International climate change projects and the carbon offset market
In order to reduce greenhouse gas (GHG) emissions, a number of international initiatives are in place. Countries that agreed to do so, have targets, expressed as levels of allowed GHG emissions. At the end of each year, allowances have to be surrendered according to a country's given target. To help meet these commitments cost effectively, there are several flexible mechanisms.
International Emissions Trading
This allows countries that have unused emissions to sell this excess capacity to countries over their target. Emissions trading can be delegated by countries to mechanisms such as the UK Emissions Trading Scheme (UK ETS) and the European Union Emissions Trading System (EU ETS), which facilitate emissions trading between organisations. Emissions trading allows companies that can reduce their emissions to do so and those that can't to buy additional emissions allowances - referred to as carbon credits - from those companies.
Emissions trading schemes in the United Kingdom apply to energy intensive industries, the power generation sector and aviation. The UK ETS applies in Scotland, while Northern Ireland electricity generators are under the EU ETS.
The UK ETS and EU ETS provide the main demand for Certified Emissions Reductions (CER) and Joint Implementation (JI) credits as companies covered by the ETS can buy certain types of these credits to meet some of their emissions reductions targets.
See in this guide: Comply with Emissions Trading requirements
See our guide: EU Emissions Trading Scheme and UK Emissions Trading Scheme
The Clean Development Mechanism (CDM) and Joint Implementation(JI)
This encourages businesses to undertake projects in developing countries to reduce GHG emissions and work towards sustainable development. For each tonne of CO2 equivalent reduced, projects earn Certified Emissions Reductions (CERs) carbon credits. The Environment Agency is the UK's Designated National Authority (DNA) for the CDM, and issues the Letters of Approval (LOA) for voluntary participation in the scheme.
See, in this guide: How to get involved with Clean Development Mechanism and Joint Implementation projects.
These mechanisms are designed to incentivise the development and implementation of projects that reduce GHG emissions, generating tradeable carbon credits while providing sustainable development, technology transfer and inward investment to the host country. The carbon credits can create a revenue stream and a means to obtain capital finance for the project as carbon finance can improve a project's internal rate of return.
There are several types of project that are eligible for CDM or JI. The projects broadly fall under the following categories:
- energy efficiency
- energy supply through less carbon intensive forms of fuel
- destruction of industrial gases
- industrial processes - eg cement, pulp and paper, steel, oil and gas production.