MECHANISMS FOR CLIMATE
CHANGE COMPLIANCE: EMISSION
OFFSET PURCHASES UNDER THE CLEAN
BY CHRISTOPHER CARR AND FLAVIA ROSEMBUJ*
INTRODUCTION – CLIMATE CHANGE COMPLIANCE
From 2005 through 2006, the international market for carbon credits experienced tremendous growth and reached an annual market value of over US$30 billion.1 As part of this growth, new tools, skills, and capital have been introduced into the international carbon market to address the global problem of climate change.
Broadly speaking, the international carbon market has involved two types of market-based tools to reduce greenhouse gas emissions. The first tool is a cap and trade program. Under such a program, emissions are capped at a certain level by regulatory fiat, regulated entities are allocated allowances to emit a certain amount of greenhouse gases (GHGs), and these entities can then trade allowances to meet their compliance obligations. An entity whose emissions fall below its allocated amount can sell unneeded allowances for compliance purposes. An entity whose emissions are higher than its allocated amount can purchase allowances from others who are willing to sell them.
The second type of program is an emission offset, or “project based" program. As opposed to a cap and trade regime, offsets involve a “baseline and trade" regime. These offset credits are generated from projects that reduce GHG emissions below a certain baseline outside of a regulated cap. These credits can then be sold to entities that can use them to meet regulatory compliance obligations inside a cap.
This article focuses on a specific type of offset program – the Clean Development Mechanism of the Kyoto Protocol (CDM).2 This article (i) begins with an overview of the Kyoto “flexible mechanisms" (including the CDM), (ii) explains how CDM offset credits are generated, (iii) examines the growth of the international carbon market, (iv) explores aspects of CDM offset purchase agreements, and (v) summarizes several lessons learned. In sum, the international carbon market has shown how market-based mechanisms can muster capital to address global climate change and transfer climate-friendly technology to the developing world.
This article provides an overview of recent developments in the CDM and an understanding of how market based mechanisms may address global climate change. This is, however, only an overview, and other sources delve into these topics in greater detail.
The complete climate change compliance paper by BY CHRISTOPHER CARR AND FLAVIA ROSEMBUJ can be downloaded here (Pdf 87Kbs).
* Christopher Carr is co-head of the climate change practice group at the law
firm of Vinson & Elkins and a former Senior Counsel at the World Bank. Flavia
Rosembuj is a Senior Counsel at the World Bank. The views expressed in the
article are the views of the authors and do not necessarily represent the views of
the World Bank or Vinson & Elkins.
1 KARAN CAPOOR & PHILIPPE AMBROSI, STATE AND TRENDS OF THE CARBONMARKET 2007 3 (World Bank 2007), available at http://carbonfinance.org/
2 See Kyoto Protocol to the United Nations Framework Convention on
Climate Change art. 12, Dec. 10 1997, U.N. Doc FCCC/CP1997/L.7/Add.1,
available at http://unfccc.int/resource/docs/convkp/kpeng.pdf, 37 I.L.M. 22