Characteristics of Carbon Transactions
Characteristics of Carbon Transactions
Characteristics of Carbon Transactions
ABSTRACT
Throughout the past years, the first carbon credits – though not yet certified by the
UNFCCC – have been traded. The technologies used, project size and regional
preferences of carbon transactions via Joint Implementation and the Clean
Development Mechanism approved under major programmes are reviewed in this
paper. The current full JI and CDM project portfolio aims to reduce some 100
MtCO2-eq. This market is highly monopsonic; the buyers determine which credits
are sold. The 12 JI projects are mainly implemented in Romania and Poland and
constitute a diverse technology portfolio. Most of the 37 CDM projects are
implemented in Latin America. Hydro and wind energy projects dominate in terms
of numbers of projects. One large-scale fuel switch and one afforestation project
bias the portfolio in terms of absolute CO2 reduction. Comments are made on the
baseline consistency and additionality of the currently selected projects. The
assessment of emissions trading programmes is more difficult than that of separate
projects, because of the characteristics of an emissions trading market. Yet,
depending on the starting conditions, the ET programmes vary in their success.
1. INTRODUCTION
Climate change as a consequence of the emission of greenhouse gases will most
probably be facing the world with costs and irreparable damage due to changes in
temperature, precipitation, agricultural suitability of land, rise of sea level and
increased incidence of natural disasters (IPCC, 2001b). The estimated costs of climate
change readily exceed the costs of mitigating the damage by the reduction of the
emission of greenhouse gases (IPCC, 2001a). In order to achieve a concentration of
greenhouse gases to a level not leading to dangerous interference with the climate, the
international community gathered in the Conference of Parties to the United Nations
Framework Convention on Climate Change (UNFCCC ) and agreed on the Kyoto
1 Corresponding author
558 Energy & Environment · Vol. 14, No. 5, 2003
Flexible mechanisms
The Kyoto Protocol provides for the establishment of an emissions trading system to
reduce the emission of greenhouse gases in a way that allows for flexibility and higher
cost-effectiveness. It provides for three so-called flexible mechanisms. Project-based
transactions can be implemented in the form of Joint Implementation (JI) in Annex B
countries (Kyoto Protocol Article 6), and Clean Development Mechanism (CDM) in
non-Annex B countries (Kyoto Protocol Article 12). The Protocol also allows for
international emissions trading of Assigned Amount Units (AAU’s) between Annex B
countries (Kyoto Protocol Article 17). In addition to the obligations of the Kyoto
Protocol, several non-government stakeholders were inspired by trading opportunities
and started voluntary initiatives: for companies to manifest (show) their corporate
responsibility and for individuals for instance to compensate for their emitting
activities (Coninck and Linden, 2003; Croci, 2003).
So far limited experience has been gained with emissions trading to achieve
environmental targets. In the United States, emissions trading systems have been set
up to reduce NOx and SO2 emissions. This worked quite well, but there are lessons to
be learned from the U.S. experience (Stavins, 1998). In order to make an emissions
trading system work, players will have to know exactly who is involved, what is the
cap, and they need to have insight in what are the future plans. There are also political
circumstances that are particularly favourable. Making all kinds of rules and
exceptions blurs the picture and makes the system less efficient. The limitations and
rules for emission inventories and accounting must be clear, but within these
limitations, there should be a level playing field and essential information should be
easily accessible.
The carbon mitigation funding of projects under Joint Implementation or the Clean
Development Mechanism is based on the amount of emissions avoided. This means
that per project, rules for accounting must be followed and monitoring and
certification must be arranged. The dead-weight administrative costs this takes are
thought to be compensated for by lower overall compliance costs generated by the
mechanism and ancillary benefits of the projects concerned, such as more benefits for
the community involved, a better contribution to sustainability and technology
transfer, and more influence of the host country government on the type of project or
technology that is implemented. In addition, via a project-based mechanism, projects
can be implemented in developing countries. None of these countries have made a
legally binding commitment towards emission limitation and they can therefore not
Characteristics of Carbon Transactions 559
2. JOINT IMPLEMENTATION
Joint Implementation (JI) allows Annex B countries to achieve part of their Kyoto
target by procurement of credits generated by the implementation of greenhouse gas
reducing projects in other Annex B countries, mostly in Eastern Europe. The emission
reduction units (ERU’s) need to be certified by means of validated baselines for
projects approved under the UNFCCC. The emissions reduced during the project are
only accountable in the commitment period of the Kyoto Protocol: 2008 through 2012.
