Emission Reduction Benefits


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A study into carbon market. Indian context added.

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Emission Reduction Benefits

  1. 1. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDS Chapter 1 Emission Reduction Benefits1.1 IntroductionThis report examines various sources of Emission Reduction Benefits which is a result ofinternational treaties such as the Kyoto Protocol which set quotas on the amount ofgreenhouse gases countries can produce. Countries, in turn, set quotas on the emissions ofbusinesses. The report also looks in to various standards which are prevalent all over theworld, with special context to India.Now as the businesses (Industrial and Commercial) which are over their quotas buy CarbonCredits or Carbon Offsets as commonly called all over for their excess emissions, whilebusinesses that are below their quotas can sell their remaining credits. By allowing credits tobe bought and sold, a business for which reducing its emissions would be expensive orprohibitive can pay another business to make the reduction for it. This creates great demandto service providers in terms of technological and financial consultant. The role of theseparties is also looked in to the report.Emission Reduction Benefits generated as carbon credits or carbon offset can be exchangedbetween businesses or bought and sold in international markets at the prevailing market price.There are exchanges for : the Chicago Climate Exchange and the European ClimateExchange and in India we have Multi Commodity Exchange (MCX).
  2. 2. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDSThe concept of ERB came into existence as a result of increasing awareness of the need forpollution control. It was formalized in the Kyoto Protocol, an international agreementbetween 169 countries. ERB are certificates awarded to countries that are successful inreducing emissions of greenhouse gases. ERB are a tradable permit scheme. They provide away to reduce greenhouse gas emissions by giving them a monetary value. A credit gives theowner the right to emit one tonne of carbon dioxide. For trading purposes, one credit isconsidered equivalent to one tonne of CO2 emissions. Such a credit can be sold in theinternational market at the prevailing market price.
  3. 3. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDSEmission Reduction Benefit (ERB) is a financial instrument aimed at a reductionin greenhouse gas emissions. ERB are measured in metric tons of carbon dioxide-equivalent (CO2e) and may represent six primary categories of greenhouse gases. One carbonoffset represents the reduction of one metric ton of carbon dioxide or its equivalent in othergreenhouse gases. In other words ERB is a credit granted upon request by an emission sourcewho voluntarily (e.g. VCS/VER) or under regulations (e.g. CDM/CER) reduces emissionsbeyond required levels of control. An Emission Reduction Benefit (ERB) represents the legalability to emit regulated pollutants in an amount equal to the quantity specified whenthe 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 inaccordance with applicable regulations established. ERBs are intended to provide anincentive for reducing emissions below required levels, and to establish a framework topromote a market based approach to pollution control (main emphasis on GHGs emission).1.2 Financial Aspect of Emission Reduction BenefitThere 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 dioxidethey are allowed to emit. In 2006, about $5.5 billion of ERBs were purchased in thecompliance market, representing about 1.6 billion metric tons of CO2e reductions.In the much smaller, voluntary market, individuals, companies, or governments purchaseVoluntary Emission Reduction (VER) to mitigate their own greenhouse gas emissions fromtransportation, electricity use, and other sources. Many companies offer ERBs as an up-sellduring the sales process so that customers can mitigate the emissions related with theirproduct or service purchase. In 2008, about $705 million of ERBs were purchased in thevoluntary market, representing about 123.4 million metric tons of CO2e reductions.ERBs are typically achieved through financial support of projects that reduce the emission ofgreenhouse gases in the short or long-term. The most common project type is renewableenergy, such as wind farms, biomass energy, or hydroelectric dams. Others include energyefficiency projects, the destruction of industrial pollutants or agricultural by-products,destruction of landfill methane, and forestry projects.NATIONAL INSTITUTE OF CONSTRUCTION MANAGEMENT AND RESEARCH PAGE 3
  4. 4. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDSERB has gained appeal and momentum mainly among consumers in western countries whohave become aware and concerned about the potentially negative environmental effects ofenergy-intensive lifestyles and economies. The Kyoto Protocol has sanctioned offsets as away for governments and private companies to earn ERB which can be traded on amarketplace. The protocol established the Clean Development Mechanism (CDM), whichvalidates and measures projects to ensure they produce authentic benefits and are genuinely"additional" activities that would not otherwise have been undertaken. Organizations that areunable to meet their emissions quota can offset their emissions by buying CDM-approvedCertified Emissions Reductions (CERs). Obtaining CER/VER is a cheaper and moreconvenient alternatives to reducing ones own fossil-fuel consumption. Offsets are viewed asan important policy tool to maintain stable economies.One of the hidden dangers of climate change policy is unequal prices of carbon in theeconomy, which can cause economic collateral damage if production flows to regions orindustries 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 tradein the same.
