Making Sense of the Voluntary Carbon Market a Comparison of Carbon Offset Standards

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Agricultural waste collection or CDM bio-mass project Malavalli, India.

Making Sense o the Voluntary Carbon Market

A Comparison o Carbon Ofset StandardsAnja Kollmuss (SEI-US), Helge Zink (Tricorona), Cli ord Polycarp (SEI-US)



Published by: WWF Germany

Title: Making Sense o the Voluntary Carbon Market: A Comparison o Carbon O set Standards

Authors: Anja Kollmuss (SEI-US), Helge Zink (Tricorona), Cli ord Polycarp (SEI-US)

Graphic Design: Tyler Kemp-Benedict

Date: March 2008

Copyright 2008 by the Stockholm Environment Institute and Tricorona. This publication may be re-produced in whole or in part and in any orm or educational or non-proft services without specialpermission rom the copyright holder, provided acknowledgement o the source is made. No use o this publication may be made or resale or any other commercial purpose without written permis-sion o the copyright holders.



Making Sense o the Voluntary Carbon MarketA Comparison o Carbon O set StandardsAnja Kollmuss (SEI-US), Helge Zink (Tricorona), Cli ord Polycarp (SEI-US)

Table o co te ts Ack owledgeme ts

About the Authors

About This Report

Executive Summar

1 I troductio

2 Market Overview

2 1 Compliance Market2 2 Voluntary Carbon Markets2 3 Voluntary and Compliance Carbon Market Size

3 How O set Projects Are Impleme ted3 1 The Stages o the CDM Project Cycle 3 2 Who Is Who in a Carbon O set Project

4 The Role o the Volu tar Market

5 Ke Eleme ts o O set Sta dards5 1 Additionality and Baseline Methodologies

5 1 1 Project Based Additionality Testing

5 1 2 Per ormance Standards5 1 3 Additionality Requirements or Each Standard 5 1 4 Baselines5 1 5Baseline Requirements or Each Standard 5 1 6 Project Boundaries and Leakage

5 2 Project Types5 2 1 Biological Sequestration5 2 2 Industrial Gases 5 2 3 Methane Capture5 2 4 Energy E ciency 5 2 5 Renewable Energy5 2 6Project Types Accepted by Each Standard

5 3 Project Location5 4 Start Date & Crediting Period

5 4 1 Start Dates and Crediting Periods or Each Standard 25 5 Co-Bene ts

5 5 1 Sustainable Development Criteria5 5 2 Stakeholder Consultations5 5 3Co-Bene ts Requirements or Each Standard

5 6 Role o Third Party Auditors5 6 1 Aligned Interests Between Buyers and Sellers 5 6 2 Independent Validation o Project Activity 5 6 3 Monitoring and Independent Veri cation o Project Activity



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5 6 4 Project Approval: Auditors or Standard Boards 5 6 5 Conficts o Interest: Auditors and Project Developers 355 6 6 Quality Control o Auditors 5 6 7Project Auditing Requirements or Each Standard 3 6

5 7 Registries 5 7 1Registries Used by Each Standard

5 8 Double Counting5 8 1Project Locations and Rules on Annex B Countries or Each Standard 4 2

6 O set Tra sactio s6 1 Pricing o O sets

6 1 1 Project Costs 6 1 2 A Common Misunderstanding: The “Project Share Pit all” 43

6 2 O set Market Prices 6 2 1Pricing o O sets or Each Standard

6 3 Choosing the Right Contract Terms 6 3 1 Low Transaction Risk: Prompt Delivery o Existing O sets 46

6 3 2 Medium Transaction Risk: Forward Delivery o Future O sets 466 3 3 High Transaction Risk: Forward Crediting o Ex-ante O sets 476 3 4 How Providers Can Reduce Delivery Risk

7 Review o Sta dards Used I the Volu tar O set Market 4 87 1 O set Standard Types 7 2 Full-fedged Standards

Clea Developme t Mecha ism

Gold Sta dard

Volu tar Carbo Sta dard 2007 VCS 2007

VER+

Chicago Climate Excha ge CCX7 3 O set Standard Screens

Volu tar O set Sta dard VOS

7 4 Bio-Sequestration Standards CDM A orestatio a d Re orestatio Sta dard CDM A/R 7 2VCS AFOLU Sta dard

The Climate, Commu it & Biodiversit Sta dards CCBS 76Pla Vivo S stem

7 5 O set Accounting Protocols GHG Protocol or Project Accou ti g

ISO 14064

8 Gover me tal Actio to Regulate the Volu tar Market 87

9 Overall Sta dard Rati gs & Co clusio s

Re ere ces

Appendix A:Re ewable E erg Certi cates RECs

Appendix B:CDM Additio alit Tool

Appendix C:Realized CDM Emissio s Reductio s

Appendix D:Glossar



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Ack owledgeme tsThe authors would like to thank the ollowing reviewers or their comments and suggestions: Derik Broekho , Barbara Haya, Toby Janson-Smith, Michael Schlup, Jutta Rothe, Anja Wucke, MichaelLazarus, and Ben Pearson

The authors would like to thank Heather Angstrom or proo -reading and editing and SusanneHä eli-Hestvik and Ann Strömberg or their contributions and comments

We would urther like to thank the ollowing people who have reviewed and commented on theollowing sections:

Joanna Durbin (CCBS)Nathan Clark and Scott Subler (CCX)Meinrad Bürer and Caitlin Sparks (Gold Standard)Patrick Hardy (ISO 14064)Alexa Morrison and Sarah Carter (Plan Vivo)Michael Gillenwater (RECs)Markus Knödlseder and Martin Schröder (VER+)Edwin Aalders, Josh Harrison and Mark Kenber (VCS)Olivia Hartridge (VOS)

About the AuthorsA ja Kollmuss works or the Stockholm Environment Institute’s US Center, an independent non-pro t research organisation dedicated to science-based policy change or a sustainable uture Herresearch areas include carbon markets, residential energy e ciency, and environmental educationwww.sei-us.organja kollmuss@sei-us org

Helge Zi k works or the Swedish Tricorona group, a major investor in carbon reduction projectsand expert in carbon credit commercialization Helge works in the mandatory and voluntary carbonmarkets dealing with risk management and quality controlwww.tricorona.comhelge zink@tricorona com

Cli ord Pol carp is a graduate student at The Fletcher School o Law and Diplomacy He works asa research intern at the Stockholm Environment Institute He has worked on carbon o set projectsand climate change policy or the Centre or Science and Environment, the British High Commissionand EcoSecurities in India



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About This ReportThis report discusses the role o the voluntary carbon market and provides an overview o the mostimportant currently available carbon o set standards It compares the ollowing standards side-by-side, outlining the most pertinent aspects o each:

• Clean Development Mechanism (CDM)• Gold Standard (GS)• Voluntary Carbon Standard (VCS)• VER+• The Voluntary O set Standard (VOS)• Chicago Climate Exchange (CCX)• The Climate, Community & Biodiversity Standards (CCBS)• Plan Vivo System• ISO 14064-2• WRI/WBCSD GHG Protocol or Project Accounting

The report is meant to be a comprehensive re erence To maximize the readability and transparencyo the report, we distinguish between the ollowing types o in ormation:• Background in ormation describes principles and mechanisms o the o set market in

general This report uses the CDM as the baseline standard against which all the otherstandards are compared It also includes an explanation o the CDM project cycle and themain actors involved in CDM o set projects The in ormation in these sections is presentedas objectively as possible and with minimal editorializing The appendices include urtherbackground in ormation Background in ormation appears in black.

• Standard Comparisons and Summaries include speci c in ormation about each standardas well as comparison tables The in ormation in these sections is presented as objectively aspossible and with minimal editorializing Standard comparisons and descriptions are titled inblue or on a blue background.

• Authors’ Comments are sections where the authors express their opinions and value judgments Editorial comments and opinions about each standard can be ound at the endo the standard description In their brie comments, the authors ocus on what they considerthe main strengths and weaknesses o each standard Editorial comments are indicated by avertical bar on the le t.

Many o the standards we have reviewed are young and have ew implemented projects Ourassessment relies on comparing the requirements o each standard and does not include projectcomparisons Judging the standards based on their per ormance in the real world will be impossibleuntil at least a ew projects have been implemented under each o them

We hope that the layout and structure o this paper will allow a diverse audience o consumers,o set pro essionals and project developers to nd the in ormation they are looking or



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Executive SummarIn order to preserve a high probability o keeping global temperature increase below 2 degreesCentigrade, current climate science suggests that atmospheric CO2 concentrations need to peak below 450ppm This requires global emissions to peak in the next decade and decline to roughly80% below 1990 levels by the year 2050 (Baer and Mastrandrea, 2006) Such dramatic emissionsreductions require a sharp move away rom ossil uel, signi cant improvements in energy e ciencyand substantial reorganisation o our current economic system This transition can only be achievedby ar-reaching national and international climate policies

Carbon o setting is an increasingly popular means o taking action By paying someone else toreduce GHG emissions elsewhere, the purchaser o a carbon o set aims to compensate or – or“o set” – their own emissions Individuals seek to o set their travel emissions and companies claim“climate neutrality” by buying large quantities o carbon o sets to “neutralize” their carbon ootprintor that o their products

Carbon o set markets exist both under complia ce schemes and as volu tar programsCompliance markets are created and regulated by mandatory regional , national, and internationalcarbon reduction regimes, such as the Kyoto Protocol and the European Union’s EmissionsTrading Scheme Voluntary o set markets unction outside o the compliance markets and enablecompanies and individuals to purchase carbon o sets on a voluntary basis (see chapter 2 2) Withmore than € 20 billion traded in 2006 (Capoor & Ambrosi, 2007), carbon markets are already asubstantial economic orce and will likely grow considerably over the coming years The voluntarymarket, although much smaller than the compliance market, (€62 6 million in 2006; Hamilton, 2007)is also growing rapidly

This report discusses the role o the voluntary carbon o set market and provides an overview andguide to the most important currently available voluntary carbon o set standards using the CleanDevelopment Mechanism (CDM) as a benchmark The report compares the standards side-by-sideand outlines the most pertinent aspects o each The evaluated standards are:

• Clean Development Mechanism (CDM)• Gold Standard (GS)• Voluntary Carbon Standard 2007 (VCS 2007)• VER+• The Voluntary O set Standard (VOS)• Chicago Climate Exchange (CCX)• The Climate, Community & Biodiversity Standards (CCBS)• Plan Vivo System• ISO 14064-2

• GHG Protocol or Project AccountingCarbon o set markets have been promoted as an important part o the solution to the climate crisisbecause o their economic and environmental e ciency and their potential to deliver sustainabilityco-bene ts through technology trans er and capacity building The voluntary o set market inparticular has been promoted or the ollowing reasons:

Possibility o Broad ParticipationThe voluntary carbon market enables those in unregulated sectors or countries that have notrati ed Kyoto, such as the US, to o set their emissions

All monetary gures were converted to euros, using the exchange rate rom Feb, 5, 2008 o 1 USD = 0 67 eurosStandard ees listed in USD were le t unchanged

The termsGHG o set standard and carbon o set standard are used as synonyms



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Preparation or Future ParticipationThe voluntary carbon market enables companies to gain experience with carbon inventories,emissions reductions and carbon markets This may acilitate uture participation in a regulatedcap-and-trade system

Innovation and ExperimentationBecause the voluntary market is not subject to the same level o oversight, management, and

regulation as the compliance market, project developers are more fexible to implement projectsthat might otherwise not be viable (e g projects that are too small or too disaggregated)

Corporate Goodwill Corporations can bene t rom the positive public relations associated with the voluntaryreduction o emissions

Most importantly, voluntary and compliance o set mechanisms have the potential to strengthenclimate policies and address equity concerns:

Cost-e ectiveness that allows or deeper caps or voluntary commitments.By decreasing the costs o reductions, o sets can in principle make a compulsory mandate morepolitically easible and a voluntary target more attractive, thereby accelerating the pace at whichnations, companies, and individuals commit to reductions

Higher overall reductions without compromising equity concerns.One o the greatest challenges o climate protection is how to achieve the deep global emissionsreductions required while also addressing the development needs o the poor Historically,developed nations have been responsible or a much larger share o the increase in atmosphericGHG concentrations than developing countries But to achieve climate stabilisation, emissionsmust be curbed in all countries, both rich and poor O sets may be one way out o theconundrum o needing to achieve steep global emissions reductions while at the same timeallowing poor nations to develop This has not been the case thus ar because the emissionsreductions undertaken have been too small to be signi cant Small reduction targets allow

participants to tinker at the margins and avoid the kind o restructuring that is needed to achieveclimate stabilizations While taking on considerable domestic emissions reductions, industrializedcountries could, through o sets, help nance the transition to low-carbon economies indeveloping nations In other words, o sets might allow equity to be decoupled rom e ciency,and thus enable a burden-sharing arrangement that involves wealthier countries acilitatingmitigation e orts in poorer countries

Yet carbon o setting is not without its critics A recent furry o media reports has criticised the poorquality o carbon o sets projects in both the compliance and the voluntary market (e g FinancialTimes, 2007) Recent research reports have pointed out that a signi cant number o o sets come

rom projects that would have been implemented anyway (i e are non-additional, see section 5 1)(Schneider, 2007; Haya, 2007) Critics have also raised concerns over equality and airness basedon the argument that carbon o setting enables developed nations to perpetuate unsustainableli estyles by unding carbon projects in developing countries Some argue that these projects rarelylead to bene ts or the host community, and have gone so ar as to call the o set market a ormo carbon colonialism (Eraker, 2000) Others assert that accounting methods or o sets are tooinaccurate to justi y claims o real emission reductions or to support the achievement o ‘carbonneutrality ’ The voluntary o set market in particular has been criticised or its lack o transparency,quality assurance and third-party standards

To address these shortcomings, over a dozen voluntary o set standards have been developed in thelast ew years Each standard has a slightly di erent ocus and none has so ar managed to establishitsel asthe industry standard Some closely mirror compliance market standards, while others take

For an in-depth analysis o such a potential climate and equity ramework, see theGreenhouse Development RightsFramework (Baer et al 2007)



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a more lenient approach in order to lessen the administrative burden and enable as many credits aspossible to enter the market Certain standards are limited to particular project types (e g orestry)while others exclude some project types in order to ocus on the social bene ts o carbon projectsIt is important to note that the vast majority o voluntary o sets are currently not certi ed by anythird-party standard This is likely to change over the coming years

Ge eral Sta dard I ormatio

The summary table provides broad comparisons and summaries o the standards Each o thecriteria is briefy put in context and explained below

Main Supporters‘Main Supporters’ lists the type o stakeholder associated with each standard Each o thereviewed standards has been developed and is supported by di erent groups o stakeholdersThe types o stakeholders refect to some extent the goal o the standard

Market ShareNot all standards are equally infuential ‘Market Share’ indicates the size o each o the standards,and thus to some extent refects the standard’s importance

Price o O sets‘Price o O sets’ indicates the cost o one o set representing the reduction o 1 tonne o CO2 eO set prices depend on many di erent parameters, such as the type o project, the location,market demand, stringency o the standard requirements, etc The pricing given in this columnindicates average prices or di erent projects as o early 2008 (see chapter 7 )

Authors’ CommentsThe Authors’ comments state the perceived goal o each standard and any relevant in ormationabout the standard More in-depth commentary and in ormation about each standard can be

ound in chapter 7

Additio alitAdditionality tests attempt to establish whether an o set project would have happened anywayA major limitation o o set systems based on project-based mitigation is that emission reductionshave to be measured against a counter actual reality The emissions that would have occurred i themarket or o sets did not exist need to be estimated in order to calculate the quantity o emissionsreductions that the project achieved This hypothetical reality cannot be proven; instead, it must bein erred and its de nition is always to some extent subjective (see chapter 5 1)

Additionality Tests (relative to CDM)The CDM additionality tool (see appendix B) most commonly used or testing the additionality o CDM projects was developed care ully over several years In this column it is used as a re erence

against which the other standards’ project-based additionality testing procedures are compared:+ Requirements go beyond and are more stringent than CDM rules– Requirements are less stringent than CDM= Requirements are the same or very similar to CDMN/A Not Applicable

Although the CDM additionality tool is well respected, it does not guarantee that only additionalprojects are approved Recent reports have shown that despite the act that the additionality toolis required or all CDM projects, it is likely that a signi cant number o non-additional projectsare registered (Schneider, 2007; Haya, 2007) Similar studies have not yet been carried out or VERprojects It is there ore impossible to know i VER standards likely have a higher or lower percentage

o additional projects It remains to be seen how well these standards will succeed in implementingtheir additionality requirements



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Some o the standards, such as the VCS and the VER+, plan to develop per ormance-basedadditionality tools (also called benchmark tools) By shi ting the tasks o establishing a baseline

rom the project developer to the standard-setting organisation, benchmark tools could potentiallyincrease transparency and decrease administrative burden or project developers Yet suchapproaches also harbour the danger o certi ying too many ree riders Benchmark rules will have tobe closely examined to ensure that they minimize or mitigate the e ects o non-additional o sets(see chapter 5 1)

Approval Process

Although o set markets are relatively straight orward in principle, they have been anything butstraight orward to implement in practice In part, this may be attributed to the inevitable birthingpains associated with creating institutions and stabilizing new markets But problems also arise

rom inherent structural problems inherent in the conception o o set markets O set marketslack a critical competitive check ound in well unctioning markets, in which the interests o buyerand seller are naturally balanced against each other In o set markets, both the sellerand thebuyer bene t rom maximizing the number o o sets a project generates This issue can partiallybe mitigated by imposing stringent requirements or auditors and an additional approval process

though the standard organisation (see chapter 5 6)Another confict o interest arises rom the act that auditors are currently chosen and paid by aproject’s developer There is thus pressure on auditors to approve projects in order to preservetheir business relationships with the developers This compromises the auditors’ independenceand neutrality To account or this dynamic, o set markets need an administrative in rastructure toensure that auditors’ estimates o project reductions are reasonable

Third-party Veri cation Required To minimize the number o “ ree riders,” most standards require third-part auditors to veri y theemissions reductions

Separation o Veri cation and Approval ProcessFundamental di erences exist among standards as to how projects are reviewed and approvedUnder the CDM, projects are veri ed by third-party auditors and then reviewed, approvedor rejected by the CDM Executive Board Most voluntary o set standards do not have such abody to review and approve the projects a ter the auditors have veri ed them Projects aresimply approved by the auditors themselves The lack o a standard body which approvesprojects exacerbates conficts o interest, particularly where auditors are selected and paid orby the project developer None o the voluntary standards have speci c procedures in place toreview the approved auditors nor to allow or sanctions against or the discrediting o an under-per orming auditor (see chapter 5 6)

Registry

Carbon o set registries keep track o o sets and are vital in minimizing the risk o double-counting, that is, having multiple stakeholders take credit or the same o set Registries alsoclari y ownership o o sets (see chapter 5 7)



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O set Project I ormatio

Each standard accepts di erent types o o set projects The CDM, or example accepts all projectsthat reduce the six GHGs listed in the Kyoto Protocol, with the exception o the protection o existing orests (REDD), nuclear energy, and HFC destruction rom new acilities (see chapter 5 2)

Project TypesREDD = Reduced Emissions rom Degradation and De orestationEE = Energy E ciencyRE = Renewable EnergyLULUCF = Land Use, Land-Use Change and Forestry = Bio-Sequestration

Excludes Project Types with High Chance o Adverse ImpactsSome project types are more likely to have adverse social and environmental impacts Somestandards there ore exclude these projects types, such as tree plantations and monocultureswhich are detrimental to biodiversity and can negatively impact watersheds or large hydroprojects, which can displace large numbers o people

Sustai able Developme t

Co-bene ts are social and environmental bene ts that go beyond the GHG reduction bene tso o set projects Such bene ts include job creation, improved local air quality, protected andenhanced biodiversity, etc The Clean Development Mechanism (CDM) was approved by developingnations speci cally because o set projects were not only to provide cost-e ective reductions orAnnex 1 countries but also development bene ts or the host countries In other words, to quali yas a CDM project, the original intention was that a CDM project would have to deliver developmentbene ts In practice, the CDM has ailed to consistently deliver such development and sustainabilitybene ts (Holm Olsen, 2007; Sutter and Parreño, 2007; see chapter 5 5 )

Co-Bene ts (relative to CDM)Voluntary standards vary in their requirements or co-bene ts This column highlights the co-

bene t requirements o each standard, comparing them to the requirements o the CDMMany o the voluntary carbon o set standards that have been developed in the last ew yearsrepresent a step in the right direction They help address some o the weaknesses in the currento setting process and oster climate mitigation projects The voluntary market in particular hashelped to shape climate actions in countries that have thus ar been reluctant to enact strongpolicies Even with ar reaching cap-and-trade policies expected to be enacted in the medium term,there will likely always be room or a voluntary market The demand or voluntary o sets will come

rom private and corporate actors who wish to go beyond regulatory requirements and will besupplied by mitigation projects in sectors that are not capped Well-designed standards will helpthe voluntary market mature and grow



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M a i n S u p p o r t e r s

M a r k e t S h a r e

A d d i t i o n a l i t y T e s t s

( r e l a t i v e t o C D M )

T h i r d - p a r t y V e r i c a t i o n

R e q u i r e d

S e p a r a t i o n o V e r i c a t i o n

a n d A p p r o v a l P r o c e s s

R e g i s t r y

P r o j e c t T y p e s

E x c l u d e s P r o j e c t T y p e s

w i t h h i g h c h a n c e o

a d v e r s e i m p a c t s

C o - B e n e t s ( r e l a t i v e t o

C D M )

P r i c e o O f s e t s


UNFCCC Parties large = yes yes yesAll minus

REDD, newHFC, nuclear

no = €14–30

Authors’ Comme ts: The CDM is part o the Kyoto protocol and aims to create economic e ciency while also deliveringdevelopment co-bene ts or poorer nations It has been success ull in generating large numbers o o setsWhether it also has delivered the promised development co-bene ts is questionable

Gold Sta dard

Environmental NGOs(e g WWF)

small butgrowing =/+1 yes yes Planned EE, RE only yes +

VERs: €10–20CERs: up to €10premium

Authors’ Comme ts: The GS aims to enhance the quality o carbon o sets and increase their co-bene ts by improving andexpanding on the CDM processes 1 For large scale projects the GS requirements are the same as or CDMYet unlike CDM, the GS also requires the CDM additionality tool also or small-scale projects

Volu tar Carbo Sta dard 2007 VCS 2007Carbon Market Actors(e g IETA)

new; likelyto be large =2 yes no Planned All minus

new HFC no - €5–15 3

Authors’ Comme ts: The VCS aims to be a universal, base-quality standard with reduced administrative burden and costs 2 The VCS plans to develop per ormance based additionality tests These tools have not yet beendeveloped and are thus not included in this rating 3 Prices are or projects implemented under VCS ver 1

VER+

Carbon Market Actors

(e g TÜV SÜD)

small but

growing= yes no yes CDM minus

large hydroyes - €5–15

Authors’ Comme ts: VER+ o ers a similar approach to CDM or project developers already amiliar with CDM procedures orprojects types that all outside o the scope o CDM

Chicago Climate Excha ge CCX

CCX Members andCarbon Market Actors

large in theUS - yes yes yes All (mostly

soil carbon) no - €1–2

Authors’ Comme ts: CCX was a pioneer in establishing a US carbon market Its o set standard is part o its cap-and-tradeprogramme

Volu tar O set Sta dard VOSFinancial Industry andCarbon Market Actors N/A = yes no Planned CDM minus

large hydro yes = N/A

Authors’ Comme ts: VOS closely ollows CDM requirements and aims to decrease risks or o set buyers in the voluntary market

Climate, Commu it a d Biodiversit Sta dards CCBSEnvironmentalNGOs (e g NatureConservancy) andlarge corporations

large orLULUCF = yes no 4 N/A LULUCF yes + €5–10

Authors’ Comme ts: The CCBS aims to support sustainable development and conserve biodiversity4The CCBS is a Project Design Standard only and does not veri y quanti ed emissions reductions

Pla Vivo

Environmental andsocial NGOs very small = no no yes 5 LULUCF yes + €2 5–9 5

Authors’ Comme ts: Plan Vivo aims to provide sustainable rural livelihoods through carbon nance5 It veri es and sells ex-antecredits only Third party veri cation is not required but recommended



1i n t r o d u c t i o n

1 I troductio“Carbon, the currency o a new world order” (Paul Kelly,The Australian, 21 March 2007)

Public awareness o the threat o climate change has risen sharply in the last couple o years and anincreasing number o businesses, organizations and individuals are looking to minimize their impacton the climate

To e ectively address the threat o climate change, we need comprehensive and stringent policiesto reduce greenhouse gas (GHG) emissions at national and international levels At the same time,voluntary individual and corporate climate action can be essential or creating the public awarenessand constituency needed or policy change

Individuals and organizations can most e ectively lower their own carbon ootprints by improvingenergy e ciency (e g in their homes, o ces, or actories), relying on lower-emission products (e gbuying locally grown ood), and changing consumption patterns (e g home size, travel choices)Beyond this, carbon o sets are gaining prominence as a tool to compensate or emissions Bypaying someone else to absorb or avoid the release o a tonne o CO2 elsewhere, the purchaser o acarbon o set can aim to compensate or or, in principle, “o set” their own emissions This is possible

because climate change is a non-localized problem; greenhouse gases spread evenly throughoutthe atmosphere, so reducing them anywhere contributes to overall climate protection

Yet carbon o setting is not without its critics A recent furry o media reports has criticized the poorquality o carbon o sets projects in both the compliance and the voluntary market (e g FinancialTimes, 2007) Recent research reports have pointed out that a signi cant number o o sest come

rom projects that would have been implemented anyway (i e are non-additional, see chapter 5 1)(Schneider, 2007; Haya 2007) Many have also raised issues o equality and airness based on theargument that carbon o setting enables developed nations to perpetuate unsustainable li estylesby unding carbon projects in developing countries Some critics have pointed out that these o setprojects rarely lead to bene ts or the host community and have gone as ar as calling the o setmarket as a orm o carbon colonialism (Eraker, 2000 ) Others assert that accounting methods or theo sets are too inaccurate to justi y claims o real emission reductions or to support the achievemento ‘carbon neutrality ’

Despite these critiques, the carbon markets are growing rapidly With more than € 20 billiontradedin 2006 (Capoor & Ambrosi, 2007), carbon markets are already a substantial economic orce and willlikely grow considerably over the coming years It is there ore important to ocus the discussion onhow to use these markets most e ectively to:

• Contribute to climate protection through real and additional, permanent, and veri ablegreenhouse gas (GHG) reductions, while limiting unintended negative consequences

• Reduce GHG emissions in an economically e cient way• Enhance the social and environmental bene ts to project hosts• Stimulate social and technological innovation and participation by new actors sectors and

groups• Create and build constituencies or more e ective and comprehensive national and

international solutions• Avoid perverse incentives that could stymie broader climate protection actions and policies• Synergistically work with other climate protection measures

Carbon o set and carbon credit are synonymous terms, yet the term carbon credit is more o ten used when re erringto the compliance markets, such as CDM The termcarbon o set is more o ten used when re erring to the voluntarymarket

All monetary gures were converted to euros, using the exchange rate rom Feb, 5, 2008 o 1 USD = 0 67 eurosStandard ees listed in USD were le t unchanged



2 m a r k E t o v E r v i E w

The voluntary o set industry has recognized the need or quality assurance in order to restore thecredibility o the o set market Over a dozen voluntary o set standards have been developed in thelast ew years Yet no single standard has so ar managed to establish itsel asthe industry standardEach standard has a slightly di erent ocus Some closely mirror compliance market standards,while others take a more lenient approach in order to lessen the administrative burden and enableas many credits as possible to enter the market Certain standards are limited to particular projecttypes (e g orestry), while others exclude some project types in order to ocus on the social bene tso carbon projects It is important to note that the vast majority o voluntary o sets are currently notcerti ed by a third-party standard This is likely to change over the coming years The next chaptersprovide an overview o the carbon markets in general and the compliance and voluntary o setmarkets

2 Market OverviewIn order to understand the carbon markets, it is important to recognize the di erences betweentwo undamentally di erent types o carbon commodities, allowances and o sets, and the systemsthat create them The rst, allowances, are created by cap-and-trade systems The second, o sets orcarbon credits, are created by baseline-and-credit systems (also sometimes called a project-basedsystem)

Under a cap-a d-trade s stem , an overall cap is set to achieve emissions reductions Each o theparticipants within a cap-and-trade system (usually countries, regions or industries) is allocated acertain number o allowances based on an emissions reduction target In a cap-and-trade systemthe cap constitutes a nite supply o allowances, set by regulation and political negotiation Theseallowances are then neither created nor removed, but merely traded among participants This nitesupply creates a scarcity and drives the demand and price or allowances

A cap-and-trade system aims to internalize (some o ) the costs o emissions, and thus drivesactors to seek cost-e ective means to reduce their emissions The challenge in a cap-and-tradeprogramme is to determine the appropriate level at which to set the cap, which should be stringentenough to induce the desired level and rate o change, while minimizing overall economic costs

Abaseli e-a d-credit s stem in contrast, does not entail a nite supply o allowances It doesnot involve projects that are implemented under the umbrella o a cap-and-trade system Rather,more credits are generated with each new project implemented These credits can then be used bybuyers to comply with a regulatory emission target, to “o set” an emitting activity (such as an airlinefight), or to be a “carbon neutral” organisation with zero “net” emissions

In a baseline-and-credit system a carbon o set buyer can only legitimately claim to o set hisemissions i the emissions reductions come rom a project that would not have happened anywayThis concept is calledadditio alit in the carbon markets, and re ers to the requirement that “[…]reductions in emissions […] are additional to any that would occur in the absence o the certi edproject activity” (Kyoto Protocol in Article 12 5) Under a cap-and-trade system it is the cap and theallocations rules that drives demand, and determines the level o emissions reduction Activities thatare undertaken in response to the pressure o the cap there ore do not need to prove that they areadditional Additionality is discussed in detail in chapter 5 1

Cap-and-trade systems o ten allow or a certain number o o sets to come rom emissionsreductions that are generated by projects that are not covered under the cap (i e rom baseline-



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and-credit systems) Under a cap-and-trade system the covered sources ( or example powerproducers) have an obligation to reduce their emissions I these covered sources cannot buyo sets, they will have to reduce their emissions in some other way (e g by buying allowances orby increasing e ciency in their plants) I they can buy o sets and these come rom projects thatare ully additional, then the o sets replace reductions that the cap-and-trade participant wouldhave had to otherwise achieve himsel In other words, under a cap-and-trade system, o sets donot lead to emissions reductions beyond the target set by the cap but only cause a geographicalshi t in where the emissions reduction occurs There ore, non-additional o sets sold into a cap-and-trade system will actually lead to anincrease in emissions since the buyer will not have reduced hisemissions and the seller will not have o set this increase in emissions

In a voluntary system, on the other hand, individuals and companies are not required to reduce theiremissions We can there ore assume that they would only do so to a limited extent The availabilityo o sets enables them to go beyond what they would have done anyway to reduce their ownemissions The availability o o sets in the voluntary market may there ore lead to additionalemissions reduction that would not have happened without the availability o o sets Buyers inthe voluntary market can only claim a unique, incremental “o set“ reduction i the reduction isadditional Yet even without additionality tests, the o set market might induce reductions that

would not have happened otherwise, because the market will bring investment to some projectsat the margin But without clearly established additionality, there is no one-to-one correspondencebetween each credit sold and an additional tonne o reductions

t a b l E 1 : Distinguishing Features o Cap-and-Trade and Baseline-and-Credit Systems

Features Cap-and-trade Baseline-and-credit

Exchangedcommodity

Allowances Carbon Credits

Quantity available Determined by overall cap Generated by each new project

Market dynamic Buyers and sellers have competing and

mutually balanced interests in allowancestrades

Buyers and sellers both have an interest

in maximizing the o sets generated bya projectSources Covered Usually high emitters such as the energy

sector and energy intensive industriesAs de ned by each standard Not limitedto just high emitting sectors

Independent thirdparty

Minor role in veri ying emissions inventories Fundamental role in veri ying thecredibility o the counter actual baselineand thus the authenticity (“additionality”)o the claimed emission reductions

Emissions impacto trade

Neutral, as is ensured by zero-sum nature o allowance trades

Neutral, providing projects are additionalOtherwise, net increase in emissionsPossible decrease in emissions in thevoluntary market

Cap-and-trade systems exist almost exclusively in the compliance market Baseline-and-creditsystems exist both in the compliance and in the voluntary market All currently established cap-and-trade programs allow or a limited use o o sets and have an associated o set programme:

For example, the EU-ETS allows or CDM credits (CERs) to be used interchangeably with their allowances (EUAs) In thecase o the EU-ETS, it is the countries themselves who set the limit on what percentage o CERs are allowed into theirsystem Allowing CERs will de- acto increase the number o available allowances and there ore raises the cap On theother hand, it makes achieving reductions potentially more cost e ective

An exception to this is the Chicago Climate Exchange which is a voluntary but legally binding cap-and-trade regime




t a b l E 2 : Types o Carbon Trading Programs

Type o Programme Cap-and-Trade Associated Baseline-and-Credit (O set)Programme

Compliance Market Emissions Trading under KyotoProtocol

CDM & JI

EU-ETS CDM & JIRGGI RGGI O set ProgrammeWestern Climate Initiative under development

Voluntary Market Chicago Climate Exchange (CCX) CCX O set Programme

Except or the CCX O set Programme, voluntary o set standards are independent o and unctionoutside o a cap-and-trade system The ollowing sections provide a brie overview o thecompliance and the voluntary markets

2.1 Complia ce Market

Carbon markets exist both under compliance schemes and as voluntary programs Compliancemarkets are created and regulated by mandatory national, regional or international carbonreduction regimes

Cap-a d-Trade S stems

Emissions Trading Under the Kyoto Protocol The Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC)established a cap-and-trade system that imposes national caps on the greenhouse gasemissions o developed countries that have rati ed the Protocol (called Annex B countries)Each participating country is assigned an emissions target and the corresponding number o

allowances – called Assigned Amount Units, or AAUs On average, this cap requires participatingcountries to reduce their emissions 5 2% below their 1990 baseline between 2008 and 2012Countries must meet their targets within a designated period o time by:• reducing their own emissions; and/or• trading emissions allowances with countries that have a surplus o allowances This ensures

that the overall costs o reducing emissions are kept as low as possible; and/or• meeting their targets by purchasing carbon credits: to urther increase cost-e ectiveness o

emissions reductions, the Kyoto Protocol also established so-calledFlexible Mechanisms: theClean Development Mechanism (CDM) and Joint Implementation (JI)

European Union Emissions Trading Scheme

The Kyoto Protocol enables a group o several Annex I countries to join together and orma so-called ‘bubble’ that is given an overall emissions cap and is treated as a single entity orcompliance purposes The 15 original member states o the EU ormed such a ‘bubble’ andcreated the EU Emissions Trading Scheme (EU-ETS) The EU-ETS is a company-based cap-andtrade system which came into orce in 2005 Under this cap-and-trade scheme, emissions arecapped and allowances may be traded among countries The EU-ETS is the largest mandatory

Although the Gold Standard also certi es CDM credits, it is a voluntary standard Annex 1 or Annex B? In practice, Annex 1 o the UNFCCCCo ve tio and Annex B o theK oto Protocol are used almost interchangeablyHowever, strictly speaking, it is theA ex 1 countries that can invest in JI / CDM projects as well as host JI projects,

ando -A ex 1

countries that can host CDM projects, even though it is the Annex B countries that have the emissionreduction obligations under the Protocol Note that Belorus and Turkey are listed in Annex 1 but not Annex B; and thatCroatia, Liechtenstein, Monaco and Slovenia are listed in Annex B but not Annex 1(source:www.cdmcapacity.org/glossary.html )



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cap-and-trade scheme to date In 2006, it traded 1 1 billion metric tonnes o CO2 e, valued atover €16 billion There are currently several cap-and-trade compliance schemes that operateindependently o the Kyoto Protocol All o these also incorporate a baseline-and-creditcomponent to their programme Three examples are:

New South Wales GHG Abatement Scheme (NSW GHGAS)The NSW GHGAS in Australia aims to reduce greenhouse gas emissions rom the power sector

It achieves this by using project-based activities to o set the production o greenhouse gasemissions The programme was established in 2003

Regional Greenhouse Gas Initiative (RGGI)RGGI is a multi-state regional cap-and-trade programme or the power sector in the NortheastUnited States The RGGI cap-and-trade programme is proposed to start in 2009 and lead to astabilisation o emissions at current levels (an average o 2002-2004 levels) by 2015, ollowed bya 10% reduction in emissions between 2015 and 2020 Some o the programme reductions willbe achieved outside the electricity sector through emissions o set projects O sets serve as theprimary cost containment mechanism in RGGI; i allowance prices rise above trigger prices, theability or regulated sources to use o sets increases

Western Climate Initiative (WCI)The WCI is a collaboration o 5 Western US stated and British Columbia launched in early 2007The initiative set a goal o reducing greenhouse gas emissions by 15% rom 2005 levels by 2020and requires partners to develop a market-based, multi-sector mechanism to help achieve thatgoal, and participate in a cross-border greenhouse gas (GHG) registry

Baseli e-a d-Credit S stems Used withi Cap-a d-Trade

The Clean Development Mechanism (CDM)The CDM allows Annex I countries to partly meet their Kyoto targets by nancing carbonemission reductions projects in developing countries Such projects are arguably more cost-e ective than projects implemented in richer nations because developing countries have onaverage lower energy e ciencies, lower labor costs, weaker regulatory requirements, and lessadvanced technologies The CDM is also meant to deliver sustainable development bene ts tothe host country CDM projects generate emissions credits called Certi ed Emissions Reductionsor CERs – one CER is equal to one tonne o carbon dioxide equivalent – which are then boughtand traded (see chapter 7 1 or more details on the CDM)

Joint Implementation (JI)Joint Implementation works similarly to CDM, with the exception that the host country is nota developing nation but another Annex I country The tradable units rom JI projects are calledEmissions Reductions Units (ERUs) It is not strictly a baseline-and-credit system since it also hasaspects o a cap-and-trade system, and, notably, both participants have an overall reduction

targetThe value o both JI and CDM projects has more than doubled in recent years, reaching acombined total o USD 5 billion (EUR 3 9 billion) in 2006 (Capoor & Ambrosi, 2007) Since JIo cially starts in 2008, it is not surprising that over 90% o the credits transacted in thesemarkets were produced by CDM projects

The EU-ETS Linking DirectiveThe EU Linking Directive, which was passed in 2004, allows operators in phase 2 o the ETS to usecredits rom Joint Implementation (JI) and the Clean Development Mechanism (CDM) to meettheir targets in place o emission cuts within the EU Member States speci y a limit up to whichindividual installations will be able to use external credits to comply with the ETS These limits

vary between 0% (Estonia) and 22% (Germany) o allowances There are also restrictions on use o CERs rom orestry projects and rom certain types o large hydro projects




2 2Volu tar Carbo MarketsThe voluntary carbon markets unction outside o the compliance market They enable businesses,governments, NGOs, and individuals to o set their emissions by purchasing o sets that werecreated either through CDM or in the voluntary market The latter are called VERs (Veri ed orVoluntary Emissions Reductions) It is noteworthy that about 17% o the o sets sold in the voluntarymarket in 2006 were sourced rom CDM projects (Hamilton, 2007)

c h a r t 1 : Carbon O sets in the Compliance and in the Voluntary Market

Unlike under CDM, there are no established rules and regulations or the voluntary carbonmarket On the positive side, voluntary markets can serve as a testing eld or new procedures,methodologies and technologies that may later be included in regulatory schemes Voluntarymarkets allow or experimentation and innovation because projects can be implemented with ewertransaction costs than CDM or other compliance market projects Voluntary markets also serve asa niche or micro projects that are too small to warrant the administrative burden o CDMor orprojects currently not covered under compliance schemes On the negative side, the lack o qualitycontrol has led to the production o some low quality VERs, such as those generated rom projectsthat appear likely to have happened anyway (see chapter 5 1 on additionality )

2 3Volu tar a d Complia ce Carbo Market SizeCompared to the compliance market, trading volumes in the voluntary market are much smallerbecause demand is created only by voluntary wish to buy o sets whereas in a compliance market,demand is created by a regulatory instrument Because there is much lower demand, becausequality standards are not widely established, and because they are not ungible in compliancemarkets, carbon o sets sold in the voluntary market tend to be cheaper than those sold in thecompliance market

When compliance market credits are used or voluntary o setting, they are retired, thus do not go towards assisting ormeeting any legally-binding reduction targets

