Difference between revisions of "Carbon Markets for Energy Access Projects"

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= Carbon Finance through CDM and VCM   =
 
  
Financial payments for reducing greenhouse gas (GHG) emissions can be an additional source of funding for energy projects. This so-called carbon finance can be accessed by implementing a project under the requirements of the Clean Development Mechanism (CDM) of the Kyoto Protocol (Kyoto Protocol) or for the Voluntary Carbon Market (VCM). This page focuses on the possibilities and challenges of successful carbon finance for stove projects. The CDM provides a tool for accessing carbon credits for certified emission reductions of greenhouse gases (GHGs) in developing countries. The funds must be used to enable these reductions, which would otherwise not be possible. 
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= Overview<br/> =
  
The CDM is one of the three flexible mechanisms under the Kyoto Protocol; the others being Emissions Trading and Joint Implementation. All these mechanisms aim to achieve GHG reduction in a cost effective manner. While Emissions Trading and Joint Implementation are reserved for countries with binding reduction targets, the CDM allows the participation of countries without targets. Emissions reduction credits that have been achieved through the CDM in a renewable energy, or energy efficiency, project in a developing country can be sold to a country with commitments listed in Annex I of the Kyoto Protocol ([http://unfccc.int/national_reports/annex_i_natcom/submitted_natcom/items/3625.php Annex I Countries]).&nbsp;
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This page focuses on the possibilities and challenges of successful carbon finance. The [[Clean Development Mechanism (CDM)|Clean Development Mechanism (CDM)]] provides a tool for accessing carbon credits for certified emission reductions of '''greenhouse gases (GHGs)''' in developing countries. The funds must be used to enable these reductions, which would otherwise not be possible.
  
The CDM has two primary goals: to assist Annex I countries in achieving their reduction targets, and to contribute to sustainable development in the host countries. The criteria for sustainable development are defined by the host country’s national authority (the Designated National Authority – DNA).
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<br/>
  
<br>
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= Carbon Finance through Clean Development Mechanism (CDM) and Voluntary Carbon Market (VCM)<br/> =
  
= The Clean Development Mechanism (CDM) =
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Financial payments for reducing '''greenhouse gas (GHG''') emissions can be an additional source of funding for energy projects. This so-called carbon finance can be accessed by implementing a project under the requirements of the '''Clean Development Mechanism (CDM)''' of the Kyoto Protocol or for the '''Voluntary Carbon Market (VCM)'''.
  
The CDM encompasses renewable energy, energy efficiency, and avoidance of GHG sources. Relevant GHGs are Carbon dioxide (C0<sub>2</sub>), which also serves as reference value, Methane (CH<sub>4</sub>), Nitrous oxide (N<sub>2</sub>0), Hydrofluorocarbons (HFCs), Perfluorocarbons (PFCs), Sulphur hexafluoride (SF<sub>6</sub>). Tiny particles like soot and sulfate aerosols are not covered by the Kyoto Protocol, although they do cause global warming.&nbsp;The global warming potential of each gas is measured in CO<sub>2 </sub>equivalents, which describe the global warming potential of each gas over a given time period compared to CO<sub>2</sub>. The calculation of the achieved CO<sub>2</sub> reduction has to follow a methodology accepted by the CDM Executive Board (EB).
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<br/>
  
== General CDM framework  ==
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= The Clean Development Mechanism (CDM)<br/> =
  
The CDM Executive Board supervises the CDM and reports directly to the Conference of the Parties to the United Nation Framework Convention on Climate Change (UNFCCC) and the Meeting of the Parties of the Kyoto Protocol. The board is responsible for approving new methodologies related to baselines, to approve monitoring plans, to accredit independent verifiers, review project validation and verification reports, and to issue the CERs.  
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The CDM is one of three felxible mechanisms under the Kyoto Protocol; the others being Emissions Trading and Joint Implementation. All these mechanisms aim to achieve GHG reduction in a cost effective manner. While Emissions Trading and Joint Implementation are reserved for countries with binding reduction targets, the CDM allows the participation of countries without targets. Emissions reduction credits that have been achieved through the CDM in a renewable energy or energy effiency prject in a developing country can be sold to a country with commitments listed in Annex I of the Kyoto Procol ([http://unfccc.int/national_reports/annex_i_natcom/submitted_natcom/items/3625.php Annex I Countries]).
  
All countries that wish to participate in the CDM must (a) have ratified the Kyoto Protocol and (b) designate a national CDM authority. The Designated National Authority (DNA) evaluates and approves the projects and serves as a point of contact. It states that the project participants participate voluntarily in the project and confirms that the project activity assists the host country in achieving sustainable development. As each DNA can establish its own working procedures, the project developer should be well informed about the requirements of the national DNA.
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<u>The CMD has two primary goals:</u>
  
The CDM requires special documents of which the '''Project Design Document (PDD)''' is the central one. The PDD describes the technology used in the project activity, the relevant project participants and project location(s). It defines the methodology used to calculate emission reductions, including the baseline, project boundary and leakages. The life time of the CDM-project is set, which can be ten years or seven years and can, if desired, be renewed twice. The PDD defines the anticipated emission reductions and the monitoring plan. It has to be validated by an independent operational entity (Designated Operational Entity, DOE) and is then submitted to the CDM-Executive Board for registration.  
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#to assist Ennex I countried in achieving their reduction targets and
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#to contribute to sustainable development in the host countries. The criteria for sustainable development are defined by the host country's national authority (the Designated National Authority - DNA).
  