  5. 5. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDSA 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 developingcountry reducing carbon emissions as an alternative to more expensive emission reductions intheir own country. CDMs are useful as they help the developed countries to lower the cost foremission reduction and enable the developing countries to achieve technology transfer andsustainable development. What is crucial to the understanding of ‘approved’ CDMs is that forany project to be approved by the CDM executive board, the project should result in reducingthe greenhouse gas emissions not mandated by law or regulatory authority but should be able
  6. 6. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDSto achieve additional emission reduction from what it would have anyways contributed tosans the project or statutory compliance. For instance switching to unleaded petrol is notreducing emissions voluntarily it as per the stated norms however setting up a waste heatrecovery plant that saves energy will surely earn some CERs to the factory. The cost oftechnology involved in taking up such projects are humungous, thus carbon financing iscritical to the development of any CDM project. These projects are undertaken in developingcountries, which has a twin benefit a) it would reduce the cost of setting up the project in adeveloping nation and b) it would provide the developing nation with technology input andsustainable development; besides it would also earn the developed nation Certified EmissionReductions (CERs). There is a primary CER market wherein the trades are conducted throughemission reduction purchase agreement (ERPAs) and the secondary market for CERs thatinvolve trades in generic issued or guaranteed delivery CERs that have been traded inpreviously. CERs are in the form of certificates, just like a stock. If a project generates energyusing wind power instead of burning coal, and in the process saves (say) 25 tonnes of carbondioxide 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’, wherethere are caps set in for emissions. Emission reductions are awarded as Emission ReductionUnits (ERUs) which come from the host country’s pool of assigned emission credits knownas Assigned Amount Units (AAUs). In JIs the total amount of emission credits does notchange, whereas CDM projects must provide for additional emission reductions to what itwould otherwise have occurred. The Joint Implementation projects are supervised by theJoint Implementation Supervisory Committee (JISC).1.3.3 Emissions TradingKyoto Protocol introduced the concept of ‘cap and trade’ system. Simply put carbon dioxideemissions would be capped and the right to emit could be traded. For instance, for Country A
  7. 7. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDSrequired reduction in carbon emission are 10 units and can generate 20 units of carbonemission at price P (which is the affordable price), whereas Country B has required reductionin carbon emissions as 10 units but at price P it can only reduce 5 units. CDM providesCountry B with an opportunity to generate 5 units of carbon emissions in the country and willtrade the rest 5 units from Country A. Thus the net cost of financing emission reductionswould come down considerably leaving both the countries in the win-win position. EUGreenhouse Gas Emission Trading System (EU-ETS) is an offspring of the cap and tradesystem, others being UK Emissions Trading Group (ETG), Chicago Climate Exchange(CCX), and the New South Wales Greenhouse Gas Reduction Scheme. The EU-ETS is thelargest 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 beworth Euro 90 billion – approximately $131 billion a year and the cap and trade system hasbeen reasonably able to meet its objective of carbon emission reduction whereas the emissionlevels have gone up for the rest of the world. As per a Bloomberg report the global carbonmarket is expected to reach US$2trillion by 2025. Apart from the primary market of tradingin 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 reductionprojects with added sustainable development benefits and guaranteed environmental integrity.The Gold Standard label certifies projects under the Clean Development Mechanism (GSCER credits) as well as for the voluntary offset market (GS VER credits). GS projectsemploy renewable energy or energy efficiency technologies and actively seek localparticipation in project design, resulting in demonstrable sustainable developmentbenefits.The Gold Standard established a registry in March 2008 to create, track and enabletrade of GS VERs and CERs. numerous publicly accessible reports create utmosttransparency on more than 200 GS projects in over 30 countries. The Gold Standard isofficially 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
  8. 8. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDSniche 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 theindustry, NGOs and carbon market specialists. Led by The Climate Group, the InternationalEmissions Trading Association (IETA) and the World Business Council for SustainableDevelopment (WBCSD), the VCS provides a robust, global standard for voluntary offsetprojects. 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 isregistered in one of the four VCS registries, it does not meet the VCS definition of aVoluntary Carbon Unit (VCU). This creates a robu system of transparent voluntary offsetcredits and provides a clear chain of ownership.1.3.6 VER+ StandardVER+ is the TÜV SÜD standard for VER projects, which is in line with the requirements ofKyoto Protocol for CDM or JI projects. The catalogue of the VER+ Standard criteria includeseligibility, additionality, permanence, exclusivity, avoidance of double-counting,environmental and social criteria, a defined ex-post crediting period and a conservativemethodological calculation approach.TÜV SÜD, a UN accredited independent verifier, is one of First Climate’s technicalpartners. 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 1.8million VER+ credits.
  9. 9. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDS1.3.7 Social Carbon MethodologySocial Carbon is a methodology developed by the Brazilian non-profit Instituto Ecológicabased on seven years of fieldwork in the Amazon region by a multidisciplinary team ofresearchers. The social carbon concept arose from the need to ensure that reducing emissionsof greenhouse gases makes a substantial contribution to sustainable development. It isfounded on the principle that transparent assessment and monitoring of the social andenvironmental performance of projects can improve their long-term effectiveness, and thusadd value to the VERs generated.This progressive methodology directly involves the local population in the project design andassessment processes, supporting the community in the achievement of its own goals andaspirations. Furthermore, the Social Carbon methodology requires continuous monitoring ofsocial and environmental benefits over the project lifetime.1.3.8 Climate, Community and Biodiversity (CCBS)The CCB standard developed by the CCBA (Climate, Community & BiodiversityAlliance) is a global partnership between leading companies, NGOs and research institutesseeking to promote integrated solutions to land management around the world anddevelop voluntary standards for multiple-benefit land and forestry projects. These projectsdeliver compelling benefits for the climate, biodiversity and the community.The standard evaluates land-based carbon mitigation projects in the early stages ofdevelopment and fosters the integration of best-practice and multiple-benefit approaches intoproject design and evolution. The projects simultaneously address climate change, supportlocal communities and conserve biodiversity and therefore promote excellence andinnovation in project design. The CCBS is the highest quality standard for land managementand forestry projects and therefore part of First Climate’s portfolio.
