>> The Background to Global Concerns About Climate Change

The global community has expressed a shared concern about the impact of human activities on levels of greenhouse gases such as carbon dioxide, methane and nitrous oxide and their potential effect on the earth's climate. Pollutants such as carbon dioxide have been on the increase since the late 19th century when the process of industrialisation resulted in the use of non renewable fossil fuels (such as coal, oil and gas) as energy sources as opposed to traditional and renewable fuels (such as firewood and dung).(1) In fact the major human source of greenhouse gas emissions is the combustion of fossil fuels which has been reported to produce 5.5 billion tonnes of carbon per year world wide, with land use change producing an additional 1.6 billion tonnes of carbon per year (2). Of this 7.1 billion tonnes of carbon emitted globally each year, 4.5 billion tonnes are absorbed by oceans and by biological processes, particularly by the process of photosynthesis in plants. The remaining 3 billion tonnes of carbon accumulates in the earth's atmosphere each year.

>> Possible Climatic Effects

Scientists have widely predicted that the impact of increased levels of greenhouse gases such as carbon dioxide will include increased temperatures and changes to ocean levels (through the melting of polar ice caps and changed weather patterns). This phenomena has been widely termed 'The Greenhouse Effect.' Whether, and to what extent increased levels of greenhouse gases will create significant climatic problems is unknown. Some scientists such as Fries (1997) have predicted that temperatures may increase by an average of 20 degrees Celsius and that sea levels may rise by 50 centimetres by the year 2100.

Such concerns have provided the basis for an increased international focus upon addressing the problem of increases in greenhouse gas emissions and climatic change.

>> International Response

The United Nations Framework Convention on Climate Change came into force on 21 March 1994, with over 160 States becoming party to the Convention. At this stage the Protocol does not have the force of law and will not do so until ratified by 55 countries. The primary aim of the Convention is to stabilise the levels of greenhouse gases in the atmosphere at a level which will prevent interference with the climate system (3). The parties to the Convention have agreed to establish programs to reduce climate change and to promote the development of technologies, practices and processes to control, prevent and reduce greenhouse gas emissions in sectors such as energy, transport, industry, agriculture, forestry and waste management (4). A series of conferences have been held in an attempt to formulate more precise ways of achieving these objectives.

 1.   C. Borough, M. Bourke and D. Bennett, 'Forests as CO2 Sinks, An Opportunity for Forest Growers' Australian Forest Grower 21(1) Autumn 1998 Special Liftout No. 43.
 2.   AACM International Pty Ltd, Greenhouse Challenge Carbon Sinks Workshop Discussion Paper (October 1997) prepared for the Greenhouse Challenge Office, Commonwealth Department of Primary Industries and Energy, Canberra, Australia.
 3.   G. Triggs, 'The Framework Convention on Climate Change: Enforcement and Australian Business' (1997) 16 AMPLJ 134, p.134
 4.   G. Triggs, 'The Framework Convention on Climate Change, Enforcement and Australian Business' (1997) 16 AMPLJ 134, p.136

>> Kyoto Protocol 

In December 1997 at a conference in Kyoto, Japan, more than 150 governments world wide agreed upon the Kyoto Protocol to the United Nations Framework Convention on Climate Change ('The Kyoto Protocol). This agreement recognises that different nations should have different targets for reducing greenhouse gas emissions. The individual targets for industrialised countries and countries with economies in transition ranges from minus 8% for EU countries to plus 10% for Iceland. However, on average, the protocol requires that developed countries reduce their greenhouse gas emissions by 5.2% as compared to their 1990 emission levels. This target has to be accomplished by the first commitment period which is 2008-2012 (5). The targets set by the Kyoto Protocol will create a demand for cost-efficient ways to reduce emissions by a number of 'polluting' sectors such as oil, gas and coal production industries as well as those involved in power generation, transportation and waste management.

A key feature of the Kyoto Protocol is agreement on various 'Kyoto Mechanisms' which may be used by nations to achieve their targets set by the protocol. One such mechanism is that of emissions trading(6) which would provide the opportunity for countries to establish an international trading system for the purpose of meeting their commitments to reducing greenhouse gas emissions under the Kyoto Protocol. On the 14 November 1998 the Parties to the Kyoto Protocol met in Buenos Aires and agreed that a deadline of late 2000 should be set to establish rules and to enforce Kyoto Protocol guidelines for such a market based trading program.

The Australian government announced its ratification of the Kyoto Protocol at the Bali Conference of the United Nations Framework Convention on Climate Change (UNFCCC) in Bali in late 2007. While it is important that Australia returned to the international fold it is also critical to look to the future. The present Protocol runs until 2012. Negotiations are presently underway to develop a successor framework and it is hoped that such a plan will be agreed at the 2009 UNFCCC conference in Copenhagen.

