Handbook on the Carbon Credits Mechanism

Rajkumar S. Adukia
B.Com (Hons.), FCA, ACS, AICWA, LLB
098200 61049
rajkumarfca@gmail.com
www.carajkumarradukia.com

CONTENTS

1. Climate Change and the Greenhouse Effect

2. Energy and Environment Interphase
3. National Action Plan on Climate Change
4. Carbon Credits
5. The United Nations Framework Convention on Climate Change
6. The Kyoto Protocol
7. Emission Trading
8. Joint Implementation
9. Clean Development Mechanism
10. Voluntary Carbon Offset Market
11. The Road Ahead
12. Useful Websites

CLIMATE CHANGE AND THE GREENHOUSE EFFECT

Public awareness of the threat of climate change has risen sharply in the last couple of
years and an increasing number of businesses, organizations and individuals are
looking to minimize their impact on the climate.

Scientists believes that global warming will cause the average World temperature rise
by one Degree Celsius by the year 2020 and four Degree Celsius by the end of 21st
century. The Earth has warmed about 1ºF in the last 100 years. The eight warmest years

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on record (since 1850) have all occurred since 1998. Periods of increased heat from the
sun may have helped make the Earth warmer. But many of the world's leading
climatologists think that the greenhouse gases people produce are making the Earth
warmer, too.

The Greenhouse Gases and the Greenhouse Effect

Greenhouse gases are the gases present in the earth's atmosphere which reduce the loss
of heat into space and therefore contribute to global temperatures through the
greenhouse effect.

The Kyoto Protocol covers six greenhouse gases - carbon dioxide (CO2), methane
(CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and
sulphur hexafluoride (SF6).

The Earth has a natural temperature control system. The Earth’s atmosphere carries out
the critical function of maintaining life-sustaining conditions on Earth. The Greenhouse
Effect is the process by which the greenhouse gases make the Earth warmer by trapping
energy in the atmosphere. Greenhouse gases re-emit some of this heat to the earth's
surface. Without the natural greenhouse effect, the average temperature at Earth’s
surface would be below the freezing point of water. An increase in the levels of GHGs
could lead to greater warming, which, in turn, could have an impact on the world's
climate, leading to the phenomenon known as climate change.

Global Warming Potential

The CO2 equivalence of a particular gas, when integrated over a time horizon of 100
years, is referred to as its Global Warming Potential (GWP).

Global warming potential (GWP) is a measure of how much a given mass of greenhouse
gas is estimated to contribute to global warming. It is a relative scale which compares
the gas in question to that of the same mass of carbon dioxide (whose GWP is by
definition 1). Carbon dioxide has a GWP of exactly 1 (since it is the baseline unit to
which all other greenhouse gases are compared).
A GWP is calculated over a specific time interval. GWPs are one type of simplified
index based upon radiative properties that can be used to estimate the potential future
impacts of emissions of different gases upon the climate system in a relative sense.
GWP is based on a number of factors, including the radiative efficiency (infrared-
absorbing ability) of each gas relative to that of carbon dioxide, as well as the decay rate
of each gas (the amount removed from the atmosphere over a given number of years)
relative to that of carbon dioxide.

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GWP (taken over time horizon of 100yrs) of the 6 GHGs under Kyoto Protocol is:
[GWP values from 2007 IPCC AR4 ]
CO2 - Carbon dioxide = 1
CH4 - Methane = 25
C2O - Nitrous oxide = 298
PFCs - Perfluorocarbons (PFC 14) = 7390
HFCs – Hydrofluorocarbons (HFC 23) = 14800
SF6 - Sulphur hexafluoride = 22800

ENERGY AND ENVIRONMENT INTERPHASE

Energy and environment are essential for sustainable development. The poor are
disproportionately affected by environmental degradation and lack of access to clean,
affordable energy services.

Section 2(h) of the Energy Conservation Act 2001, defines ‘Energy’ as –

“Energy means any form of energy derived from fossil fuels, nuclear substances or
materials, Hydro-electricity and includes electrical energy or electricity generated from
renewable sources of energy or biomass connected to the grid.”

About 20% of world’s energy is generated from coal and about 60% of worlds energy is
generated from oil and natural gas. Because of extensive use of fossil fuel, such as coal,
oil and natural gas, as primary source of energy today, the harmful emissions of GHG
(Green House Gasses) such as Carbon Dioxide increases the GHG level and causes the
Greenhouse Effect and eventually global warming.

Energy

Energy is the Ability To Do Work

All of these sources provide us the energy we need to live our busy lives.

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Source: http://www.eia.doe.gov/kids/energyfacts/sources/whatsenergy.html

Energy sources are divided into two groups:

1. Renewable energy

Renewable Energy is derived from natural processes that are replenished constantly. In
its various forms, it derives directly from the sun, or from heat generated deep within
the earth. It also includes electricity and heat generated from solar, wind, ocean,
hydropower, biomass, geothermal resources, and biofuels and hydrogen derived from
renewable resources. Each of these sources has unique characteristics which influence
how and where they are used.

Types of renewable energy include:

a. Wind Power – It is the conversion of wind energy into a useful form, such as
electricity using wind turbines. Most wind power is generated in the form of
electricity. Large scale wind farms are connected to electrical grids. Individual
turbines can provide electricity to isolated locations. In windmills, wind energy
is used directly as mechanical energy for pumping water or grinding grain. Wind
energy is plentiful, renewable, widely distributed, clean and reduces greenhouse
gas emissions when it displaces fossil-fuel-derived electricity. Today, wind
energy is mainly used to generate electricity. Wind is called a renewable energy
source because the wind will blow as long as the sun shines.

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 b. Water Power – Water Power or Hydropower or hydraulic power is the force or
energy of moving water. It may be captured for some useful prupose. Prior to
the widespread availability of commercial electric power, hydropower was used
for irrigation, and operation of various machines, such as watermills, textile
machines, and sawmill. Of the renewable energy sources that generate electricity,
hydropower is the most often used.
c. Solar energy is the utilization of the radiant energy from the Sun. Solar power is
used interchangeably with solar energy but refers more specifically to the
conversion of sunlight into electricity by photovoltaics and concentrating solar
thermal devices, or by one of several experimental technologies such as
thermoelectric converters, solar chimneys and solar ponds.The sun has produced
energy for billions of years. Solar energy is the sun’s rays (solar radiation) that
reach the earth.
d. Geothermal energy is energy obtained by tapping the heat of the earth itself,
usually from kilometers deep into the Earth's crust. Ultimately, this energy
derives from heat in the Earth's core. Geothermal energy is generated in the
earth's core, about 4,000 miles below the surface. Temperatures hotter than the
sun's surface are continuously produced inside the earth by the slow decay of
radioactive particles, a process that happens in all rocks.
e. Biomass refers to living and recently dead biological material that can be used as
fuel or for industrial production. Most commonly, biomass refers to plant matter
grown for use as biofuel, but it also includes plant or animal matter used for
production of fibres, chemicals or heat. Biomass may also include biodegradable
wastes that can be burnt as fuel. It excludes organic material which has been
transformed by geological processes into substances such as coal or petroleum.
Biomass is organic material made from plants and animals

2. Non-renewable energy

Non renewable Energy is energy taken from resources that will eventually dwindle
becoming too expensive or too environmentally damaging to retrieve. Examples of non-
renewable energy are coal, petroleum, diesel, natural gas (methane) etc.

Energy Conservation

Energy conservation is the practice of decreasing the quantity of energy used. It can be
achieved through efficient energy use, where energy use is decreased while achieving a
similar outcome, or by reduced consumption of energy services.

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Thus energy conservation has emerged as one of the major issues in recent years.
Energy requirement in our country is increasing at a very rapid rate. India’s demand for
commercial energy in 2020 is expected to increase by 250% from today’s level. Coal
accounts for about 50% of primary commercial energy today and is further increase its
share. Despite its low per capita CO 2 emission of less than 1 ton, India contributed over
4% of world total CO 2 emission in 2000.

Energy conservation is the quickest, cheapest and most practical method of overcoming
energy shortage. It is found that there is major scope of energy conservation in electrical
distribution system and in consumer’s installation. By reducing consumption of energy
we can save save precious fossil fuel like coal, gas, oil which are used by the generating
companies to generate electricity.

Energy conservation may result in increase of financial capital, environmental value,

national security, personal security, and human comfort. Individuals and organizations
that are direct consumers of energy can conserve energy in order to reduce energy costs
and promote economic security. Industrial and commercial users can increase efficiency
and thus maximize profit.

Energy conservation is also an important element of energy policy. Energy conservation

reduces the energy consumption and energy demand per capita, and thus offsets the
growth in energy supply needed to keep up with population growth. This reduces the
rise in energy costs, and can reduce the need for new power plants, and energy imports.
The reduced energy demand can provide more flexibility in choosing the most
preferred methods of energy production.

Energy Conservation in India

Economic growth is desirable for developing countries, and energy is essential for
economic growth.
If India is to achieve the targeted growth in GDP, it would need commensurate input of
energy, mainly commercial energy in the form of coal, oil, gas and electricity.
India’s fossil fuel reserves are limited. The known reserves of oil and natural gas may
last hardly for 18and 26 years respectively at the current reserves to production and 26
years respectively at the current reserves to production ratio (2004).

India has huge proven coal reserves (84 billion tonnes) may last for about 200 years but
the increasing ash content in Indian Coal as well as associated greenhouse gas emission
are the major concern. In the business as usual scenario, the exploitable coal concern
may last for about less than 100 years.

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Energy efficiency/conservation measures can reduce peak and average demand. One
unit saved avoids 2.5 to 3 times of fresh capacity addition. Investment in energy
efficiency/energy conservation is highly cost effective. It Also avoids investment in
fuel, mining, transportation etc.

The Energy Conservation Act 2001

Considering the vast potential of energy savings and benefits of energy efficiency, the
Government of India enacted the Energy Conservation Act, 2001 (52 of 2001).

It was enacted in October 2001 but became effective from 1st March, 2002.

Energy Conservation Act 2001 provides legal mandate to implement energy efficiency
measures through Institutional mechanism of Bureau of Energy Efficiency in the
Central Government and designated agencies in the states.

Measures Proposed by the Act

The Act empowers the Central Government and, in some instances, State Governments
to:
• specify energy consumption standards for notified equipment and appliances;
• direct mandatory display of label on notified equipment and appliances;
• prohibit manufacture, sale, purchase and import of notified equipment and
appliances not conforming to energy consumption standards;
• notify energy intensive industries, other establishments, and commercial
buildings as designated consumers;
• establish and prescribe energy consumption norms and standards for designated
consumers;
• prescribe energy conservation building codes for efficient use of energy and its
conservation in new commercial buildings having a connected load of 500 kW or
a contract demand of 600 kVA and above;
• direct designated consumers to -
¾ designate or appoint certified energy manager in charge of activities for
efficient use of energy and its conservation;
¾ get an energy audit conducted by an accredited energy auditor in the
specified manner and interval of time;
¾ furnish information with regard to energy consumed and action taken on the
recommendation of the accredited energy auditor to the designed agency;
¾ comply with energy consumption norms and standards;

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 ¾ prepare and implement schemes for efficient use of energy and its
conservation if the prescribed energy consumption norms and standards are
not fulfilled;
¾ get energy audit of the building conducted by an accredited energy auditor in
this specified manner and intervals of time;
• State Governments may –
¾ amend the energy conservation building codes prepared by the Central
Government to suit regional and local climatic conditions;
¾ direct every owners or occupier of a new commercial building or building
complex being a designated consumer to comply with the provisions of
energy conservation building codes;
¾ direct, if considered necessary for efficient use of energy and its conservation,
any designated consumer to get energy audit conducted by an accredited
energy auditor in such manner and at such intervals of time as may be
specified;

Framework of the Act

The Energy Conservation Act, 2001 is An Act to provide for efficient use of energy and
its conservation and for matters connected therewith or incidental thereto.

The Act is divided into 10 chapters, comprising of 62 sections and one Schedule.

Chapter I: Preliminary
Chapter II: Bureau of Energy Efficiency
Chapter III: Transfer of assets, liabilities etc. of Energy Management Centre to Bureau
Chapter IV: Powers and functions of Bureau
Chapter V: Power of Central Government to facilitate and enforce efficient use of
energy and its conservation
Chapter VI: Power of State Government to facilitate and enforce
efficient use of energy and its conservation
Chapter VII: Finance, Accounts and Audit of Bureau
Chapter VIII: Penalties and Adjudication
Chapter IX: Appellate Tribunal for Energy Conservation
Chapter X : Miscellaneous

The Schedule : List of Energy Intensive Industries and other establishments specified as
designated consumers.

However, the Central government has, vide its notification dated 12th March,2007 in
exercise of the powers conferred by the clauses (e) and (f) of section 14 of the Energy
Conservation Act,2001, in consultation with the Bureau of Energy Efficiency, altered the

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List of Energy Intensive Industries and other establishments specified in the Schedule to
the said Act.

Establishment of Bureau of Energy Efficiency

The Bureau of Energy Efficiency (BEE) is a statutory Body under the Ministry of Power,
Government of India established under the provisions of the Energy Conservation Act,
st
2001, with effect from 1 March, 2002.

The Bureau would be responsible for spearheading the improvement of energy

efficiency of the economy through various regulatory and promotional instruments.
The BEE has published specifications of several electrical equipments and appliances on
energy efficiency.

The Bureau shall be a body corporate having perpetual succession and a common seal,
with power subject to the provisions of this Act, to acquire, hold and dispose of
property, both movable and immovable, and to contract, and shall, by the said name,
sue or be sued.

The head office of the Bureau shall be at Delhi. The Bureau may establish offices at
other places in India.

The mission of the Bureau of Energy Efficiency is to develop policy and strategies with
a thrust on self-regulation and market principles, within the overall framework of the
Energy Conservation Act, 2001 with the primary objective of reducing energy intensity
of the Indian economy.

The Director-General is the chief executive officer of the Bureau of Energy Efficiency.
The general superintendence, direction and management of the affairs of BEE is vested
in the Governing Council having up to 26 members. The Governing Council is headed
by Union Minister of Power and consists of Secretaries of various line Ministries, heads
of various technical agencies under the Ministries, members representing industry,
equipment and appliance manufacturers, architects, and consumers, and members from
each of the five power regions representing the states of the region. The Director –
General of the Bureau is the ex-officio member-secretary of the Governing Council.

Initiatives of BEE:

a. Standards & Labeling Programme - The scheme was launched by the Hon'ble
Minister of Power in May,2006 and is currently invoked for
equipments/appliances (Frost Free(No-Frost) refrigerator,Tubular Fluorescent

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 Lamps, Room Air Conditioners, Direct Cool Refrigerator, Distribution
Transformer, Induction Motors, Pump Sets, Ceiling Fans, LPG, Electric Geysers
and Colour TV).
b. E-filing for Standards & Labeling Programme
c. E-filing of Energy Returns
d. Bachat Lamp Yojana - Bachat Lamp Yojana a CDM based Compact Fluorescent
Lamp (CFL) scheme is an innovative initiative put in place by the Central
Government to enhance lighting efficiency in the Indian household sector by
making available CFL at prices comparable to that of Incandescent Lamps. The
scheme seeks to leverage the high cost of the CFLs through the CERs generated
out of the project.

The Energy Conservation Building Codes (ECBC)

The BEE launched the Energy Conservation Building Code (ECBC) on 27th May 2007 in
New Delhi.

This code addresses the design of new, large commercial buildings to optimize the
building’s energy demand. Commercial buildings are one of the fastest growing sectors
of the Indian economy, reflecting the increasing share of the services sector in the
economy.

Nearly one hundred buildings are already following the Code, and compliance with it
has also been incorporated into the Environmental Impact Assessment requirements

The Energy Conservation Building Codes under the Act are aimed at achieving total
energy efficiency in buildings and establishments.
The new buildings are required to be designed and built with energy efficiency
consideration right from the initial stages itself. The development of energy
conservation building codes is necessary for this purpose. The codes would be
applicable to commercial buildings constructed after the relevant rules are notified
under the Energy Conservation Act. The Bureau would constitute Committee of Experts
for preparation of Energy Conservation Building Codes for different climatic zones.
ECBC norms will be implemented on a voluntary basis initially and then made
mandatory.

Designated Consumers (DCs)

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Under Section 2(g) of the Energy Conservation Act,2001 “designated consumer” means
any consumer specified under clause (e) of section 14 of the Act.

Section 14(e) says - The Central Government may, by notification, in consultation with
the Bureau, specify, having regarding to the intensity or quantity of energy consumed
and the amount of investment required for switching over to energy efficient
equipments and capacity or industry to invest in it and availability of the energy
efficient machinery and equipment required by the industry, any user or class of users
of energy as a designated consumer for the purposes of this Act.

The Schedule to the Act provides a list of the Designated Consumers. These DCs have
to:
1. Appoint/Designate Energy Managers
2. Get Energy Audit conducted by Accredited Energy Auditors
3. Implement Techno-Economic Viable Recommendations
4. Comply with norms of specific energy consumption fixed
5. Submit Report on Steps Taken

Gazette of India Part II Sec 3 Sub-sec(ii) 19-03-2007

Gazette of India - Ministry of Power - The Central Government notifies the 9 energy
intensive industries as designated consumers under The EC Act 2001

1) Thermal Power Stations - 30,000 metric tonne of oil equivalent (MTOE) per year and
above
2) Fertilizer - 30,000 metric tonne of oil equivalent (MTOE) per year and above
3) Cement - 30,000 metric tonne of oil equivalent (MTOE) per year and above
4) Iron & Steel - 30,000 metric tonne of oil equivalent (MTOE) per year and above
5) Chlor-Alkali - 12,000metric tonne of oil equivalent (MTOE) per year and above
6) Aluminium - 7,500 metric tonne of oil equivalent (MTOE) per year and above
7) Railways - electric traction Sub-Section(TSS),diesel loco shed, Production units and
Workshops of Indian Railways having total annual energy consumption of 30,000
MTOE or more under Ministry of Railways (as per table)
8) Textile - 3,000 metric tonne of oil equivalent (MTOE) per year and above
9) Pulp & Paper - 30,000 metric tonne of oil equivalent (MTOE) per year and above
Energy Conversion values used for working out annual energy consumption in terms
of metric tonne of oil equivalant

For the purpose of this table

i) 1 Kg of Oil Equivalant :10,000 kcal

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 ii) 1 Metric Tonne of Oil Equivalant (MTOE) : 10 x 106 kcal
iii) In case of coal, petroleum products and other fuels in absence of supplier certificate,
GCV of the above fuel (fuel sample) will be considered as per the test Certificate from a
NABL Accredited Lab or State Government Lab or Gov. recoganised Lab .
Source: http://www.bee-india.nic.in

Labeling Programme for Appliances

An energy labeling programme for appliances was launched in 2006, and comparative
starbased labeling has been introduced for fluorescent tubelights, air conditioners, and
distribution transformers.

The labels provide information about the energy consumption of an appliance, and thus
enable consumers to make informed decisions. Almost all fluorescent tubelights sold in
India, and about two-thirds of the refrigerators and air conditioners, are now covered
by the labeling programme.

Energy Managers and Energy Auditors

Under the EC Act, 2001 it is mandatory for the designated consumers to get energy
audit conducted by an “accredited energy auditor” (under clause 14(h) and 14(i)) and to
designate or appoint an energy manager (under clause 14(1)).

The BEE is empowered to specify the regulations and mechanism to meet the above
objective. It has been decided that prescribed qualification for energy manager will be
the passing of certification examination to be arranged by the Bureau. Also, regular
accreditation is proposed to be given to energy audit firms having a pool of certified
energy auditors.

BEE has retained the National Productivity Council (NPC) as the National Certifying
Agency on the advise of the Governing Council of the BEE, for conducting the National
Certification Examination for Energy Managers and Energy Auditors under the aegis of
BEE.

A Board of Examination was constituted by BEE for this purpose comprising of 6

members under the Chairmanship of Ex-Chairman, CEA and Members from CII,
PCRA, AICTE,BEE and NPC.

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To qualify as Energy Manager, a candidate has to pass 3 papers of Written
Examinations.

To qualify as Energy Auditor, a candidate has to pass 4 papers of Written examinations

and a VIVA examination.

Energy Audits of Large Industrial Consumers:

Energy audit studies conducted in several office buildings, hotels and hospitals in India
indicate energy saving potential of 20-30%. The potential is largely untapped, partly
due to lack of an effective delivery mechanism for energy efficiency.

Government buildings by themselves, constitute a very large target market. The

Government of India is committed to set an example by implementing the provisions of
the EC Act in all its establishments as a first initiative.

To begin with, the Bureau has begun conduct of energy audit in the Rashtrapathi
Bhawan, Parliament House, South Block, North Block, Shram Shakti Bhawan, AIIMS,
Safdarjung Hospital, Delhi Airport, Sanchar Bhawan, and RailBhawan. Energy audit in
the Rashtrapati Bhawan PMO, S S Bhawan, Sanchar Bhawan & Rail Bhawan has been
completed

In March 2007, the conduct of energy audits was made mandatory in large energy-
consuming units in nine industrial sectors. These units, notified as “designated
consumers” are also required to employ “certified energy managers”, and report energy
consumption and energy conservation data annually.

Indian Energy Exchange

Indian Energy Exchange Limited (IEX) is India’s first-ever, nationwide, automated, and
online electricity trading platform. It has been conceived to catalyse the modernisation
of electricity trade in the country by ushering in a transparent and neutral market
through a technology-enabled electronic trading platform.

CENTRAL ELECTRICITY REGULATORY COMMISSION (CERC) accorded approval

on 9th June 2008, to IEX to commence its operations. IEX is a demutualised exchange
that will enable efficient price discovery and price risk management in the electricity
market.