  10. 10. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDS1.4 A Note On Voluntary MarketsA voluntary carbon market exists outside the compliance market that is outside the Kyotocompliant mechanism.. The carbon credits generated outside the compliance mechanism areverified and traded in the global over the counter market for greenhouse gas emissions andare called verified emission reductions.1.5 A Note On Secondary MarketThe secondary market for carbon credits is a very active market. At present the secondarymarket 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 inthe marketplace will be 1) carbon allowances or the offset credits and 2) allowancederivatives. Carbon derivatives would be mainly swaps, options & futures that would allowcompanies to lock in pricing on carbon units. While the idea of trading the emissions rightsand 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 soafter 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 ofcarbon derivatives is not at all welcomed, including stalwarts like George Soros who calledthe emissions trading for climate control as ‘ineffective.’1.6 ERB Exchange MarketIn 2009, 8.2 billion metric tons of carbon dioxide equivalent changed hands worldwide, up68% from 2008, according to the study by carbon-market research firm Point Carbon, ofWashington and Oslo. But at EUR94 billion, or about $135 billion, the markets value wasnearly 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 isdominated by Europe, where companies that emit greenhouse gases are required to cut theiremissions or buy pollution allowances or ERB from the market. Europe, which has seenvolatile carbon prices due to fluctuations in energy prices and supply and demand, willcontinue to dominate the global carbon market for another few years, as the U.S. and China--the worlds top polluters--have yet to establish national emission-reduction policies.NATIONAL INSTITUTE OF CONSTRUCTION MANAGEMENT AND RESEARCH PAGE 10
  11. 11. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDSThe first mandatory, market-based cap-and-trade program to cut CO2 in the U.S., called theRegional Greenhouse Gas Initiative, kicked into gear in northeastern states in 2009, growingnearly 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 marketdominated by financial players and companies that want to hedge their exposure to potentialfuture emission-reduction rules.The goal of ERB market is to allow market mechanisms to drive industrial and commercialprocesses in the direction of low emissions or less carbon intensive approaches than thoseused 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 carbonreduction schemes between trading partners and around the world.There are also many companies that sell ERB to commercial and individual customers whoare interested in lowering their carbon footprint on a voluntary basis. These carbon offsetters purchase the credits from an investment fund or a carbon development company thathas aggregated the credits from individual projects. The quality of the credits is based in parton the validation process and sophistication of the fund or development company that actedas the sponsor to the carbon project. This is reflected in their price; voluntary units typicallyhave less value than the units sold through the rigorously-validated Clean DevelopmentMechanism.With the commencement of the European Union Emission Trading Scheme (EU ETS), theearliest derivatives markets on over-the-counter (OTC) and exchange-traded carbon emissioncredits took off in Europe in 2003 and early 2005 respectively, with trading mainly ofproducts on European Union Allowances (EUAs) under the EU ETS. Trading of CERderivatives started later because Clean Development projects under the CDM of the KyotoProtocol needed time to develop. The earliest exchange-traded CER derivatives werelaunched in mid-2007 in Europe. Later on we can see Indian counterpart as Multi CommodityExchange (MCX) and National Commodity and Derivative Exchange (NCDEX) playingthere role from 2008. A chart is being shown depicting the trading growth.NATIONAL INSTITUTE OF CONSTRUCTION MANAGEMENT AND RESEARCH PAGE 11
  12. 12. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDS1.7 ERB allowancesUnder the Kyoto Protocol, the caps or quotas for Greenhouse gases for the developed Annex1 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 andother organizations, generically termed operators. Countries manage this through their ownnational registries, which are required to be validated and monitored for compliance bythe UNFCCC. Each operator has an allowance of credits, where each unit gives the owner theright 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, whilebusinesses 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 emissionsmust still stay within the cap, but it allows industry some flexibility and predictability in itsplanning to accommodate this.
  13. 13. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDSBy 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 andpractices 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 countrieswithin the European Union under its European Trading Scheme (EU ETS) with the EuropeanCommission as its validating authority. From 2008, EU participants must link with the otherdeveloped countries who ratified Annex I of the protocol, and trade the six most significantanthropogenic greenhouse gases. In the United States, which has not ratified Kyoto,and Australia, whose ratification came into force in March 2008, similar schemes are beingconsidered.1.8 Kyotos Flexible MechanismsA credit can be an emissions allowance which was originally allocated or auctioned by thenational administrators of a cap-and-trade program, or it can be an offset of emissions. Suchoffsetting and mitigating activities can occur in any developing country which has ratified theKyoto Protocol, and has a national agreement in place to validate its carbon project throughone of the UNFCCCs approved mechanisms. Once approved, these units are ermed CertifiedEmission Reductions, or CERs. The Protocol allows these projects to be constructed andcredited in advance of the Kyoto trading period.The Kyoto Protocol provides for three mechanisms that enable countries or operators indeveloped 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.NATIONAL INSTITUTE OF CONSTRUCTION MANAGEMENT AND RESEARCH PAGE 13
  14. 14. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDS§ 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 thecountry. In reality, most of the transactions are not performed by national governmentsdirectly, but by operators who have been set quotas by their country.1.9 Emission TradingFor trading purposes, one allowance or CER is considered equivalent to one metric tonne ofCO2 emissions. These allowances can be sold privately or in the international market at theprevailing market price. These trade and settle internationally and hence allow allowances tobe transferred between countries. Each international transfer is validated by the UNFCCC.Each transfer of ownership within the European Union is additionally validated by theEuropean Commission.Climate exchanges have been established to provide a spot market in allowances, as wellas futures and options market to help discover a market price and maintain liquidity. Carbonprices 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 carbondioxide with respect to their global warming potential. These features reduce the quotasfinancial impact on business, while ensuring that the quotas are met at a national andinternational level.Currently there are five exchanges trading in carbon allowances: the Chicago ClimateExchange, European Climate Exchange, Nord Pool, PowerNext and the European EnergyExchange. Recently, NordPool listed a contract to trade offsets generated by a CDM carbonproject called Certified Emission Reductions (CERs). Many companies now engage inemissions abatement, offsetting, and sequestration programs to generate credits that can besold on one of the exchangesManaging emissions is one of the fastest-growing segments in financial services in the Cityof 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 worldsbiggest commodity market, and it could become the worlds biggest market overall.NATIONAL INSTITUTE OF CONSTRUCTION MANAGEMENT AND RESEARCH PAGE 14