The preparation of the PDD is a complex task and has to follow the UNFCCC requirements. It is the key document that the host country, investors, stakeholders and DOEs will use to evaluate the project’s potential, and to judge its achievements. All aspects are important; the most challenging aspects are dealing with establishing the baseline and assessing the project’s ‘'''additionality'''’. A project activity is ‘additional’ if GHG emissions are reduced below those that would have occurred in the absence of the registered CDM project activity. This is the central point of the CDM. It means that a CDM project activity is additional if GHG emissions are reduced below those that would have occurred in the absence of the registered CDM project activity. A CDM project must not be a project that would have been implemented under the business as usual scenario. The fulfilment of the additionality criteria is vital for the successful registration of a CDM project. The difference between the GHG baseline emissions and GHG emissions after implementing the CDM project activity (project emission) is the emissions reduction.<span>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </span>
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Regarding energy related projects, the follwing activities are - amongst others - typical examples for CDM projects: end-use and supply-side energy efficiency improvement, renewable energy applicatoins, fuel switches, solvent and other product use, waste management and the provision of GHG sinks by afforestation and reforestation activities. Relevant GHGs are Carbon dioxide (C0<sub>2</sub>), which also serves as reference value, Methane (CH<sub>4</sub>), Nitrous oxide (N<sub>2</sub>0), Hydrofluorocarbons (HFCs), Perfluorocarbons (PFCs), Sulphur hexafluoride (SF<sub>6</sub>). Tiny particles like soot and sulfate aerosols are not covered by the Kyoto Protocol, although they do cause global warming. The global warming potential of each gas is measured in CO<sub>2 </sub>equivalents, which describe the global warming potential of each gas over a given time period compared to CO<sub>2</sub>. The calculation of the achieved CO<sub>2</sub> reduction has to follow a methodology accepted by the CDM Executive Board (EB).
  
Baseline emissions under the selected baseline scenario are calculated according to an approved '''methodology''', (or maybe using a new methodology that is being introduced).
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<br/>
  
The process from project idea until registration as CDM project and final issuance of credits takes 6 month at a minimum; the procedures can easily take longer, possibly up to two years.
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== General CDM Framework<br/> ==
  
== The CDM project cycle  ==
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The CDM Executive Board supervises the CDM and reports directly to the Conference of the Parties to the United Nation Framework Convention on Climate Change (UNFCCC) and the Meeting of the Parties of the Kyoto Protocol. The board is responsible for approving new methodologies related to baselines, to approve monitoring plans, to accredit independent verifiers, review project validation and verification reports, and to issue the '''Certified Emissions Reductions (CERs''') measured in tons of CO<sub>2 </sub>equivalents that are being reduced through the project in comparison to the baseline scenario.
  
All projects that aim to generate CERs under the CDM rules must meet the same criteria and complete the same steps. This process is commonly known as the CDM project cycle. Some of the activities in the CDM project cycle are the same as those for any other investment projects. However, the steps to generate CERs are both unique and mandatory, as shown in Table 1 below. The development of a CDM project documentation and the involvement of different institutions throughout the project cycle generate substantial costs. Some rough estimates for current levels are given in the table.  
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All countries that wish to participate in the CDM must (a) have ratified the Kyoto Protocol and (b) designate a national CDM authority. The Designated National Authority (DNA) evaluates and approves the projects and serves as a point of contact. It states that the project participants participate voluntarily in the project and confirms that the project activity assists the host country in achieving sustainable development. As each DNA can establish its own working procedures, the project developer should be well informed about the requirements of the national DNA.
  
Transaction costs are particularly problematic when the volume of CERs being offered is relatively low. As a rule of thumb, it can be said that a project activity should generate at least 10&nbsp;000 CERs to cover the costs for CDM preparation safely. If the emission reduction of a project activity is below that threshold, projects can be implemented as projects for the Voluntary Carbon Market.  
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The CDM requires special documents of which the '''Project Design Document (PDD)''' is the central one. The PDD describes the technology used in the project activity, the relevant project participants and project location(s). It defines the methodology used to calculate emission reductions, including the baseline, project boundary and leakages. The life time of the CDM-project is set, with the choice between a fixed crediting period of ten years or a flexible crediting period of seven year which can, if desired. be renewed twice. The PDD defines the anticipated emission reductions and the monitoring plan. It has to be validated by an independent operational entity (Designated Operational Entity, DOE) and is then submitted to the CDM-Executive Board for registration.
  
Small Scale CDM Projects often contribute clearly to the sustainable development aspect of the CDM. But transaction costs associated with developing small-scale projects are high relative to the emissions benefits that may be available. Due to the combination of perceived risk factors and lack of economies of scale, small-scale projects are challenging to transact in the market.  
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The preparation of the PDD is a complex task and has to follow the UNFCCC requirements. It is the key document that the host country, investors, stakeholders and DOEs will use to evaluate the project’s potential, and to judge its achievements. All aspects are important; the most challenging aspects are dealing with establishing the baseline and assessing the project’s ‘'''additionality'''’. A project activity is ‘additional’ if GHG emissions are reduced below those that would have occurred in the absence of the registered CDM project activity. This is the central point of the CDM. A CDM project must not be a project that would have been implemented under the business as usual scenario. The fullfilment of the additionality criteria is vital for the successful registration of a CDM project. The difference between the GHG baseline emissions and GHG emissions after implementing the CDM project activity (project emission) equals the CERs generated.<span></span>
  
Small projects qualify as small-scale if they comprise the following:
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Baseline emissions under the selected baseline scenario are calculated according to an approved '''methodology '''suitabele for the envisaged project type, (or maybe using a new methodology that is being introduced).
  