On 6th February 2007, the CERC issued guidelines for grant of permission to set up
power exchanges in India. Financial Technologies (India) Ltd responded by proposing

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then tentatively named 'Indian Power Exchange Ltd' and applied for permission to set it
up and operate it within the parameters defined by CERC and other relevant
authorities. Based on the oral hearing on July 10, the CERC accorded its approval vide
its order dated 31st August, 2007. IEX thus moved from the conceptual level to firmer
grounds. On 9th June 2008 CERC accorded approval to IEX to commence its operations
and 27th June 2008 marked its presence in the history of Indian Power Sector as Indian
Energy Exchange Ltd (IEX), India’s first-ever power exchange.

Regulator of IEX:
CENTRAL ELECTRICITY REGULATORY COMMISSION (CERC)

Promoters of IEX:

IEX is promoted by Financial Technologies (India) Ltd, and PTC India Ltd.

Financial Technologies (India):

Financial Technologies has a 90% share of the electronic exchange and online brokerage
solutions market in India. The company’s solutions power six exchanges and 750 out of
the 800-odd brokerage houses operating over 1,40,000 trading terminals on a daily
basis. IEX will be the seventh exchange to be powered by Financial Technologies.

PTC India:
A public-private partnership initiated by the government of India, whose primary focus
is to develop a commercially vibrant power market in the country. It has pioneered
power trading in India and is presently the leading power trading company with a
market share of 44% (2006-2007)

Stakeholders in IEX:

There are a number of key stakeholders in IEX:

1. Infrastructure Development Finance Company (IDFC):

A private sector enterprise formed by a consortium of public and private investors,
IDFC is a specialised financial intermediary for infrastructure. It provides financial
assistance to projects in power, roads, ports, and telecommunications.

2. Adani Enterprises:

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Part of the Adani group of companies, Adani Enterprises is active in the power trading
business across the country. It is implementing mega thermal power projects at various
locations in India. It aims to enter into power transmission in a big way.

3. Reliance Energy:
India’s largest integrated private sector power utility company, Reliance Energy is into
generation, transmission, distribution, and trading of power. It is also an investor in
infrastructure projects including the prestigious Mumbai metro rail project and various
road projects of the National Highways Authority of India.

4. Lanco Infratech:
With more than two decades of experience in power generation, power trading,
construction and EPC, infrastructure and property development, Lanco Infratech’s
expertise in power encompasses conventional as well as non-conventional sources of
energy such as gas, coal, biomass, hydro, and wind. It is also one of the top three power
trading companies in the country.

5. Rural Electrification Corporation (REC):

A wholly public sector enterprise, REC’s main objective is to finance and promote
electrification projects in villages all over India. It provides financial assistance to state
electricity boards, state government departments, and rural electricity cooperatives for
rural electrification projects.

6. Tata Power Company:

Pioneers of electricity generation in India, Tata Power is the country’s largest private
sector power utility. It has successfully served customers in Mumbai for over 90 years
and has now spread its operations across the nation. Tata Power has generation units in
Mumbai, Delhi, Jojobera, Jharkhand, and Karnataka.

Technology Support to IEX:

OMX Technology, Sweden, the technology provider to the world’s leading power
exchange, NORDPOOL, has joined hands with Financial Technologies (India) Ltd to
provide technology support to Indian Energy Exchange (IEX).
OMX is a leading expert in the exchange industry. It owns exchanges in the Nordic and
Baltic regions, and develops and provides technology and services to companies in the
securities industry around the globe. In power trading, OMX is a pioneer, with four
power exchanges in Europe currently using its technology.

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 NATIONAL ACTION PLAN ON CLIMATE CHANGE

The vulnerability assessment and adaptation studies of climate change have been made
in various areas such as water resources, agriculture, forests, natural eco-systems,
coastal zones, health energy and infrastructure .This has been carried out as a part of
the Initial National Communication of India to the United Nations Framework
Convention on Climate Change (UNFCCC);

Further, the Expert Committee on Impact of Climate Change set up by the Ministry of
Environment & Forests in June 2007 assessed the impact of climate change on six areas,
namely water resources, agriculture, Natural Eco-system, Health, Coastal Zone
Management and Climate modeling. Reports of the Expert Committee in these areas
have been prepared.

Besides, a range of policies and programmes have been initiated to address the problem
of climate change in the context of sustainable development, such as:

• ensuring energy conservation and improved energy efficiency in various sectors

as well as setting up of Bureau of Energy Efficiency
• promoting use of renewable energy
• power sector reforms and active renewable energy programme
• use of cleaner and lesser carbon intensive fuel for transport
• fuel switching to cleaner energy
• afforestation and conservation of forests
• promotion of clean coal technologies
• reduction of gas flaring
• encouraging Mass Rapid Transport systems
• environmental quality management for all sectors

India released the National Action Plan on Climate Change (NAPCC) on 30th June 2008
to outline its strategy to meet the challenge of Climate Change.
It outlines a national strategy that aims to enable the country adapt to climate change
and enhances the ecological sustainability of India’s development path. It stresses that
maintaining a high growth rate is essential for increasing living standards of the vast
majority of people of India and reducing their vulnerability of the impacts of climate
change.

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The guiding principles of the plan are:
1. Inclusive and sustainable development strategy to protect the poor
2. Qualitative change in the method through which the national growth objectives will
be achieved i.e. by enhancing ecological sustainability leading to further mitigation
3. Cost effective strategies for end use demand side management
4. Deployment of appropriate technologies for extensive and accelerated adaptation,
and mitigation of green house gases
5. Innovative market, regulatory and voluntary mechanisms to promote Sustainable
Development
6. Implementation through linkages with civil society, local governments and public-
private partnerships
7. International cooperation, transfer of technology and funding

Eight National Missions, form the core of the National Action Plan, representing multi-
pronged, long term and integrate strategies for achieving key goals in the context of
climate change.

These Missions are

1. National Solar Mission,
2. National Mission on Enhanced Energy Efficiency,
3. National Mission on Sustainable Habitat,
4. National Water Mission,
5. National Mission for Sustaining the Himalayan Eco-system,
6. National Mission for a Green India,
7. National Mission for Sustainable Agriculture and
8. National Mission on Strategic Knowledge for Climate Change.

The Prime Minister’s Council on Climate Change is in charge of the overall

implementation of the plan. The Council is Chaired by the Prime Minister. The National
Missions are to be institutionalized by the respective Ministries and will be organized
through inter-sectoral groups which include in addition to related Ministries, Ministry
of Finance and the Planning Commission, Experts from Industry, academia and civil
society.

Each Mission will be tasked to evolve specific objectives spanning the remaining years
of the 11th and the 12th Plan Period. Each Mission will report publicly on its annual
performance.

Ministries with lead responsibility for each of the missions are directed to develop
objectives, implementation strategies, timelines, and monitoring and evaluation criteria,
to be submitted to the Prime Minister’s Council on Climate Change.

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The Council will also be responsible for periodically reviewing and reporting on each
mission’s progress. To be able to quantify progress, appropriate indicators and
methodologies will be developed to assess both avoided emissions and adaptation
benefits.

Government of India is designing National Mission on Enhanced Energy Efficiency

(NMEEE), which is one out of eight missions planned under the National Action Plan
on Climate Change.

CARBON CREDITS

The concept of carbon credits came into existence as a result of increasing awareness of
the need for controlling emissions.

The need for a reduction in carbon emissions was debated at the United Nations
Conference on Environment & Development (The Earth Summit) in Rio de Janeiro in
1992, resulting in the adoption of the United Nations Framework Convention on
Climate Change (UNFCCC).

Over a decade ago, most countries joined an international treaty -- the United Nations
Framework Convention on Climate Change (UNFCCC) -- to begin to consider what can
be done to reduce global warming and to cope with whatever temperature increases are
inevitable. The Convention entered into force on 21 March 1994.

More recently, a number of nations approved an addition to the treaty: the Kyoto
Protocol, which has more powerful (and legally binding) measures. The Kyoto Protocol
is an international agreement linked to the United Nations Framework Convention on
Climate Change. The major feature of the Kyoto Protocol is that it sets binding targets
for 37 industrialized countries and the European community for reducing greenhouse
gas (GHG) emissions . These amount to an average of five per cent against 1990 levels
over the five-year period 2008-2012.

The Kyoto Protocol, was adopted by the parties to the UNFCCC with the objective of
achieving quantified emission limitations through specific policies and measures to
minimizing the adverse effects of climate change. The protocol provides for various
mechanisms like joint implementation, a clean development mechanism (CDM) and
international emission trading to boost the cost effectiveness of climate change
mitigation. The Kyoto Protocol was adopted in Kyoto, Japan, on 11 December 1997 and
entered into force on 16 February 2005. 182 parties of the Convention have ratified the

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treaty to date. The detailed rules for the implementation of the Protocol were adopted at
COP 7 in Marrakesh in 2001, and are called the “Marrakesh Accords.”

The major distinction between the Protocol and the Convention is that while the
Convention encouraged industrialised countries to stabilize GHG emissions, the
Protocol commits them to do so.

What is Carbon Credit

Carbon credits are a key component of national and international emissions trading
schemes that have been implemented to mitigate global warming. They provide a way
to reduce greenhouse effect emissions on an industrial scale by capping total annual
emissions and letting the market assign a monetary value to any shortfall through
trading. Credits can be exchanged between businesses or bought and sold in
international markets at the prevailing market price. Credits can be used to finance
carbon reduction schemes between trading partners and around the world.

In accordance with the Kyoto protocol, consumers of fossil fuels are assigned CO2
emission levels. In many cases, achieving these emission levels require massive up
gradation or revamping of facilities; incurring costs too huge to justify the investment.
Such parties are allowed to pay others to store carbon for them in exchange for the right
to release carbon in excess of their limits into the atmosphere. This forms the basis of
carbon credits.

Carbon Credit is like a Permit that allows an entity to emit a specified amount of
greenhouse gases.They are certificates issued to Countries that reduce their emission of
Greenhouse Gases (GHG) which causes Global Warming.

Carbon Credit Trading

The central feature of the Kyoto Protocol is its requirement that countries limit or
reduce their greenhouse gas emissions. A country has two ways to reduce emissions.
One, it can reduce the GHG (greenhouse gases) by adopting new technology or
improving upon the existing technology to attain the new norms for emission of gases.
Or it can tie up with developing nations and help them set up new technology that is
eco-friendly, thereby helping developing country or its companies 'earn' credits.

Under the Kyoto Mechanism, Countries are separated into 2 categories:

1.Developed - referred to as Ann 1 Countries, and

2. Developing – referred to as Non-Ann 1 Countries

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Under the Treaty, countries must meet their targets primarily through national
measures. However, the Kyoto Protocol offers them an additional means of meeting
their targets through market based mechanisms.

The carbon credits can be either generated by project participants who acquire carbon
credits through implementation of Clean Development Mechanism (CDM) in Non
Annexure I countries or through Joint Implementation (JI) in Annexure I countries or
supplied into the market by those who got surplus allowances with them. The potential
buyers of carbon credits are mostly in various Annexure I countries that need to meet
the compliance prevailing in their countries as per the Kyoto Protocol or those investors
who would like buy the credits and with the expectation of selling them at a higher
price during the first commitment period of the Kyoto Protocol (2008-2012). These
credits bought over by the companies of developed nations are mostly bought by
Europeans, because the United States has not signed the Kyoto Protocol. Currently
European Union Emission Trading Scheme (EU ETS) is the most active market; Other
markets include Japan, Canada, New Zealand, etc. The major sources of supply are
Non-Annexure I countries such as India, China, and Brazil. Every year European
companies are required to meet certain norms, beginning 2008. By 2012, they will
achieve the required standard of carbon emission.

Potential participants in carbon credits trading include Hedgers, Producers,

Intermediaries in spot markets and Ultimate buyers.

The Kyoto Protocol provides for three market-based mechanisms that enable countries
or operators in developed countries to acquire greenhouse gas reduction credits:

• Emissions Trading, (known as “the carbon market" ) - 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.
• 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.
• Joint Implementation(JI) - a developed country with relatively high costs of
domestic greenhouse reduction would set up a project in another developed
country.

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The above 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.

The Protocol agreed 'caps' or quotas on the maximum amount of Greenhouse gases for
developed and developing countries, is listed in its Annex I. 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 carbon credits,
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. In this way 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'.

For example, a chemical company running a plant in the United Kingdom emits more
gases than the accepted norms of the UNFCC. It can tie up with its own subsidiary in
India or China under the Clean Development Mechanism. It can buy the carbon credit
by making the Indian or Chinese plant more eco savvy with the help of technology
transfer. It can also tie up with any other company in the open market. At the end of the
year, an audit will be done to check the company’s efforts to reduce gases and their
actual level of emission.

Any company, factories or farm owner can get linked to United Nations Framework
Convention on Climate Change and know the 'standard' level of carbon emission
allowed for its outfit or activity. The extent to which the company/ factory/ farm
owner is emitting less carbon (as per standard fixed by UNFCCC) it gets credited in a
developing country. This is how we can describe the carbon credit mechanism.

The following example of pig manure on a farm in the Philippines further explains how
the mechanics of carbon credit actually works:

Daniel Co and his family raise about 10,000 pigs on a farm called Uni-Rich Agro Industrial in
the province of Tarlac in the Philippines. Until recently pig manure was shoveled into concrete
ponds, where it decomposed, emitting methane, a potent greenhouse gas, and a putrid smell.
Daniel Co knew that he could install biogas technology to seal the ponds, trap the gas, and

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produce electricity, but he didn't want to spend the $200,000 or so it would cost until he heard
that pig farms could collect money from Europe for capturing methane: He would be paid not to
pollute.

...Daniel Co got involved when he was approached by EcoSecurities, an Irish company that has
developed more carbon-mitigation projects than any other firm. Its experts calculated that
trapping his farm's methane would generate 2,929 CERs a year. A CER is created when the
equivalent of one ton of carbon dioxide is prevented from entering the atmosphere. (Because
methane creates more global warming than carbon dioxide, trapping one ton of methane
generates 21 CERs.) CERs are sometimes called carbon credits.
EcoSecurities offered to pay Uni-Rich $4 per credit, or $12,000 a year, every year, until Kyoto
expires in 2012, and to handle all the paperwork at the UN, which registered the project late in
2006. Uni-Rich then installed the methane digesters.

Now, thanks to the magic of carbon finance, Daniel Co and his family treasure their pig waste.
They use it to produce electricity, which has reduced their utility bills by about $48,000 a year.
They collect their $12,000 a year in carbon revenues. EcoSecurities, in turn, will sell the credits
for about $18 each, or $54,000 a year, to a big French bank called Caisse des Depots. Caisse des
Depots can hold onto the CERs as an investment, betting that their value will rise, or sell them
to a client, most probably a European power generator or industrial firm that needs credits to
meet its regulatory obligations.

Carbon Markets

Growing pressure to address climate change has created multi-million dollar markets
for carbon (CO2) that are expected to reach billions of dollars in annual transactions
within the next 10 years.

Carbon credits are a part of international emission trading norms. They incentivise
companies or countries that emit less carbon. The total annual emissions are capped and
the market allocates a monetary value to any shortfall through trading. Businesses can
exchange, buy or sell carbon credits in international markets at the prevailing market
price.

Countries are permitted to use a trading system to help meet their emission targets.
Trading in carbon credits gives flexibility to companies to select cost effective solutions
to achieve established environmental goals. The price determination would be fair as
the cost of carbon is set by the market participants and not controlled by a group of
people.

Currently, futures contracts in carbon credits are actively traded in the European
exchanges. In fact, many companies actively participate in the futures market to manage
the price risks associated with trading in carbon credits and other related risks such as

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project risk, policy risk, etc. Keeping in view the various risks associated with carbon
credits, trading in futures contracts in carbon allowances has now become a reality in
Europe with burgeoning volumes. Currently, project participants, public utilities,
manufacturing entities, brokers, banks, and others actively participate in futures trading
in environment-related instruments. The European Climate Exchange (ECX), a
subsidiary of Chicago Climate Exchange (CCX), remains the leading exchange trading
in European environmental instruments that are listed on the Intercontinental Exchange
(ICE), previously known as International Petroleum Exchange (IPE).

Carbon Leakage

Carbon leakage has been cited as an impediment to the effective reduction of carbon
dioxide emissions through the Kyoto Protocol
Carbon leakage occurs when there is an increase in carbon dioxide emissions in one
country as a result of an emissions reduction by a second country with a strict climate
policy.

Carbon leakage may occur for a number of reasons:

a. if the emissions policy of a country raises local costs, then another country with a
more relaxed policy may have a trading advantage. If demand for these goods remains
the same, production may move offshore to the cheaper country with lower standards,
and global emissions will not be reduced.
b. if environmental policies in one country add a premium to certain fuels or
commodities, then the demand may decline and their price may fall. Countries that do
not place a premium on those items may then take up the demand and use the same
supply, negating any benefit.

Carbon leakage does not necessarily imply that the increased emissions are from
competing companies; climate policies may have the effect of causing companies to
relocate its production to countries without a climate policy in order to take advantage
of the economic benefits.

Carbon Finance

Carbon finance is a new branch of Environmental finance. Carbon finance explores the
financial implications of living in a carbon-constrained world, a world in which
emissions of carbon dioxide and other GHG carry a price. The general term is applied to
investments in GHG emission reduction projects and the creation (origination) of
financial instruments that are tradeable on the carbon market. Carbon finance is the
general term applied to resources provided to a project to purchase greenhouse gas

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(GHG) emission reductions (“carbon” for short). Commitments of carbon finance for the
purchase of carbon have grown rapidly since the first carbon purchases began less than
eight years ago.

The World Bank undertakes carbon finance activities through its Carbon Finance Unit.
The World Bank manages nine carbon funds and facilities comprised of public and
private participants: Prototype Carbon Fund (PCF); Netherlands JI and Netherlands
CDM Facilities; Community Development Carbon Fund (CDCF); BioCarbon Fund;
Italian Carbon Fund; Spanish Carbon Fund; Danish Carbon Fund; and the Umbrella
Carbon Facility (UCF). These funds are public or public-private partnerships managed
by the World Bank as a Trustee. They operate much like a closed-end mutual fund; they
purchase greenhouse gas emission reductions from projects in the developing world or
in countries with economies in transition, and pay on delivery of those emission
reductions. The World Bank acts as a broker to ensure that the benefits of carbon
finance make their way also to the developing world and to countries with economies
in transition.

Carbon Project

An entity whose greenhouse gas emissions are capped by a regulatory program has
three choices for complying if they exceed their cap. First, they could pay an alternative
compliance measure or "carbon tax", a default payment set by the regulatory body. The
second option is to purchase carbon credits within an emissions trading scheme. The
trade provides an economic disincentive to the polluter, while providing an incentive to
the less polluting organisation. The final option is to invest in a carbon project. The
carbon project will result in a greenhouse gas emission reduction which can be used to
offset the excess emissions generated by the polluter. The financial disincentive to
pollute is in the form of the capital expenditure to develop the project or the cost of
purchasing the offset from the developer of the project. In this case the financial
incentive would go to the owner of the carbon project.

A carbon project refers to a business initiative that receives funding because of the cut
the emission of greenhouse gases (GHGs) that will result. To prove that the project will
result in real, permanent, verifiable reductions in Greenhouse Gases, proof must be
provided in the form of a project design document and activity reports validated by an
approved third party in the case of Clean Development Mechanism (CDM) or Joint
Implementation (JI) projects.

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Carbon projects are developed for reasons of voluntary environmental stewardship, as
well as legal compliance under an Emission Trading (also called Greenhouse Gas Cap &
Trade) program.

THE UNITED NATIONS FRAMEWORK CONVENTION ON CLIMATE CHANGE

The United Nations Framework Convention on Climate Change (UNFCCC) is an

international environmental treaty that sets general goals and rules for confronting
climate change. It was entered into force on 21st March 1994.
The UNFCCC provides the basis for concerted international action to mitigate climate
change and to adapt to its impacts. Its provisions are far-sighted, innovative and firmly
embedded in the concept of sustainable development. States and regional economic
integration organizations may become Parties to the Convention. The Convention has
been ratified by 192 parties.

UNFCCC is based on three principles –

1. Common but differentiated responsibility;
2. Precautionary approach;
3. Sustainable Economic Growth and Development.

The Convention divides countries into three main groups according to differing
commitments:
1. Annex I Parties - This include the industrialized countries that were members of the
OECD (Organisation for Economic Co-operation and Development) in 1992, plus
countries with economies in transition (the EIT Parties), including the Russian
Federation, the Baltic States, and several Central and Eastern European States.
2. Annex II Parties - Consist of the OECD members of Annex I, but not the EIT Parties.
They are required to provide financial resources to enable developing countries to
undertake emissions reduction activities under the Convention Funding provided by
Annex II Parties is channelled mostly through the Convention’s financial mechanism.
3. Non-Annex I - These parties are mostly developing countries.

Apart from the above, Least developed countries (LDCs) - 49 Parties classified as such
by the United Nations are given special consideration

The Structure of the Convention

The text of Framework Convention is contained in 26 Articles. There are two annexure
to the Convention. Annexure I contains the list of 41 developed nations. 6 of these

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nations have been added by an amendment that entered into force on 13 August 1998,
pursuant to decision 4/CP.3 adopted at COP.3. Annexure I Parties include both the
relatively wealthy countries that were members of the Organization for Economic Co-
operation and Development (OECD) in 1992, as well as the Economies in Transitions
(EITs), including the Russian Federation, the Baltic States, and several Central and
Eastern European States. Annex I Parties have higher per capita emissions than most
developing countries. They also have greater financial and institutional capacity to
address climate change, and hence they are expected to take a lead in modifying longer-
term trends in emissions. Therefore, by the means of this Convention, Annex I Parties
pledged to adopt national policies and measures that aim to return national GHG
emissions to 1990 levels by the year 2000.
Annexure II of the Convention is a list of 24 countries, (who are also Annexure I Parties)
who were OECD members in 1992. They have a special obligation to provide “new and
additional financial resources” (Article 4.3) to developing countries to help them tackle
climate change. They must also facilitate the transfer of climate-friendly technologies to
both developing countries and Economies in Transition.