  15. 15. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDS1.10 Setting A Market Price For CarbonUnchecked, 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 supplyand demand will push up the market price, encouraging more groups to undertakeenvironmentally 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 offsetsuch as a CER. This is due to the lack of a developed secondary market for CERs, a lack ofhomogeneity between projects which causes difficulty in pricing, as well as questions due tothe principle of supplementary and its lifetime. Additionally, offsets generated by a carbonproject under the Clean Development Mechanism are potentially limited in value becauseoperators in the EU ETS are restricted as to what percentage of their allowance can be metthrough these flexible mechanisms.Yale University economics professor William Nordhaus argues that the price of carbon needsto be high enough to motivate the changes in behavior and changes in economic productionsystems necessary to effectively limit emissions of greenhouse gases.Raising the price of carbon will achieve four goals. First, it will provide signals to consumersabout what goods and services are high-carbon ones and should therefore be used moresparingly. 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 incentivesfor inventors and innovators to develop and introduce low-carbon products and processes thatcan replace the current generation of technologies. Fourth, and most important, a high carbonprice 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 accordingto their carbon content. Ethical consumers today, hoping to minimize their “carbonfootprint,” 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 wouldraise the price of a good proportionately to exactly the amount of CO2 that is emitted in allthe stages of production that are involved in producing that good. If 0.01 of a ton of carbonemissions results from the wheat growing and the milling and the trucking and the baking ofa loaf of bread, then a tax of $30 per ton carbon will raise the price of bread by $0.30. TheNATIONAL INSTITUTE OF CONSTRUCTION MANAGEMENT AND RESEARCH PAGE 15
  16. 16. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDS“carbon footprint” is automatically calculated by the price system. Consumers would still notknow how much of the price is due to carbon emissions, but they could make their decisionsconfident 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 carbonemissions. ... The optimal carbon price, or optimal carbon tax, is the market price (or carbontax) on carbon emissions that balance the incremental costs of reducing carbon emissionswith the incremental benefits of reducing climate damages. ... [I]f a country wished to imposea carbon tax of $30 per ton of carbon, this would involve a tax on gasoline of about 9 centsper gallon. Similarly, the tax on coal-generated electricity would be about 1 cent per kWh, or10 percent of the current retail price. At current levels of carbon emissions in the UnitedStates, 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
  17. 17. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDS 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, theenergy consumed and the Carbon emitted in the manufacture and transportation of a largewind 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 sellers 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 ERBThe principle of Supplementary within the Kyoto Protocol means that internal abatement ofemissions should take precedence before a country buys in ERB. However it also establishedthe Clean Development Mechanism as a Flexible Mechanism by which capped entities coulddevelop real, measurable, permanent emissions reductions voluntarily in sectors outside thecap. 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 processhas 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 thereduction of real, measurable, permanent emissions, is understanding the CDM methodologyprocess. This is the process by which project sponsors submit, through a DesignatedOperational Entity (DOE), their concepts for emissions reduction creation. The CDMExecutive Board, with the CDM Methodology Panel and their expert advisors, review eachproject and decide how and if they do indeed result in reductions that are additional.NATIONAL INSTITUTE OF CONSTRUCTION MANAGEMENT AND RESEARCH PAGE 17
  18. 18. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDS1.13 Different Role Players for ERB ImplementationThere are opportunities created for different business like Risk Management(Corporate/Banks/Insurance Companies), Project Financing Companies, PortfolioManagement and IT Players are depicted by the table below.
  19. 19. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDS1.13.1 Risk Management for CompaniesCompanies must realize that CO2 risk management will emerge as an important factor intheir decision-making. For individual companies the most important risk Categories resultingfrom 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 andaccurate GHG inventory which details past, current, and projected future emissions. Theyshould understand the marginal abatement cost options available from different GHGmitigation strategies and the tools that are available to achieve compliance within differentGHG regulatory regimes.1.13.2 Risk Management from Bank’s PerspectiveOffering new products and services to reduce the risk of emissions trading for corporatecustomers is a new business challenge for banks. Furthermore, banks hold stakes in thecompanies affected by trading. Consequently, the risks and opportunities for those companiesare also risks and opportunities for the banks. The complexity of emissions trading requires awide range of products and services that effectively hedge against risks emerging from theKyoto Protocol and the European trading scheme.1.13.3 Portfolio Management PerspectiveBanks can offer the service of Emission Allowances portfolio management while taking overthe responsibility of their clients’ emission allowance accounts. The most striking advantageNATIONAL INSTITUTE OF CONSTRUCTION MANAGEMENT AND RESEARCH PAGE 19