5.  Article 3 of the Kyoto Protocol to the United nations Framework Convention on Climate Change.
6.  Article 17 of the Kyoto Protocol to the United Nations Framework Convention on Climate Change  

>> Kyoto Mechanisms

A key feature of the Kyoto Protocol is agreement on various 'Kyoto Mechanisms' which may be used by nations to achieve their targets set by the protocol. Two such mechanisms are “Clean Development Mechanism (CDM)” under Article 12 and “Joint Implementation (JI)” under Article 6 .

Emission credits derived from JI/CDM projects could be used by the investor for complying with their own domestic climate commitments or could be sold to governments or other companies.

>> Project Stages

Stages in Kyoto projects are as follows:

• Project approval (Article 12.5a) approved by the host and investor governments to ensure consent and contribution to host country sustained development;
• Validation of project design (12.5b) to ensure the baseline and monitoring/ validation/certification protocol meets Kyoto standards;
• Monitoring of emissions (12.7) by project operators/owners to track project performance/ collect/internally verify data on actual project emissions;
• Verification/certification of emission reductions (12.5c and 12.7) by operational entities to determination the quantity of emission reductions achieved based on standards;
• Issuance of carbon emission reduction certificates by the executive board of the Kyoto conference of parties (protocol 12.4) based on conclusions of certification reports (step 4).

>> Kyoto Mechanism Criteria

JI/CDM projects must fulfil the relevant Kyoto Mechanism criteria, which are:

• environmental and financial additionally (see discussion below);
• cost effectiveness;
• compatibility with national development priorities of the host country;
• host country approval;
• designed to allow quantitative monitoring and verification;
• limit emission caused by energy and/and use;
• result in nett carbon reductions at the national level, local benefits generation taking into account the interests of the indigenous and local populations and sustainable management of natural resources;

>> Additionality

Both JI and CDM projects must provide emission reductions that are additional to any that would otherwise occur (environmental additionally) the emissions which would otherwise occur are called base line emissions. It is vital before any project is undertaken the following must occur:

• Approval by the host country and the investor country’s respective governments that the proposed project complies with JI/CDM criteria;
• Baseline emission are extensively and scientifically audited.

Without these 2 preliminary steps being undertaken it could not be confidently asserted that any emission reductions achieved in the course of the project would realise certifiable emission credits.

>> World Bank Carbon Fund 

The World Bank, in anticipation of the ratification of Kyoto protocol has put in place the World Bank Prototype Carbon Fund and has, since, 1997, received money from interested parties worldwide to investigate and implement such fund which is designed to pool investment funds from potential buyers of carbon credits and place those funds in projects (either by way of straight investment or equity participation) that will realise tradeable carbon credits.

The trust fund opened on the 1 November 1999 and closed on the 28 February 2000. The World Bank looked for a minimum of US$50- 60 million subscription and anticipated that subscriptions would amount to US$150- 200 million based on the current level of interest.

>> Economic Benefits Of Carbon Trading 

Agreements for trade in future carbon credits are already being entered into.

The advantages of carbon credit trading are its potential to minimise the costs of achieving given reductions in levels of greenhouse gas emissions, and its ability to provide certainty in meeting an emissions target(9). For forest growers, one predicted price for each tonne of carbon absorbed by forests is within the range of $US5-$US20 per tonne(10). It is widely believed that this estimate undervalues the price of carbon. At an average rate of 5 tonnes of carbon being absorbed per hectare of forest per year forest growers could therefore see their forests producing $US100 per hectare each year from carbon alone. The potential economic return to forestry industries engaged in such a trading system may therefore be substantial.

>> Agreements in Australia 

In June 1998 State Forests of New South Wales announced that it had entered into three agreements with electricity generating/supplying corporations. Whilst the financial details of each transaction are in commercial confidence, the Australian Financial Review indicated that one contract was for AUS$35,000 to provide a sink for 2,400 tonnes of carbon over a period of one year(11). On this information, the price paid was $14.60 for each tonne of carbon absorbed by the forest. The area of forest was 1,000 hectares and the carbon rate of 2,400 tonnes per 1,000 hectares is conservative as it is generally considered a rate of 6,000 tonnes per hectare is more likely for a plantation of that particular quality.

Another trade agreement involved a small 35.5 hectare pine plantation which was to be established under a joint venture arrangement. The agreement vests all future carbon credits obtained from the plantation with the electricity provider, Delta Electricity. The agreement allows State Forests of New South Wales to practice all of its normal operations according to an agreed plan of management and for Delta Electricity to claim whatever carbon is absorbed over time. The agreement keeps the costs of monitoring carbon absorption to a minimum as no measurements are required until Delta Electricity wishes to use the carbon credits, and provides the company with a secure source of future carbon credits(12).

