI project depending on how advanced the

Host Country’s implementation of the monitoring and inventory requirements of the Kyoto

Protocol have been:

Track 1

These procedures apply when the Host Country meets all of the eligibility requirements

related to the transfer and acquisition of ERUs. The relevant eligibility criteria include

requirements that the Host Country has:

Ratified the Kyoto Protocol;*

• calculated their assigned amount, as referred to in Articles 3.7 and 3.8 and Annex B of the

Protocol in terms of tonnes of CO2 equivalent emissions;*

• in place, a national system for estimating emissions and removals of greenhouse gases

within their territory;



• in place, a national registry to record and track the creation and movement of units issued

under the flexibility mechanisms and annually reports such information to the UNFCCC

secretariat; *

• Submitted its most recent annual report on emissions and removals to the UNFCCC

secretariat.

If all of the criteria above are met, the Host Country will be able to apply its own procedures

for assessing the JI project and will then be able to issue and transfer ERUs to the Investor

Country, without recourse to any international body for approval. However, it is open to a

party that satisfies

all of the eligibility criteria for Track 1 to undertake Track 2 projects, and this has tended to

be market practice to date.

Track 2

These procedures apply when the Host Country does not meet all of the eligibility

requirements for Track 1, but has fulfilled the requirements marked "*" above. Under Track

2, the JI Supervisory Council (JISC) (the body set up to supervise the verification procedure

of JI) assesses projects according

to the procedures it administers. After projects are approved under the JI process, Host

Countries are able to issue and transfer ERUs to Non-Host Countries. If the minimum

eligibility requirements set out above are not met by a Host Country, ERUs may not be issued

in relation to a JI project in that Host Country.

3.3.2 Project Processi. Outline of the project process

An Investor Country participant who has identified a project located in an Annex 1 country

and evaluated its eligibility and viability as a JI project activity will, if the project is to be

carried out as a Track 1 project, contact the Host Country JI Focal Point in order to ascertain

the procedures to be followed. The intending participant may in any event prepare a Project

Idea Note (PIN) summarising the project’s technical and financial characteristics. The PIN is

not compulsory but may be useful. At this stage, a request may be made (using the PIN) to

the Host Country for a Letter of Endorsement (LoE), indicating the Host Country’s

preliminary support for the project. Buyers of ERUs often require LoEs before they will



consider entering into contractual negotiations. However, many Annex 1 Parties may only

approve a Track 1 project in circumstances in which a memorandum of understanding is in

place between the Host Country and the Investor Country relating to co-operation between

the countries.

Full project documentation will then be prepared, including a Project Design Document

(PDD). The PDD contains a description of the project; the basis for determining the

emissions that would occur without the project (the baseline) and plans for monitoring the

reductions. As is the case of PDD’s under the Clean Development Mechanism, the PDD must

be validated by an independent entity. In the case of a Track 1 Project, the independent entity

must be an entity acceptable to the Host Country. In the case of a Track 2 Project, the entity

must be an Accredited Independent Entity (AIE) accredited by the JISC. The independent

entity will review and validate the baseline study and other aspects of the PDD. In all cases JI

projects must demonstrate that emissions reductions are additional to those that would

otherwise occur in a "business as usual" scenario.

Once a PDD has be validated it will be presented to the Host Country with a request to issue

a Letter of Approval. The Letter of Approval confirms the Host Country’s approval for the

transfer of ERUs. The project will be implemented in the Host Country according to the

specifications outlined in the PDD.

The Investor Country participant is required to monitor the project to identify the emission

reductions. Monitoring reports are issued to the Independent Entity.

The Independent Entity verifies the emission reductions.

Verification reports are submitted to the Host Country and the Investor Country’s JI Focal

Point. The Host Country then directs its national registry to convert specified assigned

amount units (AAUs) into ERUs within an account in that registry in accordance with the

procedures determined by it. ERUs may only be issued under Track 1 in where the Host

Country has complied with the Marrakesh Accords. ERUs may only be issued under Track 2

where the Host Country has complied with JISC verification procedures.

The Host Country will transfer ERUs from its registry account to the national registry

account of the Investor Country participant. Joint Implementation entails a number of

variations in procedures and specific risks depending on whether the project is undertaken

under Track 1 or Track 2 and the Host Country. Notably, there is an ongoing reliance on the



Host Country not only to approve the project activities but also to effect the conversion of

AAUs and transfer of ERUs. The ability of the Host

Country to transfer ERUs is (under Track 1) also dependent on the Host Country having

performed its treaty obligations, notably in relation to commitment period reserve obligations

under Article 17 of the Kyoto Protocol.

ii.Establishing additionality.

JIAG argues that the necessarily subjective and thus controversial establishment of project

additionality can be replaced by rules that ensure a conservative establishment of project

baselines. The integrity of JI is guaranteed since for the issuance of one ERU the host country

has to cancel one AAU. In addition, additionality is superfluous since the guidance on

baseline setting and determining the baseline scenario2 already provides sufficient guarantee

on the concerns that the additionality concept tries to address. Nevertheless if the Project

Participant or Host Country wishes to do so, it can integrate an additionality test in the

project. This additionality test should be based on guidance issued by the JISC and assessed

by the AIE.

iii.Establishing a baseline (Criteria for baseline setting)

1. The baseline for an Article 6 project is the scenario that reasonably represents the

anthropogenic emissions by sources or anthropogenic removals by sinks of greenhouse gases

that would occur in the absence of the proposed project. A baseline shall cover emissions

from all gases, sectors and source categories listed in Annex A, and anthropogenic removals

by sinks, within the project boundary.

2. A baseline shall be established:

(a) On a project-specific basis and/or using a multi-project emission factor;

(b) In a transparent manner with regard to the choice of approaches, assumptions,

methodologies, parameters, data sources and key factors;

(c) Taking into account relevant national and/or sectoral policies and circumstances, such as

sectoral reform initiatives, local fuel availability, power sector expansion plans, and the

economic situation in the project sector;



(d) In such a way that emission reduction units (ERUs) cannot be earned for decreases in

activity levels outside the project activity or due to force majeure;

(e) Taking account of uncertainties and using conservative assumptions.

3. Project participants shall justify their choice of baseline.

iv. Methodologies

Until recently, it has been unclear amongst host countries whether JI baselines and

monitoring methodologies would simply be based on CDM approved methodologies, or

whether they would have to follow the methodologies exactly. Recent language in the

UNFCCC Working Paper Guidance on Criteria for Baseline Setting and monitoring (Para 15

and 22) specifies that project participants may either (i) apply Methodologies for baselines

and monitoring approved by the CDM Executive Board or (ii) establish a baseline that is in

accordance with Appendix B of the JI guidelines. With the latter, selected elements or

combinations of approved CDM baseline and monitoring methodologies may be used for

Track II JI projects.

If a project developer selects option (i), then baseline and monitoring methodologies across

different projects would likely be consistent. If option (ii) were selected, this would raise the

potential for inconsistencies across different JI projects of a similar type. This inconsistency

is caused by the lack of a centralised methodology approval body for JI projects – unlike the

CDM EB. Rather, for JI it is up to Accredited Independent Entities (AIE) to assess the

baselines and monitoring plans based on the criteria in Appendix B of the JI guidelines.

Hence, the AIEs have a larger responsibility than the designated operational entities (DOEs)

in the CDM.

Criteria for Baseline Setting and Monitoring, the approaches to baseline setting and

monitoring are likely to vary more under JI and be more dependent on any national

guidelines that host countries develop.