*Renewable energy project activities with a maximum output capacity equivalent of up to 15 megawatts (or an appropriate equivalent)
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The process from project idea until registration as CDM project and final issuance of credits takes 6 months at a minimum; the procedures can easily take longer, possibly up to two years.
*Energy efficiency improvement project activities which reduce energy consumption by up to the equivalent of 60 gigawatt hours per year; and
 
*Other project activities limited to those that result in emission reduction of less than or equal to 60 kilotonnes of CO<sub>2</sub> equivalent per year<br>
 
  
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As a new instrument to push the CDM for small-scale projects and make their management easier and more cost-effective, the [[Programme of Activities (PoA)|Programme of Activities]] '''(PoA)''' was created in 2007.
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'''Table 1: Estimates for mandatory steps in developing a CDM project (2008)'''
 
  
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<span style="font-size: 10pt">Project Cycle</span>
 
 
 
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<span style="font-size: 10pt">Description</span>
 
 
 
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<span style="font-size: 10pt">Estimated costs</span>
 
  
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== The CDM Project Cycle<br/> ==
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<span style="font-size: 10pt">Planning a CDM project activity</span>  
 
  
<span style="font-size: 10pt">Preparing the PDD</span>
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All projects that aim to generate CERs under the CDM rules must meet the same criteria and complete the same steps. This process is commonly known as the CDM project cycle (see Table 1). The development of a CDM project documentation and the involvement of different institutions throughout the project cycle generate substantial costs. Some rough estimates for current levels are given in the table.
  
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Transaction costs are particularly problematic when the volume of CERs being offered is relatively low. As a rule of thumb, it can be said that a project activity should generate at least 10 000 CERs to cover the costs for CDM preparation safely. If the emission reduction of a project activity is below that threshold, projects can be implemented as projects for the Voluntary Carbon Market (see below).
<span style="font-size: 10pt">Project participants employ a consultant for PDD writing, communication with DNA, EB, etc. The standard format for the PDD must be used</span>
 
  
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Small Scale CDM Projects often contribute clearly to the sustainable development aspect of the CDM. But transaction costs associated with developing small-scale projects are high relative to the emissions benefits that may be available. Due to the combination of perceived risk factors and lack of economies of scale, small-scale projects are challenging to transact in the market.
<span style="font-size: 10pt">Consultant: 30 – 40 person days, plus travel costs</span>
 
  
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<u>Small projects qualify as small-scale if they comprise the following:</u>
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<span style="font-size: 10pt">Getting DNA-approval from each party involved</span>
 
  
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*Renewable energy project activities with a maximum output capacity equivalent of up to 15 megawatts (or an appropriate equivalent)
<span style="font-size: 10pt">The written approval of the host country must include the confirmation that the project activity assists in achieving sustainable development.</span>
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*Energy efficiency improvement project activities which reduce energy consumption by up to the equivalent of 60 gigawatt hours per year; and
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*Other project activities limited to those that result in emission reduction of less than or equal to 60 kilotonnes of CO<sub>2</sub> equivalent per year
  
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<span style="font-size: 10pt">Depends on DNA regulation</span>
 
  
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! scope="col" style="background-color: rgb(204, 204, 204)" | Project Cycle
<span style="font-size: 10pt">Validation</span>
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! scope="col" style="background-color: rgb(204, 204, 204)" | Description
 
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! scope="col" style="background-color: rgb(204, 204, 204)" | Estimated Costs
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<span style="font-size: 10pt">Validation by the DOE is the independent evaluation of a project activity against the requirements of the CDM on basis of the PDD.</span>
 
 
 
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<span style="font-size: 10pt">10&nbsp;000 – 14&nbsp;000 € </span>
 
 
 
 
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! scope="row" |  
<span style="font-size: 10pt">Registration</span>
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Planning a CDM project activity
 
 
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<span style="font-size: 10pt">The registration by the CDM EB is the formal acceptance of the validated project as a CDM project activity.</span>
 
 
 
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<span style="font-size: 10pt">&lt; 15&nbsp;000 tCO<sub>2</sub> = no fee</span>
 
  
<span style="font-size: 10pt">= 15&nbsp;000 tCO<sub>2</sub> = USD 0.10/CER</span>
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Preparing the PDD
  
<span style="font-size: 10pt">&gt; 15&nbsp;000 </span><span style="font-size: 10pt">tCO<sub>2</sub> = </span><span style="font-size: 10pt">USD 0.20/CER</span>
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|
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Project participants employ a concultant for PDD writing, communication with DNA, EB, etc.
  
<span style="font-size: 10pt">(max 350.000)</span>
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The standard format for the PDD must be used.
  
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| Consultant: 30-40 person days, plus travel costs
 
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! scope="row" | Getting DNA-approval from each party involved
<span style="font-size: 10pt">Monitoring a CDM project activity</span>
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| The written approval of the host country must include the confirmation that the project activity assists in achieving sustainable development
 
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| Depends on DNA regulation
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<span style="font-size: 10pt">Project participants collect all relevant data necessary for calculating emission reductions by the CDM project activity.</span>
 
 
 
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<span style="font-size: 10pt">10&nbsp;000 €</span>
 
 
 
 
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! scope="row" | Validation
<span style="font-size: 10pt">Verification and certification</span>
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| Validation by the DOE is the independent evaluation of a project activity against the requirement of the CDM on basis of the PDD.
 
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| 10.000 - 14.000
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<span style="font-size: 10pt">Verification is a periodic independent review and ''ex post ''determination of the monitored emission reductions and results in the certification of the emission reductions. It is carried out by a second DOE, that is different from the one that has validated the project.</span>
 
 
 
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<span style="font-size: 10pt">10&nbsp;000 – 14&nbsp;000</span>
 
 
 
 
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! scope="row" | Registration
<span style="font-size: 10pt">Issuance of CERs</span>
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| The registration by the CDM EB is the formal acceptance of the validated project as a CDM project activity.
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|  
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< 15.000 tCO<sub>2</sub>= no fee
  
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= 15.000 tCO<sub>2</sub>= $0.10/CER
<span style="font-size: 10pt">The EB will issue certified emission reductions equal to the verified amount. </span>
 
  
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> 15.000 tCO<sub>2 </sub>= $0.20/CER (max. 350.000)
<span style="font-size: 10pt">2% of the CERs issued must be paid as adaptation fee. Least developed countries are exempted.</span>  
 
  
<span style="font-size: 10pt">Depending on national regulations other fees may accrue.</span>
 