According to project developers, carbon o set project must reduce at least 5,000 metric tonnes o CO2 per year in order justi y the CDM transaction costs (myclimate, personal communication )

comPliancEmarkEt

voluntarymarkEt

vErScErs

comPliancEmarkEt

voluntarymarkEt

vErScErs



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c h a r t 2 : O set Trading Volumes in the Kyoto and in the Voluntary Markets

(Source: Capoor, 2007; Hamilton 2007)

In 2006, 23 million tonnes o CO2 e were traded at a value o €62 6 million (Hamilton, 2007) in thevoluntary market – the trading value o the compliance market, including allowances and creditswas €23 billion in 2006 The value o CDM and JI credits was €3 8 billion in 2006 (Capoor and &Ambrosi, 2007 ) Nevertheless, the voluntary carbon market has grown dramatically over the lastcouple o years According to a recent report, the voluntary o set market grew 200% between 2005and 2006 (Hamilton, 2007)

45%

10%

17%

7%

2%

13%

1%

5%

Kyoto Projects (CDM and JI) Total Volume in 2006: 466 MtCO2

Industrial GasesEnergyE ciencyRenewable EnergyForestryMethanefrom Coal MininMethane from Land llsMethane fromLivestock Other

Voluntary O set Projects Total Volume in 2006: 13 MtCO2(excluding CCX transaction of 10.3MtCO2)

33%

5%20%

36%

3%1%<1%

1%

45%

10%

17%

7%

2%

13%

1%

5%

Kyoto Projects (CDM and JI) Total Volume in 2006: 466 MtCO2

Industrial GasesEnergyE ciencyRenewable EnergyForestryMethanefrom Coal MininMethane from Land llsMethane fromLivestock Other

Voluntary O set Projects Total Volume in 2006: 13 MtCO2(excluding CCX transaction of 10.3MtCO2)

33%

5%20%

36%

3%1%<1%

1%



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3 How O set Projects Are Impleme ted

3 1The Stages o the CDM Project C cleThis chapter provides a brie overview o how o set projects are developed under the CDM TheCDM has established detailed guidelines and procedures or project developers Although the

project development process or projects implemented under a voluntary o set standard aresomewhat di erent rom CDM procedures, the CDM project cycle can serve as a rame o re erenceto analyze the di erent standards

The CDM Executive Board (CDM EB) requires that all CDM projects ollow a set o projectdevelopment steps that are re erred to as the project cycle CDM project activities can only deliverCerti ed Emission Reductions (CERs) i the project itsel and its success ul operation have beenapproved by the CDM EB Each stage o the project cycle is outlined below

c h a r t 3 : The CDM Project Cycle

Entity

(PDD)

Entity

(PDD)



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Project Desig

The Project Design stage includes developing a project concept, choosing or developing abaseline and monitoring methodology, and stakeholder consultations All o these elements aredocumented in the project design document (PDD)

Project Concept A easibility study o a potential CDM project is conducted to assess the technical easibility,investment requirements, development and operational costs, expected returns, administrativeand legal hurdles, and project risks and pit alls Based on the results o the easibility study, theproject owner will decide whether or not to continue development o the potential CDM project

Methodology A CDM methodology de nes the rules that a project developer needs to ollow to establish aproject baseline and to determine project additionality (see chapter 5 1), to calculate emissionreductions and to monitor the parameters (e g electricity produced by the project) used toestimate actual emission reductions It is a generic recipe that can be applied to di erent projectswithin a given project type (e g renewable power production) and applicability conditions(e g grid-connected) I no approved methodology exists or a speci c project type, a project

developer can submit a new methodology or approval to the CDM Methodology Panel236 methodologies have been submitted or approval, 110 have been rejected, 28 are pendingand 98 methodologies have been approved so ar

Project Design Document (PDD)The Project Design Document (PDD) describes the CDM project activity in detail and ormsthe basis or all uture planning and administrative procedures It contains a description o the chosen technology and explains the methodology used to de ne the baseline scenario,to con rm additionality and to calculate emission reductions It also contains in ormation onthe monitoring o all relevant technical parameters (e g temperature, gas fow rates, electricityproductions, operation hours, etc ) including, how monitoring procedures will be established,

measurements will be made, quality will be controlled, and records will be stored and accessedIt contains an estimate o the volume o emission reductions achieved by the project Finally, itdocuments how the project contributes to sustainable development

The PDD plays a central role in project development It serves as the basis or evaluating allcarbon credit transactions and contract proposals or a CDM project The PDD is used throughoutthe implementation phase to ensure that the project per orms according to the parametersoutlined in the document

Stakeholder Consultation(s)CDM projects are required to provide evidence that the project’s activities will not adverselyimpact local populations and other relevant stakeholders To ensure that all relevant stakeholders

have been provided an opportunity to comment on the proposed CDM project, the projectdeveloper must in orm them about the project through appropriate orms o media The projectdeveloper must respond to all stakeholder comments, and describe a course o action tominimize negative impacts The outcomes o the stakeholder consultations must be documentedin the Project Design Document (PDD)

The Methodologies Panel (Meth Panel) was established to develop recommendations to the Executive Board onguidelines or methodologies or baselines and monitoring plans, and to prepare recommendations on submittedproposals or new baseline and monitoring methodologies

UNEP, November 2007



1 0 h o w o f f S E t P r o j E c t S a r E i m P l E m E n t E d

Project ValidatioA ter the project developer has written the PDD, an independent UN-approved third-party auditorconducts the project validation Under CDM auditors are calledDesignated Operational Entities or DOEs The process o CDM project validation normally consists o our phases:

• a desk review o the PDD,• on-site visits and ollow-up interviews with project stakeholders,

• a 30 day public comment period a ter the PDD has been made available through the internet• resolution o outstanding issues, and• the issuance o the nal validation report and written by the DOE

A ter completion, the validation report and the PDD are submitted to the CDM Executive Board orreview and registration

Host Cou tr ApprovalFinal acceptance o a CDM project by the CDM EB is not possible without the approval o theproject’s host country The project documentation must be submitted to the relevant authoritywhich checks the project activity against national rules and regulations and con rms the project’s

compliance with the host country’s sustainability criteria This screening process and host countryrequirements vary rom country to country

Project RegistratioThe registration o a project by the CDM EB as a CDM project is a major step in the CDM projectcycle The CDM EB’s decision to register a project is based on the review o the PDD and thevalidation report and public eedback Once the CDM EB approves a project it is o cially registeredas a CDM project

Project Impleme tatioThe project can begin implementation anytime during the project cycle However, i the project is

implemented be ore it is registered by the CDM Executive Board, then the project developer has tosupply documentary evidence proving that they considered CDM revenues at the time o planningthe project The documentary evidence must be supplied at the time o seeking CDM registration I documentary evidence is not supplied, then the project is likely to be rejected on the grounds thatit is not additional

Project Mo itori gProject developers are required to maintain records measuring the emission reduction achievedduring the operation phase These records, maintained in a monitoring report, must be inaccordance with the parameters and procedures laid out in the original PDD that was validated bythe DOE and registered by the CDM EB Emission reductions are issued based on the monitoring

report There ore, a project developer will make the trade-o between having continuous CERincome (many short monitoring periods) and lower administrative costs (long monitoring periods)There are no requirements as to how long or short a monitoring period must be as they ranges roma ew weeks to several years

Project Veri catioThe monitoring that the project developer has done is then evaluated and approved by a DOE Tominimize confict o interest, the validating DOE cannot also conduct project veri cation A di erentauditor must be chosen or this task This is called Project Veri cation The project developer hasto submit the monitoring report to the DOE along with relevant supporting documents The DOEundertakes a desk review o the report to ensure that the monitoring has been carried out in

accordance with the procedures laid out in the original PDD The DOE may also undertake a sitevisit, i necessary Following the desk review and site visit, the DOE prepares a dra t veri cationreport highlighting any issues in the process Once the project developer resolves these issues, the



11h o w o f f S E t P r o j E c t S a r E i m P l E m E n t E d

DOE prepares the nal veri cation and certi cation report, which also quanti es the actual emissionreductions achieved by the project

Veri cation is done at time intervals reely chosen by the project developer or project owner andis usually a consideration between having low costs (long intervals) and requent sales revenues(short intervals)

Project Certi catioThe veri cation report is submitted to the CDM EB or certi cation and issuance o CERs The issuedCERs are then trans erred to the CDM registry account o the relevant project participant a ter themandatory ees are paid to the UNFCCC secretariat

CommercializatioAt the commercialization stage, a project developer sells the carbon credits rom a project to aprospective buyer The credits can either be sold directly to a company that requires it to meet itslegally binding or voluntary emission reduction obligations or it can be sold to a trading companythat acilitates the transaction between the seller and the end user o the credits

A contract to sell the carbon credits rom a project can be signed at any stage during the projectdevelopment cycle Depending on the project developer’s risk appetite, some will sign contracts asearly as the planning stage (i e orward contracts), lock in the price and other terms, and insulatethemselves rom the risks o price volatility while others will wait until the credits are generated,certi ed and issued be ore selling them (i e spot market sales) The project developer usuallyreceives payment or the credits only a ter they have been delivered However, in a ew cases, aproject developer may receive an advance payment This is usually done i the project developerwants to bridge an investment gap or needs to meet cash fow requirements during the project’simplementation (see chapter 6 3)

3 2Who Is Who i a Carbo O set ProjectDesigning, implementing and operating a carbon o set project requires the involvement o alarge number o parties, stakeholders and authorities Even though the parties involved di er romproject to project some general categories and types o stakeholders can be de ned as ollows

Project Owner The operator and owner o the physical installation where the emission reduction project takesplace can be any private person, company or other organisation

Project DevelopersA person or organisation with the intention to develop an emission reduction project could bethe project owner, a consultant or specialized services provider

Project FundersBanks, private equity rms, private investors, non-pro t organizations and other organizationsmay lend or invest equity to und a project Some o the standards have rules to what kind o

unding, aside rom the o set revenue, are acceptable or an o set project

StakeholdersStakeholders are individuals and organizations that are directly or indirectly a ected by theemission reduction project Stakeholders include the parties interested in developing a speci cproject (e g owner, developer, under, local population, host community), parties a ected by theproject (e g local population, host community environmental and human rights advocates) andnational and international authorities



12 t h E r o l E o f t h E v o l u n t a r y m a r k E t

Third Party Auditors Validators and Veri ersThe CDM and many o the voluntary o set standards require a third-party auditor to validateand veri y a project’s climate saving potential and achieved emission reductions Under CDM theauditors are called Designated Operational Entities (DOEs) To minimize confict o interest, thevalidating DOE cannot also conduct project veri cation

Standards Organisation

In the absence o national and international legislation, standard organizations de ne a set o rules and criteria or voluntary emission reduction credits

Brokers and ExchangesIn the wholesale market, emission o set buyers and sellers can have a transaction acilitated bybrokers or exchanges Exchanges are usually pre erred or requent trades or large volumes o products with standardized contracts or products, while brokers typically arrange transactions

or non-standardized products, occasionally traded and o ten in small volumes

Trader Pro essional emission reduction traders purchase and sell emission reductions by takingadvantage o market price distortions and arbitrage possibilities

O set ProvidersO set providers act as aggregators and retailers between project developers and buyers Theyprovide a convenient way or consumers and businesses to access a port olio o project o sets

Final buyersIndividuals and organizations purchase carbon o sets or counterbalancing GHG emissionsThere ore, the nal buyer has no interest in reselling the o set but will prompt the retirement o the underlying carbon o set

4 The Role o the Volu tar MarketA ter giving a brie overview about how o set projects are developed, we now examine howthe voluntary markets di er rom CDM and how the standards that have been developed or thevoluntary market approach carbon project management

Key di erences exist between the mandatory and voluntary markets Unlike the ormer, voluntarymarkets do not implement any particular policy mandates The mandatory and voluntary marketsoccupy di erent but overlapping niches As chart 1 shows, the voluntary o set market is currently

ed by two distinct o set streams: o sets that originate in the compliance market (e g CERs romCDM projects) and o sets that are created in the voluntary market (Veri ed Emissions Reductions –VERs) In other words, voluntary o set buyers can choose i they want to buy o sets that come romCDM or JI projects or o sets that come rom projects implemented exclusively or the voluntaryo set market

In order to better understand the voluntary market, it is help ul to ask what role it should play inprotecting the climate and contributing to sustainable development Compared to the compliancemarket, trading volumes are minimal in the voluntary market (see chart 2) The voluntary marketdoes currently not make signi cant contribution to reducing GHGs Furthermore, e ective utureclimate policy will necessarily involve a gradual transition rom voluntary to mandatory action, andeventual regulation (through allowance markets or other policies) o many o the actors currentlyinvolved in the voluntary market While there will likely always be a voluntary o set market to servethose individuals or companies who want to push the envelope beyond what is possible through

internal reductions and evolving regulation, a key role o the voluntary market is to shape the rules



1t h E r o l E o f t h E v o l u n t a r y m a r k E t

and procedures or o sets in uture compliance markets. In other words, the voluntary market canbe used as a testing ground or procedures, methodologies and technologies The voluntary marketcan help achieve emissions reductions with projects that are too small or CDM, projects set incountries without a Kyoto target, or reductions that are ineligible or CDM or ormal reasons otherthan quality (e g China CDM requires major Chinese ownership in project)

The opinions on how the voluntary market can best do this, vary signi cantly To clari y this ongoing

discussion, we distinguish below between three main points o view The distinction between theseviewpoints is somewhat theoretical since most market participants have views that synthesizeaspects o all three approaches Yet juxtaposing these three views helps explaining the di erencesin how the voluntary market is perceived

A. Volu tar Market Should Closel Follow, or Build Upo CDMThere are those, among them the governments o the UK and Norway (see chapter 8), whoargue that under the current market situation voluntary buyers can minimize their risk by buyingcompliance credits because the legal and procedural requirements or CERs are already wellestablished The current voluntary o set market is seen as potentially undercutting the compliancemarket with cheaper o sets that are not clearly additional and sending the wrong price signals

Since the public and the media o ten do not distinguish between the compliance and the voluntarymarket, there is also a risk o damaging the reputation o compliance markets To secure qualityand transparency in the voluntary market, it is argued that voluntary o set standards shouldclosely ollow CDM procedures and apply them to VERs (e g the CDM approach to additionality, thedocumentation o reductions, and the monitoring and veri cation processes)

Standards that share this viewpoint include VER+ and the Voluntary O set Standard (VOS)

B. Volu tar Market Should Be More Stri ge t tha CDMSome have taken this argument even urther and have created standards with the explicit goal o enhancing the quality o o sets rom both markets by requiring explicit social and environmentalbene ts as well as strict accounting standards (see chapter 5 5 on Co-Bene ts )

Standards that espouse this viewpoint include the Gold Standard and the Climate Community &Biodiversity (CCB) Standard

C. Volu tar Market Should Compleme t a d Be Di ere t From CDMOn the other end o the spectrum are those who argue that voluntary o set standards shouldbe less stringent and bureaucratic than the standards in the mandatory markets They agree thatthe voluntary market can serve as a testing ground or uture policy but they argue that in orderto preserve the voluntary market’s creativity and innovation it must be protected rom too manybureaucratic requirements They distinguish between the compliance market, where regulatoryobligations must met, and the voluntary market, were no such obligations exist and where theemphasis is on creating a market or innovative projects with as little administrative burden aspossible

Most carbon o set providers who do not use a third party standard but ollow their own proceduresall under this category The Voluntary Carbon Standard (VCS) also adheres more closely to this

viewpoint Although VCS incorporates many o the CDM procedures and guidelines, it is in principala standard that looks to loosen the requirements or VER projects to allow or more fexibility andinnovation

The tension between these di erent viewpoints on the proper unction o the voluntary market hasshaped the market’s recent development As with any complex issue, the devil lies in the details

This implies that i the voluntary market is success ul, it will become obsolete in its current orm in the medium term asmore comprehensive and e ective mandatory policies are put in place Yet there may always be a need or voluntarymarkets to serve sectors that are not included in compliance schemes



14 k E y E l E m E n t S o f o f f S E t S t a n d a r d S

All sides have contributed to the discussion on the role the voluntary carbon market can play tourther climate protection Numerous new standards and registries have been introduced over the

last couple o years and the competition among carbon o set standards has increased dramaticallysince large nancial institutions, businesses, and industries have gotten involved in the carbontrade In the next section we will discuss the elements that are necessary to create an e ectivecarbon o set standard

5 Ke Eleme ts o O set Sta dards“Carbon o sets are an intangible good, and as such their value and integrity depend entirely on how they are de ned, represented, and guaranteed. What the market lacks are common standards or how such representations and guarantees are made and en orced “ (Broekho , 2007)

Clearly, no standard can ever be per ect, and as pointed out in the discussion above each o thecurrently available standards is based on a particular view o the voluntary o set market Yet it issa e to say that notwithstanding these di erences, the best and most success ul standards will bethose that are simple yet rigorous and have very wide support rom carbon project developers,o set traders and buyers, environmental NGOs and the nancial industry A complete and ull-fedged carbon o set standard must include the ollowing three components :

• Accounting Standards• Monitoring, Veri cation and Certi cation Standards• Registration and En orcement Systems

Accou ti g sta dards ensure that o sets are “real, additional, and permanent ” They includede nitions and rules or the elements that are essential during the design and early implementationphase o a project These include additionality and baseline methodologies, de nitions aboutaccepted project types and methodologies, validation o project activity etc (chapter 5 1-5 6)

Mo itori g, Veri catio a d Certi catio Sta dards ensure that o set projects per orm aswas predicted during the project design Certi cation rules are used to quanti y the actual carbonsavings that can enter the market once the project is up and running There is sometimes a lag timebetween the start o a project and when it starts producing carbon o sets This is especially true or

orestry projects – the trees have to grow or a ew years be ore they have absorbed enough carbonthat can be quanti ed and sold Monitoring, veri cation and certi cation happen a ter validationand implementation o the project Yet procedures and protocols or monitoring and veri cationhave to be included very early on in the project design phase (chapter 5 6)

Veri cation and certi cation areex-post assessments o what has actually been produced, asopposed to validation which is the ex-ante assessment o whether a project quali es against a

standard, provided it is going to do what it promises in the project design documentation. Registratio a d E orceme t S stems e sure that carbon o sets are only sold once and

clari y ownership and enable trading o o sets They must include a registry with publicly availablein ormation to uniquely identi y o set projects and a system to transparently track ownership o o sets (chapter 5 7)

In the ollowing sections we discuss each o these elements in more detail and compare thevoluntary o set standards to the CDM rules and regulations A table at the end o each section,summarizes how each standard handles that particular issue

Much o the content in this section is based on the analysis o Derik Broekho ’s (World Resources Institute) Testimonybe ore The House Select Committee on Energy Independence and Global Warming, U S House O Representatives, July18, 2007;http://pd .wri.org/20070718_broekho _testimony.pd



1k E y E l E m E n t S o f o f f S E t S t a n d a r d S

5 1Additio alit a d Baseli e Methodologies“O sets are an imaginary commodity created by deducting what you hope happens rom what youguess would have happened.” (Dan Welch quoted inThe Guardian , June 16 2007)

The topic o ‘additionality’ is the most undamental − and contentious − issue in the carbon o setmarket In theory, additionality answers a very simple question: Would the activity have occurred,holding all else constant, i the activity were not implemented as an o set project? Or more simply:Would the project have happened anyway? I the answer to that question is yes, the project is notadditional

Additionality makes intuitive sense: I I buy carbon o sets, I make the implicit claim that I orgoreducing my own emissions (i e I still drive my car) in exchange or paying someone to reducetheir emissions in my stead I I “neutralize” the emissions I caused while driving my car by buyingo sets rom someone who would have reduced their emissions anyway, regardless o my payment,I, in e ect, have not neutralized my emissions but merely subsidized an activity that would havehappened anyway

Additionality is thus an essential element needed to ensure the integrity o any baseline-and-creditscheme Yet additionality is very di cult to determine in practice Many di erent tools have beendeveloped to maximize the accuracy o additionality testing and to minimize the administrativeburden or the project developer There are two distinct approaches to additionality testing: Projectbased additionality testing and per ormance standards

5 1 1Project Based Additio alit Testi gProject based additionality testing evaluates each individual project on a case by case basis The

ollowing is a short selection o additionality tests that are commonly used:

Legal and Regulatory Additionality Test (Regulatory Surplus)I the project is implemented to ul l o cial policies, regulations, or industry standards, it cannotbe considered additional I the project goes beyond compliance (“regulatory surplus”), it may be

additional, but more tests are required to con rm this For example, an energy e ciency projectmight be implemented because o its cost savings and would in this case not be additional

Investment Test This test assumes that an o set project is additional i it would have a lower than acceptablerate o return without revenue rom the sale o carbon o sets In other words, the revenue

rom the carbon o sets must be a decisive reason or implementing a project The investmenttest is consistent with a microeconomic view o behaviours, and in theory would be a per ectadditionality test But in reality there may be projects whose nances make them look non-additional that are still “additional” because o existing non-monetary barriers

Barriers Test

This test looks at implementation barriers, such as local resistance, lack o know-how, institutionalbarriers, etc I the project succeeds in overcoming signi cant non- nancial barriers that thebusiness-as-usual alternative would not have had to ace, the project is considered additional

Common Practice Test I the project employs technologies that are very commonly used, it might not be additionalbecause it is likely that the carbon o set bene ts do not play a decisive role in making theproject viable

Which test is best suited to validate additionality depends on the type o project An additionalitytest appropriate or one type o project (e g , a simple regulatory test or methane faring, wherethere is no reason to do the project i not required by law) might not be su cient or other kinds o

projects (e g , energy e ciency, where there could be plenty o reasons or doing a project besidescomplying with regulations)



1 6 k E y E l E m E n t S o f o f f S E t S t a n d a r d S

The main issue with project-based additionality testing is that the determination o whether aproject is additional can be quite subjective A developer can claim that their project’s IRR was toolow without a carbon revenue stream, and that the carbon revenues there ore made the projectviable But who can really determine what level o IRR is acceptable to a given company, and thuswhether the additionality demonstration is valid? Such additionality claims can only be tested withaccess to internal company in ormation relating to the nancing o the project, yet this in ormationis in most cases con dential

5 1 2Per orma ce Sta dardsPer ormance Standards try to address some o the weaknesses o project-based additionalitytests in that they do not rely on examining each individual project but establish a threshold ortechnologies or processes to determine additionality This approach is associated with simplerprocedures and lower transaction costs or project developers Per ormance standards aredeveloped and/or approved by standard organizations and there ore shi t much o the projectdeveloper’s administrative burden to the standard organisation Dra ting per ormance standardsrequires comprehensive data collection and veri cation, as well as regular updates The politicalprocess to approve such per ormance standards may take a long time and may only be easible orcertain industries (e g , small renewable heat and power, biomass, or small energy e ciency)

Per ormance Standards typically use aggregated data on project or technology characteristics toestablish a threshold (e g , a per ormance indicator such as an emissions rate or a market indicatorsuch as a penetration rate) that must be met or exceeded in order or a project to be deemedadditional Per ormance Standards include among others positive technology lists and benchmark approaches

Benchmark ApproachesThe most widely discussed o per ormance standards is the emissions-based (benchmark)additionality test This test establishes a generic baseline scenario − re erred to as a benchmark − against which all projects o a given type are assessed Employing such an assessment as anadditionality test presumes that technologies with emissions lower than a given emission ratestandard would not be deployed in the absence o the o set programme incentive

This method works best in sectors or applications where business-as-usual technologies anduels do not vary widely in emissions rates In sectors like electricity generation, where emissions

rates can be as low as near zero or some hydroelectric plants or relatively high or coal-basedplants − both o which are conventional technologies − benchmarking emissions rates can beproblematic For example, any threshold above zero would deem all new hydroelectric or winddevelopment additional

Several CDM baseline methodologies include benchmark approaches or calculating baselinesand emission rates, but additionality must still to be established by using project-basedadditionality tests (see chapter 5 1 3)

Positive Technology ListsPositive technology lists simply de ne which technologies are automatically consideredadditional i installed in a certain geographic region The project developer must still use abaseline methodology to determine the numbers o o sets a project will create Again, such listsare transparent and enable aster and simpler processing o o sets They also shi t much o theadministrative burden rom individual project hosts to a centralized standard-setting entity

The main problem with per ormance standards is that they may be too simple and broad Allactivities whose emissions all below the benchmark emissions are awarded credits, regardless o whether they would have taken place anyway Projects that are non-additional are re erred to as

ree-riders One proposed solution to the problem o ree-riders would be to discount o sets bythe number o expected ree riders For example, i a benchmark is set at the 20th percentile, wecan expect 20% o projects to be ree-riders I all o sets were then discounted by 20%, the overall




environmental integrity would be preserved Yet discounting is not a per ect solution either sinceit may skew the results and avor non-additional projects, which by de nition rely less on o setrevenue

To summarize, any additionality test, no matter how quantitative and seemingly objective, willalways create some number o alse positives (projects that appear additional although they arenot) and some number o alse negatives (projects that appear not to be additional although they

are) The design o the test determines i it will err on the side o alse positives or alse negativeThe judgment as to which is more acceptable is determined by a political process It is important tounderstand that while alse positives and alse negatives both impair economic e ciency, only alsepositives undermine the environmental integrity o o sets In other words, it is the alse positives– o sets rom non-additional projects – that lead to increases in emissions and there ore hamperclimate protection goals The most practical and viable option or additionality testing may mixelements o project based and benchmark approaches

5 1 3t a b l E 3 : Additionality Requirements or Each Standard Standard Project-Speci c Additio alit or

Per orma ce Sta dards?

How is additio alit determi ed?

CDM

Project-speci c Speci ed by individual methodologies orAdditionality Tool version 4:Step 1: Regulatory SurplusStep 2: Investment analysis orStep 3: Barrier analysisStep 4: Common PracticeStep 5: Impact o CDM Registration

GS

Project-speci c, same as CDM Gold Standard CER and VERCDM Additionality Tool version 4In addition or both CERs and VERs:Previous announcement checks required or all project types

VCS

Project-speci c or per ormance-basedCurrently approved additionalitytests are all project-speci c

Project based test:Step 1: Regulatory SurplusStep 2: Implementation Barriers: Investment barrier ortechnological barrier or institutional barrierStep 3: Common Practice

VER+

Project-speci c, same as CDM Speci c additionality requirements o CDM approvedmethodologies orMost recent version o CDM Additionality ToolPer ormance tests have not yet been developed

CCX

No ormal de nition o additionality Determinations arebased on eligibility criteria, whichare examined by the CCX O sets

Committee

Additionality testing not as a distinct step However, CCXrules explicitly de ne project eligibility requirements on thebasis o these indicators:• beyond/be ore regulatory requirements• new projects• highly unusual practices

VOS Project-speci c, same as CDM Same as CDM or Gold Standard VER

CCBS

Project-speci c Speci ed by individual methodologiesStep 1: Regulatory SurplusStep 2: Barriers: Financial, Lack o Capacity, Institutional orMarket Barriers or Common Practice

Plan Vivo

Project-speci c Project based test:Step 1: Regulatory SurplusStep 2: Financial andStep 3: Barriers test (e g lack o technical expertiseor prohibitive social, traditional, political or culturalenvironments Commercial orestry projects are excluded

rom participation)




Standard Project-Speci c Additio alit orPer orma ce Sta dards?

How is additio alit determi ed?

GHGProtocol

No ormal requirements oradditionality determinationDiscusses additionalityconceptually with respect tobaseline determination

Generic criteria on how to establish additionality eitherthrough project-speci c or per ormance-based approaches

ISO14064-2

No ormal requirements oradditionality determination ISOdoesn’t speci y how additionalitymust be demonstrated

Generic criteria on how to establish additionality eitherthrough project-speci c or per ormance-based approaches

5 1 4Baseli esIn order to calculate an o set project’s GHG bene ts, a baseline must be established This baselineexpresses the business-as-usual scenario In other words, it represents the counter actual scenarioo what would have happened i the project had not been implemented The number o creditsgenerated by the project is equal to the di erence between emissions in the baseline scenario and

emissions resulting rom the project The key di culty is that the baseline scenario is ahypothetical scenario; by de nition it describes another reality, one in which the activity isnot implemented asan o set project As that scenario will never occur, there is no ail-sa e way to divine with certaintywhat the results o that scenario would have been

The baseline must be explicit and concrete enough to allow an estimation o the correspondingGHG emissions, so that the bene ts o the o set project may be calculated Baselines should becalculated conservatively so as not to overestimate the achieved emissions reductions

The baseline must be based on veri able in ormation sources and documented in a con rmablemanner

As with additionality, baselines can be established using project based or per ormance basedapproaches These may either be the same as the approach used to determine additionality ordi erent Per ormance based tools may increase transparency and decrease costs; however, theymust be well designed to avoid inaccuracies and to ensure environmental integrity I the baseline isde ned by a per ormance standard, it provides a credible estimate o reductions in aggregate Eachstandard usually chooses one approach or the other, although some use a combination

Some standards prescribe up ront the methods that project developers must use to estimatebaseline emissions or each type o allowable project activity (top-down) Others allow projectdevelopers to propose appropriate methods or new types o projects, ollowing generalprogramme guidelines (bottom-up) A purely bottom-up standard (like the CDM) is one in whichproject developers must propose, and win approval or, appropriate methods or every project

category Some programs may be a mix o top-down and bottom-upBaselines can be static or dynamic. A static baseline does not change over time, whereas a dynamicone is updated periodically based on ex-post observations, and emission reductions are calculatedbased on the most current baseline

Many standards have di erent levels o requirements or di erent classes o projects For example,some might have simpli ed baseline methodologies or small scale projects




5 1 5t a b l E 4 : Baseline Requirements or Each Standard Sta dard How are baseli es determi ed? How are methodologies determi ed a d

approved?

CDM

Most are project-speci c, though somemethodologies usePer ormance standards as well (e g recently

approved high-e ciency coal plantmethodology)

New methodologies are submitted tothe CDM Methodology Panel, whichreviews methodologies and submits itsrecommendations to the CDM EB, which makesthe nal decision

GS

Gold Standard CER:CDM approved methodologiesGold Standard VER:CDM methodologies orSmall Scale Working Group (SSC WG) orUnited Nations Development Programme(UNDP) MDG Carbon Facility orproposed new methodology approved by GoldStandard Technical Advisory Committee

Gold Standard CER:CDM approved methodologiesGold Standard VER:New methodologies must be reviewed by twoindependent experts and are then approvedby the Gold Standard Technical AdvisoryCommittee

VCS

Projects will use one o the VCS Programmeapproved methodologies At present CDMmethodologies have been approved underthe VCS Currently CCAR is going throughthe approval process I approved, the CCARmethodologies will also be approved under theVCS ProgrammeNew methodology must be approved through adouble approval processPer ormance standards or best practiceapproaches are allowed but have not yet beendeveloped

Any new methodologies approved under a GHGProgramme (e g CDM) that has been approvedunder the VCS are automatically recognisedOther individual new methodologies must bereviewed and approved by two VCS accreditedindependent veri ers and are then acceptedby the VCS Board (though the Board retains theright to examine each methodology)

VER+

CDM approved baseline and monitoringmethodologies

Baselines that con orm with JI rules and areapproved by auditor

CDM approved methodologies in their mostcurrent version I no CDM methodology isavailable, the project speci c approach asde ned or JI may be used The proposedmethodology is assessed and approved by theauditor in charge

CCXBaselines and methodologies are pre-de ned

or each speci c project type Some are projectbased, some are per ormance based

New methodologies are reviewed and approvedby the CCX Committee on O sets

VOS

Same as CDM or Gold Standard VER Same as CDM or GS VER INCIS may decide torecognise other standards, or the application o speci c methodologies contained within thoseother standards, in the uture

CCBS

Baselines as de ned by CDM LULUCFmethodologies or IPCC’s Good PracticeGuidance (IPCC GPG)

CDM LULUCF methodologies or IPCC’s GoodPractice Guidance (IPCC GPG)New methodologies are reviewed and approvedby CCBS-approved auditors

Plan VivoProject-speci c baselines are reviewed andapproved by the Plan Vivo Foundation

Projects and new methodologies are reviewedand approved by the Plan Vivo Foundation usingstandard criteria

GHGProtocol

Generic guidelines or determining project-speci c and per ormance standard baselines orany type o project

N/A

ISO14064-2

Generic guidelines or determining project-speci c and per ormance standard baselines orany type o project

N/A

N/A Not applicable




5 1 6Project Bou daries a d LeakageEach project must de ne its boundaries, including physical, legal and organizational boundariesThis is necessary in order to calculate the emissions reductions accurately: all emissions reductionsand increases within the project boundaries must be taken into account Some standards requirespeci ying a boundary encompassing all the e ects a project has on GHG emissions Others do notexplicitly spell out rules and guidelines on determining boundaries

Leakage is a project’s unintended e ects on GHG emissions outside the project’s boundaries Forexample, a project may reduce GHG emissions in one place, but cause an unintended increasein emissions elsewhere Under some standards, leakage is explicitly accounted or by examiningemissions outside the project’s boundaries In many cases, it can be burdensome or impossible totrace every possible e ect an individual project may have on GHG emissions Standards there oresometimes explicitly exclude certain types o leakage rom project accounting It is importantto address leakage in bio-sequestration projects; this issue is urther discussed or the bio-sequestration standards in chapter 5 2 1

5 2Project T pesCarbon o set projects can be grouped by type o project Most projects may be broadly categorizedinto bio-sequestration, industrial gases, methane, energy-e ciency, and renewable energy projectsThe ollowing chapter discusses each project category

Not all project types are equally e ective at delivering the emissions reductions that they initiallyset out to deliver The CDM keeps statistics on what percentage o projected emissions are realizedin each project category (see Appendix C) No such statistics currently exist or the voluntary market

5 2 1Biological SequestratioForestry mitigation projects can make a “very signi cant contribution to a low-cost globalmitigation port olio that provides synergies with adaptation and sustainable development” (IPCC2007, WGIII) Historic data indicate that cumulative emissions rom land use changes, predominantlyde orestation, have contributed about a quarter o all GHG emissions (IPCC Special Report on LandUse, Land-Use Change And Forestry)

Projects that aim to reduce GHG emissions rom land use practices are collectively calledLand Use,Land-Use Change, and Forestry (LULUCF) activities There are three broad types o LULUCF projects:

• Those that avoid emissions via conservation o existing carbon stocks (i e avoidedde orestation), called Reduced De orestation and Degradation (REDD)

• Those that increase carbon storage by sequestration (a orestation and re orestation)• Those that increase carbon storage by soil management techniques (e g no-till agriculture)

“Tree projects” have a natural appeal, since they conjure up images o pristine and healthyecosystems Yet the reality o LULUCF projects is ar more complex The amount o carbonsequestered by orests depends upon a number o actors including tree age, growth rate, localclimate, and soil quality Climate change impacts on orest health and the trees’ ability to storecarbon, as a result o increased temperatures, altered precipitation patterns, and changes indisturbance regimes ( re, insects, disease), are still largely unknown across the globe Over timethese uncertainties are expected to make the accurate measurement and calculation o LULUCFcarbon sequestration projects more challenging and complex

Leakage is o particular concern in LULUCF projects Leakage is the unanticipated loss o carbonreductions outside the project boundary For example, the re orestation o pastureland may drivelocal armers to clear orests elsewhere or new pastures Leakage can best be addressed through

care ul project design (e g , incorporating project activities that reduce pressure on other lands),and any resulting leakage must be accounted or and subtracted i project calculations are to beconsidered credible and accurate




Perma e ce is another issue that LULUCF projects must contend with Permanence re ers to thelength o time that carbon will remain stored a ter being sequestered in vegetation Forests caneasily be destroyed by natural events such as re, pests, or disease, or by illegal logging or burningLULUCF projects can there ore only temporarily sequester carbon rom the atmosphere

Several trade o s exist in the design o e ective orest management strategies which balancecarbon storage along with a wide range o ecosystem services Despite the act that young orests

have the greatest gross rate o carbon uptake, i an old growth orest is cut down and replacedwith young ast-growing trees, it will take years to decades be ore the new orest will constitutea net carbon sink This is because two-thirds o the carbon in terrestrial ecosystems is storedbelow ground Clear cutting leads to large emissions o carbon rom disturbed soils and debrisdecomposition Projects that protect existing old growth orests are expected to provide thegreatest carbon mitigation bene ts (IPCC 2007, WGIII) Currently, emissions rom de orestation areso great that stopping this emission source would have the greatest net impact on orest-relatedemissions

Despite the importance o REDD (Reducing Emissions rom De orestation and Degradation), veryew such projects have been implemented in the voluntary market, and CDM does not currently

allow or REDD projects The science to account or carbon storage in existing orests is verycomplicated It can also be di cult to prove that the orest would have been cleared i it were not

or the o set project, i e it may be di cult to prove the additionality o certain REDD projects

Furthermore, it can be argued that de orestation is a demand-side problem, and that as long as thedemand or biomass ( uel and timber) and land cannot be shi ted and decreased, orestry o setprojects in one area will only cause a change in the supply source rather than lower demand on thewhole In other words, none o the orestry standards are able to account or international leakageand market shi ting This argument holds true or certain sectors (e g timber demand) but may notdo so or others, where good project design is able to a ect supply and demand (e g by providinglocal livelihoods through sustainable harvesting, more sustainable and productive agriculture,increasing energy-e ciency and providing alternatives to wood uel)

Over the long term, sustainable orest management strategies which aim to maintain or increaseorest carbon stocks while providing ecosystem services and o ering income or local communities

will generate the largest sustained mitigation bene ts (IPPC 2007, WGIII) Strategies that maximizeboth carbon storage and carbon uptake include protecting carbon rich old growth orests butallowing selective, well managed harvesting to increase carbon uptake o young trees, to createlocal economic opportunities, and to protect biodiversity

Without doubt, exemplary LULUCF projects can address several global problems: they can sequesterand store carbon, protect watersheds, o er economic opportunities or the local population,and conserve or restore biodiversity Conversely, poor-quality projects may result in a loss o biodiversity and the displacement o the local population Although major international agreements

call or integrated approaches to global problems (see section XX), there is little concrete guidanceas to how to develop such holistic projects

The currently available o set standards deal with the challenges o LULUCF projects in the ollowingways:

• Either excluding or strictly limiting LULUCF projects (Gold Standard, CDM)• Imposing rules or LULUCF projects that speci cally ocus on maximizing biodiversity and

social bene ts (CCBS, Plan Vivo)

Stephen Pacala and Robert Socolow calculate that over the next 50 years, we need to stop all clear-cutting in primarytropical orests, re orest or a orest 250 million hectares in the tropics or 400 million hectares in temperate zones andplant 300 million hectares o new tree plantations (S Pacala and R Socolow, “Stabilisation Wedges: Solving the ClimateProblem or the Next 50 Years with Current Technologies,” Science, 13 August 2004, Vol 305, No 5686, pp 968–972 )




• Addressing issues o permanence by either issuing temporary o set credits (LULUCF CDM)or establishing carbon bu er zones which retain a portion o the project carbon credits andsales in case o orest loss and provide unding or reestablishment (VCS, Plan Vivo)

LULUCF projects have only reluctantly been included into the CDM and are currently excluded romthe EU-ETS As o early 2007, seven di erent a orestation/re orestation methodologies had beenaccepted by the CDM board Yet o the total 827 projects registered in the CDM as o September

2007, only 1 is an a orestation/re orestation project (www.cdmpipeline.org/cdm-projects-type.htm )Forestry and other land use projects play a much larger role in the voluntary o set market

In 2006, orestry accounted or 36% o the transaction volume in the voluntary market (Hamilton,2007) Yet there is a noticeable di erence between orestry’s role in the American and Europeanmarkets Forestry credits in the European market have decreased considerably due to concernsabout additionality and a ocus on clean technology investments But orestry projects still play animportant role in the American market Two-thirds o the o sets that entered the voluntary marketin the US in 2006 came rom sequestration projects (Hamilton, 2007)

5 2 2I dustrial Gases

Some industrial gases have very high Global Warming Potentials(GWP) The destruction o these gases is there ore a very e ective way to reduce GHGs Yet industrial gas o set projects arecontroversial because although they are the cheapest to conduct and generate large numbers o o sets, they do not contribute to the path to a low-carbon economy and deliver ew additionalenvironmental and social bene ts

Few disagree that these industrial gases should either be destroyed or not produced in the rstplace, but the o set market does not appear to be the best way to reduce these emissions Somereports have indicated that the creation o an o set market or HFC-23 gases has created perverseincentives in China and India to start building new HCFC-22 acilitiesto increase revenue romo sets Many balk at the idea that heavily polluting industries such as these should be rewarded

or the destruction o gases that should not have been produced in the rst place (Financial Times,Jan 18, 2007) Furthermore, some research has shown that establishing an international und to

nance the capture and phasing out o HCFCs (via the World Bank, or example) would be much lessexpensive than reducing these emissions through the o set market (Wara, 2007 )