Another agreement entered into by State Forests of New South Wales involved an electricity generating company, Pacific Power purchasing the carbon rights for two years as well as options to purchase the carbon rights over a further nine years in respect of a 1000 hectare plantation of eucalypts. The quantity of carbon contracted by State Forests over the initial 12 month period is 4500 tonnes of carbon. The arrangement also gives Pacific Power the option to purchase the future carbon credits at the prevailing market price at the time the credits are purchased.

In each of these agreements the use of Option Agreements is integral, allowing the companies to secure the rights to take up carbon credits in the future when trading rules are clearly defined.

11. Australian Financial Review, 5 June 1998.
12. C. Borough and M. Bourke (1998)
13. Margules Poyry Pty Ltd Audit of Carbon Credits prepared for State Forests of New South Wales-Pacific Power September 1999, p.1.

>> Energy Efficient Projects 

Projects designed to improve the efficiency of energy related activities such as power generation and heating are sometimes more attractive to investors and may enjoy a marketing advantage over many other JI/CDM projects (eg forestry).

>> Swiss Pilot Program 

At a seminar presented in Basel, Switzerland over 21-22 October 1999 attended by representatives of governments, industry groups, The World Bank, UBS (Union bank of Switzerland) and private companies a consultant retained by the Swiss Government in relation to AIJ (Activities Implemented Jointly) pilot projects, presented a paper discussing four AIJ projects implemented by the Swiss Government in relation to mitigation projects (JI and CDM). Several other countries are also active in AIJ although emission reductions achieved during this pilot phase are not allowed to be used for compliance with climate policy regulations. Host countries include:

 1.  Latvia (24 projects);
 2.  Russian Federation (8);
 3.  Costa Rica (9);
 4.  Lithuania (9).

Sponsor countries include:

 1.  Australia;
 2.  Norway;
 3.  Sweden;
 4.  The Netherlands;
 5.  The US.

Of the four projects to be implemented, 2 are well advanced while the other 2 are in feasibility stages. The 2 most advanced projects are the Romanian thermal energy project and the Slovakian energy optimisation project. The remaining projects involve the reconstruction of 2 heating centres in Poland and the introductions of methane gas utilisation in a Russian waste water treatment plant.

The Romanian thermal energy project falls within energy efficiency category and involved the reconstruction of 2 district heating systems with new high efficiency boilers, burners and distribution systems.

The project lifetime is 15 years with heat production and distribution initially with existing low efficiency equipment for the first 8 years of the project for the purposes of establishing a base line then with new medium efficiency for the remaining 7 years with central coal based power generation throughout.

The project investment involved a total of US$6.4 million and is estimated result in 140,000 tonnes of carbon dioxide reduced costing US$8 per tonne of carbon dioxide (equivalent USD$32 per tonne carbon).

The success of the Swiss Romanian project to date can be pointed to in marketing JI/CDM projects identified as meeting in the Kyoto Mechanisms and Protocol. In particular, the heating sector seems well suited for the marketing of projects for the benefit of the host country for the following reasons:

• The operation is usually well established (ie a stable environment).
• The heating sector offers a huge replication potential and possibility to reduce transaction costs by standardising procedures such as technical planning, base line assessment and monitoring and report protocols.
• the existence of recognised energy efficiency measures at relatively low cost
• the monitoring of project performance is relatively simple (in comparison to carbon sinks, for example).

Some degree of local project funding where possible is beneficial in that there would be a perception by the investors of improved and increased motivation of the host. This can only increase the prospects of obtaining adequate funding from sources such as the World Bank Carbon Fund.

The attractiveness of energy efficiency projects over the more commonly considered forestry/ carbon sinks projects are readily apparent.

• Carbon sinks are more susceptible to risk ie. disease, pest, fire, local population influences;
• The establishment of base lines and monitoring is more difficult.
• The technology for reduction in the use of fossil fuels for heating is not complicated and may be merely more adequate heat loss prevention measures (insulation, carpeting etc) being introduced. Experts in these fields particularly have emerged and studies as to the benefits in terms of reduced fossil fuel use and associated carbon emission reduction be readily available.

Heating efficiency projects related to public buildings in highly urbanised, large population countries are well suited to these projects as:

• the “owner” of achieved carbon credits (ie the public authority or national government) is readily identifiable; and
• the volume of credits generated by each projects is likely to be large enough to interest large international investors.

Apart the financial benefits of trade in carbon credits arising from JI/CDM projects the host country could realise secondary benefits in the form of technology and know how transferred, energy efficiency improvements and/or energy savings.

At the initial stage of market development, governments in developing countries that have already established economic relationships with foreign investors will have a significant advantage in terms of attracting additional JI/CDM investment funds.
 
   

>> Carbon Sinks 

Carbon credits can be created by forests or 'carbon sinks.' Carbon sinks, such as forest plantations are included in an emissions trading system by allocating 'credits' for the amount of carbon which they soak up from the atmosphere and store. Forest growers can sell those credits under an emissions trading scheme to a company which requires credits to offset any emissions above those permitted.

