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The Kyoto Protocol - DOC


									                                 The Kyoto Protocol
The Kyoto Protocol is an international agreement linked to the United Nations
Framework Convention on Climate Change. The major feature of the Kyoto Protocol is
that it sets binding targets for 37 industrialized countries and the European community
for reducing greenhouse gas (GHG) emissions. This amounts to an average of five per
cent against 1990 levels over the five year period 2008-2012.

The major distinction between the Protocol and the Convention is that while the
Convention encouraged industrialized countries to stabilize GHG emissions, the Protocol
commits them to do so. Recognizing that developed countries are principally
responsible for the current high levels of GHG emissions in the atmosphere as a result of
more than 150 years of industrial activity, the Protocol places a heavier burden on
developed nations under the principle of “common but differentiated responsibilities.”
The Kyoto Protocol was adopted in Kyoto, Japan, on 11 December 1997 and entered
into force on 16 February 2005. 184 Parties of the Convention have ratified its Protcol
to date. The details rules for the implementation of the Protocol were adopted at COP 7
in Marrakesh in 2001, and are called the “Marrekesh Accords.”

The Kyoto Mechanisms
Under the Treaty, countries must meet their targets primarily through national
measures. However, the Kyoto Protocol offers them an additional means of meeting
their targets by way of three market-based mechanisms.

The Kyoto mechanisms are
     Emissions trading – known as ‘the carbon market’
     Clean development mechanism (CDM)
     Joint implementation (JI)

The mechanisms help stimulate green investment and help Parties meet their emission
targets in a cost-effective way.

Emission Trading
Emissions trading, as set out in Article 17 of the Kyoto Protocol, allows countries that
have emission units to spare – emissions permitted them but not “used” – to sell this
excess capacity to countries that are over their targets.

Joint Implementation
The mechanism known as “joint implementation”, defined in Articles 6 of the Kyoto
Protocol, allows a country with an emission reduction or limitation commitment under
the Kyoto Protocol (Anned B Party) to earn emission reduction units (ERUs) from an
emission-reduction or emission removal project in another Annex B Party, each
equivalent to one tonne of CO2, which can be counted towards meeting its Kyoto target.
Joint implementation offers Parties a flexible and cost-efficient means of fulfilling a part
of their Kyoto commitments, while the host Paraty benefits from foreign investment
and technology transfer.

Clean Development Mechanism

The Clean Development Mechanism (CDM), defined in Article 12 of the Kyoto Protocol,
allows a country with an emission –reduction or emission-limitation commitment under
the Kyoto Protocol (Annex B Party) to implement an emission reduction project in
developing countries. Such projects can earn saleable Certified Emission Reduction
(CER) credits, each equivalent to one tonne of CO2, which can be counted towards
meeting Kyoto targets. The mechanism is seen by many as a trailblazer. It is the first
global, environmental investment and credit scheme of its kind, providing standardized
emissions offset instrument, CERs. The mechanism stimulates sustainable development
and emission reductions, while giving industrialized countries some flexibility in how
they meet their emission reduction or limitation targets.
(Definition by United Nations Framework Convention On Climate Change – UNFCCC)

The main benefits from the project-based Kyoto mechanisms include the potential
reduction in cost of meeting the Kyoto Protocol targets for developed countries and
support to the host countries objectives regarding sustainable development. Under this
mechanism, countries which have set themselves an emission reduction target under
the Kyoto Protocol can contribute to the financing of projects in developing countries
which do not have a reduction target. The project should reduce the emission of
greenhouse gases by contributing to the sustainable development of the host country.
The achieved emission reductions can be used by the industrialized country to meet its
reduction target.

Countries listed in Annex I of the UNFCCC can purchase CDM credits.
Non-Annex-I Countries can host CDM projects.

                                     Annex I
Australia                  Hungary                    Portugal
Austria                    Iceland                    Romania
Belgium                    Ireland                    Russian Federation
Bulgaria                   Italy                      Slovakia
Canada                     Japan                      Slovenia
Croatia                    Latvia                     Spain
Czech Republic             Liechtenstein              Sweden
Denmark                    Lithuania                  Switzerland
Estonia                    Luxembourg                 Ukraine
European Community         Monaco                     United Kingdom
Finland                    Netherlands                United States of America
                                                      (Not Ratified)
France                     New Zealand                New Zealand
Germany                    Norway
Greece                     Poland