 
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| style="border-right: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt; background: rgb(224,224,224); padding-bottom: 0cm; border-left: windowtext 1pt solid; width: 99pt; border-top-color: rgb(212,208,200); padding-top: 0cm; border-bottom: windowtext 1pt solid; -moz-background-clip: -moz-initial; -moz-background-origin: -moz-initial; -moz-background-inline-policy: -moz-initial" valign="top" width="132" rowspan="2" |
 
<span style="font-size: 10pt">Distribution of CERs</span>
 
 
| style="border-right: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt; border-left-color: rgb(212,208,200); padding-bottom: 0cm; width: 189pt; border-top-color: rgb(212,208,200); padding-top: 0cm; border-bottom: windowtext 1pt solid; background-color: transparent" valign="top" width="252" |
 
<span style="font-size: 10pt">Consultant works out agreements of CER distribution among project participants.</span>
 
 
| style="border-right: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt; border-left-color: rgb(212,208,200); padding-bottom: 0cm; width: 162pt; border-top-color: rgb(212,208,200); padding-top: 0cm; border-bottom: windowtext 1pt solid; background-color: transparent" valign="top" width="216" |
 
<span style="font-size: 10pt">5000 – 10&nbsp;000</span>
 
 
|- style="page-break-inside: avoid"
 
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<span style="font-size: 10pt">Broker markets the CERs.</span>
 
 
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<span style="font-size: 10pt">To be negotiated</span>
 
 
|}
 
 
<br>
 
 
== Programme of Activities (PoA)  ==
 
 
The Programmatic Approach was officially established in 2007 by the adoption of Guidelines and Procedures for PoA by the CDM EB. Due to high transaction costs small single CDM projects had previously hardly been represented in the CDM portfolio. The PoA approach was designed in order to bring in the possibility for small projects. With the PoA approach the project approval process for many individual activities that are distributed over space and time are brought together.
 
 
A CDM PoA occurs at two levels: at the program level and at the activity level. At the program level, the PoA is the organizational and financial framework that provides structure to the activities, and is managed by a coordinating entity for a period of no longer than 28 years. At the program activity level, a single measure or a set of measures to reduce GHGs is applied to many plants/installations of the same type over the life time of the program. A CDM PoA is considered: ''"a voluntary coordinated action by a private or public entity which coordinates and implements any policy/measure or stated goal (i.e., incentive schemes and voluntary programs), which leads to GHG emission reductions or increase net GHG removals by sinks that are additional to any that would occur in the absence of the PoA, via an unlimited number of CDM program activities (CPAs)" ''(Annex 38, EB 32). On the other side, a CPA is more similar to a standard CDM project in the sense that both must comply with procedures and modalities of the CDM and each must include an activity that has a direct, real and measurable impact on emission reductions. By definition (Annex 38, EB 32), a CPA is: ''"a single, or set of interrelated measure(s), to reduce GHG emissions or result in net anthropogenic greenhouse gas removals by sinks, applied within a designated&nbsp;area defined in the baseline methodology".''
 
 
'''Advantages''' of a PoA compared to a set of individual standard CDM projects:
 
 
{| style="width: 635px; height: 187px" cellspacing="1" cellpadding="1" width="635" border="1"
 
 
|-
 
|-
| '''Multiplicity of activities to reduce GHG distributed in time and space'''
+
! scope="row" | Monitoring a CDM project activity
| Numerous activities are participating in the program and resulting in GHG emission reduction in multiple sites over lifetime of the program. The sites could be located in one or more countries.
+
| Project participants collect all relevant data necessary for calculating emission reductions by the CDM project activity.
 +
| 10.000 €
 
|-
 
|-
| '''One managing / coordinating entity, many implementers'''
+
! scope="row" | Verification and certification
| The program is coordinated or managed by one entity, which can be private or public, and does not necessarily achieve the reductions but promotes others to do so. The coordinating entity is responsible for the CERs distribution and communication with the EB.
+
| Verification is a periodic independent review and ''ex post ''determination of the monitored emission reductions and results in the certification of the emission reductions. It is carried out by a second DOE that is different from the one having validated the project.
 +
| 10.000 - 14.000 €
 
|-
 
|-
| '''Duration (PoA and CPA)'''
+
! scope="row" | Issuance of CERs
| The length of the PoA is up to 28 years (60 for afforestation/reforestation projects (A/R)). The crediting period of a CPA is either a maximum of seven years (20 for A/R project acitivities) which may be renewed at most two times, or a maximum of ten years (30 for A/R) with no option for renewal.
+
| The EB will issue certified emission reductions equal to the verfied amount.
|-
+
|  
| '''Size'''
+
2% of the CERs issued must be paid as adaptation fee. LEast developed countries are exempted.
| For Small-scale&nbsp;(SSC) programmatic CDM only the individual CPAs have to be under the SSC threshold, while the overall&nbsp; program can go beyond.
 
|-
 
| '''Monitoring and Verification'''
 
| The total volume of emission reductions to be achieved by a program may not be known at the time of registration. Each CPA has to be monitored according to the methodology and sampling procedures applied for monitoring and verification purposes.
 
|-
 
| '''No registration of CPAs'''
 
| After the registration of the PoA, individual CPAs are not required to request registration. Instead the DOE includes the CPA after a check&nbsp; that the CPA follows the rules for inclusion in the PoA.
 
|-
 
| '''Can run in more than one country'''
 
| A PoA can run in more than one country provided that the Letter of Approval from each of the countries is obtained.
 
|}
 
 
 
<br>
 
  
'''Diadvantages''' of a PoA compared to a set of individual standard CDM projects:
+
Depending on national regulation other fees may accrue.
  