Moreover, methodologies for some potential CDM project types have yet to be developed

and/or approved by the CDM Executive Board. The implies that for certain JI projects types

not yet covered by approved CDM methodologies, new baseline and monitoring

methodologies will need to be verified by the AIEs e.g. for district heating projects; the built

environment; and energy efficiency projects. Again, this raises the strong possibility that

projects from these sectors in different countries which use different AIEs to validate the



baseline and monitoring methodologies will not be consistent. This problem may even arise

across projects within a single host country that has several AIEs.

These issues are likely to be exacerbated when it comes to Track I JI, when national

governments are allowed to establish their own guidelines for approval of projects and

baseline and monitoring methods.

Under Track I, there is no creation of emissions rights as with CDM, and it is a zero sum

game. It is in the host country’s interest to ensure that the JI project generates effective,

measurable and sustainable reduction emissions. This responsibility has been designated to

AIEs.

Though the JISC does not have the same mandate as the CDM EB, once the JISC approves of

a project with a specific baseline methodology in a sector not covered by the CDM approved

methodologies, then it will be desirable for all other projects in that sector to use baseline

methodologies that are consistent with that project. This would create a more centralised

approach to methodologies that would also serve to reduce the transaction costs of project

participants identifying and developing baseline methodologies on an ad hoc basis.

Overall, there is likely to be more variability in the baselines and monitoring approaches in JI

than there is in the CDM. This could result in discrepancies in the number of ERUs that are

actually generated across similar projects, particularly given the lack of a centralised

decision-making body. Rigorous approval procedures under the JISC could help to reduce

such discrepancies. With regard to Track I JI national guidelines on baselines and monitoring,

concerted collaboration and co-ordinated efforts across different countries would help to

reduce the costs of developing national guidelines and would ensure that there is a greater

degree of consistency across projects as well as countries. Facilitative guidelines could be

developed to aid in the design of, and investment in, JI projects.

3.3.3 Financial issuesBuyers

The buyers of ERUs are most likely to be those companies and countries that are, or will

become subject to, emission reduction commitments and have relatively high costs of

reducing emissions domestically. Early buyers may be prepared to take a certain risk, buying



options or futures, in order to obtain low cost emission credits that are likely to qualify for the

Kyoto Mechanisms.

Even though the procedures for JI projects are still to be formally established, some early

trades of potential ERUs are already occurring. Major ERU buyers to date have been the

World Bank’s Prototype Carbon Fund (www.prototypecarbonfund.org) and the Netherlands’s

ERUPT program (www.senter.nl). Under the ERUPT’s tender programmes, contracts to date

have amounted to 11 million ERUs.

Countries that have entered into specific JI project agreements to date include Latvia, the

Czech Republic, Hungary, Poland, Bulgaria, Romania, Estonia, Slovakia and New Zealand.

A number of countries, including Sweden, Finland, Denmark, Italy, Austria, Spain, Portugal

and Japan are also entering this market as buyers.

Prices

Prices of ERUs in the carbon market so far have ranged widely. The World Bank's Prototype

Carbon Fund prices range between US$3.5 and US$5 per tonne CO2, while the Dutch

Government's ERUPT tenders prices have ranged between €5 and €9 per tonne CO2. Up-to-

date information on the price of carbon credits can be obtained from potential buyers, brokers

and trader or via the CCPO.



3.4 VOLUNTARY CARBON STANDARD

3.4.1 History and purpose

Work to develop the Voluntary Carbon Standard was initiated by The Climate Group, the

International Emissions Trading Association and the World Economic Forum in late 2005.

Version 1 of the VCS was released on 28 March 2006 as both a consultation document and a

pilot standard for use in the market. VCS version 2 was released in October 2006 as a

consultation document and did not replace Version 1 as the market standard. 150 written

submissions were received from carbon market stakeholders on VCS versions 1 and 2.

After the release of version 2, a 19 member Steering Committee was established to consider

all of the stakeholder comments and develop the final standard. Within the Committee seven

technical working groups provided advice on VCS governance, additionality, validation and

verification, registries, land use change and forestry, general policy issues and performance

standards.

The World Business Council for Sustainable Development joined the initiative as a founding

partner in 2007. After two years of work, VCS 2007 was released on 19 November 2007.

Scope

Standardize and provide transparency and credibility to the voluntary offset

market.

Enhance business, consumer and government confidence in voluntary offsets.

Create a trusted and tradable voluntary offset credit; the Voluntary Carbon Unit. (VCU)

Stimulate additional investments in emissions reductions and low carbon solutions

Experiment and stimulate innovation in emission reduction technologies and offer lessons

that can be build into future regulation.



Provide a clear chain of ownership over voluntary offsets that prevent them being used

twice. This is achieved through multiple VCS registries and a central project database that

is open to the public.

3.4.2 Project Processi.Outline of the project process

The VCU Registration Process is designed in a way that makes it easy for project owners to

follow easily and carry out efficiently and cost effectively.

1. The VCU registration process is only applicable to existing verified emission reductions.

2. At the time of the launch of the Standard, forward streams of VCUs cannot be registered

(“validated”) into a VCU Registry. However, the

Voluntary Carbon Standard Steering Committee encourages project developers and

Certification Entities to create validation procedures

at market terms to give project developers security of generating VCUs in the future.

3. Applicable Certification Entities are all credible institutions and organizations with

documented experience in verifying & certifying greenhouse gas emission reductions. The

Entity is a UNFCCC accredited Designated Operational Entity and Applicant entity, a

UNFCCC accredited Independent Entity by the Join Implementation Supervisory Committee

(“JISC”), or Certification body formally accredited for

ISO 14 064 by an accreditation body member of the IAF (International Accreditation Forum).

4. Certification Entities must be accredited as a verifier for the appropriate scope of work and

project category.

5. The five steps (four steps without validation process) described below are to be followed in

full.

6. Validation is a voluntary step, and not a required part of the VCU registration process.




In addition to using a VCS Program approved methodology; the project proponent shall

demonstrate that the project is additional using one of the following tests:

Test 1 - The project test:

Step 1: Regulatory Surplus

The project shall not be mandated by any enforced law, statute or other regulatory

framework.

Step 2: Implementation Barriers

The project shall face one (or more) distinct barrier(s) compared with barriers faced by

alternative projects.

• Investment Barrier – Project faces capital or investment return constraints that can be

overcome by the additional revenues associated with the generation of VCUs.

• Technological Barriers – Project faces technology-related barriers to its implementation.

• Institutional barriers – Project faces financial, organizational, cultural or social barriers that

the VCU revenue stream can help overcome.

Step 3: Common Practice

• Project type shall not be common practice in sector/region, compared with projects that

have received no carbon finance.

• If it is common practice, the project proponents shall identify barriers faced compared with

existing projects.

• Demonstration that the project is not common practice shall be based on guidance in the

GHG Protocol for Project Accounting.

Test 2 – Performance test



framework.



Step 2: Performance Standard

The emissions generated per unit output by the project shall be below the level that has been

approved by the VCS Program for the product, service, sector or industry, as the level defined

to ensure that the project is not business-as-usual performance standard based additionality

tests shall be approved through the double approval process and by the VCS Board. The list

of approved performance standards is on www.v-c-s.org.

Test 3 – Technology test



framework.

Step 2: Technology Additionality

The project and its location are contained in the list of project types and applicable areas

approved as being additional by the VCS Program. These project types are defined as those in

which all projects would also be deemed additional using Additionality test 1 and will be

determined on a case by case basis.

ii Establishing a baseline.

The Baseline Scenario is a hypothetical description of how the underlying service or product,

would have most likely been provided in the absence of any considerations about climate

change mitigation through the Project.

