Wednesday, June 27, 2007

The Kyoto Protocol was established under the UN FCCC -- the "Framework Convention on Climate Change." The Kyoto Protocol states that starting in 2008 the developed countries and the Economies in Transition will on a country by country basis reduce their CO2 equivalent emissions to below 1990 levels.

The protocol covers six greenhouse gases using CO2 equivalents for measurement. The countries have until 2012 to reach that reduction. Each country must create its own plan and its own country inventory of CO2 emissions.

The Kyoto Protocol suggests three ways to meet its targets:
1. Reduction in the country itself.
2. Reduction in other developed countries or countries in transition. In this case a county with a shortage could buy the credits that were assigned to the other developed country which would be excess to the selling country.
3. Sponsoring the creation of new credits by buying CDM credits.

CDM-- The Clean Development Mechanism is the term for the project specific creation of new CO2 credits in Non-Annex I countries -- i.e., the developing countries. The project should involve some transfer of technology, but it must:
1. Need the money from the sale of the credits in order to make the project achieve economic feasibility -- this requirement is known as "additionality."
2. Be a reduction in CO2 emissions (or a creation of emissions free energy) that is not required by any other law or treaty.

For instance HCFC (sometimes call FREON or cholorodifluoromethane) under the Montral Protocol that went into effect in 1989 will be eliminated by 2040. Therefore it is not eligible for CDM, but the by-product of HCFC's creation, HFC-23 (trifluormethane) is eligible because HFC-23 was not covered by the earlier treaty.

Examples of what goes into the calculation of a country's total CO2 emissions under the Kyoto Protocol include CO2 produced by:
* Cars and Trucks -- from the gas and diesel they burn.
* Cows and other farm animals -- from their enteric fermentation or the release of methane gas by burps and farts.
* Power Plants that produce electricity from coal, gas or oil, etc.
* Fire Extinguishers and Air Conditioners -- which use hydrofluorocarbon gases (but not including the gases covered under the Montreal Treaty, i.e., HCFC),
* Fertilization of soil for farming using ?????
* Cement manufacture which releases CO2 in the mining of raw materials used to make cement clinker. By replacing some of the clinker materials with fly ash from coal plants (or other unused waste products) CO2 released in mining could be reduced..

The European Trading Scheme (ETS) is the way the EU decided to take the Kyoto Protocol Seriously and get ready for it. The ETS is basically the EU's national plan to meet the Kyoto targets. The EU works as a unit and assigns allocations itself to each of its member countries.

The ETS started operation before the Kyoto Protocol will take effect on January 1, 2008. The ETS also added an earlier two year phase from 2005 through 2007. It of course has an additional five year phase that coincides with the Kyoto Protocol.

Part of what the ETS did was to foster an electronic trading market like a stock exchange to encourage the buying and selling of EU credits called EUA's (European Allowance Units).

An EUA, starting in 2008, will be quite similar to a CER (certified emission reduction) under the Kyoto Protocol's CDM or a ERU (emission reduction unit) representing a reduction that could be sold of existing emissions also under Kyoto.

One difference between the Kyoto Protocol emission reduction units and the European Union EU Allowance is that in the EU neither nuclear power nor reforestation are permitted for sale of new CDM credits. Under Kyoto reforestation can be up to 1% per year per country of its credits.

Starting in 2008 the ETS also allows the purchase of unused credits from other countries (in addition to the CDM CER's). This brings up the issue of "hot air" from countries like Russia that are already below their 1990 targets. It appears a compromise will allow the hot air to be sold as long as the money is used by the country for additional green projects. This would be the sale of the extra credits by the country itself, rather than by a specific company they may otherwise have been allocated to.

CDM credits are verified by a system set up by the Secretariat of the UN Framework Convention on Climate Change. The UN has essentially set up a regulator called the CDM--Accreditation Panel with its own assessment team that makes visits to what are essentially project auditors. There auditors must be approved by the UNFCCC, first as an applicant entity and then as a designated operational entity. They make sure that the project design document is followed for the CER's to be issued.