This system offers forestry sectors commercial opportunities which are additional to their current operations through projects involving carbon absorption by forests and the creation of tradeable carbon credits.

>> How do Forests Act As Carbon Sinks 

Growing forests act as 'carbon sinks' by soaking up carbon from the atmosphere and storing it in their leaves, branches, stems and roots. Unlike many plants and most crops which have short lives or release much of the carbon stored at the end of each season, forests soak up and store carbon over decades and centuries(7). Furthermore, it has been noted that the potential of forests to store carbon is large enough that forests offer the possibility of storing significant amounts of additional carbon in relatively short periods, even decades.

Whilst scientific formulae have been developed for calculating the quantity of carbon which can be absorbed by forests, at a basic level, the quantity of carbon which can be soaked up and stored by a forest depends upon a number of factors. These include the type of forest, its' rate of growth and the ultimate use of the wood or other plant form harvested. In terms of species, the highest rates of carbon absorption are reported to be achieved by well managed, fast growing species located in good soils and high rainfall areas(8). Conversely, Borough, Bourke and Bennett (1998) report that the lowest rates of carbon absorption occur in forests located in areas of low rainfall, where soil and forest management is poor and slow growing species are used. However, many factors such as forest disturbance, harvesting and decay as well as vegetation and soil interactions will ultimately affect the total amount of carbon which can be stored within a forest over time.

>> Salinity Alleviation Project in Australia 

SGC of the Netherlands has prepared a pre feasibility report on a saltbush project in Australia. SGS is a member of the SGS Group which is the world’s largest inspection verification and testing organisation. The Group employs over 30,000 in 140 countries. The company offers a Carbon Offset Verification Service, providing verification and certification of greenhouse gas emissions and sequestration activities. It is anticipated that SGS will become accredited to issue certificates under the Framework Convention when such a scheme becomes operational.

A saltbush planting project in Australia would be considered either a domestic project or a Joint Implementation project. It would not be a CDM project because the activity is taking place in an annex 1 country.

As a domestic project such an activity would gain benefit by undertaking afforestation activities post 1990 which would increase Australia’s carbon stocks, helping to offset emissions arising from land clearance and combustion of fossil fuels. The benefit to be calculated as the difference between the carbon stock on the planted lands between 2008 and 2012 – ie the growth and sequestration of the saltbush over the five year period commencing in 2008. Similar benefits can be expected during subsequent accounting periods.

The carbon stored in the planted bush would be included in Australia’s annual inventories submitted to the UNFCCC, but whether or not the Australian government awards any credit to the project for this carbon is a domestic decision. The Australian government is to determine the Eligibility Criteria and accounting rules for such projects.

As a Joint Implementation project two things are required:

 1.  A non-host country that wishes to invest in the project or buy the ERU’s (Emission Reduction Units) produced by the project. That country must indicate its acceptance in the project.
 2.  Approval from the Australian government that the ERU’s deprived from the project can be transferred. Such approval is vital and cannot be taken for granted. ERU’s transferred from a host country will be deducted from that host country’s Assigned Amount. Therefore, before the Australian government agrees to such a transfer, it must be confident that it has picked up the benefits in its national inventories and does not need to retain the benefits to ensure its own compliance.

The Kyoto Protocol gives some indication of criteria that projects must fulfill to create ERU’s that are eligible and therefore tradable under the Protocol. No such criteria have been officially defined, but terms such as additional, long term involuntary are used and give a good indication as to the likely content of Eligible Criteria. SGS has been working with a set of criteria for several years and has applied these to a wide variety of sinks projects in a range of countries.

The SGS Eligibility Criteria fall into four main headings, these are:

• Acceptability;
• Additionality;
• Externalities; and
• Capacity.

Externalities refers to leakage and slippage. Leakage and slippage have the potential to detract from the project gains by either resulting in the relocation of emission actions or (in this case) substitution for sequestering actions and emissions from project activities.

In the context of this possible project, leakage is unlikely to be an issue. Assuming that there are no planting activities taking place on the land, there will be nothing to shift elsewhere. However, if money to pay for the planting where sourced from a fund that had been established to pay for such an activity, analysis might determine that the project was simply shifting the planting of saltbush into the project area at the expense of planting elsewhere.

Slipping will arise from the activities undertaken to prepare the land for planting, raising and transferring seedlings, planting and maintenance. Experience to date shows that this source of emission is a small percentage of project gains.

7. R. Sedjo, B. Sohngen & P. Jagger, 'Carbon Sinks in the Post Kyoto World-Part I', Weathervane.
8. C. Borough, M. Bourke and D. Bennett, 'Forests as CO2 Sinks, An Opportunity for Forest Growers' (1998).