{| style="width: 635px; height: 45px" cellspacing="1" cellpadding="1" width="635" border="1"
 
 
|-
 
|-
| '''Starting date of CPA'''
+
! scope="row" | Distribution of CERs
| In contrast to the standard CDM approach where the starting date of a project activity can be before the project registration, the earliest starting date of a CPA can be the registration date of a PoA.
+
|  
|-
+
A consultant works out agreements of CER distribution among project participants.
| '''Revalidation of the PoA due to methodology revision'''
 
| The PoA provedures require that in the case the methodology is revised after registration of the PoA, the PoA has to be adjusted accordingly. All changes made to the PoA require reassessment and validation by the DOE and approval from the EB.
 
|}
 
  
<br>
+
Broker markets the CERs
  
= The voluntary market<br> =
+
|
 +
5.000 - 10.000 €
  
The compliance market regulated by the Kyoto Protocol or other mandatory reduction schemes, are not the only route to emissions trading.&nbsp;Voluntary Carbon Markets (VCMs) are developing rapidly. They function outside of the compliance markets and enable companies and individuals to purchase carbon offsets on a voluntary basis.
+
<br/>
  
Companies and individuals are increasingly concerned about their environmental impact. Some will neutralise activities they cannot avoid by “offsetting” their own emissions. Individuals may seek to offset their travel emissions and companies claim they are ‘carbon neutral’&nbsp;by buying large quantities of carbon offsets to ‘neutralize’ their own carbon footprint or that of their products.
+
To be negotiated
  
They see voluntary offsetting as part of their corporate responsibility and/or as part of their image strategy. Emission offsets in this category are usually verified by independent agents and are commonly referred to as Verified Emission Reductions (VERs).
+
|}
 
 
The VCM enables activities in unregulated sectors like aviation or maritime transport, or countries that have not ratified the Kyoto Protocol (such as the US), to participate in carbon trading. Companies can gain experience with carbon inventories, emissions reductions and carbon markets even if they are not yet required to accept mandatory commitments. This may facilitate future participation in a regulated ‘cap-and-trade’ system.
 
 
 
The voluntary market comprises more different project types than the compliance market. Because the voluntary market is not subject to the same level of scrutiny, 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). This provides opportunities for innovation and experiment.
 
 
 
Although VER projects are not necessarily required to go through the project cycle, they should be developed and documented according to CDM rules and procedures, for example, by using the PDD format to develop the project.
 
 
 
To provide evidence of its effectiveness, it is recommended that the project is validated, particularly as the voluntary offset market has been criticised for its lack of transparency, quality assurance and third-party standards. To address these shortcomings, several Standards have been developed on the Voluntary Carbon Market to ensure reliable emission reductions. Each standard has a slightly different focus, and none has so far managed to establish itself as ''the ''industry standard. A good overview of the Standards has been published by WWF in March 2008 ([http://assets.panda.org/downloads/vcm_report_final.pdf assets.panda.org/downloads/vcm_report_final.pdf]).
 
 
 
It is possible for project developers to try to get into the premium market for small projects with high development benefits. The Gold Standard (GS) Foundation offers a quality label to CDM/JI and voluntary offset projects, fetching premium prices. Only renewable energy and energy efficiency projects with sustainable development benefits are eligible. The Gold Standard is endorsed by over 38 non-governmental organizations worldwide. Under [http://www.cdmgoldstandard.org/ www.cdmgoldstandard.org] the relevant guidance and the PDD formats for the generation of Gold Standard CERs and VERs can be found.
 
 
 
<br>
 
 
 
= Links to General Information  =
 
  
[http://cdm.unfccc.int/Projects/pac/index.html CDM Project Activity Cycle]
+
<br/>
  
[http://cdm.unfccc.int/Projects/pac/pac_ssc.html Small Scale CDM Project Activities]
+
<br/>
  
[http://cdm.unfccc.int/methodologies/SSCmethodologies/approved.html Small Scale CDM Methodologies]
+
= The Voluntary Carbon Market (VCM)<br/> =
  
[http://www.cdmgoldstandard.org/ Gold Standard]
+
The compliance market regulated by the Kyoto Protocol or other mandatory reduction schemes, are not the only route to emissions trading. '''Voluntary Carbon Markets (VCMs) '''are developing rapidly. They function outside of the compliance markets and enable companies and individuals to purchase carbon offsets on a voluntary basis.
  
[http://wbcarbonfinance.org/docs/State___Trends_of_the_Carbon_Market_2009-FINAL_26_May09.pdf The World Bank: State and Trends of the Carbon Market 2009]&nbsp;(pdf, 656 kB)
+
Companies and individuals are increasingly concerned about their environmental impact. Some will neutralise activities they cannot avoid by “offsetting” their own emissions. Individuals may seek to offset their travel emissions and companies claim they are ‘carbon neutral’ by buying large quantities of carbon offsets to ‘neutralize’ their own carbon footprint or that of their products.
  
Newsletter CDM Highlights [http://www.gtz.de/climate www.gtz.de/climate] <br>
+
They see voluntary offsetting as part of their corporate responsibility and/or as part of their image strategy. Emission offsets in this category are usually verified by independent agents and are commonly referred to as '''Verified Emission Reductions (VERs)'''.
  
= Small Hydro Power and Carbon Finance =
+
The VCM enables activities in unregulated sectors like aviation or maritime transport, or countries that have not ratified the Kyoto Protocol (such as the US), to participate in carbon trading. Companies can gain experience with carbon inventories, emissions reductions and carbon markets even if they are not yet required to accept mandatory commitments. This may facilitate future participation in a regulated ‘cap-and-trade’ system.
  
[http://www.research4development.info/PDF/Outputs/R8150.pdf A Guide to CDM and Family Hydro Power]
+
The voluntary market comprises more different project types than the compliance market. Because the voluntary market is not subject to the same level of scrutiny, 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). This provides opportunities for innovation and experiment.
  
== Selected Small Hydro Power CDM Projects  ==
+
Although VER projects are not necessarily required to go through the project cycle, they should be developed and documented according to CDM rules and procedures, for example, by using the PDD format to develop the project.
  