Baseline Emissions are described as an estimate of GHG emissions that would likely have

occurred in absence of the proposed project activity (WBCSD GHG-PP Sec 2.8-2.9 and Ch. 8

& 9). The Performance Standard approach to calculating baseline is described in detail in

Chapter 9 of the WBCSD GHG-PP. Step-by-step guidance in sections 9.1-9.5 in the WBCSD

GHG PP shall be used to create and verify the use of the Performance Standard.

Stringency Level is defined (Sec 9.3-9.4 of WBCSD GHG-PP) as a GHG emission rate that

is more restrictive than the average GHG emission rate of all baseline candidates (i.e. better

than the 50% percentile). The Steering Committee will consider methodologies approved by

other programmes (e.g. CCX, RGGI, CCAR) with a view to approving their use as

methodologies appropriate for inclusion in the VCU Verification Criteria.

iii.Methodologies

http://www.v-c-s.org



VCS methodology elements provide the framework for the development of projects and

quantification of GHG emission reductions or removals. Specifically, methodology elements

describe one of the following:

• Methodologies and methodology revisions;

• Additionality performance tests; or

• Tools/modules.

The following methodology elements are approved under the VCS Program:

• Voluntary Carbon Standard methodology elements

• Clean Development Mechanism methodology elements

• Climate Action Reserve methodology elements

The current and valid versions of such methodology elements shall be used, though a revoked

or revised VCS methodology element can be used where the VCS validation report is issued

no later than eight months after the date of the revocation or revision or by the end of the

validity period of the methodology element, whichever is later. The validity period is the

period specified by the GHG program under which the methodology element was approved.

For example, in the case of a withdrawn or revised CDM methodology, the VCS validation

report shall be issued before the date and time by which any requests for registration would

have to be submitted under the CDM.

VCS Methodology Elements under Development

Under the VCS double approval process, new methodology elements are posted on the VCS

website for global stakeholder consultation, before independent assessment by two VCS

validation/verification bodies and final approval by the VCSA. More information about the

double approval process may be found in the Double Approval Process normative document.

3.4.2 Financial issuesThe Voluntary Carbon Standard Association (VCSA) launched its state-of-the-art global

registry and project database system on 17th march 2009

The VCS (Voluntary Carbon Standard) Registry System is the first multiple registry system

to launch in the $330m voluntary carbon market. The new global registry system, which

includes the VCS Project Database, ensures all carbon credits generated under the VCS –

Voluntary Carbon Units (VCUs) – can be tracked from issuance to retirement. It is a key part



of the VCS Program which ensures that all VCUs are real, measurable, additional,

permanent, independently verified, unique and traceable.

Three international companies are contracted to act as registries for the VCS Program: APX

Inc. (a leading environmental market infrastructure provider in North America), Caisse des

Dépôts (a leading French financial institution and developer of CO2 registries in Europe), and

TZ1 (a leading international financial markets metaregistry in the US, UK and Asia Pacific).

VCS Registries will issue, hold, transfer and retire VCUs representing one tonne of

greenhouse gas reduction or removal. The registries will interact directly with the VCS

Project Database, which can be viewed publicly (www.vcsprojectdatabase.org), to upload

project documentation and obtain unique serial numbers for each VCU. Together, the

infrastructure provided by the global registries and the database provides a transparent, robust

and scalable chain of custody for the voluntary carbon market.



3.5 VOLUNTARY GOLD STANDARD

3.5.1 History and purpose

The Gold Standard for CDM (GS CER) was developed in 2003 by World Wide Fund for

Nature (WWF), SouthSouthNorth, and Helio International. The Voluntary Gold Standard

(GS VER), a methodology for use within the voluntary carbon market, was launched in May

2006. Both were the result of an extensive 12-month workshop and web-based consultation

process conducted by an independent Standards Advisory Board composed of NGOs,

scientists, project developers and government representatives.

The Gold Standard is open to any non-government, community based organization especially

those with an interest in the promotion of sustainable development or a focus on climate and

energy issues. As of March 2009, 60 environmental and development non-profit

organizations internationally officially endorse The Gold Standard. These organizations

support The Gold Standard as an effective tool for creating high-quality emission reduction

projects that promote sustainable development and benefit local communities.

The Gold Standard is headquartered in the BASE (Basel Agency for Sustainable Energy)

offices in Basel, Switzerland, with offices in Geneva, Rome and San Francisco. It employs

local experts in Brazil, China, India and South Africa.

(The Gold Standard is registered as a non-profit foundation under Swiss law.)

To be eligible for Gold Standard Certification, a project must:

1. Be an approved Renewable Energy Supply or End-use Energy Efficiency Improvement

project type.

2. Be reducing one of the three eligible Green House Gases: Carbon Dioxide (CO2),

Methane (CH4) and Nitrous Oxide (N2O)

3. Not employ Official Development Assistance (ODA) under the condition that the credits

coming out of the project are transferred to the donor country.

4. Not be applying for other certifications, to ensure there is no double counting of Credits

5. Demonstrate it's 'additionality' by using the United Nations Framework Convention on

Climate Change's (UNFCCC) Large Scale Additionality Tool[5]; and show that the

project is not a 'business-as-usual' scenario



6. Make a net-positive contribution to the economic, environmental and social welfare of the

local population that hosts it

3.5.2 Project process i) Outline of the project process

The overriding aim of the Gold Standard is to promote investments in energy technologies

and energy management techniques that mitigate climate change, promote (local) sustainable

development and are directed towards a transition to non-fossil energy systems. As a result

the Gold Standard only accredits premium quality greenhouse gas reduction projects that

generate credible greenhouse gas emission reductions, show environmental integrity and

contribute to local sustainable development. Project eligibility is defined by several aspects,

and each of these aspects is discussed in the following paragraphs.

To define which guidance is relevant to you it is necessary to know the scale of your project.

Project scale divisions of the Gold Standard are the same as those of the UNFCCC, except for

the micro scale which is Gold Standard specific.

In principle, any country can host a Gold Standard voluntary carbon market project.

However, in host countries with a cap on GHG emissions, issued GS VERs need to be backed

up by allowances or other denominated units reflecting emission reductions. For project

activities located in a country that ratified the Koto Protocol, any AAUs can be used for this

purpose. You need to provide the Gold Standard Foundation with an official approval from

the relevant local authorities stating that an equivalent amount of allowances will be retired to

back-up the GS VERs issued.

ii) Establishing additionality

In order to prove the additionality of your project the Gold Standard requires you to use one

of the UNFCCC or Gold Standard approved additionality tools, whatever the scale and type

of the project and whatever the stream you are applying for (VER, CDM or JI). The Gold

Standard relies substantially on the CDM EB guidance from the Validation Verification

Manual (VVM) for the evaluation of the additionality. One are allowed to use a self

developed additionality tool, as long as it is approved by the Gold Standard. See the GS

website, technical documents section, for a list of approved tools.



Mandatory guidance for the use of the UNFCCC tools for demonstration of additionality19 is

presented here, examples can be found in Annex G.

Step: Identification of alternative scenarios

Come up with realistic alternatives that provide the same service output (e.g. kWh) as your

project. Identify the legislation applicable to your project.

Step: Barrier analysis

A key requirement of the barrier analysis is that barriers should be credible and should

prevent the project from occurring without registration as a CDM/JI or VER project.

Therefore barriers should be:

• Credible;

• Not subjective (the DOE must be able to validate the barriers); Related to the project

activity.

