Environmental guidance for your business in Northern Ireland & Scotland

International climate change projects and the carbon offset market

International climate change projects

The Kyoto Protocol is an international agreement which required developed countries to limit their greenhouse gas (GHG) emissions. These targets are expressed as levels of allowed 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, the protocol includes 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 European Union Emissions Trading System (EU ETS), which facilitates 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.

The EU ETS provides the main demand for Certified Emissions Reductions (CER) and Joint Implementation (JI) credits as companies covered by the EU ETS can buy certain types of these credits to meet some of their emissions reductions targets.

GOV.UK: Emissions Trading Scheme

EU Emissions Trading Scheme

The Clean Development Mechanism (CDM)

This encourages businesses to undertake projects in developing countries (which have no obligation to reduce emissions under the Kyoto Protocol) 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.

Environment Agency: CDM and JI and letters of approval

Joint Implementation (JI)

Encourages businesses to undertake projects in developed countries under Kyoto Protocol targets to reduce GHG emissions. For each tonne of CO2 equivalent reduced, projects earn an Emissions Reduction Unit (ERU) which can be sold on the carbon market and used to offset emissions elsewhere.

The Environment Agency is the UK's Designated Focal Point (DFP) for JI and issues the Letters of Aproval (LOA).

Environment Agency: CDM and JI and letters of approval

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.

Further information

United Nations Framework Convention on Climate Change (UNFCCC): The Kyoto Protocol

UNFCCC: A beginner's guide to the UN Framework Convention (PDF, 404KB)

UNFCCC: Clean Development Mechanism Bazaar

CD4CDM: CDM Guidebook

CD4CDM: Guide to financing CDM projects

In this Guideline

How climate change affects your business

How to cut carbon emissions from energy use

How to cut carbon emissions from business travel

How to cut carbon emissions from business buildings

How to design low-carbon products

How to find suppliers of low-carbon products

Tax breaks to encourage energy efficiency

Comply with emissions trading requirements

International climate change projects and the carbon offset market

How to get involved with Clean Development Mechanism and Joint Implementation projects

Purchasing carbon offsets

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