A voluntary market has arisen for companies and individuals wanting to offset their use of carbon by supporting green projects. Some of these have been reforestation. Theses credits are verified or issued by a number of different competing organizations. They are sold at a large discount to Kyoto approved credits. The total value of this market is relatively small in $100 millions vs. US$ billions for Kyoto credits.

Development bankers could:
1. Support the establishment of DOE's (designated operational entities) approved by the UN to audit CDM projects.
2. Become more involved in the voluntary market as a brand name like for instance Fiji Water, which is bottled in Fiji and sold around the world.
3. Support educational programs to teach companies or entrepreneurs how to do carbon credits.
4. Work on ways to package several smaller projects together to meet CDM requirements, while reducing certification costs.


Frequently used Acronyms:

Terms for Kyoto Protocol

* COP The Conference of Parties to the Kyoto Protocol is the rule making authority (MOP -- meeting of parties)
* EB The executive board of the COP
* UNFCCC United Nations Framework Convention on Climate Change -- the original treaty agreement that later was modified as the Kyoto Protocol
* CDM Clean Development Mechanism
* CER Certified Emission Reductions
* LULUCF Land Use, Land Use Change and Forestry -- refers to reforestation of areas depleted before 1989.
* RMU Removal units for LULUCF (use limited in percentage by Kyoto and not permitted under the ETS)
* TCER Temporary 5 year CER credits used in conjunction with LULUCF
* ICER 20 year CER credits used in conjunction with LULUCF
* ERU Emission Reduction Unit -- a ton of co2 under the JI -- additional reduction of existing emissions to sell credits already issued, but not creating a new credit
* JI Joint Implementation -- credits from the projects reducing emissions in Annex 1 countries (i.e., unlike CER, these are not newly created credits)
* AAU Assigned Amount Units -- the carbon emissions allowed to a country
* GIS Green Investment Scheme -- countries that are below their 1990 targets (have 'hot air' because of economic decline) can sell their AAU's to other countries. The money should be used to further reduce emissions.
* IET International Trading of Emissions used when discussing GIS
* DNA Designated National Authority -- for each member country
* AE An applicant entity: essentially on the way to becoming a DOE.
* DOE A designated operational entity, authorized by the UNFCCC to validate, verify and certify CDM projects; essentially an auditor.
* CDM-AP CDM Accreditation Panel -- approves DOE's. Essentially a regulator.
* CDM-AT CDM Assessment Team -- makes visits to check AE's and DOE's and reports to the CDM-AP.
* PPD Project Design Document submitted in applying for CER's

Terms for the European Trading Scheme

* ETS The EU Emissions Trading Scheme
* EUA EU Allowance -- allocated under the NAP and must be used or sold within the period (ending Dec 31, 2007 and then 5 years later)
* NAP National Allocation Plan in the EU

Terms for the Voluntary Market

* VER Verified Emission Reductions for the voluntary market (estimated to reach 100 million tons in 2007)

General Terms

* Sinks Removals of CO2 from the atmosphere, such as by the growth of a tree.
* EIT Economies in Transition

Regional Terms

* RGGI US North Eastern states' Regional Greenhouse Gas Initiative -- would start in 2009 and lead to a stabilization of emissions at current levels (an average of 2002-2004 levels) by 2015. This would be followed by a 10% reduction in emissions between 2015 and 2020. The proposal would also allow participants to purchase offsets to meet 50% of their emission reductions.


* ITL International Transaction Log -- UN coordination of national registries, the EU log (CITL) and the CDM registry for Kyoto set up by the United Nations Framework Convention on Climate Change (UNFCCC) Secretariat

Demand Side Management

* EPP Efficiency power plant: the idea of creating the energy equivalent of a new power plant (300 to 500MW) by investing in energy efficiency rather than production. This method is not necessarily supported for carbon credits under the CDM.