However, the concept of the so-called "forward swaps" is in practice applied – the
purchaser of the ERU’s then already purchases AAU’s which are linked to the
emission reductions of the JI project in the pre-2008 time period. In the project
emissions administration, however, these extra AAU’s should be listed as AAU’s and
not as ERU’s, which enables us to still distinguish the 2008-2012 emission reduction.
Potential
There are several studies that estimate the potential greenhouse gas reductions in
Eastern Europe and the Former Soviet Union. According Linden et al. (2002), 792
MtCO2-eq can be realised against zero or negative costs (no-regret options). At a
maximum price of 10 US$ per tCO2-eq, the potential is 2,000 MtCO2-eq.2 The potential
is estimated to be substantial with regard to the current target of the Kyoto signatory
countries.
Programmes
Several countries (e.g. Denmark, Sweden) and international institutions are currently
planning to procure credits from proposed JI projects in order to achieve their Kyoto
targets. However, at the moment of the writing of this paper, only two programmes
were in place: the Prototype Carbon Fund of the World Bank, and the Emission
Reduction Units Procurement Tender (ERUPT) from the Dutch government.
Prototype Carbon Fund: The World Bank established the PCF in July 1999 with the
objective to invest in CDM and JI projects that generate greenhouse gas emission
reductions that could be registered with the UNFCCC. Project developers can submit
projects continuously by submitting a Project Idea Note. The participating
governments (Canada, Finland, Norway, Sweden, Netherlands, Japan) have agreed
that US$ 75 million will be allocated for JI projects and indicated specific objectives
2 In this study, all transaction costs and practical barriers are excluded, as well as non-CO2 greenhouse
gases, which have quite a large potential.
Characteristics of Carbon Transactions 561
regarding the technology mix of the project portfolio. The amount of land-use and
land-use change projects is restricted and the PCF aims at a ratio of 3:2 between
renewable energy and energy efficiency projects (PCF, 2002).
The ERUPT Programme: The Emission Reduction Unit Purchasing Tender (ERUPT)
programme was set up by the Dutch government. It is implemented on a tender basis.
Based on the expression of interests received, the executing agency Senter draws up a
short list of project developers, which are invited to submit a detailed proposal
according to predetermined guidelines. The guidelines of ERUPT contain
requirements for baseline methodology and do not allow for sinks-projects (ERUPT 3,
2002).
Project characteristics
In February 2003, 12 JI projects were officially approved under the PCF or ERUPT
programme, totalling a greenhouse gas reduction of some 9.6 MtCO2-eq. In table 2, the
characteristics are listed. The average price of a credit for the ERUPT 2000 tender was
US$ 8.3 per tCO2-eq reduction. The average price for the ERUPT 2001 tender dropped
significantly to US$ 4.8 per tCO2-eq reduction. For PCF, the prices are not fully
available.
The Prototype Carbon Fund is open for Project Idea Notes continuously, which
resulted in 4 JI projects so far. For ERUPT, the first tender was launched in 2000. Of
the many applicants, Senter selected 4 projects with a total emission reduction of 3.9
MtCO2-eq. The second tender was launched in 2001 and resulted in at least 6 projects,
aiming at a total reduction of 5 MtCO2-eq. ERUPT-3 has been open until 30 January
2003. Senter has received Expressions of Interest for a total of almost 40 MtCO2-eq
H ost C ou n try P rogram P roject Typ e P roject D escrip tion G reen hou se gas
red u ction [tC O 2-eq ]
Czech Republic ERUPT Biomass portfolio 28 biomass projects 1,200,000
Hungary ERUPT Biomass 90 MW fuel switch coal to biomass 710,000
Latvia PCF Waste management Methane capture 368,101
Poland PCF Geothermal Replace coal for district heating 364,553
Poland PCF Biomass Use of biomass waste 190,630
Poland ERUPT Wind energy 60MW new capacity 583,500
Romania PCF Afforestation 6,728 ha of public land 1,018,000
Romania ERUPT Hydro 55MW 612,631
Romania ERUPT Co-generation 26MWe CHP 1,536,140
Romania ERUPT Energy efficiency 2 cement plants 800,000
Romania ERUPT Hydro 3 x 19.5 MW additional capacity 1,673,844
through modernisation
Slovakia ERUPT Waste management Methane capture 550,203
Total 9,607,602
562 Energy & Environment · Vol. 14, No. 5, 2003
and has selected 17 projects with a total emission reduction of 19.8 MtCO2-eq to
submit a formal proposal (Senter, 2003a).