Objective of the Convention

Article 2 of the Convention sets out the objective of the Convention. According to this
article, the Convention’s ultimate objective is “to achieve, in accordance with the
relevant provisions of the Convention, stabilization of greenhouse gas concentrations in
the atmosphere at a level that would prevent dangerous anthropogenic [originating in
human activity] interference with the climate system”. This objective is qualified in that
it “should be achieved within a time frame sufficient to allow ecosystems to adapt
naturally to climate change, to ensure that food production is not threatened and to
enable economic development to proceed in a sustainable manner”.
“Greenhouse gases” has been defined in the Article 1 of the Convention as, ‘those
gaseous constituents of the atmosphere, both natural and anthropogenic, that absorb
and re-emit infrared radiation.’ The Convention does not provide a list of the GHGs
that are to be regulated nor does it state a limit for total anthropogenic GHG emissions
which would have to be respected to reach the objective. It only refers to carbon dioxide
that is the greatest quantity of all GHGs and “other greenhouse gases not controlled by
the Montreal Protocol”. Here it should be noted that the Montreal Protocol regulates
those GHGs that also contribute to the depletion of the ozone layer, for example,
chlorofluorocarbons (CFCs). Another important factor is that stabilizing atmospheric
concentrations of GHGs near current levels would actually require a steep reduction of
current emissions. This is because, once emitted, GHGs remain in the atmosphere for a
considerable length of time: carbon dioxide, for instance, stays in the climate system, on
average, for a century or more.

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Principles behind the Convention

The 3rd Article to the Convention, states the principles of the Convention, which though
not the exhaustive list are the guide lines for the Parties. Article 3.1 stresses the
principles of equity and of common but differentiated responsibilities. The concept of
differentiated principle was also formulated in 1992 as Principle 7 of the Rio
Declaration. The justification for this lies in the fact that the past and present GHG
emissions are distributed unevenly among Parties as the industrialized countries have
caused more emission of greenhouse gases than lesser developed nations for instance
the U.S alone accounts for 21.13% of carbon emission of world. The per capita emission
of GHGs in U.S is almost 19 times higher than that in India. Moreover, the Parties have
different capacities and resources to address the causes and effects of climate change.
Article 3.1 thus calls on industrialized countries to “take the lead in combating climate
change and the adverse effects thereof”. This is also reflected in the Convention by
differentiating between Annex I Parties and those Parties not listed in Annex I to the
Convention (non-Annex I Parties). Within these two basic groups, further
differentiations are made to take account of the different capacities, specific situations
and vulnerabilities of Parties. While all Parties have commitments under the
Convention, most of which are laid down in Article 4.1 of the Convention, Annex I
Parties are subject to specific requirements to demonstrate that they are taking the lead
in combating climate change. Article 4.2 requires them to adopt policies and measures
to mitigate climate change by limiting their GHG emissions and enhancing their GHG
sinks and reservoirs. Further differentiation occurs within Annex I. On one hand,
Parties listed in Annex II to the Convention (Annex II Parties) are required to provide
financial assistance and facilitate the transfer of technologies to developing countries to
help them implement their commitments under the Convention. On the other hand, the
group of countries with economies in transition (EITs) are granted a certain degree of
flexibility in implementing their commitments, on account of recent economic and
political upheavals in those countries.
Article 3.2 states that the consideration should be given to the different degrees to
which Parties will be affected by climate change and by measures to implement the
Convention. It calls for “full consideration of specific needs and special circumstances of
developing Country and Parties, especially those that are particularly vulnerable to the
adverse effects of climate change.” For instance, sea level that is expected to rise by 1
meter by the end of this century can result in 17% of the land area of Bangladesh getting
lost and tens of millions of people displaced.

Article 3.3 refers to the precautionary principle, which is widely reflected in

environmental law and environmental agreements: “Where there are threats of serious
or irreversible damage, lack of full scientific certainty should not be used as a reason for
postponing such measures” – a statement which closely mirrors the wording of

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Principle 15 of the Rio Declaration. Thereby, calling up industrialized nations to share
the advanced technologies with lesser developed nations for reducing emission of
GHGs. In line with this, Article 3.3 further stresses the need for cost-effectiveness.
Accordingly, the measures undertaken to implement the Convention should avoid
unnecessary burdens for the economy. One way of minimizing costs might be to
implement measures jointly.
Article 3.4 lays down the right, and obligation, to promote sustainable development.
This is in line with Principle 3 of the Rio Declaration. Article 3.4 specifies that policies
and measures to protect the climate system “should be appropriate for the specific
conditions of each Party and should be integrated with national development
programmes, taking into account that economic development is essential for adopting
measures to address climate change”.
Article 3.5 upholds the principle of free trade, calling on the Parties to promote a
“supportive and open international economic system that would lead to sustainable
economic growth and sustainable development in all Parties, particularly developing
country Parties, thus enabling them better to address the problems of climate change”.
Article 3.5 also calls on Parties to avoid measures that “constitute a means of arbitrary
or unjustifiable discrimination or a disguised restriction on international trade”. This
Article is closely related to Principle 12 of the Rio Declaration.

Commitments under the Convention

Article 4 of the Convention deals with commitments of the Parties to the Convention.
General commitments of Parties to mitigate climate change are included in Article 4.1
(for all Parties) and more specific commitments are in Article 4.2 (for Annex I Parties).
The Convention draws attention to the different needs and capacities of Parties in the
implementation of the commitments contained in Article 4.1. The article is premised on
the need to take into account Parties’ “common but differentiated responsibilities and
their specific national and regional development priorities, objectives and
circumstances”. The Parties to the Convention will have commitments to
(a) Develop, periodically update, publish and make available to the Conference of the
Parties national inventories of anthropogenic emissions of all greenhouse gases
calculated using agreed methodologies.
(b) Formulate, implement, publish and regularly update national and regional
programmes containing measures to mitigate climate change by addressing
anthropogenic and measures to facilitate adequate adaptation to climate change.
(c) Promote and cooperate in the development, application and diffusion, including
transfer, of technologies, practices and processes that control, reduce or prevent
anthropogenic emissions of greenhouse gases in all relevant sectors, including the
energy, transport, industry, agriculture, forestry and waste management sectors

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(d) Promote sustainable management, and promote and cooperate in the conservation
and enhancement of sinks and reservoirs of all greenhouse gases including biomass,
forests and oceans as well as other terrestrial, coastal and marine ecosystems
(e) Cooperate in preparing for adaptation to the impacts of climate change; develop and
elaborate appropriate and integrated plans for coastal zone management, water
resources and agriculture, and for the protection and rehabilitation of areas, particularly
in Africa, affected by drought and desertification, as well as floods;
(f) Take climate change considerations into account, to the extent feasible, in their
relevant social, economic and environmental policies and actions, and employ
appropriate methods, for example impact assessments, formulated and determined
nationally, with a view to minimizing adverse effects on the economy, on public health
and on the quality of the environment, of projects or measures undertaken by them to
mitigate or adapt to climate change;
(g) Promote and cooperate in scientific, technological, technical, socio-economic and
other research, systematic observation and development of data archives related to the
climate system and intended to further the understanding and to reduce or eliminate
the remaining uncertainties regarding the causes, effects, magnitude and timing of
climate change and the economic and social consequences of various response strategies
(h) Promote and cooperate in the full, open and prompt exchange of relevant scientific,
technological, technical, socio-economic and legal information related to the climate
system and climate change, and to the economic and social consequences of various
response strategies.
(i) Promote and cooperate in education, training and public awareness related to
climate change and encourage the widest participation in this process, including that of
non-governmental organizations; and
(j) Communicate to the Conference of the Parties information related to implementation
The paragraph 2 of the article 4 of the Convention contains further commitments for
industrialized nations contained in Annexure I of the Convention. Article 4.2(a) also
calls for differentiation among the Annex I Parties, stating that account should be taken
of “the differences in these Parties’ starting points and approaches, economic structures
and resource bases, the need to maintain strong and sustainable economic growth,
available technologies and other individual circumstances
Paragraph 3 to 5 of the Article 4 states further requirements to be adhered to by the
Parties specified in the Annexure II of the Connention.
Article 4.7 requires that to the extent to which developing country Parties will
effectively implement their commitments under the Convention will depend on the
effective implementation by developed country Parties of their commitments under the
Convention related to financial resources and transfer of technology and will take fully
into account that economic and social development and poverty eradication are the first
and overriding priorities of the developing country Parties.

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Institutional Bodies under the Convention

Various institutions and bodies work within the framework of the Convention. These
include institutions and bodies established by the Convention like the Conference of
the Parties to the Convention (COP), the subsidiary bodies (SBs), the Bureau and the
secretariat and also other bodies established by the COP, in accordance with Article
7.2(i) of the Convention like committees, working groups and expert bodies. Here we
will have a overview of these institutional bodies.

The Conference of the Parties (COP)

Article 7.2 defines the COP as the “supreme body” of the Convention, as it is its highest
decision-making authority. The climate change process revolves around the annual
sessions of the COP, which bring together all countries that are Parties to the
Convention. The COP is responsible for reviewing the implementation of the
Convention and any related legal instruments, and has to make the decisions necessary
to promote the effective implementation of the Convention. COP is headed by its
President. The office of the COP President normally rotates among the five United
Nations regional groups. The President is usually the environment minister of his or her
home country. She/he is elected by acclamation immediately after the opening of a
COP session. Their role is to facilitate the work of the COP and promote agreements
among Parties. The work of the COP and each subsidiary body is guided by an elected
Bureau. To ensure continuity, it serves not only during sessions, but between sessions
as well. The COP Bureau consists of 11 officers: the COP President, seven Vice-
Presidents, the Chairs of the two subsidiary bodies and a Rapporteur. It deals mainly
with procedural and organizational issues arising from the COP, and advises the
President. In addition, the Bureau has other technical functions, such as examining the
credentials of Party representatives and reviewing – in cooperation with the secretariat
– requests for accreditation by nongovernmental organizations (NGOs) and
intergovernmental organizations (IGOs).

Subsidiary Bodies (SBs)

The Convention establishes two permanent subsidiary bodies (SBs), namely the
Subsidiary Body for Scientific and Technological Advice (SBSTA), by Article 9, and the
Subsidiary Body for Implementation (SBI), by Article 10. These bodies
advise the COP. In accordance with Articles 9.1 and 10.1, they are both
multidisciplinary bodies open to participation by any Party, and governments send
representatives with relevant expertise.

Subsidiary Body for Scientific and Technological Advice (SBSTA)

The SBSTA’s task is to provide the COP and, as appropriate, its other subsidiary bodies
“with timely advice on scientific and technological matters relating to the Convention”.
The following tasks are assigned to the SBSTA:

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 ¾ to provide assessments of the state of scientific knowledge of climate change and
its effects to the COP by reviewing the latest relevant information provided by
competent bodies such as the IPCC, and evaluating its implications to the extent
possible
¾ to prepare scientific assessments of the effects of measures taken in
implementing the Convention by compiling in-depth reports on national
communications, and making recommendations on technical aspects of the
review process
¾ to identify innovative, efficient and state-of-the-art technologies and know-how
and advise on how to promote their development and/or transfer by ensuring
that information on them is collected and disseminated and by providing advice
on them and evaluating ongoing efforts in their development and/or transfer
according to need under the Convention
¾ to advise on scientific programmes, international cooperation in research and
development and on supporting capacity-building in developing countries, and
to assist the Parties in implementing Article 5 and Article 6 of the Convention, by
ensuring that information on related international initiatives is collected and
disseminated. In addition, to advise on education programmes, human resources
and training and on the promotion of such initiatives, and to evaluate ongoing
efforts in this field according to need under the Convention
¾ to respond to scientific, technological and methodological questions that the
COP and the SBI may put to it.

Subsidiary Body for Implementation (SBI)

The SBI’s task is to assist the COP “in the assessment and review of the effective
implementation of the Convention”. More specifically, the following tasks are assigned
to the SBI:
¾ to consider the information communicated by all Parties in accordance with
Article 12.1, in order to assess the overall aggregated effect of the steps taken in
the light of the latest scientific assessments of climate change
¾ to consider the information communicated by Annex I Parties in accordance
with Article 12.2, in order to assist the COP in carrying out the review of the
adequacy of commitments.
¾ to assist the COP, as appropriate, in preparing and implementing its decisions

The Secretariat
The secretariat, also known as the Climate Change Secretariat, was established as per
the Article 8 of the Convention. This secretariat services the COP, the SBs, the Bureau
and other bodies established by the COP. Its main function includes:
¾ to make practical arrangements for sessions of the Convention bodies, namely
the COP and its SBs

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 ¾ to assist Parties, in particular developing countries, in implementing their
commitments
¾ to provide support to negotiations and
¾ to coordinate with the secretariats of other relevant international bodies, notably
the Global Environment Facility (GEF) and its implementing agencies (United
Nations Development Programme (UNDP), United Nations Environment
Programme (UNEP) and the World Bank), the IPCC and other relevant
conventions
¾ to prepare official documents for the COP and the SBs, coordinating in-depth
reviews of Annex I Party national communications and compiling GHG
inventory data
¾ It also carries out tasks that are specified in the programme of work that is
adopted by the COP and other tasks decided by the COP.
¾ The secretariat also services the bodies established by the Kyoto Protocol

Other bodies

Other bodies have been set up by the COP to undertake specific tasks. These bodies
report back to the COP when they complete their work. Some of the bodies established
by COP are various Ad hoc groups and certain limited membership bodies. Some of the
important Ad hoc group are , the Ad hoc Group on the Berlin Mandate (AGBM) , the
Ad hoc Group on Article 13 (AG13), and Ad hoc working group on Further
Commitments for Annex I Parties under the Kyoto Protocol (AWG). Beside these,
several specialized bodies with a limited membership have been established to address
specific areas, namely:
¾ the Expert Group on Technology Transfer (EGTT);
¾ the Consultative Group of Experts on National Communications from Parties
not included in Annex I to the Convention (Consultative Group of Experts, or
CGE); and
¾ the Least Developed Countries Expert Group (LEG).
These groups have been set up on an ad hoc and temporary basis. Their mandate and
possible continuation is subject to review by the COP. The nature of their work is
technical; their conclusions and recommendations must be reported either to the SBSTA
or to the SBI.
A variety of groups of a more informal character has been set up on an ad hoc basis to
move the negotiation process forward during sessions. Their existence is therefore
usually limited to the session in which they were established.

Parties & Observers under the Convention

32
 1. Parties

The Convention divides countries into three main groups according to differing
commitments:

Annex I Parties
This include the industrialized countries that were members of the OECD (Organisation
for Economic Co-operation and Development) in 1992, plus countries with economies in
transition (the EIT Parties), including the Russian Federation, the Baltic States, and
several Central and Eastern European States.

Annex II Parties
This consist of the OECD members of Annex I, but not the EIT Parties. They are
required to provide financial resources to enable developing countries to undertake
emissions reduction activities under the Convention and to help them adapt to adverse
effects of climate change. In addition, they have to "take all practicable steps" to
promote the development and transfer of environmentally friendly technologies to EIT
Parties and developing countries. Funding provided by Annex II Parties is channelled
mostly through the Convention’s financial mechanism.

Non-Annex I Parties
These are mostly developing countries. Certain groups of developing countries are
recognized by the Convention as being especially vulnerable to the adverse impacts of
climate change, including countries with low-lying coastal areas and those prone to
desertification and drought. Others (such as countries that rely heavily on income from
fossil fuel production and commerce) feel more vulnerable to the potential economic
impacts of climate change response measures. The Convention emphasizes activities
that promise to answer the special needs and concerns of these vulnerable countries,
such as investment, insurance and technology transfer.

The 49 Parties classified as least developed countries (LDCs) by the United Nations are
given special consideration under the Convention on account of their limited capacity
to respond to climate change and adapt to its adverse effects. Parties are urged to take
full account of the special situation of LDCs when considering funding and technology-
transfer activities.

2. Observer organizations

Several categories of observer organizations also attend sessions of the COP and its
subsidiary bodies. These include representatives of United Nations secretariat units and
bodies, such as UNDP, UNEP and UNCTAD, as well as its specialized agencies and

33
related organizations, such as the GEF and WMO/UNEP Intergovernmental Panel on
Climate Change (IPCC). Observer organizations also include intergovernmental
organizations (IGOs), such as the OECD and its International Energy Agency (IEA),
along with non-governmental organizations (NGOs).
The NGOs represent a broad spectrum of interests, and embrace representatives from
business and industry, environmental groups, indigenous populations, local
governments and municipal authorities, research and academic institutes, parliaments,
labour unions, faith groups, women and youth. Constituency groupings have emerged
to facilitate interaction.

THE KYOTO PROTOCOL

The Kyoto Protocol is an international and legally binding agreement to reduce

greenhouse gas emissions worldwide and is an addition to the UNFCCC treaty. The
Kyoto Protocol was adopted in Kyoto, Japan, on 11 December 1997 and entered into
force on 16 February 2005. 185 parties of the UNFCCC have ratified the Protocol. The
major feature of the Kyoto Protocol is that it assigns mandatory targets for 37
industrialized nations and the European Community to reduce their emission of the
specified 6 greenhouse gases (GHGs). These amounts to an average of five per cent
against 1990 levels over the five-year period 2008-2012. The Protocol distinguishes
between two types of countries: Annex I countries – with binding emission targets for
Industrialized countries (West and Eastern Europe, Canada, Japan, New Zealand ,
Russia etc.); and Non-Annex – I Countries – with voluntary participation of developing
countries (China, India, Phillipines, Brazil etc. )

The first commitment period under this Protocol starts from calendar year 2008 to
calendar year end 2012. Annex I parties of the UNFCCC have agreed to reduce their
GHGs emission by 5.2 % below 1990 levels in the Protocol’s 1st commitment period

The major distinction between the Protocol and the Convention is that while the
Convention encouraged industrialized countries to stabilize GHG emissions, the
Protocol commits them to do so. However, to understand the Kyoto Protocol (KP), it is
important to read it together with the Framework Convention on Climate Change
(FCCC).

Structure of the Protocol

The text of the Kyoto Protocol comprises of a short preamble, twenty-eight Articles and
two Annexure viz. Annexure A and Annexure B. Annexure A give the list of
Greenhouse Gasses the emission of which is to be regulated under the Protocol. It also

34
gives the list of sources and categories of sectors, which are significant in respect to
controlling emission of GHG. Annexure B gives the name of the parties and “quantified
emission limitation or reduction commitment” (QUELROS) binding upon the parties as
a percentage of the base year.

Objective of the Kyoto Protocol

The preamble to the Kyoto Protocol states that the Protocol has been developed to meet
the ‘ultimate objective’ of the FCCC as stated in its Article 2. The objective of the FCCC
is "to achieve....stabilization of greenhouse gas concentrations in the atmosphere at a level that
would prevent anthropogenic interference with the climate system. Such a level should be
achieved within a time-frame sufficient to allow ecosystems to adapt naturally to climate change,
to ensure that food production is not threatened and to enable economic development to proceed
in a sustainable manner."

Under the Treaty, countries must meet their targets primarily through national
measures. However, the Kyoto Protocol offers them an additional means of meeting
their targets by way of three market-based mechanisms:
-Joint Implementation
-Clean Development Mechanism
- Emission Trading

Principles behind the Protocol

The preamble of the Protocol states that the development of Protocol has been guided
by the Article 3 of FCCC. Equity and common but differentiated responsibilities are,
important guiding principles of the Kyoto Protocol.

Paragraph 1 of Article 3 specifies that the Parties included in Annex I of the UNFCCC
shall, individually or jointly, ensure that their aggregate anthropogenic carbon dioxide
equivalent emissions of the greenhouse gases listed in Annex A of Kyoto Protocol do
not exceed their assigned amounts, calculated pursuant to their quantified emission
limitation and reduction commitments inscribed in Annex B of the Protocol and in
accordance with the provisions of this Article, with a view to reducing their overall
emissions of such gases by at least 5 per cent below 1990 levels in the commitment
period 2008 to 2012.

The Article 3 of the FCCC lists the following guiding principles, among others:

¾ Nations which have become a party to the FCCC will take action to protect the
climate system keeping in mind the following:

35
 • the benefits of present and future generations;
• equity; and,
• the common but differentiated responsibilities and respective capabilities
of nations.
• Developed countries are expected to take the lead in combating climate
change and its adverse effects.

¾ The special needs and circumstances of developing countries will be given full
consideration, especially the needs of those that are particularly vulnerable to
the adverse effects of climate change, and those that would have to bear a
disproportionate or abnormal burden under the FCCC.
¾ Signatories to the FCCC will take precautionary measures keeping the following
in mind:

• anticipate, prevent or minimize the causes of climate change and mitigate

its adverse effects;
• where there are serious threats of serious or irreversible damage, lack of
full scientific certainty will not be used as a reason for postponing such
measures;
• policies and measures to deal with climate change will be cost-effective so
as to ensure global benefits at the lowest possible cost; and,
• these policies and measures should take into account different socio-
economic contexts, be comprehensive, cover all relevant sources, sinks
and reservoirs of greenhouse gases and adaptation, and cover all
economic sectors.

Interested nations can cooperate amongst themselves to address climate change.

¾ Nations have a right to, and should, promote sustainable development. Policies
and measures should be appropriate for the specific conditions of each nation
and should be integrated with national development programmes, taking into
account that economic development is essential for adopting measures to
address climate change.
¾ Nations should cooperate to promote a supportive and open international
economic system so that there is sustainable economic growth in all nations,
especially developing countries, which will enable them to address climate
change in a better way. Measures taken to combat climate change, including
unilateral ones, should not lead to arbitrary or unjustifiable discrimination or a
disguised restriction on international trade.

Highlights of Kyoto Protocol

36
1. Important Definitions

Article 1 of the Kyoto Protocol defines the terms like conference of parties, convention,
Intergovernmental Panel on Climate Change, Montreal Protocol, parties present and
voting, party and party included in Annex 1. It is important to note that party refers to
the party to the Kyoto Protocol whereas as Conference of Parties has been defined as
Parties to the Convention.