Furthermore for a transparent validation it is key that:

• You provide documentation that demonstrates the barriers. The chosen line of reasoning

for the identification of barriers must be reproducible and supported by a sufficient amount

of independent, non-company information. You are allowed to use company-specific

information, but only if it is compared to non-company information (by the PDD author);

• You provide an explanation of how the income from carbon credits helps to overcome or

alleviate the identified barriers. A general statement that the revenues from the carbon

credits help to overcome the barrier is not sufficient.

• Include a substantial explanation, e.g. on how a cooperation with a technology supplier

has been enabled by means of the CDM.

A list of possible barriers that prevent the implementation of Renewable energy generating

projects can be in a summary on experiences.

Step: Investment analysis

If investment analysis is used to demonstrate additionality, the PDD should provide evidence

that the project is economically/financially unattractive without the revenue from the sale of

carbon credits because:



• There are costs associated with the project activity and it is demonstrated that the activity

produces no economic benefits other than carbon credits related income;

• The proposed project activity is economically or financially less attractive than at least one

other plausible alternative;

• The financial returns of the proposed project activity are insufficient to justify the required

investment.

Step: Common Practice Analysis

The common practice analysis is an important credibility check in which you have to

demonstrate that your project is not common practice in the region or country in which it is

being implemented. The common practice analysis should:

• Not assess the motivation or intent but provide a more objective approach to assess

additionality;

• Use independent external documentation.

i.Establishing a baseline

Emission reductions under the Gold Standard need to be real, measurable and verifiable. This

can be assured by using an approved baseline and monitoring methodology. A baseline

methodology estimates the emissions that would have been created without implementation

of the project. A monitoring methodology calculates the actual emission reductions from the

project, taking into account any emissions from sources within the project boundary. Further

to this, a monitoring methodology enables verification of the realised emission reductions in a

transparent way. Both are combined in one baseline and monitoring methodology, often

referred to simply as ‘methodology’. The selected baseline and monitoring methodology is

key to the development of the PDD. When using an approved methodology you must follow

the Gold Standard principles of conservativeness and transparency.

ii.Methodologies

The use of a UNFCCC or Gold Standard approved methodology is mandatory, for

CDM, JI and VER projects. Make sure that the version of the methodology you intend

to use is the latest one available at the time of your first submission to the Gold

Standard. The time of first submission is defined as the date of upload of the Local

Stakeholder Consultation report or in case of pre-feasibility assessment, the day of



the application for a pre-feasibility assessment.

Through a screening of the applicability criteria of existing approved CDM

methodologies you can find out whether an existing methodology can be used or a

new methodology has to be developed. The procedures for developing a

methodology for the Voluntary Gold Standard are described below

All methodologies approved by the CDM Executive Board that meet GS scope and specific

eligibility criteria are accepted by the Gold Standard for both GS-CER and GS-VER projects.

For a complete list of approved CDM methodologies, see UNFCCC/CDM methodologies.

In addition, the Gold Standard Foundation has approved the following methodologies for use

in VER projects:

Biogas Digesters

Energy Efficient Cooking Stoves

Energy Efficient Cooking Stoves – V.02 (8 Feb 2010)Switch to Biomass Fuel

Indicative Program, Baseline and Monitoring Methodology for Large-Scale Supply and Distribution

of Efficient Light Bulb and Showerhead Products to Households

Biodiesel from Waste Oil/Fat (Revised AM0047)

The following GS VER methodologies are currently under development:

Thermal Energy from Plant Oil for the User of Cooking Stoves

• Revised AMS.I.C.

• Bio-ethanol Diesel Blends for Stationary or Mobile Sources

Prior to approval, further disclosures on these methodologies to interested parties are subject to

consent of the submitting party.

3.5.3 Financial issuesIssuance of Gold Standard Credits

Gold Standard CDM and JI project activities. Following the Project Proponent’s submission

of UNFCCC serial numbers for issued CERs and ERUs that satisfy all Gold Standard criteria,

and, for projects employing the Fixed-Cash-Per Credit Fee Structure, upon payment of the

required Gold Standard issuance fee, or, for projects employing the Share of Proceeds Fee

Structure, upon the deduction of the predetermined percentage of Gold Standard-labeled

CERs, the Gold



Standard Foundation shall issue the premium quality label associated with issued CERs or

ERUs. No Gold Standard-labeled CERs are delivered to the UNFCCC Adaptation Fund Gold

Standard prices still highest despite 15% price drop from Sept/Oct levels. Although the Gold

Standard also primarily relies on the “pure” voluntary market due to its status as a high

quality standard GS VER prices are still 162% higher than VCS prices (at $9.7/t). In addition,

trading activity for GS VERs has picked up in Mar/April 2009.



3.6 VOULUNTARY EMISSION REDUCTION PLUS

(VER+)

3.6.1 History and PurposeThe VER+ standard was developed by TÜV SÜD, a Designated Operational Entity (DOE)

for the validation and verification of CDM projects. It was designed for project developers

who have projects that cannot be implemented under CDM yet who want to use very similar

procedures as the CDM. The VER Plus was launched in mid 2007.

VER+ can be applied globally.

Projects have to consider the greenhouse gases included in the Kyoto Protocol. These are

CO2 Carbon dioxide, CH4 - Methane, N2O - Nitrous oxide, PFCs - Perfluorocarbons, HFCs -

Hydrofluorocarbons and SF6 - Sulphur hexafluoride.

Project activities may be implemented in all 15 project categories (sectoral scopes) as defined

by the UNFCCC. This excludes nuclear energy as established by the Marrakech Accords.

Hydropower projects are only eligible if they create or expand the installed capacity of not

more than 80 MW. Hydropower projects exceeding the installation or expansion of capacity

by more than 20 MW have to conform to the requirements of the World Commission on

Dams (as further specified by any EU country, i.e. UK or Germany). Additional to

afforestation and reforestation measures that are currently eligible under the CDM other land

use activities such as forest conservation (avoided deforestation / degradation) and improved

forest management and re-vegetation are eligible.

3.6.2 Project process1. Outline of the project process

The VER+ standard is offered by German project validation firm TÜV SÜD. The standard is

available to project developers looking to verify projects to best practice levels around UN

Joint Implementation (JI) and Clean Development Mechanism (CDM) rules, but for sale of

the resulting credits into the voluntary carbon market.

The standard is heavily based on the JI standard in particular. Project developers can rely on

the methodologies of JI and the CDM to gain VER+ carbon credits for use in the voluntary

market. This is the major appeal of this standard – it suits developers trying to keep voluntary

market verification efforts in parallel with CDM/JI requirements.



The major difference to CDM/JI is in how permanence of carbon sequestration is treated.

Like other voluntary standards in forestry, permanent credits are offered but a buffer reserve

holding back some credits would be applied. Future losses are covered by the cancelling of

credits from the reserve pool.

The standard is not fully developed for forestry sector projects and TÜV SÜD said it only

intends to issue firmer guidance for the sector if there is demand from project developers. A

project developer may not be able therefore to count on a smooth passage through registration

and verification if among the first to apply. Because it focuses on voluntary market access for

JI and CDM style projects, the emerging REDD avoided deforestation space won’t be

covered by VER+.

VER+ has managed to gain some traction in the overall voluntary carbon space, but may

struggle in a market which sees a number of standards emerging. TÜV SÜD makes the point,

however, that many of the forestry projects now seeking carbon revenues in the voluntary

market are primarily or originally CDM projects anyway. The firm says this should underpin

demand for VER+.

A further issue is that TÜV SÜD is itself a primarily a private sector project auditor.