  20. 20. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDSof such a service is that it is not necessary to set up internal expertise in the affectedcompanies, thus resulting in lower transaction costs. This can be a part of Derivatives desk asthe products they can offer are derivative instruments such as Futures, Options and Swapsand 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 productsor interest rates or basket of currencies and so on.1.13.4 Project Finance PerspectiveAn emission trading also offers potential business in the field of project finance – providingproject developers with the chance to generate additional income sources by investing inenergy-efficient technology. This applies to JI and CDM projects, where the inclusion ofemission credits in the analysis of a project’s credit quality could become imperative. Inprinciple, the securitisation of these cash flows could either help to reduce the financingneeds of a project developer or reduce the re-financing costs by embedding them into interestrate derivatives. Accordingly, emission certificates could help plant developers with newfinancing mechanisms, thereby leading to more sophisticated structures as the marketexpands.1.13.5 Risk Management from Insurance PerspectiveInsurance Products cover the legal obligation to reduce greenhouse emissions resulting innew liabilities, fines and penalties resulting from a breach of law would not be covered underInsurance policy. Inappropriate or inadequate management of climate risks, resulting in afailure to protect a company’s interests would affect the decision of the Insurance Company.NATIONAL INSTITUTE OF CONSTRUCTION MANAGEMENT AND RESEARCH PAGE 20
  21. 21. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDS1.13.6 IT PlayersSetting up emission data management systems, Trading, and clearing systems, research anddevelopment activities which can deliver end to end solutions for emission managementEmission Exchanges: A platform to be built to facilitate faster and transparent carbon tradingsystem 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.NATIONAL INSTITUTE OF CONSTRUCTION MANAGEMENT AND RESEARCH PAGE 21
  23. 23. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDS Chapter 2 Sources of Emission Reduction Benefits2.1 Introduction to The Sources of ERBFollowing are the sources which will fetch the Emission Reduction Benefits and can beformulated 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 efficiencyFollowing is a graph showing different sources of earning ERBs
  24. 24. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDSIt is learnt that ERB create a market for reducing greenhouse emissions by giving a monetaryvalue to the cost of polluting the air. This means that carbon becomes a cost of business andis 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 ayear. The government then enacts a law that limits the maximum emissions a business canhave. So the factory is given a quota of say 80,000 tonnes. The factory either reduces itsemissions 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 havebeen approved as being able to sell legitimate carbon credits. One seller might be a companythat will plant so many trees for every carbon credit you buy from them. So, for this factory itmight 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 ofcompanies wanting to buy more credits will increase, which will push the market price upand encourage more groups to undertake environmentally friendly activities that create forthem carbon credits to sell. Another model is that companies that use below their quota cansell their excess as ‘carbon credits.’The possibilities are endless; hence making it an open market.2.2 Description Of Sources Of ERBWhat we need next is various means of reducing green house gasses and covering them intocarbon 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.NATIONAL INSTITUTE OF CONSTRUCTION MANAGEMENT AND RESEARCH PAGE 24
  25. 25. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDS RENEWABLE SOURCE CATEGORISATION IN ENERGY INDUSTRY Energy Industries Energy Recovery from Renewables Efficiency wastes Zero Hydropower Emissions Tidal , Wind Solar Biomass Geothermal etc.2.2.2 Cogeneration plants generate both electricity and heat from the samepower source, thus improving upon the energy efficiency of most power plants whichwaste the energy.Following is the table which shows the targeted benefit from cogeneration thus enablingcarbon credits thus ERBs.Table Showing Typical Cogeneration Performance Parameters.
  26. 26. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDS 2.2.3 Fuel efficiency and Energy Efficiency ( EE) projects replace 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.).NATIONAL INSTITUTE OF CONSTRUCTION MANAGEMENT AND RESEARCH PAGE 26
  27. 27. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDS 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.NATIONAL INSTITUTE OF CONSTRUCTION MANAGEMENT AND RESEARCH PAGE 27
  28. 28. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDS 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.
  29. 29. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDS 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.
  30. 30. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDS 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. 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.
  31. 31. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDS Technopolis is Indias 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.
  32. 32. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDS 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.NATIONAL INSTITUTE OF CONSTRUCTION MANAGEMENT AND RESEARCH PAGE 32
  33. 33. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDS 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.
  34. 34. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDS 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
  35. 35. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDS 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. 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 revenueNATIONAL INSTITUTE OF CONSTRUCTION MANAGEMENT AND RESEARCH PAGE 35
  36. 36. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDS [B20/B100- types of bio diesel developed from Jatropa]2.3.2 SOLID WASTE MANAGEMENT- CARBON TRADING POTENTIALThere are definite linkages between sanitation and climate change. All human activitiesincluding defecation release green house gases (GHGs) and are causing to global warmingand climate change. The Climate Change Market Based Mechanisms allow developedcountries to invest in carbon emission reduction (CER) projects in developing countries andthese credits can be traded and sold. This is the first environment investment and creditscheme. The present focus is largely on “toilets” and “safe disposal of excreta”. Little or noattention is being paid to liquid and solid waste management. There has also been verylimited focus on “recycling and reuse” and on extraction of the economic value of waste.2.3.3 BIO- GAS - CARBON TRADING POTENTIALTypes of Biomass ProjectsCollection of generated methaneMethane ReductionEffluent TreatmentDirect Combustion (Bagasse, etc.)Liquid FuelRoughly, 1 mwh of power is generated using 1-1.5 tonnes of biomass. Thus, a 7.5 mwplant, operating at 100 per cent capacity, would need 65,700-98,550 tonnes of biomassper annum. If the raw material is purchased at Rs 800 per tonne, the plant spends Rs 0.80