Technology Contribution to
investment costs (%)
Solar Home Systems 0.5–2 +
Wind 5–15*
Energy efficiency 10–30*
Biomass 15–30*
Fuel switch 30–70*
Gas capture/landfill gas 50–100*
+ Based on a 10-year lifetime, 5 hours per day production, 4.5 euro/tCO2-eq and an emission factor of 0.9
kgCO2/kWh, which is the emission factor recommended in the small-scale procedures from the CDM
Executive Board
* Based on five-year crediting period and 4.5 euro/tCO2-eq
Potential
The potential reduction of greenhouse gases under the CDM is estimated to be very
substantial. It is projected that even at prices lower than US$ 0 per tCO2-eq (no-regret
options), reductions are possible world-wide totalling 848 MtCO2-eq over the next
commitment period of the Kyoto Protocol (Linden et al., 2000, and Linden et al.,
2002).3 At a maximum price of 10 US$ per tCO2-eq, the potential is estimated at 2,400
MtCO2-eq in the first Kyoto commitment period. In addition, only CO2 is analysed as
a reduction option. Reduction of non-CO2 greenhouse gases is projected to have a large
potential with relatively low marginal abatement costs as well, and when incorporating
these gases as well, the overall greenhouse gas reduction potential would be even
larger.
Programmes
On the CDM markets, several programmes are active. Apart from the Prototype
Carbon Fund and the tender programme of the Dutch government Certified Emission
Reduction Unit Procurement Tender (CERUPT), the Japanese government has
contracted several projects and the Dutch government has also started a programme
under the World Bank (Netherlands Clean Development Fund, NCDF). The Singapore
and Finnish governments have also called for projects, but no approved projects are
listed yet under these programmes. In addition, Italy has expressed interest.
Prototype Carbon Fund: The same rules as for Joint Implementation projects apply for
Clean Development Mechanism under the PCF. The World Bank has reserved US$
105 million for CDM projects and has certain regionally determined funding
restrictions. The funding for projects in Latin America should not exceed US$ 35
million, and the technology mix ratio of 3:2 renewable energy and energy efficiency
is valid for CDM as well.
CERUPT: The Certified Emission Reduction Unit Purchasing Tender (CERUPT)
programme was set up by the Dutch government. The CERUPT programme is
implemented on a tender basis. The guidelines of CERUPT contain requirements for
baseline methodology and do not allow for sinks-projects (CERUPT, 2001; VROM,
3 It must be said that in these studies, all transaction costs and practical barriers are excluded
Characteristics of Carbon Transactions 565
2001a; VROM, 2001b). There has been only one CERUPT call for tender, and it has
been declared that no new CERUPT call for tender will be opened (Senter, 2003).
Singapore-ASEAN Carbon Fund: The Singapore-ASEAN Carbon Fund 2003 has been
established to be administered through Electric Eye Pte Ltd in Singapore. It is an
independent initiative that seeks to kick-start CDM projects under the Kyoto Protocol.
The fund will be a 5-year closed-end investment fund, with a target capitalisation of
US$120 million. It will target energy efficiency and renewable energy in the ASEAN
countries, and aims at 200,000 tCO2-eq in carbon credits per year. If successful it will
function as model for a larger Asian carbon fund.
Government of Finland: The Ministry of Foreign Affairs (Development Co-operation)
is currently exploring the possibilities of purchasing certified emission reductions via
small-scale CDM projects. The guidelines for small-scale projects are simplified,
reducing transaction costs, and small-scale projects are in general more beneficial for
sustainable development than large-scale CDM projects. The government of Finland
has published an invitation to submit project proposals. Three projects will be granted
from the total of 27 bids, leaving Finland purchasing 0.5 MtCO2-eq of small-scale
CDM credits.