The term ‘ party included in Annex 1’ means a nation included in Annex 1 to the FCCC
or a Party which has made a notification under Article 4, paragraph 2 (g), of the
Convention. By making this notification any party though not in Annex I of the
Convention may commit itself to actions specifically provided under subparagraph (a)
and (b) of Article 4(2) of the FCCC. These actions described under Article 4, sub-
paragraphs 2(a) and 2(b) are:

a. adoption of national policies and measures and implementation of corresponding

measures to mitigate climate change by limiting their anthropogenic emissions of
greenhouse gases and protecting their sinks and reservoirs; and,

b. keeping other nations informed about their policies and measures so that this
information can be reviewed by the Conference of Parties (CoP).

2. Commitments under Kyoto Protocol

Article 2 of the Kyoto Protocol states the activities that Annex 1 countries should take to
meet their commitments under the Kyoto Protocol. Sub-paragraph 1 (a) lists a number
of activities that Annex 1 nations can undertake to achieve their "quantified emission
limitation and reduction commitments" (QUELROS). These activities are:

• enhancement of energy efficiency;

• protection and enhancement of sinks and reservoirs of greenhouse gases not
controlled by the Montreal Protocol and promotion of sustainable forest
management, afforestation and reforestation;
• promotion of sustainable agriculture;
• research and promotion of new and renewable sources of energy, carbon dioxide
sequestration technologies, and innovative environmentally-sound technologies;
• changes in fiscal policies, including subsidies in all greenhouse gas emitting
sectors;
• reforms in relevant sectors;
• limit and/or reduce greenhouse gases from the transport sector; and,
• limit and/or reduce methane emissions through better management of wastes
and of the energy sector.

37
The article also says that countries should cooperate with each other to enhance their
individual and combined effectiveness. The COP serving as the first meeting of Parties
(MOP) to the Kyoto Protocol will consider ways to facilitate such cooperation.

Paragraph 2 of Article 2 states that nations will reduce greenhouse gas emissions from
the aviation and marine sectors working through the International Civil Aviation
Organization (ICAO) and the International Maritime Organization (IMO).

Paragraph 3 states that measures taken by Annex 1 nations must minimize adverse
effects, including adverse effects:

• of climate change;
• of measures taken to address climate change on international trade; and,
• social, environmental and economic impacts on other nations, especially
developing countries and in particular small island nations; countries with low-
lying coastal areas; countries with arid and semi-arid areas, forested areas and
areas liable to forest decay; countries with areas prone to natural disasters;
countries with areas liable to drought and desertification; countries with areas of
high urban atmospheric pollution; countries with areas with fragile ecosystems,
including mountainous ecosystems; countries whose economies are highly
dependent on income generated from production, processing and export, and/or
on consumption of fossil fuels and associated energy-intensive products; land-
locked and transit countries; and, least developed countries.

Measures must take into account the guiding principles of Article 3 of FCCC described
in the previous chapter. The MOP will take action to promote the implementation of
this sub-paragraph.

Finally paragraph 4 states that the MOP can set up mechanisms to coordinate the
policies identified in sub-paragraph 2.1(a) if it considers such coordination to be
beneficial.

3. Emission Reduction Targets

Paragraph 1 of Article 3 details the first commitment period and the overall reduction
targets. It says, that a reduction in "...overall emission of such gases by at least 5 per cent
below 1990 levels in the commitment period 2008-2012" has to be achieved by Annex 1
countries as a whole. The greenhouse gases are listed in Annex A of the Kyoto Protocol
and the quantified emission limitation and reduction commitments (QUELROS) are
listed in Annex B.

This sub-paragraph also states that Annex 1 nations can meet their reduction targets
individually or jointly. It also clarifies that their "aggregate anthropogenic carbon

38
dioxide equivalent emissions of the greenhouse gases" should not exceed their ‘assigned
amounts’.

In other words, even if the emissions of one greenhouse gas goes up, emissions in other
greenhouse gases should be enough to meet the reduction target in aggregate. Separate
targets have not been set for the different greenhouse gases, which was a demand of
many countries and environmental groups.

The paragraph 2 of article 3 says that by 2005 nations should "have made
demonstratable progress in achieving commitments ...". However, what is
"demonstratable progress" has not been defined. However, this is a provision to ensure
that effective greenhouse gas accounting systems have been created domestically by
then. Particularly in relation to tradable emissions and joint implementation, a
"certifiable national system" would be necessary to ensure and judge compliance.

Paragraphs 5 and 6 provide certain flexibilities for economies in transition listed under
Annex 1. While the base year or period for the implementation of commitments will
remain the same for those economies in transition which have already had their’s set
pursuant to the Decision 9 of CoP-2, others which have not yet submitted their first
national communication under Article 12 of the FCCC can notify the MOP the historical
base year or period other than 1990 for the implementation of its commitments. But the
MOP will decide on the acceptance of this notification. The MOP will provide
economies of transition with a certain degree of flexibility in order to enhance their
ability to address climate change. This was also agreed to in sub-clause 4(6) of the
FCCC. According to the Decision 9 of CoP-2, Bulgaria was granted the base year of
1989, Poland 1988, Romania 1989 and Hungary the base period of 1985-87.

Paragraph 7 and 8 explains how Annex I countries will calculate their emissions
reductions in the first commitment period, which is from 2008 to 2012, a period of five
years. These countries will individually take their 1990 "aggregate anthropogenic
carbon dioxide equivalent emissions of the greenhouse gases listed in Annex A (of the
Kyoto Protocol)" and multiply this figure by five. Then each country will ensure that its
total reductions during the entire period of 2008 to 2012 when compared to the 1990
figure multiplied by 5 is equal to or less than the percentage ascribed to that country in
Annex B. However, the Kyoto Protocol leaves one big loophole here in terms of its
ability to actually control build up of greenhouse gases. The Kyoto Protocol does not
specify any quantification of the ‘emissions pathway’ between the base year 1990 and
the commitment period.

Paragraph 8 states that Annex 1 countries can take 1995 as the base year for estimating
their QUELROS with respect to the three gases — hydrofluorocarbons (HFCs),
perfluorocarbons and sulphur hexafluoride — which are helping to reduce damage to

39
the ozone layer, a threat which is being addressed by the Montreal Protocol on
Substances that Deplete the Ozone Layer. These gases have a potential to cause global
warming.

As per the paragraph 9 of the Kyoto Protocol, commitments for subsequent periods will
be established in accordance with Article 21.7 of the Kyoto Protocol. The MOP will start
consideration of these commitments at least 7 years before the end of the first
commitment period, which means that this exercise will begin before the start of 2006.

Paragraphs 10, 11 and 12 set rules for the benefits that an Annex I party can get from
other Annex 1 or non-Annex 1 parties. These nations will have to follow the rules set by
Article 6 which deals with Joint Implementation activities, Article 12 which deals with
the Clean Development Mechanism, and Article 17 which deals with emissions trading.

According to these three paragraphs, countries can transfer and/or accept:

• emissions reduction units;

• parts of assigned amounts; and,
• certified emissions reductions.

Paragraph 13 states that if the emissions of an Annex 1 country are less than its assigned
amount for the first commitment period, then this difference can be added to the
assigned amount of that country in subsequent commitment periods.

Paragraph 14 states that Annex 1 countries must ensure that their actions do not result
in adverse social, environmental or economic impacts on all developing countries and
especially those identified in paragraphs 4.8 and 4.9 of the FCCC and listed above. In
case there are possibilities of adverse effects, efforts will be made to minimize these
adverse effects.

The first MOP will consider what actions are necessary to minimize adverse effects of
climate change and/or impacts of response measures by Annex I countries on
developing countries. Among other issues, MOP-I will discuss funding, insurance and
technology transfer.

4. Mechanisms for attaining targets

a. Bubble Formation

Article 4 o the Kyoto Protocol contains a provision which allow developed nations to
form a bubble wherein they can set out their own individual targets as long as the
countries which set out to form a ‘bubble’ meet their targets in aggregate. However, this
provision will be applicable only for first commitment period. In case countries that

40
form a bubble fail to achieve their "total combined level of emission reduction", each
party to that agreement will be responsible only for that level of emissions that have
been set out in the agreement

b. Formation of national accounting system

The article 4 of the Protocol states that all Annex I nations must have in place, no later
than one year prior to the start of the first commitment period, namely, by 2007, a
national accounting system for estimation of emissions of greenhouse gases and their
absorption by sinks. The methodology for these estimations will be developed by the
Intergovernmental Panel on Climate Change and agreed by COP-3 which was held in
Kyoto in December 1997. MOP-I will build upon these methodologies to develop
guidelines for the national accounting systems. Where such methodologies are not
used, appropriate adjustments to these methodologies can be agreed upon by MOP-I.
The MOPs will take advice of IPCC, SUBSTA and other bodies to regularly review and,
where necessary, revise these methodologies.

c. Joint Implementation

Joint Implementation means transfer of emissions reduction at the project level only
between Annex I Parties. This is one of the three flexible mechanism provided to Annex
I Parties in Kyoto Protocol for accomplishing their reduction targets. This mechanism
has been discussed at length in subsequent chapter.

d. Clean development Mechanism

Article 12 of the Protocol defines Clean Development Mechanism (CDM). Unlike Article
6, this is a mechanism between industrialized countries and developing countries. This
mechanism has been discussed at length in subsequent chapter.

e. Emission Trading

Article 17 of the Protocol states that the Parties included in Annex B may participate in
emissions trading for the purposes of fulfilling their commitments under Article 3. This
provides the Parties with another flexible mechanism under the Protocol for fulfillment
of the commitment. The mechanism has been discussed at length in subsequent chapter.

Bodies under the Protocol

1. Meeting of Parties (MOP)

41
As per the article 13 of the Protocol, the COP, which is the supreme body of the FCCC,
will also serve as the Meeting of Parties (MOP) of the Kyoto Protocol. Nations that have
become parties to the FCCC but not parties to the Protocol can participate as observers
in the MOP. The MOP will regularly review the implementation of the Protocol and
take decisions to promote its effective implementation. It will also assess the overall
effects, in particular environmental, economic and social effects, of the measures taken
in pursuance of the Protocol and the extent to which progress is being made to achieve
the objective of the FCCC. It will periodically examine the obligations of parties i.e. the
adequacy of their commitments in the light of new scientific and technical knowledge
and consider and adopt regular reports on the implementation of the Protocol.

The MOP will also:

¾ promote exchange of information on measures adopted by parties to address

climate change and its effects;
¾ coordinate measures adopted by two or more parties, at their request, to address
climate and its effects;
¾ develop and periodically refine comparable methodologies for the effective
implementation of the KP;
¾ recommend any other matter necessary for the implementation of the KP;
¾ mobilise additional financial resources as indicated in Article 11.2 of the KP;
¾ establish subsidiary bodies as required;
¾ seek the services of competent international organisations, and
intergovernmental bodies and NGOs, as necessary; and,
¾ undertake all other steps as may be required to implement the KP.

The first MOP will take place in conjunction with the first CoP that meets after the KP
has entered into force. Subsequent ordinary sessions of the MOPs will take place every
year and in conjunction with the ordinary sessions of the CoPs.

Extraordinary sessions of the MOPs will be held either if they have been decided by
earlier MOPs or at the request of any party, provided one-third or more parties agree
within six months of the request being communicated by the secretariat.

National or international, governmental or non-governmental agencies can attend the

MOP as observers provided they are qualified in matters covered by the Protocol, they
have informed the secretariat in advance, and their presence has not been objected to by
at least one-third of the parties present.

2. Secretariat

As per the Article 14 of the Protocol, the Secretariat for the KP will be the same as the
Secretariat for the FCCC. It will have same functions and arrangements for functioning

42
as specified in the convention. The Secretariat shall, in addition to its functions under
the FCCC, exercise the functions assigned to it under this Protocol.

3. Subsidiary Bodies

The Subsidiary Body for Scientific and Technological Advice (SBSTA) and the
Subsidiary Body
for Implementation (SBI) established by Articles 9 and 10 of the Convention shall serve
as, the Subsidiary Body for Scientific and Technological Advice and the Subsidiary
Body for Implementation of this Protocol. They will have same functions as specified in
the convention.

EMISSION TRADING

Countries with commitments under the Kyoto Protocol to limit or reduce greenhouse
gas emissions must meet their targets primarily through national measures. The three
market-based mechanisms i.e Emission Trading, Joint Implementation and Clean
Development Mechanism are additional means of meeting these targets. Parties with
commitments under the Kyoto Protocol i.e. Annex B Parties have accepted targets for
limiting or reducing emissions. These targets are expressed as levels of allowed
emissions, or “assigned amounts,” over the first commitment period i.e. 2008-2012.
The Article 17 of the Kyoto Protocol allows countries that have emission units to spare
i.e. emissions permitted to them but not used by them, to sell this excess capacity to
countries that are exceeded their targets. This transaction of the excess of the assigned
amount, expressed in units called Assigned Amount Units (AAU’s) is called Emission
Trading.

Thus, a new commodity was created in the form of emission reductions or removals.
Since carbon dioxide is the principal greenhouse gas, people speak simply of trading
in carbon. Carbon is now tracked and traded like any other commodity. This is known
as the "carbon market." The carbon market is a key tool for reducing emissions
worldwide. It was worth 30 billion USD in 2006 and is growing.

As per the Article 17 of the Protocol, the Conference of the Parties(COP) shall define the
relevant principles, modalities, rules and guidelines, in particular for verification,
reporting and accountability for emissions trading. Accordingly, modalities, rules and
guidelines for emissions trading under Article 17 of the Kyoto Protocol is contained in
decision 18 of COP 7 and Modalities for the accounting of assigned amounts under
Article 7, paragraph 4, of the Kyoto Protocol is contained in decision 19 of COP 7.

43
Units for Trading

¾ Emission Reduction Unit (ERU) : It is a unit generated by a joint

implementation project and is equal to one metric tonne of carbon dioxide
equivalent, calculated using global warming potentials defined by decision
2/CP.3 or as subsequently revised in accordance with Article 5.
¾ Certified Emission Reduction (CER): It is a unit issued pursuant to Article 12 of
the Protocol i.e in Clean Development Mechanism and is equal to one metric
tonne of carbon dioxide equivalent, calculated using global warming potentials
defined by decision 2/CP.3 or as subsequently revised in accordance with Article
5.
¾ Assigned Amount Unit (AAU): It is a unit issued under the Protocol to Annex B
Parties and is equal to one metric tonne of carbon dioxide equivalent, calculated
using global warming potentials defined by decision 2/CP.3 or as subsequently
revised in accordance with Article 5. This unit is relevant in Emission Trading
Mechanism.
¾ Removal Unit (RMU): It is a unit issued pursuant land use, land-use change and
forestry (LULUCF) activities such as reforestation and is equal to one metric
tonne of carbon calculated using global warming potentials.

Eligibility Requirement for transfer of Units

A Party included in Annex I of the Convention (FCCC) with a commitment inscribed in

Annex B of the Protocol is eligible to transfer and/or acquire ERUs, CERs, AAUs, or
RMUs issued in accordance with the relevant provisions, if it complies with the
following eligibility requirements:

• They must have ratified the Kyoto Protocol.

• They must have calculated their assigned amount in terms of tonnes of CO2-
equivalent emissions.
• They must have in place a national system for estimating emissions and
removals of greenhouse gases within their territory.
• They must have in place a national registry to record and track the creation and
movement of ERUs, CERs, AAUs and RMUs and must annually report such
information to the secretariat.
• They must annually report information on emissions and removals to the
secretariat.
• They must submit the supplementary information on assigned amount in
accordance with Article 7, paragraph 1, and make any additions to, and
subtractions from, assigned amount as per the provisions of the Protocol.

44
A Party is considered to meet the eligibility requirements referred above only after 16
months have elapsed since the submission of its report to facilitate the calculation of its
assigned amount and to demonstrate its capacity to account for its emissions and
assigned amount, in accordance with the modalities adopted for the accounting of
assigned amount.

Moreover, a Party is considered to continue to meet the eligibility requirements referred

above unless and until the enforcement branch of the compliance committee decides
that the Party does not meet one or more of the eligibility requirements, has suspended
the Party’s eligibility and has transmitted this information to the secretariat.

Calculation of Assigned Amount Unit

The assigned amount, for the first commitment period, for each Party having a
commitment inscribed in Annex B shall be equal to the percentage inscribed for it in
Annex B of its aggregate anthropogenic carbon dioxide equivalent emissions of the
greenhouse gases, and from the sources, listed in Annex A in the base year, multiplied
by five.

For instance, let us assume that country A had in 1990 aggregate anthropogenic carbon
dioxide equivalent emissions of greenhouse gases listed in Annex A equal to 50 million
tonnes of carbon equivalent (or 50mtC). Then, in the period 2008 to 2012, in case of
Annex B states whose QUELROS is 95 per cent, its total aggregate anthropogenic
carbon dioxide equivalent emissions of greenhouse gases must not be more than 50mtC
x 5 x 0.95, i.e. 237.5mtC during the entire commitment period or an average of 47.5 mtC
per year during the commitment period.

For the purpose of calculation the base year taken was 1990 except for those Parties
undergoing the process of transition to a market economy that have selected a historical
base year or period other than 1990, and for those Parties that have selected 1995 as the
base year for total emissions of hydrofluorocarbons, perfluorocarbons and sulphur
hexafluoride. [ref. to paragraph 3 and 5 of Article 3 of Kyoto Protocol}

Further, those Annex 1 countries in which land-use changes and forestry activities
constituted in 1990 net emissions of greenhouse gases (which means the total emissions
from sources were more than the total absorption of emissions by sinks) could add
these net emissions to their base year emissions of 1990 and thus increase their base
year emissions.

Those Parties, which form a bubble in accordance with Article 4 to fulfill their
commitments under the Protocol jointly, shall use the respective emission level

45
allocated to each of the Parties in that agreement instead of the percentage inscribed for
it in Annex B.

Reporting to facilitate calculation of Assigned Amount

Each Party included in Annex I were required to facilitate the calculation of its assigned
amount
for the commitment period and demonstrate their capacity to account for the emissions
and assigned amount. To this end, each Party were required to submit a report, in two
parts.
The Part one of the report contained the following information or references to such
information where it has been previously submitted to the secretariat:
(a) Complete inventories of anthropogenic emissions by sources and removals by sinks
of greenhouse gases not controlled by the Montreal Protocol for all years from 1990, or
another approved base year to the most recent year available
(b) Identification of its selected base year for hydrofluorocarbons, perfluorocarbons and
sulphur hexafluoride.
(c) The agreement where the Party has reached such an agreement to fulfill its
commitments jointly with other Parties;
(d) Calculation of its assigned amount based on its inventory of anthropogenic
emissions by sources and removals by sinks of greenhouse gases not controlled by the
Montreal Protocol.
Part two of the report contained the following information or references to such
information where it has been previously submitted to the secretariat:
(a) Calculation of its commitment period reserve
(b) Identification of its selection of single minimum values for tree crown cover, land
area and tree height for use in accounting for its activities together with a justification of
the consistency of those values with the information that has been historically reported
to the Food and Agriculture Organization of the United Nations or other international
bodies, and in the case of difference, an explanation of why and how such values were
chosen.
(c) Identification of its election of activities for inclusion in its accounting for the first
commitment period, together with information on how its national system will identify
land areas associated with the activities.
(d) Identification of whether it intends to account annually or for the entire
commitment period;
(e) A description of its national system
(f) A description of its national registry

Recording of assigned amount

46
Article 7 of the Protocol requires Parties to provide information for ensuring compliance
with the emissions reduction objectives. This information are incorporated in the annual
inventory of anthropogenic emissions and is put through a review process by expert
teams. After this initial review and resolution of any questions of implementation
relating to adjustments or the calculation of its assigned, the assigned amount of each
Party is recorded in the database for the compilation and accounting of emissions and
assigned amounts. Once recorded in the compilation and accounting database, the
assigned amount of each Party remains fixed for the commitment period.

Additions to, and subtractions from, assigned amount for the compliance assessment

At the end of the additional period for fulfilling commitments, the following additions
to the assigned amount of a Party shall be made in for the accounting of the compliance
assessment for the commitment period:
o Acquisitions by the Party of ERUs
o Net acquisitions by the Party of CERs, where it acquires more than it
o Acquisitions by the Party of AAUs
o Acquisitions by the Party of
o Issuance by the Party of RMUs on the basis of its activities where such
activities result in a net removal of greenhouse gases
o Carry-over by the Party of ERUs, CERs and/or AAUs from the previous
commitment period.

At the end of the additional period for fulfilling commitments, the following
subtractions
from the assigned amount of a Party shall be made for the accounting of the compliance
assessment for the commitment period:
o Transfers by the Party of ERUs
o Transfers by the Party of AAUs
o Transfers by the Party of RMUs
o Cancellation by the Party of ERUs, CERs, AAUs and/or RMUs on the
basis of its activities where such activities result in a net source of
greenhouse gas emissions
o Cancellation by the Party of ERUs, CERs, AAUs and/or RMUs following
determination by the compliance committee that the Party was not in
compliance with its for the previous commitment period
o Other cancellations by the Party of ERUs, CERs, AAUs and/or RMUs.

Compliance assessment

47
Each Party included in Annex I shall retire ERUs, CERs, AAUs and/or RMUs for
demonstrating its compliance with its commitment. The assessment shall be based on
the comparison of the quantity of ERUs, CERs, AAUs and/or RMUs, valid for the
commitment period in question, retired by the Party with its aggregate anthropogenic
carbon dioxide equivalent emissions of the greenhouse gases, and from the sources,
listed in Annex A to the Kyoto Protocol during the commitment period as reported by
the Party reviewed by expert team.