Furthermore, although industrial gas projects can generate large emission reductions, theseprojects are high-tech end-o -the-pipe applications with limited employment and localenvironmental bene ts

To counteract some o this criticism and to support sustainable development initiatives, someproject developers have chosen to invest a portion o their gains into local schools, health caresystems, etc For example, 65% o the revenue rom CER sales in China is collected as tax revenue bythe government and is supposed to be used to support sustainable development initiatives

Nitrouse Oxide (N2 O, e g rom ertilizer production) is 296 times, Hydrofuorocarbons (HFCs, used as non-ozonedepleting re rigerants) thousands o times, and Sulphur Hexafuoride (SF6 , used in the electrical industry) more than22,000 times more potent than CO2

At a Montreal Protocol con erence in the September 2007, 191 nations agreed to a aster phaseout o ozone-depletingchemicals than had originally been negotiated in 1987 Developed countries have agreed to reduce production andconsumption by 75 percent by 2010 and by 90 percent by 2015 with nal phase out in 2020 – 10 years sooner than theearlier agreement Developing countries have agreed to cut production and consumption by 10 per cent in 2015; by 35percent by 2020 and by 67 5 percent by 2025 with a nal phase-out in 2030

HFC-23 is created as a by-product during HCFC-22 production E g Oeko Institute (2005) Implications o the CDM on other Conventions The case o HFC-23 destruction, discussion

paper See also Warra, 2007 The cost to the developed world or installing technology to capture and destroy HFC-23 at the 17 production acilities

in the developing world would be €100 million, compared to €4 7 billion in value or CERs generated under CDMthrough 2012, based on €10/tonne price o carbon at time o author’s calculations, and neglecting taxes




Current CDM rules prohibit new capacity at HCFC-22 plants rom earning carbon credits, butthe issue will be reconsidered at the next meeting o the UN Subsidiary Body or Scienti c andTechnological Advice in June 2008 A range o di erent solutions have been proposed Theseinclude, among others, continuing the ban on including HFC-23 rom new HCFC-22 plants, anda tax on carbon credits generated by newer re rigerant plants, the proceeds o which would bechannelled into a clean technology und to invest in renewable technologies

The exclusion o new HFC acilities rom the CDM market might have the unanticipated e ect o creating a large supply o these o sets in the voluntary market New HFC producing acilities, whichare no longer eligible under CDM, could potentially food the VER market with a large supply o cheap o sets

Nevertheless, because o these controversies, some standards exclude industrial gas projectsaltogether The Gold Standard does not accept any industrial gas projects O those standards thataccept all projects types, VER+ excludes all HFC projects, while the VCS and the VOS exclude HFC-23destruction credits rom new HCFC-22 plants

In the CDM market, 34% o all CERs transacted in 2006 came rom HFC destruction projects, downrom 67% in 2005 N2 O destruction projects accounted or 13% o o sets transacted in 2006 (Capoor

& Ambrosi, 2007) Yet despite this trend, N2 O and HFC projects are projected to account or 50% o all cumulative o sets sales under CDM by 2012 Industrial gas destruction accounted or 20% o VERs sold in the voluntary market in 2006 (Hamilton, 2007)

5 2 3Metha e CaptureMethane’s global warming potential is about 21 times greater than that o CO2 Methane isproduced and emitted by land lls, during wastewater treatment, in natural gas and petroleumsystems, by agriculture (livestock and rice cultivation), and during coal mining Methane is naturalgas and can there ore be captured and used as a source o energy

There are two types o methane projects The rst type captures and fares methane Throughcombustion, methane gas is turned into less potent CO2 and H2 O Examples o such projects includethe capture and faring o land ll gas and o coal mining gas The second type o project capturesmethane and uses it to produce either hot water or electricity Such projects include those thatcapture and puri y methane in wastewater treatment plants or land lls and use it or electricityproduction or the production o another orm o energy

Bio uel plants that use agricultural or orestry waste to produce electricity also use methane– organic matter is anaerobically digested and the resulting methane is used to produce electricity– but such bio uel projects are considered renewable energy projects rather than methane capture

It is usually quite easy to establish additionality or methane projects because there is generallyno other source o revenue rom the activity aside rom the sale o o sets Yet methane o setprojects could create disincentives to regulate land lls and agricultural emissions (e g rom manurelagoons) Once methane capture and destruction becomes pro table, there is little incentive orproject owners to support legislation that would mandate capture and destruction rom all suchsources Yet such regulation would likely cover more sources, and thus would decrease emissionsdirectly without generating o sets that would allow buyers to increase their emissions In otherwords, the climate bene ts o such regulation could be greater overall This issue o perverseincentives that could stife more e ective general regulation holds true or all o set types (seechapter 9)

In 2006, methane projects accounted or approximately 3% o VERs sold in the voluntary market(Hamilton, 2007) In the regulatory market, 8% o all CDM projects are methane projects Theseprojects accounted or 11% o CERs in 2006 (Capoor & Ambrosi, 2007 )

http://cdmpipeline.org , accessed October 2007




5 2 4E erg E cie cEnergy e cient products or systems use less energy than conventional technology to per orm thesame task, such as a new car feet that replaces old, less uel-e cient vehicles There is clearly greatpotential or energy e ciency projects (Weizsäcker & Lovins, 1997) Such projects are o ten quitecost e ective because they save money over the long term through avoided uel costs In otherwords, such projects have a “payback” Additionality tests or energy e cient projects must showthat the revenue rom the carbon o sets played a decisive role in making the projects viable

Demand-side-management energy e ciency projects are held back by methodological challenges,such as additionality requirements or activities that are considered economically rational Suchdemand-side energy e ciency projects are o ten small and disaggregated (e g distributingcompact fuorescent bulbs or installing more e cient cooking stoves) Establishing a baseline,monitoring and evaluating energy e ciency projects can be challenging and labour-intensiveConsequently, such projects o ten have higher transition costs than large centralized o setprojects

In 2006, energy e ciency projects made up 5% o o sets sold in the voluntary market (Hamilton,2007) 9% o the CERs in 2006 came rom energy e ciency and uel switching projects This is a largeincrease rom 2005, when only 1% o the CERs originated rom energy e ciency projects (Capoor &Ambrosi, 2007) Most CDM energy e ciency projects are implemented at large industrial acilities

5 2 5Re ewable E ergRenewable Energy (RE) projects include hydro, wind, and photovoltaic solar power, solar hot waterand biomass power and heat production Renewable energy projects are crucial or the long-termprotection o the global climate because they help us move away rom ossil uel-based electricityand heat production to more benign orms o energy production Although in theory this makesrenewable energy projects ideal or the carbon o set market, it is sometimes di cult to establishthe additionality o such projects

Many renewable energy projects have high up- ront capital costs Legislative hurdles and local

opposition can urther complicate the implementation o such projects Yet because mostrenewable energy projects have very low (bio uel) or no uel costs (wind, solar, hydro), theiroperating costs are minimal once built

As with all o set projects, additionality tests or renewable energy projects must determine that theprojected revenue rom the sale o o sets played a decisive actor in making the project viable Alack o adequate additionality testing may be an issue when Renewable Energy Certi cates (RECs)are converted to carbon o sets Because RECs were created or a regulatory market with a cap, theyare not designed to be tested or additionality (see Appendix A or a discussion on RECs)

Not all renewable power projects are benign Hydro power projects in particular are controversialbecause they can have large negative environmental and social impacts Several o the standards

there ore require that hydro projects above a certain size comply with The World Commission onDams (WCD) Framework The WCD was an independent, international, multi-stakeholder processwhich addressed the controversial issues associated with large dams Its nal report,Dams and Development: A New Framework or Decision-Making, was released in November 2000 The reportoutlines a ramework or decision-making based on ve core values: equity, sustainability, e ciency,participatory decision-making, and accountability

To address this issue, the CDM has approved to use o a programmatic approach or certain projects: A programmaticCDM project activity is one in which the emission reductions are achieved by multiple actions executed over time

as a result o a government measure or a private sector initiative Examples include grant or so t loan programs topromote energy e ciency, uel switching activities, and the use o renewable energies by private households, in thetransportation sector or by small enterprises, as well as voluntary or mandatory e ciency standards or equipment or

acilities




In 2006, renewable energy projects made up approximately 33% o o sets sold in the voluntarymarket Over hal o those originated as RECs (Hamilton, 2007) In the regulatory market, 11% o allCDM projects are renewable energy projects, but only 4% o the CERs in 2006 came rom RE projects(Capoor & Ambrosi, 2007)

5 2 6t a b l E 5 : Project Types Accepted By Each Standard Standard Accepted Project Types

CDM Any except nuclear energy, new HCFC-22 acilities and avoided de orestation (REDD)

GS Renewable energy (including methane-to-energy projects) and end-use energy e ciencyNo large hydro above 15 MW

VCS Any except projects that can reasonably be assumed to have generated GHG emissions primarilyor the purpose o their subsequent reduction, removal or destruction (e g new HCFC-22acilities)

VER+ Any except any HFC projects, nuclear power projects and hydro power projects exceeding 80MWHydro projects exceeding 20MW with World Commission on Dams compliance only

CCX Renewable energy, energy e ciency, HFC-23 destruction except rom new HCFC-22 acilities,methane capture and destruction, orestry (including REDD) and agricultural practices

VOS GS VERs: see above or CDM plus large hydro above 20 MW have to comply with WCD guidelines;no new HCFC-22 acilities

CCBS LULUCF

Plan Vivo LULUCF except commercial orestry

GHGProtocol

Any

ISO 14064-2 Any

5 3Project LocatioUnder CDM, o set projects can only be implemented in non-Annex 1 countries – countries thathave no Kyoto obligation to reduce their emissions There is high demand or projects implementedin the consumer’s home country I these countries are signatories to the Kyoto Protocol and haveemissions reductions requirements, then it is currently not possible to implement such projectswithout running into issues o double counting (see chapter 5 7 )

Carbon o set projects are implemented on all continents, yet there are some striking trends Chinahas been the single largest seller o CDM credits, accounting or 60% o the cumulative total In

2006, 61% o all CERs came rom projects in China, 12% rom India, 10% rom Latin America, and 3%rom A rica(Capoor & Ambrosi, 2007; see chart 4)

In the voluntary market, 43% o VERs came rom projects in North America, 22% rom Asia, 20%rom Latin America, 6% rom Europe and Russia, 6% rom A rica, and 3% rom Australia (Hamilton,

2007; see chart 5)

Any project that reduced the emissions o one o the GHGs covered under the Kyoto Protocol: CO2 , CH4 , N2 O, HFCs,PFCs, and SF6

Four UN agencies, the A rican Development Bank and the Worldbank have been implementing the Nairobi Framework since 2006 to help sub-Saharan A rica, to increase the number o CDM projects complementary to bilateral support o di erent donors Seehttp://cdm.un ccc.int/Nairobi_Framework/index.html




c h a r t 4 : CERs Issues By Host Country and Region, 2006

c h a r t 5 : VERs Issues By Host Country and Region, 2006

5 4Start Date & Crediti g PeriodThe ‘start date’ in the context o a carbon o set project re ers to either the start date o the projectactivity itsel or the start date o the crediting period The ‘crediting period’ is the period duringwhich a carbon o set project can generate veri able and/or certi able emissions reductions creditsThe project start date is one o the parameters used by all carbon o set programs to determine theeligibility o a project or consideration For example, i a project started be ore 2000, it is considerednon-additional under CDM More signi cantly, the start date o the crediting period is used to

determine the starting point or calculating the emission reductions achieved by a project

Project Start DatesUnder CDM, the project start date is de ned as “the date on which the implementation orconstruction or real action o a project activity begins” resulting in actual GHG reductions or netGHG removals in the case o orestry carbon sequestration projects The Gold Standard uses thesame de nition as CDM The VCS 2007 de nes the project start date somewhat di erently as “thedate on which the project reached nancial closure ” While other schemes do not explicitly de neproject start date, they do speci y earliest possible start dates or projects For the purposes o accounting emissions reductions, the relevant start date o a carbon o set project is the date whenthe project starts to reduce or remove GHG emissions

Standards speci y the earliest possible start date o a project to limit the number o alreadyimplemented projects entering the pipeline Such projects may be additional, but proo o

China61 %India

12 %

Brazil4%

Res t of Latin Am erica6%

Res t of Asia7%

Africa3%

Othe7%

China61 %India

12 %

Brazil4%

Res t of Latin Am erica6%

Res t of Asia7%

Africa3%

Othe7%

North America43%

Asia22%

Latin America20%

Europe &Russia

6%

Africa6%

Australia3%

North America43%

Asia22%

Latin America20%

Europe &Russia

6%

Africa6%

Australia3%



2 7k E y E l E m E n t S o f o f f S E t S t a n d a r d S

additionality is more di cult to establish with projects that were ully implemented years ago Therules on start date vary somewhat across standards (see table 6)

Crediti g Period

Start and end datesThe start date o the crediting period can be any date a ter the project start date provided the

project starts a ter it has been registered I the project start date is earlier than the registrationdate, then each programme has somewhat di erent rules that govern the determination o theearliest start date o the crediting period (seeretroactive and CDM pre-registration crediting ) Theend date o the crediting period is either the maximum permissible duration o the creditingperiod (see duration and renewals ) or the end o the project itsel The end o Kyoto Protocolcrediting period, 2012, acts as thede acto end date or the CDM programme, and the VER+programme links the end date to the Kyoto expiry date until a post-Kyoto regime has beenestablished, at which point the crediting period or projects can be extended

Retroactive and CDM pre-registration creditingCDM no longer allows retroactive crediting, but most o the voluntary schemes do allow it Forexample, the earliest start date or retroactive crediting under the Gold Standard is 1 January2006 and 28 March 2006 or the VCS VER+ allows retroactive crediting up to 2 years be ore theregistration o the project Thus, CDM project developers can sell their CDM pre-registrationcredits in the voluntary market as VERs, in e ect extending the total crediting period (seediscussion below) The prices o VERs are usually much lower than the prices o CERs, but, theydo remain an additional revenue source or project developers Notwithstanding the bene tsto project developers, the sale o CDM pre-registration credits does call into question theadditionality o these CDM pre-registration credits, since the project was deemed additional yetpro table without the revenue o the CDM pre-registration credits

Duration and renewalsThe duration o the crediting period varies based on either project types or whether they are

renewable or not Most programs only distinguish between LULUCF projects and all other projecttypes in speci ying the eligible crediting periods The CCX is the only exception in that it speci esdi erent crediting periods or di erent project types The permissible crediting periods acrossschemes range rom 4 to 25 years or standard projects and rom 20 to 100 years or LULUCFprojects (see table 6) The justi cation or generally longer crediting periods or sequestrationprojects is to enhance their viability

There is a trade-o between limiting crediting periods to the minimum to allow more projectsto enter the market and extending it to the maximum to make more projects viable Longercrediting periods will result in ewer projects being implemented: For example, i we assume thatthree identical o set projects under a 10 year crediting period meet the demand or all o sets inthis hypothetical example, a 15 year crediting period will deliver the same number o o sets with just two o the three projects In other words, longer crediting periods increase supply withoutincreasing emissions reductions

Further, having longer crediting periods under some standards enables a project developer topotentially register the project rst under one standard (e g with a 10 year limit), and a ter theend o its crediting period, switch to another standard (e g with a 15 year limit) or the remainingtime (in this example, 5 years) This raises potential additionality issues

Projects that started between 1 January 2000 and 18 November 2004 (the date o registration o the rst CDM project)could claim retroactive credits provided they submitted the projects or CDM registration by 30 April 2007 andprovided that the project was validated be ore 31 December 2005




5 4 1t a b l E 6 : Start Dates and Crediting Periods or Each Standard Standard Project Start Date Rules Crediting Periods Fixed/

RenewableCDM Pre-registration Credits

CDM Originally: 1/1/00,This rule has elapsedCurrently: date o registration

10 yrs/ 3x7 yrsLULUCF: 30 yrs/ 3x20 yrs

Not allowed

GS For Gold Standard CERs: asCDMFor Gold Standard VERs:Maximum 2 years back romthe date o GS registration;with earliest start date being1 January 2006

10 yrs/ 3x7 yrs Allowed or up to 1 year be oreCDM registration i the projectis submitted or validationbe ore January 31st 2008 andmeets certain criteria

VCS 1/1/02; a ter 19/11/08: startdate must be within 2 years o present date

3x10 yrsAFOLU: 20-100 yrs

Allowed No urtheradditionality proo required

VER+ 1/1/00; issues credits up to

2 years back rom date o registration This rule expiresin 2009

Extension possible up to 25 yrs

or standard projects and 50yrs or LULUCF projects

Allowed or the period

between PDD publication inthe Global Stakeholder Processand UNFCCC registration No

urther additionality proo required

CCX Land ll methane & renewableenergy: 1/1/99Forestation & orestenrichment: 1/1/90Destruction o HFC: 1/1/07

Renewable Energy: 6 yearsSoil Carbon: 5 yearsHFC: 4yearsAll other projects: 8 years

Allowed No urtheradditionality proo required

VOS Same as CDM As CDM or as GS VERs Allowed No urtheradditionality proo required

CCBS No Start Date N/A N/A

Plan Vivo No Start Date Varies project-by-project; 5-15years

N/A

GHGProtocol

N/A N/A N/A

ISO14064-2

N/A N/A N/A

5 5Co-Be e ts

5 5 1Sustai able Developme t CriteriaIn the o set industry, people like to talk about ‘gourmet o sets’ versus ‘minimum standard o sets ’A minimum standard makes sure that o sets are real, not double counted and additional Gourmeto sets are those that are sourced rom projects that adhere to strict additionality standards andhave strong social and environmental bene ts (so calledco-bene ts or secondary bene ts Sucho sets o ten etch a considerably higher price in the voluntary carbon market

The distinction between ‘minimum standard’ and ‘gourmet’ o sets is to some extent a use ulshorthand, yet it also reveals that sustainability and development bene ts are no longer seen as anintegral requirement or a carbon o set This holds true or the compliance market as well as the

voluntary market Yet the carbon o set mechanism was originally conceived as a mechanism thatwould not only yield climate bene ts but also include co-bene ts




As the word ‘Development’ in the Clean Development Mechanism indicates, when CDM wasapproved by developing nations, it was speci cally because o set projects were not only toprovide cost-e ective reductions or Annex 1 countries but also development bene ts or thehost countries In other words, to quali y as a CDM project, the original intention was that a CDMproject must not only have carbon bene ts but also development bene ts This two- old goal is stillincluded in the CDM guidelines (Article 12 o the Kyoto Protocol)

In practice, however, the CDM has ailed to consistently deliver such development and sustainabilitybene ts What anecdotal evidence has indicated or a while is corroborated by recent scienti canalyses: A literature review (Holm Olsen, 2007) concludes that there is a trade-o between theCDM target o supplying cheap emission credits and the promotion o sustainable development,and that the ormer goal has taken precedence Another study (Sutter and Parreño, 2007) evaluatedregistered CDM projects and concluded that none o the 16 analyzed projects score high onsustainability and “likelihood o real emissions reduction” simultaneously They nd that the largeprojects in their sample have a low sustainability score and that over 95% o reductions come romprojects with a low score

Authors’ Comme tsWe would argue that removing the development goals rom the requirements o a voluntaryo set standard undermines the original goal o carbon o setting as de ned by CDM, andgives credence to the critics who claim that carbon o setting enables rich countries totake advantage o cheap business opportunities in developing nations that lead to noimprovements or the local population

Persistent criticism o the market could seriously hamper the growth o the voluntary o setmarket Removing the development requirement could communicate to the consumers andto the public at large that the development bene ts are a ‘gourmet’ attribute, a luxury add-on that is only or those o set purchasers who can a ord to pay a premium

Yet in reality, these development bene ts are not just charitable contributions rom theNorth to the South, but are essential in achieving climate protection Responding tothe world’s main development challenges, 192 United Nations member states agreed in2000 to actively support the Millennium Development Goals (MDG) – which range romhalving extreme poverty to halting the spread o HIV/AIDS and providing universal primaryeducation, all by the target date o 2015 The MDGs include an eight-goal action planTwo o the action items target energy and resource planning and collaboration betweendeveloped and developing countries and there ore directly relate to climate mitigation andadaptation Many governments have recognized that the success o the MDGs will dependless on direct oreign aid, than on integrating the goals into all trade and investment policiesand agreements

Carbon o set standards that solely promote cost e ective climate mitigation projects anddo not deliver other sustainability bene ts such as employment creation and reductionin air pollution do not support the MDGs To truly impact the carbon market and tosupport projects that are sustainable on many levels, a standard must include additionalsustainability and development goals

The eight action items are as ollows:1 Eradicate extreme poverty and hunger2 Achieve universal primary education3 Promote gender equality and empower women4 Reduce child mortality

5 Improve maternal health6 Combat HIV/AIDS, malaria, and other diseases7 Ensure environmental sustainability8 Develop a global partnership or development, see:http://www.un.org/millenniumgoals/




It is important to recognize that there is o ten a trade-o between maximising emissions reductionsand increasing sustainability bene ts Projects that work on the grass-roots level and involvelocal populations are o ten small-scale and require much continuous support, capacity buildingand ollow-up Such projects are not primarily about maximizing emissions reductions but aboutproviding nancial alternatives to projects with high sustainability bene ts

Several initiatives are underway to support the growths o CDM projects with true development

and sustainability bene ts Two UN initiatives ocus speci cally on linking development goals withcarbon o set and energy projects:

MDG Carbon Facility The UN Development Programm, recently established itsMDG Carbon Facility with the goal o :

Broadening access to carbon nance by enabling a wider range o developing countries to participate, particularly those countries which are presently under-represented. Promotingemission reduction projects which contribute to the Millennium Development Goals (“MDGs”), yielding additional sustainable development and poverty reduction bene ts.

http://www.undp.org/mdgcarbon acility /

The MDG Carbon Facility is a joint project between UNDP and Fortis Bank UNDP o ers projectdevelopment services, including per orming due diligence, providing technical assistance orCDM or JI project approval, and establishing the monitoring system or the project’s emissiono sets Each prospective project is assessed against criteria in ve main areas: carbon potential,technical easibility, nance and legal issues, MDGs and the environment, and country risk

UNDP charges a fat-rate cost-recovery ee or these services Fortis provides carbon bankingservices, comprised o purchasing and marketing the emission o sets generated by the projects

CD4CDMTheCapacity Development or the Clean Development Mechanism (CD4CDM) project wasdeveloped by the United Nations Environment Programme (UNEP) with nancial support

rom the Dutch government CD4CDM was established to promote GHG emission reductionprojects that are consistent with national sustainable development goals, particularly projectsin the energy sector CD4CDM gives guidance to participating developing countries aboutthe opportunities o ered by CDM projects, and helps these countries develop the necessaryinstitutional and human capabilities to plan and implement projects under the CDM (seehttp://cd4cdm.org )

Several o the voluntary standards also ocus on strengthening the cobene ts o carbon projects

The Gold Standard (GS) was developed by a group o environmental and social non-pro torganizations to strengthen the social and environmental bene ts o carbon o set projects TheGold Standard can be used or voluntary as well as CDM projects It has a very well developedstakeholder process and stresses environmental and socio-economic co-bene ts or the hostcommunities

TheClimate, Community & Biodiversity Standards(CCBS) ocuses exclusively on bio-sequestration projects and emphasizes the social and environmental bene ts o such projectsCCBS is a project design standard and o ers rules and guidance or project design anddevelopment It has a very well developed stakeholder process and stresses environmental co-bene ts

Plan Vivo is a standard or community-based agro orestry projects and ocuses on promotingsustainable livelihoods in rural communities




5 5 2Stakeholder Co sultatio sStakeholders are individuals or organizations that are in some way a ected by the project In thecase o a wind arm, or example, stakeholders include the project owner, the wind turbine supplier,the employees, the municipality, nearby inhabitants, and banks

Stakeholder consultations are an important tool to minimize possible negative impacts o carbono set projects Because many o set projects are being carried out in countries where regulations

are routinely poorly en orced, stakeholder consultations also unction as a risk managementtool When regulations are poorly en orced, an investor is unable to tell whether appropriate duediligence has been carried out with respect to local environmental impacts, land rights or labourissues Embedding stakeholder consultation in the project approval process is there ore a way orinvestors to gain more assurance that violations o either their investment principles or o locallegislation are not taking place In China, or example, stakeholder consultation is being prioritisedby the government as a tool to improve en orcement o environmental legislation at the local level

The evaluated o set standards require stakeholder involvement to varying degrees and alsodi er in terms o how speci c the stakeholder involvement rules are spelled out The CDM rulesare quite general and require relevant local stakeholders to be consulted via “appropriate media ”The validator (DOE) needs to con rm that relevant stakeholders have indeed been consultedwith appropriate media and that comments rom local stakeholders have been appropriatelytaken into account during the validation It is ultimately up to the DOE to judge whether localstakeholders have been consulted appropriately Some countries require certain local stakeholdersto be consulted as part o their regulation to obtain a construction license or the approval o theenvironmental impact assessment Some countries, such as Brazil, have clearly de ned rules as towhich stakeholders have to be consulted

O the reviewed standards, the Gold Standard most proactively spells out stakeholder rules TheGold Standard tries to ensure transparency and participation with clear rules at to what media is tobe used, what type o in ormation is to be presented, and what questions are to be asked o localstakeholders For example, the GS details the documentation that needs to be made available to

local stakeholders along with a questionnaire or the stakeholders to ll out It also requires anadditional local stakeholder consultation or CDM projects (i e , once the PDD is nalized and thecomments rom the initial stakeholder consultation have been taken into account)




5 5 3t a b l E 7 : Co-Bene t Requirements or Each Standard

Sta dard E viro me talRequireme ts

Social Requireme ts Comme ts

CDM Negativeenvironmentalimpacts must bestated in the PDDand minimized

The Kyoto Protocol requires that CDM projectsenable developing countries to achievesustainable development

Stakeholder consultation is required at initialproject planning stage

The sustainability criteria orCDM projects are developed byeach individual host country andthere ore varyI required by the host country, anEnvironmental Impact Assessment(EIA) has to be done and ndingsincluded in the PDD

GS Mustdemonstrateenvironmentalbene ts

Major negativeimpacts thatcannot bemitigated

lead to projectdisquali cation

The project must demonstrate social,economic or technical development bene ts

Major negative impacts that cannot bemitigated lead to project disquali cation

Stakeholder consultation required at initialproject planning stage There are speci crequirements as to which stakeholders have toactively be invited

Two public consultation rounds are requiredbe ore validation is completed There is a 60day commenting period or stakeholders inparallel to validation process

For Gold Standard VER, no public internationalstakeholder consultation such as or CDM isrequired

NGO supporters o the Gold Standard must beincluded in all consultation rounds

The Gold Standard provides a set o sustainable development indicatorsto support project developers’ e ortsto de ne and assess co-bene ts

EIA requirements are the same orCER and VER

The Gold Standard providesdetailed documentation on how astakeholder consultation has to beconducted and which requirementsapply The Gold Standard rules aremore speci c than under CDM

Micro-scale projects need only onestakeholder consultation round

The claimed co-bene ts and impactmitigation measures must bemonitored

VCS Must complywith localand nationalenvironmentallaws

The project document must include “relevantoutcomes rom stakeholder consultations andmechanisms or ongoing communication ”(VCS 2007, p 14)

I required by the host country, anEnvironmental Impact Assessment(EIA) has to be done

VER+ Negativeenvironmentimpacts must bestated in the PDDand minimized

Local stakeholder consultation required only

- i required by national law o host country or

- i project proponent cannot demonstratethat the project does not impact the vicinity

I required by the host country, anEnvironmental Impact Assessment(EIA) has to be done

CCX Must complywith localand nationalenvironmentallaws

Must comply with local and national laws I required by the host country, anEnvironmental Impact Assessment(EIA) has to be done

For agriculture, land-use and orestryprojects the proponent must identi ypotential negative environmentaland/or socio- economic impacts andtake steps to mitigate them

VOS Same as CDMor GS

Same as CDM or GS Same as CDM or GS



k E y E l E m E n t S o f o f f S E t S t a n d a r d S

Sta dard E viro me talRequireme ts

Social Requireme ts Comme ts

CCBS Mustdemonstrateenvironmentalbene ts

Major negative

impacts thatcannot bemitigatedlead to projectdisquali cation

Must generate positive social and economicimpacts Stakeholder involvement is requiredand must be documented

21-day public commenting period

Extra points are given or positiveenvironmental impacts such as useo native species and biodiversityprotection

Extra points are given or capacity

building and use o best practices incommunity involvement

The CCBS is intended to beapplied early on during the projectdesign phase, which is when theenvironmental and social outcomesare o ten “locked in”

Pla Vivo Mustdemonstrateenvironmentalbene ts

Must demonstrate social bene ts Projects arerequired to increase capacity over time andpromote extra activities contributing to well-being (e g micro-enterprises, uel-e cientstoves etc )

The Standard Manual includesexplicit requirements or ecosystemand livelihood bene ts and isreviewed periodically

GHG

Protocol

N/A N/A

ISO14064-2

N/A N/A

5 6Role o Third Part Auditors

5 6 1Alig ed I terests Betwee Bu ers a d SellersIn a typical market, the competing interests o buyer and seller create checks and balances:Producers try to maximize both price and the number o items sold or services rendered, whilstbuyers try to lower the price and minimize the number o products they must purchase to satis y

their need This system o checks and balances does not unction in o set trading – there is aninherent confict o interest in the current market design Although there is competition on pricing– the supplier (project developer/ under) wants high prices, the o set buyer wants low – since boththe supplier and buyer o carbon o sets aim to maximize the number o o sets produced, there isa strong nancial incentive or both supplier and buyer to overestimate the baseline scenario andthus arti cially infate emission credits to increase pro tability The purpose o a ree market is toenable dynamic innovation and entrepreneurship Free markets are not designed to protect publicgoods Neither suppliers nor buyers o carbon o sets can there ore be reasonably expected to actaltruistically and conservatively estimate a project’s reductions, as this would directly translate intodecreased pro ts In a “normal” market, the seller aces this same incentive, but it is balanced by thebuyer’s incentive to ensure that the o sets are not overestimated

This inherent alignment o interests is a pro ound design faw o project-based carbon tradingsystems, which can only to partly be mitigated by rigorous monitoring and third-party validationand veri cation o o set projects Most standards do require third-party auditors The ollowingsections detail validation and veri cation as well as the role o third-party auditors

5 6 2I depe de t Validatio o Project ActivitThe validation process is initiated during the planning and early implementation phase o a projectIt con rms the sound planning o a project developer and the compliance with the chosen o setstandard’s rules and regulations The project has usually not been implemented at this stage and

This dynamic is to some extent mitigated by the buyers’ potential risk o damaging his reputation i he buys o setsrom a project that might later be criticised or overestimating its credit reductions




the validation neither comments on the actual per ormance o a project nor certi es any emissionsreductions

Validation ProcessAn independent auditor reviews and validates the project design documents (PDD) and otherproject-related documentation such as construction licenses, environmental impact assessmentsand records rom the stakeholder consultation meetings with local stakeholders For CDM

projects, the in ormation in these documents is reviewed against CDM rules and regulations Inthe voluntary market, the validation entails the comparison o the proposed project to the ruleso the standard under which the project is implemented

It is important to point out that a validation can only be as good as the standard which it ollowsI the requirements o a standard are weak, e g i the baseline requirements are not rigorous andconservative, the validation will not recti y that but will simply con rm that the proposed projectcon orms to the requirements o the standard

A validation process under CDM typically consists o the ollowing three phases:• A desk review o the project design document: The auditor reviews the PDD and other relevant

documents and critically checks the assumptions and calculations given by the project

developer• Follow-up interviews with project stakeholders : The auditor con rms elements rom the project

documentation during interviews with local regulatory bodies (e g that the project hascomplied with all local regulations) and the project owner (e g that su cient training hasbeen administered to the sta to run the project equipment pro essionally) The auditoralso consults a selection o local stakeholders i e organizations or individuals other than theproject participants that are a ected by the project so as to con rm that their concerns havebeen taken into account

• The resolution o outstanding issues and the issuance o the nal validation report: Inconsistenciesin the documentation or missing evidential documents are pointed out by the auditor andcorrections requested Only a ter all open issues are resolved will the nal validation report beissued and the project recommended or registration

Validation is an ex-ante con rmation that the project, i implemented according to design, willgenerate the expected amount o emission reductions and comply with rules and regulationsThe nal validation report does not con rm the amount o carbon reductions that will begenerated It is the later veri cation and certi cation process which con rms and certi es theactual emissions reductions

Table 8 lists the validation requirement and the review process or each o the evaluatedstandards

5 6 3Mo itori g a d I depe de t Veri catio o Project ActivitVeri cation is an ex-post con rmation that the project was implemented and is per ormingaccording to design Veri cation con rms and quanti es the amount o emission reductions

Monitoring and veri cation standards are required to ensure that o set projects per orm asexpected

Under CDM procedures, an accredited third-party auditor (Designated Operational Entity - DOE)must con rm that the claimed emissions reductions have actually occurred To reduce confict o interest, DOEs are not allowed to do validation and veri cation on the same project

Veri cation is only as good as the accounting standards it veri es against.Veri cation by itsel cannot ensure high quality o the project because it only con rms that

the methodologies and monitoring standards have been implemented according to whatwas speci ed in the validation documents I these methodologies and monitoring standards




are weak, the veri cation process will not recti y this For example, in a land- ll gas project, averi cation report will con rm i the emissions reductions were actually achieved to the extentthey were estimated in the PDD The veri cation report will not evaluate or reconsider theadditionality requirements

Veri cation In the Voluntary Market The lack o third-party project veri cation by a certi ed and independent auditor is one o the

biggest gaps in the current voluntary carbon o set market Many project developers in theVER market do not use third-party veri cation at all but do the veri cation in-house One o thereasons or this is that historically, project developers were the ones that knew most about thetechnologies they implemented and the circumstances o their projects Early on, there simplywere not enough third-party veri ers with the necessary technical expertise available to allow

or external veri cation Sel -veri cation does not necessary indicate that such projects are o lowquality, but there is clearly a strong incentive or the project developer to evaluate his projects inas positive a light as possible Third-party evaluation there ore not only adds to the transparencyo projects but also decreases the inherent confict o interest in sel -evaluated projects Many o the voluntary o set standards have recognized the need or independent veri cation and requirethird-party auditors Table 8 outlines the requirements or each standard

5 6 4Project Approval: Auditors or Sta dard BoardsUnder the CDM, upon completion o the validation or the veri cation process, the DOE submitsthe documents to the CDM Executive Board who will then approve or reject the project Many o the voluntary o set standards also require the use o third-party auditors or project validationand veri cation In other words, it is the auditors themselves that approve the projects This isproblematic or the reasons explained in the next two sections

5 6 5Co ficts o I terest: Auditors a d Project DevelopersUnder both the CDM and voluntary o set standards, auditors are generally hired and paid byproject developers This creates a confict o interest because the auditor will need to be impartial,

yet may want to generously overlook issues and overestimate emission reductions in order to keepthe customer The CDM has tried to address this confict o interest by stipulating that auditors arenot allowed to provide any consulting services to project participants:

The DOE [Designated Operational Entity – CDM approved auditor] shall work in a credible,independent, non-discriminatory and transparent manner. The structure o the DOE shall sa eguard impartiality o its operations. I the DOE is part o a larger operation, the DOE shall clearly de ne the links with other parts to demonstrate that no con icts o interest exists. TheDOE shall demonstrate that it is not involved in any commercial, nancial or other processeswhich might in uence its judgment or endanger trust in its independence and integrity. (CDMmodalities & procedures, Appendix A, paragraph 2)

In the CDM, the additional approval process through the CDM Executive Board adds a layer o quality control because it is not solely up to auditors to approve or reject a project

Except or the Gold Standard and the CCX, the evaluated voluntary o set standards do not employan additional approval process Auditors themselves approve the projects This lack o an additionalapproval process potentially exacerbates the confict o interest or the project auditor

In addition, the subjectivity that is inherent in any o set project validation process weakens thequality control unction o the auditor In every project review, there is a signi cant degree o subjective judgment involved Auditors are paid by project developers and are given the powerto make judgments about issues such as whether assumptions are “conservative”, whether a givenbarrier is substantial in a given country, whether a baseline and an additionality argument make

sense, and whether data sources are legitimate




To counterbalance these design faws, many o the standards, including CDM, require a shortpublic commenting period – or example, or review o the baseline documents and backgroundin ormation It is nevertheless questionable whether these public commenting periods are su cientto properly review the social and environmental consequences o projects

5 6 6Qualit Co trol o AuditorsUnder CDM’s accreditation standard,DOEs have to provide proo that they have the necessarycompetences to conduct project validation (e g experience and technical expertise with validatingbiomass plants) To ensure auditors’ quality, the CDM Executive Board has set up a regularsurveillance system or DOEs, including on-site assessment o every DOE at least every threeyears Furthermore, the CDM Executive Board is authorized to conduct “spot-check” activities (i eunscheduled surveillance) o DOEs at any time Depending on the results o the spot check, theCDM EB can issue a warning to the DOE or in the most severe cases suspend its accreditation

In 2006 the CDM EB conducted three spot checks, yet it did not suspend any DOEs or publish theirnames despite “several non-con ormities o the DOE regarding both procedural and operationalrequirements” Given the negative ndings o all three spot-checks, the EB set up a regularsurveillance system or DOEs, including on-site assessment o every DOE at least every three years

The volu tar sta dards evaluated i this report curre tl have o ormal structures iplace to assess a d e sure the qualit o the auditors’ work.