  37. 37. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDSper k Wh on it. If bought at Rs 1,200 per tonne, the plant will spend Rs 1.20 per k Wh onits raw material. Thus, the economics and sustainability of these plants are determinedby 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 residueslike rice husk, cotton sticks, chilli waste, mustard sticks and wood of 24 such projectsare in the process of being validated/registered with the CDM Board. They constituteabout 44 per cent of Indian CDM projects, 57-odd in all, listed on the UNFCCC websiteas on September 9, 2005. But projects are small, and add up to only nine per cent ofCERs India could sell through its projects.If all the 24 biomass projects are cleared, India could sell roughly 700,000 CERs, earnRs 16 crore per year (at US $5 per CER). Privately owned, these would generate 3-12megawatt (mw) of power, selling it mostly to state electricity boards. The Indiangovernment has been promoting these projects through its Union ministry of non-conventional energy sources (MoNES), and many states now have a power purchasepolicy under which they will buy biomass-generated power at rates varying from Rs 2.25in Uttar Pradesh to Rs 3.32 in Rajasthan per unit generated. The CDM credit, roughly Rs14-15 lakh per mw per year, gives additional benefits for plants to operate.The first registered project is in Rajasthan, by privately-owned Kalpataru PowerTransmission Ltd. It will sell the Netherlands government a total of 313,743 CER s over7-10 years. At US $5 per CER, the company will get roughly Rs 1 crore per year forcarbon credits sold. It sources raw material from farmers mustard sticks, agriculturalresidues like rice husk or even saw dust. It sells power to the Rajasthan state electricityboard. The project design document does not specify the rate, but the state purchasepolicy for biomass-generated power is Rs 3.32 per unit. In this way, the state useselectricity from renewable sources, replacing coal and so saving carbon dioxideemissions.NATIONAL INSTITUTE OF CONSTRUCTION MANAGEMENT AND RESEARCH PAGE 37
  38. 38. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDSFollowing is a graph comparing Biomass & Biogas projects and other ERB projects.Some more pictorial views of generation of ERB are shown for easy reference:
  42. 42. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDS Chapter 3 Study of Prevailing Standards3.1 CARBON MARKET STANDARDSThere are several types of carbon markets operating throughout the world, and the differencesmay 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 asthe U.S.).There are significant differences in these markets, both in terms of how they operate andmarket prices for carbon credits. In this report the following standards have been discussed indetail.Compliance or Regulated or market standard 1.) CDM 2.) JIVoluntary market standard 1.) VCS 2.) VGS
  43. 43. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDS 3.) VER+ 4.) World Bank Carbon Finance FundsThe 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 issues3.2 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 achievedand proposed international emissions trading as a way of achieving cost-effective emissionreductions. At the time it was considered a controversial element and was opposed byenvironmental NGOs and, initially, by developing countries who felt that industrialisedcountries should put their own house in order first and feared the environmental integrity ofthe mechanism would be too hard to guarantee (see Environmental Concerns below).Eventually, and largely on US insistence, the CDM and two other flexible mechanisms werewritten into the Kyoto Protocol.The purpose of the CDM was defined under Article 12 of the Kyoto Protocol. Apart fromhelping Annex 1 countries comply with their emission reduction commitments, it must assistdeveloping countries in achieving sustainable development, while also contributing tostabilization of greenhouse gas concentrations in the atmosphere.To prevent industrialised countries from making unlimited use of CDM, the framework has aprovision that use of CDM be ‘supplemental’ to domestic actions to reduce emissions. ThisNATIONAL INSTITUTE OF CONSTRUCTION MANAGEMENT AND RESEARCH PAGE 43
  44. 44. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDSwording has led to a wide range of interpretations - the Netherlands for example aims toachieve half of its required emission reductions (from a BAU baseline) by CDM . 3.2.2 Project Process i.Outline of the project processAn industrialised country that wishes to get credits from a CDM project must obtain theconsent of the developing country hosting the project that the project will contribute tosustainable development. Then, using methodologies approved by the CDM Executive Board(EB), the applicant (the industrialised country) must make the case that the carbon projectwould not have happened anyway (establishing additionality), and must establish a baselineestimating the future emissions in absence of the registered project. The case is then validatedby a third party agency, called a Designated Operational Entity (DOE), to ensure the projectresults in real, measurable, and long-term emission reductions. The EB then decides whetheror not to register (approve) the project. If a project is registered and implemented, the EBissues credits, called Certified Emission Reductions (CERs, commonly known as carboncredits, where each unit is equivalent to the reduction of one metric tonne of CO2e, e.g. CO2or its equivalent), to project participants based on the monitored difference between thebaseline and the actual emissions, verified by the DOE. ii.Establishing additionalityTo avoid giving credits to projects that would have happened anyway ("freeriders"), ruleshave been specified to ensure additionality of the project, that is, to ensure the project reducesemissions more than would have occurred in the absence of the project. At present, the CDMExecutive Board deems a project additional if its proponents can document that realisticalternative scenarios to the proposed project would be more economically attractive or thatthe project faces barriers that CDM helps it overcome. Current Guidance from the EB isavailable 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.NATIONAL INSTITUTE OF CONSTRUCTION MANAGEMENT AND RESEARCH PAGE 44
  45. 45. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDS 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 someconfusion, particularly over the terms financial additionality and investment additionalitywhich are sometimes used as synonyms. Investment additionality, however, was a conceptdiscussed and ultimately rejected during negotiation of the Marrakech Accords. Investmentadditionality carried the idea that any project that surpasses a certain risk-adjustedprofitability threshold would automatically be deemed non-additional. Financialadditionality is often defined as an economically non-viable project becoming viable as adirect result of CDM revenues.Many investors argue that the environmental additionality interpretation would make theCDM simpler. Environmental NGOs have argued that this interpretation would open theCDM to free-riders, permitting developing countries to emit more CO2e, while failing toproduce emission reductions in the CDM host countries. WWF have undertaken a study ofadditionality 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, carbonrevenues 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 CDMor 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 bythe CDM Executive Board for assessing additionality. iii.Establishing a baselineThe amount of emission reduction, obviously, depends on the emissions that would haveoccurred without the project minus the emissions of the project. The construction of such ahypothetical scenario is known as the baseline of the project. The baseline may be estimatedthrough reference to emissions from similar activities and technologies in the same country orother countries, or to actual emissions prior to project implementation. The partners involvedin the project could have an interest in establishing a baseline with high emissions, whichwould yield a risk of awarding spurious credits. Independent third party verification is meantto avoid this potential problem.NATIONAL INSTITUTE OF CONSTRUCTION MANAGEMENT AND RESEARCH PAGE 45