Carry-over

After expiration of the additional period for fulfilling commitments and where the final
compilation and accounting report indicates that the quantity of ERUs, CERs, AAUs
and/or RMUs retired by the Party is at least equivalent to its anthropogenic carbon
dioxide equivalent emissions of the greenhouse gases, and from the sources, for that
commitment period,
the Party may carry over to the subsequent commitment period:
o Any ERUs held in its national registry, which have not been converted
from RMUs and have not been retired for that commitment period or
cancelled, to a maximum of 2.5 per cent of the assigned amount of that
Party;
o Any CERs held in its national registry, which have not been retired for
that commitment period or cancelled, to a maximum of 2.5 per of that
Party;
o Any AAUs held in its national registry, which have not been retired for
that commitment period or cancelled.
o However, RMUs may not be carried over to the subsequent commitment
period.

Issuance of ERUs, AAUs and RMUs

Each Party included in Annex I , prior to any transactions taking place for that
commitment period, issues a quantity of AAUs equivalent to its assigned calculated and
recorded in its national registry. Each AAU has a unique serial number comprising the
following elements:
o Commitment period: the commitment period for which the AAU is
issued;
o Party of origin: the Party issuing the AAU, identified by means of the two-
letter country code defined by ISO 3166;
o Type: an element identifying the unit as an AAU;
o Unit: a number unique to the AAU for the identified commitment period
and
o Party of origin.

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They also issue in their national registry RMUs equivalent to the net removals of
anthropogenic greenhouse gases from aforestation and reforestation activity. They elect
for each activity, prior to the start of the commitment period, to issue such RMUs
annually or for the entire commitment period. Each RMU has a unique serial number
comprising the following elements:
o Commitment period: the commitment period for which the RMU is
issued;
o Party of origin: the Party included in Annex I issuing the RMU, identified
by means of the two-letter country code defined by ISO 3166;
o Type: an element identifying the unit as an RMU;
o Activity: the type of activity for which the RMU was issued;
o Unit: a number unique to the RMU for the identified commitment period
and
o Party of origin.
However, the Party has to ensure that the total quantity of RMUs issued into its for the
commitment period does not exceed the limits established for that Party.
Prior to their transfer, each Party has to issue ERUs into its national registry by
converting AAUs or RMUs previously issued by that Party and held in its national
registry. An AAU or RMU is converted into an ERU by adding a project identifier to the
serial number and changing the type indicator in the serial number to indicate an ERU.
Other elements of the serial number of the AAU or RMU remain unchanged. The
project identifier identifies the specific Jointly Implemented project for which the ERU is
issued, using a number unique to the project for the Party of origin, including whether
the relevant reductions in anthropogenic emissions by sources or enhancements of
anthropogenic removals by sinks were verified by supervisory committee.

Transfer, acquisition, cancellation, retirement and carry-over

ERUs, CERs, AAUs and RMUs may be transferred between registries and may be
transferred within registries. Party included in Annex I will have to ensure that its net
acquisitions of CERs from afforestation and reforestation for the first commitment
period do not exceed the limits established for that Party. Each Party will have to cancel
CERs, ERUs, AAUs and/or RMUs equivalent to the net emissions of anthropogenic
greenhouse gases resulting from its afforestation and reforestation activities by
transferring the ERUs, CERs, AAUs and/or RMUs to the appropriate cancellation
account in its national registry. Each Party will cancel ERUs, CERs, AAUs and/or
RMUs for each activity for the same period for which it has elected to issue RMUs for
that activity.

Registry systems under the Kyoto Protocol

49
 Emission targets for industrialized country Parties to the Kyoto Protocol are
expressed as levels of allowed emissions, or “assigned amounts”, over the 2008-2012
commitment period. Such assigned amounts are denominated in tonnes (of CO2
equivalent emissions) known informally as “Kyoto units”.

The ability of Parties to add to their holdings of Kyoto units (e.g. through credits for
CDM) or move units from one country to another (e.g. through emissions trading or
JI projects) requires registry systems that can track the location of Kyoto units at all
times.

Registry systems track and record transactions by Parties under the mechanisms.
The UN Climate Change Secretariat, based in Bonn, Germany, keeps an international
transaction log to verify that transactions are consistent with the rules of the
Protocol.

There are two types of registry:

1. National registry (by each country): Governments of the 38 Annex B Parties to

the Kyoto Protocol are implementing national registries, containing accounts
within which units are held in the name of the government or in the name of
legal entities authorized by the government to hold and trade units
2. CDM registry (Clean Development Mechanism registry by the UNFCC): The
UNFCCC secretariat, under the authority of the CDM Executive Board, has
implemented the CDM registry for issuing CDM credits and distributing them to
national registries. Accounts in the CDM registry are held only by CDM project
participants, as the registry does not accept emissions trading between accounts.

In addition to recording the holdings of Kyoto units, these registries “settle” emissions
trades by delivering units from the accounts of sellers to those of buyers, thus forming
the backbone infrastructure for the carbon market.

Each registry will operate through a link established with the International transaction
log (ITL) put in place and administered by the UNFCCC secretariat. The ITL verifies
registry transactions, in real time, to ensure they are consistent with rules agreed under
the Kyoto Protocol. The ITL requires registries to terminate transactions they propose
that are found to infringe upon the Kyoto rules.

In verifying registry transactions, the ITL provides an independent check that unit
holdings are being recorded accurately in registries. After the Kyoto commitment
period is finished, the end status of the unit holdings for each Annex B Party will be
compared with the Party’s emissions over the commitment period in order to assess
whether it has complied with its emission target under the Kyoto Protocol.

50
Meaningful emission reductions within a trading system can only occur if they can be
measured at the level of operator or installation and reported to a regulator. For
greenhouse gases all trading countries maintain an inventory of emissions at national
and international level.

In addition to the above, the trading groups within North America maintain inventories
at the state level through The Climate Registry. For trading between regions these
inventories must be consistent, with equivalent units and measurement techniques.

Climate registry is a nonprofit organization in North America created to record and

track the greenhouse gas emissions of businesses, municipalities and other
organizations in 31 states of USA and 3 provinces of Canada. The registry was launched
on May 8, 2007 and became operative from January 2008. It will be used to provide data
for carbon-reduction initiatives. This is similar to the California Climate Action Registry
that was established by California Statute as a non-profit voluntary registry for
greenhouse gas emissions. The purpose of this registry is to help companies and
organizations with operations in the State to establish greenhouse gas emissions
baselines against which any future emission reduction requirements may be applied.

In some industrial processes emissions can be physically measured by inserting sensors

and flowmeters in chimneys and stacks, but many types of activity rely on theoretical
calculations for measurement. Depending on local legislation, these measurements may
require additional checks and verification by government or third party auditors, prior
or post submission to the local regulator.

Guidelines under Articles 5, 7 and 8 of the Kyoto Protocol: Methodological Issues,

Reporting and Review

Articles 5, 7 and 8 of the Kyoto Protocol address reporting and review of information
by Annex I Parties under the Protocol, as well as national systems and
methodologies for the preparation of greenhouse gas inventories.

• Article 5 commits Annex I Parties to having in place, no later than 2007,

national systems for the estimation of greenhouse gas emissions by sources and
removals by sinks (Article 5.1).
• Article 7 requires Annex I Parties to submit annual greenhouse gas inventories,
as well as national communications, at regular intervals, both including
supplementary information to demonstrate compliance with the Protocol.

51
 • Article 8 establishes that expert review teams will review the inventories, and
national communications submitted by Annex I Parties.

European Union Emission Trading System

In January 2005 the European Union Greenhouse Gas Emission Trading Scheme (EU
ETS) commenced operation as the largest multi-country, multi-sector Greenhouse Gas
emission trading scheme world-wide.

Allowances traded in the EU ETS will not be printed but held in accounts in electronic
registries set up by Member States. All of these registries will be overseen by a Central
Administrator at EU level who, through the Community independent transaction log,
will check each transaction for any irregularities. In this way, the registries system keep
track of the ownership of allowances in the same way as a banking system keeps track
of the ownership of money.

EU emissions trading – Registry System

Domestic or regional emissions trading schemes that use Kyoto units also undertake
their settlement through these registry systems. For example, under the second phase of
the European Union emissions trading scheme, EU allowances are specific Kyoto units
which have been designated as being valid for trading under the scheme. Transactions
in EU allowances are therefore recorded automatically as transactions under the Kyoto
Protocol.

As EU trading legislation sets in place rules over and above those agreed for the Kyoto
Protocol, a supplemental transaction log has been implemented by the European
Commission. The Community Independent Transaction Log has been in place since the
start of the scheme in 2005 and EU registries are now operating with it.

For the start of the Kyoto commitment period in 2008, EU registries are to switch their
connections from the CITL to the ITL. The ITL will conduct “Kyoto checks” on
transactions proposed by both EU and non-EU registries. In the case of transactions
involving EU registries, the ITL will forward information to the CITL so that it can
conduct “supplementary checks” defined under the EU scheme.

How the EU-ETS works

The European Union Emission Trading System (EU ETS) is the largest multi-national,
emissions trading scheme in the world and is a major pillar of EU climate policy. The

52
ETS currently covers more than 10,000 installations in the energy and industrial sectors
which are collectively responsible for close to half of the EU's emissions of CO2 and 40%
of its total greenhouse gas emissions.

Under the EU ETS, large emitters of carbon dioxide within the EU must monitor and
annually report their CO2 emissions, and they are obliged every year to return an
amount of emission allowances to the government that is equivalent to their CO2
emissions in that year. In order to neutralise annual irregularities in CO2-emission levels
that may occur due to extreme weather events (such as harsh winters or very hot
summers), emission allowances for any plant operator subject to the EU ETS are given
out for a sequence of several years at once. Each such sequence of years is called a
Trading Period. The 1st EU ETS Trading Period expired in December 2007; it had
covered all EU ETS emissions since January 2005. With its termination, the 1st phase EU
allowances became invalid. Since January 2008, the 2nd Trading Period is under way
which will last until December 2012. Currently, the installations get the allowances for
free from the EU member states' governments. Besides receiving this initial allocation
on a plant-by plant basis, an operator may purchase EU allowances from others
(installations, traders, the government.) If an installation has received more free
allowances than it needs, it may sell them to anybody.

Emission Markets

For trading purposes, one allowance or CER (certified emission reduction) 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. 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.

The spot market or cash market is a commodities or securities market in which goods
are sold for cash and delivered immediately. Contracts bought and sold on these
markets are immediately effective. Spot markets can operate wherever the
infrastructure exists to conduct the transaction. The spot market for most securities
exists primarily on the Internet.

A futures exchange is a central financial exchange where people can trade standardized
futures contracts; that is, a contract to buy specific quantities of a commodity or
financial instrument at a specified price with delivery set at a specified time in the
future.

53
Options are financial instruments that convey the right, but not the obligation, to
engage in a future transaction on some underlying security, or in a futures contract. In
other words, the holder does not have to exercise this right, unlike a forward or future.

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. Many companies now engage in
emissions abatement, offsetting, and sequestration programs to generate credits that can
be sold on one of the exchanges.

Some exchanges trading in carbon allowances:

1. Chicago Climate Exchange

www.chicagoclimatex.com

Chicago Climate Exchange (CCX) launched in 2003, is the world’s first and North
America’s only voluntary, legally binding integrated trading system to reduce
emissions of all six major greenhouse gas (GHG) with offset projects worldwide.

CCX employs independent verification, includes six greenhouse gases, and has
been trading greenhouse gas emission allowances since 2003. The companies
joining the exchange commit to reduce their aggregate emissions by 6% by 2010.
The exchange has more than 350 members ranging from corporations like Ford,
DuPont, and Motorola, to state and municipalities such as Oakland and Chicago,
to educational institutions such as University of California, San Diego and
University of Minnesota, to farmers and their organizations, such as the National
Farmers Union and the Iowa Farm Bureau. CCX has an aggregate baseline of 226
million metric tons of CO2 equivalent, which is equal to the United Kingdom’s
annual allocation under the EU ETS. CCX is operated by the public company
Climate Exchange PLC, which also owns the European Climate Exchange. The
exchange trades in emissions of six gases: Carbon dioxide, methane, nitrous
oxide, sulfur hexafluoride, perfluorocarbons and hydro fluorocarbons.

The trading system of CCX consists of the following:

i. The Trading Platform is a marketplace for executing trades among

Registry Account Holders. For instance, National Farmers Union’s Carbon
Credit Program is a multi-state program that allows farmers and
landowners to earn income by storing carbon in their soil through no-till

54
 crop production and long term grass seeding practices. Farmers Union has
earned approval from the Chicago Climate Exchange to aggregate carbon
credits. Farmers Union is enrolling producer areas of carbon into blocks of
credits that will be traded on the Exchange, much like other agricultural
commodities are traded.
ii. The Clearing and Settlement Platform processes all transaction
information.
iii. The Registry is the official database for Carbon Financial Instruments.

2. European Climate Exchange

www.europeanclimateexchange.com

The European Climate Exchange (ECX) manages the marketing and product
development for ECX Carbon Financial Instruments (ECX CFIs), listed and
admitted to trading on the ICE Futures Europe's electronic platform. ECX / ICE
Futures Europe is the most liquid platform for carbon emissions trading,
attracting over 85% of the exchange-traded volume in the European carbon
market. ECX CFI Contract includes standardised futures and options based on
EU Allowances (EUAs) and Certified Emission Reductions (CERs). More than 90
leading businesses have signed up for membership to trade ECX products. In
addition, several thousand ICE clients can access the emissions market daily via
banks and brokers.
ECX is a member of the Climate Exchange Plc group of companies. Other
member companies include the Chicago Climate Exchange (CCX) and the
Chicago Climate Futures Exchange (CCFE). Climate Exchange Plc (CLE) is listed
on the AIM market of the London Stock Exchange.

3. Nord Pool

www.nordpool.com

Nord Pool (the Nordic Power Exchange) is the single power market for Norway,
Denmark, Sweden and Finland. It was the world's first multinational exchange
for trading electric power. As of 2008, Nord Pool is the largest power derivatives
exchange and the second largest exchange in European Union emission
allowances (EUAs) and global certified emission reductions (CERs) trading.

4. Powernext

www.powernext.fr

Powernext is a Paris-based company operating a European energy exchange,

owned by NYSE Euronext, providing an electronic market, similar to a stock

55
 market, for the trading of energy futures contracts and derivatives in Europe.
Created in July 2001 with the opening of the European electricity market,
Powernext has built a network of over 70 European members, including energy
producers, end users, banks, brokers, traders, and retailers.

5. Multi Commodity Exchange

www.mcxindia.com

Multi Commodity Exchange (MCX) is an independent commodity exchange

based in India. It was established in 2003 and is based in Mumbai. It has an
average daily turnover of around US$1.55 billion. MCX offers futures trading in
Agricultural Commodities, Bullion, Ferrous & Non-ferrous metals, Pulses, Oils &
Oilseeds, Energy, Plantations, Spices and other soft commodities.

MCX also carries on future trading in carbon credits which is the first initiative in
Asia. Carbon credits or carbon emission reduction certificates are issued by the
Clean Development Mechanism Executive Board which is the highest
international body to register projects and issue credits.

Commodity exchanges are considered as the best vehicles for trading in carbon
credit. MCX being a national level online commodity exchange offers the best
platform for this market.

Trading at MCX - The parties having open positions on MCX enter into bilateral
physical trade as per their futures obligation. The sellers will have to submit
copies of relevant documents as a proof of holding carbon credits at the time of
giving intention to the Exchange. If the documents submitted by the sellers are
considered acceptable as per exchange specifications, it would result in valid
delivery of carbon credit. Alternatively, buyers can also choose to invest directly
in projects that will enable them get a reasonable rate of return along with
emission reductions.

6. National Commodity and Derivatives Exchange

www.ncdex.com

National Commodity & Derivatives Exchange Limited (NCDEX) is an online

commodity exchange based in Mumbai, India. It commenced its operations on
December 15, 2003. NCDEX is a closely held private company which is promoted
by national level institutions and has an independent Board of Directors and
professionals not having vested interest in commodity markets. NCDEX is

56
 regulated by Forward Market Commission (FMC) in respect of futures trading in
commodities.

NCDEX also handles futures trading in carbon credits. Carbon credit futures
provides transparency to markets and help producers earn remunerative returns
out of environmentally clean projects.

JOINT IMPLEMENTATION

Joint implementation is one of the three flexible mechanisms under the Kyoto Protocol
that allows industrialized countries to meet part of their required cuts in greenhouse-
gas emissions by paying for projects that reduce emissions in other industrialized
countries. The provision for this mechanism is provided in the Article 6 of the Kyoto
Protocol. However, the concept of joint implementation (JI), was first introduced in
Article 4.2(a) of the United Nations Framework Convention on Climate Change
(UNFCCC) which allowed Annex I countries the option of contributing to the
Convention’s objectives by implementing policies and measures ‘jointly’ with other
countries.

In 1995, the first Conference of the Parties (COP1) to the UNFCCC created a pilot phase
of Activities Implemented Jointly (AIJ). This pilot phase had the objective of
establishing expertise with project-based mechanisms. In 1997, the third Conference of
the Parties established the Kyoto Protocol, including Article 6 which stipulates that “for
the purpose of meeting its commitments… any Party included in Annex I may transfer
to, or acquire from, any other such Party emission reduction units resulting from
projects aimed at reducing anthropogenic emissions by sources or enhancing
anthropogenic removals by sinks of greenhouse gases in any sector of the economy.”
Thus, any Annex I Party can be a host and/or an investor country at any one point in
time. The 2001 Marrakesh Accords (Decision 16/CP.7) provide the rules and modalities
relating to JI. They indicate that a JI host country can qualify for JI via either of two
tracks, depending on its ability to meet certain eligibility requirements.

Therefore, the mechanism known as “joint implementation,” defined in Article 6 of the

Kyoto Protocol, allows a country with an emission reduction or limitation commitment
under the Kyoto Protocol (Annex B Party) to earn emission reduction units (ERUs) from
an emission-reduction or emission removal project in another Annex B Party, each
equivalent to one tonne of CO2, which can be counted towards meeting its Kyoto target.

57
Joint implementation offers Parties a flexible and cost-efficient means of fulfilling a part
of their Kyoto commitments, while the host Party benefits from foreign investment and
technology transfer.

Advantage of the mechanism

The rationale for JI is to reduce the aggregate costs of greenhouse gas (GHG) mitigation,
since the environmental impact of emissions is the same irrespective of the geographic
location of the emissions source. This is because the marginal abatements costs of
emissions reductions across countries and sources are likely to vary significantly.
Moreover, JI enables the transfer of efficient activities, technologies and techniques to
countries that are hosting the projects, thereby contributing to respecting their
commitment under the Kyoto Protocol (KP), as well as to sustainable development. The
general expectation for JI was that the more developed Annex I countries would invest
in projects in Annex I Economies in Transition (EITs) where marginal abatements costs
were expected to be lower. In practice, this will likely mean facilities built in the
countries of Eastern Europe and the former Soviet Union -- the "transition economies" --
paid for by Western European and North American countries. The sponsoring
governments will receive credits that may be applied to their emissions targets; the
recipient nations will gain foreign investment and advanced technology. The system
has advantages of flexibility and efficiency. It often is cheaper to carry out energy-
efficiency work in the transition countries, and to realize greater cuts in emissions by
doing so. The atmosphere benefits wherever these reductions occur.

Eligibility Requirements

JI project must provide a reduction in emissions by sources, or an enhancement of

removals by sinks, that is additional to what would otherwise have occurred. Projects
must have approval of the host Party and participants have to be authorized to
participate by a Party involved in the project.

Projects starting as from the year 2000 may be eligible as JI projects if they meet the
relevant requirements, but ERUs may only be issued for a crediting period starting after
the beginning of 2008.

Decision 9 of CMP 1, spells the guidelines for implementation of Joint Implementation

Projects. The paragraph 21 of the decision sets the eligibility requirement for Parties
included in the Annex I of the Convention and having commitment as specified in the
Annex B of the Kyoto Protocol. The highlights of these requirements are:

¾ It is a Party to the Kyoto Protocol

¾ Its assigned amount has been calculated and recorded

58
 ¾ It has in place a national system for the estimation of anthropogenic emissions by
sources and anthropogenic removals by sinks of all greenhouse gases not
controlled by the Montreal Protocol
¾ It has in place a national registry
¾ It has submitted annually the most recent required inventory, including the
national inventory report and the common reporting format. For the first
commitment period, the quality assessment needed for the purpose of
determining eligibility to use the mechanisms shall be limited to the parts of the
inventory pertaining to emissions of greenhouse gases from sources/sector
categories from Annex A to the Kyoto Protocol and the submission of the annual
inventory on sinks
¾ It submits the supplementary information on assigned amount and makes any
additions to, and subtractions from, assigned amount according to requirements
of the Protocol

As per the paragraph A Party is considered to meet the eligibility requirements referred
above only after 16 months have elapsed since the submission of its report to facilitate
the calculation of its assigned amount and to demonstrate its capacity to account for its
emissions and assigned amount, in accordance with the modalities adopted for the
accounting of assigned amount. Moreover, a Party is considered to continue to meet the
eligibility requirements referred above unless and until the enforcement branch of the
compliance committee decides that the Party does not meet one or more of the
eligibility requirements, has suspended the Party’s eligibility and has transmitted this
information to the secretariat.
A Party involved in a JI project are required to inform the secretariat of:
¾ Its designated focal point for approving projects
¾ Its national guidelines and procedures for approving JI projects, including the
consideration of stakeholders’ comments, as well as monitoring and verification.

Types of Procedures

If a host Party meets all of the eligibility requirements to transfer and/or acquire ERUs,
it may verify emission reductions or enhancements of removals from a JI project as
being additional to any that would otherwise occur. Upon such verification, the host
Party may issue the appropriate quantity of ERUs. This procedure is commonly referred
to as the “Track 1” procedure.”

Under Track I, host country requirements are stricter, but there is less international
oversight. Track I requires a Party to the Kyoto Protocol to establish an assigned
amount and create a national registry for tracking the transfer of any assigned amounts.
Countries eligible for Track I must also have a national system in place to estimate
emissions and removals by sinks, they must submit an annual inventory to estimate

59
GHG emissions and have accurate accounting of their assigned amount and
submissions of information.

If a host Party does not meet all, but only a limited set of eligibility requirements,
verification of emission reductions or enhancements of removals as being additional has
to be done through the verification procedure under the Joint Implementation
Supervisory Committee (JISC). This is known as the “Track 2” procedure.