Although highly regarded, some have raised the issue of a conflict of interest in one firm

providing an industry standard and also validating projects to that standard. TÜV SÜD

responds that developing industry standards in areas of its auditing activity is nothing new for

the company.

2. Establishing additionality

The project needs to be additional and reduce the anthropogenic emissions of greenhouse

gases by sources below those that would have occurred in the absence of the project activity.

Project additionality shall be tested according to existing tools and guidelines as defined for

project activities under the Kyoto Protocol.

Procedural steps include: 1) identification of alternative scenarios, 2) investment analysis (if

applicable), 3) barrier analysis and 4) common practice analysis.

For proof of additionality the following options exist:

a) If an approved CDM methodology is applied, which includes specific guidance on

additionality, then these specific indications shall be followed;

b) In all other cases, the most recent version of the CDM Additionality Tool shall be applied



a. Establishing a baseline

The baseline setting, monitoring and quantification of the net GHG emission reductions and

removals of a VER+ project may be based on any technically sound, reasonable, and

conservative methodological approach. The methodology to be used (independent to project

location) shall be chosen in the following order of priority:

a) Approved by the CDM Executive Board or

b) Project specific based on the approach applied under JI

b. Methodologies

The latest versions of a CDM baseline and monitoring methodology shall be used as this is

considered to reflect good practice. No update of formats is necessary after validation start.

Ifthe applicability criteria of an identified CDM methodology do not match the project setting

completely deviations from that methodology shall be documented in the PDD. A project

specific methodology may be created according to the JI approach, if existing CDM

methodology do not match the project setting in at least 50 % of its applicability criteria. The

project specific methodology approach shall be based on the “Guidance on criteria for

baseline setting and monitoring” as defined for JI project activities. In all cases the

methodological steps and approach taken shall be clearly documented in the PDD. The

guidance of the CDM Executive Board on new methodologies should be considered.

The methodology selected at the stage of project design shall stay the same until the end of

the crediting period.

3.6.3 Financial issuesThe VER process offers some facilitations and possibilities to reduce transaction cost in

comparison to the CDM process. E.g. there is no necessity for host country and investor

country approval letters, the validation and verification can be conducted by the same DOE

and no administration and registration costs for the CDM Executive Board must be paid. This

can help realise projects that might not be feasible under the CDM process. Certification of

VERs can lead to reduced transaction cost in comparison to a CDM project. For example,

cost of validation and verification by an accredited entity can be around 30% lower than for a

CDM project. The local validator should be contacted for price information for validation and

verification in the individual case. Development time can also be reduced as there is no need

for approval by host or investor country DNAs, or for submittance of the project to the CDM

executive board.



Based on a positive verification statement the issuance of VER+ credits will be carried out by

TÜV SÜD. The VER+ credits are added to an account within the BlueRegistry that is held by

the project participant or any other entitled entity. From this account the VER+ credits can be

immediately transferred to another account within the BlueRegistry or to an entity not

represented in the BlueRegistry.

The BlueRegistry allows project participants and traders to administer their VER+ credits and

avoid any potential double selling. The latter contributes to transparency as well as the

overall credibility and value of your VER+ credits.



3.7 World Bank Carbon Finance Funds

3.7.1 History and Purpose

In July 2005, the leaders of the G8 countries, meeting in Gleneagles, Scotland, launched a

new dialogue on climate change, clean energy, and sustainable development involving 20

energy-intensive economies. The goal was to create a forum, outside the formal negotiations

on the United Nations Framework Convention on Climate Change, to discuss ways to reduce

emissions of greenhouse gases and promote greater levels of investment in green

technologies, while expanding access to the energy needed for growth and poverty reduction

in developing countries. At the Gleneagles Summit, the G8 and the so-called +5 countries

(Brazil, China, India, Mexico, and South Africa) agreed on the Gleneagles Plan of Action on

Climate Change, Clean Energy, and Sustainable Development. As part of that plan, they

asked the World Bank to prepare, in consultation with other international financial

institutions and multilateral development banks, an Investment Framework for Clean Energy

and Development to address the investment challenges ahead. Following consultations that

included the private sector, civil society, and a network of legislators from the G8 and +5

countries, early versions of the Investment Framework were favourably reviewed by the

ministers of finance and of development that make up the World Bank’s governing body, the

Development Committee. The Bank’s Development Committee has voiced broad support for

the approach taken in the framework, which is organized around three linked pillars that

represent key policy issues:

• Meeting the energy needs of developing countries and widening access to energy services

for their citizens in an environmentally responsible way

• Reducing greenhouse gas emissions and speeding the transition to a low-carbon economy

• Helping developing countries adapt to climate risks goal.

The overall goal of the Investment Framework is to catalyze investments from public and

private sources to increase access to energy in developing countries and, thereby, to spur

development, while using cleaner technologies that protect the environment. To achieve that

goal, the Bank is exploring the potential value of new financial approaches to accelerate

investment in clean, sustainable, cost-effective, and efficient energy. As its roadmap for

accelerating investments that will bring modern and efficient energy services to people who



need them most, the Investment Framework rearms the primacy of the United Nations

Framework Convention on Climate Change, including the emphasis on “common, but

differentiated responsibilities” among rich and developing countries.

3.7.2 Project processi.Outline of the project process

The World Bank Carbon Finance Unit's (CFU) initiatives are part of the larger global effort

to combat climate change, and go hand in hand with the World Bank and its Environment

Department 's mission to reduce poverty and improve living standards in the developing

world. The CFU uses money contributed by governments and companies in OECD

(Organization for Economic Co-operation and Development) countries to purchase project-

based greenhouse gas emission reductions in developing countries and countries with

economies in transition. The emission reductions are purchased through one of the CFU's

carbon funds on behalf of the contributor, and within the framework of the Kyoto Protocol's

Clean Development Mechanism (CDM) or Joint Implementation (JI).

Unlike other World Bank development products, the CFU does not lend or grant resources to

projects, but rather contracts to purchase emission reductions similar to a commercial

transaction, paying for them annually or periodically once they have been verified by a third

party auditor. The selling of emission reductions - or carbon finance - has been shown to

increase the bankability of projects, by adding an additional revenue stream in hard currency,

which reduces the risks of commercial lending or grant finance. Thus, carbon finance

provides a means of leveraging new private and public investment into projects that reduce

greenhouse gas emissions, thereby mitigating climate change while contributing to

sustainable development.

The Bank's carbon finance operations have demonstrated numerous opportunities for

collaborating across sectors, and have served as a catalyst in bringing climate issues to bear in

projects relating to rural electrification, renewable energy, energy efficiency, urban

infrastructure, waste management, pollution abatement, forestry, and water resource

management.

The World Bank's carbon finance initiatives are an integral part of the Bank's mission to

reduce poverty through its environment and energy strategies. The threat climate change



poses to long-term development and the ability of the poor to escape from poverty is of

particular concern to the World Bank. The impacts of climate change threaten to unravel

many of the development gains of the last several decades. The Bank is therefore making

every effort to ensure that developing countries can benefit from international efforts to

address climate change.

