Offsets in the Global Market

The Kyoto Protocol allows Annex B countries to offset their emissions by undertaking projects, including forestry projects, and to record the offsets in their national carbon accounts (UNFCCC, 2008b). Net removals of greenhouse gases from eligible land-use change and forestry (LULUCF) activities generate so-called removal units (RMUs), equal to 1 tonne of CO2e, that Parties can count against their emission targets. They are deemed valid only when the removals have been verified by expert review teams under the Protocol's reporting and review procedures, and they cannot be banked (that is credits cannot be carried over to future commitment periods).

The Marrakesh Accords (UNFCCC, 2008b) provide definitions for four additional LULUCF activities, these being:

Country A tCO2e

1990 Country B tCO2e

Purchase AAUs

1990

Sell AAUs

2008

2012

1990 emissions Reduction commitment Actual emissions

Note: Country A and Country B have the same emissions in 1990 and an equal commitment to reduce by 5% below their 1990 base year emissions. Country A purchases AAUs to cover emissions 10% above commitment. B achieves its target of 95% of 1990 emissions and, while doing so, also sells AAUs to satisfy B. The combined AAUs held by the two countries in the commitment period, 2008-2012, amounts to 5% below the 1990 level.

Figure 1.1 A two-country model of trade in Assigned Amount Units (AAUs), each equal to 1 tonne of CO2e

• forest management;

• cropland management;

• grazing land management; and

• revegetation.

Parties to the Protocol may choose to include any of these activities to help meet their emission targets; the choice is then fixed for the first commitment period. While the Protocol allows these activities domestically, it has a special scheme, the Clean Development Mechanism (CDM), to facilitate the offsetting of GHGs by mounting projects in non-Annex B (developing) countries. The tradable units generated by these offsets are certified emission reduction units (CERs) (UNFCCC, 2008a).

The CDM allows two types of forestry projects, afforestation (on land that has not been forested for at least 50 years) and reforestation (on land that was forested but did not contain forest on 31 December 1989). The Conference of the Parties (COP) 7, at Marrakesh in 2001, decided that greenhouse gas removals from such projects may only be used to help meet emission targets up to 1 percent of an Annex B party's base year emissions for each year of the commitment period (UNFCCC, 2008b). Projects under the CDM are expected to achieve sustainable development objectives as well as creating carbon sinks. The mechanism for offset projects in other Annex B countries is known as Joint Implementation (JI). JI projects, including afforestation and reforestation, generate emission reduction units (ERUs). The forestry components of the Protocol are summarized in Box 1.2.

Outside the CDM and national cap and mandatory cap and trade schemes, forestry is a global mechanism by which companies, institutions and individuals can participate directly in climate change mitigation on an unofficial basis. But these 'voluntary' offsets generally do not comply with the strict methodologies for additionality and verification demanded under the Kyoto Protocol, so that emission abatement by voluntary offset projects does not enter the national carbon accounts of countries.

The Chicago Climate Exchange (CCX) with subsidiaries in Europe, Montreal, the US North East and New York is a unique institution in that participation is voluntary but caps are mandatory. The CCX facilitates trade between members who have voluntarily signed up to its mandatory reductions policy of reducing CO2e emissions by 6 percent below the 1998-2001 baseline by 2010. Trades are mainly between members either below or above their targets, but forestry offsets are an option.

Chapter 2 deals in detail with the mechanisms of the CDM of the Kyoto Protocol and how national schemes might link with it.

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