Under this “Track 2” procedure, an independent entity accredited by the JISC has to
determine whether the relevant requirements have been met before the host Party can
issue and transfer ERUs. A host Party which meets all the eligibility requirements may
at any time choose to use the verification procedure under the JISC (Track 2 procedure).

Hence, where a host Party does not meet all of the eligibility requirements, "Track II"
has to be applied. Otherwise, it has the choice between "Track I" and "Track II".

If a host country meets all the eligibility requirements and qualifies for Track I, it is
allowed to set its own national guidelines and procedures for the approval of JI projects,
verification, and transaction of emission reduction units (ERUs).

If a host country does not meet all the eligibility requirements and therefore follows
Track II, the host country must follow the international rules for JI project approval and
verification of ERUs and be supervised by the JI Supervisory Committee (JISC).

The role of the JISC is to establish the rules of procedures for JI including the
elaboration of standards and procedures for the accreditation of independent entities,
and the accreditation of independent entities. These accredited independent entities
(AIE) are required to undertake third party verification of a JI project under Track II.
Track I guidelines are therefore more flexible than Track II because host countries can
decide on the methodologies themselves without the involvement of the JISC. However,
Track I JI requires a stronger capacity of the host country government and more
elaborate technical requirements for baseline setting. Another important provision of
the Marrakech Accords stipulates that JI projects may begin as of the year 2000, but can
only generate ERUs beginning in 2008.

Joint Implementation Supervisory Committee (JISC)

The Conference of the Parties serving as the meeting of the Parties to the Kyoto Protocol
(COP/MOP) shall provide guidance regarding the implementation of Article 6 and
exercise authority over the Article 6 Supervisory Committee.

The Joint Implementation Supervisory Committee (JISC), under the authority and
guidance of the Conference of the Parties serving as the meeting of the Parties to the

60
Kyoto Protocol, inter alia, supervises the verification procedure defined in paragraphs
30-45 of the JI guidelines. At its first meeting, the JISC adopted draft rules of procedure
and applied them provisionally until adoption by the CMP at its second session.

The JI Supervisory Committee shall supervise, inter alia, the verification of ERUs
generated by Article 6 project activities, and be responsible for:

(a) Reporting on its activities to each session of the COP/MOP;

(b) The accreditation of independent entities in accordance with specified standards and
procedures
(c) The review of standards and procedures for the accreditation of independent entities
giving consideration to relevant work of the Executive Board of the clean development
mechanism (CDM) and, as appropriate, making recommendations to the COP/MOP on
revisions to these standards and procedures;
(d) The review and revision of reporting guidelines and criteria for baselines and
monitoring
in appendix B below, for consideration by the COP/MOP, giving consideration to
relevant work of the Executive Board of the CDM, as appropriate;
(e) The elaboration of the Article 6 project design document, for consideration by the
COP/MOP, taking into consideration the annex on modalities and procedures for a
clean development mechanism and giving consideration to relevant work of the
Executive Board of the CDM, as appropriate;
(f) The review procedures set out in the Verification Procedure;
(g) The elaboration of any rules of procedure additional to those contained in the annex,
for consideration by the COP/MOP.

Accredited Independent Entities (AIEs)

According to paragraphs 3 (b) and (c) of the JI guidelines the Joint Implementation
Supervisory Committee (JISC) shall be responsible for the "accreditation of independent
entities in accordance with standards and procedures contained in appendix A", as well
as the "review of standards and procedures for the accreditation of independent entities
in appendix A... , giving consideration to relevant work of the Executive Board of the
clean development mechanism (CDM) and, as appropriate, making recommendations
to the CMP on revisions to these standards and procedures".

Appendix A of the JI guidelines defines standards and procedures for the accreditation
of independent entities.

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Text of APPENDIX A of the JI GUIDELINES
Standards and procedures for the accreditation of independent entities

1. An independent entity shall:

(a) Be a legal entity (either a domestic legal entity or an international organization) and
provide documentation of this status;
(b) Employ a sufficient number of persons having the necessary competence to perform
all
necessary functions relevant to the verification of emission reduction units (ERUs)
generated by Article 6 projects relating to the type, range and volume of work
performed,
under a responsible senior executive;
(c) Have the financial stability, insurance coverage and resources required for its
activities;
(d) Have sufficient arrangements to cover legal and financial liabilities arising from its
activities;
(e) Have documented internal procedures for carrying out its functions including, inter
alia,
procedures for the allocation of responsibilities within the organization and for
handling
complaints. These procedures shall be made publicly available;
(f) Have the necessary expertise to carry out the functions specified in this and relevant
decisions by the Conference of the Parties serving as the meeting of the Parties to the
Kyoto Protocol (COP/MOP), and, in particular, have sufficient knowledge and
understanding of:
(i) The guidelines for the implementation of Article 6 of the Kyoto Protocol, and
relevant decisions of the COP/MOP and of the Article 6 Supervisory Committee;
(ii) Environmental issues relevant to the verification of Article 6 projects;
(iii) The technical aspects of Article 6 activities relevant to environmental issues,
including expertise in the setting of baselines and monitoring of emissions and
other environmental impacts;
(iv) Relevant environmental auditing requirements and methodologies;
(v) Methodologies for the accounting of anthropogenic emissions by sources and/or
anthropogenic removals by sinks;
(g) Have a management structure that has overall responsibility for performance and
implementation of the entity’s functions, including quality assurance procedures, and
all
relevant decisions relating to verification. The applicant independent entity shall make
available:
(i) The names, qualifications, experience and terms of reference of the senior
executive, board members, senior officers and other relevant personnel;
(ii) An organization chart showing lines of authority, responsibility and allocation of
functions stemming from the senior executive;

62
(iii) Its quality assurance policy and procedures;
(iv) Administrative procedures, including document control;
(v) Its policy and procedures for the recruitment and training of independent entity
personnel, for ensuring their competence for all necessary functions and for
monitoring their performance;
(vi) Its procedures for handling complaints, appeals and disputes;
(h) Not have pending any judicial process for malpractice, fraud and/or other activity
incompatible with its functions as an accredited independent entity.

2. An applicant independent entity shall meet the following operational requirements:

(a) Work in a credible, independent, non-discriminatory and transparent manner,
complying with applicable national law and meeting, in particular, the following
requirements:
(i) An applicant independent entity shall have a documented structure, which
safeguards impartiality, including provisions to ensure the impartiality of its operations
(ii) If it is part of a larger organization, and where parts of that organization are, or may
become, involved in the identification, development or financing of any Article 6
project, the applicant independent entity shall:
− Make a declaration of all the organization’s actual and potential Article 6 activities;
− Clearly define the links with other parts of the organization, demonstrating that no
conflicts of interest exist;
− Demonstrate that no actual or potential conflict of interest exists between its functions
as an accredited independent entity and any other functions that it may have, and
demonstrate how business is managed to minimize any identified risk to impartiality.
The demonstration shall
cover all potential sources of conflict of interest, whether they arise from within the
applicant independent entity or from the activities of related bodies;
− Demonstrate that it, together with its senior executive and staff, is not involved in any
commercial, financial or other processes which might influence its judgement or
endanger trust in its independence of judgement and integrity in relation to its
activities, and that it complies
with any rules applicable in this respect;
(b) Have adequate arrangements to safeguard confidentiality of the information
obtained
from Article 6 project participants in accordance with provisions contained in the
present
annex on guidelines for the implementation of Article 6.

Verification procedure under Supervisory Committee

The verification procedure under the Article 6 Supervisory Committee is the

determination by an accredited independent entity, of whether a project and the

63
ensuing reductions of anthropogenic emissions by sources or enhancements of
anthropogenic removals by sinks meet the relevant. The following processes are
involved in it.

1. Submission of PDD
The project participants must submit to an accredited independent entity a project
design document that contains all information needed for the determination of whether
the project:
¾ Has been approved by the Parties involved;
¾ Would result in a reduction of anthropogenic emissions by sources or an
enhancement of anthropogenic removals by sinks that is additional to any that
would otherwise occur
¾ Has an appropriate baseline and monitoring plan

2. Validation by AIE
The accredited independent entity then makes the project design document publicly
available through the secretariat, subject to certain confidentiality provisions and
receives comments from Parties, stakeholders and UNFCCC accredited observers on the
project design document and any supporting information for 30 days from the date the
project design document is made publicly available.
The accredited independent entity determines whether:
¾ The project has been approved by the Parties involved;
¾ The project would result in a reduction of anthropogenic emissions by sources or
an enhancement of anthropogenic removals by sinks that is additional to any
that would otherwise occur
¾ The project has an appropriate baseline and monitoring
¾ Project participants have submitted to the accredited independent entity
documentation on the analysis of the environmental impacts of the project
activity, including transboundary impacts, in accordance with procedures as
determined by the host Party, and, if those impacts are considered significant by
the project participants or the host Party, have undertaken an environmental
impact assessment.

The accredited independent entity shall make its determination publicly available
through the secretariat, together with an explanation of its reasons, including a
summary of comments received and a report of how due account was taken of these.
The determination regarding a project design document shall be deemed final 45 days
after the date on which the determination is made public, unless a Party involved in the
project or three of the members of the JI Supervisory Committee request a review by
the JI Supervisory Committee. If such a review is requested, the JI Supervisory
Committee shall finalize the review as soon as possible, but no later than six months or
at the second meeting following the request for review. The JI Supervisory Committee

64
shall communicate its decision on the determination and the reasons for it to the project
participants and the public. Its decision shall be final.

3. Verification of Project by AIE

Project participants submits to an accredited independent entity a report in accordance

with the monitoring plan on reductions in anthropogenic emissions by sources or
enhancements of anthropogenic removals by sinks that have already occurred. The
report is made publicly available. The accredited independent entity, upon receipt of a
report, make a determination of the reductions in anthropogenic emissions by sources
or enhancements of anthropogenic removals by sinks reported by project participants
provided that they were monitored and calculated in accordance guidelines. Then it
makes its determination publicly available through the secretariat, together with an
explanation of its reasons. This determination is deemed final 15 days after the date on
which it is made public, unless a Party involved in the project or three of the members
of the JI Supervisory Committee request a review by the JI Supervisory Committee. If
such a review is requested, the JISC:
¾ At its next meeting or no later than 30 days after the formal request for the
review decides on its course of action. If it decides that the request has merit, it
performs a review;
¾ Completes its review within 30 days following its decision to perform the review;
¾ Informs the project participants of the outcome of the review, and make public
its decision and the reasons for it.

4. Confidentiality of Report
Information obtained from project participants marked as proprietary or confidential
are not to be disclosed without the written consent of the provider of the information,
except as required by applicable national law of the host Party. Information used to
determine whether reductions in anthropogenic emissions by sources or enhancements
of anthropogenic removals by sinks are additional, to describe the baseline
methodology and its application, and to support an environmental impact assessment
cannot be considered as proprietary or confidential.

5. Commitment Period Reserve

Any provisions relating to the commitment period reserve or other limitations to
transfers under
Article 17 does not apply to transfers by a Party of ERUs issued into its national registry
that were verified in accordance with the verification procedure under the JISC.

CLEAN DEVELOPMENT MECHANISM

65
Clean Development Mechanism (CDM) is one of the flexible mechanisms following the
Kyoto Protocol. Article 12 of this protocol states all the regulating framework of the
CDM. The CDM offers industrialized countries the possibility to engage in
economically and environmentally competitive emission reduction projects in
developing countries (the Non-Annexure I countries). Through the CDM, certified
emission reductions (CERs) will be generated. These certified emission reduction (CER)
credits, each equivalent to one tonne of CO2, can be can be traded and sold, and used
by industrialized countries for the purpose of being counted towards meeting Kyoto
targets. Projects that will be implemented through the CDM have to fulfill additional
criteria that will be defined by a national framework of the host countries (developing
countries, where the project will be implemented). A CDM project has a pre-defined
project-cycle that was defined by the UNFCCC, the official executive institution
concerning these questions.

India is seen as one of the Non-Annex I countries offering the largest potential for CDM
development, besides China and Brazil.

However, operational since the beginning of 2006, the CDM mechanism has already
registered more than 1,000 projects and is anticipated to produce CERs amounting to
more than 2.7 billion tonnes of CO2 equivalent in the first commitment period of the
Kyoto Protocol, 2008–2012.

The mechanism is seen by many as a trailblazer. It is the first global, environmental

investment and credit scheme of its kind, providing a standardized emissions offset
instrument, CERs.

Current Scenario of CDM

India could emerge as one of the largest beneficiaries accounting for 25 per cent of the
total world carbon trade. India is considered one of the largest beneficiaries in carbon
credit trade accounting for about $5bn.
Some Facts:
• CDM projects in the pipeline are > 4200 as on 23.7.2009, which are expected to
generate > 2,900,000,000 CERs until end of 2012 subject to the assumption that
there is No renewal of crediting periods
• Out of the approx. 4200 projects 1740 are registered which are expected to
generate > 1,630,000,000 CERs until end of 2012 subject to the assumption that
there is No renewal of crediting periods.
• India is the largest supplier of CERs after China.
• As on 23rd July 2009, 446 out of total 1740 projects registered by the CDM
Executive Board are from India, which is next only to China with 594 projects.

66
 • Expected Average Annual CERs from registered projects by India as on 23.7.2009
is 11.62%
• As on 24.07.2009, India has issued 68,812,951 CERs out of the total 314,550,482
CERs issued globally amounting to an average of 21.88%.
• The National CDM Authority (NCDMA) in India has accorded Host Country
Approval to 1226 projects facilitating an investment of more than Rs.151,397
crores
• Projects accorded approval are in the sectors of energy efficiency, fuel switching,
industrial processes, municipal solid waste and renewable energy.
• If all the 1226 projects approved by NCDMA get registered by the CDM
Executive Board, they have the potential to generate 573 million Certified
Emission Reductions (CERs) by the year 2012. At a conservative price of US $ 10
per CER, it corresponds to an overall inflow of approximately US $ 5.73 billion in
the country by the year 2012.

Certified Emission Reduction

Certified Emission Reductions (CERs) are climate credits (or carbon credits) issued by
the Clean Development Mechanism (CDM) Executive Board for emission reductions
achieved by CDM projects and verified by a Designated Operational Entity (DOE)
under the rules of the Kyoto Protocol. CERs can be used by Annex 1 countries in order
to comply with their emission limitation targets or by operators of installations covered
by the European Union Emission Trading Scheme (EU ETS) in order to comply with
their obligations to surrender EU Allowances, CERs or Emission Reduction Units
(ERUs) for the CO2 emissions of their installations. CERs can be held by governmental
and private entities on electronic accounts. CERs are split into long-term (lCER) or
temporary (tCER), depending on the likely duration of their benefit. At present, most of
the approved CERs are recorded in CDM Registry accounts only. It is only when the
CER is actually sitting in an operator's trading account that its value can be monetized
through being traded. The UNFCCC's International Transaction Log has already
validated and transferred CERs into the accounts of some national climate registries,
although European operators are waiting for the European Commission to facilitate the
transfer of their units into the registries of their Member States.

CDM Projects

The Clean Development Mechanism allows emission-reduction (or emission removal)

projects in developing countries to earn certified emission reduction (CER) credits, each

67
equivalent to one tonne of CO2. These CERs can be traded and sold, and used by
industrialized countries to a meet a part of their emission reduction targets under the
Kyoto Protocol.

The mechanism stimulates sustainable development and emission reductions, while

giving industrialized countries some flexibility in how they meet their emission
reduction limitation targets. While investors profit from CDM projects by obtaining
reductions at costs lower than in their own countries, the gains to the developing
country host parties are in the form of finance, technology, and sustainable
development benefits.

The basic rules for the functioning of the CDM were agreed on at the seventh
Conference of Parties (COP-7) to the UNFCCC held in Marrakesh, Morocco in October-
November 2001. Projects starting in the year 2000 are eligible to earn CERs if they lead
to "real, measurable, and long-term" GHG reductions, which are additional to any that
would occur in the absence of the CDM project. This includes afforestation and
reforestation projects, which lead to the sequestration of carbon dioxide.

At COP-7, it was decided that the following types of projects would qualify for fast-
track approval procedures:
• Renewable energy projects with output capacity up to 15 MW
• Energy efficiency improvement projects which reduce energy consumption on
the supply and/or demand side by up to 15 GWh annually
• Other project activities that both reduce emissions by sources and directly emit
less than 15 kt CO2 equivalent annually.

The projects must qualify through a rigorous and public registration and issuance
process designed to ensure real, measurable and verifiable emission reductions that are
additional to what would have occurred without the project.

The mechanism is overseen by the CDM Executive Board, answerable ultimately to the
countries that have ratified the Kyoto Protocol. The CDM Executive Board supervises
the CDM, under the authority and guidance of the Conference of the Parties serving as
the meeting of the Parties to the Kyoto Protocol (CMP)

In order to be considered for registration, a project must first be approved by the

Designated National Authorities (DNA) of the Host country where the project is being
set up.

The Designated National Authority (DNA) in India is the NCDMA:-

National Clean Development Mechanism (CDM) Authority,
Ministry of Environment and Forests

68
Member Secretary ,
115, Paryavaran Bhawan,CGO Complex,Lodhi Road, New Delhi, India
Director (Climate Change) Phone: (91-11) 2436 2252 Fax: (91-11) 2436 2252

The projects which would be eligible to be set up as CDM projects should lead to
reductions of greenhouse gases (CO2, CH4, N2O, HFC, PFC and/or SF6), for example:
• Renewable energy projects, such as: wind, solar, geothermal, (clean) biomass and
hydro energy.
• Energy efficiency improvement projects.
• Transportation improvement projects.
• Projects concerning recovery and utilisation of methane, for example from waste
landfills or coal mines.
• Projects concerning fossil fuel switching to less carbon-intensive sources.

Eligibility Criteria for CDM Project Activity

The Clean Development Mechanism allows industrialized nations to gain emission

offsets through investing in project activities in non-industrialized nations. The purpose
is both to assist in the sustainable development of non-industrialized nations and to
assist industrialized nations in meeting their targets.
CDM Mechanism grants project-based emission reductions. Project-Based Emission
Reductions are Emission reductions that occur from projects pursuant to JI or CDM (as
opposed to “emissions trading” or transfer of assigned amount units under Article 17 of
the Kyoto Protocol).

CDM Project requirements:

1. The CDM Project must promote sustainable development as defined by host
countries
2. Emission reductions must be:
a. Real
b. Measurable
c. Additional
3. Funding for CDM must not divert funds from existing government development
programs

CDM Projects have to satisfy the “additionality” criteria, which means – “ The emission
reductions of the proposed project must be additional to any that would occur in
absence of the project”.

69
Additionality: According to the Kyoto Protocol, gas emission reductions generated by
Clean Development Mechanism and Joint Implementation project activities must be
additional to those that otherwise would occur. Additionality is established when there
is a positive difference between the emissions that occur in the baseline scenario, and
the emissions that occur in the proposed project.

The project proposal should establish the following in order to qualify for consideration
as CDM project activity:

• Emission Additionality: The project should lead to real, measurable and long
term GHG mitigation. The additional GHG reductions are to be calculated with
reference to a baseline
• Financial Additionality: The procurement of Certified Emission Reduction
(CERs) should not be from Official Development Assistance (ODA)

There are other sustainable development indicators which is the prerogative of the
host Party to confirm whether a clean development mechanism project activity
assists it in achieving sustainable development. The CDM projects should also be
oriented towards improving the quality of life of the poor from the environmental
standpoint. Following aspects should be considered while designing CDM project
activity:

• Social well being: The CDM project activity should lead to alleviation of
poverty by generating additional employment, removal of social disparities
and contribution to provision of basic amenities to people leading to
improvement in quality of life of people.
• Economic well being: The CDM project activity should bring in additional
investment consistent with the needs of the people
• Environmental well being: This should include a discussion of impact of the
project activity on resource sustainability and resource degradation, if any,
due to proposed activity; bio-diversity friendliness; impact on human health;
reduction of levels of pollution in general
• Technological well being: The CDM project activity should lead to transfer
of environmentally safe and sound technologies that are comparable to best
practices in order to assist in upgradation of the technological base. The
transfer of technology can be within the country as well from other
developing countries also

Eligible Host Countries for CDM Projects

70
CDM projects are possible in countries that (1) have ratified the Kyoto Protocol, (2) have
satisfactorily established the amount to which the country must reduce its emissions
over the 2008-2012 commitment period, (3) have in place its national system for
estimating emissions and removals, (4) have in place a national registry, (5) have
submitted its most recent required inventory (the inventory must also be assessed for
quality) and (6) submit any supplementary information required to show that it is in
compliance with its emissions commitments.

Eligible CDM host countries must have designated a national authority (DNA) for the
CDM. The DNA is additional to the UNFCCC Focal Point, although in reality they may
be the same organisation. The DNA is responsible for approval of hosted CDM projects
and for setting national guidelines for CDM implementation. The approval of CDM
projects are done in the form of Letter of Approvals (LoAs), which include a statement
for voluntary participation in CDM and a declaration confirming the project’s
contribution to sustainable development in the host country.

The CDM Project Cycle

CDM project cycle

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Full CDM Cycle Time Frame:

Legend
PP - Project Proponent
DOE - Designated Operational
Entities
AE - Applicant Entity
EB - Executive Board
COP/MOP - Conference of the Parties
and Meetings serving as
the meeting of the Parties
to the Kyoto Protocol

72
 CER - Certified Emission
Reductions
DNA - Designated National
Authority

1. Registration Process = TOTAL 8 –12 Months [Existing Methodology], 24 Months [for

New Methodology]
• Project Design Document: Large scale - 3 to 4 months, Small scale PDD : 1 to 2
months
• Host country approval : 2 to 4 months
• Validation
- Adopt an approved methodology : about 2 months
- Propose a new methodology : 6 to 12 months
• Registration
- Large scale PDD: 8 weeks after submission unless revision required.
- Small scale PDD: 4 weeks after submission unless revision required.