A vital element of this is ensuring that developing countries and economies in transition are

key players in the emerging carbon market for greenhouse gas emission reductions. The role

of the Bank's Carbon Finance Unit is to catalyze a global carbon market that reduces

transaction costs, supports sustainable development and reaches and benefits the poorer

communities of the developing world


Environmental integrity is essential for both the overall climate regime and the carbon

market. In the context of CDM (and JI), environmental integrity is preserved though the

concept of additionality. While efforts have been made by the CDM Executive Board to

provide greater clarity, proving additionality remains a challenge because of its inherent

subjective nature. What would have happened in the absence of the mechanism, by definition,

cannot be verified. Certain types of projects, in particular gas capture-type projects (capture

of industrial gases; landfill gases) may offer the closest to “black and white” assessments of

additionality. But the demonstration and assessment of additionality is more complex—and

underlying assumptions critical but not universal—for projects that produce a valuable output

other than emission reductions, such as electricity, cement, or energy savings, all key areas

for addressing climate change globally. Moreover, traditional investment analysis is not

appropriate for certain projects, such as demand-side energy efficiency, where neither the

barriers nor the cost of delivering energy efficiency are captured. There are options for

assessing additionality that merit consideration to address commonly heard criticism, such as

the notion that demonstrating additionality is too subjective and open to manipulation. Such

options could be the development of a definition of additionality according to exogenous

criteria, standards and benchmarks. Additionality could then be defined according to the

current ‘state of play’ and observed market realities, or perhaps policy objectives for a given

sector, thus avoiding second guessing what might have been “business as usual”.

Environmental integrity could be maintained and perverse incentives avoided by clearly

indicating that projects which meet or beat certain ambitious policy objectives or

technology/sector specifications would be deemed additional. This would provide investors



with the increased certainty they need to make more climate friendly investments, thereby

maximizing the leveraging impact of carbon finance. This could—and must—be done while

maintaining environmental integrity.


Baseline: The emission of greenhouse gases that would occur without the contemplated

policy intervention or project activity. Once the CFU has decided to include the project in the

Portfolio, it will commission a Baseline Study and Monitoring Plan, if the project is not

applying an approved methodology. The Baseline Study investigates the project-based

creation of ERs and explains how those ERs are 'additional' to what would have happened

'anyway' without the project. First, it defines the 'without project' scenario as the baseline.

Next, it quantifies the number and timing of ERs created by the project. The MP defines how

project operation will be monitored, how achieved ERs are calculated, and how the ERs will

be independently verified on a periodic basis throughout the project operational phase.

iv.Methodologies

The Methodology Team in the World Bank's Carbon Finance Unit systematically observes

the CDM regulatory process and contributes to bottom-up rulemaking for CDM by

interpreting regulatory decisions, providing input, and developing new methodologies, thus

bridging the gap between general guidelines and methodologies with their application to real-

world projects. The CFU also prepares policy and position papers and takes an active role in

initiating research and studies on methodological and policy issues related to CDM.

The objective of the methodology section is to provide easily accessible information that

helps to understand the CDM rules of procedures and basic concepts of approved

methodologies for CDM projects. However, the information provided in this section does not

eliminate the need to always consult the approved methodologies and the guidance provided

by the CDM Executive Board, which is recorded on the official CDM website and can be

accessed at http://cdm.unfccc.int/

This section is divided into three areas:

CDM Methodology Overview: An overview of basic concepts and rules for CDM

methodologies and of the approved methodologies for regular and small scale project

activities including A/R CDM project activities. The objective of this section is to assist

http://cdm.unfccc.int/



project developers in using and developing appropriate methodologies and to contribute to a

systematization of presentation and explanation of approved methodological tools.

CDM Methodology Database: A searchable database including a one page description of all

approved CDM methodologies using a common classification scheme. The objective of the

database is to assist project developers in finding the most appropriate methodology for their

project activities and to assist in understanding the basic requirements of the approved

methodology. Methodology developers and experts working on CDM methodology rules and

concepts will find the underlining classification scheme useful for comparing approved

methodologies.

CDM Methodology Papers: Reports on methodological issues regularly published by the

World Bank; reports on methodological workshops, information on methodological work

done at the World Bank, position papers, lessons learned papers and World Bank input on

methodologies and procedures for consideration by the regulatory process.

3.7.3 Financial issuesIn 2000 the PCF started with $160 million (USD). Since then, the World Bank has gone

on to create a whole family of funds and facilities—capitalized at approximately $2.5

billion—designed to facilitate access to the mechanisms by its borrowing countries,

reduce risk, and extend the reach of carbon finance into diverse niches in the market. It

continues to set an example in this field both by effecting “learning- doing” and providing

catalytic carbon finance to under-represented project types, with funds like the BioCarbon

Fund and the Community Development Carbon Fund, respectively focusing on areas such

as land use/forestry and small-scale projects in the poorest communities. One of the many

successes and a key feature of carbon finance is that it can both complement and leverage

other financial resources to unlock low carbon investments in host countries. Carbon

revenues provide an additional revenue stream to low carbon projects that enhances the

overall financial viability of the project while rewarding more GHG friendly investments

and purchasing decisions. The “pay-upon-performance” nature of the asset creates

positive incentives for good management and operational practices to sustain emission

reductions over time. Carbon finance revenues can also leverage upfront capital for

underlying investments by addressing the initial investment barrier and providing

incentives to overcome social inertia, lack of awareness, transaction costs and the

financing of programmes of activities. The origin of underlying capital for CDM projects



in the World Bank portfolio highlights the large share of private investment that has been

put into climate action. If this experience is extrapolated to the market as a whole, it is

estimated that CDM transactions have catalyzed over $100 billion of mostly private underlying

capital for low carbon investments over the 2002–2008 period.

Chapter 4

INDIAN SCENARIO

6.1 IntroductionWhether it is the Delhi Metro Rail Corporation or Navi Mumbai Municipal Corporation

Everyone is earning carbon credits. Call it a fad, a new avenue of earning or just a way taking

care of the corporates’ social responsibility and doing some good to our own environment,

everyone is into carbon credits. If you are polluting the environment now is the situation

where you would have to pay to do so. The demand for renewal sources of energy would

grow over a period of time and with the increase in economic activities so would the need for

these carbon credits. India already is the second largest country in terms of CDM project,

second only to China but stands first in matters of implementation of these projects. Till the

end of the first quarter of 2009, 442 CDM projects have been registered in India and the

market is expected to grow at around US$100 billion by 2010. From India’s perspective

India’s per capital emission figures as compared to other

nations is very low; India is being viewed as one of the potential countries for CDM projects.

To ensure that India also has a systematic approach at combating with the Climate

Changes, the Government of India has released its ‘National Action Plan on Climate

Changes’ (NAPCC) http://www.energymanagertraining.com/NAPCC/main.htm

India too has been on the forefront with regard to developing an active trading market for

these carbon credits. Multi Commodity Exchange of India Limited (MCX) in alliance with

the Chicago Climate Exchange had introduced carbon credit trading in India in 2005. Futures

trading in carbon credits began in 2008 that made MCX the first commodity exchange in

Asia to trade in carbon futures.

In India already companies like SRF, Gujarat Flurochemicals and Grasim Industries have

started generating revenues through CDM.

http://www.energymanagertraining.com/NAPCC/main.htm



Reliance Industries, ONGC and RCF are also exploring possibilities of entering the CDM

business. Chemical Firm SRF has sold 2.5 million units of carbon credits to European

agencies for Rs250 crore .It has appointed trading partners in France, the UK and Germany to

sell carbon credits.Refrigerant makers Gujarat Flurochemicals expects revenue of about Rs

500 crore over the next 6-7 years through the sale of carbon credits. Grasim Industries has

encashed the carbon credits it earned and until now received Rs 17 crore by selling these

credits in Europe and expects to earn Rs 55 crore over the next couple of months.

In recent times ,banks in India have woken up to the new opportunity for money to be made

by protecting the environmrnt.From,identifying and funding projects likely to generate

carbon emission to offering prepayment facilities to local seller on behalf of buyers in

overseas market ,different banks like SBI,IDBI and ICICI Bank and multinational banks like

HSBC ,Standard Charted and ABN Amro are bullish on this business. Though the business is

at an ascent stage, it’s very much emerging and envolving, say Bankers.