The PCF is continuously open for submitting Project Idea Notes. 10 Projects have
been approved. CERUPT received 80 Expressions of Interest for projects in 27
different host countries and a total reduction of 90 MtCO2-eq. After the first evaluation
round, 26 projects in 13 host countries and with a total emission reduction of 32
MtCO2-eq have been invited to prepare a detailed proposal. The average price for these
26 projects amounts to – C 4.7 per tCO2-eq (table 4).4
Project characteristics
CDM projects are generally much larger than JI projects in terms of CO2 reductions.
This is due to the larger crediting time of the CDM projects. For CDM projects, it is
allowed to bank emission reductions, which makes it possible to generate emission
reductions before the crediting period starts in 2008. For Joint Implementation, only
the emission reductions in the five years 2008 to 2012 can be contracted to contribute
to the emission target of the donor country. CDM projects may have a crediting time
of 10 or even 20 years (most PCF projects have a crediting period of 20 years).
4 In March 2003, the Dutch Ministry of Environment declared that 18 projects with a total reduction of 16
MtCO2-eq have been selected for contracting (Senter, 2003b)
566 Energy & Environment · Vol. 14, No. 5, 2003
* S e le c te d b y D u tc h g o v e rn m e n t fo r c o n tra c tin g (S e n te r, 2 0 0 3 b )
Characteristics of Carbon Transactions 567
switch, gas capture (or landfill gas) and hydropower each contribute about one quarter.
Sinks (13%), energy generated by biomass (7,5%) and wind energy (almost 7%) share
the remainder of the total reduction of over 90 MtCO2-eq. In terms of numbers of
projects, however, this picture changes. The contribution of hydro, biomass and wind
energy projects in terms of reduction of greenhouse gases (38%) makes up 29 of the
37 projects. A very large-scale fuel switch, sinks and some gas capture projects
generate the rest. Energy efficiency plays a negligible role in CDM projects.
It is assumed that the contribution of the CDM revenues for the projects in relation
to the investment costs are not much different from the shares indicated in table 2. This
would explain the large amount of credits generated by gas capture and fuel switch
technology in the current CDM portfolio, since the CDM funds contribute a relatively
large share of the investment costs for the technology concerned. The disposition of
project developers of solar energy projects to apply for support by the CDM may be
limited for the same reason, given the very low contribution of potential carbon credits
to project investment costs.
With CDM, some of the baselines can be questioned in the same manner as with
the project portfolio of JI. The crediting time for CDM projects can vary, so in the
examples a yearly emission factor is taken to rule our the difference in crediting time.
The example of three different hydro projects in Panama, all contracted by CERUPT
for 620, 60, and 41 GWh, have been pre-validated to account for emission reductions
of 3,575; 367, and 261 tCO2-eq, respectively. Assuming a crediting time of 10 years
for all projects, the emission factors are 577, 612 and 637 tCO2-eq/GWh, respectively.
Though these numbers are some 10% apart from each other, the differences may be
defendable in the context of the baseline uncertainties. In the neighbouring country of
Costa Rica, however, emission factors for wind energy projects under the PCF are in
the order of 940 to almost 1200 tCO2-eq/GWh. As Costa Rica is a country quite
depending on emission-free hydro electricity, these numbers seem to be quite high.
The difference in the emission factors of on the first glance quite similar projects in
comparable countries is on several occasions quite large. Specific project conditions
can vary considerably, so a provision must be made that the circumstances justify a
less conservative baseline. However, it can be concluded that the difference in
emission factor is on several occasions quite remarkable.
The CDM projects have not been without criticism. A critique has been given by
NGO’s on the full project portfolio selected by the government of the Netherlands
from the CERUPT Expressions of Interest. In a brief report by CDM Watch (Pearson,
2003), the additionality of several projects is questioned, because several projects are
already in an advanced degree of completion and are therefore qualified as Business
As Usual projects, not entitled to any emission Reduction Units. Other comments by
Pearson (2003) are:
Many of the credits are generated from large dams, which are not considered
environmentally and socially sound
Three of the projects have not yet gone through the obligatory public comment
period
One of the project developers is a member of a declared climate change sceptic
association, which is undermining US ratification of the Kyoto Protocol and the
actual validation of the credits.
Other NGO’s have exclaimed similar criticism.