2. Accrual Process Accrual Process = TOTAL about 14 Months

Data Generation – e.g Duration maybe for 1 year
Certification –About 1 Month
International Trading & Final Receipt of funds–About 1 Month

Steps in Development of CDM project

In India, clearance for a CDM project is granted by the National CDM Authority
(NCDMA)and is spearheaded by the Union Ministry of Environment and Forests.

Irrespective of whether CDM projects are initiated by the private sector, non-
government organisations or government agencies, their development will involve a
number of essential steps. This section outlines these requirements, from a project
developer's perspective.

1. Identify project and develop project concept note

The process of developing a CDM project starts by identifying an idea that will reduce
GHG emissions. The initial steps require the project proponent to examine the
emissions reduction resulting from the project and to ascertain if it contributes to the
development priorities of the nation. This will need to take into account any national or
regional requirements for project eligibility. Project developers should note that
potential investors and verification bodies will also operate their own screening

73
procedures. It is important that local stakeholders' needs and aspirations are considered
at this early stage.

A Project Concept Note (PCN) needs to be submitted. The National CDM Authority in
India has specified format for the project Concept note. PCN is a brief description of a
project prepared by the project proponent entity or intermediary.

2. Project Development and Project Design Document.

Each project plan should include details of how the greenhouse gas benefits are
calculated and how they will be monitored over time. In most cases the quantification
of benefits will begin prior to submission to the National CDM Authority.
Quantification involves the following steps:

• Definition of the boundaries of the project - this will result in a list of all the processes
that result in uptake or release of carbon (and other greenhouse gases covered by
the Kyoto Protocol) as a result of the project activities.

• Description of the baseline and additionality - the effect of the project is measured
relative to a 'baseline scenario' that represents what would happen in the absence
of the project. Additionality is the extent to which the activities promoted by the
project (e.g. the planting of trees) can only have happened with the project's
specific intervention

• Quantification of baseline emissions and crediting period - the emissions that would
occur with the baseline scenario, and the number of years over which the project
may take credit, will be defined using one of the procedures approved by the
CDM Executive Board.

The project proposal must clearly and transparently describe methodology of

determination of baseline. It should confirm to following:

• Baselines should be precise, transparent, comparable and workable;

• Should avoid overestimation;

• The methodology for determination of baseline should be homogeneous and

reliable;

• Potential errors should be indicated;

• System boundaries of baselines should be established;

74
 • Interval between updates of baselines should be clearly described;

• Role of externalities should be brought out (social, economic and environmental);

• Should include historic emission data-sets wherever available;

• Lifetime of project cycle should be clearly mentioned;

The project proponent could develop a new methodology for its project activity or
could use one of the approved methodologies by the CDM Executive Board. For small
scale CDM projects, the simplified procedures can be used by the project proponent.
The project proposal should indicate the formulae used for calculating GHG offsets in
the project and baseline scenario. Leakage, if any, within or outside the project
boundary, should be clearly described. Determination of alternative project, which
would have come up in absence of proposed CDM project activity should also be
described in the project proposal.

• The emissions and uptake of carbon by the project - in the case of afforestation and
reforestation projects, the uptake of carbon will be calculated using forestry
growth data. The net benefit of the project is then calculated by subtracting the
emissions that would have occurred in the baseline scenario.

• Adjustment for leakage and risk - The amount of benefit for which a project will be
allowed to take credit may need to be adjusted to take account of leakage and
risks. Creating a reserve or buffer of carbon offsets is one method that has been
proposed for dealing with project risks. The best approach to managing leakage
is to avoid it in the first place. This is best done at the project design stage,
notably by:
o Consultation with local stakeholders;
o Integration of project design with local, regional and/or national priorities
and legislation;
o Participation of landowners or managers in the project, avoiding their
exclusion or displacement;
o Clear and fair benefit sharing through the project;
o Awareness building of carbon project needs;
o Effective monitoring of project activities and likely sources of leakage.

The results and methodologies used in the quantification of the greenhouse gas benefits
will need to be presented in a Project Design Document.

Project Design Document (PDD) is a project specific document required under the
CDM rules which will enable the Operational Entity to determine whether the project
(i) has been approved by the parties involved in a project, (ii) would result in reductions

75
of greenhouse gas emissions that are additional, (iii) has an appropriate baseline and
monitoring plan.

A report summarising comments by local stakeholders and how these are taken into
account in the project design must also be included in this document.

Baseline and Methodologies

The baseline is the basis for calculation of the emission reductions generated by a CDM
project.
The baseline-or reference scenario-of a CDM project comprises the current level and the
evolution of GHG emissions which might occur if the CDM activity were not
implemented. This scenario is used for calculating emission reductions (carbon credits)
to be generated by the project.
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 ameliorate this
potential problem.
Project baselines must be established using one of the existing methodologies approved
by the CDM Executive Board, or a new methodology. A new methodology needs to be
approved by the CDM Executive Board before validation can take place.

Methodologies rely on one of the following three underlying approaches, or on a

combination of them:
• Existing actual or historical emissions, as applicable.
• Emissions from a technology that represents an economically attractive course of
action, taking into account barriers to investment.
• The average emissions of similar project activities undertaken in the previous
five years in similar social, economic, environmental and technological
circumstances, and whose performance is among the top 20% of their category.

3. Host country approval

Any project wishing to participate in the CDM must obtain approval from the host
government. A pro-active government National Authority for CDM will facilitate this.

76
In addition, the host government should determine whether or not the project will lead
to sustainable development benefits.

The National CDM Authority is a single window clearance for CDM projects in the
country. The project proponents are required to submit one soft copy of Project Concept
Note (PCN) and Project Design Document (PDD) through online form and 20
hardcopies each of PCN and PDD along with two CDs containing all the information in
each of them.

The project report and CDs should be forwarded through covering letter signed by the
project sponsors. The project report submitted should be properly bound. The National
CDM Authority examines the documents and if there are any preliminary queries the
same are asked from the project proponents. The project proposals are then put up for
consideration by the National CDM Authority. The project proponent and his
consultants are normally given about 10-15 days notice to come to the Authority
meeting and give a brief power point presentation regarding their CDM project
proposals. Members seek clarifications during the presentation and in case the members
feel that some additional clarifications or information is required from the project
proponent the same is informed to the presenter. Once the members of Authority are
satisfied, the Host Country Approval (HCA) is issued by the Member-Secretary of the
National CDM Authority.

4. Validation of the project

A CDM project must be checked by two processes – Validation and Verification.

Validation is done once before initial project approval. Verification is done periodically
after the project has been approved or registered.

Before projects can produce emission reductions that will be recognised by the CDM,
they must be 'validated' by one of the independent companies approved by the CDM
Executive Board. The project developer must submit the Project Design Document and
any related documentation to the ‘Designated Operational Entity'. The process will
involve detailed scrutiny of the institutional capacity of the project stakeholders, the
evidence underlying the calculations of carbon benefits, the systems to be used for
monitoring, and of course the relevant government approvals. During this period, the
Project Design Document will be made publicly available for comments.

A Designated Operational Entity (DOE) is an organization accredited provisionally by

the CDM Executive Board (until confirmed by the meeting of the Parties to the Kyoto
Protocol) that checks whether projects are fulfilling CDM criteria. There are currently 11
DOE’s globally, and 5 represented in India.

77
A Designated Operational Entity under the CDM is either a domestic legal entity or an
international organization accredited and designated, on a provisional basis until
confirmed by the CMP, by the Executive Board (EB).

It has two key functions:

1. It validates and subsequently requests registration of a proposed CDM project

activity which will be considered valid after 8 weeks if no request for review was made.

2. It verifies emission reduction of a registered CDM project activity, certifies as

appropriate and requests the Board to issue Certified Emission Reductions accordingly.
The issuance will be considered final 15 days after the request is made unless a request
of review is made

Designated Operational Entities in India:

• TUV Suddeutschland India (www.tun-sud.in/CDM.asp)

• Det Norske Veritas
(www.dnv.com/services/certification/climate_change/index.asp)
(email:climatechangr@dnv.com))
• SGS United Kingdom Limited (www.sgs.com)
• tüv Rheinland India (www.tuv.com)( E-Mail: info-ind@ind.tuv.com)
• BVQI(Bureau Veritas Quality International) (www.bureauveritas.co.in)

Validation
Based on the project design document (PDD), the DOE will evaluate and validate the
proposed CDM project, confirming :

1 - Voluntary participation of parties

2 - Comments by stakeholders have been invited

3 – Project participants have submitted documentation on environmental impacts to the

DOE

4 – The project will result in reduction in greenhouse gas that are additional

5 – A methodology has been adopted in accordance with CDM rules

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6 – Provisions for monitoring, verification and reporting are in accordance with CDM
rules

7 - The project complies with all other CDM rules

The DOE then issues a validation report, and requests the CDM Executive Board for
registration of the project based on this report.

5. Registration with the CDM

The validation report and Project Design Document will be submitted to the CDM
Executive Board by the operational entity. Registration will be finalised after a
maximum of 8 weeks from receipt, unless a review is requested. The detailed procedure
for registration is stated below:

1. In accordance with paragraph 40 (f) of the CDM modalities and procedures (CDM
M&P), the request for registration of a proposed CDM project activity shall be in the
form of a validation report which includes the project design document, the written
approval of the host Party and an explanation of how the DOE has taken due account of
public comments received on the CDM-PDD.

2. A designated operational entity shall submit its validation report using the “CDM
project activity registration and validation report form” (F-CDM-REG) (attached to
these procedures) to request for registration of a proposed project activity.

3. In order to ensure transparency and efficiency of the registration process:

(a) A request for registration will only be processed after the secretariat has determined
that all information and documentation requested in the registration form has been
provided by the DOE;

(b) The date of receipt of a request for registration is the date when the deposit of the
registration fee indicated in the registration form has been received by the secretariat;

(c) A request for registration” (as defined in paragraph 40 (f) of the CDM modalities and
procedures) shall be made publicly available through the UNFCCC CDM web site
(either by a link to the DOE web site or by being directly posted) for a period of eight (8)
weeks. The secretariat shall announce a request for registration of a proposed CDM
project activity on the UNFCCC CDM web site and in the CDM news facility. The
announcement shall specify where the request for registration can be found, the name
of the proposed CDM project activity and the first and last day of the eight-week
period. The secretariat shall notify the DOE requesting a registration when and where
the request for registration is posted.

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(d) Unless there is a request for review, a request for registration shall, after eight
weeks, bemarked in the UNFCC CDM web site as “registration completed” and the
corresponding proposed CDMproject activity and related public documents
recorded/displayed as registered.

Registration Fee to be paid:

A registration fee is payable by project proponents in order to have a project considered

for registration. The registration fee is an upfront payment of the estimated amount
due for the Administration Share of Proceeds for the first year of the project. The
amount paid as a registration fee is deducted from the Administration Share of
Proceeds that is due at the time of the issuance of the first year's certified emission
reductions (CERs). The registration fee is calculated using the following scale:

a. USD 0.10 per certified emission reduction issued for the first 15,000 tonnes of
CO2 equivalent for which issuance is requested in a given calendar year;
b. USD 0.20 per certified emission reduction issued for any amount in excess of
15,000 tonnes of CO2 equivalent for which issuance is requested in a given
calendar year (EB 37, Annex 20, paragraph 1).

The fee that is actually payable is based on an average of the estimated annual
quantities of CERs that will be generated over the crediting period, as set out in the
PDD. The revised registration fee shall be the share of proceeds applied to the expected
average annual emission reduction for the project activity over its crediting period.
However, the maximum registration fee payable is capped at USD 350,000 and no
registration fee has to be paid for CDM project activities with expected average annual
emission reduction over the crediting period below 15,000 t CO2-equivalent.

6. Project implementation and monitoring

Registered projects, and those that have entered the implementation phase, will be
required to maintain internal monitoring systems to demonstrate they are achieving the
emission reductions specified in the Project Design Document

7. Verification and certification

Once the project is being implemented, it will undergo additional scrutiny by the
operational entities in the form of verification and certification. The verification report is
then made available to the CDM Executive Board and the general public, after which

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the Certified Emission Reductions will be issued to the project developer within 15
days, unless the Executive Board requests a review.

Registration Procedure for Small Scale CDM Projects

Projects registered as small-scale CDM projects are entitled to use the simplified
modalities and procedures for small-scale CDM project activities set out in 4/CMP.1,
Annex II. To qualify as small scale a project activity must meet the eligibility
requirements. The proposed project activity shall:

1. Meet the eligibility criteria for small-scale CDM project activities set out in
paragraph 6 (c) of decision 17/CP.7. There are three types of projects referred to
in paragraph 6(c) of decision 17/CP.7. The updated small-scale project types are
as follows:

a. Type (i): renewable energy project activities with a maximum output capacity
equivalent to up to 15 megawatts (or an appropriate equivalent);
b. Type (ii): energy efficiency improvement project activities which reduce
energy consumption, on the supply and/or demand side, by up to the
equivalent of 60 gigawatt hours per year; and
c. Type (iii): other project activities that both reduce anthropogenic emissions by
sources and directly emit less than 60 kilotonnes of carbon dioxide equivalent
annually (17/CP.7, paragraph 6(c) as amended by 1/CMP.2, paragraph 28).
2. Conform to one of the project categories in appendix B to Annex II. This list shall
not preclude other types of small-scale CDM project activities. If a proposed
small-scale CDM project activity does not fall into any of the categories in
appendix B, the project participants may submit a request to the Executive Board
for approval of a simplified baseline and/or monitoring plan developed. The
following table, showing the 14 project types, is extracted from 4/CMP.1, Annex
II, Appendix B:

Project types Project categories

Type (i): Renewable energy A. Electricity generation by the user/household
projects
B. Mechanical energy for the user/enterprise
C. Thermal energy for the user
D. Electricity generation for a system
Type (ii): Energy efficiency E. Supply-side energy efficiency improvements -
improvement projects transmission and distribution activities

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 F. Supply-side energy efficiency improvements -
generation
G. Demand-side energy efficiency programmes for
specific technologies
H. Energy efficiency and fuel switching measures for
industrial facilities
I. Energy efficiency and fuel switching measures for
buildings
Type (iii): Other project J. Agriculture
activities
K. Switching fossil fuels
L. Emission reductions in the transport sector
M. Methane recovery

These categories are reviewed at least once a year and updated as necessary. Any such
amendments to appendix B will not apply retroactively. Moreover, these three project
types are mutually exclusive - that is, project activities that contain more than one
component must meet the eligibility criteria relevant to each component. It is not
sufficient that a project activity come within the Type (i) limits for its renewable energy
component if it exceeds the Type (iii) limits for its agricultural component. Where a
project activity comprises multiple components of the same type, the combined size of
the components must not exceed the limits set out above:

3. Not be a debundled component of a larger project activity.

Examples of CDM Projects

The CDM projects may vary much in their nature and context, but as the market
develops further the diversity of project types is likely to grow. Examples of projects
are given below, classified in 12 categories:

1. Installations based on renewable energy sources

Utilization of wind, wave/tidal, solar, hydro, biomass or geothermal energy sources in
order to generate electricity or heat. In such projects the emission reductions occur by
substituting electricity and/or heat generated by combustion of fossil fuels with
electricity and/or heat from zero-emission sources.

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2. Fuel switch to lower carbon intensive fuels
If one fossil fuel is substituted with another less carbon intensive fuel this would lead to
emission reductions. An example could be switching from coal to gas-fired power or
heat generation at a heat and power station or in industry.

3. Energy efficiency at supply side of energy systems

The energy industry can mitigate emissions if improving the efficiency of energy
generation and distribution by reducing losses in these processes. Reducing electricity
losses in transmission and distribution grid would lead to a lower consumption of fossil
fuels per kWh electricity delivered and thus lower emissions.

4. Energy efficiency at the demand side.

Manufacturing industries can reduce emissions by cutting direct consumption of fossil
fuels such as coal or gas, or indirectly, by minimizing energy and electricity use. These
projects could be best fitted to large heavy industries, such as metallurgical, cement,
glass, etc. Programmes for energy efficiency in buildings could also generate CERs.

5. Combined heat and power projects

By implementing cogeneration projects the waste heat from a conventional power plant
could be utilized for industrial heating processes or supply heat to a district heating
network. If the district heating is based on i.e coal combustion the heat that otherwise
would have been wasted can reduce the consumption of coal, thus reducing GHG
emissions.
Note: Cogeneration is the use of a heat engine or a power station to simultaneously
generate both electricity and useful heat.

6. Chemical Industries
In nitric acid/ammonia production processes, N20 waste gases are often emitted. Given
high GHG potential of nitrous oxide, destroying or catalysing this gas yields a high
volume of CERs. Another example is reducing PFCs emissions as a result of “anode
effect” in smelting of aluminium.

7. Mining and minerals production

Methane is often emitted from coal beds and mines. If it is captured it could be flared or
used for electricity generation, reducing the fugitive emissions that would otherwise
occur. Each ton methane abated could generate 21 CERs.

8. Reduction of methane emissions from waste handling facilities

When municipal solid waste is deposited in land-fills, methane is generated due to
anaerobic decomposition processes. Similar type of processes happens in treatment of
municipal wastewater and wastewater resulting from production of starch. These
methane streams could be collected in order to simply flare or to generate
heat/electricity in addition to reducing methane emissions to the atmosphere.

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9. Fugitive emissions from fuels
This category of projects includes recovery and utilization of gas flared from oils wells
and reduction of fugitive emissions from leaking gas pipelines.

10. Transport
Transport is responsible for approximately 30% of the global GHG emissions. CDM
projects in this sector focus on decreasing the consumption of diesel and petrol by using
more efficient vehicles and utilizing fuels such as bio-gas, bio-ethanol or bio-diesel.

11. Reduction of methane emissions from biomass

In agriculture and timber industry, biomass is often considered as waste and dumped
landfills where the anaerobic decomposition leads to emission of methane. The methane
emissions can be avoided by combusting of the biomass to generate heat and/or
electricity.

12. Other type of projects

Other types of projects are planting of trees (afforestation /reforestation), reducing use
of solvents and destruction of HFCs.

VOLUNTARY CARBON OFFSET MARKET

An emerging global market is developing for "verified emission reductions" (VERs),

emission reductions that are created outside of the standardized procedures and
methodologies for certified emission reductions (CERs) under the Clean Development
Mechanism (CDM) of the Kyoto Protocol. International companies are trading these
VERs.

VERs are non-Kyoto compliant emission reductions. Non-compliance might include

“additionality” or “leakage” criteria, organizations that lack host country approval and
projects that are just too small to meet the criteria that traditionally apply for certified
emission reductions (CERs).

In the absence of approved protocols and procedures for these types of emission
reductions, VERs are now being standardized by several companies and organizations
for use in the voluntary market.

VERs are non compliant reductions, being taken up by a rising number of companies,
mainly as a part of the corporate social responsibility, or for the marketing and
promotional value to their business (‘green image’), or purely out of a desire to establish

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more sustainable practices in the face of global warming. Verified Emissions Reductions
(VERs) are not regulated by the UNFCCC.

A VER project is the voluntary world's equivalent of Certified Emission Reduction

certificates (CERs) offered under the Kyoto Protocol's Clean Development Mechanism.
Like CERs, a VER makes it possible for a company to reduce its greenhouse gas
footprint by funding a carbon-offset project that reduces emissions. Unlike the Kyoto
Market, however, the voluntary market is still struggling to come up with generally
agreed upon standards and practices

Verified or Voluntary Emission Reductions

VERs are commonly understood as tradable emission reductions that have been
generated according to defined standards and requirements other than the Kyoto
Protocol.

VER are a unit of greenhouse gas emission reductions that has been verified by an
independent auditor, but that has not yet undergone the procedures and may not yet
have met the requirements for verification, certification and issuance of CERs (in the
case of the CDM) or ERUs (in the case of JI) under the Kyoto Protocol.

Buyers of VERs assume all carbon-specific policy and regulatory risks (i.e. the risk that
the VERs are not ultimately registered as CERs or ERUs). Buyers therefore tend to pay a
discounted price for VERs, which takes the inherent regulatory risks into account.

Carbon Offset Projects

A “carbon offset” is an emission reduction credit from another organization’s project

that results in less carbon dioxide or other greenhouse gases in the atmosphere than
would otherwise occur. Carbon Offsets are typically measured in tons of CO2
equivalents (or 'CO2e') and are bought and sold through a number of international
brokers, online retailers, and trading platforms.

It is a reduction of one metric ton of greenhouse gas emissions (expressed as a CO2

equivalent, or CO2e) below a baseline or business-as-usual level.

Many types of activities can generate carbon offsets. Renewable energy such as wind
energy, or installations of solar, small hydro, geothermal, and biomass energy can all
create carbon offsets by displacing fossil fuels. Other types of offsets available for sale
on the market include those resulting from energy efficiency projects, methane capture
from landfills or livestock, destruction of potent greenhouse gases such as halocarbons,

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and carbon sequestration projects (through reforestation, or agriculture) that absorb
carbon dioxide from the atmosphere.

Parties Involved in a Carbon Offset Project

Even though the parties involved differ from project to project some general categories
and types of stakeholders are:

1. Project Owner
The operator and owner of the physical installation where the emission reduction
project takes place can be any private person, company or other organisation.

2. Project Developers
A person or organisation with the intention to develop an emission reduction project
could be the project owner, a consultant or specialized services provider.

3. Project Funders
Banks, private equity firms, private investors, non-profit organizations and other
organizations may lend or invest equity to fund a project. Some of the standards have
rules to what kind of funding, aside from the offset revenue, are acceptable for an offset
project.