Indian Banks are working on two business models in the CDM segment.

1. The First model involves identifying CDM enabled Greenfield projects and financing

them.

2. The other model is giving upfront payment through securitisation of carbon credits.

6.2 PRESENT INDIAN SCENARIO

a) Indian CDM projects, that are diversified in character, are mainly small

(averaging 70,000 carbon credits per year), although the observed trend is

that it is increasing. The small size of Indian CDM projects is explained by

the fact that many early movers were mid-size private companies that

selected 'low risk projects' not requiring large upfront investment.

b) In the initial stage of CDM development, the main projects that were being

implemented were biomass utilisation projects, waste gas/heat utilisation

projects, and renewable energy (wind, hydro) projects. Today the country

has a wide variety of registered CDM projects that include energy

efficiency projects (cement, steel), fuel switch projects, hydroflurocarbons

(HFC) reduction projects and transportation projects. Comparatively, few


projects are registered by state-owned companies or municipalities, though

various large state-owned enterprises are entering the field.

c) Another unique feature of Indian projects is that a large share of the

projects have been undertaken by local stakeholders without the

involvement (financial or technological) of Annex I countries. Indian

project developers bear the transaction costs of CDM and take on the risks

of the projects. The Indian market is thus characterised by competitive and

entrepreneurial developers, who develop projects unilaterally and offer

CERs to buyers at a later stage of the CDM cycle to capture the highest

margin. International involvement in the entire process is extremely

restricted. In contrast, the Chinese CDM pipeline developed around a few

core CDM methodologies. Almost 33 per cent of Chinese CERs come

from HFCs, 16 per cent from hydro and nine per cent from coal mine

methane projects.

d) India is the first country to have a dedicated

ministry - Ministry of New and Renewable

Energy (MNES) - for developing and

promoting non-conventional energy sources.

Fiscal benefits to companies include duty

exemptions, income-tax holidays, accelerated

depreciation norms, etc. Policy measures are

in place to promote specific renewable energy alternatives including bio-

diesel, ethanol and solar thermal water heaters. There is an emphasis on

creating a market for the alternatives by specifying some sort of purchase

obligation for other participants like oil companies and government

agencies.

e) To tackle the problem associated with small scale projects bundling of

these projects by combining them into a portfolio, with an overall

monitoring plan, verification and certification to cover all the projects in

the bundle has been initiated in the country. Bundling organisations

include governmental (Indian Renewable Energy Development Agency)

and non-governmental agencies that aim at promoting rural development,

financial institutions and Strategic Business Units that have a profit motive



as well as trade associations targeting an increase in technology sales for

members.

f) Bundling small scale projects helps to reduce CDM transaction costs due

to fast tracking procedures and spreading of costs across several projects

and provides access to carbon finance for small-scale renewable energy

and energy efficiency/conservation projects. It adds carbon finance to help

overcome barriers to new and renewable sources of energy. In addition it

helps to maximise carbon revenues by acting as a single contact for carbon

buyers. MCX, a nationwide electronic multi commodity futures exchange

with recognition from the Government of India, has launched carbon credit

trading in India since January 2008.

g) The carbon market which is expected to grow to US$ 100 billion annually

has the potential to be a significant source of foreign capital flows from the

developed to the developing world, on par with levels of Official

Development Assistance.

6.3 Global CDM Statistics

Kyoto Protocol Adopted : 1997

M&P : 1 Nov 2001

Entry Into Force : 16 Feb 2005

First CDM Project registered : 18 Nov 2004

CERs first issued : 20 Oct 2005

Total Registered Projects : 1026

CERs Issued : 209,768,516

Expected CERs by 2012 : > 1,250,000,000

Projects requesting registration : 86

CDM Pipeline : > 3000

CERs Volume : > 2,700,000,000



6.4 China vs. India CDM ScenariosThe following fig. shows India is a way ahead of China in terms of CDM projects

China vs. India CDM Scenarios

China Indian Comparison

Total no. of registered projects 197 333 +69%

Total no. of registered projects (Large) 157 125 -20%

Total no. of registered projects (small) 40 208 +420%

Total no. of projects under req. for registration 7 18 +157%

Total no. of projects review requested 20 11 -81%

Total no. of rejected projects 0 27 -

Total no. of CERs issued (millions) 39.33 39.15 -0.45%

Expected avg. annual CERs (millions) 106 30 -253%



6.5 Project distribution by sector - INDIA

Sector No ofprojects*

Share

Energy industries 267 75%

Energy demand 12 3%

Manufacturing industries 46 13%

Chemical industries 1 0%

Transportation 1 0%

Fugitive emissions from fuels 4 1%

Fugitive emissions from the production of halocarbons and sulphur hexa fluoride 4 1%

Waste handling and disposal 13 4%

Afforestration and reforestation 9 3%

No CDM’s yet in:

• Construction

• Mining/Mineral production

• Energy Distribution

• Metal production

• Solvent use



6.6 Major CDM industrial sectors in India

• Renewable energy

• Biomass energy

• Biomass cogeneration

• Biogas

• Large hydro

• Small hydro

• Wind energy

• Solar thermal energy

• Energy efficiency

• Fuel Switching

• Low carbon intensive fuels – Natural gas

• Sponge iron sector – Waste Heat Recovery

• Cement sector - blending

• Methane recovery and avoidance

6.7 Emerging CDM industries

Sectors in India Renewable energy

• Solar PV

• Municipal Solid Waste (MSW) based Power generation

• MSW composting

• Methane recovery and avoidance in Industrial waste water treatment

• Off grid and remote distributed generation projects



• Energy efficiency measures in industrial clusters

• Energy efficiency and waste management in households

• Transportation

• Bio diesel

• Bundled and programme of activities (PoAs) in energy efficiency and transport

sectors

6.8 Advantage for India in Carbon Market.

ó India, being a developing country, will benefit from the provisions of CDM while

continuing its efforts towards sustainable development.

ó With an early start in Renewable Energy Development and significant achievement

and the rapidly growing economy, India is considered to be one of the most potential

country for setting up of CDM projects and a reservoir of ready to take CDM projects

ó In fact, India is considered an excellent country to develop CDM projects with Point

Carbon ranking it number one in terms of CDM project opportunities.

ó The country’s vast market potential for both urban and small-scale renewable energy

projects is complemented by a (relatively) well developed industrial, financing and

business infrastructure. India’s energy, transport, forestry, agriculture and other

sectors offer significant opportunities for GHG reductions at low marginal abatement

costs and can help India fulfill its potential to be a major player in the global CDM

market.

6.9 Status of India in Carbon Market

Signatory to the UNFCCC and ratified the Convention in 1993

Central institutional framework for CDM implementation and host country approval

is already in place

National CDM authority has been established

DNA established in MOEF

Indian DNA accords made monthly

Over 50 consultancy firms offering CDM services



More than 6 accredited Designated Operating Agencies DOEs

International companies and financial institutions in search of CERs from India.

6.9 Conclusion

CDM projects in India contribute towards sustainable development. In the agricultural

sector, utilisation of biomass waste for power generation as well as in the transport

sector reduces consumption of conventional fuel and also eliminates methane formed

by its decay. Agroforestry yields multiple purpose benefits such as arresting land

degradation, restoring fertility of soils, protecting watersheds, reducing surface run-

off, providing wood for fuels and building materials as well as supplementing and

diversifying income of local communities.