  46. 46. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDS iv.MethodologiesAny proposed CDM project has to use an approved baseline and monitoring methodology tobe validated, approved and registered. Baseline Methodology will set steps to determine thebaseline within certain applicability conditions whilst monitoring methodology will setspecific steps to determine monitoring parameters, quality assurance, equipment to be used,in order to obtain datas to calculate the emission reductions. Those approved methodologiesare all coded. "AM" stands for "Approved Methodology," "ACM" stands for "ApprovedConsolidated Methodology," "AMS" stands for "Approved Methodology for Small ScaleProjects" and so on. All the approved methodology are listed in the UNFCCC home page. If aproject 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 thenew methodology will be converted to an Approved Methodology. 3.2.3 Financial IssuesWith costs of emission reduction typically much lower in developing countries than inindustrialised countries, industrialised countries can comply with their emission reductiontargets at much lower cost by receiving credits for emissions reduced in developing countriesas long as administration costs are low.The IPCC has projected GDP losses for OECD Europe with full use of CDM and JointImplementation 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 avery good price if it agrees to bear the risk that the projects baseline and monitoringmethodology is rejected; that the host country rejects the project; that the CDM ExecutiveBoard rejects the project; that the project for some reason produces fewer credits thanplanned; or that the buyer doesnt get CERs at the agreed time if the international transactionlog (the technical infrastructure ensuring international transfer of carbon credits) is not inplace by then. The seller can usually only take these risks if the counterparty is deemed veryreliable, as rated by international rating agencies.NATIONAL INSTITUTE OF CONSTRUCTION MANAGEMENT AND RESEARCH PAGE 46
  47. 47. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDS 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 theKyoto Protocol) (Annex I Parties) to meet part of its emissions reduction target by carryingout or financing sustainable development project activities to reduce greenhouse gasemissions in another Annex 1 country (Host Country). It is one of the "flexibilitymechanisms" established under the Kyoto Protocol.JI is effected by the transfer of emission reduction units (ERUs) equal to the emissionreductions made by JI project activities in the Host Country, from the Host Country to theother Annex I Party (Investor Country). Under JI, an Investor Country may authorise legalentities (e.g. companies) to participate in JI projects on its behalf. If an Annex 1 countrywishes to participate in a JI project (as a Host Country or a Non-Host Country) it must informthe 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 nationalguidelines and procedures for approving JI projects.There are two tracks for getting approval for a JI project depending on how advanced theHost Country’s implementation of the monitoring and inventory requirements of the KyotoProtocol have been:Track 1These procedures apply when the Host Country meets all of the eligibility requirementsrelated to the transfer and acquisition of ERUs. The relevant eligibility criteria includerequirements 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;NATIONAL INSTITUTE OF CONSTRUCTION MANAGEMENT AND RESEARCH PAGE 47
  48. 48. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDS• 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 proceduresfor assessing the JI project and will then be able to issue and transfer ERUs to the InvestorCountry, without recourse to any international body for approval. However, it is open to aparty that satisfiesall of the eligibility criteria for Track 1 to undertake Track 2 projects, and this has tended tobe market practice to date.Track 2These procedures apply when the Host Country does not meet all of the eligibilityrequirements for Track 1, but has fulfilled the requirements marked "*" above. Under Track2, the JI Supervisory Council (JISC) (the body set up to supervise the verification procedureof JI) assesses projects accordingto the procedures it administers. After projects are approved under the JI process, HostCountries are able to issue and transfer ERUs to Non-Host Countries. If the minimumeligibility requirements set out above are not met by a Host Country, ERUs may not be issuedin relation to a JI project in that Host Country. 3.3.2 Project Process i. Outline of the project process An Investor Country participant who has identified a project located in an Annex 1 countryand evaluated its eligibility and viability as a JI project activity will, if the project is to becarried out as a Track 1 project, contact the Host Country JI Focal Point in order to ascertainthe procedures to be followed. The intending participant may in any event prepare a ProjectIdea Note (PIN) summarising the project’s technical and financial characteristics. The PIN isnot compulsory but may be useful. At this stage, a request may be made (using the PIN) tothe Host Country for a Letter of Endorsement (LoE), indicating the Host Country’spreliminary support for the project. Buyers of ERUs often require LoEs before they willNATIONAL INSTITUTE OF CONSTRUCTION MANAGEMENT AND RESEARCH PAGE 48
  49. 49. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDSconsider entering into contractual negotiations. However, many Annex 1 Parties may onlyapprove a Track 1 project in circumstances in which a memorandum of understanding is inplace between the Host Country and the Investor Country relating to co-operation betweenthe 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 theemissions that would occur without the project (the baseline) and plans for monitoring thereductions. As is the case of PDD’s under the Clean Development Mechanism, the PDD mustbe validated by an independent entity. In the case of a Track 1 Project, the independent entitymust be an entity acceptable to the Host Country. In the case of a Track 2 Project, the entitymust be an Accredited Independent Entity (AIE) accredited by the JISC. The independententity will review and validate the baseline study and other aspects of the PDD. In all cases JIprojects must demonstrate that emissions reductions are additional to those that wouldotherwise 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 issuea Letter of Approval. The Letter of Approval confirms the Host Country’s approval for thetransfer of ERUs. The project will be implemented in the Host Country according to thespecifications outlined in the PDD.The Investor Country participant is required to monitor the project to identify the emissionreductions. 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 FocalPoint. The Host Country then directs its national registry to convert specified assignedamount units (AAUs) into ERUs within an account in that registry in accordance with theprocedures determined by it. ERUs may only be issued under Track 1 in where the HostCountry has complied with the Marrakesh Accords. ERUs may only be issued under Track 2where the Host Country has complied with JISC verification procedures.The Host Country will transfer ERUs from its registry account to the national registryaccount of the Investor Country participant. Joint Implementation entails a number ofvariations in procedures and specific risks depending on whether the project is undertakenunder Track 1 or Track 2 and the Host Country. Notably, there is an ongoing reliance on theNATIONAL INSTITUTE OF CONSTRUCTION MANAGEMENT AND RESEARCH PAGE 49