4. Stakeholders
Stakeholders are individuals and organizations that are directly or indirectly affected by
the emission reduction project. Stakeholders include the parties interested in
developing a specific project (e.g. owner, developer, funder, local population, host
community), parties affected by the project (e.g. local population, host community
environmental and human rights advocates) and national and international authorities.

5. Third Party Auditors

The CDM and many of the voluntary offset standards require a third-party auditor to
validate and verify a project’s climate saving potential and achieved emission
reductions. Under CDM the auditors are called Designated Operational Entities (DOEs).
To minimize conflict of interest, the validating DOE cannot also conduct project
verification.

6. Standards Organisation
In the absence of national and international legislation, standard organizations define a
set of rules and criteria for voluntary emission reduction credits.

7. Brokers and Exchanges

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In the wholesale market, emission offset buyers and sellers can have a transaction
facilitated by brokers or exchanges. Exchanges are usually preferred for frequent trades
or large volumes of products with standardized contracts or products, while brokers
typically arrange transactions for non-standardized products, occasionally traded and
often in small volumes.

8. Trader
Professional emission reduction traders purchase and sell emission reductions by taking
advantage of market price distortions and arbitrage possibilities.

9. Offset Providers
Offset providers act as aggregators and retailers between project developers and
buyers. They provide a convenient way for consumers and businesses to access a
portfolio of project offsets.

10. Final buyers

Individuals and organizations purchase carbon offsets for counterbalancing GHG
emissions. Therefore, the final buyer has no interest in reselling the offset but will
prompt the retirement of the underlying carbon offset.

Voluntary Carbon Offset Market

The voluntary carbon markets function outside of the compliance market. They enable
businesses, governments, NGOs, and individuals to offset their emissions by
purchasing offsets that were created either through CDM or in the voluntary market .
The latter are called VERs (Verified or Voluntary Emissions Reductions). About 17% of
the offsets sold in the voluntary market in 2006 were sourced from CDM projects
(Hamilton, 2007).

Carbon Offsets in the Compliance and Voluntary Markets:

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[Source: Making Sense of the Voluntary Carbon Market: A Comparison of Carbon
Offset Standards; by the Stockholm Environment Institute and Tricorona. March 2008.]

Carbon offsetting is an increasingly popular means of taking action. By paying someone

else to reduce GHG emissions elsewhere, the purchaser of a carbon offset aims to
compensate for – or “offset” – their own emissions.

Carbon offset markets exist both under compliance schemes and as voluntary
programs.
Compliance markets are created and regulated by mandatory regional , national, and
international carbon reduction regimes, such as the Kyoto Protocol and the European
Union’s Emissions Trading Scheme. Voluntary offset markets function outside of the
compliance markets and enable companies and individuals to purchase carbon offsets
on a voluntary basis.

Carbon offset markets have been promoted as an important part of the solution to the
climate crisis because of their economic and environmental efficiency and their
potential to deliver sustainability co-benefits through technology transfer and capacity
building.

The voluntary carbon offset market in particular has been promoted for the following
reasons:

1. Possibility of Broad Participation

The voluntary carbon market enables those in unregulated sectors or countries that
have not ratified Kyoto, such as the US, to offset their emissions.

2. Preparation for Future Participation

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The voluntary carbon market enables companies to gain experience with carbon
inventories, emissions reductions and carbon markets. This may facilitate future
participation in a regulated cap-and-trade system.

3. Innovation and Experimentation

Because the voluntary market is not subject to the same level of oversight, management,
and regulation as the compliance market, project developers are more flexible to
implement projects that might otherwise not be viable (e.g. projects that are too small or
too disaggregated).

4. Corporate Goodwill
Corporations can benefit from the positive public relations associated with the
voluntary reduction of emissions.

5. Voluntary and compliance offset mechanisms have the potential to strengthen climate
policies and address equity concerns.

The voluntary market can help achieve emissions reductions with projects that are too
small for CDM, projects set in countries without a Kyoto target, or reductions that are
ineligible for CDM for formal reasons other than quality (e.g. China CDM requires
major Chinese ownership in project).

Purchasing Carbon Offsets / VERs

As with any purchase, buyers need to choose their offsets carefully, particularly as the
voluntary offset market is largely unregulated.

Issues to consider when purchasing offsets include:

1. Carbon Offset project type.
For example, although quite popular, offsets from tree-planting projects are problematic
for a number of reasons, including their lack of permanence and the fact that these
projects do not address our dependence on fossil fuels. Similarly, offset projects
involving the destruction of halocarbon gases such as HFC-23 have sustained numerous
criticisms, including the fact that they actually result in a perverse incentive (due to the
sheer volume of offsets - and profits - that they generate) for more of the ozone-
depleting gas to be created. The price of offsets from these projects is also so low (due to
the very high global warming potential of the gas) that they tend to flood the market
and squeeze out more sustainable offset projects, like solar and wind.

2. Additionality
An offset project is considered additional if it isn't business as usual. Typically this
means that the project wouldn't have happened without the extra funding from the sale

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of offsets. Additionality is extremely important, as the entire concept of offsetting - i.e.
purchasing greenhouse gas reduction credits from a project elsewhere to neutralize
one's own emissions - is based on the premise that those reductions wouldn't have
happened otherwise. Only by buying offsets that have met additionality criteria can you
be assured that your purchase is resulting in a net benefit for the climate.

3. Validation and verification of the project by reputable third-parties; steps by the

project developer to ensure that each offset is only sold once (e.g. by listing the offsets
on a public registry); and systems in place to control 'leakage', where the creation of a
GHG reduction in one region causes an unintended increase in GHG emissions
somewhere else (for example, protecting a forest in one location could simply shift
logging to a forested area in a new location).

Some questions that potential buyers can ask of offset vendors are:

• Do your offsets result from specific projects?

• Do you use an objective standard to ensure the additionality and quality of the
offsets you sell?
• How do you demonstrate that the projects in your portfolio would not have
happened without the greenhouse gas offset market?
• Have your offsets been validated against a third-party standard by a credible
source?
• Do you sell offsets that will actually accrue in the future? If so, how long into the
future, and can you explain why you need to 'forward sell' the offsets?
• Can you demonstrate that your offsets are not sold to multiple buyers?
• What are you doing to educate your buyers about climate change and the need
for climate change policy?

Because it can be difficult for offset buyers to get clear answers to each of the above
questions, a good way to ensure that your offset purchase is making a positive
contribution to the climate is to purchase offsets that meet recognized standards. Just as
consumers can feel confident when purchasing food products that meet strict third-
party standards for organic agriculture, standards for carbon offsets provide assurance
that certain criteria are met when the offset is developed and sold.

Standards for measurement and recognition of VERs

The voluntary offset market in particular has been criticised for its lack of transparency,

90
quality assurance and third-party standards. To address these shortcomings, over a
dozen voluntary offset standards have been developed in the last few years. Each
standard has a slightly different focus and none has so far managed to establish itself as
the industry standard. Some closely mirror compliance market standards, while others
take a more lenient approach in order to lessen the administrative burden and enable as
many credits as possible to enter the market. Certain standards are limited to particular
project types (e.g. forestry) while others exclude some project types in order to focus on
the social benefits of carbon projects. It is important to note that the vast majority of
voluntary offsets are currently not certified by any third-party standard.

Well-designed standards will help the voluntary market mature and grow

1. Voluntary Carbon Standard

http://www.v-c-s.org

The Voluntary Carbon Standard (VCS), a standard for measurement and

recognition of VERs was established by The Climate Group (TCG), the
International Emissions Trading Association (IETA) and the World Economic
Forum (WEF) in 2006. It created a trusted and tradable voluntary offset credit; the
Voluntary Carbon Unit. (VCU).

The VCS Program provides a robust, new global standard and program for approval
of credible voluntary offsets. It focuses on GHG reduction attributes only and does
not require projects to have additional environmental or social benefits. The VCS
2007 is broadly supported by the carbon offset industry. VCS approved carbon
offsets are registered and traded as Voluntary Carbon Units (VCUs) and represent
emissions reductions of 1 metric tonne of CO2.
VCS offsets must be real (have happened), additional (beyond business-as-usual
activities), measurable, permanent (not temporarily displace emissions),
independently verified and unique (not used more than once to offset emissions).

The purpose is to provide a detailed description of the minimum quality level that
any voluntary emission reduction project needs to satisfy in order for its
reductions to meet the Voluntary Carbon Standard, be recognized as a source of
Voluntary Carbon Units (VCU) and to become eligible for registration into a
VCU Registry. Once registered in a VCU Registry, the VCUs become fundable
and tradable instruments between market participants. In addition, they provide a
guide for certification entities on how to verify compliance of voluntary emission
reduction projects with the Voluntary Carbon Standard. The VCS will initially
reference current CDM accounting and verification standards.

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 2. The Gold Standard
http://www.cdmgoldstandard.org

Founded by the World Wildlife Foundation (WWF), SSN and Helio International, In
2003, the Gold Standard is a non-profit foundation under Swiss Law and funded by
public and private donors. A methodology for voluntary offset projects was launched in
May 2006. The Gold Standard Foundation offers labeling for voluntary offset projects.

Individuals and organisations may choose to buy carbon credits to offset their
greenhouse gas impact, even if they are not bound to do so under the Kyoto Protocol.

The Gold Standard is widely considered to be the highest standard in the world for
carbon offsets. It ensures that key environmental criteria have been met by offset
projects that carry its label. Significantly, only offsets from energy efficiency and
renewable energy projects qualify for the Gold Standard, as these projects encourage a
shift away from fossil fuel use and carry inherently low environmental risks. Tree
planting projects are explicitly excluded by The Gold Standard.

Gold Standard projects must meet very high additionality criteria to ensure that they
contribute to the adoption of additional sustainable energy projects, rather than simply
funding existing projects. The Gold Standard also includes social and environmental
indicators to ensure the offset project contributes to sustainable development goals in
the country where the project is based. All Gold Standard projects have been
independently verified by a third party to ensure integrity.

Currently, The Gold Standard is restricted to offset projects in countries that don't have
emission reduction targets under the Kyoto Protocol, which are primarily developing
countries.

3. American Carbon Registry (formerly known as the GHG Registry) by Environmental

Resources Trust (ERT)

Founded by the Environmental Defense Fund in 1996, Environmental Resources

Trust (ERT) created the world’s first private greenhouse gas emissions registry in
1997, the GHG Registry. The GHG Registry was officially re-launched as the
American Carbon Registry (www.americancarbonregistry.org). This US registry
includes the American Carbon Registry Operating Standard, a corporate
inventory protocol and various industry and project protocols as well as an
upgraded trading platform.

The American Carbon Registry® is designed to:

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• Provide transparency over ownership claims concerning emission reductions
• Support market transactions of verified emission reductions
• Record validated greenhouse gas emissions profiles
• Document the environmental integrity of registered GHG emissions
• American Carbon Registry utilizes ERT’s rigorous screening process
(www.ert.net), which enables cost-effective registration of high quality GHG
inventories and Verified Emission Reductions, denominated in units of metrics
tons and labeled as Emissions Reduction Tons (“ERTs”).

Buyers of verified project-based carbon offsets may use the American Carbon
Registry® to identify and contact potential sellers and to support and document
their purchases. Sellers of verified project-based carbon offsets may use the
American Carbon Registry® to advertise and promote their projects, document
their validity and support the sales process.

4. VER+ Standard by TÜV SÜD

www.tuev-sued.de/climatechange

VER+ is the TÜV SÜD standard for projects targeting at Verified Emission
Reductions. The VER+ closely follows the Kyoto Protocol’s project-based
mechanisms (CDM and JI). The VER+ standard was developed by TÜV SÜD, a
Designated Operational Entity (DOE) for the validation and verification of CDM
projects. It was designed for roject developers who have projects that cannot be
implemented under CDM yet who want to use very imilar procedures as the CDM.
The VER+ was launched n mid 2007.

In principle the criteria for VER+ are in line with those for the Kyoto Protocol
project based mechanisms (JI and CDM), including the requirement on project
additionality proving that the project is not a business as usual scenario. The main
difference to regular JI and CDM activities comprises that VER+ projects are not
brought to registration with UNFCCC and therefore will not be accounted on any
Annex-I-country's Kyoto balance. For projects in developing countries larger
flexibility is provided on the choice of the applied methodologies, which may be
composed according to the guidelines applied for JI projects.

5. Green-e Standard by the Center for Resource Solutions (CRS)

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Green-e Climate is the America’s first certification program for carbon offsets sold to
consumers on the retail market. This consumer-protection program strengthens the
voluntary market by providing credible oversight and transparency to retail
greenhouse gas (GHG) emission reduction products (offsets), from beginning to end.
Consumers purchasing Green-e Climate Certified offsets have clear information
about the projects their GHG reductions are sourced from, and are guaranteed that
no one else can claim their offset. The program verifies that a seller's supply of
offsets equals their sales, that GHG reductions are independently certified, and that
consumer disclosures are accurate.

The Center for Resource Solutions initiated a greenhouse gas product certification
program in 2006, followed by comprehensive stakeholder input. The program is
designed to certify carbon offsets that are created for projects that already have
accounting and verification systems in place. The Green-e program provides
consumer protection by providing an enforcement mechanism, requiring
disclosure of offset marketer information to buyers.

6. The GHG CleanProjects™ Registry by the Canadian Standards Association (CSA)

The Canadian Standards Association (CSA) designed The GHG CleanProjects™

Registry. The GHG CleanProjects™ Registry’s focused mandate relates to the
listing and delisting of greenhouse gas projects and resulting verified emission
reductions and removals. Through its serialization engine, the GHG
CleanProjects™ Registry's tags each tonne of verified emission
reductions/removal with a unique serial number. Information displayed in the
GHG CleanProjects™ Registry may be useful for corporate risk management,
voluntary initiatives, GHG markets and regulatory reporting/compliance. It
offers a web-based public location that is accessible world-wide.

The GHG CleanProjects™ Registry’s is based on ISO 14064 standards for

greenhouse gas inventory and reporting, which were adopted in March 2006 by
the international community:
- ISO 14064–2 specifies principles, requirements and provides guidance at the
project level for quantifying and reporting activities intended to cause GHG
emission reductions or removal enhancements.
- ISO 14064–3 specifies principles and requirements and provides guidance for
those conducting or managing the validation and or verification of a project’s
GHG emission reductions/removals.

CSA continues to offer the 2 following products since acquiring Canada's

Climate Change Voluntary Challenge & Registry Inc. (VCR Inc.) on January 1,
2005:

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 a. Canadian GHG Challenge Registry © - Showcases organizations' actions which
contribute towards the reduction of GHG emissions and allows for the
comparison and publishing of best practices.
b. Canadian GHG Reductions Registry © - Provides a service for organizations
that wish to have GHG reduction projects posted.

7. The Climate, Community & Biodiversity Standards (CCBS)

http://www.climate-standards.org/

The Climate, Community & Biodiversity Standards (CCBS) focuses exclusively on

biosequestration projects and emphasizes the social and environmental benefits of
such projects. CCBS is a project design standard and offers rules and guidance for
project design and development. It has a very well developed stakeholder process
and stresses environmental cobenefits.

The CCBS was developed by the Climate, Community and Biodiversity Alliance
(CCBA) with feedback and suggestions from independent experts. CCBA is a
partnership of non-governmental organizations, corporations and research
institutes, such as Conservation International, The Nature Conservancy, CARE,
Sustainable Forestry Management, BP and CATIE. The first edition was released in
May 2005.

8. Plan Vivo
Plan Vivo is a standard for community-based agro forestry projects and focuses on
promoting sustainable livelihoods in rural communities.

9. Chicago Climate Exchange

http://www.chicagoclimatex.com

The Chicago Climate Exchange (CCX) is a voluntary GHG emissions cap-and-trade

scheme based in North America. Although participation is voluntary, compliance
with emission reduction objectives is legally binding once a member joins. CCX has
as part of its cap-and-trade scheme an offset programme with full-fledged carbon
offset standard. CCX members commit to reduce their emissions by a fixed amount
below the established baseline level. Members who cannot achieve the reduction
target through cutting their emissions internally can meet their compliance
commitment by purchasing emission allowances called Carbon Financial
Instruments; CFI) through CCX’s electronic trading platform from other CCX
Members that reduce their emissions beyond the reduction target. Offsets from
projects implemented through the CCX offset programme can also be used to
comply with reduction targets. Total use of offsets for compliance is limited to no
more that one half of the required reductions.

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 10. Voluntary Offset Standard
http://www.carboninvestors.org/

The Voluntary Offset Standard (VOS) is a carbon offset screen. Offset Standard
Screens are not full-fledged standards by themselves but accept projects that were
implemented under other standards and adhere to their screening standards.

VOS accepts other standards and methodologies using certain screening criteria. It
currently accepts Gold Standards VER projects and projects that employ CDM
procedures but which are implemented in countries that have not ratified the Kyoto
Protocol and are
therefore not eligible for CDM.

The International Carbon Investors and Services (INCIS) launched the VOS in June
2007. INCIS is a not-for-profit association of large investment companies that
provide carbon-related investments and services. INCIS has 26 members (as of
November 2007).

INCIS was initially set up as the “European Carbon Investors and Services” but has
since its launch expanded to represent the interests of 26 members based both within
and outside of Europe. These include, among others, ABN AMRO, Baker &
McKenzie, Barclays Capital, Climate Change Capital, Credit Suisse, Deutsche
Bank, Fortis, ING, MGM International, Morgan Stanley, and Standard Bank.

Key Elements of Carbon Offsets Standards

No standard can ever be perfect, and each of the available standards is based on a
particular view of the voluntary offset market. However notwithstanding these
differences, the best and most successful standards will be those that are simple yet
rigorous and have very wide support from carbon project developers, offset traders and
buyers, environmental NGOs and the financial industry.

A complete and fullfledged carbon offset standard must include the following three
components :

1. Accounting Standards
Accounting standards ensure that offsets are “real, additional, and permanent.” They
include definitions and rules for the elements that are essential during the design and
early implementation phase of a project. These include additionality and baseline

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methodologies, definitions about accepted project types and methodologies, validation
of project activity etc

2. Monitoring, Verification and Certification Standards

Ensure that offset projects perform as was predicted during the project design.
Certification rules are used to quantify the actual carbon savings that can enter the
market once the project is running. Verification and certification are ex-post
assessments of what has actually been produced, as opposed to validation which is the
ex-ante assessment of whether a project qualifies against a standard, provided it is
going to do what it promises in the project design documentation.

3. Registration and Enforcement Systems

Registration and Enforcement Systems ensure that carbon offsets are only sold once and
clarify ownership and enable trading of offsets. They must include a registry with
publicly available information to uniquely identify offset projects and a system to
transparently track ownership of offsets.

Conclusion

In 2007, the World Bank Institute reported that the total global market in 2006 for
voluntary offsets was over $100 million with prices ranging from $1 to $80 for over 10
million tons of CO2 equivalent emission reductions.

Companies like 3C based in Frankfurt, Germany have developed a carbon fund

available for the purchase of voluntary emission reduction credits around the world;
they are specifically looking for projects that fall outside of CDM criteria. They work
with companies like The Climate Trust in Oregon that supplies the offsets that 3C seek,
including projects that power truck stops at night, supplying an electric energy source
that emits fewer emission than idling trucks.

It is estimated that the voluntary market may be almost equal to the market value of
today's CDM market by 2011. With this growth prospect and a buyers market that
currently seeks emission offsets, a global standard for VERs is most certainly on the
way, one that provides input to any mandatory schemes that are developed, and
oversight for credible VERs in the future.

THE ROAD AHEAD

Addressing climate change can be considered an integral element of sustainable

development policies of Nations. National circumstances and the strengths of

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institutions determine how development policies impact GHG emissions. The concept
of carbon credits came into existence as a result of increasing awareness of the need for
controlling emissions.

We are running out of time. New scientific research suggests that climate change is
taking place faster than foreseen in studies considered so far.

As the 2012 deadline is drawing close, countries are in a hurry to meet their
commitments. By the end of the first commitment period of the Kyoto Protocol in 2012,
a new international framework needs to have been negotiated and ratified that can
deliver the stringent emission reductions the Intergovernmental Panel on Climate
Change (IPCC) has clearly indicated are needed. The IPCC is currently starting to
outline its Fifth Assessment Report (AR5) which will be finalized in 2014. The IPCC is
also preparing two new Special Reports, one on Renewable Energy Sources and Climate
Change Mitigation, due in 2010, and one on Managing the Risks of Extreme Events and
Disasters to Advance Climate Change Adaptation, due in 2011. Mega UNFCCC
meeting due at Copenhagen in December 2009, where a new roadmap to a low carbon
destination is supposed to be finalied.

USEFUL WEBSITES

Websites

http://www.cseindia.org/programme/geg/cdm_faq.htm
http://www.cseindia.org/programme/geg/cdm_guide.htm
http://www.cdmindia.nic.in/
http://envfor.nic.in/cc/index.htm
http://cdm.unfccc.int/index.html
http://www.ficci.com
http://www.mcxindia.com
http://www.worldbank.org
http://www.cdmindia.com
http://www.cdmindia.nic.in
http://www.teriin.org/
http://www.iexindia.com
http://www.ipcc.ch/

Websites Links

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UN Gateway to Climate Change
Convention on Biological Diversity (CBD)
Convention on Long-Range Transboundary Air Pollution
Global Environment Facility (GEF)
Linkages by International Institute for Sustainable Development (IISD)
IPCC Data Distribution Centre
IPCC National Greenhouse Gas Inventories Programme
IPCC Working Group I
IPCC Working Group II
IPCC Working Group III
The Ozone Secretariat, UNEP
United Nations Convention to Combat Desertification
United Nations Environment Programme, Geneva (UNEP)
United Nations Environment Programme, Nairobi (UNEP)
United Nations Framework Convention on Climate Change (UNFCCC)
World Meteorological Organization (WMO)

• Ministry of Environment & Forests

• Ministry of Power
• Ministry of Commerce & Industry
• Ministry of Non-Conventional
Energy Sources
• Central Electricity Authority
• Bureau of Energy Efficiency
• Central Electricity Regulatory
Commission

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