                            Non – Annex I Countries
Afghanisthan               Albania                    Kuwait
Algeria                    Angola                     Lao People’s Democratic
Antigua and Barbuda        Argentina                  Lesotho
Armenia                    Azerbaijan                 Libyan Arab Jamahiriya
Bahamas                    Bahrain                    Malawi
Bangladesh                 Barbados                   Maldives
Belize                     Benin                      Malta
Bhutan                     Bolivia                    Mauritania
Bosnia and Herzegovina     Botswana                   Mexico
Marshall Islands           South Africa               Micronesia (Federated
                                                                 States of )
Vanuata                    Tuvalu                     Micronesia (Federated
                                                                 States of )
Brazil                     Burkina Faso               Mongolia
Mauritius                  Sudan                      Montenegro
Burundi                    Cambodia                   Morocco
Pakistan                   Swaziland                  Mozambique
Cameroon                   Cape Verde                 Myanmar
Panama                     Tajikistan                 Namibia
Central African Republic   Chad                       Nauru
Paraguay                   Timor-Leste                Nepal
Chile                      China                      Nicaragua

Phillipines                   Tonga                          Niger
Colombia                      Comoros                        Nigeria
Republic of Korea             Tunisia                        Niue
Congo                         Cook Islands                   Oman
Costa Rica                    Cuba                           Palau
Cyprus                        Cote d’Ivoire                  Papua New Guinea
Democratic People’s           Democratic People’s            Peru
Republic of Korea             Republic of Congo
Djibouti                      Dominica                       Qatar
Dominican Republic            Ecuador                        Republic of Moldova
Egypt                         El Salvador                    Saint Kitts and Nevis
Equatorial Guinea             Eritrea                        Saint Vincent and the
Ethiopia                      Fiji                           San Marino
The former Yugoslav           Gabon                          Saudi Arabia
Republic of Macedonia
Gambia                        Georgia                        Serbia
Ghana                         Grenada                        Sierra Leone
Guatemala                     Guinea                         Solomon Islands
Guinea-Bissau                 Guyana                         Sri Lanlka
Haiti                         Honduras                       Suriname
India                         Indonesia                      Syrian Arab Republic
Iran (Islamic Republic of)    Israel                         Thailand
Jamaica                       Jordan                         Togo
Kazakhstan                    Kenya                          Trinidad and Tobago
Kiribati                      Rwanda                         Turkmenistan
Kyrgztan                      Saint Lucia                    Uganda
Lebanon                       Samoa                          United Republic of Tanzania
Liberia                       Sao Tome and Priniciple        Uzbekistan **
Madagascar                    Sengal                         Venezuela (Bolivarian
                                                             Republic of)
Malaysia                      Seychelles                     Yemen
Mali                          Singapore                      Zimbabwe
Viet Nam                      United Arab Emirates
Zambia                        Uruguay

How does CDM work?
The project proposal should establish the following in order to qualify for consideration
as CDM project activity.

      Emission Additionality : The project should lead to real, measurable and long
       term GHG mitigation. The additional GHG reductions are to be calculated with
       reference to a baseline.
      Financial Additionality : The procurement of Certified Emission Reduction (CERs)
       should not be from Official Development Assistance (ODA)

Sustainable Development Indicators

It is the prerogative of the host Party to confirm whether a clean development
mechanism project activity assists it in achieving sustainable development. The CDM
projects should also be oriented towards improving the quality of life of the poor from
the environmental standpoint.

Following aspects should be considered while designing CDM project activity
   1. Social well being: The CDM project activity shoud lead to alleviation of poverty
      by generating additional employment, removal of social disparities and
      contribution to provision of basic amenities to people leading to improvement in
      quality of life of people.

   2. Economic well being: The CDM project activity should bring in additional
      investment consistent with the needs of the people.

   3. Environmental well being: This should include a discussion of impact of the
      project activity on resource sustainability and resource degradation, if any, due
      to proposed activity; bio-diversity friendliness; impact on human health;
      reduction of levels of pollution in general.

   4. Technological well being: The CDM project activity should lead to transfer of
      environmentally safe and sound technologies that are comparable to best
      practices in order to assist in upgradation of the technological base. The transfer
      of technology can be within the country as well from other developing countries


   The project proposal must clearly and transparently describe methodology of
   determination of baseline. It should confirm to following:

       1. Baselines should be precise, transparent, comparable and workable
       2. Should avoid overestimation
       3. The methodology for determination of baseline should be homogeneous and
       4. Potential errors should be indicated
       5. System boundaries of baselines should be established
       6. Interval between updated of baselines should be clearly described
       7. Role of externalities should be brought out (social, economic and
       8. Should include historic emission data-sets wherever available
       9. Lifetime of project cycle should be clearly mentioned.