5 6 1t a b l E 8 : Validation, Veri cation and Third-Party Auditor Requirements

Sta dard Requireme tsor Validatio

ValidatioApprovalProcess

Requireme ts orVeri catio

Veri catio ApprovalProcess

Third-partRequireme ts

CDM

Project DesignDocument (PDD)containing:

Description o theproject activity;

In ormationon baselinemethodology;Crediting period;

Monitoringmethodology andplan; Estimationo GHG emissionsby sources;

Environmentalimpacts;

Stakeholders’comments;

Host nationapproval

Validationdocuments needto be approvedby the CDMExecutive BoardA ter approval,the projectis o ciallyregistered

Monitoringreport (by projectdeveloper)including estimateo CERs generated

Veri cationreport (by DOE)and certi cationreport (by DOE)con rmingthe emissionsreductions

Project developersmonitor project accordingto monitoring plans asgiven in the PDD

Monitoring reports aresubmitted to third-partyauditor (DOE) DOE writesveri cation reports whichare then submitted orapproval to the CDMExecutive Board

Validation andveri cationhave to bedone by third-party auditors(DesignatedOperationalEntities, DOEs)

To avoid conficto interest,validation andveri cationcannot be doneby the sameDOE

Procedure or Accrediting Operational Entities by the Executive Board o the Clean Development Mechanism(http://cdm.un ccc.int/DOE/cdm_accr_01.pd )

Details can be ound: Executive Board o the Clean Development Mechanism Twenty-ninth Meeting(http://cdm.un ccc.int/EB/029/eb29rep.pd )









GS

All CDMrequirementsplus additionalGS requirementsmust be met (e gGS eligibility,previousannouncement,scoring o sustainabledevelopmentindicators,monitoring plan

or sustainableindicators,detailedoutcomes o both stakeholderconsultations)

Validationdocumentsneed to beapproved by theGold StandardTechnicalAdvisoryCommittee(TAC)

Gold StandardTAC and GoldStandardsupporter NGOshave six weeks toseek clari cationand can requestan in-depth audito a projectA ter approval,the projectis o ciallyregistered

Micro-scaleprojects canbe submitted

or an internalvalidation Someare externallyvalidated on atargeted randombasis

Monitoringreport (by projectdeveloper)including estimateo CERs or VERsgenerated

Veri cationreport includingthe GS-speci cannex (includingmonitored sustaindev indicators)and statement (byDOE) con rmingthe emissionsreductions andcomplianceo sustainabledevelopmentindicators

Veri cation reportincluding the GS-speci c annex to besubmitted to GoldStandard by CDM-accredited DOE

Gold Standardveri cation periodshave to correspondto CDM veri cationperiods

Project developersmonitor project accordingto monitoring plans asgiven in the PDD

Monitoring reports aresubmitted to third-partyauditor (DOE) DOE writesveri cation reports

Gold Standard CER:submitted or approval tothe CDM Executive Boardand the Gold StandardTAC

Gold Standard VER:submitted or approval tothe Gold Standard TAC

Micro-scale projects areselected to be veri ed ona targeted random basis

Both Gold Standard CERand VER: a 2-week reviewperiod precedes issuanceduring which the GoldStandard TAC and GoldStandard NGO supporterscan ask or clari cationsand corrective actions

Registered DOEs

DOEs conductinga rst timevalidation o a

Gold StandardPDD trigger amore in-depthaudit o theproject by theGold StandardTAC, whichalso serves asaccreditationprocedure o theDOE to the GoldStandard

Validation andveri cation can

only be done bythe same DOE orsmall-scale andVER micro-scaleprojects

VCS

The VCS ProjectDescription(VCS PD),monitoring plan,environmentalimpacts,comments bystakeholders etcare validatedaccording toISO 14064-3requirements andVCS Programmerequirements

Validationdocuments areapproved by theauditors

Validations aremandatory,and can becompleted up

ront or at thetime o the rstveri cation

Monitoringreport (by projectdeveloper)including estimateo VCUs generated

ISO 14064-3requirements usingthe VCS Veri cationReport templatecon rmingthe emissionsreductions

Project developersmonitor project accordingto VCS PD

Monitoring reports areveri ed by third-partyauditor Auditor writesveri cation reports andalso approves them andthe emissions reductionsThese are automaticallyapproved by the VCSonce authenticityand completeness o documents have beencon rmed

Registered CDMDOEs

Certi ed auditorsunder ISO140065

Auditorsregistered underJI

Other auditorsneed to becerti ed by theVCS board

VER+

JI or CDM PDDplus ormalstatement o compliance withVER+ criteria

Validationdocuments areapproved by theauditors

Monitoringreport (by projectdeveloper)including estimateo VERs generated

Veri cation report(by auditor)con rmingthe emissionsreductions

Project developersmonitor project accordingto PDD

Monitoring reports aresubmitted to third-partyauditor who writesveri cation reports andalso approves them andthe emissions reductions

Validation andveri cationhave to be doneby third-partyauditors (DOEs)

Validation andveri cation canbe done by thesame DOE

DOEs have a “certi cation body” which reviews and approves the validation and veri cation reports For CDM projects,the DOE certi cation body is the DOE’s quality control be ore the documentation is submitted to the CDM EB For VERproject, it is that certi cation body that gives the nal approval or a project









CCX

CCX does notdistinguishbetweenvalidation andveri cation

See veri cation Project proposal

Independentveri cationreport con rming

the emissionsreductions

Veri cation documentsare submitted orapproval to the CCXCommittee on O sets

Third-partyauditors areapproved by CCX

or each projecttype

VOS

Same as CDMor GS

Same as CDMor GS

Same as CDM or GS For GS VERs: see above

For other VERs: projectdevelopers monitorproject according to PDDMonitoring reports aresubmitted to third-partyauditor (DOE) DOE writesveri cation reports andalso approves them andthe emissions reductions

Same as CDMor GS

CCBS

Fi teen requiredcriteria and eightoptional “point-scoring” criteriaProject ratings:Approved, Silver,Gold

The CCBAlliance worksclosely withauditors, butit is ultimatelythe auditorwho makesthe decision toapprove or rejecta project

Project documentsand monitoringresults reviewed byauditors

Each project must beveri ed at least every veyears

Because CCBS is only aproject design standard, itdoes not veri y quanti edemissions reductions

Registered DOEsor ‘A orestation

andRe orestation’

and accreditedFSC auditors

Validation andveri cation canbe done by thesame auditor

Pla Vivo

Report including:Projectdescription

Communicationwith nationalregulatoryauthoritiesMonitoringprotocol

Technicalspeci cations

Size o risk bu er

Financial records

Validation carriedout by expertreviewers Alldocumentationreviewed andapproved bythe Plan VivoFoundationProjects arereviewed ona yearly basisthrough annualreporting

Veri cation iscurrently notrequired or PlanVivo projects butrecommended

Because Plan Vivo sellsex-ante credits it does notveri y quanti ed ex-postemissions reductions

Approvedvalidatorswith extensiveexperiencein orestryand carbonmanagementprojects

GHG

Protocol

Requiresmonitoring planbut does notcover validationand veri cation

N/A N/A N/A N/A

ISO14064-2

Does notdistinguishbetween, anddoes not require,validation andveri cation

N/A N/A N/A No third-party auditorrequirements;ISO certi esauditors underISO 14065 andISO 14066 (notyet released)




5 7RegistriesCarbon o set registries keep track o o sets and are vital in minimizing the risk o double-counting (that is, to have multiple stakeholders take credit or the same o set ) Registries alsoclari y ownership o o sets A serial number is assigned to each veri ed o set When an o set issold, the serial number and “credit” or the reduction is trans erred rom the account o the seller toan account or the buyer I the buyer “uses” the credit by claiming it as an o set against their ownemissions, the registry retires the serial number so that the credit cannot be resold

Registratio a d E orceme t S stems must include:• A registry with publicly available in ormation to uniquely identi y o set projects• Serial numbers or each o set credit generated by each project• A system to transparently track ownership o o sets which makes it possible to track each

o set to the project rom which it originated• A system to easily check on the status o an o set (i e , whether an o set has been retired)• Contractual or legal standards that clearly identi y the original “owner” o emission

reductions

• Contractual or legal standards that spell out who bears the risk in case o project ailure orpartial project ailure (e g who is responsible or replacing the o sets that should have beenproduced by the ailed project)

(Broekho , 2007)

Obtaining o sets directly through a registry simpli es the delivery process signi cantly, as buyerssimply establish an account into which the registry trans ers the purchased o sets In so doing, thebuyer is assured o both the quality o the purchased o sets (as only o sets that meet the registry’sstandards are transacted) and their ownership o the o sets, since they are deposited directly intothe purchaser’s account

Under CDM, the certi cation process is the phase o a CDM or JI project during which permits

are issued on the basis o calculated emissions reductions and veri cation In the VER market,credits are not certi ed but solely veri ed -- thus the di erence between CERs (Certi ed ERs) andVERs (Veri ed ERs ) The CDM registry is used to issue CERs rom registered CDM project activitiesinto the Pending Account Up to date in ormation on all registered projects can be ound at:http://cdm.un ccc.int/Issuance/cers_iss.html. Entities authorized to participate in a CDM projectactivity by a Non-Annex I Party may apply or a permanent holding account in the CDM registry atthe time o the rst issuance o CERs or their CDM project activity Entities authorized to participatein a CDM project activity by an Annex I Party may apply or a temporary holding account in the CDMregistry Registry-administered o sets transactions have the advantage o transaction credibility,protection against raud and errors, and simpli ed acilitation o transactions based on establishedstandards and procedures

There is no one single registry or the voluntary market Registries or the voluntary market havebeen developed by governments, non-pro ts, and the private sector Some o the registries are tiedto certain standards whereas others unction independently Most voluntary standard registriesare still in the planning stage and not yet operational Table 9 summarizes the registries and theapproval process or each o the standards

The term ‘registry’ is somewhat loosely de ned It sometimes also re ers to accounting systems that track greenhousegas emissions and/or emissions reductions In this section we ocus solely on registries that are carbon creditaccounting systems

The issue o ownership is not a trivial one: “For example, both the manu acturer and the installer o energy e cientlight bulbs might want to claim the emission reductions caused by the light bulbs – as might the owners o the powerplants where the reductions actually occur Right now, establishing the right to an o set reduction largely consists o making public marketing claims and trying to exclude others rom doing the same “ (Broekho , 2007)




When transactions occur without registry administration, providers and buyers must nd otherways to ensure the integrity o the delivery process Since o sets have no physical orm, buyersmust be given proo that the stated emission reductions have truly taken place A veri cationreport rom an independent thirdparty can serve this purpose Furthermore, buyers must obtainall rights and titles to the emission reductions and assurance that the provider did not and will notdouble-sell the o sets This con rmation usually takes the orm o a “trans er o title and ownership”document signed by the provider However, unless the provider engages an independent thirdparty to veri y its internal processes, the buyer cannot be sure that the provider has truly retiredthe stated amount o o sets This orm o delivery is o ten time-consuming, may require extensivenegotiations, and demands a great deal o know-how on the part o the buyer It is there ore onlysuitable or deliveries o large quantities o o sets

5 7 1t a b l E 9 : Registries Used by Each Standard Sta dard Accepted Registries Approval Process

CDM CDM Registry Veri cation documents need to be approved by the CDMExecutive board

GS

Gold Standard Registry (currentlyunder construction, predicted startdate early 2008) For CERs: CDMRegistry; GS-labeled CDM serialnumbers will be tracked in the GoldStandard registryFor VERs: Gold Standard Registry

Veri cation documentation or CER and VER projectsare approved by the Gold Standard Technical AdvisoryCommitteeCERs are issued by the UNFCCC and the Gold Standardlabel is delivered by the Gold StandardVERs are issued by the Gold Standard

VCS

In the process o accrediting multipleVCS registries that are electronicallyconnected and trans er data betweeneach other in real time All registries willbe connected to a central VCS projectdatabase which is under development

and aiming to launch in March 2008

Veri cation documents are approved by the third partyauditor

VER+

Blue Registry o TÜV SÜD Veri cation documents are approved by the thirdparty auditor and then orwarded to BlueRegistryadministration All VER+ projects must be registered inthe BlueRegistry

VOSIs planning to establish their ownregistry

For GS VERs: see above For other VOS VERs: veri cationdocuments are approved by the third party auditor (DOE)

CCXCCX Registry O set projects need to be approved by the CCX

Committee on O sets

CCBS N/A N/A

Pla VivoPlan Vivo Registry Plan Vivo sells ex-ante credits (Plan Vivo Certi cates)

which are recorded in their own registry

GHGProtocol

N/A N/A

ISO14064-2

N/A N/A

5 8Double Cou ti gSome double-counting issues can be addressed through the use o a registry A universal

mandatory registry or all types o o sets could ensure that each o set is sold only once Such aregistry could also ensure that o sets are not also sold as other commodities, such as Renewable




Energy Certi cates (RECs) But because multiple registries operate independently in the VERmarket, a project developer could potentially sell his credits through two di erent registries Such

raudulent activity would not be possible i the market used a single registry, or several linkedregistries, but the di erences between the current standards have made e orts to coordinate themso ar unsuccess ul

Other double-counting issues are more di cult to address For example, many customers want

to buy o sets that come rom projects implemented in their own country Whereas the averageEuropean produces 11 tonnes o CO2 , and the average American produces 20 tonnes, the averageChinese or Indian produces just 4 or 2 tonnes respectively, so clearly there is a moral imperative orrich nations to reduce their emissions rst But while this seems logical, such a system turns out tobe problematic because o double-counting issues

Under Kyoto, 39 developed countries (called “Annex B countries”) adopted legally binding emissionsreduction targets I the o sets or a carbon project implemented in an Annex B country are soldin the voluntary market, the reductions will automatically be double-counted: the purchasingindividual or organisation will claim them, but they will also be counted toward the host country’sgreenhouse gas inventory I a company unds an o set project in an Annex B country, the resultingcarbon o sets would need to be retired rom that country’s national greenhouse gas inventory inorder to avoid double-counting This matters because every Annex B country has to implementpolicies and projects to achieve their Kyoto goals, but to date no Annex B country has a regulatorysystem in place that would prevent this kind o double-counting This means that voluntary o setprojects in Annex B countries e ectively replace another set o emissions reduction measures thatthe country would have had to take in order to meet its Kyoto requirements had the reductionsnot been double-counted This problem could be addressed i Annex B countries with emissionsreduction obligations retired AAU credits or all VERs created through the voluntary market Yetcountries are unlikely to approve such a mechanism because it would mean that governmentswould indirectly endorse VERs Once accepted as AAU equivalents, they would in e ect beequivalent to CERs

Paradoxically, in high-emitting countries that have not rati ed Kyoto, such as the United Statesand Australia, these double-counting issues don’t exist at the national level They do exist on amore local level, however: i a region, state, county, or city has enacted an emissions reductiontarget (even just a voluntary one), any emissions reductions that are created in that area but thensold as o sets in the voluntary market should not also be counted in that jurisdiction’s emissionsinventory

This is only true i the country has a serious commitment to meeting its emissions targets Give the ailure o manynations to stay on target with their goals, it could be argued that any emissions reductions are welcome and thatvoluntary actions do not replace mandatory action

Another type o double counting can occur with company-based trading schemes such as the EU ETS In this casecancellation o AAU would be insu cient; cancellation o EUA would be required as well



4 2 o f f S E t t r a n S a c t i o n S

5 8 1t a b l E 1 0 : Project Locations and Rules on Annex B Countriesor Each Standard

Sta dard Project Locatio Rules to avoid double cou ti g or projects i A ex Bcou tries.

CDM Non-Annex I countries N/A

GS

Gold Standard CERs:Non-Annex 1 countriesGold Standard VERs:Any country

Retirement o corresponding amount o AAUsVERs: Retirement o corresponding allowances in caped countries

VCS Any country Retirement o corresponding amount o AAUs

VER+

Any country Retirement o corresponding amount o AAUs ( or projects carriedout during commitment period)or i applicable: statement o country that AAU shortage exists notallowing International Emissions Trading;or statement o project participant, that VER+ will not be trans erredout o the country

CCXAny country butmember states o theEU-ETS

CCX does not allow or the registration o projects in Annex 1countries during the Kyoto period that might be counted under thecountry level inventory (AAU)

VOS Any country Retirement o corresponding amount o AAUs

CCBS Any country Rules to be developed or CCBS (2008)

Pla Vivo Developing countries N/A

GHG Protocol N/A N/A

ISO 14064-2 N/A N/A

6 O set Tra sactio sIn the absence o predominant market standards, the variety o o set prices, qualities, deliveryconditions and contract terms makes it di cult to get a clear overview o the voluntary o setmarket The ollowing clari es pricing, costs, risks and delivery terms within the market mechanisms

6 1Prici g o O setsA complete and correct assessment o the production costs o an o set requires extensiveknowledge o investment costs, operational costs, past, present and uture project per ormance,corporate nance, and risk management, among other actors, and is extremely time-consumingFew consumers have the time and know-how to conduct such extensive analyses Even those thatdo may nd it extremely di cult to actor all cost components correctly

6 1 1Project Costs

O set providers must cover costs incurred at many di erent stages o project implementationbe ore the emission reduction can be sold as an o set The main cost actors can be divided into:

• Project cycle-related costs: investment or technological implementation, nancing o

investment capital, costs or technical project operation, maintenance, administration, etc ,and



4o f f S E t t r a n S a c t i o n S

• Delivery process-related costs: costs or the management o project ailure risk, qualitycontrol, administration, legal, printing costs, etc

These costs have an indirect infuence on the market price o o sets: in a unctioning market whererigorous and transparent standards are available, prices are set by supply and demand O setproviders whose e cient projects and internal processes enable them to generate o sets belowmarket prices will be most success ul Providers whose generation costs exceed market prices, on

the other hand, will need to increase their prices, which may result in decreased salesThe cost o each aspect o production varies rom project to project, so no rule o thumb exists orpredicting the generation cost o an o set The cost can be as low as two Euros per o set (typicallyin projects at large chemical plants), but has no upper limit Some projects incur costs o € 20 pero set and more, not including delivery process-related costs The generation costs or some o setsexceed resale prices as early as in the planning stage Other projects reach equivalent cost levelsdue to technical ailure or generation short all

Since no or-pro t organisation can sell o sets below production costs over the long term, less cost-e cient projects are typically implemented with unds donated to non-pro t organizations Suchprojects may in turn have high co-bene ts which have no assigned monetary value in the current

carbon markets, in which the traded commodity is a CO2 e reduction

6 1 2A Commo Misu dersta di g: The “Project Share Pit all”Buyers o o sets are inclined to pay the lowest possible price or o sets o a given quality, and arenot willing to pay or a provider’s unreasonable pro t or other unwanted expenditures (e g projectadministration or taxes) In comparing di erent o set purchase o ers, buyers o ten try to invest inprojects with high project share – that is, the proportion o the investment that goes toward directimplementation costs as opposed to overhead and organizational costs Many buyers pre er o setswith a high project share because they believe this indicates a more signi cant contribution toclimate protection

But the project share measure can be manipulated, and is subject to individual assumptions andde nitions:

a) There is no agreed-upon method or calculating project share, so di erent providers mayinclude various costs in their calculations Internal administration costs to the provider, orexample may or may not be included in the administration costs or a speci c project

b) Purchasing o sets with a high project share that are signi cantly more expensive than othero sets may not be the most e ective use o available unds, since the same unds could beused to achieve more emissions reductions at a lower price

c) Even i two projects have the same project share in the planning stage, the projects’generation success (and, there ore, climate impact) may di er signi cantly The overall projectshare may be known only a ter success ul long-term project operation

d) Some projects are easily constructed but di cult to administer, while the opposite is true orothers

Most buyers aim to maximize the emissions reductions they are unding But project share is o tenan unreliable measure or evaluating and comparing the quality and e ectiveness o o set projects

6 2O set Market PricesIt is nearly impossible to give a precise overview o current o set market prices, as the market isconsiderably ragmented due to the variety o available standards, project types and locations,o set qualities, delivery guarantees, contract terms and conditions, etc That said, the main price

drivers are an o set’s standard and origin (i e project type)




In a competitive market, o set prices are a unction o supply and demand The attractiveness o a project depends on the buyer’s objectives These are di erent or a compliance buyer than or avoluntary buyer:

• Compliance buyers are interested in obtaining credits reliably and cheaply in order to ul ltheir regulatory requirements

• Most institutions that voluntarily use o sets or their climate neutralization e orts want to

communicate that e ort to the public and choose projects that are well-received by thetarget group• In Europe, voluntary buyers are especially interested in biomass, renewable energy and end-

user energy e ciency projects rom less developed countries Other emissions reductionprojects such as industrial gas projects at chemical plants are less attractive to these buyersbecause, despite their emission reducing capability, such projects deliver very limited co-bene ts such as job creation and protection o local ecosystems

• In the US, voluntary buyers pre er o sets generated by domestic projects, and are lessocused on project type or sustainable development components

Carbon markets are still in their in ancy As public opinion and understanding o the markets

increase, di erent project attributes may become more attractive to buyers The ollowing marketprices are only approximations, and do not refect the ull variety o the purchase and salepre erences o all market participants

6 2 1t a b l E 11 : Pricing o O sets or Each Standard Standard Pricing

CDM The wholesale market price or CERs is at around € 18A seller there ore has the possibility to sell theCER to a compliance customer at that price using a standardized and cost e cient process and willsell to other buyers only, i any additional administration costs are covered by additional revenuesAdditional costs apply or marketing expenses, certi cate management, administration, value addedtax etc There ore, CERs are sold in the area o € 14 to € 30

GS

GS CER or GS VERs are sold on average at a premium to regular CERs or comparable VERs o 5-25%o the market price The premium varies depending on a number o actors: the project itsel (itsattractiveness or communication or example), project location (projects in so called least-developed-countries or example, are much sought a ter), whether a trade happens in the wholesale or in theretail market, vintage etc

VCS VCU prices depend to a large extend on the project type VCS version 1 VCUs are traded at € 5 to € 15

VER+ VER+ o set prices depend to a large extend on the project type and are traded at € 5 to € 15

VOS

GS VER: see above

Other VOS VERs: prices depend to a large extent on the project type They trade at a premiumcompared to other VERs, but at a lower level than GS VER levels

CCXCCX o sets are traded at around €1 3Additional costs apply or exchange ees, marketing expenses,certi cate management, administration, providers pro t, value added tax etc and resale prices willusually be higher than the price listed on the exchange

CCBS O sets rom CCB projects are traded at €5 - €10

Plan VivoThe price o Plan Vivo Certi cates depends on the volume o the purchase and the project Plan Vivocerti cates are traded at €2 30 - €9 50 / tCO2

GHG Protocol N/A

ISO 14064-2 N/A

“State o the Voluntary Carbon Market 2007 – Picking Up Steam“, Ecosystem Marketplace & New Carbon Finance, 17th

July 2007 and Tricorona, November 2007 Nordpool price, 14th November 2007: € 17 70 Chicago Climate Exchange, 13th November 2007: USD 2 10



4o f f S E t t r a n S a c t i o n S

6 3Choosi g the Right Co tract TermsIn the o set market, as in most other markets, participants compete to secure market shares Inorder to do so, providers o a certain o set quality (e g Gold Standard CERs) must set prices atcompetitive levels This requires e cient project operation on the part o the provider, as well aslimited pro t margins A provider o o sets with pro tability expectations substantially abovethe competition will set their prices too high and as a consequence lose market share On theother hand, a provider pricing o sets too low without looking at all o the applicable risk and costcomponents runs the risk o bankruptcy – especially in case o project short all or ailure

Yet the market can only unction success ully i reliable in ormation is available about the qualityo o sets Otherwise, the markets will ail to ensure quality and e ciency For example, i non-additional o sets enter the market and are indistinguishable rom additional o sets, a marketdriven race-to-the-bottom will occur, since the non-additional o sets will by de nition becheaper than the additional ones Standards must ul ll the role o ensuring quality and providingtransparent in ormation to buyers and sellers I reliable standards are available to distinguish thedi erent types and qualities o o sets, buyers can take advantage o the competition in the o setmarket by comparing prices or products o a desired quality

Comparing o sets is no simple task Buyers must take into consideration project type, o setstandard, delivery guarantee, and other actors Ideally, by choosing o sets o ering the best valueamong those o similar type and quality, the consumer uels market competition, which in turnresults in more e cient emission reduction activities

Among the most important contract parameters are the delivery provisions, which are speci ed inthe contract between buyer and seller In order to choose the product that best ts their needs, it iscrucial that buyers understand the terms o the contract and the delivery terms and risks involved

The cost o purchasingguaranteed o sets, or example, may be more than that o buyingintended emission reductions, even i the o ered o sets are o the same quality Guaranteed reductions haveeither already occurred (prompt deliver ) or will occur in the near uture and are guaranteed tobe delivered ( orward deliver In the latter case, the provider is held liable or contract de ault i they ail to deliver the agreed-upon number o emissions reductions In cases where buyers donatetoward intended emission reductions, project short all or ailure has no consequences or the o setprovider Suchintended emission reductions are re erred to as orward crediti g or ex-a tecredits.

Some buyers may pre er to make a donation toward intended reductions based on personalpre erences, especially i a project delivers high co-bene ts Others may pre er the certainty o achieved emission reductions associated with purchasing guaranteed o sets

All but one o the reviewed ull-fedged standards veri y exclusively ex-post emissions For sucho sets, it is up to the buyer and seller to choose between prompt delivery and orward delivery

Plan Vivo is the only standard that veri es ex-ante credits But not all providers clearly distinguishbetween non-guaranteed ex-ante credits and guaranteed o set purchases For example, a providercould advertise to sell Gold Standard o sets rom projects that have not yet produced veri edemissions reductions I this is not clearly communicated to the buyers, they might be unaware o the risk they are taking It is there ore vital that the buyer reads the general terms and conditions o the contract and identi es i the purchased amount o o sets is backed by real emission reductionsor not The ollowing sections describe the three levels o delivery risk in broad terms Though singlecontracts may deviate rom this scheme, the underlying principles generally hold true




6 3 1Low Tra sactio Risk: Prompt Deliver o Existi g O setsPrompt delivery in the carbon markets typically means delivery within a ew days o contractsignature This delay allows or administration o the actual transaction, but not or the generationo o sets, which would be impossible in such a short time

In such cases, the provider assumes all project and price risks and generates the carbon o sets priorto selling them The provider invests in the necessary technology, oversees project implementation,

covers the operational project expenses, and pays the costs or the validation, registration andveri cation o the project activity The provider does so without knowing or certain how large avolume o o sets the project will ultimately generate, nor at what price these o sets may be soldHowever, a ter success ul project operation, having the carbon o sets in stock enables the providerto o er risk- ree deliveries, and to achieve a higher nominal sales price than could be set or high-risk (non-guaranteed) o sets

Since providers o promptly delivered o sets can speci y and easily guarantee the exact amount,quality and parameters o their products, buyers o such o sets carry no project-related risks Thus,this type o contract is suitable or buyers that wish to receive risk- ree emission reductions quickly

6 3 2Medium Tra sactio Risk: Forward Deliver o Future O setsA orward contract constitutes a binding agreement between the o set provider and the buyer todeliver emission reductions at a pre-de ned time and price The provider may have access to utureemission reductions rom a certain project or port olio o projects or may have existing emissionreductions available in stock

For both the provider and the buyer, a orward contract is a way to eliminate market price risks andsecure a desired transaction price, even though delivery may not occur or months or years Suchan arrangement protects the provider rom alling market prices, and the buyer rom rising marketprices

Forward contracts may speci y a xed or proportional amount o o sets to be delivered A xeddelivery quantity speci es the exact amount o o sets to be delivered, while a relative numbertypically re ers to the project’s overall success (e g buyer agrees to buy 50% o all generated o setseach year or 3 years)

In xed volume transactions, the seller carries the risk i the project produces ewer o sets thanexpected In case o an o set short all, the seller must make up the missing o sets by deliveringo sets rom other projects at the same price

A orward contract can be executed only i both parties still exist at the time o delivery (i e havenot su ered bankruptcy) I the seller is unable to meet their contractual obligation, the buyer

aces the risk o having to pay the current market price or o sets, which may be more than theyhad originally settled on with the orward contract The risk o a party not being able to ul ll itscontractual commitment is re erred to as credit risk Be ore signing a orward contract, each partytypically assesses the credit risk o the other party

While organizations applying pro essional risk management strategies may pre er orward deliveriesto eliminate market price risks, such arrangements are less suitable or consumers who do not knowhow to assess credit risk Forward contracts are most suitable or buyers who want to secure a priceahead o actual delivery and payment date (e g buyers who expect market prices to increase in the

uture)



4 7o f f S E t t r a n S a c t i o n S

6 3 3High Tra sactio Risk: Forward Crediti g o Ex-a te O setsForward crediting – the sale o ex-ante credits – is the most complicated type o transaction or thebuyer to understand Typically, at contract closure, the buyer pays the purchase price or a certainnumber o o sets that have yet to be produced, and the provider delivers a certi cate con rmingthe purchase However, these o sets do not yet exist, and the success ul generation o the agreednumber o emission reductions is uncertain

Unless the contract contains an ex-post adjustment o the purchase price corresponding to anyshort all in o set generation, the customer carries the risk that some or all o the purchase price maybe lost, given that o sets might not be delivered Transparency in such transactions is likely to belimited because providers are unlikely to in orm buyers o any short all in the number o emissionsultimately achieved This is especially true or projects that are not expected to deliver the emissionsreductions or several decades, as is the case with certain orestry projects Because buyers must payup ront with no guarantee o the ul llment o delivery, such transactions carry the highest risk orthe buyer

Forward crediting is similar to orward purchasing (see above) and the same principles o price-risk hedging and credit risk assessment apply But there is a substantial di erence in risk associated withthe two types o transactions: In orward crediting contracts, the purchase price is paid up ront andis not repaid in case o delivery short alls The seller is not obligated to replace delivery short allswith o sets rom other projects Because o this, orward crediting might be more suitable ordonors who do not depend on exact emissions reductions than or buyers who are looking to o seta precise amount

6 3 4How Providers Ca Reduce Deliver Risk Risk management techniques can substantially reduce the risk o project under-per ormanceand consequent delivery ailure One key technique is the port olio approach: by contracting /developing not just one or a ew projects but a large number (e g with di ering technologies orlocations), the provider can di use the risk o catastrophic project ailure Restricting sales to theexpected delivered volume based on the probability o project ailure can signi cantly reduce therisk o over-selling Providers with a substantial port olio o projects are thus able to guarantee theamount, quality, and parameters o the carbon o set delivery to the buyer at contract signature,prior to generation and delivery

Active risk management can also be applied on a technical and operational level By hiringtechnical experts to oversee the job site and per orm quality control, and by consulting withlocal representatives, providers ensure that they will react in a timely manner to technical ailure,short alls and errors in project documentation, changes in laws and regulations, etc Although suchmeasures raise project costs or the provider, they also ensure a lower project ailure rate

A third way or the provider to avoid delivery de ault is to compensate or generation short alls withemission reductions purchased rom other providers

Since all orms o risk management require an investment o resources, not all providers are able too er an optimal delivery guarantee when contracting to generate o sets



4 r E v i E w o f S t a n d a r d S u S E d i n t h E v o l u n t a r y o f f S E t m a r k E t

7 Review o Sta dards Used I theVolu tar O set Market

7 1 O set Sta dard T pes

In order to better understand the di erent standards and their goals we distinguish between theollowing types o o set standards:

Full-fedged carbo o set sta dards o er all three components:

1 Accounting Standards2 Monitoring, Veri cation and Certi cation Standards3 Registration and En orcement Systems

Project Desig Sta dards (PDS) include accounting standards and some monitoring standardsor guidelines, but do not o er certi cation o o sets or a registry These PDS are use ul or projectdevelopers in the initial phase o project development and may help secure up ront unding Butthe project developers must use the PDS in conjunction with a ull-fedged standard in order to getcerti cation and access to a registry once the project starts producing credits

O set Sta dard Scree s are not ull-fedged standards by themselves but accept projects thatwere implemented under other standards and that adhere to their screening standards (e g ano set screen that accepts all CDM credits, except those rom large hydro and industrial gas projects )

O set Accou ti g Protocols provide de nitions and procedures to account or GHG reductionsrom o set projects but have no associated regulatory or administrative bodies They have

programme-speci c rules and procedures or reviewing, validating, and registering GHG projects,as well as veri ying and certi ying GHG reductions Yet protocols do not de ne eligibility criteria orhave procedural requirements Many o the ull-fedged standards are based on such protocols ( orexample, the VCS uses ISO-14064 methodologies)

Other Sta dards T pes Some standards don’t quite t any o the above mentioned categoriesThese are usually less widely used standards that have been developed or very speci c projecttypes Some o these standards, such as Plan Vivo, sell ex-ante credits In other words, they sellcarbon o sets that are projected to be produced in the uture The standards discussed in this paper

t into the ollowing categories:

t a b l E 1 2 : O set Standard Types

Full-FledgedCarbon O setStandards

Project DesignStandards

O set StandardScreens

O set Protocols Other StandardTypes

CDM

VER+

CCX

Once they haveestablished theirregistries:Gold Standard(GS)

Voluntary CarbonStandard (VCS)

Climate,Community &BiodiversityStandards (CCBS)

Voluntary O setStandard (VOS)

ISO 14064-2

WRI/WBCSD’s GHGProject Protocol

Plan Vivo



4r E v i E w o f S t a n d a r d S u S E d i n t h E v o l u n t a r y o f f S E t m a r k E t

The ollowing sections describe each standard in more detail To acilitate cross comparisons, we haveollowed the same order o topics and the same layout or all standards The only exceptions to this are

the bio-sequestration rules or CDM and VCS, which are discussed in more detail in chapter 7 4 on orestrystandards In these sections, the numbering system is slightly di erent

The standards are summarized as objectively as possible Editorial comments and opinions about thestandards can be ound in the Authors’ Comments at the end o each standard description Their brie

comments ocus on what they consider the main strengths and weaknesses o each standard

7 2Full-fedged Sta dardsFull-fedged carbo o set sta dards o er all three components:

1 Accounting Standards; 2 Monitoring, Veri cation and Certi cation Standards and; 3 Registration andEn orcement Systems In the ollowing sections we describe these ull-fedged standards: CDM, GoldStandard, Voluntary Carbon Standard, VER+, and CCX

CLEAn DEVELOPMEnT MECHAnISM

http://cdm.un ccc.int/index.html

and is ully accountable to the COP/MOP The EB has 10members rom parties to the Kyoto Protocol includingone representative each rom the ve UN regions,two each rom the list o industrializing countries withemission reduction targets and those without targets,and one rom the Small Island Developing States

The responsibilities o the CDM EB include:

• Developing and amending the rules o procedure orCDM

• Accrediting DOEs• Registering CDM projects

• Approving new baseline and monitoringmethodologies or amendments to existing ones

• Authorizing the issuance o CERs

Accreditation Panel reviews applications romprospective DOEs, reports conclusions and preparesrecommendations to the EB or accrediting anddesignating operational entities

Methodologies (Meth) Panel reviews proposed newor amendments to existing baseline and monitoringmethodologies, and makes recommendations tothe EB regarding their approval or amendments TheMeth Panel also makes recommendations to the EBregarding changes to the guidelines or methodologies

or baselines and monitoring plans The Meth Panel isco-chaired by two members o the EB and is composedo an additional 15 members who serve as technicalexperts on the panel

A orestation and Re orestation (A&R) WorkingGroup prepares recommendations to the EB on

submitted proposals or new baseline and monitoringmethodologies or CDM A&R project activities incooperation with the Meth Panel

1. Overview

Type o Standard The Clean Development Mechanism (CDM) is a ull-fedged o set standard and is a part o the internationallegally binding Kyoto Protocol and its related accordsIt is administered by the United Nations Framework Convention on Climate Change (UNFCCC) CDM enablesindustrialized countries to achieve emissions reductionsby paying developing countries or certi ed emissionreductions (CERs)

History o Standard Recognizing the need or stronger action to combatclimate change, the parties o the UNFCCC negotiatedand adopted the Kyoto Protocol in 1997 At the timeo its adoption, the treaty only sketched out the basic

eatures o the GHG trading mechanisms like the CDMThe rulebook detailing how the mechanisms wouldoperate was feshed out over the next our years,culminating in the Marrakech Accords The treaty came

into orce on 16 February 2005, making the tradingmechanisms operational

Administrative Bodies

Con erence o Parties serves as the Meeting o Partiesto the Kyoto Protocol (COP/MOP): The COP/MOP is theultimate decision-making body o the UNFCCC It iscomprised o representatives rom each member statethat has rati ed the Kyoto Protocol The COP/MOPreviews and approves the CDM EB’s recommendations,thereby providing guidance and direction to the EB inadministering the CDM

CDM Executive Board (CDM EB)supervises the CDMunder the authority and guidance o the COP/MOP,



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Small-Scale (SSC) Working Group preparesrecommendations to the EB on submitted proposals ornew baseline and monitoring methodologies or CDMsmall scale project activities

CDM Registration and Issuance Team (RIT)assiststhe CDM EB by appraising requests or registration o project activities and requests or issuance o CERs Itis chaired by a member o the EB on a rotational basisThe RIT was established in 2006 (be ore that, in 2004-5,projects were assessed by individual Board members)

Designated National Authorities are agenciesdesignated by each party to the Kyoto Protocol to act asa nodal agency or administering CDM involving partieswithin its jurisdiction

Designated Operational Entities (DOEs) are theaccredited auditors who validate and veri y CDMprojects There are currently 19 registered DOEs, o which 18 are authorized to validate projects and 7 o the18 are also authorized to veri y projects Only one o 19is designated solely as a veri er DOEs are not allowedto do the validation and the veri cation or the sameproject, and the sectors that each o them can cover alsovaries

Financing o the Standard OrganisationThe CDM is nanced through the CER issuance ees andthrough start-up donations rom Annex I countries

Recognition o Other StandardsThe CDM does not recognize any other standards

However, many o the regulated and voluntary carbono set schemes recognize CDM and accept CERs aseligible o sets under their respective schemes Theseschemes include the EU ETS, the VOS, VER+, CCX, andthe VCS

Number o ProjectsAs o September 2007, there are 827 registered projectswith a urther 154 in the registration process, 2,647projects in the CDM Pipeline, 46 projects have beenrejected and 8 withdrawn 85,9 million CERs have beenissued to date

2. Eligibilit o Projects

Project TypeCDM accepts projects that reduce the emissions o ,avoid the release o or sequester any one o the sixgases covered by the Kyoto Protocol with the exceptiono nuclear energy projects, and sequestration projectsother than a orestation and re orestation projects(REDD)

UNEP RISOE Centerhttp://www.cdmpipeline.org/ , accessedon 15 November 2007

Project LocationCDM only accepts projects in non-Annex I countries

Project SizeThere are no restrictions on the size o projects

Projects may be classi ed as small-scale CDM projects Small-scale projects use simpler documents and are

subject to a simpler approval process than otherprojects

Start DateOriginally: 1 January 2000

This rule has lapsed Currently, the start date is the dateo registration

Crediting Period The crediting period options or CDM projects arethe same or all project types, except a orestationand re orestation projects In the case o the ormer,

project developers can choose between: (i) a seven-yearcrediting period with the option o up to two seven-yearrenewals, , provided the project baseline is still valid orhas been updated to take new data into account or (ii)a maximum period o 10 years with no renewal optionFor a orestation and re orestation projects, the choiceis between: (i) a 20-year period with up to two 20-yearrenewals or (ii) a maximum o 30 years with no renewal

CDM Pre-Registration CreditsN/A

Project Funding RestrictionsCDM projects cannot accept any O cial DevelopmentAssistance (ODA)

Environmental & Social ImpactsWhile there are no explicit guidelines laid out or theenvironmental or social impacts o CDM projects,the Kyoto Protocol requires that CDM projectsenable developing countries to achieve sustainabledevelopment Each country sets the policies or thesustainable development criteria by which it can assessCDM projects Social criteria may include improvementsin the quality o li e, alleviation o poverty, and greater

equity, while environmental criteria may include theconservation o local resources, removing pressure onlocal environments, health bene ts, and compliancewith domestic environmental policies

An analysis o the environmental impacts o the project,including trans-boundary impacts, must be provided inthe PDD I an Environmental Impact Assessment (EIA)is required by the host country, the project developer

Projects can quali y assmall scale i they ul ll the ollowingtwo criteria:

1 the energy output does not exceed 15 MW,2 the reduction in energy consumption is less than 15gigawatt hours per year or the reduction in emissions is lessthan 15 kilotons o CO2 -equivalent per year




methodology Upon receipt o the completedocumentation and a ee o USD 1,000, the secretariatmakes the methodology publicly available or comment

or a period o 15 days The Meth Panel reviews andassesses the proposed methodology with the helpo the secretariat and based on the independentassessments o our members o the Meth Panel (who

are selected on a rotational basis), two independentexperts, and comments rom the public Based onthe recommendations o the Meth Panel, the CDM EBapproves or rejects the proposed methodology I theproposed methodology is approved or incorporatedinto a consolidated methodology, then the USD 1,000

ee is adjusted in the registration ees

4. Validatio & Registratio

ProcessThe project developer or a consultant acting on behal o the project developer must prepare a Project DesignDocument (PDD) describing the project activity,the baseline methodology to be used to calculatethe emissions reductions under the project and themethodology that will be used to monitor the emissionreductions achieved The PDD is then reviewed by aDOE to con rm the veracity o the in ormation andarguments provided Simultaneously, the PDD is postedon the DOE’s website and opened to public comments

or a period o 30 days The DOE and project developerneed to consider the comments received and takeaction (i deemed necessary) be ore the DOE nalizesthe Validation Report The DOE review process alsoinvolves visits to the project site and consultationswith local stakeholders The DOE’s assessment andconclusions, including a summary o the stakeholderconsultations, are synthesized into a Validation Report

The PDD and the Validation Report are submitted tothe project host nation’s DNA or approval I the projectmeets the sustainable development criteria, complieswith the country’s laws and regulations, and ul lls anyother requirement speci ed by the DNA, the DNA issuesa letter con rming the host nation’s approval The PDD,the Validation Report and the Host Nation Approval arethen submitted to the CDM EB or registration

Within 8 weeks (or 4 weeks or small projects) o receipto theRequest or Registration, the EB is required toregister the project The RIT supports the EB in thisprocess by reviewing the reports submitted along withthe Request or Registration I a party to the project orat least three members o the EU request a review o theproject, then registration can be delayed until the nextEB meeting

http://cdm.un ccc.int/Re erence/Procedures/Pnm_proced_ver12.pd

must also include conclusions o the EIA in the PDDSimilarly, the project developer must also describe theprocess o inviting comments rom local stakeholderslikely to be a ected by the project, summarize theircomments and document the action taken to addresstheir concerns

The PDD is published or commenting or 30 days onthe CDM website

. Additio alit a d Baseli es

Additionality RequirementsCDM uses project-speci c tools to assess additionalityHowever, some o the baseline tools are based onper ormance standards

The process o determining whether a project isadditional involves three or our steps as laid out in theUNFCCC additionality tool version 4 ( or details, seeAppendix B)

Step 1: Identi ying realistic and credible alternatives tothe proposed project activity that are compliant withcurrent laws and regulations

Step 2: Investment analysis to determine that theproposed project activity is not the most economicallyor nancially attractive, or step 3

Step 3: Analysis o barriers that prevent theimplementation o the proposed project activity or donot prevent the implementation o one o the otheralternatives