[http://cdm.unfccc.int/Projects/DB/KEMCO1232010360.71/view Phu Mau hydropower project] (Vietnam): small scale run-of-river hydropower plant; three cascades with a total installed capacity of 5.6 MW. Crediting period 05 Jun 09 - 04 Jun 16.  
+
To provide evidence of its effectiveness, it is recommended that the project is validated, particularly as the voluntary offset market has been criticised for its lack of transparency, quality assurance and third-party standards. To address these shortcomings, several Standards have been developed on the Voluntary Carbon Market to ensure reliable emission reductions. Each standard has a slightly different focus, and none has so far managed to establish itself as ''the ''industry standard. A good overview of the Standards has been published by WWF in March 2008 ([http://assets.panda.org/downloads/vcm_report_final.pdf assets.panda.org]).
  
[http://cdm.unfccc.int/Projects/DB/TUEV-SUED1218471622.6/view Sichuan provincial Longchi &amp; Caoyuan Small-scale Hydro Power Bundle Project] (China): two small-scale hydro projects - Longchi 5 MW + Caoyuan 4MW. Crediting period 28 Apr 09 - 27 Apr 16.  
+
It is possible for project developers to try to get into the premium market for small projects with high development benefits. The Gold Standard (GS) Foundation offers a quality label to CDM/JI and voluntary offset projects, fetching premium prices. Only renewable energy and energy efficiency projects with sustainable development benefits are eligible. The Gold Standard is endorsed by over 38 non-governmental organizations worldwide. Under [http://www.cdmgoldstandard.org/ www.cdmgoldstandard.org] the relevant guidance and the PDD formats for the generation of Gold Standard CERs and VERs can be found.
  
[http://cdm.unfccc.int/Projects/DB/SGS-UKL1200391307.92/view Iruttukanam Small Hydro Electric Project] (India): small scale run-of-river, 3 MW. Crediting period 01 Jun 09 - 31 May 19.  
+
-> VER Prices: [http://www.carbonpositive.net/searchnewsarticles.aspx?menu=1&s=1&categoryID=3&subcategoryID=22&results=10 Reports on VER market prices.]
  
[http://cdm.unfccc.int/Projects/DB/JACO1113389887.76/view e7 Bhutan Micro Hydro Power CDM Project] (Bhutan): power generation capacity 70 kW. Crediting period 19 Aug 05 - 18 Aug 12.
+
<br/>
  
[http://cdm.unfccc.int/Projects/DB/DNV-CUK1162559668.67/view Sanquhar and Delta Small Hydro Power Projects] (Sri Lanka): two small-scale, run of river hydropower plants, each with an installed capacity of 1.6 MW. Crediting period 01 Jan 04 - 31 Dec 10.
 
  
[http://cdm.unfccc.int/Projects/DB/SGS-UKL1158857850.19/view Santa Lúcia II Small Hydropower Plant] (Brazil): run-of-river small hydro plant with installed capacity of 7.6 MW. Crediting period 01 Oct 03 - 30 Sep 10.
 
  
[http://www.unido.org/fileadmin/media/documents/pdf/Energy_Environment/SmallHydroPower2.pdf Feasibility of CDM as a financing model] (Case studies from Ethiopia)
+
= Technology-specific Information<br/> =
  
<br>
+
<u>For technology-specific information on carbon financing please refer to the following pages:</u>
  
= PV Solar Home Systems and the CDM  =
+
*[[Carbon Markets for Photovoltaic (PV) Systems|Carbon Markets for PV Systems]]
 +
*[[Carbon Markets for Biogas Digesters|Carbon Markets for Biogas Digesters]]
 +
*[[Carbon Markets for Small Hydro Power|Carbon Markets for Small Hydro Power]]
 +
*[[Carbon_Funding_for_Cookstoves|Carbon Funding for Cookstoves]]
  
PV Solar home system (SHS) could be an excellent fit for the CDM because of both its CO<sub>2</sub> abatement and its sustainable development potential. However, this will only be possible if transaction costs of the Certified Emission Reduction (CER) are limited by a system of streamlined baseline setting, validation, and monitoring procedures.
+
<br/>
  
For further information and studies see the website of the [http://www.ecn.nl/en/ps/research-programme/international-climate-policy/cdm/archive/?0= Energy research Centre of the Netherlands].
+
<br/>
  
[http://cdm.unfccc.int/Projects/DB/TUEV-SUED1134746545.91/view Photovoltaic kits to light up rural households in Marocco]: Up to now this is the only registered SHS CDM project. Crediting period: 01 Jan 07 - 31 Dec 16.<br>
 
  
Study: [http://www.endev.info/index.php?option=com_docman&task=doc_download&gid=448 PCF''plus'': Robert F. Lee et al.: Could carbon financing appreciably accelerate the diffusion of Solar Home Systems?, 2001]
+
= Further Information =
  
