Key items, technical terms
The first of these nuts and bolts items/terms is Certified Emissions Reduction (CER) credits. These arise when an investor in a project (from an industrialised country) that is aimed at reducing emissions of greenhouse gases under the Kyoto Protocol’s Clean Development Mechanism (CDM) locates it in a developing country. Readers would recall it is mandatory for projects which seek to secure reductions in greenhouse gases emissions to have these converted into standard carbon dioxide (CO2) equivalents. On the carbon market one CER credit is equal to one metric ton of CO2 equivalent. That is, in other words, 1tCO2e, as it has been described in the LCDS and elsewhere.
A second important item/technical term to note is an Emissions Reduction Unit (ERU). This is limited to projects between industrialized countries, similarly aimed at reducing greenhouse gases emissions. Again it would be recalled that such projects come under the Joint Implementation (JI) mechanism and not the CDM mechanism. The latter is reserved exclusively for projects between industrialized and developing countries.
As my assessment of carbon markets proceeds, we shall see, it is vital to the success of carbon-trading that both the CER and the ERU constitute what in fact they claim to be representing. That is, each unit (CER or ERU) must be equal to one metric ton of carbon dioxide emissions equivalent. To ensure this is the case, the market expects that there would be scientific validation beyond doubt that each unit of CER or ERU always results in real, measurable, long-term benefits related to global warming and climate change. In other words it is necessary for the intended reduction in carbon dioxide emissions equivalent to occur. The United Nations Framework Convention for Climate Change (IPCC) drawn up in 1992 and entered into force in 1994, through its executive board is the regulatory and oversight authority responsible for this, on behalf of its 192 signatory parties. It is therefore ultimately responsible for the validation of all traded CERs and ERUs.
A third item/technical term with which readers ought to be familiar is the tradable emissions allowances under the European Union’s Emissions Trading Scheme. These are termed European Union Allowances (EUA) and are issued by the EU under its National Allocation Plans, which sets the overall emissions caps for the EU as well as the allowances/permits granted for each sector and covered entity under the EU and its member states national caps. Each emissions allowance/permit therefore equals the right to emit one metric ton of carbon dioxide.
The last technical term/item that I shall consider here is offsets. These are interchangeably referred to as carbon credits or carbon offsets. When generated from forest-based projects they are referred to as forest-carbon offsets or credits. A carbon offset/credit therefore is provided in exchange for a reduction of carbon emissions into the atmosphere through projects that are designed to do this. In practice the types of projects, which are designed to achieve this range through renewable energy, reforestation, and avoided deforestation. The latter is the form proposed in the LCDS for Guyana’s pristine forests. By investing in carbon emission-reducing projects, the resultant credits earned can be used by investors either to offset their own emissions, or to put them on sale in carbon markets for others to buy. Once again, technically, one offset credit equals one metric ton of carbon dioxide emissions reduction.
Other characteristics
There are certain other distinctive characteristics of offsets that should also be recognised. One of these is their vintage needs to be clearly specified. By this is meant, the precise year in which the reduction in carbon emissions is intended to take place. Secondly, the source of the carbon-emission reduction should also be clearly specified. For example, is it in the technology to be used in the project or is it intrinsic to the way the separate components of the project are brought together? Thirdly, all possible co-benefits to be derived from the project should be highlighted. And, finally there must be in place a robust, independent scientific authority, responsible for the monitoring, reporting, and verifying (MRV) regime.
It is this last feature which underpins the validity of the items traded on carbon markets. As we shall see later, in practice carbon-trading in these markets has been riddled with scams and frauds. I promise readers to supply them in the coming weeks with specific information in support of this strikingly negative observation. The pertinent point for me at this stage however, is that there still remains great technical and other challenges to the accurate measurement, transparent reporting and independent verification of carbon credits/offsets generally, but more particularly in the case of forest-carbon offsets/credits.
Conclusion
In conclusion, it should be noted that the price arrived at in climate carbon exchanges has extraordinary significance. It is supposed to represent the economic value, which should be placed on the harmful emission of greenhouse gases into the atmosphere as a result of human activity! Important as this function is, however, the climate exchanges are expected to do more than fix the price. Through their arrangements climate exchanges are also expected to generate the required liquidity in the instruments traded in order to facilitate their widespread acceptance and use. Ease of acquisition and disposition (sale) is vital to the continued success of carbon markets. As a consequence the importance of price signals and liquidity of traded instruments on climate exchanges cannot be exaggerated.
Next week I shall continue with this assessment of carbon-trading.
