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).
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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.
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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.
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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.
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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
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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
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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
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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.
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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.
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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.
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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.
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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.
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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'.
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§ 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.
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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
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“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
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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.
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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.
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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
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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.
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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.
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TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUSPREVAILING STANDARDS
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
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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.
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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.
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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.).
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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
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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
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[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
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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.
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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:
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Some more ERB sources-Its Project Type, Description, Co-Benefits and more
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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
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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
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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.
ii.Establishing additionality
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.
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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.
iii.Establishing a baseline
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.
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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.
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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;
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• 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
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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
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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;
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(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
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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
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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.
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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.
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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.
ii.Establishing additionality
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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
Step 1: Regulatory Surplus
The project shall not be mandated by any enforced law, statute or other regulatory
framework.
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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
Step 1: Regulatory Surplus
The project shall not be mandated by any enforced law, statute or other regulatory
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
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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
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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.
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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
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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.
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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:
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• 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
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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
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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.
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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.
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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
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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.
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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.
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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
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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
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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
ii.Establishing additionality
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
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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.
iii.Establishing a baseline
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
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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 coun- tries,
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
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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.
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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
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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
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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
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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%
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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
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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
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• 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
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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.
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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.
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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.
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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.
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TO EXAMINE SOURCES OF GENERATING EMISSION REDUCTION BENEFITS AND VARIOUSPREVAILING STANDARDS
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
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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)
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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
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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
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–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
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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
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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.
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