[http://www.endev.info/index.php?option=com_docman&task=doc_download&gid=449 Annexes to the Study]  
+
*[[Clean Development Mechanism (CDM)|Clean Development Mechanism (CDM)]]
 +
*[[Programme of Activities (PoA)|Programmes of Activities (PoA)]]
 +
*[http://cdm.unfccc.int/Projects/pac/index.html CDM Project Activity Cycle]
 +
*[http://cdm.unfccc.int/Statistics/index.html Statistics on projects registered under the UNFCCC]
 +
*[http://www.cdmgoldstandard.org/ Gold Standard]
 +
*[http://gec.jp/gec/en/Activities/cdm/cdmjimanual2009e.pdf CDM/JI Manual]- A general CDM guidebook published by the Japanese Ministry of the Environment
 +
*[http://wbcarbonfinance.org/docs/State___Trends_of_the_Carbon_Market_2009-FINAL_26_May09.pdf The World Bank: State and Trends of the Carbon Market 2009] (pdf, 656 kB)
 +
*[http://siteresources.worldbank.org/INTCARBONFINANCE/Resources/Carbon_Fund_12-1-09_web.pdf 10 Years of Experience in Carbon Finance] - World Bank's lessons learned in 10 years of Carbon Finance projects
 +
*[http://cdmpipeline.org/ CDM pipeline] - UNEP Risoe Centre on Energy, Climate and Sustainable Development (URC) - news, statistics, etc.
 +
*Newsletter CDM Highlights [http://www.gtz.de/climate www.gtz.de - climate]
 +
*Worldwide news on the carbon market - [http://www.pointcarbon.com www.pointcarbon.com]
 +
*[http://en.microsol-int.com/microsol/our-work Analysis of the potential to foster electricity and lighting access in the Andean region, thanks to carbon mechanism] - Microsol and Rexel Foundation, study led from June 2013 to May 2014.<br/>
  
<br>
+
<br/>
  
<br>
+
= References =
  
[[Solar Main Page|⇒ Back to Solar Section]]
+
<references />
[[Hydro|⇒ Back to Hydro Section]]
 
  
[[Category:Hydro]]
+
[[Category:Carbon_Market]]
[[Category:Solar]]
+
[[Category:Clean_Development_Mechanism_(CDM)]]
[[Category:Biogas]]
+
[[Category:Financing_and_Funding]]
[[Category:Cooking]]
+
[[Category:Voluntary_Carbon_Market_(VCM)]]
[[Category:]]
 

Latest revision as of 10:48, 2 March 2021

Overview

This page focuses on the possibilities and challenges of successful carbon finance. The Clean Development Mechanism (CDM) provides a tool for accessing carbon credits for certified emission reductions of greenhouse gases (GHGs) in developing countries. The funds must be used to enable these reductions, which would otherwise not be possible.


Carbon Finance through Clean Development Mechanism (CDM) and Voluntary Carbon Market (VCM)

Financial payments for reducing greenhouse gas (GHG) emissions can be an additional source of funding for energy projects. This so-called carbon finance can be accessed by implementing a project under the requirements of the Clean Development Mechanism (CDM) of the Kyoto Protocol or for the Voluntary Carbon Market (VCM).


The Clean Development Mechanism (CDM)

The CDM is one of three felxible mechanisms under the Kyoto Protocol; the others being Emissions Trading and Joint Implementation. All these mechanisms aim to achieve GHG reduction in a cost effective manner. While Emissions Trading and Joint Implementation are reserved for countries with binding reduction targets, the CDM allows the participation of countries without targets. Emissions reduction credits that have been achieved through the CDM in a renewable energy or energy effiency prject in a developing country can be sold to a country with commitments listed in Annex I of the Kyoto Procol (Annex I Countries).

The CMD has two primary goals:

  1. to assist Ennex I countried in achieving their reduction targets and
  2. to contribute to sustainable development in the host countries. The criteria for sustainable development are defined by the host country's national authority (the Designated National Authority - DNA).

Regarding energy related projects, the follwing activities are - amongst others - typical examples for CDM projects: end-use and supply-side energy efficiency improvement, renewable energy applicatoins, fuel switches, solvent and other product use, waste management and the provision of GHG sinks by afforestation and reforestation activities. Relevant GHGs are Carbon dioxide (C02), which also serves as reference value, Methane (CH4), Nitrous oxide (N20), Hydrofluorocarbons (HFCs), Perfluorocarbons (PFCs), Sulphur hexafluoride (SF6). Tiny particles like soot and sulfate aerosols are not covered by the Kyoto Protocol, although they do cause global warming. The global warming potential of each gas is measured in CO2 equivalents, which describe the global warming potential of each gas over a given time period compared to CO2. The calculation of the achieved CO2 reduction has to follow a methodology accepted by the CDM Executive Board (EB).


General CDM Framework

The CDM Executive Board supervises the CDM and reports directly to the Conference of the Parties to the United Nation Framework Convention on Climate Change (UNFCCC) and the Meeting of the Parties of the Kyoto Protocol. The board is responsible for approving new methodologies related to baselines, to approve monitoring plans, to accredit independent verifiers, review project validation and verification reports, and to issue the Certified Emissions Reductions (CERs) measured in tons of CO2 equivalents that are being reduced through the project in comparison to the baseline scenario.

All countries that wish to participate in the CDM must (a) have ratified the Kyoto Protocol and (b) designate a national CDM authority. The Designated National Authority (DNA) evaluates and approves the projects and serves as a point of contact. It states that the project participants participate voluntarily in the project and confirms that the project activity assists the host country in achieving sustainable development. As each DNA can establish its own working procedures, the project developer should be well informed about the requirements of the national DNA.

The CDM requires special documents of which the Project Design Document (PDD) is the central one. The PDD describes the technology used in the project activity, the relevant project participants and project location(s). It defines the methodology used to calculate emission reductions, including the baseline, project boundary and leakages. The life time of the CDM-project is set, with the choice between a fixed crediting period of ten years or a flexible crediting period of seven year which can, if desired. be renewed twice. The PDD defines the anticipated emission reductions and the monitoring plan. It has to be validated by an independent operational entity (Designated Operational Entity, DOE) and is then submitted to the CDM-Executive Board for registration.

The preparation of the PDD is a complex task and has to follow the UNFCCC requirements. It is the key document that the host country, investors, stakeholders and DOEs will use to evaluate the project’s potential, and to judge its achievements. All aspects are important; the most challenging aspects are dealing with establishing the baseline and assessing the project’s ‘additionality’. A project activity is ‘additional’ if GHG emissions are reduced below those that would have occurred in the absence of the registered CDM project activity. This is the central point of the CDM. A CDM project must not be a project that would have been implemented under the business as usual scenario. The fullfilment of the additionality criteria is vital for the successful registration of a CDM project. The difference between the GHG baseline emissions and GHG emissions after implementing the CDM project activity (project emission) equals the CERs generated.