In reaction to the above, one can say that though the original text of the Kyoto Protocol
states that the emission reduction of the projects "that is additional to any [reductions] that
would otherwise occur" (Kyoto Protocol, Article 6), the Marrakesh Accords allow for
flexibility in financial additionality (UNFCCC, 2001). The unqualified validations5 of the
project baselines should be in accordance with the UNFCCC decisions and, though it
5 The validation is unqualified, because the CDM Executive Board’s recommendation on project
acceptance has not yet been approved by a Conference of Parties. Moreover, the Kyoto Protocol has not
yet entered into force.
Characteristics of Carbon Transactions 569
agrees with the factual notification by the commentaries, the conclusion has to be that the
credits claimed are valid under the current climate policy regime (see, e.g., SGS, 2002).
Regarding the other comments listed above, the NGO’s can claim that many of the
projects are not ideal in terms of sustainable development and social benefits, but this
technically does not exclude the projects from the UNFCCC procedures. One project
developer taking a climate-cynical stand is also not contradicting the procedural
requirements in the Kyoto Protocol or the Marrakesh Accords. The public comment
round is obligatory, and the designated operational entities of the three projects referred
to here are obliged to fulfil this requirement.
It must be noted here that if the criticism actually convinces the CDM Executive
Board of the UNFCCC, the credits generated by the CERUPT projects will not be
accountable for the Dutch Kyoto target.
The projects that qualify as small-scale in the portfolio given above are all in the
renewable energy category. It is unclear if the possibility of streamlining the
procedures has made a significant difference for the projects. The small projects are
dominated by wind and biomass projects. There are no solar or rural electrification
projects listed until now, which can be explained by the small contribution that the
credit revenues make in relation to the investment costs of solar systems.
4. EMISSIONS TRADING
International Emissions Trading (IET), the non-project-based flexible mechanism
under the Kyoto Protocol, would imply the trading of parts of assigned amount
allocations among Annex B countries. Emission reductions traded under the Kyoto
Protocol emissions trading instrument do not necessarily require additional efforts, as
opposed to emission reductions from project-based mechanisms. This observation is
the basis of the so-called hot air issue: Eastern European countries will achieve their
Kyoto targets without extra efforts because of the economic transformation after the
democratisation of this region induced a sufficient decline in greenhouse gas
emissions. The difference between their actual emissions and the Kyoto target can be
sold to countries that have a deficit of greenhouse gas emission allowances. This issue
was also addressed in the introduction. Apart from the emission trading under the
Kyoto Protocol, the European Union has agreed to establish an emission trading
system for its member states, of which the pilot phase will start in 2005 and the system
will work to achieve the Kyoto targets of the member states of the EU by 2008
(European Commission, 2001).
It is likely that large official greenhouse gas emissions trading systems will be in
place soon (e.g. the EU Emissions Trading System due to be launched in year 2005),
international emissions trading under the Kyoto Protocol may take longer to achieve a
degree of maturity. Fungibility issues, such as the value of JI and CDM credits in the
emissions trading scheme, remain unresolved for the moment.
In principle, IET forms a rather cost-effective and flexible way of achieving
national targets for greenhouse gas emissions. Therefore, it might be interesting for
countries or industries to participate in an early stage in an emission trading market.
In this way, lessons will be learned on strategy for emission trading, which can be
quite necessary, since awareness with industry is not always optimal (Schleich et al.,
2003). Several programmes are currently in place, of which five are briefly reviewed
in this section.
Denmark
The Danish "Bill on CO2 quotas for electricity production" (Act no. 376 of 2 June
1999) provides the specifics of the Danish domestic emission allowances trading
system. The Danish system focuses on the producers of electricity. Aforementioned
Bill sets annual sector ceilings in the period 2000-2003, declining from 23 Mt CO2-
equivalent in 2000 to 20 Mt CO 2-equivalent in 2003. Certain adverse circumstances
may prompt the ministry supervising the implementation of the Danish domestic
scheme, i.e. the minister for environment and energy, (after having informed the
parliamentary Energy Policy Committee) to raise these ceilings. The method for
allocating allowances to individual producers is either grandfathering or, at the request
of an association of electricity producers, is relegated to this association.
If it is found that an electricity producer or an association of electricity producers
have excess emissions, a penalty shall be payable to the Danish government,
amounting to DDK 40 (C – 5.38) per excess tonne of CO2-equivalent. The penalty
receipts shall be used for energy-saving purposes. Prima facie, it would appear that the
penalty is rather low which sets an accordingly low upper limit on the value of
emission allowances.