Step 4: Analysis as to whether the proposed projectactivity is ‘commonly practiced’ by assessing the extento di usion o the proposed project activity

Baseline & Monitoring MethodologiesCDM ollows a bottom-up, project-speci c approachto determine baseline and monitoring methodologiesHowever, once a baseline and monitoring methodologyis developed and approved by the CDM EB, the same

ramework can be used to develop other projects,provided they meet the other eligibility requirementsExisting methodologies have been amended andre ned over time as new projects have been proposedand approved with amendments to the previouslyexisting methodologies Further, similar methodologies

or certain types o projects have been consolidated intosingle methodologies so that they are applicable to abroad range o projects

Project developers or consultants acting on behal o the project developers may propose newmethodologies The proposal or a new methodologymust be submitted to the UNFCCC secretariat througha DOE The DOE or a member o the Meth Panelmay undertake a pre-assessment o the proposed




Key Requirements• Completed PDD with the baseline and monitoring

methodology

• Validation Report including the stakeholderconsultation

• Host Nation Approval

. Mo itori g, Veri catio &Certi catio , a d Issua ce

ProcessOnce the project is operational, the project implementeror a consultant acting on behal o the projectimplementer is required to prepare a MonitoringReport on a periodical basis in accordance with themonitoring protocol in the PDD The report must alsoinclude an estimate o the CERs generated during there erence period A DOE veri es the Monitoring Reportand also carries out a site visit, i deemed necessary TheDOE prepares a Veri cation Report documenting itsassessment o the monitoring report and veri ying theemissions reductions The same DOE that validated aproject cannot also veri y it except in the case o small-scale projects

The Monitoring, Veri cation and Certi cation Reportsare submitted to the CDM EB with a request to issue therequisite amount o CERs Within 15 days o receipt o this request, the EB must authorize the issuance o theCERs unless a project participant or three EB members

request a review The RIT supports the EB in this processby reviewing the reports submitted along with theRequest or Issuance

Key Requirements• Monitoring Report estimating the emissions

reduction achieved

• Veri cation and Certi cation Reports rom the DOEcon rming the emissions reductions

6. Evaluatio o AuditorsThe CDM Accreditation Panel (CDM-AP), which reportsto the CDM EB, is required to undertake regularsurveillance o the DOE’s management responsibilities,resource and organizational management, and technicaland analytical review processes, with a view to assessingthe DOE’s ability to deliver the intended quality o itsservice The CDM-AP carries out this surveillance at leastevery three years with the help o the CDM AssessmentTeam (CDM-AT)

In addition to the regular surveillance, the CDM EB, withthe help o the CDM-AP and the CDM-AT, can conductan unscheduled assessment o a DOE, a ‘spot check’ to

ascertain whether the DOE still meets the accreditationrequirements

For both the regular surveillance and the spot checks,the DOE that is being assessed pays or the expenses tobe incurred by the CDM-AP and CDM-AT in carrying outthe assessment in advance

7. RegistriesThe CDM Registry is administered by the UNFCCCsecretariat Upon authorization rom the EB to issueCERs or a project activity, the secretariat orwards theissued CERs into a Pending Account until it receivesinstructions to orward CERs into the relevant HoldingAccount Project participants may have a HoldingAccount either in the CDM Registry or in the NationalRegistry o an Annex I country

For CERs to be trans erred rom an account in the CDMRegistry to a National Registry account, they mustpass through the International Transaction Log (ITL)The ITL, which is still under development, will recordtransactions o CERs rom the CDM registries to theAnnex I National Registries These transactions includeissuance, cancellation, replacement, retirement andthe trans er o CERsOnce the CERs are received in aNational Registry account they may be traded or used

or complying with national or regional targets Atpresent, CERs cannot be trans erred between NationalRegistries but internal trans ers within a NationalRegistry are possible

. FeesNew methodology submission ee: USD 1,000(adjustable in the registration ee i the methodology isapproved or consolidated)

Registration ee: USD 0 10 per CER issued or the 15,000CERs issued in a given calendar year and USD 0 20 perCER or every CER issued over and above the 15,000CERs The upper limit set or the ee is USD 350,000No registration ee is charged i the average annualemissions over the crediting period are less than15,000 tCO2 e I the project is not registered, then anyamount above USD 30,000 is reimbursed to the projectdeveloper

Issuance ee: 2% o the CERs rom each issuanceis charged to cover administrative expenses andadaptation costs

http://cdm.un ccc.int/Issuance/IssuanceCERs.html http://regserver.un ccc.int/seors/ le_storage/ ak11nelszg grda.pd



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Authors’ Comme ts o CDM

Qualit o EB Decisio sThe raction o projects that are being reviewed and rejected by the CDM Executive Board hasincreased notably over time This is especially true since the Registration and Issuance Team (RIT)was established in 2006 Nevertheless, the EB still has a large backlog o CDM projects awaitingregistration Some project developers have expressed dissatis action with the act that projectassessment varies quite considerably among RIT members A major cause or this is the lack o institutional memory and insu cient training o sta Despite the addition o the RITs, the EB is stillnot very e cient and is at times quite bureaucratic

Qualit o DOEsCurrently project developers choose and pay DOEs This causes a confict o interest which potentiallyundermines the environmental integrity o CDM projects As discussed earlier, DOEs are underpressure to do validation and veri cation services at low prices and in as little time as possible Also,CDM does not provide detailed instructions on auditing procedures Despite the DOE review andspot check procedures, there currently does not seem to be a strong threat o sanctions against DOEsthat under-per orm (Schneider, 2007)

Additio alitThe CDMadditionality tool was developed over several years and is seen as a benchmark againstwhich to compare other additionality testing procedures (it is used by a number o other standardsdescribed in this report) Yet recent reports have shown the current additionality tests are to a largeextent subjective and can easily be misrepresented (Schneider, 2007; Haya 2007) No approach ordetermining additionality is per ect Yet given the importance o ensuring environmental integrity o CDM projects, great care and e ort should be put in place to minimize ree riders The CDM ExecutiveBoard is in the process o creating a set o validation and veri cation guidelines Through creatingbetter de nitions or terms such as “common practice” and guidelines or evaluating argumentsabout project barriers, some non-additional projects could be less likely to be registered

Co-Be e tsThere are trade-o s between generating large quantities o o sets and bene ts or sustainabledevelopment: Project activities with large emission reductions o ten have ew bene ts orsustainable development (e g industrial gas projects), whereas emissions reductions are o tensmall or projects which have high bene ts or sustainable development (e g many types o smallscale projects) The CDM has so ar not been very success ul in ostering projects that contribute tosustainable development This is partly due to the act that each country can establish their ownsustainability criteria Some host countries may be hesitant to develop stringent sustainability criteriabecause o the perceived risk o having project developers turn away i their criteria are too stringentOn the other hand, it is also worthwhile pointing out that some co-bene ts are indirect such asimprovement o in rastructure, additional tax income or the host country, improved power supply

and grid stability




GOLD STAnDARD

http://www.cdmgoldstandard.org

Gold Standard NGO Supporters decide on major rulechanges (e g eligibility o project types) Gold StandardSupporter NGOs must be consulted as part o the GoldStandard stakeholder consultation in case they haveoperations in the relevant host country Supporter NGOsare also invited to take part in the project reviewingprocess and can request an in-depth audit o GSprojects both at the registration as well as issuancestage

GS Auditorsare UNFCCC accredited DOEs who carryout validation and veri cation o GS projects DOEs arenot allowed to do the validation and the veri cation

or the same project, except or micro and small scaleprojects

Financing o the Standard OrganisationThe standard is nanced through donors and incomerom issuance ees and ranchising ees

Recognition o Other StandardsThe GS does not recognize any other voluntarystandards Yet the GS it is recognized by the VOS andis likely to be recognized in the near uture by severalother standards (VER+, VCS )

Number o ProjectsIn total, 10 projects have been registered under the GoldStandard About 35 projects are o cial Gold StandardApplicants, representing about 4 million CERs and500,000 VERs Another 65+ projects are in the pipeline


Project TypeThe GS accepts renewable energy (including methane-to-energy projects) and energy e ciency projects Itexcludes large hydro projects above 15 MW capacity

Project LocationGold Standard VER projects cannot be implemented incountries with an emissions cap, except i Gold StandardVERs are backed by AAUs being permanently retired

Project SizeThe Gold Standard does not have any project sizeminimum Project sizes or Gold Standard VERs are:micro-scale (<5,000 tonnes CO2 per year), small-scale(5,000-60,000 tonnes CO2 per year) or large-scale(>60,000 tonnes CO2 per year)

For Gold Standard CERs, the same size limits as or theCDM apply

1. Overview

Type o Standard The Gold Standard (GS) is a ull-fedged carbon o setstandard The Gold Standard (GS) requires social andenvironmental bene ts o its carbon o set projects andhas a very well developed stakeholder process The GScan be applied to voluntary o set projects as well as toCDM projects

History o Standard The GS was developed under the leadership o the WWFin order to ensure that emission reduction projects arereal and provide social, economic and environmentalbene ts The GS CDM was launched in 2003 a ter atwo year period o consultation with stakeholders,governments, NGOs and the private sector rom over40 countries GS VER was launched in 2006 The GS isendorsed by 56 NGOs


The Gold Standard Foundation is a non-pro torganisation under Swiss Law, unded by public andprivate donors The operational activities o the GSare managed by the Gold Standard secretariat basedin Basel, Switzerland, including capacity building,marketing and communications, certi cation,registration and issuance as well as maintenance o theGS rules and procedures The secretariat has currently asta o 5

The Foundation Board oversees the strategic andorganizational development o the Gold StandardThe Board has currently 8 members At least 50% o itsmembers must be recruited rom the Gold StandardNGO supporter community, and one member is at thesame time the Chair o the Gold Standard TechnicalAdvisory Committee (GS-TAC, see below) In case o signi cant changes to the Gold Standard rules and

procedures, the Board decides whether or not a GoldStandard NGO supporter majority is necessary toimplement the change

Technical Advisory Committee (GS-TAC)evaluatesand approves projects, new methodologies or VERprojects and is in charge o updating the GS rulesand procedures It is the equivalent o the CDM EB /Meth Panel or VER projects The GS-TAC has currently7 members, all acting in their personal capacitiesThe GS-TAC members are rom the NGO community,multilateral organizations, aid agencies and the private

sector




Start DateThe earliest start date or retroactive crediting o GoldStandard VERs is January 1st 2006, and retroactivecrediting is only permitted or a maximum o 2 yearsprior to the registration date

Retroactive crediting or CDM projects submittingdocumentation (Gold Standard Validation report) islimited to two years prior to the date o registration orthe Gold Standard For years with compliant veri cationreports that lie only partly within that period, aproportional volume o credits is issued

Crediting Period Crediting periods are either one 10 years period, or a 7year period renewable three times, except or validatedpre-CDM Gold Standard VERs (see below)

Projects can opt-in or Gold Standard crediting duringthe overall crediting period by submitting a Gold

Standard-compliance veri cation report to the GoldStandard Projects can opt-out o Gold Standardcrediting during the overall crediting period, but opt-out is nal and the project cannot be communicated asGold Standard any more

Prior to opt-in and a ter opt-out it is permissible to seek issuance o credits rom other standards It is howevernot permitted to apply or issuance o credits underdi erent standards i this extends the overall creditingperiod o the project beyond what is possible under theGold Standard VER rules

CDM Pre-registration CreditsThe Gold Standard does certi y CDM pre-registrationcredits or a maximum o a year prior to the project’sCDM registration date under certain conditions:

• The project developer can provide proo that thenal version o the PDD has been submitted or

validation to the DOE prior to 31st o January 2008

• The DOE must provide a veri cation report coveringthe Gold Standard VER period either with the rstveri cation o Gold Standard CERs or separately

• The reasons or the delay between the start o

project operation and CDM registration have tobe explained by the DOE as part o the veri cationreport covering the Gold Standard VER period

Gold Standard VERs will only be issued a ter the projecthas been success ully registered as a Gold StandardCDM project Once the project has been registered as aGold Standard CDM project the normal Gold Standardrules apply

Project Funding RestrictionsO cial Development Assistance (ODA) unding is notallowed or Gold Standard CER projects, except rom

the development o the PDD or o a new methodology,

but is acceptable or Gold Standard VER projects i additionality o the project can be clearly established

Environmental & Social ImpactsBoth Gold Standard CER and Gold Standard VERprojects must show clear sustainable developmentbene ts, including local and global environmental,social, and economic as well as technologicalsustainability The GS provides a sustainability matrixto help project developers develop their sustainabilitycriteria The GS requires that critical and sensitivesustainable development indicators and mitigation orcompensation measures are monitored over the entirecrediting period and in ormation on the status o theindicators is included in the veri cation reports

Both the project developer and the stakeholdersconsulted assign scores between -2 (major impact thatcannot be mitigated) and +2 (major positive impact)to a broad set o pre-de ned indicators covering all

aspects o sustainable development Scoring dependson speci c circumstances, and the ramework chosen

or the scoring process is tailored to each project andmust be clearly explained and justi ed

Environmental Impact Assessment (EIA) requirementsare the same or both VER and CER stream or small-and large-scale projects For micro-scale voluntaryo set projects, an EIA is required i the relevant localor national law prescribes an EIA or potentially i stakeholders have concerns about environmentalimpacts or which mitigation measures cannot be

identi ed – in such a case, the project must be treatedas a small- or large-scale project I no EIA is required bythe legislation, the project developer still has to providea statement con rming that the project complies withlocal environmental regulation

Gold Standard requires two public consultation roundsor all projects (except micro-scale projects, which

require one initial consultation only) VER o set projectsrequire a letter to the Designated National Authority(DNA or, i not present, other relevant authority) tocommunicate the development o the project as a GSvoluntary o set project For micro-scale projects, onlyone consultation round is needed during the designphase

During a 60-day period prior to nalizing the validationprocess, stakeholders must have the opportunity tomake comments on the GS-PDDs For VER projects,no international stakeholder consultation is required,in contrast to CDM projects National Gold StandardNGO supporters and international GS NGO supporterswith o ces in the host country must be involved instakeholder consultations in all cases




. Additio alit

Additionality RequirementsThe additionality tools or both GS CERs and VERs areproject based In addition, previous announcementchecks are required or both CER and VER projects

The GS requires the application o the latest UNFCCCadditionality tool (see Appendix B)

Baselines & MethodologiesGS CDM projects can only use CDM EB approvedmethodologies Gold Standard VER projects can chooseto use the baseline methodologies approved by theMethodology Panel o the CDM Executive Board, theSmall Scale Working Group (SSC WG) or the UnitedNations Development Programme (UNDP) MDGCarbon Facility I no suitable methodology exists,Gold Standard VER projects can propose a new one toGold Standard, to be approved by the Gold Standard

Technical Advisory Committee at a xed cost paid bythe project developer The ees are USD 2,500 or small& large projects and USD 1,000 or micro-scale projectsA methodology or the deployment o a feet o small-scale biodigesters has been approved so ar and othersare under review


ProcessIn general, the requirements or Gold Standard VER andGold Standard CER projects are identical, but or VERs,some requirements o the CDM have been simpli ed orremoved:

• Simpli ed guidelines or micro-scale projects (<5000 t o emission reductions annually)

• Broader eligibility o host countries

• Lower requirements on the use o o cialdevelopment assistance (ODA)

• Broader scope o eligible baseline methodologies

• No need or ormal host country approval

All Gold Standard projects must be validated andveri ed by a DOE The Gold Standard supports DOEswith a validation manual or each VER and CDM stream

Micro ProjectsValidation and veri cation procedures are o tenunreasonably costly or micro-scale projects Hence,micro-scale projects pay a standard ee to a validation

und (USD 5,000) and to a veri cation und (USD 2,500)A ter submitting all documentation, Gold StandardTAC uses a ‘targeted random’ selection method toselect projects or validation and veri cation Actualvalidations and veri cations per ormed by DOEs arepaid or via the Gold Standard validation and veri cation

unds Projects not selected or DOE validation/

veri cation in this approach are validated/veri ed bythe Gold Standard in-house but may be required toundergo DOE veri cation in later years

Key Requirements• Stakeholder consultation report

• Completed PDD with the baseline and monitoring

methodology, and the sustainable developmentmatrix

• Validation Report

• Acceptance o the Gold Standard Terms andConditions

GS CDM projects use CDM PDD and validation orms,with the additional Gold Standard speci c in ormationon project type, stakeholder consultation andcontribution to sustainable development provided as anappendix The GS provides templates and instructions

or GS VER project veri cation documents

. Mo itori g, Veri catio &Certi catio

ProcessProject developers monitor projects according tomonitoring plans as given in the PDD Monitoringreports are submitted to a third-party auditor (DOE)Gold Standard-speci c veri cation is conductedby DOEs It includes emission reduction data andmonitoring o sustainable development indicators

Monitoring reports have to be submitted yearlyNormally, the same DOE cannot validate and veri y thesame project, except or micro-scale and small-scaleprojects

The Technical Advisory Committee, the GS secretariatand GS NGO supporters can request clari cationsor corrective actions within a 2-week period a tersubmission o the veri cation report to the GS be orecredit issuance (GS VERs) or certi cation o CERs isinitiated

Until the Gold Standard VER Registry has been

approved, GS VERs are issued with unique provisionalserial numbers Currently, VERs are issued directly by theGold Standard

Key RequirementsThe veri cation report showing compliance with GSreporting criteria (especially Sustainable DevelopmentIndicators ) Indicators must be monitored i :

• they are crucial or the overall positive impact onsustainable development

• they are particularly sensitive to changes

• stakeholder concerns have been raised




Appropriate success indicators or mitigation orcompensation measures must also be monitored

6. Evaluatio o AuditorsThe GS only accredits DOEs and relies on the qualitycontrol procedures o the UNFCCC (e g CDM spot check procedure)

7. RegistriesThe Gold Standard Foundation announced in November2007 that APX, Inc has been selected to create andmanage the Gold Standard’s Registry or Veri edEmissions Reductions (VERs) in the voluntary carbonmarket CERs are registered in the CDM registry and willbe tracked in the Gold Standard registry as well VERswill be registered in the Gold Standard registry which

will be launched in early 2008The Gold Standard does not engage in project orcredit transactions In the upcoming Gold StandardVER registry, it will be possible to track the number o retired Gold Standard VERs and to review the numbero issued Gold Standard VERs However, buyers andintermediaries between the point o issuance andthe point o retirement remain unknown to the Gold

Standard The ownership o retired credits can be madepublic i desired

. FeesThe Gold Standard charges an issuance ee o currently0 01 USD or CERs and 0 10 USD or VERs No registration

ee is charged Separate ees are charged by the GoldStandard VER registry operators: 0 05 USD at issuanceand 250 USD per year or all accounts except projectowners The 250 USD include trading transactions or25,000 credits p a , a ter which every trade is chargedwith 0 01 USD/credit No ees are charged to trans er thecredits out o the project owner account

Already operational projects can earn retroactive GoldStandard status For this, they need to go through a

easibility pre-assessment process or which the GoldStandard charges a ee o USD 0 01 per VER or an

amount o VERs equivalent to the expected annualvolume o reductions (with a minimum ee o 250 USD)

I the project developer submits a new baselinemethodology, the methodology must be approved bythe Gold Standard TAC A xed ee is charged or thisprocess (1,000 USD or micro-scale and 2,500 USD orsmall and large-scale projects)

Authors’ Comme ts o the Gold Sta dard

The Gold Standard is generally accepted as the standard with the most stringent quality criteriaMany buyers turn to Gold Standard as the only ull-fedged standard endorsed by leadingenvironmental NGOs It is urthermore the only voluntary standard that has the ollowing threeelements: clearly de ned additionality rules, required third-party auditing and an approval bodysimilar to the CDM EB

Co-Be e tsThe supplemental criteria o the GS are all validated by a DOE According to project developers, thiso ten makes the validation process more intensive In their experience, DOEs take this additional GSvalidation seriously and ask tough questions about the project’s background data or lling in theGold Standard SD matrix

The CDM has a rather poorly de ned process or how to involve stakeholders The GS improves thisprocess by having clear and detailed de nitions o the stakeholder consultation process However,the projects eligible or GS generally do not ace serious concerns rom stakeholders It wouldactually be much more important to improve stakeholder consultation o other CDM projects, orexample, large hydro projects

Additio alitSimilar to the stakeholder process mentioned above, the UN regulations on additionality or small-scale projects are not very well de ned The GS addresses this issue by requiring that the additionalitytool is also applied to small-scale projects




Complex Docume tatioThe Gold Standard sets demanding requirements and documentation thereo This makes thevalidation and veri cation process more complicated, time-consuming and expensive Some projectdevelopers might decide that the higher income rom Gold Standard CERs (over regular CERs) doesnot justi y the extra work

Limitatio o Project Categories

Gold Standard only recognizes o set reductions rom renewable energy and energy e ciencyprojects This is potentially limiting, since the energy sectors are the most likely to be covered bymandatory reduction targets I the United States, or example, were to implement a cap-and-tradeprogramme covering the electricity generation sector, o sets rom these types o projects would nolonger be possible Also, given the large contribution o de orestation to climate change, it wouldseem important to add bio-sequestration projects, especially since the Gold Standard, with its ocuson high quality o sets with co-bene ts could play an important role in ensuring quality in this sector

Future o Gold Sta dardCurrently, the Gold Standard is in the process o improving its rules and procedures Gold Standardversion 2 is expected to go live in May 2008 and will provide urther clari cation and guidance or

project types, additionality, sustainable development assessment, stakeholder consultation, andor the validation and veri cation process It remains to be seen i the GS, currently a very smallorganisation, will be able to certi y large quantities o emission reductions

At the moment, with only a ew projects using Gold Standard, it is a challenge to balancestrengthening the standards with the need to attract project developers, most o whom are currentlynot willing to invest in much additional work to ensure environmental integrity and co-bene ts

It seems likely that the Gold Standard will only be success ul on a larger scale i it succeeds in creatingenough incentives to motivate more project developers to ollow the strict guidelines This couldpossibly be accomplished thought creating a large and sustained demand or Gold Standard o setsand through streamlining the Gold Standard process as much as possible without compromising the

integrity o the standard

VOLUnTARy CARBOn STAnDARD 2007 (VCS 2007)

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

1. Overview

Type o Standard The Voluntary Carbon Standard is a ull-fedged

carbon o set standard It ocuses on GHG reductionattributes only and does not require projects to haveadditional environmental or social bene ts The VCS2007 is broadly supported by the carbon o set industry(project developers, large o set buyers, veri ers,projects consultants) VCS approved carbon o sets areregistered and traded as Voluntary Carbon Units (VCUs)and represent emissions reductions o 1 metric tonne o CO2

History o Standard The Voluntary Carbon Standard (VCS) version 1 was

published jointly in March 2006 byThe Climate Group (TCG), theInternational Emissions Trading Association (

IETA) and theWorld Economic Forum Global GreenhouseRegister (WEF) The VCS 2007 was launched in November2007 ollowing a 19-member Steering Committeereview o comments received on earlier dra t versionsThe Steering Committee was made up o members rom

NGOs, DOEs, industry associations, project developersand large o set buyers TheWorld Business Council or Sustainable Development joined in 2007 as a oundingpartner o the VCS 2007 The VCS will be updated yearly

or the rst two years and every two years a ter that


VCS Association manages the VCS The VCS Associationis an independent, non-pro t association registeredunder Swiss law that represents the VCS Secretariat andthe VCS Board

VCS Secretariat is responsible or responding tostakeholder queries, managing relationships with




registry operators and accreditation bodies, andmanaging the VCS website and projects database

VCS Board is responsible or approving any substantialchanges to the VCS 2007 It also evaluates and approvesother GHG Standards (whether in ull or elementso them) project methodologies and additionalityper ormance standards It also has the authority tosuspend an approved programme temporarily orinde nitely i changes are made to it that a ect itscompatibility with the VCS Programme Further, it cansanction validators and veri ers, project proponentsand registry operators or improper procedure Finally, itdecides on appeals made by project developers againsta validator or veri er

Technical Advisory Groups (TAGs)support the Boardby providing detailed technical recommendations onissues related to the programme and its requirements(e g the Agriculture, Forestry and Other Land Use TAG

or bio-sequestration projects) Accredited Third-Party Auditors have the authorityto validate and veri y GHG emission reduction projects,validate new baseline and monitoring methodologies,validate additionality per ormance standards, andper orm gap analyses o other GHG programs Theycan only do so or project scopes and geographies orwhich they are accredited To receive accreditation,they must either be accredited under an approvedGHG Programme or under the ISO 14065:2007 with anaccreditation scope speci cally or the VCS ProgrammeUnlike under CDM, accredited third-party auditors canvalidate and veri y the same project

Financing o the Standard OrganisationStart-up unding or the VCS Standard Organisationcomes rom TCG, IETA and WBCSD with additional

undraising currently underway Donations romcommercial organisations are capped at €20,000 perannum In the medium term costs will be covered by aper-tonne levy charged at the point o VCU issuance

Recognition o Other StandardsAt present, the VCS Programme recognizes the CDM and

JI, and is in the processing o evaluating the Cali orniaClimate Action Registry VCS will evaluate and adoptother o set standards either ully or elements o themThe approval process will be based on the principle o

ull compatibility with the VCS Programme I anothero set standard is ully adopted by the VCS, all theirauditors and methodologies are automatically acceptedby the VCS All credits certi ed by that standard willthen be ungible with VCS credits, the Voluntary CarbonUnit (VCU)

Number o Projects

VCS 2007 was launched in November o 2007 It is notpossible to determine how many projects have beencerti ed under VCS 2007 to date because the VCS

registries and central project database are still underdevelopment Several projects were validated andveri ed against VCS version 1 The VCS Associationexpects that between 50–150 projects creating between10–20 million tonnes o CO2 e will have been approvedunder the VCS Programme by the end o 2008


Project TypeAll project types are allowed under the VCS Programmeprovided they are supported by an approved VCSmethodology or i they are a part o an approvedGHG programme Exceptions are: projects thatare “reasonably assumed” to have generated GHGemissions primarily or the purpose o their subsequentreduction, removal or destruction (e g new HCFC

acilities) and projects that have created anotherorm o environmental credit (e g Renewable Energy

Certi cate) RECs are ungible with VCUs i the GHGProgramme certi ying the RECs has been approvedunder the VCS In addition, projects that have createdanother orm o environmental credit must provide aletter rom the programme operator that the credit hasnot been used under the relevant programme and hasnow been cancelled (so it can not be used in the uture)

Project LocationNo restrictions Retirement o corresponding AAUsrequired or projects in Annex-1 countries

Project SizeThere is no upper or lower limit on project size VCSdoes however classi y projects into 3 categories basedon their size:

• Micro projects: under 5,000 tCO2 e per year

• Projects: 5,000–1,000,000 tCO2 e per year

• Mega projects: greater than 1,000,000 tCO2 e peryear

The rules on validation and veri cation vary to somedegree or projects that all in the ‘micro’ or ‘mega’categories

Start DateThe earliest project start date permissible under theVCS is 1 January 2002 For the 1st year o the VCS 2007’soperation, projects that started anytime a ter January1st 2002 will be accepted provided they complete thevalidation process within a year rom 19 November2007 A ter the rst year, only those projects thatstarted within 2 years be ore the validation date willbe accepted In other words, retroactive crediting isallowed or up to two years rom the validation date



r E v i E w o f S t a n d a r d S u S E d i n t h E v o l u n t a r y o f f S E t m a r k E t6 0

Crediting Period The earliest permissible start date or the creditingperiod is 28 March 2006 The duration o the creditingperiod can be a maximum o 10 years and it can berenewed up to three times

CDM Pre-registration CreditsCDM pre-registration credits are allowed in accordancewith the start date and crediting period rules above No

urther additionality proo required

Project Funding RestrictionsThe VCS imposes no exclusion o ODA unds

Environmental & Social ImpactsThe VCS does not ocus on environmental and socialbene ts It is su cient or VCS projects to showthat they are compliant with local and nationalenvironmental laws

The requirements or stakeholder involvement arebased on ISO 14064-2 requirements and are stated ingeneral terms: Independent stakeholders are providedwith access to all documents that are not commerciallysensitive and given su cient opportunity to o ercomments and other inputs


Additionality RequirementsThe VCS uses project-based, per ormance-based andpositive technology list-based additionality tests The

project-based test closely ollows CDM procedures:Step 1: Regulatory surplus: The project must notbe mandated by any en orced law, statute or otherregulatory ramework This criterion also applies toprojects using the per ormance or positive list tests

Step 2: Implementation barrier: The project mustdemonstrate that it aces capital or investment returnconstraints or an institutional barrier that can beovercome by additional revenues rom VCU sales,or thatit aces technology-related barriers to implementationo the project

Step 3: Common practice: The project must demonstratethat it is not common practice in the sector or regionwhen compared with other projects that received nocarbon nance, and i it is ound to be common practice,then the project proponent must identi y barriers it

aces that were not aced by the other projects Indemonstrating this criteria, the VCS advocates the useo guidance provided by the GHG Project Protocol orProject Accounting (see GHG Protocol)

Aper orma ce test can be used as an alternative tothe project-based additionality test With a per ormancetest, a project can demonstrate that it is not businessas usual i the emissions generated per unit o outputit generates are below a benchmark level approvedby the VCS Programme or the product, service, sectoror industry At the time o its launch, no per ormance

standards had been approved New per ormance testswill be approved through the double approval processand by the VCS Board

Apositive list o approved tech ologies can beused as an alternative to the project-based additionalitytest The project developer still has to use a baselinemethodology to determine the number o o setsa project will create At the time o its launch, notechnology was included in the positive list The list iscurrently under development

Baselines & MethodologiesThe VCS accepts projects using existing methodologieseither approved under the VCS Programme or anotherapproved GHG Programme, and also approves newones At the time o the VCS 2007 launch, all CDMbaselines and monitoring methodologies had beenapproved or use under VCS and methodologies romthe Cali ornia Climate Action Registry were underconsideration

For the most part, VCS draws on guidelines provided inISO 14064-2:2006 to guide the development o a VCSProgramme Methodology (see section on ISO 14064)

The VCS Board will approve new methodologies usinga double approval process which entails seeking anapproval rom two independent accredited auditors,one appointed by the project developer and theother appointed by the VCS Secretariat The Boardautomatically approves the standard i there isunanimity amongst the two auditors and rejects it i there is a disagreement between them The projectdeveloper can appeal the decision I it does so, then theVCS Secretariat appoints an independent consultantto review the project proponent’s claim Based on thereview, the VCS Board then makes a nal decision

The expenses or each review are borne by the projectproponent


ProcessUnder the VCS, validation is required but can be doneat the same time as veri cation The VCS provides atemplate or both the validation and the veri cationreport




Projects may choose to be validated either as anindividual project or as part o a grouped projectincluding two or more subgroups each retaining theirdistinctive characteristics Group projects are onlysampled by the project auditor

A project proponent contracts an accredited auditoro the VCS Programme or o a VCS-approved GHGProgramme to validate the project The auditorevaluates the project against the VCS’ validationrequirements (see below) and prepares its report as perthe VCS Validation Report template

The project is automatically approved i it is success ullyvalidated by the auditor A ormal registration processwith the VCS Association takes place only at the time o issuance o VCUs However, upon success ul validation,a VCS project may volunteer to be recorded on theVCS Project Database In order to do so, its documentsare checked or authenticity by the registry operator

and the veri er completes a GPS search on the projectdatabase that checks i the project has been registeredunder the VCS be ore

Key RequirementsThe validation o a project is to be carried out incon ormance with the requirements o ISO 14064-3:2006 and the report prepared as per the VCSValidation Report template including:

• Project Design

• Baseline

• Monitoring Plan

• Calculation o GHG Emissions

• Environmental Impact

• Comments by Stakeholders


ProcessThe emission reductions achieved by VCS projects canbe veri ed by the same entity that validated the project

The VCS Board does not approve or reject projects; itis the auditors themselves who veri y the projects andapprove the claimed emissions reductions

The third-party auditor veri es the emissions reductionsand the accuracy o emission reduction calculationsas per the requirements o ISO 14064-3:2006 A ter aproject has been validated and veri ed, the VCS ProjectDocument and proo o title are submitted to theregistry operator Electronic copies o these documentsare then put on the VCS project database and arepublicly available

Key RequirementsVeri cation report prepared as per the VCS ValidationReport template

6. Evaluatio o AuditorsOne year a ter the launch o the VCS 2007, the VCS willconduct an external review o all the projects that willhave been certi ed This work will likely be carried outby a commissioned NGO VCS will then evaluate theresults and decide i any o the rules have to be modi edto improve the standard or close any un oreseenloopholes

There is currently no plan to have a systematicevaluation o the third-party auditors Yet the VCSboard has the authority to sanction auditors, projectdevelopers or registry operators “based on evidence o an improper behavior ” (VCS Programme Guidelines, p 7)

7. RegistriesThe VCS will accredit di erent registries To avoid doublecounting and to ensure that VCUs are only registeredin a single registry, the VCS will also maintain a projectdatabase on its website which will assign a serialnumber to each project The database will be publiclyavailable and enable anyone to look up the vintage o the o sets, the project proponent, the registry in whichthey are kept, and other project in ormation

To minimize the risks o double counting, the projectowner must urther submit the ollowing to the VCS:

a) A letter con rming that the VCUs being registeredhave not been registered, trans erred or retired prior tothe said registration;

b) Where emissions reductions have occurred in anAnnex-1 country, a certi cate rom the national registryo the host country stating that an equal number o Assigned Amount Units have been cancelled rom thatregistry;

c) Proo that emission reductions ( rom renewableenergy projects) have not arisen rom an activity usedto meet a regulatory renewable energy commitment orto generate Renewable Energy Certi cates or that thelatter have been cancelled

. FeesThe registration ee or each VCU issued is 0 04 Euros(November 2007) Account ees will be set by each o the VCS approved registries




Authors’ Comme ts o the VCS

The VCS is a base-level-quality standard that aims to keep costs or validation and veri cation lowwhile still ensuring basic quality requirements The VCS has outsourced a number o tasks that underCDM are done by the Executive Board and the Methodology Panel (e g project and methodologyapproval) The advantage o this is that the organisation can be kept very lean Also, outsourcingtasks to pro essionals in the respective elds can potentially increase the quality o work (e g havinga proposed methodology evaluated by an external advisory group o experts in that particulartechnology) The downside o this approach is that more decision making power is given to outsideentities

no Separatio o Veri catio a d Approval o ProjectsUnder the VCS, it is the auditors themselves who approve the projects Given the pressures onauditors and given the confict o interest discussed earlier, we see the lack o an accrediting board toreview projects and give nal project approval as a potential weakness o the VCS A double approvalprocess or projects similar to the one VCS uses or methodology approval could be a potentialsolution to this

Approval o Methodologies

There is pressure on auditors to approve their clients’ methodologies in order to maintain a goodrelationship and not compromise uture work opportunities As has been shown in the CDM(Schneider, 2007), this design faw in carbon markets is di cult to address as long as the projectdeveloper pays or and can choose the auditor VCS is mitigating the act that project developers andauditors have aligned interests by having two auditors approve a new methodology (the second o which is chosen by the VCS and reports directly to the board) It will be interesting to see how wellthis system works in practice

Additio alitThe VCS plans to add benchmark tools and technology lists to its additionality tests Since thesetools have not been developed yet, we cannot comment on their quality or stringency However, the

VCS 2007 states that benchmark and technology list tools must demonstrate that projects approvedunder them would also be approved under the project-based tests Nevertheless, current VCSdocuments do not indicate that these tools will have embedded measures to account or ree riders,

or example through discounting o o sets that are accredited through benchmark tools We hopethat a conservative approach will be taken to ensure the integrity o these additionality tools

Crediti g PeriodThe VCS crediting period or o set projects is 10 years with the option to renew three times Thisis considerably longer than under the CDM or the Gold Standard (3 times 7 years) Extending thecrediting period means that ewer emissions reduction projects are necessary to create the samenumber o emissions reductions In other words, there is a trade-o between limiting creditingperiods to the minimum to allow more projects to enter the market and extending it to the

maximum to make more projects viable Longer crediting periods will result in ewer projects beingimplemented Also, having longer crediting periods than other standards might allow projectdevelopers to jump to the VCS once the crediting period o the originally chosen standard hasexpired This raises potential additionality issues

Commercially sensitive in ormation is de ned as:Trade secrets, nancial, commercial, scienti c, technical or other in ormation whose disclosure could reasonably be expectedto result in a material nancial loss or gain, prejudice the outcome o contractual or other negotiations or otherwise damage orenrich the person or entity to which the in ormation relates (VCS 2007, p 6)




Co-Be e tsThe VCS requirements or stakeholder involvement are based on ISO 14064-2, which states theseonly in very general terms De nitions o stakeholders, con dential in ormationand ‘su cientopportunity’ or comments appear to be le t to the project developer to decide There are also nospeci ed procedures and rules on how stakeholder concerns are to be taken into consideration Forbuyers who place value on these co-bene ts, VCS would not be a su cient standard

Future o VCSGiven that the VCS 2007 is broadly supported by the carbon o set industry, it will likely become oneo the more important standards in the voluntary o set market and might very well establish itsel as the main standard or voluntary o sets The VCS version 1 was criticized by many as too weak and vague The VCS 2007 was developed a ter a 2-year stakeholder consultation and has taken intoaccount many o these criticisms and is clearly an improvement over version 1

Since VCS 2007 was just released, it is too early to judge i the standard will be able to realize itsgoal o ensuring “that carbon o sets that businesses and consumers buy can be trusted and havereal environmental bene ts ” We are hoping that the VCS will use its market position to improve thequality o o sets and will address some o the potential weaknesses in the standard

VER+

www.tuev-sued.de/climatechangewww.netin orm.de

1. Overview

Type o Standard

The VER+ is a ull-fedged carbon o set standard andclosely ollows the Kyoto Protocol’s project-basedmechanisms (CDM and JI) It does not ocus on co-bene ts

History o Standard The VER+ standard was developed by TÜV SÜD, aDesignated Operational Entity (DOE) or the validationand veri cation o CDM projects It was designed orproject developers who have projects that cannot beimplemented under CDM yet who want to use verysimilar procedures as the CDM The VER+ was launchedin mid 2007


TÜV SÜD certi cation body “climate and energy” hasour members who supervise and administer the VER+

standard’s criteria The same body also reviews all theCDM projects that TÜV SÜD audits as a DOE be ore thedocuments are submitted to the CDM EB

Third Party Auditorsare CDM and JI accreditedauditors They are approved to validate and veri yprojects In the validation and veri cation process, theauditing company is obliged to ollow the requirementsas de ned by the Validation and Veri cation Manual(initially published by Worldbank / IETA), in its most

recent version Unlike under CDM, accredited third-party auditors can validate and veri y the same project

Financing o the Standard OrganisationThe VER+ is nanced by unds rom TÜV SÜD and byissuance ees or use o the registry

Recognition o Other StandardsI a project that has been initially implemented underanother standard seeks VER+ certi cation, a so called“equivalence check” is carried out Based on validationand veri cation reports, the auditor in charge con rmsthat the already audited project also complies withVER+ requirements

Number o ProjectsAt the end o 2007 there were approximately 25

validated projects and several veri cations were takingplace The demand or VER+ is growing, especiallyamong project developers in China and or CDM pre-registration credits


Project TypeVER+ accepts all project types except HFC projects,nuclear energy projects, large and hydropower projectsover 80MW Hydro projects exceeding 20MW have tocon orm with World Commission on Dams rules LULUCFprojects, including REDD, are accepted i implemented




with a bu er approach to address the risk o potentialnon-permanence

Project LocationVER+ ollows the same project criteria as JI but withoutlimitation to the status o the host country Hence, thehost country can be an Annex I, non-Annex I or non-rati cation country

VER+ credits generated in an Annex I country need todemonstrate the retirement o AAUs in order to be ullyinterchangeable with VER+ credits rom a non-Annex 1country Furthermore VER+ credits can be issued i it isdemonstrated that the host nation does not participatein International Emissions Trading (Kyoto Protocol Art17) or i it is con rmed that VER+ credits will not betrans erred out o the host country

Project SizeNo restrictions apply

Start DateApplications or retroactive VER+ accreditation can besubmitted or start dates as early as January 1st, 2000Retroactive crediting has been limited such that creditsare issued or 2 years back rom the registration date (atthe certi cation body o the auditor in charge) and willbe phased out by the end o 2009

Crediting Period The crediting period o VER+ activities ends at the endo the latest agreed commitment period under theUNFCCC scheme At the end o 2012 a brie check up

on the “Kyoto status” o the host country will be carriedout to avoid double counting with UNFCCC regimesOnce this review is carried out, the crediting periodis extended up to the end o the next commitmentperiod (as de ned by UNFCCC) At the end o thisnext commitment period (e g 2020), a revalidation isrequired The maximum crediting periods are limited to25 years or standard projects and 50 years or LULUCFactivities