Green House Gases

The Kyoto Protocol targets cover national CO2 equivalent emissions of the six main greenhouse gases:
* CO2 Carbon dioxide - HFCs Hydrofluorocarbons
* CH4 Methane - PFCs Perfluorocarbons
* N2O Nitrous oxide - SF6 Sulphur hexafluoride

Practical Application of Country Limits in the European Union

The EU ETS is not an economy-wide cap-and-trade system. Rather, it regulates downstream about 12,000 emissions sources, accounting for half of all EU emissions. Covered sources include iron and steel; cement, glass, and ceramics; pulp and paper; electric-power generation, and refineries.
* Transport is not currently included in the system, although the EU will include air transport in 2011.

Prior Treaty -- Montreal Protocol on Ozone Depleting Substances

The Montreal Protocol on ozone layer depleting substances (in force from 1989) reduced Chlorofluorocarbons (CFCs). They were substituted with others powerful greenhouse gases (but ones not as bad for ozone), for example by hydrochlorofluorocarbons, or HCFCs, and hydrofluorocarbons, or HFCs. The Montreal Protocol currently calls for a complete phase-out of HCFCs by 2030-40, but does not place any restriction on HFCs,


A large part of the CDM certificates have been for reduction of HFC-23 (trifluromethane) emissions. HFC-23 is a waste by-product of the production of HCFC-22 (Freon-22 or Chlorodifluoromethane). HCFC-22 is a powerful greenhouse gas used in foam sprays, fire extinguishers, refrigerators and the production of Telflon (PTFE Polytetrafluoroethylene). For each ton of HCFC-22 produced, three to four percent of HFC-23 is also created in the process; the HFC-23 has been released into the atmosphere, even though it could easily be incinerated instead. Each ton of HFC-23 is equivalent to over 11,000 tons of CO2 in greenhouse gas equivalent and is counted that way under the Kyoto Protocol. China has established the Clean Development Fund which will receive 65% of the revenue produced by all HFC-23 carbon credit projects in China from 2005 on (also shares from other CDM projects). The funds will be used for other environmental projects.

Exchanges: Trading of European allowances (EUA's)

European Climate Exchange (ECX) Trading of futures and options on EUA's through the Intercontinental Exchange electronic market (ICE)

Chicago Climate Exchange (CCX) In the US -- trading in Verified Emission Reductions (VER's) for US states and companies which agree to reduce emissions.


A 500 MW coal plant creates about one kilogram of CO2 per kilowatt/hour or about 4 million tons CO2 per year.

A hectare of corn in Ontario, Canada, for example, removes about 22 tons of carbon dioxide per annual season. (To counteract the 500 MW annual coal plant release of CO2 would take about 180,000 hectares of corn.

Parties to the UN Convention on Climate Change

The Convention divides countries into three main groups according to differing commitments:

* Annex I Parties. These include the industrialized countries that were members of the OECD (Organization for Economic Co-operation and Development) in 1992, plus countries with economies in transition (the EIT Parties), including the Russian Federation, the Baltic States, and several Central and Eastern European States.

* Annex II Parties. These consist of the OECD members of Annex I, but not the EIT Parties. They are required to provide financial resources to enable developing countries to undertake emissions reduction activities under the Convention and to help them adapt to adverse effects of climate change. In addition, they have to "take all practicable steps" to promote the development and transfer of environmentally friendly technologies to EIT Parties and developing countries. Funding provided by Annex II Parties is channeled mostly through the Convention’s financial mechanism.

* Non-Annex I Parties. These are mostly developing countries. Certain groups of developing countries are recognized by the Convention as being especially vulnerable to the adverse impacts of climate change, including countries with low-lying coastal areas and those prone to desertification and drought. Others (such as countries that rely heavily on income from fossil fuel production and commerce) feel more vulnerable to the potential economic impacts of climate change response measures. The Convention emphasizes activities that promise to answer the special needs and concerns of these vulnerable countries, such as investment, insurance and technology transfer.