The Clean Development Mechanism (“CDM”) allows a country with an emission-reduction or
emission-limitation commitment under the Kyoto Protocol 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 stimulates sustainable development and emission reductions, while
giving industrialized countries some flexibility in how they meet their emission reduction or
limitation targets.
India ratified the Kyoto Protocol in August 2002 and, not being an Annex 1 signatory as a
developing country, is therefore exempt from the framework of the United Nations Framework
Convention on Climate Change (“UNFCCC”). As a result, India is able to benefit from the Kyoto
Protocol in terms of transfer of technology and related foreign investments. More importantly, this
enables the creation of CERs through the CDM, which can then be traded.
In order to qualify for CERs, each project must be registered with the UNFCCC. India has
the highest number of CER-qualifying projects registered with the UNFCCC.
Voluntary Emission Reductions
The emergence of a secondary market for carbon credits outside the Kyoto Protocol is driven
by corporations and individuals looking to reduce voluntarily their carbon footprint. Voluntary
Emission Reductions (“VERs”) arise from projects awaiting CDM clearance, special situations
carbon capture and storage) or smaller projects. Projects require third party verification and are
required to meet standards such as the Voluntary Carbon Standard (there are higher standards such
as “Gold” and “Gold+” reflecting higher levels of accreditation incorporating issues such as social
responsibility and sustainability). The quantity of the VER is based on the estimation of the
management, verification by an independent assessor and subject to the satisfaction of the buyer.
The market is currently small but expected to increase substantially. Due to the less regulated
environment and operating outside the regulated Kyoto Protocol, such VER certificates trade at a
discount to CERs.
Renewable Energy Certificates
The REC mechanism offers the potential to expand the market for renewables by broadening
the availability and scope of power products which are available to customers. RECs are a type of
environmental commodity intended to provide an economic incentive for electricity generation
128
from renewable energy sources and represent the attributes of electricity generated from renewable
energy sources. These attributes are unbundled from the physical electricity and the two products,
first being the attributes embodied in the certificates and the commodity, and second being
electricity, may be sold or traded separately.
When purchased, the owner of the REC is considered to have purchased renewable energy.
The CERC notified the Central Electricity Regulatory Commission (Terms and Conditions for
Recognition and Issuance of Renewable Energy Certificate for Renewable Energy Generation)
Regulations, 2010 (the “REC Regulations”) on January 14, 2010. The REC Regulations aim at the
development of market for power from non conventional energy sources by issuance of
transferable and saleable credit certificates. The REC Regulations facilitate fungibility and
inter-state transaction of renewable energy with minimal cost and technicality involved. The CERC
has nominated the National Load Despatch Centre as the central agency to perform the functions,
including, inter alia, registration of eligible entities, issuance of certificates, maintaining and
settling accounts in respect of certificates, acting as repository of transactions in certificates and
such other functions incidental to the implementation of REC mechanism as may be assigned by
the CERC. The REC mechanism provides a market-based instrument which can be traded freely
and provides a means for fulfilment of renewable purchase obligations by distribution utilities and
consumers.
emission-limitation commitment under the Kyoto Protocol 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 stimulates sustainable development and emission reductions, while
giving industrialized countries some flexibility in how they meet their emission reduction or
limitation targets.
India ratified the Kyoto Protocol in August 2002 and, not being an Annex 1 signatory as a
developing country, is therefore exempt from the framework of the United Nations Framework
Convention on Climate Change (“UNFCCC”). As a result, India is able to benefit from the Kyoto
Protocol in terms of transfer of technology and related foreign investments. More importantly, this
enables the creation of CERs through the CDM, which can then be traded.
In order to qualify for CERs, each project must be registered with the UNFCCC. India has
the highest number of CER-qualifying projects registered with the UNFCCC.
Voluntary Emission Reductions
The emergence of a secondary market for carbon credits outside the Kyoto Protocol is driven
by corporations and individuals looking to reduce voluntarily their carbon footprint. Voluntary
Emission Reductions (“VERs”) arise from projects awaiting CDM clearance, special situations
carbon capture and storage) or smaller projects. Projects require third party verification and are
required to meet standards such as the Voluntary Carbon Standard (there are higher standards such
as “Gold” and “Gold+” reflecting higher levels of accreditation incorporating issues such as social
responsibility and sustainability). The quantity of the VER is based on the estimation of the
management, verification by an independent assessor and subject to the satisfaction of the buyer.
The market is currently small but expected to increase substantially. Due to the less regulated
environment and operating outside the regulated Kyoto Protocol, such VER certificates trade at a
discount to CERs.
Renewable Energy Certificates
The REC mechanism offers the potential to expand the market for renewables by broadening
the availability and scope of power products which are available to customers. RECs are a type of
environmental commodity intended to provide an economic incentive for electricity generation
128
from renewable energy sources and represent the attributes of electricity generated from renewable
energy sources. These attributes are unbundled from the physical electricity and the two products,
first being the attributes embodied in the certificates and the commodity, and second being
electricity, may be sold or traded separately.
When purchased, the owner of the REC is considered to have purchased renewable energy.
The CERC notified the Central Electricity Regulatory Commission (Terms and Conditions for
Recognition and Issuance of Renewable Energy Certificate for Renewable Energy Generation)
Regulations, 2010 (the “REC Regulations”) on January 14, 2010. The REC Regulations aim at the
development of market for power from non conventional energy sources by issuance of
transferable and saleable credit certificates. The REC Regulations facilitate fungibility and
inter-state transaction of renewable energy with minimal cost and technicality involved. The CERC
has nominated the National Load Despatch Centre as the central agency to perform the functions,
including, inter alia, registration of eligible entities, issuance of certificates, maintaining and
settling accounts in respect of certificates, acting as repository of transactions in certificates and
such other functions incidental to the implementation of REC mechanism as may be assigned by
the CERC. The REC mechanism provides a market-based instrument which can be traded freely
and provides a means for fulfilment of renewable purchase obligations by distribution utilities and
consumers.
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