CDM Pre-Registration CreditsThe generation o VER+ credits is possible ahead o

the registration o a CDM project without any urtheradditionality testing A registered CDM project has tohave started to operate and reduced emissions priorto UNFCCC registration The earliest starting date orthis pre-CDM/JI crediting is the date o publication o the PDD on the UNFCCC website (Global StakeholderProcess) VER+ crediting may occur until CDM/JIregistration No separate PDD is needed or CDM or JIactivities applying or VER+ credits or a crediting periodprior to the one under UNFCCC

Project Funding SourceAs under CDM rules, VER+ projects are not allowed touse O cial Development Assistance (ODA)

Environmental & Social ImpactsI the project activity requires an Environmental ImpactAssessment (EIA) due to national legislation, it needs tobe submitted or project approval

I required by national law, a local stakeholder processhas to be carried out Otherwise, the project developercan choose between:

• per orming a voluntary stakeholder process andinclude documentation to the VER+ Project DesignDocument (PDD), or

• justi ying in the VER+ PDD that the project does notimpact the vicinity

Just like in CDM the PDD is published or 30 days onthe DOE’s website and comments can be made via thewebsite, which will then be considered in the auditprocess(www.netin orm.de ; look or climate and energy)


Additionality RequirementsAdditionality tests or VER+ are project-based

Baselines & MethodologiesAll CDM approved baselines and methodologies areallowed The latest versions o the CDM methodologieshave to be used I there is no existing CDMmethodology that matches the project conditions,a project speci c methodology can be developed

This new methodology is reviewed on a project byproject basis The project methodology has to bebased on “guidance on criteria or baseline setting andmonitoring” as de ned or JI activities

Additionality CriteriaVER+ projects are required to:

• ollow speci c additionality rules o an approvedCDM methodology or

• in all other cases, apply the most recent version o the CDM Additionality Tool

4. Validatio & Registratio Process

ProcessA UNFCCC-accredited auditor reviews the validationprocess and approves the project The project is thenregistered with the auditor in charge The results o the validation (as well as veri cation at a later stage)are orwarded to the BlueRegistry, where relevantin ormation o VER+ projects is held and publiclyavailable




Key RequirementsThe requirements are similar to those o CDM but theydo not require approval rom the host country:

1 Completed PDD

2 Validation Report

A project speci c approach as de ned or JI can beused or those project settings where a CDM approvedmethodology is not available or ully applicable


ProcessVeri cation is based on monitoring reports rom theproject developers and conducted by an auditor Theauditor also approves the veri cation report All VER+project documentation is submitted to the BlueRegistryUnlike under CDM rules, an auditor is allowed to dovalidation and veri cation o the same project

The rst veri cation is required at latest one year a terregistration o the starting date o the crediting periodFor LULUCF projects, a rst veri cation is required within5 years rom validation

For any VER+ activity, the requency o the proceedingveri cations can be chosen by the project participantsBased on a positive veri cation statement, VER+ creditsare issued by the auditor

Key Requirements1 Monitoring Report

2 Veri cation Report

6. Evaluatio o AuditorsSince the VER+ relies exclusively on DOEs, the standardrelies on the review procedures o the CDM

7. Registries

In June 2007, TÜV SÜD launched its own BlueRegistryor VER+ credits An account is opened or each veri ed

VER+ project at TÜV SÜD’s BlueRegistry In an e ort toprevent project developers rom registering their creditswith multiple registries, VER+ includes in its contract aclause that stipulates that the credit holder shall re rain

rom double selling / registering The BlueRegistryintends to accept GS-VER and VCS certi ed credits andalready registers green energy certi cates Agreementson the standardized interchange between registries arecurrently pending

. FeesTotal costs or validation, registration and VER+ issuancecharged by the auditing company vary depending onproject size, technology, location etc and is estimatedto be in the range o 5,000 to 15,000 Euros

I veri cation has been carried out by TÜV SÜD thenall VER+ credits are automatically registered in theBlueRegistry without additional costs

For projects and credits not veri ed by TÜV SÜD, there

is a registration ee which covers incorporation into theBlueRegistry TÜV SÜD charges a one time subscriptionee (550-1100 Euros) and a registration ee (1500-3000

Euros p a ) or opening and maintaining accounts Inaddition the transaction ee or registered credits ranges

rom 120 Euros or 200 tonnes or less to 700 Euros or10,000 tonnes or more

Authors’ Comme ts o the VER+

no Separatio o Veri catio a d Approval o ProjectsTÜV SÜD has a good reputation as a DOE and is a well-know auditor We are nevertheless concernedabout potential conficts o interest Currently, most VER+ projects are validated and veri ed in house,since both the certi cation body and the auditor are in this case TÜV SÜD, it is di cult to know i project approval will always be strictly independent

Projects are validated, veri ed and approved by the same DOE Even with TÜV SÜD’s best intentions,given the pressures DOEs are currently acing to do very ast and low cost evaluations, thepossible confict o interest is real Yet, since the standard is very new and ew projects have beenimplemented it remains to be seen i these concerns prove to be valid

TÜV SÜD responded to this criticism:

The well established internal quality control processes and the general relevance o transparent procedures within a companyor which auditing is a core business activity, create the sa eguards, which ensure that standard de nition does not constitute aconfict o interest with validation and veri cation (e-mail communication, Markus Knödlseder, 14/11/07)




Double Cou ti g i A ex 1 Cou triesThe VER+ standard allows projects in any country For Annex 1 countries they stipulate thatthe corresponding amount o AAUs are retired or that the generated VER+ credits are not to betrans erred out o the country We agree that the rst provision avoids double counting but donot see how VERs used within the country avoids double counting We there ore see the secondalternative as insu cient to avoid double counting

Co-Be e tsVER+ does not require a local stakeholder process and does not ocus on enhancing co-bene ts Forbuyers who place value on these co-bene ts, VER+ would not be a su cient standard

Future o VER+There are several reasons why project developers might choose VER+ over CDM In comparison toCDM, VER+ provides more fexibility on methodologies, which speeds up validation and veri cationA project speci c approach as de ned or JI can be used or those project settings where a CDMapproved methodology is not available or ully applicable The ees or the incorporation o VER+credits to the BlueRegistry are usually lower than those covered by UNFCCC or registration andissuance o CDM projects

Given the proli eration o standards, it remains to be seen how well the VER+ will be able to establishitsel Although TÜV SÜD is well respected in the industry, the VER+ was developed by a single DOEand does not have the wide NGO or industry-based support that the Gold Standard and the VCShave It is there ore unclear how widely the VER+ will be used

CHICAGO CLIMATE EXCHAnGE (CCX)

http://www.chicagoclimatex.com

that reduce their emissions beyond the reduction

target O sets rom projects implemented through theCCX o set programme can also be used to comply withreduction targets Total use o o sets or complianceis limited to no more that one hal o the requiredreductions

History o Standard In 2000, a group o researchers led by Richard Sandor atNorthwestern University carried out a easibility studyon the viability o a cap-and-trade market to reducegreenhouse gas (GHG) emissions in the US Through2002, they developed the rules and protocols requiredto establish the scheme and, by 2003, they launchedtrading operations with 13 members that madevoluntary but legally binding commitments to reducesix GHGs Total membership has grown to almost 400entities


CCX Committee on O sets is responsible or reviewingand approving proposed o set projects The o setcommittee has currently approximately 12 membersEach member is appointed by the CCX ExecutiveCommittee or a 1 year appointment with the possibility

o renewal

1. OverviewType o Standard The Chicago Climate Exchange (CCX) is a voluntaryGHG emissions cap-and-trade scheme based inNorth America Although participation is voluntary,compliance with emission reduction objectives islegally binding once a member joins CCX has as parto its cap-and-trade scheme an o set programme witha ull-fedged carbon o set standard CCX memberscommit to reduce their emissions by a xed amountbelow the established baseline level Members who

cannot achieve the reduction target through cuttingtheir emissions internally can meet their compliancecommitment by purchasing emission allowances(called Carbon Financial Instruments; CFI) through CCX’selectronic trading plat orm rom other CCX Members

In the rst phase o the scheme, rom 2003 to 2006,members agreed to cut their emissions by 1 per cent eachyear below their annual average emissions or the period1998 to 2001, thereby by achieving a reduction o 4 per centby the end o the ourth year For the second phase rom2007 to 2010, the original members have to urther cut their

annual emissions to achieve the target o six per cent by2010 The new members who did not participate in the rstphase have to achieve the same target by 2010 by reducingtheir emissions by 1 5 per cent each year



6 7r E v i E w o f S t a n d a r d S u S E d i n t h E v o l u n t a r y o f f S E t m a r k E t

External Advisory Board provides external strategicinput to the CCX team and includes experts rom theenvironmental, business, academic and policy-makingcommunities

Technical Advisory Committeesare establishedby request o each CCX standing committee or onan ad-hoc basis These technical committees areusually comprised o outside experts Currently CCXhas technical advisory committees on agriculturalmethane capture, land ll methane capture, soil carbonsequestration or conservation tillage and rangelandsoils, orestry and ozone depleting substances

CCX Committee on Forestry is responsible, amongother things, or reviewing proposed orestry o setprojects

CCX Regulatory Services Provider is the Financial Industry Regulatory Authority (FINRA), the largest non-governmental regulator or all securities rms doingbusiness in the United States, which provides externalveri cation o the baseline and annual emissions reporto each member, monitors CCX trading activity andreviews veri ers’ reports or o set projects

Third-party O set Project Auditors are called ‘veri ers’and are approved by CCX or each project type toveri y an o set project’s annual GHG sequestration ordestruction There are currently 29 approved auditors(12/07)

Financing o the Standard Organisation

Climate Exchange PLC is a publicly listed companyon the AIM division o the London Stock ExchangeFinancials o Climate Exchange, including CCX, areavailable to the public The operations and managemento the exchange is nanced primarily through tradingand o set registration ees as well as through enrolmentand annual ees generated rom its members

Recognition o Other StandardsThe CCX allows trading o credits generated in someprojects registered under the CDM Such projects mustbe approved by the CCX O sets Committee and mustretire their CERs in exchange or receiving CCX credits

Number o Projects registered and o sets issued 44 o set projects have been issued 20 82 millionmetric tonnes o CO2 e o sets since the scheme’sinception in 2003 as o 28 November 2007 (http://www.chicagoclimatex.com/o sets/projectReport.js , accessedNov 28, 2007)


Project TypesCCX accepts the ollowing project types:

• Energy e ciency and uel switching• Renewable energy • Coal mine and land ll methane• Agricultural methane such as anaerobic digesters

• Agricultural soil carbon: Project owners mustmake a minimum 5 year contractual commitment tocontinuous no-till, strip till or ridge till on enrolledacres

• Rangeland soil carbon: Projects must take placewithin designated land resource regions Further,non-degraded rangeland projects in speci clocations that are managed to increase carbonsequestration through grazing land managementthat employs sustainable stocking rates, rotationalgrazing and seasonal use are eligible

• Forestry carbon: a) Forestation and orestenrichment projects must be on de orested ordegraded lands b) orest conservation projectsin speci ed locations may be eligible i they areundertaken in conjunction with orestation on acontiguous site CCX rules address permanenceissues o orestry projects by requiring a carbonreserve pool equal to 20 percent o all o set creditsissued or the project and the cancellation o reservepool o sets in case o sequestration reversal

• Ozone depleting substance ODS destruction isaccepted only or chemicals that can no longer beproduced and where there is no legal requirementto destroy remaining stocks

Project LocationMost CCX o set projects to date are located in the USIn order to avoid double counting, CCX accepts projectsin any country except in member states o the EU-ETSFurthermore, CCX does not allow or the registrationo projects in Annex 1 countries during the Kyotoperiod that might be counted under the country levelinventory (AAU)

Project SizeThere is no limit on the project size However, projectswith less than 10,000 metric tonnes o CO2 e cannottrade on the exchange directly but can do so through ano set aggregator

Start DateProjects selling o sets on the CCX should not havestarted earlier than January 1, 1999 or most projecttypes However, the earliest start date or orestryprojects is January 1, 1990 and or HFC destruction

projects is January 1, 2007




4. Validatio a d RegistratioI itial Veri catio a d E rolme t

CCX does not distinguish between validation andveri cation Both steps are usually done at the sametime by the same auditor and are called “projectveri cation and enrollment ” In other words, an initial

validation o projects is optional Credits are generateda ter veri cation

ProcessThe ollowing steps are involved in veri ying or enrollingan o set project on the CCX:

1 An o set project owner submits a projectproposal or questionnaire or an eligibleproject to the CCX

2 The proposal is reviewed by the CCXCommittee on O sets and they provide apreliminary approval i the project is eligible(the project may be re erred to scienti ctechnical advisory committees, i required)

3 Once approved by the Committee, theproject owner or aggregator must obtain anindependent veri cation by a CCX-approvedveri er (the veri cation may include site visits)to accurately assess a project’s annual GHGsequestration or destruction potential

4 The veri cation reports are then reviewedby CCX sta as well as the CCX provider o

regulatory services, FINRA, or completenessand accuracy

5 The o set provider can then join the CCXand enroll the project (i the o set provider isalready a member or o set aggregator, thenthe new project is enrolled independently oraggregated together with other projects)

Key Requirements1 Eligible project proposal2 Veri cation Statement by the third-part

auditor

Crediting Period Most o the eligible project types can earn o sets or theperiod 2003 to 2010 (8 years) The exceptions includerenewable energy projects, which can earn o sets

rom 2005 to 2010 (6 years), HFC destruction projects,which can earn o sets rom 2007 to 2010 (4 years), andrangeland soil carbon projects, which can earn o set

rom 2006 to 2010 (5 years)CDM Pre-registration CreditsCCX generally approves CDM pre-registration creditsi all the CDM documentation is in place CCX does notrequire any urther additionality proo or such pre-registration VERs

Project Funding RestrictionNo unding restrictions

Environmental & Social ImpactsO set projects must comply with the rules and

regulations o the host country Beyond this legalprerequisite, CCX does not have any requirements orstakeholder involvement and other co-bene ts The vastmajority o CCX o sets are implemented in developedcountries where legal and regulatory rameworksalready require assessment o environmental and socialimpacts In cases where projects originate rom a non-Annex I country, environmental and social impacts areconsidered by the o set committee on a case by casebasis depending on the project type

. Additio alit a d Baseli es Additionality RequirementsAdditionality criteria are incorporated into the eligibilitycriteria o the project types The CCX requires thatprojects are new, beyond regulation and involved inhighly unusual “best in class” practices There is no

ormal project-speci c assessment o additionalityAdditionality o each project is reviewed by the CCXO sets Committee

Baselines & MethodologiesThe baselines and methodologies or calculatingemission reductions are de ned or each project typethrough the use o speci ed crediting rates or eligibleproject activities Some baselines are project-speci c(e g , large re orestation projects are credited relative tomeasured site-speci c carbon levels prior to the start o the project) Other baselines are based on per ormancestandards (e g avoided de orestation projects in Brazilare credited using predetermined annual de orestationrates or speci c states within Brazil)




o set project that registers and sells o sets directly onthe Exchange An O set Aggregator is an entity thatserves as the administrative representative or multipleo set-generating projects on behal o multiple projectowners The CCX Trading System has three components:

1. The CCX RegistrThe CCX Registry is the electronic database that servesas the o cial record holder and trans er mechanism orCarbon Financial Instrument® (CFI™) contracts All CCXMembers have CCX Registry Accounts

2. The CCX Tradi g Plat ormThe CCX Trading Plat orm is an internet-accessiblemarketplace in order to execute trades among CCXRegistry Account holders and to complete and posttrades that are established through private bilateralnegotiations

. The Cleari g a d Settleme t Plat ormThe Clearing and Settlement Plat orm processes dailyin ormation rom the CCX Trading Plat orm on all tradeactivity

. FeesFees or CCX membership areUSD1,000-35,000 peryear depending on the size and type o member O setregistration ees are USD 0 12 per metric tonne romnon-Annex I countries and USD 0 15 per metric tonne

rom Annex I countries The trading ee is USD 0 05 permetric tonne Trading and o set registration ees are

posted on the CCX website and are subject to change

. Mo itori g, Veri catio a dCerti catio A ual Veri catioa d Issua ce

ProcessThe steps involved include:

1 The CCX-approved auditors veri y theproject’s actual annual GHG sequestration ordestruction

2 The CCX then issues the o set provider oraggregator Carbon Financial Instrument®(CFI™) contracts equivalent to the quantity o emission sequestered or destroyed (one CFI isequivalent to 100 metric tonnes o CO2e)

Key RequirementsVeri cation Statement by the third-part auditor arerequired

6. Evaluatio o AuditorsAuditors are approved or each project type Onceapproved the CCX does not have a ormal processin place to evaluate and sanction auditors in case o underper ormance

7. RegistriesO set project developers can participate in CCX by

registering o sets either as O set Providers or O setAggregators An O set Provider is an owner o an

Authors’ Comme ts o CCX

CCX has been a pioneer in establishing a cap-and-trade system It was the rst such systemestablished in North America and it has given companies the opportunity to learn and gainexperience with emissions reduction commitments and carbon trading Despite these very positiveaspects o CCX, there have been several points o criticism o CCX in general (as a cap-and-tradesystem) and o CCX’s o set programme We rst discuss the o set programme:

Co-Be e tsCCX does not require a local stakeholder consultation process and does not ocus on enhancing co-bene ts For buyers who place value on these co-bene ts, CCX would not be a su cient standard

Additio alitThere has been signi cant criticism o the lack o additionality o some CCX o sets, in particularthose involving no-till agriculture There were several documented instances where armers receivedcarbon o set revenue or practicing no-till agriculture despite the act that these armers had beenpracticing no till or many years already.

J Goodell, “Capital Pollution Solution?” New York Times Magazine (July 30, 2006)




CCX argues that it would be un air i the proactive armer who has been practicing no-till cannot sellhis carbon credits, whereas a armer who just started doing so in order to get revenue can earn creditThis argumentation in avour o ‘rewarding early action’ with carbon credits confates two separateissues:

Environmental integrity : ‘Rewarding early action’ with carbon credits undermines the environmentalintegrity o o sets: I non-additional credits enter a cap-and-trade system, emissions are actuallyincreasing because the buyer o the non-additional o sets will continue to emit whilst no urtheremissions reductions are achieved through the o set projects

Fairness to early actors : it is true that additionality raises an equity issue: Individuals who have actedas pioneers and have already been engaged in non-traditional low-carbon practices such as no-tillagriculture will not be able to sell their carbon credits because their actions are by de nition non-additional (they happened or other reasons than the carbon o set market)

In order to preserve the environmental integrity o the broader o sets market, the airness concernwould need to be addressed via measures other than handing out non-additional carbon credits (e gearly action provisions, tax/subsidy treatment, discounting o credits, etc)

The ollowi g poi ts appl to CCX i ge eral:Tra spare c o CCXSeveral groups have in the past criticized CCX or its general lack o transparencyCCX has respondedto this criticism by making its rule book and many o the methodologies available on its website Wewelcome this increase in transparency which will enable a more independent evaluation o projectmethodologies

Accomplishme ts o CCX a d additio alit o CFIsCompanies who voluntarily signed on to CCX are a sel -selecting subset o corporations who arelikely to be con dent that they can comply or even over comply with the commitments It is there oredi cult to assess the achievements o the CCX per se The very low prices o CFIs indicate that many

o the member companies o CCX have over-complied with their commitments and, conversely, thatthe CCX targets are not stringent enough to exert any pressure above and beyond the companies’expected emission levels I the cap in a cap-and-trade system is low and there is over-compliance,the cap may not be leading to any reductions beyond business-as-usual There is a risk that carbono sets rom unspeci ed CFIs do not actually lead to emissions reductions beyond business-as-usual

Future o CCXCCX was the rst cap-and-trade system that was established in the US and as such has played ainnovative and valuable role in bringing carbon trading to the US It is unclear how CCX will unctioni the US adopts a mandatory cap-and-trade programme It is possible that CCX could become largelya trading plat orm and exchange, de erring to government authorities to de ne rules and proceduresand to certi y reductions

CCX responded to this criticism by claiming that tillage can only be ensured through a contract and a veri cation process, whichCCX provides “There is no guarantee it would go on without a contract with CCX ” No-till has been practiced or decades Where itcan right ully be assumed that more armers will change to no-till now that revenue rom o sets are available, the argument thatwithout the o sets the amount o no-till agriculture would actually decrease below the current level is not supported CCX urtherstates:The primary concern was that we not encourage perverse actions that would encourage people to game the system to quali yas “new no-tillers” by virtue o the act that they have tilled up elds that ormerly had been subject to conservation tillage thatremoves CO2 rom the air We did not want to see reversals o stored carbon dioxide with the resulting release to the atmosphere(Michael Walsh, e-mail communication 12/21/08)Although a valid argument, it is unclear how many armers would choose to start to till again, since they had enough incentiveto switch their tilling practice be ore o sets were available Even more importantly, the argument ignores the issue that non-additional o sets will lead to a de acto increase in emissions under a cap-and-trade system (see chapter 5 1 )

Dale S Bryk (2006) ‘States and Cities Should Not Join the Chicago Climate Exchange ’ Natural Resources De ense Council




7 3O set Sta dard Scree sO set Standard Screens are not ull-fedged standards by themselves but accept projects that wereimplemented under other standards and adhere to their screening standards

VOLUnTARy OFFSET STAnDARD (VOS)

http://www.carboninvestors.org/

1. Overview

Type o Standard The Voluntary O set Standard (VOS) is a carbon o setscreen that accepts other standards and methodologiesusing certain screening criteria It currently accepts GoldStandards VER projects and projects that employ CDMprocedures but which are implemented in countriesthat have not rati ed the Kyoto Protocol and are

there ore not eligible or CDMHistory o Standard The International Carbon Investors and Services (INCIS)launched the VOS in June 2007 INCIS is a not- or-pro tassociation o large investment companies that providecarbon-related investments and services INCIS has 26members (as o November 2007)

Administrative BodiesSince the VOS is a new standard, many o itsadministrative structures are not yet in place

Members: INCIS was initially set up as the “EuropeanCarbon Investors and Services” but has since its launchexpanded to represent the interests o 26 membersbased both within and outside o Europe These include,among others, ABN AMRO, Baker & McKenzie, BarclaysCapital, Climate Change Capital, Credit Suisse, DeutscheBank, Fortis, ING, MGM International, Morgan Stanley,and Standard Bank

Auditors: UNFCCC approved DOEs veri y and approveprojects

Financing o the Standard OrganisationThe VOS is nanced through INCIS membership ees andwill urther be nanced through the issuance ees onceits registry is established

Recognition o Other StandardsThe VOS accepts credits rom CDM, JI, and GoldStandard CER and VER projects Other VER standards(or speci c methodologies approved under theseadditional standards) may be recognised under the VOSin the uture by INCIS

Number o ProjectsNo in ormation is available: the VOS relies upon DOEcerti cation so there will be no central entity to collectVOS project numbers until a registry is established


Project TypeVOS accepts project types covered under the CDM/JImechanism, with the exception o new HFC projectsand 20 MW-plus hydroelectric dams unless they meetthe criteria and guidelines o the World Commission onDams

Project LocationProjects are allowed in any country except those basedin countries covered by a scheme or greenhouse gasemission allowance trading, such as the EU-ETS, i there is no mechanism in place to retire the equivalentnumbers o allowances in that country (e g retiring o AAUs)

Project SizeThe limitations speci ed under CDM/JI mechanismsapply

Start DateThe limitations speci ed under CDM/JI mechanismsapply

Crediting Period The same as CDM/JI and CDM Gold Standard

CDM Pre-registration CreditsPre-registration VERs are generally accepted by the VOS

Such VERs can be issued rom the project start date i the project has been success ully validated by a DOE asmeeting the CDM standard, including additionality, andthe number o VERs has been veri ed by a di erent DOE

Project Funding RestrictionThe limitations speci ed under CDM/JI mechanismsapply

Environmental & Social ImpactsThe limitations speci ed under CDM/JI mechanismsapply I the credits are GS, then Gold Standard rulesapply




. Additio alit a d Baseli esThe rules and guidelines speci ed under the CDM/JImechanisms and the Gold Standard apply


For GS VERs: validation is done through the GoldStandard For CDM standard VERs: validation is donethrough DOE certi cation

. Mo itori g, Veri catio &Certi catioFor GS VERs: veri cation is done through the GoldStandard For CDM standard VERs: veri cation is donethrough DOE certi cation

Authors’ Comme ts o VOS

The VOS standard screen is supported by many o the heavy weights in the nancial industry This isan indication that these nancial players are concerned about the risk they are taking by trading VERs

rom an unregulated market Because o the support by these power ul nancial players, the VOScould potentially play an important role

Yet currently the VOS seems somewhat vague It is di cult to get any speci c in ormation about theVOS There is little in ormation available on the website or in printed materials

Currently the VOS only accepts VERs rom projects implemented using CDM methodologies and GoldStandard o sets In terms o VER projects implemented using CDM methodologies, the VOS is similarto the VER+, yet has ewer de ned organisational structures and procedures It is still unclear howthe decision making structures or approval o methodologies or other standards will look For thesereasons, it is unclear how important a role the VOS will play in the voluntary o set market

7 4Bio-Sequestratio Sta dardsCDM AFFORESTATIOn AnD REFORESTATIOn STAnDARD (CDM A/R)

Number o ProjectsAs o September 2007, only 10 a orestation/re orestation projects are registered with CDM (Source:http://www.cdmpipeline.org/cdm-projects-type.htm )

6. Evaluatio o AuditorsThe VOS relies on the review processes o the CDM anddoes not have its own review process or auditors

7. Registries

The VOS is planning to establish its own registry

. FeesFor GS VERs: see the Gold Standard section For CDMstandard VERs: the DOE validation and veri cation costsRegistry costs are yet to be determined

1. OverviewThis section ocuses on CDM’s bio-sequestration rulesonly For a complete description o the CDM, seechapter 7 1





Project Type

CDM accepts a orestation or re orestation projectsCDM orestry projects can only be implemented on land(a) that is not orested at the start o the project activity;(b) which was not recently harvested; and (c) which isnot likely to become orested in the near uture withouthuman intervention All other orms o biologicalsequestration or land-based emissions reductionactivities, including avoided de orestation, are currentlynot allowed

The requirements or registering, validating, andcerti ying orestry projects are the same as or otherproject types However, the ollowing requirements arespeci cally or CDM orestry projects

LeakageSpeci c methods to account or leakage are developedunder each baseline methodology Methodologiesmust identi y the sources o leakage and explain whichsources o leakage are to be calculated, and whichcan be neglected They must also speci y any relevantcalculations, parameters, and coe cients; indicate howvalues will be obtained; and describe uncertaintiesassociated with key parameters Speci c methodologiesmay identi y circumstances in which a particularsource o leakage can be “neglected” or ignored Suchexclusions must be justi ed

CDM does not account or international leakage and

market shi ting

PermanenceTo address the risk that carbon might be re-released inthe atmosphere due to orest destruction, CERs rom

orestry CDM projects producetemporary emissionscredits . Speci cally, these are either termed “temporaryCERs” (tCERs) or “long-term CERs” (lCERs) Both typeso CERs have expiration dates, a ter which they must

be replaced by another tradable emissions unit underthe Kyoto Protocol (e g , standard CERs, AAUs, ERUs, orRMUs)

I an Annex 1 country uses a tCER or compliance it mustreplace it with a permanent Kyoto unit or an unexpiredtCER in the next commitment period I the project is stillper orming as expected, the new tCERs will just replacethe expired ones I the project ails during the rst yearo the commitment period, the tCERs will not have tobe replaced until the end o that commitment periodThis reduces the risk or the buyer who can plan or thewhole commitment period

lCERs expire at the end o the nal crediting periodor the project activity lCERs may be cancelled i the

veri cation reveals that the stored carbon or whichthey were issued got released back into the atmosphereUpon cancellation, they must be replaced by anotherKyoto Protocol emissions trading unit

Crediting PeriodsCDM orestry projects have either a single 30-yearcrediting period, or 20-year crediting periods that arerenewable up to two times

Other RulesDuring the rst commitment period, Annex 1 countriesare limited to using orestry credits or no more than 1%o their baseline emissions

Authors’ Comme ts o the CDM A/R

There have been very ew implemented CDM A/R projects The methodology requirements arecomplicated and require sophisticated measurements o carbon stocks

CDM currently does not allow or REDD projects, yet de orestation remains a serious problemand contributes signi cantly to climate change Many developing countries and NGOs have beenadvocating or the inclusion o REDD into CDM Yet it is unclear how well suited CDM is or addressingde orestation Even with care ully designed methodologies, (international) leakage is di cult toaddress in REDD projects For authors’ comments on the CDM, see chapter 7 1

A orestation: The direct human-induced conversion o land that has not been orested or a period o at least 50 years to orestedland through planting, seeding and/or the human-induced promotion o natural seed sources (Kyoto De nition)

Re orestation: The direct human-induced conversion o non- orested land to orested land through planting, seeding and/or thehuman-induced promotion o natural seed sources, on land that was orested but that has been converted to non- orested landFor the rst commitment period, re orestation activities will be limited to those lands that did not contain orest on 31 December1989




VCS AFOLU STAnDARD

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

This section ocuses on bio-sequestration rules only For a complete description o the VCS, see chapter 7 1

In the case o RED projects, an analysis o agents anddrivers o de orestation must be presented to the

veri er, as well as a description o the measures thatwill be implemented to address them (e g , buildingin sustainable agricultural intensi cation practiceswhen shi ting agriculture is a de orestation driver, orincorporating ast-growing wood lots to address local

uel wood or timber needs) The identi ed actorsmust subsequently be monitored on a regular basisDepending on the extent o possible leakage, the areasubject to leakage monitoring could encompass theentire host-country I signi cant leakage that is directlyattributable to the project is likely to occur beyond thisarea (such that it cannot be monitored), the activity isnot eligible

In line with the CDM, VCS AFOLU does not account orinternational leakage or international market shi ting

PermanenceUnlike CDM, the VCS does not issue temporary creditsVCS AFOLU projects produce permanent VCUs that are

ully ungible regardless o the project type generatingthem VCS AFOLU projects set aside a portion o all theircredits generated into a bu er reserve to mitigate non-permanence risk The bu er credits rom all projectsare held in a single pooled VCS bu er account to act asinsurance against unanticipated project ailure

The bu ers are sized depending on the risk level o aproject Projects with higher risk o (partial) ailure mustinclude a larger bu er than projects with smaller risks

Risk Class RED Bu er ARR Bu er

High 20–30% 40–60%

Medium 10–20% 20–40%

Low 5–10% 5–20%

This risk assessment and subsequent bu erdetermination is conducted by two separateindependent veri ers to ensure that a conservativenumber o credits are set aside

The bu er solution to permanence issues in bio-sequestration projects reduces the risk to the buyerand seller o the o sets because the bu er acts as aguarantee Credits in the bu er are cancelled whencarbon is lost rom the project compared to a previousissuance event, or should the project not be re-veri edin the uture The bu er approach is meant to encourage

developers to design projects or longer time-horizons

1. OverviewVoluntary Carbon Standard (VCS) includes bio-sequestration and land-based emissions reductionsprojects and has developed a speci c set o rules toaddress the particular issues and risks associated withthese project types The VSC uses the acronym AFOLU(Agriculture, Forestry and Other Land Use) or its bio-sequestration projects

Number o ProjectsThe VCS AFOLU standards were launched on November19th, 2007, and new methodologies and projects have

yet to be approved


Project TypeThe ollowing types o projects are acceptable under theVCS AFOLU:

• A orestation, Re orestation and Revegetation (ARR)

• Agricultural Land Management (ALM)

• Improved cropland management

• Improved grassland management

• Cropland to grassland conversions

• Improved Forest Management (IFM)

• Conventional to Reduced Impact Logging

• Convert logged to protected orest

• Extend rotation age

• Conversion o low-productive orests toproductive orests

• Reducing Emissions rom De orestation (RED)

• Further activities can be added in the uture

LeakageThe geographical area subject to potential leakagemust be identi ed ex-ante, and any potential leakagesubtracted rom the net carbon bene ts generatedEach project activity type has speci c rules governinghow leakage must be addressed

Given the potential or regional markets to shi t leakagerom improved orest management projects (i they

reduce overall timber supply), the VCS provides de aultleakage actors to ensure that potential leakage impactsare captured and subtracted These de ault values canrange rom 10% to 70%




and adopt strong risk mitigation strategies, since long-term projects with a low risk pro le will be subject to alower bu er withholding requirement

Bu ers can be drawn upon over time as project’slongevity is established and risks shown to bee ectively mitigated 15% o project’s bu er is releasedevery 5 years at re-veri cation For example, a medium-risk project starting out with a 30% bu er would have15% o this (or 4 5% o total credits) released at its nextveri cation event ve years later This 15% release wouldcontinue (e g , at next veri cation would release 15% o 25 5% o credits rom bu er), so that by 50 years a terthe rst veri cation (or 55+ years since project start),assuming that the project’s risks have been shown to bee ectively managed, the project would be subject to a~6% bu er withholding

Veri cation o the project is in theory optional, but itis in interest o project proponents to regularly submit

veri cation reports to the VCS because i a project ailsto submit a veri cation report to the VCS within veyears rom latest veri cation, 50% o the bu er creditsare cancelled A ter another ve years, all remainingbu er credits are cancelled Projects may claimcancelled credits in the uture by submitting a newveri cation be ore the end o the crediting period

To ensure the environmental integrity o the bu erapproach the VCS will conduct “truing up” o the overallVCS bu er pool every ew years A review o existingVCS veri cation reports or all AFOLU projects underthe VCS would fag the projects that have ailed orunderper ormed and then identi y their commoncharacteristics The bu er values and/or risk criteria or

VCS projects going orward would then be adjustedaccordingly

Crediting PeriodsVCS crediting period or AFOLU projects are the same asthe li e o the project, with a minimum o 20 years and amaximum o 100 years

Socio-Economic and Environmental ImpactsVCS requires all AFOLU projects to “identi y potentialnegative environmental and/or socio-economic impactsthey might have, and e ectively mitigate them priorto generating VCUs ” However, VCS does not monitorsocial and environmental impacts; project developerssimply have to demonstrate to veri ers that there are nonegative social and environmental impacts

Authors’ Comme ts o VCS AFOLU

The VCS AFOLU rules are thorough and innovative and they address many permanence andadditionality concerns It is also the rst carbon standard to cover all the major land use activities,

whether orestry or agricultur related, under a single veri cation ramework Only once projects havebeen implemented will it be possible to ully evaluate the quality o the standard

Co-Be e tsVCS AFOLU does not require a local stakeholder process beyond what is required by law and doesnot ocus on enhancing co-bene ts For buyers who place value on these co-bene ts, VCS AFOLUalone would not be a su cient standard but could be combined with a standard such as the CCBSFor authors’ comments on the VCS, see chapter 7 1




Financing o the Standard OrganisationThe CCBS are managed by the CCBA which is supportedby contributions rom alliance member organizationsand by oundation grants

Recognition o Other StandardsBecause CCBS is a project design standard only, and nota ull fedged carbon o set standard, project developerswho want to sell certi ed or veri ed emissions haveto apply another standard to get certi cation andregistration o their o sets About 30% o the projectsare developed as CDM projects that will generate CERs70% o the projects are looking to sell their o sets in thevoluntary market

Projects may combine the use o several di erent

standards (e g CCBS to ensure validity o design togenerate carbon credits with social and environmentalbene ts, FSC or certi cation o timber products, andthe VCS or veri cation and registration o carboncredits) Using di erent standards might potentially helpprojects attract di erent unders and product buyers atdi erent stages in the project cycle

Number o ProjectsAs o September 2007, two projects have been validatedagainst CCBS, a urther ve projects are undergoingvalidation and at least 20 more projects plan or CCBSvalidation in the coming ew months Over 70 projectsare under development using the CCB Standards Thepool is growing by a ew projects every month

Ex-Ante Sale o Carbon O setsSome CCBS projects are selling ex-ante credits Someare planning to sell a mixture o ex-ante and ex-postcredits Ex-ante credits enable projects to raise unds

or project implementation Because o the risk that isassociated with purchasing ex-ante credits, buyers areo ten o ered pre erential rates or such up- ront creditsIn cases where the buyer requires carbon veri cation,the projects can, once real carbon bene ts have beengenerated (5-12 years or most re orestation projectsand shorter or avoided de orestation and degradation),apply a carbon veri cation standard such as the CDM orVCS

As a design standard, CCBS does not veri y emissionsreductions The o sets must be veri ed through anotherstandard (e g , VCS or CDM) When the carbon creditsare veri ed, they are tracked by the registry associatedwith the carbon accounting standard used It is theresponsibility o the project proponent to register andcancel any ex-ante carbon credits that might be sold

in advance o veri cation, in order to prevent doubleselling

THE CLIMATE, COMMUnITy & BIODIVERSITy STAnDARDS

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

I troductio

Type o Standard

The Climate, Community & Biodiversity Standards(CCBS) is a project design standard and o ers rulesand guidance or project design and development Itis intended to be applied early on during a project’sdesign phase to ensure robust project design andlocal community and biodiversity bene ts It does notveri y quanti ed carbon o sets nor does it provide aregistry The CCBS ocus exclusively on land-based bio-sequestration and mitigation projects and require socialand environmental bene ts rom such projects

History o Standard The CCBS was developed by the Climate, Communityand Biodiversity Alliance (CCBA) with eedback andsuggestions rom independent experts CCBA is apartnership o non-governmental organizations,corporations and research institutes, such asConservation International, The Nature Conservancy,CARE, Sustainable Forestry Management, BP and CATIEThe rst edition was released in May 2005


CCB Allianceis ormed by representatives rom each

member organisation The alliance currently has 13members and makes decisions about changes tothe standards It also works closely with the auditors,advising them on interpretation and application o thestandards

Working groups are comprised o alliance membersand external advisors and are appointed when neededto address speci c issues Working groups proposals orchanges must be approved by the Alliance

Third-party auditors are certi ed DOEs under the CDMor a orestation and re orestation – organizations that

are approved to evaluate CDM projects – or evaluatorswho are certi ed under the Forest Stewardship CouncilValidation and veri cation can be done by the sameauditor

The Forest Stewardship Council (FSC,www. sc.org/en/ )is a non-pro t organisation with a mission “to promoteenvironmentally appropriate, socially bene cial and

economically viable management o the world’s orests”It certi es sustainably managed orestry operations, andtracks their timber through the supply chain to the endproduct, which can then carry the FSC ecolabel





Project TypeCCBS ocuses on land-based climate change mitigationprojects, and accepts the ollowing project types:

• primary or secondary orest conservation;

• re orestation or re-vegetation;

• agro- orestry plantations;• densi cation and enrichment planting;

• introduction o new cultivation practices;

• introduction o new timber harvesting and/orprocessing practices (e g , reduced impact logging);

• reduced tillage on cropland;

• improved livestock management; etc

Project LocationProjects can be located in industrialized and developingcountries The revised version o the Standards – CCBS(2008) – will include rules to prevent potential doublecounting o Annex 1 based projects

Project SizeThere is no restriction on project size

Start DateThere is no restriction on project start date but projectsmust have credible documentation or baselines

rom the start o the accounting period or carbon,community and biodiversity bene ts

Crediting Period The CCBS has no rules on crediting periods because it issolely a project design standard

CDM Pre-registration CreditsN/A

Project Funding RestrictionNo restrictions on unding sources On the contrary,since o set revenue alone is usually not enough toensure project viability, many projects rely on co-

unding through other means

Environmental & Social ImpactsCCBS projects must generate net positive impacts onbiodiversity The standard employs a screen to ruleout negative impacts and a point system to rewardadditional environmental bene ts The screen stipulatesthat projects cannot have negative e ects on speciesincluded in the IUCN Red List o threatened species orspecies on nationally recognized lists Invasive speciesor genetically modi ed organisms cannot be used in aproject CCBS rewards projects with an additional pointeach or the use o native species and water and soilresource enhancement

Projects must generate net positive impacts on thesocial and economic wellbeing o communities and

must mitigate potential negative e ects caused by theproject on-site and o site

Stakeholder involvement is required and must bedocumented during all phases o project developmentStakeholders must have an opportunity be ore theproject design is nalized, to raise concerns aboutpotential negative impacts, express desired outcomesand provide input on the project design The projectdesign must include a process or hearing, respondingto and resolving community grievances within areasonable time period The overall net social andeconomic e ect o the project has to be positiveAdditional credit is given or capacity building activitiesand best practices in community involvement

LeakageDecreased carbon stocks or increased emissions o non-CO2 GHGs outside the project boundary resulting romproject activities need to be quanti ed and mitigated

The project proponents must:1) Estimate potential o site decreases in carbon stocks(increases in emissions or decreases in sequestration) dueto project activities.