The traded volume and the average price in 2000 were much lower (2.7 Mt at $7.6 per
tonne), due to a less strict emission target in that year. Parts of BP will take part in the
UK Emissions trading where appropriate. In 2002, BP intended to include CDM
projects in its internal emission trading system. The trading system strongly
contributed to BP achieving its internal target of 10% reduction in 2010 in 2002
already.6
Shell: Shell had set up a cap and trade system called STEPS (Shell Tradable Emission
Permit System) that aims to reduce Shell’s own emission in a cost effective way. The
system commenced in January 2000 and will continue until the end of 2002.
Participation is voluntary and trade is done only in the two main greenhouse gas
emissions, namely CO2 and CH4.
Six business units contributing to about a third of Shell’s total emissions
participated in the system. The overall goal set is a reduction by 2 percent in 2002
compared to the base year 1998. Permits have been allocated to the participating units
in proportion to the units’1998 baseline emissions for the three-year period and
resembling 98 per cent of the 1998 emissions. A permit has a value of 100 tCO2-eq.
Each company is free to determine its individual strategy for compliance, whether
through abatement projects or through trade. The trade is done through the web and is
handled by Shell Energy. The STEP programme eventually was abandoned because of
lack of success. Probably, the voluntary participation was part of the problem; the
supply greatly exceeded the demand of credits and no healthy market could therefore
be established.
Summary
The list of carbon trading initiatives set out above is by no means comprehensive. Yet
these appear to be the most significant ones to date in terms of impact awareness that
carbon emissions are not priceless. Emissions trading in its pilot phase has not always
been successful. The BP and UK programmes seem to work well, whereas the Shell
programme has been abandoned. Future programmes will include the EU emission
trading directive and possibly a more developed voluntary emissions trading scheme
in the US. Much is expected from this programme for the compliance of the EU with
the Kyoto Protocol.
the current CDM/JI project portfolio by technology. The high share in CDM of
sequestration of carbon is somewhat biased because it involves only one
(controversial) project in Brazil. This project alone generates 12 MtCO2-eq reduction
by replanting of 23,100 ha of Eucalyptus plantations to produce wood for charcoal
which will then be used in pig iron production instead of coal. The same applies to the
fuel switch project under CDM.
The general preference is biased towards hydro and gas capture. It must be noted
here, that, despite that CDM has the aim to induce technology transfer toward
developing countries, the wide-spread use of mature technologies for CDM is
probably not contributing much to this goal. The idea behind diffusion of technologies
is that developing countries benefit from knowledge developed in the industrialised
countries. This does not seem to be the case for the project portfolio currently in place.
In this light, it seems remarkable that so far no solar projects have reached the final
project cycle stage despite the fact that considerable experience has been gained with
these projects in programmes such as GEF and AIJ. One of the reasons is probably the
generally small emission reductions of PV projects, resulting in relatively high
transaction costs. Initiatives are undertaken to mitigate this problem, such as the
drafting of the standardised baselines and simplified procedures for small-scale
projects. These were included in the CERUPT guidelines and are currently under
consideration by the UNFCCC. In addition, the low contribution that the credits
provide to the up-front investment may be another reason. A potential solution for this
would be to introduce a higher carbon price for extremely beneficial projects.
Another issue is foreign investment. It has been expected that CDM and JI would
lead to increased foreign investment of industrialised country companies in
developing countries and economies in transition. Many of the projects under CDM
are however developed by local energy companies. The only foreign investment
flowing into the country is therefore the credit revenue, which is only a fraction of the
total project costs, as estimated in this paper. In terms of increased foreign investment,
therefore, by far not all the current projects seem to really contribute.
Over the past years a lot of effort has been put in developing capacity in the non-
Annex I countries and the Eastern European countries within programmes such as the
AIJ programme, GEF facility, climate change studies programme by the US, the
Netherlands and others, and bilateral co-operation programmes. These efforts have
resulted in an enhanced awareness and increased local capacity for identifying,
evaluating and developing CDM/JI projects. This seems to have had effect, in
particular countries such as India, Costa Rica, Brazil, Poland, Czech Republic and
Romania that are the current frontrunners in this respect. Other countries such as
China, Bolivia, Uganda and Peru also have shown keen interest in participating in the
CDM and are now rapidly developing CDM capacity building programmes. In
addition to the existing capacity to identify and evaluate CDM/JI projects, other
aspects such as a politically stable, enabling environment, attitude of the central
government towards the UNFCCC process and signing of an Memorandum of
Understanding with the donor countries play an important role. It is therefore expected
that the number of countries participating in the CDM/JI mechanisms will increase
significantly over the coming decade.