The project proponent could develop a new methodology for its project activity or could
use one of the approved methodologies by the CDM Executive Board. For small scale
CDM projects, the simplified procedures can be used by the project proponent. The
project proposal should indicate the formulae used for calculating GHG offsets in the
project and baseline scenario. Leakage, if any, within or outside the project boundary,
should be clearly described. Determination of alternative project, which would have
come up in absence of proposed CDM project activity should also be described in the
project proposal.

CDM Projects approval

      The National CDM Authority is a single window clearance for CDM projects in the
       country. The project proponents are required to submit one soft copy of Project
       Concept Note (PCN) and Project Design Document (PDD) through online form
       and 20 hardcopies each of PCM and PDD along with two CDs containing all the
       information in each of them. The project report and CDs shoul;d be forwardead
       through covering letter signed byl the project sponsors. The project report
       submitted should be properly bound. The National CDM Authority examines the
       documents and if there are any preliminary queries the same are asked from the
       project proponents. The project proposals are then put up for consideration by
       the National CDM Authority. The project proponent and his consultants are
       normally given about 10-15 days notice to come to the Authority meeting and
       give a brief power point presentation regarding their CDM Project proposals.
       Members seek clarifications during the presentation and in case the members
       feel that some additional clarifications or information is required from the
       project proponent the same is informed to the presenter. Once the members of

       Authority are satisfied, the Host Country Approval (HCA) is issued by the
       Member -Secretary of the National CDM Authority.

      Validation of the CDM Project is done by Designated Operation Entity. There are
       11 DOE’s worldwide and 5 are operation in India. They review the projects to
       make sure they fulfil CDM criteria, and act as a intermediary between the project
       developer and the Executive Board. After the DOE clears the project it submits a
       request for registration to the UNFCCC Executive Board. The CDM Executive
       Board meets 4-5 times a year, and is charged with giving final approval or
       registration to projects.

      Further the DOE’s are called in second time after the project is registered for the
       monitoring phase. For large scale projects, the DOE for verification cannot be
       the same DOE as for the validation stage. Once the DOE is satisfied that the
       green house gas reductions that were set out have been achieved, those
       emission reductions are certified.

Carbon Credits and Certified Emission Reductions

      Carbon Credits and Certificates issued to countries that reduce their emission of
       GHG (Greenhouse Gases) which causes global warming. They are generated by
       enterprises in the developing world that shift to cleaner technologies and
       thereby save on energy consumption, consequently reducing their greenhouse
       gas emissions.

      Carbon credits are measured in units of certified emission reductions (CERs).
       Each CER is equivalent to one tonne of carbon dioxide reduction. Countries with
       surplus credits can sell the same to countries with quantified emission limitation
       and reduction commitments under the Kyoto Protocol. Developed countries
       that have exceeded the levels can either cut down emissions, or borrow or buy
       carbon credits from developing countries. The certificates are sold to entities in
       rich countries, like power utilities, which have emission reduction targets to
       achieve and find it cheaper to buy ‘offsetting’ certificates rather than do a clean-
       up in their own backyard.
      This trade is carried out under a UN –mandated international convention on
       climate change to help rich countries reduce their emissions.

Trading of Carbon Credits

      Emission trading (ET) is a mechanism that enables countries with legally binding
       emissions targets to buy and sell emissions allowances among themselves.
       Currently, futures contracts in carbon credits are actively traded in European
       exchanges. In fact, many companies actively participate in the future market to
       manage the price risks associated with trading in carbon credits and other
       related risks such as project risk, policy risk, etc. Keeping in view the various
       risks associated with carbon credits, trading in future contracts in carbon
       allowances has now become a reality in Europe with burgeoning volumes.

      Currently, project participants, public utilities, manufacturing entities, brokers,
       banks, and others actively participate in future trading in environment-related
       instruments. The European Climate Exchange (ECX), a subsidiary of Chicago
       Climate Exchange (CCX), remains the leading exchange trading in European
       environmental instruments that are listed on the Intercontinental Exchange
       (ICE), previously known as International Petroleum Exchange (IPE).

      Industry watchers say carbon markets will continue to grow at a fast. It’s not just
       governments who are demanding emissions compliance – consumers want it,
       too. The commitment a company makes to curb its pollutant output is an
       increasingly public aspect of strategy. More and more employees are taking
       these factors into account when deciding where to work. A recent study found
       that 80 per cent of young professionals want their work to impact the
       environment in a positive way, and 92 per cent prefer to work for an
       environmentally friendly company.