Carbon-sequestration is a by-product. Fuel switching helps to conserve valuable

energy resources, contain the oil import bill and reduce carbon dioxide emissions in

addition to garnering carbon credits. Additional revenue earned from carbon credits

by the industrial sectors of the economy gives them an edge and helps to make them

more competitive in the global market. Moreover energy-efficient products are not

priced out of equal competition with those products which are cheaper to make, but

less energy efficient.

CDM projects play an important role in lowering carbon emissions. They provide a

means to acquire technology to achieve significant reduction in specific energy

consumption. This will help meet India's energy challenge and ensure its energy

security. Revenue earned from CDM projects will make it possible to implement

projects in relatively high risk areas where, without this extra support, they would not

go ahead.

Small sized projects, which are a characteristic feature of the country, are beneficial

because of greater employment potential. They help to supplement and diversify

income of local communities. This promotes rural development with local benefits

thus providing the linkage to sustainable development. CDM projects have also

helped the process of spatial diffusion of development to backward regions. In 2007,

BIMARU (the acronym for the backward states of Bihar, Madhya Pradesh, Rajasthan

and Uttar Pradesh) accounted for 28.71 per cent and hill states for eight per cent of

CER projects.



The active role of local stakeholders in CDM projects is a positive aspect as is the

proactive support of the government and the strong project pipeline that exists in the

country. The government estimates that India's green initiatives could generate 355

million CERs and fetch US$ 3.5 billion foreign exchange by 2012. However,

precaution needs to be exercised. India is a land comprising bio-diverse ecosystems

occupied by indigenous people and subsistence farmers. The divergence of land for

alternate uses can have serious consequences. Locally focused, energy efficient and

people-centered alternatives should be promoted which do not threaten food systems,

the environment or livelihoods.



Chapter 5

PLAYERS OF ERB

7.1 Major Players Involved in CDM

a) Executive Board (EB)

b) Project Participants (PP)

c) Designated National Authority (DNA)

d) Designated Operational Entity (DOE)

7.2 Executive Board (EB)

7.2.1 The responsibilities of EB :

a) To supervise the CDM, under the authority and guidance of the COP/MOP;

b) to make recommendation to the COP/MOP on further modalities &

procedures for the CDM, as appropriate;

c) To review and approve new methodologies related to baseline and monitoring

Plan;

d) Accreditation of operational entities;

e) To develop and maintain the CDM registry

7.2.2 Project participants (PP)

PP include:

- Project developers

- Investors

- to develop the CDM project activity;

The Role of PP includes:

to implement/operate the CDM project;

- monitoring the CDM project activity.

Designated National Authority (DNA)

DNA

-serves as a point of contact.

- determines the national criteria for project approval.



Designated Operational Entity (DOE)

DOE is an independent organization accredited by EB to:

a) validate proposed CDM project;

b) verify the resulting emission reductions; and

c) certify those emission reductions as CERs.

• DOE for validation is different from DOE for verification and certification (except in

small-scale projects).

• A DOE could be a private company such as auditing and accounting firm, consulting

company, and law firm.


The Following graph shows the annual growth of CDM,JI n OTHERS in terms Volume.

Sellers and Buyers are the major players in ERB/CDM

a) Who is selling?

Dominated by Asia Pacific (India, China)

Followed by Latin America (Brazil, Mexico, Chile)

Latest addition is the Middle East with several

projects in the pipeline


Africa still very under-represented

b) Who Is Selling?

By Region/Volume (ktCO2e 2012)

c) Who is Selling?

By Country/Number And Credit Volume(ktCo2e)


d) Who is Buying?

European buyers now account for over 75% of

purchases

Great increase in the number of funds

Roughly 3/4 by private sector, 1/4 by

government (including through carbon funds)

Japan has declined sharply, from being the

largest buyer in 2003-2004 (29%) to only 15% in

2007

In India already companies like SRF,Gujrat Flurochemicals and Grasim Industries have

started generating revenues through CDM.

7.4 Case Study on SRF’s experience with CDM


The CDM Project

•HFC 23 is a waste stream from existing HCFC 22 refrigerant plant

•HFC 23 a high GWP gas (eqvtto 11700 of CO2)

•Otherwise a harmless gas and no local legislation prohibiting its emission

•Project is to capture HFC 23 emissions and incinerate;

•Sustainable development around Project site

–Natural Resources Management

–Education



–Health (HIV/ AIDS)

•PwC, India and UK are our global transaction advisors; AZB are our legal advisors

CDM project: Current status

•HFC-23 thermal oxidation plant (incinerator) commissioned Aug’05 with

technology transfer from Solvay, Germany

•Project registered with UNFCCC on 24 December 2005

•Seven issuances have already taken place

–6.84 mln CERs issued…38% of CERs issued globally

–Rs 370 croresapprox. Realised from CER sales till end Sept’06

CDM project: Focus on Sustainable Development

•Natural Resources Management:

•Afforestation

•Soil and water

conservation

•Water harvesting

–active participation of community

–part contribution from them

•Improvement in educational infrastructure of schools in the vicinity

•Creation of HIV/AIDS awareness amongst high risk groups



Project Participants

1. Barclays BankUK

2. BNP UK, France

3. Climate Change Capital Carbon Fund, UK

4. EDF Trading UK

5. Enel Italy

6. ICECAP UK

7. KfW Germany

8. Nuon Netherlands

9. Shell Trading International UK

10. Solvay Fluor GmbH Germany



BIBLIOGRAPHY

• Krishnakedar.S.Gumaste (2007) “Embodied green energy ”.

• Prof. B.V. Venkatarama Reddy (2005) “Carbon Market”.

• Richard Hyde (2000) Published by St. Edmundsbury Press, Printed in Great Britain,

Edition 2001 “Climate Responsive Carbon Market”.

• Bureau Indian Standards - SP-41.

• Indian Environment Code SP-7.

• ASHRAE/IESNA Standard 90.1—Energy Standard for Carbon Trade.

• ASHRAE 90.1 2004 / ECBC (Energy)

• ASHRAE 62 2004 (Carbon Offsets)

• IPMVP (For monitoring performance)

• IS - 2440 - 1975, Guide for day lighting of building, BIS.

• ECBC (Energy Conservation) 2007.

• http://www.wbdg.org/

• http://en.wikipedia.org/wiki/Carbon Offset

• http://www.forms.org/index.cfm/ICFtypes

• http://www.energysavingtrust.org.uk/Cavity-wall-insulation>

• Research Institute for Sustainable Energy (RISE)

• http://www.recovery-insulation.co.uk/index.html

• http://www.daylighting/whole building design guide/

• http://unfccc.org/

• "Environmental Impact of Energy Conservation by Carbon Credits--Real Case

Studies," by Peter Suter

• Environmental Resource Guide, The American Institute of Architects, 1995

• Environmental Choices for Marketers , published by The US Environmentalist'

Association(1994)

• Environment Graphic Standards (AGS), 11th Edition by John Wiley & Sons, Inc.: The

American Institute of Architects, March 2007.

• "Practical Control Strategies for Carbon Markets"(2007)

• www.igbc.in

• Lunt, M. G., Stabilized Carbon Market of future. Overseas Environment Notes,

1980, 184.

http://www.wbdg.org/

http://en.wikipedia.org/wiki/Carbon

http://www.forms.org/index.cfm/ICFtypes

http://www.energysavingtrust.org.uk/Cavity-wall-insulation

http://www.recovery-insulation.co.uk/index.html

http://www.daylighting/whole

http://unfccc.org/

http://www.igbc.in

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