2) Document how negative o site impacts resulting rom project activities will be mitigated, and estimate the extent to which such impacts will be reduced.

3) Subtract any likely project-related unmitigated negativeo site climate impacts rom the climate bene ts beingclaimed by the project. The total net e ect, equal to the net

increase in onsite carbon minus negative o site climateimpacts, must be positive. (Climate, Community and Biodiversity Project Design Standards, First Edition, p. 17)

PermanencePermanence is addressed by requiring that projectsidenti y potential risks up ront and design in measuresto mitigate potential reversals o carbon, communityand biodiversity gains, including establishing bu erzones Yet because CCBS is a project design standard, itdoes not have speci c permanence requirements suchas the issuance o temporary o sets


Additionality RequirementsThe additionality tests or CCBS are project based andspeci ed by individual methodologies

The CCBS require:

Step 1: Regulatory Surplus: Project developers mustprove that existing laws or regulations would not haverequired that project activities be undertaken anywayThe standard also allows or project developers to makeclaims when a law is in existence but is not en orced e g





ProcessTo keep its CCB validation, each project must be veri edevery 5 years Veri cation includes a project documentreview by the auditor and a site visit to check on project

implementation and monitoring results in addition toany changes in project design

The validation and the veri cation can be done bythe same auditor Currently all o the CCB projects areless than 5 years old and have there ore not yet beenveri ed CCBA intends to develop and publish urtherrules and guidance on project veri cation

Key RequirementsThe CCB veri cation does not include a quantitativecerti cation o the carbon bene ts but is a qualitativeevaluation that con rms carbon bene ts as well as the

environmental and social bene ts o the project

6. Evaluatio o AuditorsThe accreditation o auditors lies with the CCB Alliancecurrently limited to DOE’s accredited by CDM EB orA orestation and Re orestation auditors accreditedby the Forestry Stewardship Council (FSC) There is no

ormal procedure in place to “spot check” auditors butthe CCB Alliance could potentially decide to ban orrestrict certain auditors that under-per orm

7. RegistriesBecause CCBS is a Project Design Standard it does nothave a registry accredited or its o sets

. FeesCost or validation o a project rages rom €3,500 to€10,000 I the validation is being done in conjunctionwith CDM, validation costs are lower or CCBS than orstand alone projects, because many o the requirements

or CCBS will already have been ul lled through theCDM requirements (e g baseline calculations)

i heavy logging happens in an area that is pro ormaunder protection

Step 2: Barriers: Financial, Lack o Capacity, Institutionalor Market Barriers or Common Practice: Severaladditionality tests are required The project proponentsmust provide analyses (poverty assessments, armingknowledge assessments, remote sensing analysis, etc)showing that without the project, improved land-usepractices would be unlikely to materialize

Baselines & MethodologiesCCBS relies on methods and tools developed byother organizations and standards or their baselinecalculations For example, to estimate net change incarbon stocks they accept the methodologies o theIPCC’s Good Practice Guidance (IPCC GPG) and anymethodology approved by the CDM

The baseline calculations must be based on clearlyde ned and de endable assumptions about how projectactivities will alter carbon stocks and non-CO2 GHGemissions over the duration o the project or the projectaccounting period


ProcessOnce a project has been designed, a third-party auditorvalidates the project A ter reviewing relevant projectdocuments, a site visit, and taking account o thecomments received during a 21-day public commentperiod, the auditor approves or rejects the projectThe CCB Alliance works very closely with the auditors,commenting on and reviewing project documentationYet is it is ultimately the auditor who makes the decisionto approve or reject a project

Key RequirementsThe CCBS include teen required criteria and eightoptional “point-scoring” criteria Silver or Gold statusis awarded to exceptionally designed projects that gobeyond the basic requirements Such Gold and Silverprojects use primarily native species, enhance water and

soil resources, build community capacity, and adapt toclimate change and climate variability

Authors’ Comme ts o CCBS

Project Desig Sta dardThe CCBS is intended to be used as a design tool to ensure robust multiple-bene ts will be deliveredProject design standards or orestry projects are especially valuable and important, since carbonveri cation standards typically do not come into play until many years a ter the project has beendesigned and a ter up ront investment has been secured




1. I troductio

Type o Standard Plan Vivo is an O set Project Method or small scaleLULUCF projects with a ocus on promoting sustainabledevelopment and improving rural livelihoods andecosystems Plan Vivo works very closely with ruralcommunities, emphasizes participatory design, ongoingstakeholder consultation, and the use o native speciesThe Plan Vivo Foundation certi es and issues only ex-ante credits, called Plan Vivo Certi cates,and there oredoes not veri y ex-post o sets

History o Standard The Plan Vivo System was initiated in 1994 or a research

project in southern Mexico The system was developedby the Edinburgh Centre or Carbon Management(ECCM,http://www.eccm.uk.com/ ), a consultingcompany that ocuses on climate change mitigationstrategies and policies, in partnership with El Colegio dela Frontera Sur (ECOSUR), the University o Edinburghand other local organisations with unding rom the UK Department or International Development (DFID)

Administrative BodiesPlan Vivo is currently managed by the Plan VivoFoundation ( ormerly BioClimate Research andDevelopment), a non-pro t ocused on promotingactions to reconcile human development andenvironmental change The Foundation reviews and

registers projects according to the Plan Vivo System,issues Plan Vivo Certi cates annually ollowing thesubmission and approval o each project’s annualreport, and acts as overall ‘keeper’ o the Plan VivoSystem which is periodically reviewed in consultationwith projects and other stakeholders It also approvesthird-party veri ers and registers resellers o Plan VivoCerti cates

Consultants are hired by Plan Vivo to review certainaspects o their projects Because o the small number o projects, there is no established procedure or this ThePlan Vivo Foundation also conducts requent eld visitsto projects in order to monitor their progress and seethat evaluations are done as needed

Project Developers: Plan Vivo works with localNGOs who unction as project developers (‘projectcoordinators’) They coordinate sales with the o setpurchasers and administer payments to local armersbased on the achievement o ‘monitoring targets’

Financing o the Standard OrganisationThe nancing o the Plan Vivo Foundation is sourcedprimarily rom a levy imposed on the issuance o PlanVivo Certi cates They currently take USD 0 30 per tonneo carbon dioxide sold Other sources o income come

rom project and resellers’ registration ees

Recognition o Other StandardsPlan Vivo does not currently work in conjunction withother standards

Co-Be e tsCCBS emphasizes the social and environmental bene ts o projects and has developed a set o use ultools and guidelines to ensure and measure these co-bene ts Some o their criteria are quite speci c(e g biodiversity rules) while others are de ned in very general terms (e g stakeholder and capacitybuilding rules) Using general language to de ne requirements gives the project developer thefexibility to address the issue in a way that ts the project best yet it also places more onus on the

auditor’s judgment when making the assessment Quality o projects can there ore only be assured i auditors are truly independent and adhere to high standards in their work

no Separatio o Veri catio a d Approval o ProjectsUnder the CCBS it is the auditors themselves that approve the projects Given the pressures onauditors and confict o interest discussed earlier, we see the lack o an accrediting board as apotential weakness o the CCBS

The CCBA is currently working airly actively with auditors, because the validation procedures haveonly recently been de ned and some initial guidance was needed Also, the CCBA has been solicitingauditor eedback to help in orm the development o the 2nd edition o the CCBS (to be developed in2008) However, CCBA expects less and less engagement with projects and auditors This separation

o CCBA, auditors and project developers is needed since it helps minimize a potential confict o interest between the project developer and the CCBS

PLAn VIVO SySTEM

www.planvivo.org




Number o ProjectsPlan Vivo currently has three projects (in Mexico,Uganda and Mozambique) and a ew more are currentlybeing reviewed

Ex-Ante Sale o Carbon O setsPlan Vivo exclusively certi es ex-ante credits


Project TypePlan Vivo accepts the ollowing project types: orestrestoration; agro orestry/small plantations; orestprotection and management; soil conservation andagricultural improvement

Project LocationPlan Vivo projects are located in developing countries

Project SizeThere is no minimum or maximum size limitation orPlan Vivo projects Projects generally expand in sizeover a number o years as more armers hear about theproject, learn more about the notion o selling carbon asa commodity and see it working in practice The currentPlan Vivo projects range in size rom a carbon o setpotential o 10,000 tCO2 / yr to 100,000 tCO2 /yr

Start DateIn order to sell Plan Vivo Certi cates, projects must rstbe registered as Plan Vivo projects There is no timerestriction on this

Crediting Period The crediting period varies rom project to projectFarmers are reimbursed or sequestration activities or5-15 years, yet carbon bene ts are calculated over muchlonger time periods o up to 150 years


Project Funding RestrictionNo restrictions are imposed on unding sources Onthe contrary, since carbon nance only becomes

available once a project has gone through the processo easibility studies, detailed project design, extensivetraining and registration, many projects rely on co-

unding through other means during the initial stagesProjects are designed so that carbon payments willsustain the projects once they are ully unctional

Environmental & Social ImpactsPlan Vivo requires that all its projects provide additionalbene ts to the local environment and communitythrough the development o sustainable land-usesystems, planting o native species, and promotion

o sustainable and improved livelihoods through the

diversi cation o income sources Metrics or quanti yingenvironmental and social bene ts o Plan Vivo projectshave recently been revised and standardized and cannow be ound in the Plan Vivo Standards

Leakage

Leakage at individual plot level

To minimize leakage, each producer must show thatthey are not reducing their agricultural output belowsustainable levels In other words, a Plan Vivo projectwill not be registered unless the producer can livesustainably rom their land under the plan , and hasidenti ed management objectives beyond receivingcarbon payments (e g sustainable timber production,

ruits or other non-timber products, agro- orestry)

Leakage at project level Leakage is assessed or each land-use activity in thetechnical speci cations, considering the local andregional trends, identi ying potential leakage risks andmechanisms or controlling them Some examples aregiven in the ollowing table:

Land useactivity

Potentialleakage

Mitigation

A orestation Planting trees onagricultural landleads to urtherde orestation as

armers clear newareas o orest toplant crops

Ensure thatarmers have

su cient land oragriculture andtree-planting

ForestConservation

Leads toincreasedharvesting inother areas inorder to meetdemand ortimber

Ensure that PlanVivo managementplan includesactions to improvesustainable timberproduction

PermanenceThe Plan Vivo System contains a number o mechanismsthat ensure permanence:

• Projects are initially assessed or their long-termviability, taking into account issues such as theorganisational capacity and experience o allpartners involved and the stability o the area

• Producers selling carbon through the Plan VivoSystem must enter into long-term sale agreements(contracts) with the in-country project coordinatorwhich ensures that payments are made ollowingmonitoring against measurable and realistic goals

• Producers must hold land tenure agreements (orcommunity concession or similar usu ruct rights) todemonstrate long-term ownership o land




• All producers are under obligations to re-plantwhere trees die, or example rom disease orextreme weather events, or i harvested or timber

• Projects are internally monitored by Plan Vivothrough the approval o annual reports and sitevisits

• Each project maintains an unsold reserve o carboncredits called a risk bu er The level o the risk bu eris set by the Plan Vivo Foundation according to itsrisk assessment o the project (normally 10-20%)The aim o the risk bu er is to cover any unexpectedshort all in carbon credits supplied to purchasers,

or example due to extreme weather events,inaccuracies in baseline assumptions or producersde aulting on sale agreements


Additionality RequirementsThe additionality tools or Plan Vivo are project based Additionality may be demonstrated through an analysiso the barriers to implementing activities in the absenceo the project These could include, or example, lack o nances, lack o technical expertise or prohibitivepolitical or cultural environments Only native species,which are unlikely to be planted without nancialincentives in many countries where seedlings aredi cult to nd, may be planted Commercial orestryprojects are excluded rom participation

Baselines & MethodologiesBaselines are calculated at the project level and alsomodelled at the regional scale Carbon sequestrationpotential, or the sale o ex-ante credits, is calculatedon a per hectare basis or a speci ed length o timeusing in ormation on the management regime, growingconditions, proposed species, growth rates, andproposed planting densities

Technical speci cations which describe themethodologies or and carbon potential o each land-use system (e g boundary planting, mixed specieswoodlot etc ) are commissioned by the Plan VivoFoundation All existing technical speci cations can beviewed in the project pages o the Plan Vivo website(www.planvivo.org )

All Plan Vivo Technical Speci cations are currently beingexternally reviewed by independent organisationsincluding the University o Edinburgh and TerraCarbonWhen this process is concluded the Plan Vivo TechnicalAdvisory Board will discuss the results and the PlanVivo Foundation will commission revisions and newTechnical Speci cations as necessary


ProcessProjects must register as Plan Vivo Concepts, whichinvolves a desk review o the project’s long-termviability The project developer must describe theproposed project area and proposed activities

and identi y its sustainable development aims inconsultation with the communities

Key RequirementsProjects can be registered as Plan Vivo projects oncethey have:

1 A Plan Vivo Foundation approved set o technical speci cations (used or describingland-use activities, carbon accounting,prescribing risk and other managementactivities and monitoring indicators andcontaining analyses o leakage, additionalityand permanence)

2 A Plan Vivo Foundation approved operationalmanual ( or describing project governance,systems or evaluating and monitoringPlan Vivos, administering payments andcommunity-led planning)

3 Been validated by an expert reviewer chosenby BR&D

. Mo itori g, Veri catio &Certi catioProcessMonitoring is conducted throughout the creditingperiod by local technicians based on the protocol andindicators identi ed in the technical speci cations o thePlan Vivo project approved by the Plan Vivo Foundationduring project validation.

All operational projects must conduct and submitannual reports to the Plan Vivo Foundation using thestandard Plan Vivo Annual Reporting Template This

report contains a ull update o the project’s status anddevelopment, including what sales and payments havebeen made, the results o monitoring and outcomes o consultations The Plan Vivo Foundation reviews eachannual report and issues Plan Vivo Certi cates a terapproval o the report Approval o annual reports maybe quali ed by imposing corrective actions, i the reportshows the project ails to act in ull compliance with thePlan Vivo System or Plan Vivo principles

The Foundation may choose to ollow up correctiveactions with site visits where it is deemed necessary




The local project coordinators monitor the work o eachindividual armer and pay them when they are ound tohave reached their targets The exact payment schedulevaries with each project, but normally involves periodicmonitoring and payments over periods o 10–15 years

The Plan Vivo System currently does not require third-party veri cation, but has procedures or assistingprojects in preparing or and choosing a veri er whichmust veri y the project according to the Plan VivoSystem (terms o re erence are provided by the PlanVivo Foundation) In the uture as there are more PlanVivo projects, it is likely that more speci c veri cationrequirement rules will be instituted

Key RequirementsEach project must develop its own internal MonitoringProtocol based on the monitoring o indicatorsprescribed in the project’s technical speci cations Anychange to the Monitoring Protocol must be reported to

the Plan Vivo Foundation in the project’s annual reportSpeci c requirements or each producer are set outin their individual sale agreement with the projectcoordinator For example, a producer may receive 20%o the total payment a ter completing 50% o planting,and a urther 10% a ter one year provided they havecompleted 100% o the planting

6. Evaluatio o AuditorsPlan Vivo has no ormalized process to evaluate andsanction auditors in case o underper ormance

7. Registries

The Plan Vivo Foundation maintains a registry o carboncredits sold rom Plan Vivo projects and issues Plan VivoCerti cates to purchasers accordingly All carbon creditsare sold as ex-ante payments Each Certi cate has aunique serial number which can be traced back to theproject and exact producer, which ensures there is nodouble-counting o carbon credits

. FeesCosts vary rom project to project Example operationalcosts can be ound in project annual reports which canbe viewed on the Plan Vivo website (www.planvivo.org )

The Plan Vivo Foundation currently charges novalidation ee but takes a levy o USD 0 30 per Certi cateissued The Plan Vivo Foundation plans to implementregistration ees or both projects and resellers,which are expected to be nominal amounts to coveradministrative costs

Authors’ Comme ts o Pla Vivo

Grass-Roots ApproachPlan Vivo is a small standard organisation that works closely with rural communities Becauseo the grass-roots approach o Plan Vivo, conservation and community bene ts are veryhigh, yet standards o this type usually remain small because they are very costly comparedto cheap carbon options available on a globally traded carbon market It is likely that PlanVivo will stay small and not grow its port olio beyond a hand ul o projects

Ex-A te O setsFarmers who participate in Plan Vivo are paid in regular installments over 10-15 years,yet they are expected to keep their trees standing or many decades Plan Vivo’s o setcalculations are based on the trees remaining standing or decades a ter payments haveceased Once all payments have been made to the armers, there are no repercussions

or armers who decide to cut their trees down Plan Vivo argues that the threat o non-compliance is largely mitigated through their project design: all Plan Vivo projects striveto improve the livelihoods o armers and it is there ore in their own (economic) interest tokeep the trees standing even a ter o set payments have ceased

The authors welcome Plan Vivo’s multi-bene t, grassroots approach that aims to help thevery poorest, something that many larger o set projects and the CDM as a whole have so

ar ailed to do (Schneider, 2007) Yet ex-ante credits cannot guarantee that actual emissionsreductions will be realized This should be clearly communicated to prospective buyers: PlanVivo projects have high co-bene ts but the carbon o sets are less secure than with ex-postcredits




7 5O set Accou ti g ProtocolsO set Accounting Protocols provide de nitions and procedures to account or GHG reductions rom o setprojects yet they have no associated regulatory or administrative bodies and do not de ne eligibility criteria,or procedural requirements Many o the ull-fedged standards are based on such protocols, or example theVCS uses ISO-14064 methodologies Below we describe the GHG Project Protocol and ISO 14064

GHG PROTOCOL FOR PROJECT ACCOUnTInG

www.ghgprotocol.org

Financing o the Standard OrganisationThe development o the GHG Project Protocol orProject Accounting was supported by numerouscompanies, organisations, and governmental sponsors,including Energy Foundation, US AID, US EPA, BP,Chevron Corporation, Ford, International Paper, SCJohnson, Dow, and Environment Canada

Recognition o Other StandardsThe GHG Project Protocol is programme neutral andis o ten used in conjunction with other standards orprograms

Number o ProjectsN/A


Project TypeThe GHG Project Protocol can be used to develop any

project type The protocol is supplemented with morespeci c guidelines or accounting or GHG emissionsreductions in grid-connected electricity and LULUCFprojects

Project LocationNot de ned under the GHG Protocol

Project SizeNot de ned under the GHG Project Protocol

Start DateNot de ned under the GHG Project Protocol

Crediting Period The protocol does not speci y the duration o thecrediting period and advises the project developer toerr on the side o conservativeness

The protocol recommends that the ollowing aspectsbe taken into account when determining a creditingperiod:

• The pace at which economic conditions,technologies or practices are changing

• The point at which the underlying assumptions,

the barriers or the net bene ts are likely to changesigni cantly

1. I troductio

Type o Standard The GHG Protocol Initiative has developed twoseparate protocols TheCorporate Accounting and Reporting Standard covers accounting or corporateGHG emissions inventories TheGHG Protocol or Project

Accounting is an o set accounting protocol It is a toolor quanti ying and reporting GHG emissions reductionsrom GHG mitigation projects It does not ocus on

veri cation, en orcement or co-bene ts We discuss onlythe latter and re er to it as theGHG Protocol

History o Standard The GHG Project Protocol was jointly developed bythe World Business Council or Sustainable Development (WBCSD)and the World Resources Institute (WRI)inpartnership with a coalition o businesses, NGOs,governmental and inter-governmental organizations

The initiative was launched in 1998 with the aim o developing internationally accepted GHG accountingand reporting standards The Corporate Accountingand Reporting Standard (revised edition) was publishedin 2004 The GHG Protocol or Project Accounting was

nalized and published in December 2005

Administrative BodiesThe GHG Protocol is developed by the WRI and theWBCSD:

The World Resources Institute (WRI) is an environmentalthink tank “that goes beyond research to create practical

ways to protect the Earth and improve people’s lives[WRI’s] mission is to move human society to live inways that protect Earth’s environment or current and

uture generations [WRI’s] programme meets globalchallenges by using knowledge to catalyze public andprivate action ” (GHG Protocol, p 145)

The World Business Council or SustainableDevelopment (WBCSD) is a coalition o 175 internationalcompanies “united by a shared commitment tosustainable development via the three pillars o economic growth, ecological balance and social

progress [WBCSD’s] members are drawn rom morethan 30 countries and 20 major industrial sectors ” (GHGProtocol, p 145)




• Whether the baseline emissions are static ordynamic


Project Funding RestrictionNot de ned under the GHG Project Protocol

Environmental & Social ImpactsGHG Project Protocol does not address environmentaland social impacts as they are not directly related toGHG reduction accounting and quanti cation per se Itacknowledges the importance o these issues but leavesit to the users o the protocol to determine policies inthis regard and incorporate them in their programme’sor standard’s requirements


Additionality RequirementsThe GHG Protocol contains no ormal requirements oradditionality determination It discusses additionalityconceptually with respect to baseline determination(see below), but doesn’t require speci c additionalitytests

Baselines & MethodologiesThe GHG Project Protocol o ers guidance on the use o both project-speci c and per ormance-based methods

or estimating the baseline in a project The protocolrecommends the use o the per ormance standard

procedure when:• a number o similar projects are implemented

• obtaining veri able data on alternatives to theproject activity is di cult

• the project developer intends to keep con dentialdata that would need to be revealed i a project-speci c standard were used

• the number o baseline candidates is limited or theGHG emission rate data or baseline candidates aredi cult to obtain


ProcessThe GHG Project Protocol is only an accountingguidance document, and there ore does not provideguidance on validation or registration

Key RequirementsN/A


ProcessThe GHG Project Protocol requires a plan or monitoringGHG emissions related to the primary and relevantsigni cant secondary GHG e ects o a project withinthe scope o the assessment boundary The GHG ProjectProtocol does not cover veri cation or certi cation

Key RequirementsThe monitoring plan must describe the qualityassurance and quality control measures that will beemployed or data collection, processing and storage Italso requires the monitoring o data related to baselineparameters and assumptions to ensure their continuingvalidity

6. Evaluatio o AuditorsN/A

7. RegistriesN/A

. FeesThe GHG Project Protocol is ree and publicly available

or any GHG programme or project developer to use

Author’s Comme ts o GHG Protocol

The GHG Project Protocol can be used as a building block or a ull-fedged o set standard As such, itis a use ul tool and has been used by many regulatory and voluntary schemes

In this paper we evaluate the overall quality o o set standards rather than protocols It wouldthere ore go beyond the scope o this paper to comment on the speci cs o the GHG Protocol




ISO 14064

http://www.iso.org

intended to be used in conjunction with otherregulations or standards For example, the procedures

or the VSC are based on ISO 14064

ISO 14064 is intended by be programme-neutral andthe requirements o the programme under which ISO isused take precedence to the ISO rules

Number o ProjectsN/A


Project TypeNot de ned under ISO 14064

Project LocationNot de ned under ISO 14064

Project SizeNot de ned under ISO 14064

Start DateNot de ned under ISO 14064

Crediting Period Not de ned under ISO 14064

Project Funding SourceNot de ned under ISO 14064

Project Funding RestrictionNot de ned under ISO 14064

Environmental & Social ImpactsThe requirements are listed in only general terms: anEnvironmental Impact Assessment (EIA) is required i thehost country or region requires the completion o suchan assessment

ISO also speci es that relevant outcomes o stakeholderparticipation have to be presented


Additionality RequirementsISO 14064-2 contains no ormal requirements oradditionality determination but o ers generalguidelines The guidelines or additionality toolsgenerally assume a project-speci c approach However,since the requirements o a GHG programme takeprecedence over speci c ISO 14064-2 requirementsISO 14064-2 allows per ormance standards to be usedwhere this is prescribed by a GHG programme

1. Overview

Type o Standard ISO 14064 is an o set protocol It is an independent,voluntary GHG project accounting standard, and isdeliberately policy neutral The ISO 14064 standardconsists o three parts The rst part (14064-1)speci es requirements or designing and developingorganisation or entity-level GHG inventories The secondpart (14064-2) details requirements or quanti ying,monitoring and reporting emission reductions andremoval enhancements rom GHG projects The thirdpart (14064-3) provides requirements and guidance

or the conducting o GHG in ormation validation andveri cation

Unlike the GHG Project Protocol, which has speci cguidelines on what tools and accounting methods touse, ISO 14064 gives guidance on what to do but doesnot spell out the exact requirements The requirementsare usually spelled out only in general terms Forexample, ISO points out that additionality needs to betaken into account but does not require a speci c toolor additionality test to be used These would be de nedby the GHG programme or regulation under which ISO14064 is used ISO 14064 does not ocus on co-bene ts

History o Standard ISO 14064 was developed over several years by theInternational Organisation or Standardization (ISO) Itwas launched in the spring 2006


ISO (International Organisation or Standardization) is the world’s largest developer and publisher o International Standards ISO is a non-governmentalorganisation that orms a bridge between the publicand private sectors It is a network o the nationalstandards institutes o 157 countries

Financing o the Standard OrganisationISO’s national members pay subscriptions to coverthe operational cost o ISO’s Central Secretariat Thesubscription paid by each member is in proportion tothe country’s Gross National Income and trade guresAnother source o revenue is the sale o standards Thecost or ISO 14064 is around € 85 or each o the threestandards

Recognition o Other StandardsBecause ISO 14064 is an O set Standard Protocols andnot a ull fedged o set standard it provides de nitionsand procedures to account or GHG reductions yet doesnot de ne eligibility criteria ISO 14064 is there ore




Baselines & MethodologiesISO 14064-2 does not prescribe baseline procedures,but rather o ers general requirements and guidance onhow to determine a project baseline


ProcessISO 14064-2 strongly recommends the use o third-partyauditors but it is a requirement to do so only i the partywants to make its GHG claims public

ISO 14064-3 de nes the validation and veri cationprocess “It speci es requirements or selectingGHG validators/veri ers, establishing the level o assurance, objectives, criteria and scope, determiningthe validation/veri cation approach, assessing GHGdata, in ormation, in ormation systems and controls,evaluating GHG assertions and preparing validation/

veri cation statements,” (ISO-14064-3) Validation andveri cation requirements are stated together with ewdistinctions between the two

Key RequirementsISO 14064 does not require validation or veri cation. Suchrequirements are usually elements o a GHG programme.I a GHG project has not been linked to a speci c GHG programme, the project proponent has to decide on thetype o validation and/or veri cation (1st, 2nd or 3rd party veri cation) and the level o assurance (e.g. high or moderate) required against the GHG assertion. The GHG

assertion is a statement on the per ormance o the GHG project usually made by the project proponent. ISO 14064-3 speci es principles and requirements or the validationand veri cation o GHG assertions.(ISO 14064-2)


ProcessISO de nes criteria in general terms: Project proponentsmust establish the criteria and procedures or projectmonitoring, including selecting or establishing “criteriaand procedures or selecting relevant GHG sources,sinks and reservoirs or either regular monitoring orestimation ”

Key RequirementsProject only have to be veri ed i they are reportedpublicly Project proponents must identi y and justi ywhich GHG sources, sinks, and reservoirs will bemonitored

Monitoring procedures should include the ollowing:

a) purpose o monitoring;b) types o data and in ormation to be reported,

including units o measurement;

c) origin o the data;

d) monitoring methodologies, includingestimation, modelling, measurement or calculation approaches;

e) monitoring times and periods, considering theneeds o intended users;

) monitoring roles and responsibilities;

g) GHG in ormation management systems,including the location and retention o stored data.

6. Evaluatio o AuditorsISO 14065 was released in 2007 and spells out therequirements or greenhouse gas validation andveri cation bodies or project accreditation andemissions reductions veri cations

ISO is currently developing ISO 14066 which will outlinehow individuals can get accredited auditors and howauditors will be reviewed

It is not yet clear how ISO will supervise the work o itsGHG project auditors

7. RegistriesNot applicable

. FeesThe purchase cost o each o the three ISO standardmanuals is around € 85

Author’s Comme ts o ISO 14064

ISO 14064 can be used as a building block or a ull-fedged o set standard As such it is a use ul tooland has been used by many regulatory and voluntary schemes

In this paper we evaluate the overall quality o o set standards rather than protocols It wouldthere ore go beyond the scope o this paper to comment on the speci cs o the ISO 14064



7G o v E r n m E n t a l a c t i o n t o r E G u l a t E t h E v o l u n t a r y m a r k E t

8 Gover me tal Actio to Regulate theVolu tar Market

Several governments have expressed concern about the lack o quality control in the voluntarymarket and are starting to explore possibilities to regulate the voluntary market

United KingdomIn early 2007, the UK’s Department or Environment, Food and Rural A airs (DEFRA) launched theirconsultation process or establishing a code o best practice or voluntary carbon o setting Thecode is meant to:

1 educate consumers about o setting and its role in addressing climate change2 enable consumers to make choices about o setting3 increase consumer con dence4 show o set providers the quality and veri cation standards to which they should aspire

In February 2008 DEFRA released its code o best parctice, initially limiting it to credits that havebeen certi ed and issued by the UN, such as CERs and ERUs Although the code o practice currently

excludes VERs, these might be included at a later point Such VERs would have to prove that they areadditional and permanent, avoid leakage, are veri ed, transparent and not double counted

Norway In mid 2007, the government o Norway announced that it will set up a web-based system orconsumers or purchasing and cancelling CER o sets Starting in April 2008, Norway will allowprivate consumers, businesses and organizations to purchase and cancel UN-backed carbon credits

rom a government website, in an e ort to ease concerns over the quality o o set credits

In July 2007, The US House o Representatives Select Committee on Energy Independence andGlobal Warming hosted a hearing on voluntary carbon o sets “to explore the issues o transparency,e ectiveness and other necessary questions to ensure carbon o sets can be a responsible way to

address global warming on a consumer-based level ”FranceThe ADEME (Agence de l’Environnement et de la Maîtrise de l’Energie;www.ademe. r ), a publicagency under the joint supervision o the Ministries or Environment and Education and Research,is currently developing aCharter o Good Practice or o set providers in France The charter willstandardize de nitions and methodologies, and provide transparent and homogeneously ratedin ormation on o set projects in terms o their environmental and social impacts O set providerscan sign on to the charter and agree to having their projects evaluated ADEME will make itsin ormation available to the public via a website

http://www.de ra.gov.uk/environment/climatechange/uk/carbono set/codeo practice.htm , accessed on Fed 22, 2008http://www.house.gov/apps/list/press/global_warming/July18CarbonO sets.shtml , accessed Nov 16, 2007

Charte de bonnes pratiques des opérateurs de compensation volontaire, http://ademe. r , accessed Nov 16 2007



o v E r a l l S t a n d a r d r a t i n G S & c o n c l u S i o n S

9 Overall Sta dard Rati gs & Co clusio s“For every complex problem, there is a solution that is simple, elegant, and wrong.” ( Henry Louis Mencken1880–1956)

In order to preserve a high probability o keeping global temperature increase below 2 degreesCentigrade, current climate science suggests that atmospheric CO2 concentrations need to peak

below 450ppm This requires global emissions to peak in the next decade and decline to roughly80% below 1990 levels by the year 2050 (Baer and Mastrandrea, 2006) Such dramatic emissionsreductions require a sharp move away rom ossil uel, signi cant improvements in energy e ciencyand substantial reorganisation o our current economic system This transition can only be achievedby ar-reaching national and international climate policies

Carbon o set markets have been promoted as an important part o the solution to the climate crisisbecause o their economic and environmental e ciency and their potential to deliver sustainabilityco-bene ts through technology trans er and capacity building The voluntary o set market inparticular has been promoted or the ollowing reasons:

Possibility o Broad Participation

The voluntary carbon market enables those in unregulated sectors or countries that have notrati ed Kyoto, such as the US, to o set their emissions

Preparation or Future ParticipationThe voluntary carbon market enables companies to gain experience with carbon inventories,emissions reductions and carbon markets This may acilitate uture participation in a regulatedcap-and-trade system

Innovation and ExperimentationBecause the voluntary market is not subject to the same level o oversight, management,and regulation as the compliance market, project developers have greater fexiblility toimplement projects that might otherwise not be viable (e g projects that are too small or too

disaggregated)Corporate Goodwill Corporations can bene t rom the positive public relations associated with the voluntaryreduction o emissions

Most importantly, voluntary and compliance o set mechanisms have the potential to strengthenclimate policies and addres equity concerns:

Cost-e ectiveness that allows or deeper caps or voluntary commitments.By decreasing the costs o reductions, o sets can in principle make a compulsory mandate morepolitically easible and a voluntary target more attractive, thereby accelerating the pace at whichnations, companies, and individuals commit to reductions

Higher overall reductions without compromising equity concerns.One o the greatest challenges o climate protection is how to achieve the deep global emissionsreductions required while also addressing the development needs o the poor Historically,developed nations have been responsible or a much larger share o the increase in atmosphericGHG concentrations than developing countries But to achieve climate stabilisation, emissionsmust be curbed in all countries, both rich and poor O sets may be one way out o theconundrum o needing to achieve steep global emissions reductions while at the same timeallowing poor nations to develop This has not been the case thus ar because the emissionsreductions undertaken have been too small to be signi cant Small reduction targets allowparticipants to tinker at the margins and avoid the kind o restructuring that is needed to achieve

climate stabilizations While taking on considerable domestic emissions reductions, industrializedcountries could, through o sets, help nance the transition to low-carbon economies in



o v E r a l l S t a n d a r d r a t i n G S & c o n c l u S i o n S

developing nations In other words, o sets might allow equity to be decoupled rom e ciency,and thus enable a burden-sharing arrangement that involves wealthier countries acilitatingmitigation e orts in poorer countries

Yet as experience with o set markets grows, their shortcomings have become more widelyunderstood The main points o criticism against carbon o setting include:

Carbon O sets May Stife Action At HomeCarbon o setting enables industrialized nations to avoid taking action domestically, corporationsto continue ine cient and unsustainable production methods, and individuals to perpetuateunsustainable li estyles While the cost-e ectiveness arguments or o set markets should not bedismissed, it is important to note that they are based on somewhat oversimpli ed interpretationso the required transition to a low-GHG economy

It is true a tonne o carbon has the same impact on atmospheric GHG concentrations regardlesso its source, and there ore “cheap” reductions are equivalent to “costly” reductions However,di erent reductions have varying long-term impacts in terms o technological innovation,market trans ormation, and in rastructural transition For example, a reduction that comes

rom uel switching rom oil to gas may be cheaper than a comparatively costly investment in

a public transit system, but is much less e ective at acilitating change in the long-term Theormer may be based on entirely conventional technology and undone as soon as relative uelprice incentives reverse By contrast, the latter may help to advance a relatively novel practice(e g , hybrid bus rapid transit), curb sprawl by making a denser urban core more attractive,and demonstrate appealing alternatives to automobile dependence For this reason, marketmechanisms alone are not su cient to address climate change, and complementary policies thatprioritise a long-term transition to a low carbon economy are needed

Unintended Negative Impact on PoliciesCarbon markets can create barriers to uture regulation o emissions sources Those who bene t

rom the sale o carbon o sets may oppose regulation that would deny them that stream o revenue

Additionality Di cult to Test Additionality tests attempt to establish that an o set project would not have happened in abusiness-as-usual scenario The major weakness o o set systems centered on project-basedmitigation is that emission reductions have to be measured against a counter actual reality Theemissions that would have occurred i the market or o sets did not exist must be estimatedin order to calculate the quantity o emissions reductions that the project achieves Thishypothetical reality cannot be proven; instead, it must be in erred and thus its de nition is alwaysto some extent subjective Unless the issue o additionality is addressed e ectively, it is unclear towhat extent o sets can make a use ul contribution to climate protection

Unbalanced Market Dynamics and Free RidersAlthough o set markets are relatively straight orward in principle, they have been anything butstraight orward to implement in practice In part, this may be attributed to the inevitable birthingpains associated with creating institutions and stabilizing new markets But problems also arise

rom inherent structural problems inherent in the conception o o set markets O set marketslack a critical competitive check ound in well unctioning markets, in which the interests o buyerand seller are naturally balanced against each other In o set markets, both the sellerand thebuyer bene t rom maximizing the number o o sets a project generates This issue can partiallybe mitigated by imposing stringent requirements or auditors and an additional approval processthough the standard organisation (see chapter 5 6)

For an in-depth analysis o such a potential climate and equity ramework, see theGreenhouse Development RightsFramework (Baer et al 2007)



0 o v E r a l l S t a n d a r d r a t i n G S & c o n c l u S i o n S

Inherent Conficts o Interest To minimize the number o “ ree riders” most standards require third-part auditors to veri y theemissions reductions Yet auditors are chosen and paid by a project’s developer There is thuspressure on the auditors to approve projects in order to preserve their business relationshipswith the project developers This compromises the auditors’ independence and neutrality Toaccount or this dynamic, o set markets need an administrative in rastructure to ensure thatauditors’ estimates o project reductions are reasonable This has proven to be a much greaterchallenge than anticipated (Schneider, 2007 & Haya, 2007)

Lack o Development Bene tsAlthough carbon markets − and speci cally the CDM − are intended to deliver development co-bene ts or their host countries, these have not been widely realized In practice, o set projectso ten rely on relatively conventional technologies, and rarely bene t poor communities withinsu cient access to energy services

Carbon o setting is a complex and multi aceted process No o set standard will ever be able tosimultaneously maximize quality, minimize cost, and ensure large co-bene ts or all its projects,because the design o o set systems inherently involves tradeo s between these actors Therelative wieght given to each o these considerations depends on the overall goals o eachstandard Many standards or the voluntary o set market have only recently been developedA ull evaluation o how these standards per orm in practice is thus not yet easible Yet, it ispossible at this time to compare each standard’s approach to minimizing the weaknesses andmaximizing the strengths o o set schemes The ollowing sections and table summarize themost relevant aspects o each standard

Ge eral Sta dard I ormatio

Main Supporters‘Main Supporters’ lists the type o stakeholder associated with each standard Each o thereviewed standards has been developed and is supported by di erent groups o stakeholders

The types o stakeholders refect to some extent the goal o the standard For example,environmental NGOs tend to be more concerned about credit quality and co-bene ts, whereasprivate actors in the carbon markets tend to put more emphasis on simpli ying procedures tominimize costs

Market ShareNot all standards are equally infuential ‘Market Share’ indicates the size o each o the standards,and thus to some extent refects the standard’s importance With most standards, it is verydi cult or impossible to get actual gures or the numbers o o sets sold Some standards, suchas the VCS 2007, were only recently released and do not yet have a history o transactions, sotheir market share is di cult to predict This column there ore gives only a broad indication o the current and predicted market share o each standard

Price o O sets‘Price o O sets’ indicates the cost o one o set, representing the reduction o 1 tonne o CO2eO set prices depend on many di erent parameters, such as the type o project, the location,market demand, stringency o the standard requirements, etc The pricing given in this columnindicates average prices or di erent projects (as o January 2008; see chapter 7) While it wouldbe wrong to assume that low prices are necessarily an indication o lower quality o sets, it istrue that very low priced carbon o sets are more likely to originate rom projects that are non-additional Since the revenue they produce is small, it is on average less likely that the o setsare vital to the project’s easibility Industrial gas projects, which are low-cost mitigation options,are an exception to this general rule These projects point to a second aspect o very low priced

o sets: they usually do not have high co-bene ts



1o v E r a l l S t a n d a r d r a t i n G S & c o n c l u S i o n S

Authors’ CommentsThe Author’s comments state the perceived goal o each standard and any relevant in ormationabout the standard More in-depth commentary and in ormation about each standard can be

ound in chapter 7

O set Qualit Co trol

Additionality Tests (relative to CDM)The CDM additionality tool (see appendix B) most commonly used or testing the additionality o CDM projects was developed care ully over several years In this column it is used as a re erenceagainst which the other standards’ project-based additionality testing procedures are compared:

+ Requirements go beyond and are more stringent than CDM rules– Requirements are less stringent than CDM= Requirements are the same or very similar to CDMN/A Not Applicable

Although the CDM additionality tool is well respected, it does not guarantee that only additionalprojects are approved Recent reports have shown that despite the act that the additionality tool

is required or all CDM projects; it is likely that a signi cant number o non-additional projectsare registered (Schneider, 2007; Haya 2007) Similar studies have not yet been carried out or VERprojects It is there ore impossible to know i VER standards likely have a higher or lower percentageo additional projects It remains to be seen how well these standards will succeed in implementingtheir additionality requirements