Voluntary or Verified Emission Reductions (VER)

      Voluntary emission reductions are reductions that are not mandated by any law
       or regulations but originate from an organisation’s desire to take active part in
       climate change mitigation efforts. This may enable the organization to be
       recognized as a proactive advocate for new technologies and approaches in this
       area. The compliance market has evolved around a set of rules and regulations
       that define issuance, validity and use of emissions allowances and offsets.
       Principally, they relate to the criteria set forth for the Kyoto Protocol’s flexible

       mechanisms and the European Directive on Emissions Trading (EU ETS).
       However, no similar framework has existed for voluntary emission reduction
       actions. In response to this, the Voluntary Carbon Standard (VCS) is established
       to provide a credible and simple set of criteria that provide integrity to the
       voluntary carbon market. Specifically, the Voluntary Carbon Standard ensures
       that all voluntary emission reductions meet specific criteria and are
       independently verified, creating Voluntary Carbon Units.

      The voluntary carbon market is now growing because companies, government
       bodies, non-governmental organizations, and others that are often not subject
       to binding greenhouse gas regulations wish to:

       1.   Make a quantifiable contribution to reduce emissions.
       2.   Increase response options and flexibility of carbon management
       3.   Enhance public relations
       4.   Generate goodwill by entering the carbon market
       5.   Cement strategic interest in specific offset projects
       6.   Manage corporate social responsibility commitments
       7.   Become carbon neutral and/or sell carbon neutral products and services

CDM & Carbon Credit – Accounting and Taxation

      Developing a CDM project should not be viewed as a commercial transaction. It
       is not a huge business but simply a profitable way of making business
       environmentally conscious.

      CDM project cannot be undertaken only on the basis of generation of expected
       CERs points and its market value. To be sustainable, the project must be
       financially sound by itself. There are several benefits of undertaking CDM
       projects, starting from reduced energy bills by using energy-efficient equipment,
       additional depreciation on capital equipments installed for CDM projects,
       reduced regulatory oversight, image of a responsible corporate citizen, advance
       preparation for such time when India will be given targets to reduce green house
       gas emissions on its own account , and so on. The availability of mechanism of
       recognition of carbon credits and its marketability provides additional revenues,
       and makes businesses more competitive in the global market.

      As of now, there are no separate Indian accounting standards to measure
       income and expenditure from carbon reducing projects. The existing standards
       can well account for new capital investments, its depreciation, recurring costs
       and sale proceeds of CERs. Some experts suggested that they be accounted as
       Government Grant. Their logic is based on the definition of the term
       ‘Government’ prescribed in para 3.1 of As-12, which reads: “Government refers
       to government, government agencies and similar bodies, where local, national or

      Some experts feel that CDM projects should be accounted for as a separate
       segment -17 (segment reporting). This, line of thought does not appear practical
       if the concept of ‘journey, not destination’ is properly followed. A CDM project
       cannot be a profit centre or cost centre in itself. In a multi-segment industry,
       any CDM project can be identified with is parent segment.

      CER credits are considered good, as they have all the attributes thereof. We
       safely say that sale proceeds of CER credits cannot be included in Turnover.
       Section 43A(11) of the Companies Act, 1956, defines ‘Turnover’ as “the
       aggregate value of the realisation made from the sale, supply or distribution of
       goods or on account of services rendered, or both”. Part II of Schedule VI to the
       Companies Act, 1956, requires a separate disclosure of “profits or losses in
       respect of transactions of a kind, not usually undertaken by the company or
       undertaken in circumstances of an exceptional or non-recurring nature, if
       material in amount”.

Recent Developments - CDM and Carbon Credit

      Article 1 : Slowdown hits clean energy market – The Hindu (1 Feb 2009)
For the first time in more than four years, growth is slowing in India’s clean energy
sector. With falling oil prices, constrictions in credit and a volatile carbon credit market,
investors are growing increasingly bearish about what has, until recently, been one of
the country’s fastest developing markets. Industry analysts expect the slowdown in the
United Stated and Europe to have a considerable impact on the development of clean
energy projects in India in the coming year. Signs are that in some sense, the impact is
already being felt : In 2007 -08 , when the worst of the credit crunch had yet to come, an
additional capacity of 1,663 MW was added in wind energy, down from 1,716 MW in
2005-06 and 1,742 MW in 2006-07.