Characteristics of Carbon Transactions 575
Every project has specific project conditions, and each country has an energy
supply mix leading to a different local carbon intensity situation. It is therefore
expected that each baseline is different, and that (world-wide) not much unity in the
project emission factors can be discerned. Projects with the same technology,
implemented in the same country (thus probably a similar fuel mix) and under the
same programme, however, should have a comparable emission reduction intensity in
terms of avoided greenhouse gas emission per generated electricity (tCO 2-eq/GWh).
Both in JI and CDM, comparable projects could be identified that turned out to differ
by up to a factor 2 in the emission factors used. This remarkable observation could be
explained by different project circumstances leading to very different baseline
assumptions. This, however, could not be verified and these examples do illustrate
how cautious accredited validating and supervisory issuing and certification bodies
should be when validating a baseline. The current CDM project selection brought
about much criticism mainly based on the lack of financial additionality, which is
another illustration of the vulnerability of a baseline and the thin line between a "good"
and a "bad" greenhouse gas reducing project.
The total greenhouse gas abatement potential for CDM and JI projects has been
estimated to amount to some 4,400 MtCO2-eq, (2,000 Mt in Eastern Europe and the
Former Soviet Union and 2,400 Mt in the non-Annex B countries, for the Kyoto
Protocol commitment period, and at a price of less than US$ 10 per tCO2-eq). Only a
small fraction (100 MtCO2-eq) of this amount has been realised so far. Due to the
decision of the US not to ratify the Kyoto Protocol, the total Annex B reduction
requirements have decreased significantly. In addition, the agreements achieved in
Marrakesh on the use of sinks (as a domestic measure in general a very cheap option
to meet the greenhouse gas reduction target) further reduced the prospects for CDM/JI
mechanisms. In fact, total Annex B reduction requirements (excluding the US) could
be met for 70% by purchasing hot air and sequestration of carbon in the Annex B
countries (Linden et al., 2002). This observation is confirmed by institutions involved
in buying and selling of emission reduction units. In addition, consensus on which
projects should be eligible under JI or CDM has not been achieved yet.
On the demand side of the carbon credit market, it may be remarked that it has
many characteristics of a monopsonistic market, with only a few buyers of the credits,
and many sellers. This means that the price and therefore indirectly also the project
portfolio can to a great extent be determined by the buyers of the credits, which are
usually also the governments that have to comply with a Kyoto target and prefer doing
this as cost-effective as possible. As a consequence, the sellers are forced to offer their
projects for low carbon prices and the opportunities for the from the viewpoint of
sustainable development more desirable small-scale and decentral projects are reduced
substantially. The estimate of the contribution of the carbon credit sales to the
investment costs of a solar home system project illustrates this observation.
In summary, the carbon market, still in its inception phase, is getting started, but
still has many barriers to overcome before it becomes a mature mechanism to mitigate
climate change substantially. The current portfolio of JI and CDM projects is still
limited, and the mechanisms show many (market) imperfections that result in projects
that are not optimal in terms of technology transfer, foreign investment and baseline
576 Energy & Environment · Vol. 14, No. 5, 2003
consistency. However, the first modest but possibly defining steps have been made
towards the emergence of a global carbon market. Still many barriers have to be
overcome until fungibility issues are settled and the currently fragmented markets
have converged into one that is truly globally integrated and that can serve as a vehicle
for consistent compliance with an increasingly stringent climate policy regime.
ACKNOWLEDGEMENTS
With the usual disclaimer on remaining errors, the authors would like to thank the
anonymous reviewers for their constructive comments, which increased the quality of
the article. The very valuable discussions with Jaap Jansen (ECN Policy Studies) have
also contributed much to the profoundness of the paper. The authors acknowledge the
stimulating exchange of ideas with Remko Ybema (ECN Policy Studies) and
Alexander Gijsen (RIVM ). This paper was written as part of a project registered at
ECN under number 77.513.03. The authors acknowledge the organisation of the
ENER Forum 4, funded by the EU, for being able to present the results in this paper.
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