Some o the standards, such as the VCS and the VER+, plan to develop per ormance-basedadditionality tools (also called benchmark tools) By shi ting the tasks o establishing a baseline

rom the project developer to the standard-setting organisation, benchmark tools could potentiallyincrease transparency and decrease administrative burden or project developers Yet suchapproaches also harbour the danger o certi ying too many ree riders Benchmark rules will have tobe closely examined to ensure that they minimize or mitigate the e ects o non-additional o sets(see chapter 5 1)

Third-party Veri cation Required To minimize the number o “ ree riders” most standards require third-part auditors to veri y theemissions reductions

Separation o Veri cation and Approval ProcessFundamental di erences exist among standards as to how projects are reviewed and approvedUnder the CDM, projects are veri ed by third-party auditors and then reviewed, approvedor rejected by the CDM Executive Board Most voluntary o set standards do not have such abody to review and approve the projects a ter the auditors have veri ed them Projects aresimply approved by the auditors themselves The lack o a standard body which approvesprojects exacerbates conficts o interest, particularly where auditors are selected and paid orby the project developer None o the voluntary standards have speci c procedures in place toreview the approved auditors nor to allow or sanctions against or the discrediting o an under-per orming auditor (see chapter 5 6)

Registry Carbon o set registries keep track o o sets and are vital in minimizing the risk o double-counting, that is, having multiple stakeholders take credit or the same o set Registries alsoclari y ownership o o sets (see chapter 5 7)

Related to additionality are baseline calculations The requirements or baselines methodologies are not included inthis summary table but can be ound in chapter 5 1



2 o v E r a l l S t a n d a r d r a t i n G S & c o n c l u S i o n S

O set Project I ormatio

Each standard accepts di erent types o o set projects The CDM, or example accepts all projectsthat reduce the six GHGs listed in the Kyoto Protocol, with the exception o the protection o existing orests (REDD), nuclear energy, and HFC destruction rom new acilities (see chapter 5 2)

Project TypesREDD = Reduced Emissions rom Degradation and De orestationEE = Energy E ciencyRE = Renewable EnergyLULUCF = Land Use, Land-Use Change and Forestry = Bio-Sequestration

Excludes Project Types with High Chance o Adverse ImpactsSome project types are more likely to have adverse social and environmental impacts Somestandards there ore exclude these projects types, such as tree plantations and monocultureswhich are detrimental to biodiversity and can negatively impact watersheds or large hydroprojects, which can displace large numbers o people

Sustai able Developme t

Co-bene ts are social and environmental bene ts that go beyond the GHG reduction bene tso o set projects Such bene ts include job creation, improved local air quality, protected andenhanced biodiversity, etc The Clean Development Mechanism (CDM) was approved by developingnations speci cally because o set projects were not only to provide cost-e ective reductions orAnnex 1 countries but also development bene ts or the host countries In other words, to quali yas a CDM project, the original intention was that a CDM project would have to deliver developmentbene ts In practice, the CDM has ailed to consistently deliver such development and sustainabilitybene ts (Holm Olsen, 2007; Sutter and Parreño, 2007; see chapter 5 5 )

Co-Bene ts (relative to CDM)Voluntary standards vary in their requirements or co-bene ts This column highlights the co-

bene t requirements o each standard, comparing them to the requirements o the CDMMany o the voluntary carbon o set standards that have been developed in the last ew yearsrepresent a step in the right direction They help address some o the weaknesses in the currento setting process and oster climate mitigation projects The voluntary market in particular hashelped to shape climate actions in countries that have thus ar been reluctant to enact strongpolicies Even with ar reaching cap-and-trade policies expected to be enacted in the medium term,there will likely always be room or a voluntary market The demand or voluntary o sets will come

rom private and corporate actors who wish to go beyond regulatory requirements and will besupplied by mitigation projects in sectors that are not capped Well-designed standards will helpthe voluntary market mature and grow



S u m m a r y t a b l E

M a i n S u p p o r t e r s

M a r k e t S h a r e

A d d i t i o n a l i t y T e s t s

( r e l a t i v e t o C D M )

T h i r d - p a r t y V e r i c a t i o n

R e q u i r e d

S e p a r a t i o n o V e r i c a t i o n

a n d A p p r o v a l P r o c e s s

R e g i s t r y

P r o j e c t T y p e s

E x c l u d e s P r o j e c t T y p e s

w i t h h i g h c h a n c e o

a d v e r s e i m p a c t s

C o - B e n e t s ( r e l a t i v e t o

C D M )

P r i c e o O f s e t s


UNFCCC Parties large = yes yes yesAll minus

REDD, newHFC, nuclear

no = €14–30

Authors’ Comme ts: The CDM is part o the Kyoto protocol and aims to create economic e ciency while also deliveringdevelopment co-bene ts or poorer nations It has been success ull in generating large numbers o o setsWhether it also has delivered the promised development co-bene ts is questionable

Gold Sta dard

Environmental NGOs(e g WWF)

small butgrowing =/+1 yes yes Planned EE, RE only yes +

VERs: €10–20CERs: up to €10premium

Authors’ Comme ts: The GS aims to enhance the quality o carbon o sets and increase their co-bene ts by improving andexpanding on the CDM processes 1 For large scale projects the GS requirements are the same as or CDMYet unlike CDM, the GS also requires the CDM additionality tool also or small-scale projects

Volu tar Carbo Sta dard 2007 VCS 2007Carbon Market Actors(e g IETA)

new; likelyto be large =2 yes no Planned All minus

new HFC no - €5–15 3

Authors’ Comme ts: The VCS aims to be a universal, base-quality standard with reduced administrative burden and costs 2 The VCS plans to develop per ormance based additionality tests These tools have not yet beendeveloped and are thus not included in this rating 3 Prices are or projects implemented under VCS ver 1

VER+

Carbon Market Actors

(e g TÜV SÜD)

small but

growing= yes no yes CDM minus

large hydroyes - €5–15

Authors’ Comme ts: VER+ o ers a similar approach to CDM or project developers already amiliar with CDM procedures orprojects types that all outside o the scope o CDM

Chicago Climate Excha ge CCX

CCX Members andCarbon Market Actors

large in theUS - yes yes yes All (mostly

soil carbon) no - €1–2

Authors’ Comme ts: CCX was a pioneer in establishing a US carbon market Its o set standard is part o its cap-and-tradeprogramme

Volu tar O set Sta dard VOSFinancial Industry andCarbon Market Actors N/A = yes no Planned CDM minus

large hydro yes = N/A

Authors’ Comme ts: VOS closely ollows CDM requirements and aims to decrease risks or o set buyers in the voluntary market

Climate, Commu it a d Biodiversit Sta dards CCBSEnvironmentalNGOs (e g NatureConservancy) andlarge corporations

large orLULUCF = yes no 4 N/A LULUCF yes + €5–10

Authors’ Comme ts: The CCBS aims to support sustainable development and conserve biodiversity4The CCBS is a Project Design Standard only and does not veri y quanti ed emissions reductions

Pla Vivo

Environmental andsocial NGOs very small = no no yes 5 LULUCF yes + €2 5–9 5

Authors’ Comme ts: Plan Vivo aims to provide sustainable rural livelihoods through carbon nance5 It veri es and sells ex-antecredits only Third party veri cation is not required but recommended



r E f E r E n c E S4

Re ere cesCCX (2007) CCX trading plat orm Available athttp://

www.chicagoclimatex.com/content.js ?id=482

CCX (2007) Clearing and settlement Available athttp:// www.chicagoclimatex.com/content.js ?id=561

Department or Environmental Food and Rural A airs(2007) Consultation on Establishing a Voluntary Codeo Best Practice or the Provision o Carbon O settingto UK Customers Available athttp://www.de ra.gov.uk/environment/climatechange/uk/carbono set/ codeo practice.htm

ECCM (n d ) The Edinburgh Centre or CarbonManagement Available athttp://www.eccm.uk.com/ httpdocs/index.htm

Eraker, H (2000) CO2lonialism: Norwegian treeplantations, carbon credits, and land conficts in

Uganda NorWatch , 2007 Available athttp://www.norwatch.no/index.php?artikkelid=689&back=1

FSC (2003) The Forest Stewardshop Council Availableat http://www. sc.org/en/

Gillenwater, M (2007)Rede ning RECs (Part 1):Untangling Attributes and O sets [Discussion paper]Princeton, NJ: Princeton University Availableat http://www.princeton.edu/~mgillenw/REC-O setPaper-PartI_v2.pd

Gillenwater, M (2007)Rede ning RECs (Part 2):

Untangling Certi cates and Emission Markets [Discussion paper] Princeton, NJ: PrincetonUniversity Available athttp://www.princeton.edu/ ~mgillenw/REC-O setPaper-PartII_v2.pd

The Gold Standard (n d ) Gold Standard Available athttp://www.cdmgoldstandard.org

Goodell, J (2006) Capital pollution solution?New York Times Magazine, July 30, 2006

Hamilton, K , Bayon, R , Turner, G , & Higgins, D(2007) State o the Voluntary Carbon Markets2007: Picking Up Steam. EcoSystem Marketplaceand New Carbon Finance Available athttp:// ecosystemmarketplace.com/documents/acrobat/ Stateo theVoluntaryCarbonMarket17July.pd

Harvey, F (2007) Chineses actories and carbon tradersexploit Kyoto loophole Financial Times January18, 2007 Available athttp://www. t.com/cms/s/2/ 47e0ee1c-a699-11db-937 -0000779e2340.html

Haya, B (2007) Failed mechanism: How the CDM issubsidizing hydro developers and harming the KyotoProtocol International Rivers , Berkeley CA: Nov 2007Available athttp://www.internationalrivers.org/

les/Failed_Mechanism_3.pd

Agence de l’Environnement et de la Maitrise del’Energie (n d ) Charte de bonnes pratiques desopérateurs de compensation volontaire AccessedNov 16, 2007, athttp://ademe. r

Aukland, L , Moura Costa, P , Bass, S , Huq, S , Landell-Mills, N , Tipper, R & Carr, R (2002) Glossary InLaying the Foundations or Clean Development:Preparing the Land Use Sector. A quick guide to theClean Development Mechanism. IIED, LondonAvailable athttp://www.cdmcapacity.org/glossary.html

Baer P & Mastrandrea M (2006) ,High Stakes: Designingemissions pathways to reduce the risk o dangerousclimate change , Institute or Public Policy Research,London, http://www.ippr.org

Baer P , Athanasiou T Kartha S (2007)The GreenhouseDevelopment Rights Framework. Christian Aid,Heinrich Boll Foundation Available athttp://www.ecoequity.org/GDRs/

Bellassen, V , & Leguet, B (2007) The emergence o voluntary carbon o setting Caisse des Depots Research Report No 11, September 2007

Bird, L & Lokey, E (2007)Interaction o Complianceand Voluntary Renewable Energy Markets [Technicalreport] National Renewable Energy LaboratoryAvailable athttp://www.eere.energy.gov/

greenpower/pd s/42096.pd Boehmer, K , & Cherp, A (2003)ISO 14064: An Emerging

Standard on Greenhouse Gas Accounting and Veri cation. Available athttp://www.ceu.hu/envsci/ aleg/research/ISO-EnvFinance110503.pd

Bryk, D S (2006) States and cities should not jointhe Chicago Climate Exchange Natural ResourcesDe ense Council , 2006

Capoor, K , & Ambrosi, P (2007)State and Trends o theCarbon Market 2007. World Bank Institute Availableat http://carbon nance.org/docs/Carbon_Trends_ 2007-_FINAL_-_May_2.pd

CCBA (2005) Climate, community and biodiversityproject design standards, rst edition CCBA,Washington DC May 2005 Available athttp://www.climate-standards.org

Chicago Climate Exchange (CCX) (2007) CCX registryAvailable athttp://www.chicagoclimatex.com/ content.js ?id=501

CCX (2007) CCX registry o sets report AccessedNov 28, 2007 athttp://www.chicagoclimatex.com/

o sets/projectReport.js



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Holt, E A , & Wiser, R H (2007)The Treatment o Renewable Energy Certi cates , Emissions Allowances,and Green Power Programs in State RenewablesPort olio Standards. University o Cali ornia Availableat http://eetd.lbl.gov/ea/ems/reports/62574.pd

INCIS (n d ) International Carbon Investors andServices Available athttp://www.carboninvestors.org /

ISO (2008) International Organisation orStandardization Available athtpp://www.iso.org

Metz, B , Davidson, O R , Bosch, P R , Dave, R , &Meyer, L A [eds] (2007) Contribution o WorkingGroup III to the ourth assessment report o theIntergovernmental Panel on Climate Change ClimateChange 2007: Mitigation. Available athttp://www.ipcc.ch/SPM040507.pd

Olsen, K H (2007) The Clean Development Mechanism’s

contribution to sustainable development: A reviewo the literature Climatic Change, May 24, 2007

Plan Vivo, (n d ) Available atwww.planvivo.org

Point Carbon Research (2007) Voluntary carbonmarkets: Lost in transactions?Carbon Market Analyst, October 24, 2007 Available athttp://www. pointcarbon.com/Home/Box%20elements/ Right%20column/article25160-509.html

Ranganathan, J , Corbier, L , Bhatia, P , Schmitz, S ,Gage, P , & Oren, K [eds] (2004)The GreenhouseGas Protocol: A Corporate Accounting and ReportingStandard (Revised Edition) Washington, DC: WorldResources Institute and World Business Council orSustainable Development

Select Committee on Energy Independence andGlobal Warming (2007) Carbon o sets: Keeping

aith with climate-conscious consumers; Selectcommittee to examine promise, challenges o o set market Accessed Nov 16, 2007, athttp:// www.house.gov/apps/list/press/global_warming/ July18CarbonO sets.shtml

Schneider, L (2007) Is the CDM ul lling itsenvironmental and sustainable developmentobjectives? An evaluation o the CDM and options

or improvement Report prepared or WWF by Öko-Institut E V Berlin, 5 November 2007

Shell Trading (n d ) International transaction logAvailable athttp://www.cdmgoldstandard.org

Sutter, C , & Parreno, J C (2007) Does the currentClean Development Mechanism (CDM) deliver itssustainable development claim? An analysis o o cially registered CDM projectsClimatic Change,

July 7, 2007

Testimony o Derik Broekho , Senior Associate,World Resources Institute (2007) Testimonybe ore the House Select Committee on EnergyIndependence and Global Warming Voluntary Carbon O sets: Get ting What You Pay For. U S Houseo Representatives, July 18, 2007 Available athttp:// pd .wri.org/20070718_broekho _testimony.pd

Trexler, M C (2006)A Consumer’s Guide to Retail CarbonO set Providers. Clean Air Cool Planet, December2006 Available athttp://www.cleanair-coolplanet.org/ConsumersGuidetoCarbonO sets.pd

Trexler, M C , Broekho , D J , & Koslo , L H (2006) Astatistically-driven approach to o set-based GHGadditionality determinations: what can we learn?Sustainable Development Law & Policy 6(VI): 30-40

TÜV SÜD (n d ) Climate change Available atwww.tuev-sued.de/climatechange

TÜV SÜD (n d ) Netin orm, das In ormationsportal derTÜV SÜD Industrie Service GmbH Available athttp:// www.netin orm.de

UNEP (2004)CDM In ormation and Guidebook, Second Edition Denmark: UNEP Risoe Centre on Climate,Energy and Sustainable Development, June 2004

United Nations Framework Convention on ClimateChange (2006)Tool or the Demonstration and Assessment o Additionality (Version 3)

UNDP (n d ) MDG Carbon Facility Available athttp:// www.undp.org/mdgcarbon acility

UNEP (2008) UNEP Risoe CDM/JI Pipeline analysis anddatabase Available athttp://cdmpipeline.org

UNEP (2004)CDM In ormation and Guidebook, Second Edition Denmark: UNEP Risoe Centre on Climate,Energy and Sustainable Development, June 2004

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United Nations Framework Convention on ClimateChange (UNFCC) (n d ) Annex I: Procedure oraccrediting operational entities by the ExecutiveBoard o the Clean Development Mechanism (CDM),version 08 Available athttp://cdm.un ccc.int/DOE/ cdm_accr_01.pd

UNFCC (n d ) CDM registry Available athttp://cdm.un ccc.int/Issuance/IssuanceCERs.html

UNFCC (n d ) The Nairobi Framework: Catalysing theCDM in A rica Available athttp://cdm.un ccc.int/ Nairobi_Framework/index.html

UNFCC (2008) CERs issued Available athttp://cdm.un ccc.int/Issuance/cers_iss.html



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UNFCC (2008) Clean Development Mechanism (CDM)Available athttp://cdm.un ccc.int/Re erence/ Procedures/Pnm_proced_ver12.pd

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World Business Council or Sustainable Development(WBCSD) and World Resources Institute (2005)The Greenhouse Gas Protocol: The GHG Protocol or Project Accounting. Washington, DC: World ResourcesInstitute and World Business Council or SustainableDevelopment



7a P P E n d i x a : r E n E w a b l E E n E r G y c E r t i f i c a t E S ( r E c S )

Appendix A:Re ewable E erg Certi cates RECsAre RECs equivale t to or u gible with emissio o sets?Renewable Energy Certi cates (RECs) are an environmental commodity created to provideeconomic incentive or electricity generation rom renewable energy sources Commonly, aREC is re erred to as representing the environmental bene ts attributed to one megawatt hour

o electricity generated rom a renewable energy resource Yet the de nitions o RECs as anenvironmental commodity are vague at best It might there ore be more correct to de ne a RECas “Representing the exclusive proo that one MWh o electricity was generated rom an eligiblerenewable energy resource ” (Gillenwater, 2007) Typically, RECs are sold separately rom theelectricity that is generated

Regulated and voluntary REC markets exist in the United States, Europe and Australia Both o thesemarkets are growing rapidly Voluntary markets are driven by large buyers such as corporationsand institutional customers In the US, renewable energy sales in voluntary markets have grown atrates ranging rom 40% to 60% annually or the past several years Collectively, the compliance andvoluntary renewable energy markets made up an estimated 1 7% o total U S electric power sales in2006 (Bird, 2007)

In the voluntary carbon o set market, RECs are increasingly being converted to and sold as carbon-o set equivalents RECs and other renewable energy projects accounted or 33% o the voluntarycarbon market and over hal o those originated as RECs (Ecosystem Marketplace) Converted RECs,while o ten considerably cheaper than other o sets are highly controversial To understand why, it isespecially important to examine additionality and ownership issues

Additio alitRECs are designed primarily to track renewable energy production In the United States, orexample, many states have established Renewable Port olio Standards (RPSs) These standardsrequire utilities to produce a certain percentage o their electricity with renewables Utilitycompanies can either choose to build new renewable acilities or buy RECs rom other utilities whohave more than met their requirement Under an RPS, RECs unction the same way allowances

unction in an emissions Cap-and-trade system The lower the emissions cap, the more emissionsreductions will be needed; the higher the RPS requirement is, the more renewable energy will haveto be produced In other words, In a quota system, additionality is not necessary or environmentalintegrity Because o that RECs that are used in a quota system do not have to be tested oradditionality In the voluntary markets, RECs do not unction under a quota and there ore have tobe additional in order to ul ll their purpose o compensating or other emissions (see section onAdditionality XXX)

Some certi ed RECs are tested or additionality Yet these additionality tests are usually quiteminimal: Theregulatory test typically states that the same renewable generation must not be

counted toward RPS compliance Thetechnology test con rms that electricity is generated rom aneligible renewable energy technology (e g wind, solar, or geothermal) Thestart date test sets theearliest acceptable start date o a project (e g 1996) Projects that were built be ore the set start dateare not eligible to produce RECs To de ne RECs that have passed these three tests as additional,implies that all renewable energy generation capacity outside an RPS and built a ter 1996 were builtbecause o the revenue they are generating rom REC sales into the voluntary market

Much o this section was in ormed by Gillenwater, 2007 His two papers o er an in-depth analysis o how RECs unctionin emissions markets

Many US states have not ully de ned a REC or speci ed which environmental attributes must remain with renewableenergy transactions or those transactions to count towards RPS compliance For more in ormation see Holt, 2007

“As o the end o 2006, twenty-one [US] states and the District o Columbia had mandated RPSs in the United StatesHowever, only eighteen o these states allowed the use o tradable RECs” (Gillenwater, 2007, p 4)



a P P E n d i x a : r E n E w a b l E E n E r G y c E r t i f i c a t E S ( r E c S )

I RECs are converted to carbon o sets without any strict additionality testing, RECs will tend tocome rom cheaper business-as-usual (BAU) projects (which by de nition are economic withoutadditional REC incentives) These BAU projects will thus tend to dominate the market Trulyadditional projects will not be able to compete because they ace additional costs or barriersIn conclusion, the sale o non-additional RECs in voluntary market can potentially hamper trulyadditional projects and lead to increases in emissions

However, these tests may not provide a complete picture o the whether a renewable project wouldhave otherwise occurred, and in particular, the role that o set revenue might play in making arenewable energy project happen To do this, the REC and RPS markets alone do not tell the ullstory Many national and sub-national programs o er nancial incentives or renewable energyprojects (e g production tax credits, state/local tax incentives, and/or guaranteed eed-in or netmetering tari s) that may play a even more important role in unding renewable projects than REC(or o set) revenue In other words, i the presumption is that a retired REC should count as an o set,the threshold question is whether REC revenue was su cient to make a project “happen” The very

act that RECs trade or as little as 0 1c/kWh in some parts o the US (equivalent to perhaps USD 1-2/tCO2), and that production tax credits are worth about 1 8c/kWh in the US, casts some doubt Also,renewable electricity plants operate with very low variable operating costs because unlike ossil uel

plans, they do not incur uel costs There ore, the additionality o RECs must be determined duringthe project design phase, not the operation phase Projects shown to have been started with theexpectation and need or REC revenues are likely to be additional

Ow ershipO sets in general and RECs in particular ace challenges about who has the right to claim ownershipo a particular emission reduction Establishing ownership o o set reductions rom renewableenergy projects is especially di cult For example, i a wind arm is built, the emissions reductionscould potentially be claimed by: the utility, the state the wind arm is located in, or the end-user o the electricity Few policies are in place to prevent two parties rom selling the same reduction or toprevent a single party rom selling a reduction to multiple buyers (see section on double counting

XXX) This lack o clear ownership is exacerbated with RECs, the attributes o which are o ten de nedin general and ambiguous terms, which makes assigning ownership more di cult The lack o aconsistent REC de nition in the voluntary and the compliance REC markets prevents RECs rom

unctioning as a homogeneous environmental commodity (Gillenwater, 2007)

RECs as Carbo O setsBecause o the issues discussed above, the retirement o RECs does not automatically provide a solidbasis or a GHG o sets To do so, the ollowing conditions should be met:

• The RECs originate rom an RPS compliance market, with adequately ambitious RPS targetsand the likelihood o strict en orcement (i e they create true scarcity)

• The attributes o RECs are clearly and unambiguously de ned,

• Ownership issues have been resolved (e g through a registry)

I these conditions are met, then voluntarily buying and retiring RECs rom a RPS compliance marketcould be an e ective tactic to ensure genuine emissions reductions Buying such RECs reduces theirsupply, leading to the implementation o more renewable energy projects to meet RPS targets

The ollowing is an excerpt rom a BusinessWeek article:The trouble stems rom the basic economics o RECs. Credits purchased at $2 a megawatt hour, the price Aspen Skiing and many other corporations pay, logically can’t have much e ect. Wind developers receive about $51 per megawatt hour or theelectricity they sell to utilities. They get another $20 in ederal tax breaks, and the equivalent o up to $20 more in accelerated depreciation o their capital equipment. Even many wind-power developers that stand to pro t rom RECs concede that

producers making $91 a megawatt hour aren’t going to expand production or another $2. “At this price, they’re not very meaning ul or the developer,” says John Calaway, chie development ofcer or U.S. wind power at Babcock & Brown, aninvestment bank that unds new wind projects. “It doesn’t support building something that wouldn’t otherwise be built.” ( BenElgin, Little Green Lies, October 29, 2007, BusinessWeek)



a P P E n d i x a : r E n E w a b l E E n E r G y c E r t i f i c a t E S ( r E c S )

Yet a more undamental issue remains: I a sector that currently generates voluntary RECs andVERs becomes part o a regulated market with its own emissions cap, voluntary o sets based onRECs may no longer be valid For example, a region’s electric sector is capped, with allowancesdistributed to generators or retail electricity providers I renewable energy projects in this regionare reducing emissions rom these capped sources, allowances are reed up I these projects (e gvia their RECs) claim o sets as well, this would lead to double counting or the same emissionreductions It is possible to avoid these double counting issues by designing a cap-and-trade systemthat enables o sets within capped sectors (by setting aside a xed amount o allowances or up tothat amount o o sets), but that has yet to occur in the GHG cap-and-trade systems implemented todate (EU ETS and RGGI)

The voluntary market could also potentially create barriers to uture regulation o sources I a sector that currentlygenerates voluntary RECs and VERs becomes part o a regulated market, that sector can no longer sell those voluntaryRECs and VERs Those who bene t rom the current sales might there ore oppose regulation that would remove thatstream o revenue rom them



1 0 0 a P P E n d i x b : c d m a d d i t i o n a l i t y t o o l

Appendix B:CDM Additio alit Tool

Step 1: Ide ti i g realistic a d credible alter atives to the proposed project activit thatare complia t with curre t laws a d regulatio sCompliance with existing laws and regulations is mandatory even i they are unrelated to GHGemissions I the proposed project activity is not compliant with existing laws and regulations,then the project developer must demonstrate that the applicable laws and regulations are not

systematically en orced, and that widespread non-compliance is prevalent I this step is satis ed,then project developers need to satis y either the investment analysis test (step 2) or the barrieranalysis test (step 3), or both, be ore moving to demonstrate that the proposed project is notcommonly practiced (step 4)

Step 2: I vestme t a al sis to determi e that the proposed project activit is ot the mosteco omicall or a ciall attractiveI the proposed project produces no economic bene ts other than CDM revenues, a simple costmethod can be used to demonstrate that the project is not nancially attractive without the CDMrevenues However, i the project does generate revenues other than CDM revenues, then aninvestment comparison analysis or a benchmark analysis using appropriate nancial indicatorsshould be applied The nancial analysis must also include a sensitivity analysis to show that theconclusion the nancial attractiveness o the project is robust to reasonable variations in the criticalassumptions

I the analysis results in at least one o the alternatives being more nancially attractive than theproposed project activity, then it would have satis ed the investment analysis test and the projectdeveloper can move directly to satis y step 4 (common practice analysis) But i the project does notsatis y step 2, then the project developer needs to rst ul l step 3 be ore moving to step 4



10 1a P P E n d i x b : c d m a d d i t i o n a l i t y t o o l

Step : A al sis o barriers that preve t the impleme tatio o the proposed projectactivit or do ot preve t the impleme tatio o o e o the other alter ativesIn undertaking the barrier analysis test, project developers must assess barriers other than the

nancial barriers discussed in step 2 Such barriers may include investment barriers like the non-availability o private capital or technological barriers like the non-availability o skilled labour orhigher technological risks under local conditions To satis y the barrier analysis test the projectdeveloper must demonstrate that the barrier identi ed prevents the implementation o theproposed project and does not prevent the implementation o the one o the identi ed alternativesI this condition is satis ed, then the project developer can move directly to satis y step 4 But i it isnot satis ed, then the project developer must satis y step 2 be ore moving to step 4

Step 4: A al ze whether the proposed project activit is ‘commo l practiced’ b assessi gthe exte t o di usio o the proposed project activitA ter demonstrating step 1 and either step 2, 3 or both, the project developer must demonstratedthat the proposed project activity is not commonly practiced in the speci ed region This is done bydiscussing other similar activities to the proposed project either to prove that no similar activitiescan be observed I they are observed, then the essential distinctions between the proposed projectand the observed similar projects must be explained This step rein orces and complements claims

made under the investment and/or barrier analyses The satis action o this step means that theproject is additional



1 0 2 a P P E n d i x c : r E a l i z E d c d m E m i S S i o n S r E d u c t i o n S

Appendix C:Realized CDM Emissio s Reductio sRealized CDM Emissio s Reductio s B Project CategorCDM project with CERs issued november 2007

Type

Numbero

Projects Issued kCERs Issuance success

Agriculture 29 2019 49%

Biogas 3 274 87%

Biomass Energy 76 7328 90%

Energy Efciency 26 6969 63–103%

HFCs 11 41570 93%

Hydro 44 3175 88%

Land ll gas 12 2301 35%

N2O 4 17504 119%Transport 1 59 51%

Wind 37 2257 74%

Total 259 85850 90%

For current and complete statistics, please see UNEP RISOE:http://cdmpipeline.org/publications/CDMpipeline.xls



1 0a P P E n d i x d : G l o S S a r y

Appendix D:GlossarCerti catio : Certi cation is the written assurance by athird party that, during a speci ed time period, a projectactivity achieved the reductions in anthropogenicemissions by sources o greenhouse gases (GHG) asveri ed

Certi ed Emissio s Reductio s CERs : Tradableunits issued by the UN through the Clean DevelopmentMechanism or emission reduction projects indeveloping countries Each CER represents one metrictonne o carbon emissions reduction CERs can be usedby Annex 1 countries to meet their emissions goalsunder the Kyoto Protocol

Clea Developme t Mecha ism CDM : A provisiono the Kyoto Protocol that allows developed countries(Annex 1) to o set their emissions by undingemissions-reduction projects in developing countries

(non-Annex 1)

Complia ce Market: The market or carbon credits(speci cally CERs, EUAs, AAUs, and ERUs) used to reachemissions targets under the Kyoto Protocol or the EUETS Also called the Regulated Market

Co ere ce o Parties COP : The meeting o parties tothe United Nations Framework Convention on ClimateChange

Crediti g Period: The period a mitigation project cangenerate o sets

Desig ated Operatio al E tit DOE : Anindependent entity, accredited by the CDM ExecutiveBoard, which validates CDM project activities, andveri es and certi es emission reductions generated bysuch projects

Double-Cou ti g: Double counting occurs when acarbon emissions reduction is counted toward multipleo setting goals or targets (voluntary or regulated)An example would be i an energy e ciency projectsold voluntarily credits to business owners, and thesame project was counted toward meeting a national

emissions reduction targetEmissio Reductio s ERs : The measurable reductiono release o greenhouse gases into the atmosphere

rom a speci ed activity or over a speci ed area, and aspeci ed period o time

Emissio Reductio U its ERUs : A tradable unit,equivalent to one metric tonne o CO2 emissions,generated by a Joint Implementation project and usedto quanti y emissions reductions or the purpose o buying and selling credits between Annex 1 countriesunder the Kyoto Protocol

Additio alit : The principle that only those projectsthat would not have happened anyway should becounted or carbon credits

A orestatio : The process o establishing and growingorests on bare or cultivated land, which has not beenorested in recent history

A ex 1 Cou tries: The 36 industrialized countries andeconomies in transition listed in Annex 1 o the UNFCCCTheir responsibilities under the Convention are various,and include a non-binding commitment to reducingtheir GHG emissions to 1990 levels by the year 2000

A ex B Cou tries: The 39 emissions-cappedindustrialised countries and economies in transitionlisted in Annex B o the Kyoto Protocol Legally-bindingemission reduction obligations or Annex B countries

range rom an 8% decrease to a 10% increase on 1990levels by the rst commitment period o the Protocol,2008–2012

Assig ed Amou t U it AAU : A tradable unit,equivalent to one metric tonne o CO2 emissions, basedon an Annex 1 country’s assigned carbon emissions goalunder the Kyoto Protocol AAUs are used to quanti yemissions reductions or the purpose o buying andselling credits between Annex 1 countries

Baseli e sce ario: A scenario that reasonablyrepresents the anthropogenic emissions by sources

o greenhouse gases (GHG) that would occur in theabsence o the proposed project activity

Baseli e-a d-credit s stem: More credits aregenerated with each new project implemented Projectsthat are implemented outside o a cap-and-tradesystem

Ca cellatio see Retireme t

Cap-a d-Trade: A Cap and Trade system involvestrading o emission allowances, where the totalallowance is strictly limited or ‘capped’ Trading occurswhen an entity has excess allowances, either throughactions taken or improvements made, and sells themto an entity requiring allowances because o growthin emissions or an inability to make cost-e ectivereductions

Carbo Dioxide CO 2 :This greenhouse gas is thelargest contributor to man-made climate changeEmitted rom ossil uel burning and de orestation

Carbo Dioxide Equivale t CO 2e :A measure o theglobal warming potential o a particular greenhouse gascompared to that o carbon dioxide One unit o a gas

with a CO2 e rating o 21, or example, would have thewarming e ect o 21 units o carbon dioxide emissions(over a time rame o 100 years)



a P P E n d i x d : G l o S S a r y1 0 4

Emissio s Tradi g: A provision o the Kyoto Protocolthat allows Annex 1 countries to trade emissionsreduction credits in order to comply with their Kyoto-assigned targets This system allows countries to payand take credit or emissions reduction projects indeveloping countries where the cost o these projectsmay be lower, thus ensuring that overall emissions are

lessened in the most cost-e ective mannerE viro me tal I tegrit : Is used to express the actthat o sets need to be real, not double counted andadditional in order to deliver the desired GHG bene tsThe term should not be con used with “secondaryenvironmental bene ts” which is used or the addedbene ts an o set projects can have (e g air pollutionreduction and protection o biodiversity )

Europea U io Allowa ce EUA : Tradable emissioncredits rom the European Union Emissions TradingScheme Each allowance carries the right to emit one

tonne o carbon dioxideEuropea U io Emissio s Tradi g Scheme EUETS :The EU ETS is a greenhouse gas emissions tradingscheme which aims to limit emissions by imposingprogressively lower limits on power plants and othersources o greenhouse gases The scheme consists o two phases: Phase I (2005-07) and Phase II (2008-12)

Ex-a te: In terms o carbon o sets, ex-ante re ers toreductions that are planned or orecasted but havenot yet been achieved The exact quantities o thereductions are there ore uncertain

Ex-post: As opposed to ex-ante o sets, ex-postreductions have already occurred and their quantitiesare certain

Forward Crediti g: Sale o ex-ante credits At contractclosure the buyer pays or and receives a certain numbero o sets or emissions reductions or sequestration thatwill occur in the uture

Forward Deliver : At contract closure the buyer paysthe purchase price or a certain number o o sets thathave yet to be produced The o sets will be delivered to

the buyer once they have been realized and veri edGree house Gases GHGs : Gases that cause climatechange The GHGs covered under the Kyoto Protocolare: CO2 , CH4 , N2 O, HFCs, PFCs, and SF6

Host Cou tr : The country where an emissionreduction project is physically located

I ter al rate o retur IRR : The annual return thatwould make the present value o uture cash fows roman investment (including its residual market value)equal the current market price o the investment Inother words, the discount rate at which an investmenthas zero net present value

Issua ce: Issuing a speci ed quantity o CERs or aproject activity into the pending account o the CDM EBinto the CDM registry

Joi t Impleme tatio JI : A provision o the KyotoProtocol that allows those in Annex 1 (developed)countries to undertake projects in other Annex 1(developed or transitional) countries (as opposed tothose undertaken in non-Annex 1 countries through theCDM)

K oto Mecha isms: The three fexibility mechanismsthat may be used by Annex I Parties to the KyotoProtocol to ul l their commitments through emissionstrading (Art 17) Those are the Joint Implementation (JI,Art 6), Clean Development Mechanism (CDM, Art 12)and trading o Assigned Amount Units (AAUs)

K oto Protocol: An international treaty that requiresparticipating countries to reduce their emissions by5 percent below 1990 levels by 2012 The Protocol,developed in 1997, is administered by the Secretariat o the UN Framework Convention on Climate Change

Leakage: Leakage is de ned as the net change o anthropogenic emissions by sources o greenhousegases (GHG) which occurs outside the project boundary,and which is measurable and attributable to the projectactivity

LULUCF:Land use, land use change and orestry Theterm given to tree-planting projects, re orestation anda orestation, designed to remove carbon rom the

atmosphereMille ium Developme t Goals MDGs : The MDGscommit the international community to an expandedvision o development, one that vigorously promoteshuman development as the key to sustaining socialand economic progress in all countries, and recognisesthe importance o creating a global partnership ordevelopment The goals have been commonly acceptedas a ramework or measuring development progress

no -A ex 1 Cou tries: A group o mostlydeveloping countries which have not been assigned

emissions targets under the Kyoto Protocol and whichare recognised by the UNFCCC as being especiallyvulnerable to the e ects o climate change

O set Compa : A company whose primary purposeis to create or sell o sets, either directly to consumers orthrough another organisation that wish to o er o setsto their clients

O set Provider: O set providers include both o setcompanies and other businesses that utilize the serviceso o set companies to provide o sets to their clients



1 0a P P E n d i x d : G l o S S a r y

Pre-registered Emissio Reductio s pre-CERs : Aunit o greenhouse gas emission reductions that hasbeen veri ed by an independent auditor but that hasnot yet undergone the procedures and may not yethave met the requirements or registration, veri cation,certi cation and issuance o CERs (in the case o the CDM) or ERUs (in the case o JI) under the Kyoto

Protocol Buyers o VERs assume all carbon-speci cpolicy and regulatory risks (i e the risk that the VERsare not ultimately registered as CERs or ERUs) Buyersthere ore tend to pay a discounted price or VERs, whichtakes the inherent regulatory risks into account

Primar market: The exchange o emission reductions,o sets, or allowances between buyer and seller wherethe seller is the originator o the supply and where theproduct has not been traded more than once

Project-based s stem see Baseli e-a d-credits stem

Project bou dar : The project boundary shallencompass all anthropogenic emissions by sourceso greenhouse gases (GHG) under the control o theproject participants that are signi cant and reasonablyattributable to the project activity

Project Desig Docume t PDD : A project speci cdocument required under the CDM rules which willenable the Operational Entity to determine whether theproject (i) has been approved by the parties involved ina project, (ii) would result in reductions o greenhousegas emissions that are additional, (iii) has an appropriatebaseline and monitoring plan

Prompt Deliver : At contract closure the buyer paysthe purchase price or a certain number o o sets whichhave already been realized and are delivered to thebuyer promptly

Re ewable E erg Certi cates RECs : A RenewableEnergy Certi cate represents a unit o electricitygenerated rom renewable energy with low netgreenhouse gas emissions One REC represents 1megawatt-hour

Re orestatio : This process increases the capacityo the land to sequester carbon by replanting orestbiomass in areas where orests have been previouslyharvested

Registratio : The ormal acceptance by the CDMExecutive Board o a validated project as a CDM projectactivity

Retireme t: Retirement is a way o reducing overallemissions by purchasing carbon o sets and retiringthem so that they may not be used to o set others’emissions Retired credits can no longer be traded

Seco dar Market: The exchange o emissionreductions, o sets, or allowances between buyer andseller where the seller is not the originator o the supplyand represents a secondary trade in the particularproduct

Stakeholders: Stakeholders mean the public, includingindividuals, groups or communities a ected, or likely tobe a ected, by the proposed project activity or actionsleading to the implementation o such an activity

Temporar certi ed emissio reductio s tCERs : Atemporary certi ed emission reduction or tCER is a unitissued pursuant to Article 12 o the Kyoto Protocol or anA orestation/Re orestation CDM project activity underthe CDM, which expires at the end o the commitmentperiod ollowing the one during which it was issued It isequal to one metric tonne o carbon dioxide equivalent

U ited natio s Framework Co ve tio o ClimateCha ge UnFCCC : An international treaty, developedat the 1992 UN Con erence on Environment andDevelopment, which aims to combat climate changeby reducing global greenhouse gas emissions Theoriginal treaty was considered legally non-binding, butmade provisions or uture protocols, such as the KyotoProtocol, to set mandatory emissions limits

Validatio : The assessment o a project’s ProjectDesign Document, which describes its design, includingits baseline and monitoring plan, by an independentthird party, be ore the implementation o the projectagainst the requirements o a speci c standard

Veri catio : Provides an independent third partyassessment o the expected or actual emissionreductions o a particular abatement project

Veri ed or Volu tar Emissio s Reductio s VERs : Reductions that, unlike CERs, are sold on the voluntarymarket VERs are linked neither to the Kyoto Protocolnor to the EU ETS VERs are sometimes re erred to asVoluntary Emissions Reductions

Volu tar Market: The non-regulated marketor carbon credits (especially VERs) that operates

independently rom Kyoto and the EU ETS Also calledthe Non-Regulated Market

Volu tar O setti g: O setting purchases made byindividuals, businesses, and institutions that are not legally mandated

Making Sense of the Voluntary Carbon Market a Comparison of Carbon Offset Standards

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