  50. 50. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDSHost Country not only to approve the project activities but also to effect the conversion ofAAUs and transfer of ERUs. The ability of the HostCountry to transfer ERUs is (under Track 1) also dependent on the Host Country havingperformed its treaty obligations, notably in relation to commitment period reserve obligationsunder Article 17 of the Kyoto Protocol. ii.Establishing additionality.JIAG argues that the necessarily subjective and thus controversial establishment of projectadditionality can be replaced by rules that ensure a conservative establishment of projectbaselines. The integrity of JI is guaranteed since for the issuance of one ERU the host countryhas to cancel one AAU. In addition, additionality is superfluous since the guidance onbaseline setting and determining the baseline scenario2 already provides sufficient guaranteeon the concerns that the additionality concept tries to address. Nevertheless if the ProjectParticipant or Host Country wishes to do so, it can integrate an additionality test in theproject. This additionality test should be based on guidance issued by the JISC and assessedby the AIE. iii.Establishing a baseline (Criteria for baseline setting)1. The baseline for an Article 6 project is the scenario that reasonably represents theanthropogenic emissions by sources or anthropogenic removals by sinks of greenhouse gasesthat would occur in the absence of the proposed project. A baseline shall cover emissionsfrom all gases, sectors and source categories listed in Annex A, and anthropogenic removalsby 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 assectoral reform initiatives, local fuel availability, power sector expansion plans, and theeconomic situation in the project sector;NATIONAL INSTITUTE OF CONSTRUCTION MANAGEMENT AND RESEARCH PAGE 50
  51. 51. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDS(d) In such a way that emission reduction units (ERUs) cannot be earned for decreases inactivity 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. MethodologiesUntil recently, it has been unclear amongst host countries whether JI baselines andmonitoring methodologies would simply be based on CDM approved methodologies, orwhether they would have to follow the methodologies exactly. Recent language in theUNFCCC Working Paper Guidance on Criteria for Baseline Setting and monitoring (Para 15and 22) specifies that project participants may either (i) apply Methodologies for baselinesand monitoring approved by the CDM Executive Board or (ii) establish a baseline that is inaccordance with Appendix B of the JI guidelines. With the latter, selected elements orcombinations of approved CDM baseline and monitoring methodologies may be used forTrack II JI projects.If a project developer selects option (i), then baseline and monitoring methodologies acrossdifferent projects would likely be consistent. If option (ii) were selected, this would raise thepotential for inconsistencies across different JI projects of a similar type. This inconsistencyis caused by the lack of a centralised methodology approval body for JI projects – unlike theCDM EB. Rather, for JI it is up to Accredited Independent Entities (AIE) to assess thebaselines 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 andmonitoring are likely to vary more under JI and be more dependent on any nationalguidelines that host countries develop.Moreover, methodologies for some potential CDM project types have yet to be developedand/or approved by the CDM Executive Board. The implies that for certain JI projects typesnot yet covered by approved CDM methodologies, new baseline and monitoringmethodologies will need to be verified by the AIEs e.g. for district heating projects; the builtenvironment; and energy efficiency projects. Again, this raises the strong possibility thatprojects from these sectors in different countries which use different AIEs to validate theNATIONAL INSTITUTE OF CONSTRUCTION MANAGEMENT AND RESEARCH PAGE 51
  52. 52. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDSbaseline and monitoring methodologies will not be consistent. This problem may even ariseacross 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 nationalgovernments are allowed to establish their own guidelines for approval of projects andbaseline and monitoring methods.Under Track I, there is no creation of emissions rights as with CDM, and it is a zero sumgame. 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 toAIEs.Though the JISC does not have the same mandate as the CDM EB, once the JISC approves ofa project with a specific baseline methodology in a sector not covered by the CDM approvedmethodologies, then it will be desirable for all other projects in that sector to use baselinemethodologies that are consistent with that project. This would create a more centralisedapproach to methodologies that would also serve to reduce the transaction costs of projectparticipants 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 JIthan there is in the CDM. This could result in discrepancies in the number of ERUs that areactually generated across similar projects, particularly given the lack of a centraliseddecision-making body. Rigorous approval procedures under the JISC could help to reducesuch discrepancies. With regard to Track I JI national guidelines on baselines and monitoring,concerted collaboration and co-ordinated efforts across different countries would help toreduce the costs of developing national guidelines and would ensure that there is a greaterdegree of consistency across projects as well as countries. Facilitative guidelines could bedeveloped to aid in the design of, and investment in, JI projects. 3.3.3 Financial issuesBuyersThe buyers of ERUs are most likely to be those companies and countries that are, or willbecome subject to, emission reduction commitments and have relatively high costs ofreducing emissions domestically. Early buyers may be prepared to take a certain risk, buyingNATIONAL INSTITUTE OF CONSTRUCTION MANAGEMENT AND RESEARCH PAGE 52
  53. 53. TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUS PREVAILING STANDARDSoptions or futures, in order to obtain low cost emission credits that are likely to qualify for theKyoto Mechanisms.Even though the procedures for JI projects are still to be formally established, some earlytrades of potential ERUs are already occurring. Major ERU buyers to date have been theWorld Bank’s Prototype Carbon Fund (www.prototypecarbonfund.org) and the Netherlands’sERUPT program (www.senter.nl). Under the ERUPT’s tender programmes, contracts to datehave amounted to 11 million ERUs.Countries that have entered into specific JI project agreements to date include Latvia, theCzech Republic, Hungary, Poland, Bulgaria, Romania, Estonia, Slovakia and New Zealand.A number of countries, including Sweden, Finland, Denmark, Italy, Austria, Spain, Portugaland Japan are also entering this market as buyers.PricesPrices of ERUs in the carbon market so far have ranged widely. The World Banks PrototypeCarbon Fund prices range between US$3.5 and US$5 per tonne CO2, while the DutchGovernments 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, brokersand trader or via the CCPO.NATIONAL INSTITUTE OF CONSTRUCTION MANAGEMENT AND RESEARCH PAGE 53