Baseline emissions under the selected baseline scenario are calculated according to an approved methodology suitabele for the envisaged project type, (or maybe using a new methodology that is being introduced).

The process from project idea until registration as CDM project and final issuance of credits takes 6 months at a minimum; the procedures can easily take longer, possibly up to two years.

As a new instrument to push the CDM for small-scale projects and make their management easier and more cost-effective, the Programme of Activities (PoA) was created in 2007.


The CDM Project Cycle

All projects that aim to generate CERs under the CDM rules must meet the same criteria and complete the same steps. This process is commonly known as the CDM project cycle (see Table 1). The development of a CDM project documentation and the involvement of different institutions throughout the project cycle generate substantial costs. Some rough estimates for current levels are given in the table.

Transaction costs are particularly problematic when the volume of CERs being offered is relatively low. As a rule of thumb, it can be said that a project activity should generate at least 10 000 CERs to cover the costs for CDM preparation safely. If the emission reduction of a project activity is below that threshold, projects can be implemented as projects for the Voluntary Carbon Market (see below).

Small Scale CDM Projects often contribute clearly to the sustainable development aspect of the CDM. But transaction costs associated with developing small-scale projects are high relative to the emissions benefits that may be available. Due to the combination of perceived risk factors and lack of economies of scale, small-scale projects are challenging to transact in the market.

Small projects qualify as small-scale if they comprise the following:

  • Renewable energy project activities with a maximum output capacity equivalent of up to 15 megawatts (or an appropriate equivalent)
  • Energy efficiency improvement project activities which reduce energy consumption by up to the equivalent of 60 gigawatt hours per year; and
  • Other project activities limited to those that result in emission reduction of less than or equal to 60 kilotonnes of CO2 equivalent per year


Project Cycle Description Estimated Costs

Planning a CDM project activity

Preparing the PDD

Project participants employ a concultant for PDD writing, communication with DNA, EB, etc.

The standard format for the PDD must be used.

Consultant: 30-40 person days, plus travel costs
Getting DNA-approval from each party involved The written approval of the host country must include the confirmation that the project activity assists in achieving sustainable development Depends on DNA regulation
Validation Validation by the DOE is the independent evaluation of a project activity against the requirement of the CDM on basis of the PDD. 10.000 - 14.000 €
Registration The registration by the CDM EB is the formal acceptance of the validated project as a CDM project activity.

< 15.000 tCO2= no fee

= 15.000 tCO2= $0.10/CER

> 15.000 tCO2 = $0.20/CER (max. 350.000)

Monitoring a CDM project activity Project participants collect all relevant data necessary for calculating emission reductions by the CDM project activity. 10.000 €
Verification and certification Verification is a periodic independent review and ex post determination of the monitored emission reductions and results in the certification of the emission reductions. It is carried out by a second DOE that is different from the one having validated the project. 10.000 - 14.000 €
Issuance of CERs The EB will issue certified emission reductions equal to the verfied amount.

2% of the CERs issued must be paid as adaptation fee. LEast developed countries are exempted.

Depending on national regulation other fees may accrue.

Distribution of CERs

A consultant works out agreements of CER distribution among project participants.

Broker markets the CERs

5.000 - 10.000 €


To be negotiated



The Voluntary Carbon Market (VCM)

The compliance market regulated by the Kyoto Protocol or other mandatory reduction schemes, are not the only route to emissions trading. Voluntary Carbon Markets (VCMs) are developing rapidly. They function outside of the compliance markets and enable companies and individuals to purchase carbon offsets on a voluntary basis.

Companies and individuals are increasingly concerned about their environmental impact. Some will neutralise activities they cannot avoid by “offsetting” their own emissions. Individuals may seek to offset their travel emissions and companies claim they are ‘carbon neutral’ by buying large quantities of carbon offsets to ‘neutralize’ their own carbon footprint or that of their products.

They see voluntary offsetting as part of their corporate responsibility and/or as part of their image strategy. Emission offsets in this category are usually verified by independent agents and are commonly referred to as Verified Emission Reductions (VERs).

The VCM enables activities in unregulated sectors like aviation or maritime transport, or countries that have not ratified the Kyoto Protocol (such as the US), to participate in carbon trading. Companies can gain experience with carbon inventories, emissions reductions and carbon markets even if they are not yet required to accept mandatory commitments. This may facilitate future participation in a regulated ‘cap-and-trade’ system.

The voluntary market comprises more different project types than the compliance market. Because the voluntary market is not subject to the same level of scrutiny, 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). This provides opportunities for innovation and experiment.

Although VER projects are not necessarily required to go through the project cycle, they should be developed and documented according to CDM rules and procedures, for example, by using the PDD format to develop the project.

To provide evidence of its effectiveness, it is recommended that the project is validated, particularly as the voluntary offset market has been criticised for its lack of transparency, quality assurance and third-party standards. To address these shortcomings, several Standards have been developed on the Voluntary Carbon Market to ensure reliable emission reductions. Each standard has a slightly different focus, and none has so far managed to establish itself as the industry standard. A good overview of the Standards has been published by WWF in March 2008 (assets.panda.org).

It is possible for project developers to try to get into the premium market for small projects with high development benefits. The Gold Standard (GS) Foundation offers a quality label to CDM/JI and voluntary offset projects, fetching premium prices. Only renewable energy and energy efficiency projects with sustainable development benefits are eligible. The Gold Standard is endorsed by over 38 non-governmental organizations worldwide. Under www.cdmgoldstandard.org the relevant guidance and the PDD formats for the generation of Gold Standard CERs and VERs can be found.

-> VER Prices: Reports on VER market prices.



Technology-specific Information

For technology-specific information on carbon financing please refer to the following pages:




Further Information


References