“The carbon market is expected to become the world’s biggest commodity market and looking to be a trillion- dollar industry very soon.”
~ New York Times
MEANING & CONCEPT
Carbon Credit is a general term for tradeable certificate or permit to emit one tonne of carbon or carbon equivalent. The concept of carbon credit helps in putting a cap on countries/ legal entities to emit carbon within a particular limit.
Let’s say that a developed country is allowed to emit only 100 tonnes of carbon, however they require 200 tonnes of carbon emission and the same cannot be reduced. There are few ways by which they can achieve their goal:
i. Adopt a new technology to reduce CO2 emission; or,
ii. Improve existing technology to reduce CO2 emission; or,
iii. Tie up with a developing country.
Now let’s say, a developing country is permitted to emit 1000 tonnes of carbon, but they have emitted only 900 tonnes and are left with 100 tonnes, unused. This means that the developing country has gained 100 carbon credits for saving 100 tonnes of carbon emission. In such cases, these 100 carbon credits can be traded with a developed country who is in requirement of additional tonnes of carbon emission in exchange of money or technology or both, to save more carbon emission. This process is called as Credit Carbon Trading.
Currently, India and China are the biggest sellers of carbon credit whereas countries in Europe are the biggest buyers. The concept of Carbon Credit Trading is set out in Article 17 of the Kyoto Protocol.
BACKGROUND
According to leading Scientists, Carbon Dioxide, Methane, Nitrous Oxide and Chlorofluorocarbons are the biggest contributors to climate change. To address this problem, on 11th December 1997, representatives from more than 160 countries, met at Kyoto, Japan to discuss the issue of climate change and global warming and to take appropriate steps accordingly. In the meeting, the participating countries pledged to reduce emissions of Green House Gases (‘GHGs’) and hence the Kyoto Protocol was adopted, which later came into force on 16th February 2005. The Kyoto Protocol (‘KP’) are the rules to the United National Framework Convention on Climate Change (‘UNFCCC’) to control the concern regarding climate change and global warming. The Kyoto Protocol puts a cap on the Member Countries for carbon emission i.e. number of tonnes of carbon. Today, 184 countries have ratified this protocol to achieve the target of reducing climate change.
The KP established three mechanisms, based on the market size and wants, thereby creating a Carbon Market, allowing for flexibility in terms of the methods countries could use to meet their gas reduction commitments. Such mechanisms are:
i. Clean Development Mechanism (CDM): This mechanism encourages the developed countries to invest in emission reduction projects in developing countries that contribute to the developing countries’ sustainable development. Under this mechanism, the Country acquire certified emission reductions from projects in non-Annex I parties from 2000 and onwards. The Annex I Parties buy and non-Annex I parties sell the carbon credits under this mechanism.
ii. Joint Implementation (JI): This mechanism encourages the developed countries to carry out emission reduction projects in other developed countries. The participants in such mechanism can be Annex I Parties and legal entities authorized by Parties.
iii. International Emission Trading/ Carbon Trading (ET): It is a flexibility mechanism of the Kyoto Protocol that allows the trade of assigned amount units among Annex B Countries.
Note: Carbon Sinks: Compensating for emissions by increasing the number of a country’s carbon sinks. Carbon sinks are forests, which take up CO2 from the atmosphere. Countries are allowed to create carbon sinks on suitable sites of their own territory.
REGISTRATION
Emission cap for developed countries which are parties to the Kyoto Protocol are expressed as permitted emission limit or “assigned amounts”, over the 2008- 2012 commitment period. These “assigned amounts” are denominated in terms of “tonnes” of CO2 emissions or CO2 equivalent emissions, also known as the “Kyoto Units”. To track the location of Kyoto Units, it is mandatory for the concerned project to be registered under the Kyoto Protocol.
National Registries are implemented by Governments of 38 Annex B Parties having such accounts within which units are held (i) in the name of the Government, or (ii) in the name of the legal entities authorized by the Government to hold and trade units.
CDM Registries are implemented by the UNFCCC Secretariat (under the authority of CDM Executive Board) for (i) issuing CDM Credits and (ii) distributing them to national registries. Only the CDM Project participants can hold accounts in the CDM Registry.
PROCESS OF REGISTRATION
A. Process of Registration when following the CDM/ ET Mechanism
First, the Project Design Document is submitted to the National CDM Authority to seek their validation; (ii) After the National CDM Authority’s validation is achieved the project has to be registered in the host country; (iii) Then the Project Design Document has to be submitted to the UNFCCC for their review and validation; (iv) The UNFCCC will make the Project Design Document public to receive the public comments and reaction on the project; (v) Based on public’s reaction to the project, the decision on project validation shall be taken; (vi) Project validation will be made by a third party auditor (Designated Operational Entity); (vii) This Designated Operation Entity forwards the Project Designed Document to the Executive Board of the UNFCCC for registration; (viii) Once registered, the project shall be ready for operationalization; (ix) Thereafter, the project will have to be monitored by the host country; (x) A second Designated Operational Entity shall verify the emission reductions; (xi) A formal request for issuance of certificate along with the verification report will have to be made; (xii) and finally, Emission Reduction Certificate is issued to the legal entity/ country who submitted their project.
Process of Registration when following the JI Mechanism
After the completion of the registration process, parties may wish to involve in carbon credit trading, a process is followed by the Registries (provided under Figure 5), that tracks the location of Kyoto Units for surveillance purposes.
ELIGIBILITY
The eligibility criteria for Annex I Parties to act as a buyer or a seller in trading of carbon credits are given under Article 5 and Article 7 of the Kyoto Protocol. Annx I Parties under the Kyoto Protocol must provide information in their national communication under the KP to demonstrate that their use of the mechanism is supplemental to domestic action to achieve their targets. This information is assessed by the facilitative branch of the Compliance Committee.
Eligibility Criteria for A nnex II & Non- Annex I Parties (i.e. Annex I not included) is provided under Article 12 of the Kyoto Protocol, which are also reflected in Section F of the Modalities & Procedures for CDM under ‘Decision 3/ CMP1’. These are also known as CDM Eligibility requirements.
Eligibility Criteria for JI Mechanism is provided under Section D of the Guidelines for implementation of Article 6 of the Kyoto Protocol reflected in ‘Decision 9/ CMP.1’.
Eligibility Criteria for ET Mechanism is provided in the Modalities, Guidelines and Rules for emissions trading Article 17 of the Kyoto Protocol, reflected under ‘Decision 11/ CMP.1’.
After careful consideration, it is observed that (I), (II), (III) and (IV) have the same eligibility criteria (i.e. the requirements that a party must fulfil while registering itself as a Party to the Kyoto Protocol). The said eligibility criteria is summarized hereunder:
According to the ‘Decision 3/ CMP1’, the ‘Decision 9/ CMP.1’ and the ‘Decision 11/ CMP.1’: (i) the concerned party must be a party to the KP and must have ratified the same; (ii) pursuant to Article 3.7 and Article 3.8. of the KP, the assigned amount must be calculated in terms of tonnes of CO2 emission; (iii) that in accordance with Article 5.1, the party must have in place a national system for estimating anthropogenic emissions by sources and anthropogenic removals by sinks of all GHGs which are not controlled by the Montreal Protocol; (iv) that in accordance with Article 7.4 of the KP, it must have in place a national registry to record and track the creation and movement of ERUs, CERs, AAUs and RMUs; (v) that in accordance with Article 5.2 and Article 7.1, the most recent required inventory must be submitted on annual basis, 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; (vi) that in accordance with Article 7.1, it must submit the supplementary information on assigned amount.