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The offset mechanisms in the Kyoto Protocol

The offset mechanisms in the Kyoto Protocol

The main difference between the two offset mechanisms – the CDM and JI – is that the CDM generates offset credits in a country without an emissions target under the Kyoto Protocol, while with JI the offset-generating projects are located in a country that has a Kyoto target.

The conceptual problem of verifying the generated offset credits applies in both mechanisms, but many proponents of JI projects argue that additionality is less of an issue for them, because they take place in a capped country. Thus any credit it generates and sells is deducted from the capped country’s pool of emission permits that it was issued under the Kyoto Protocol. This is important, as without such a conversion, the reduction would be counted twice: once by the carbon offset project that sells the offset credit, and once by the country in which the reduction takes place, where the project contributes to reducing the overall emissions in that capped country.

To avoid this risk of double counting, every JI project requires approval from the country in which it is located. Once issued, the JI project’s offset credits are exchanged for an equivalent portion of that country’s allocation of AAUs, with the AAUs being converted into a new unit, Emissions Reduction Units (ERUs), to identify their origin as JI offset credits. With this conversion, the country that gives up some of its emissions permits for JI offset credits accepts an exchange between an emission permit with a clearly verifiable value (the AAU) with an offset credit whose reduction value is not verifiable to the same extent (because it is a credit generated from comparing an actual reduction with an estimate of how high emissions would otherwise have been).

Because JI credits can only be sold if the country in which the project takes place is willing to exchange the offset credits for emission permits, few JI projects currently exist. By February 2010, just 17 projects in three countries were eligible to earn JI ERUs.

What types of projects are financed through offset schemes?

By February 2010, over 2500 carbon offset projects in 62 countries had been registered with the CDM. The CDM identifies over 200 types of projects from which carbon offsets can be generated. They are grouped into broad categories, including renewable energy, energy distribution, methane abatement, energy efficiency, reforestation and fuel switching (see Chart 3).1

Although Chart 3 shows the percentages of projects per sector, a different picture emerges if this is considered per offset credit, as shown in Chart 4.  See charts 3 and 4. The fraction of renewable energy projects always has oscillated around 60 per cent of all CDM projects while the number of HFC, PFC and nitrous oxide projects only account for 2.1 per cent of all projects. HFC, a refrigerant gas, and nitrous oxide, a by-product of synthetic fibre production, have however claimed a large proportion of all credits; 26 per cent of all CERs by 2012. These reductions were achieved by making comparatively minor technical adjustments to existing factory operations. See Case study 4. These projects have been widely criticised mainly because of their spectacular profit margins: it is estimated that the value of credits given to HFC-23 projects at average 2007 carbon prices is € 4.7 billion, while the cost of technology needed to capture and destroy the same amount of HFC-23 is around € 100 million. Many companies invested their profits not in renewable energy but to expand their polluting operations.2

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  • 2. Point Carbon Market News, 10 April 2007: ‘Indian chemical company books € 87 million windfall from carbon trading.’