      Crash in CER prices
Prices of certified Emission Reductions (CERs) – the in-demand carbon credit achieved
through UN-approved Clean Development Mechanism (CDM) projects – have crashed
from 22 euro to 8 euro in the past two months, at a time when the Indian companies
holding them were expecting their prices to go up. CER prices are significant because
they reflect the incentive for investing in clean energy. Under the United Natlions
Framework Convention on Climate Change (UNFCCC), credits achieved through CDM
projects can be purchased by companies in Annex One countries that have ratified the
Kyoto Protocol so that they can meet their emission reductions. India and China are the
world’s largest suppliers of carbon credits.

A volatile carbon credit market means companies will be less likelyl to invest in clean
energy projects as the incentives are had to predict, says Ram Babu, Managing Director
(Asia) of CantorCO2e, an emissions trading company and consultancy whose clients
include the GVK group, Jindal Power and the GMR group.

“Six months ago we had a healthy, bullish market that was maturing,” Mr.Babu says
“Then came the recession, and falling oil prices. Now, the market is so up and down
that it is likely that people will make an investment in developing technology or
projects.” Mr. Babu says while companies are still likely to stick to their long-term plans
of adding capacity, projects in the coming months are likely to be put on hold.

“This month has been particularly bad with the revised forecasts from the EU indicating
the possibility of economic contraction,” he says. “If this happens, EU firms simply will
not face the need to meet emission limits and there will be absolutely no demand for
carbon credits.”

      Initial Investment
Mid-level energy companies also face the problem of financing their projects in the
current climate.

“In clean energy, the initial investment is higher than in conventional energy projects
though the operating cost is less, but with the credit crunch, companies are now facing
the problem of making that investment,” says Sudipta Das, partner and national leader,
climate change and sustainability services, Ernst & Young. Recent months have also

seen companies affected by growing supply constraints and increasing delivery times for

“Many suppliers in this sector are heavily dependent on the export market, and have
been very badly affected by the problems in the EU and the U.S., “Mr. Das Says.

Prabhat Upadhaya of the Energy and Resources Institute (TERI) says the slowdown in
clean energy projects in India has been compounded by “the system tightening its
screws,” which, he says,has affected the sector more than the downturn. CDM projects
need approval from the UNFCCC in order to be eligible for carbon credits. The second
half of 2008 saw a tightening up of monitoring, regulation and registration for such

“There has definitely been a slowdown in CDM projects and it is not going to be an
aggressive market for the next few months, “ Mr. Upadhaya says. Under the XI Plan
(2007-12), the government has ambitiously targeted adding 15,000 MW of installed
capacity by 2012, including 10,500 MW additional capacity in wind energy. If these
targets are to be met, the consensus among those in the industry is that more
government incentives, such as the generation-based incentives announced for wind
and solar power last year, are needed.

“The UNFCCC envisaged the carbon credit market as the main incentive to support clean
energy efficiency,” says Mr. Das.

“Many of the premises on which the projects are based on and the cost-benefit analyses
are going haywire. If those incentives go down, people will be looking at other
incentives from the government, but we haven’t seen any indications of that happening
soon. If the slowdown continues, it is going to be a challenge for India to meet its
targets,” Mr Das says.

      Article 2 : Planning it dead right to earn carbon credit – DNA 3 Feb 2009-02-12
Mumbai: If the civic body’s plan to have an “eco-friendly green cremation system” is
anything to go by, then burning of wood in such crematoriums will come down by
around 70%. This will also help India earn precious carbon credits.

In an endeavour to reduce the emission of carbon di-oxide (CO2) through the burning of
wood, the United Nations Development Programme has tied up with the Union Ministry
of environment and forests and appointed the Delhi-based Mokshada Parya-varan Evam
Van Surakhsa Samiti to set up eco-friendly funeral pyres in 30 major cities across the
country. Mumbai will have 10 such crematoriums. The BMC has short-listed five
crematoriums – at Haines Road in Worli, Swarag-dwar in Bandra East, Bhoiwada in
Parel, Sion, and Charai in Chembur – for the project. “These crematoriums were
selected on the basis of the number of bodies disposed and the availability of space for
installing the eco-friendly pyres, “ said Dr GT Ambe, Joint Executive, Health Officer,
BMC. The green crematorium system is based on the principle wherein a raised
container will allow circulation of air to fan the flames and capture particles in a
chimney filter.

Ambe said Mokshada will install the pyres free of cost. “They will maintain it for 20-
years and the carbon credits will be used by them. BMC will save on money and wood,”
he said. Ambe added that while a traditional pyre consumes 300-400 kg of wood to
burn a body, the eco-friendly system will consume only 100 kg.

He pointed out that four eco-friendly pyres have already been installed at the
Jogeshwari crematorium. “The crematorium was affected due to the road-widening
project but will become operational by March 31,” he said.

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