Carbon futures

Trygve Reed-Larsen of Det Norske Veritas explains the Clean Development Mechanism

The Kyoto Protocol has not yet entered into force; nevertheless it - together with the UN Climate Change Convention - is setting a course that will affect corporate decisions for years to come. Restrictions on greenhouse gas emissions seem inevitable. Through the flexible mechanisms, the Kyoto Protocol allows to offset emissions with more cost-efficient reductions elsewhere. The credibility of these emission reductions will be fundamental.

Emissions of GHGs contribute to climate change regardless of their point of origin. Therefore, the Kyoto Protocol outlines the basics of emission reduction schemes that reduce, in addition to domestic efforts, emissions where the costs of reduction are lowest. Accordingly, the Clean Development Mechanism was created. Under the CDM, a country or investor with reduction commitments can invest in an emission reduction project in a country without an emission reduction commitment under the Protocol. A CDM project is a win-win situation: the host country gets the project and assistance in implementing climate change mitigating technology and the investor receives the emission reduction credits generated.

The Clean Development Mechanism

The CDM came into force in 2000. Many projects have already been developed and the first projects are expected to be registered this summer. Projects organised as a CDM project have to meet certain requirements and there is a defined process for having a CDM project registered.

The applied approach for determining and monitoring emission reductions from CDM projects must be accepted by the governing body, the CDM Executive Board. The scheme is now in the starting phase and nine approaches (as of June 2004) are approved, but many more are currently under evaluation. The accepted methodologies include the following sectors: power generation from renewable sources displacing fossil-fuel-based power generation; capture and flaring/utilisation of landfill gas; incineration of HFC 23 waste streams, and switching to lower carbon intensive fuels.

CDM projects must also be approved by the host country's designated national authority. Finally, all projects have to go through a public hearing process.

CDM project requirements

CDM projects must contribute to the host country's sustainable development. Also, they must reduce emissions over and beyond "business as usual" actions. Emission reductions must be real, measurable and long-term. This additional requirement has proven to be the most difficult to address both for participants and the validators. In the project design document, the project owners must describe the most likely emission scenario in the project's absence. It is this baseline that the emissions from the project will be compared with, and determines the amount of certified emission reductions. Requirements relating to environmental impact analyses must also be fulfilled and documented.

A monitoring plan is required that allows for monitoring and reporting of all data necessary to prove emission reductions. This includes provisions for the monitoring of all relevant indicators for determining project and baseline emissions, including sufficient quality assurance measures.

Credible verification procedures

Fundamental to the credibility of the emission reductions and to the robustness of emissions trading markets in general is the independent verification of GHG emission reductions. Proper verification assures the reliability and quality of emission reduction claims. For the CDM, there are requirements for independent validation of projects (assessment of project eligibility before the project can be registered) as well as for periodic verifications during its lifetime to determine the amount of emission reductions. The verified amount of GHG savings is termed certified emission reductions (CERs in units of tonnes CO2 equivalents).

The validation and verification processes represent significant challenges and require degrees of rigour that are not expected of other non-financial audit processes such as management systems. As an example, the validator must assess a project's baseline. The approach involves an iterative risk assessment to identify qualitative factors, errors and omissions which might lead to the data being materially misstated. The verification "output" is a document determining the amount of GHG gases abated and once registered, it can be traded. This financial value places the verifier under new and extended liability.

The CDM Executive Board has therefore instituted strict requirements for accrediting companies to perform these tasks. As of June 2004 only four certification companies have been accredited for CDM validation tasks out of 20 applicants. Accreditation is given for a specific scope of industrial activity or technology area.

DNV's experience

Accredited certification company DNV has evaluated many excellent project ideas and well elaborated project design documents. However, some proposed CDM projects are plagued by a number of pitfalls:

  • incomplete or insufficient project design documentation;
  • lack of verifiable data and references;
  • omission of likely baseline scenarios;
  • too ambitious emission reduction objectives;
  • insufficient demonstration of project additionality;
  • incomplete monitoring plan, and
  • insufficient quality assurance measures.

As the CDM matures we expect that the quality of proposed project design documentation will improve and that the projects that eventually are registered as CDM projects will be of high quality.

Guidance tools for greenhouse gas management

Together with other certification companies, DNV has worked to develop a validation and verification manual for the World Bank's Prototype Carbon Fund and the International Emission Trading Association. The manual is accessible on and is intended to be a standard for providing CDM and JI validation and verification services, but gives also guidance to CDM project developers.

ISO will soon complete its development work on an international standard for climate change inventories and reduction projects. The standard, ISO 14064, will likely be issued early in 2005. Together with the standard issued by the WBCSD and World Resources Institute (, companies will have proven guidelines for emissions management work.



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