International climate policy provides the regulatory framework, the targets and the instruments for UPM’s emission reduction activities.
The main policy instrument for emissions reductions is the Kyoto Protocol in which the developed countries of the world agreed to reduce their emissions by an average of 5.2% in the period 2008 to 2012. It has been approved on 11 December 1997 at the UN Climate Summit in Kyoto (Japan) and came into force in February 2005 following ratification by the Russian Federation. The USA, the largest emitter of greenhouse gases and user of fossil fuels in the world, has adopted a policy position of non-ratification of the Kyoto Protocol.
Nevertheless, this agreement is a milestone of international climate policy since it specifies the United Nations Framework Convention on Climate Change (UNFCCC), adopted in 1992, and defines legally binding emission reduction targets for Annex I countries with precise deadlines for the first time.
Annex A of the Kyoto Protocol regulates the following greenhouse gases (GHGs): carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulphur hexafluoride (SF6). To simplify the measurement of GHG emissions and reductions CO2 equivalents (CO2e) are used as a standard unit of reference.
In addition to preferential domestic emission reductions, the protocol allows for several so called “flexible mechanisms” to be used by sovereign states and private actors to meet their reduction obligations. These include in particular
- the Clean Development Mechanism (CDM)
- Joint Implementation (JI) and
- Emissions Trading.
The core idea of all these Kyoto market-based instruments for climate protection is to reduce the total level of global GHG emissions at minimal cost.
The Kyoto Protocol has been extended post 2012 at the 2011 UN Climate Summit in Durban but a long-term successor is still under discussion by all parties to the UNFCCC.
The Clean Development Mechanism (CDM) is decisive for UPM’s climate protection activities, since UPM mainly develops CDM projects.
CDM projects are carried through jointly by a developed country with GHG reduction obligation (Annex I country) and a developing country without reduction target (Non-Annex I country). The emissions that have been saved and certified in such a project (Certified Emission Reductions, CERs) can be credited to the emissions budget of a developed country.
Thus, the CDM is a policy measure which encourages the transfer of clean energy technologies and the proliferation of emission reduction projects to ensure that economic growth in developing countries is sustainable. In addition, it also allows the developed world to bear the burden of emissions reductions but at a lower cost as it is generally cheaper to abate greenhouse gas emissions in the developing world.
The CDM is supervised by the CDM Executive Board (CDM EB) based in Bonn, Germany. The functions of the CDM EB include the approval of new baseline methodologies which can be applied to qualifying projects, the accreditation of Designated Operational Entities (DOEs) who validate and verify projects, the registration of projects and the issuance of CERs. The CDM Executive Board is accountable to the Conference of the Parties (COP) which meets annually and oversees UNFCCC climate change policy.
Developers of CDM projects such as UPM go through a rigorous and public registration and issuance process. This consists of:
- Preparation of a Project Design Document (PDD), the format of which has been specified by the CDM Executive Board. The PDD includes the quantification of the emissions reductions against a new or existing baseline methodology, a plan for the monitoring of the reductions over the life span of the project, and a case that the emissions reductions achieved are additional to business-as-usual in the context in which the project is undertaken
- Validation of the PDD by a Designated Operational Entity who certifies that the project is in compliance with the CDM framework
- Registration of the project with the CDM Executive Board
- Annual verification of the emissions reductions, also by an accredited Designated Operational Entity
- Issuance of CERs from the CDM registry
In addition, each CDM project must receive a Letter of Approval (LoA) from the Designated National Authority (DNA) in the host country in which the project is being implemented. The DNA certifies that the project is contributing to sustainable development in that country. Before registration, the project must also have a named participant from an Annex I country accompanied by a Letter of Approval from its DNA.
The Kyoto Conference in 2005 introduced a new CDM project approach named Programme of Activities (PoA). PoAs are a container of individual projects, in which a central coordinator (Programme Manager, Focal Point) may bundle many decentral climate protection activities (CDM Programme Activities, CPAs). Under the umbrella of a PoA various baseline and monitoring methodologies can be applied. This enables CDM developers to include renewable energy projects as well as energy efficiency measures in one PoA.
A good example of a large PoA is UPM’s Biogas Household PoA in China, that has been registered successfully with the CDM by mid 2012. Throughout its 28 year programme duration, this ambitious PoA provides up to 1 million poor farmer household in China’s rural Sichuan province with small robust biogas digesters and in doing so avoids enormous amounts of GHGs.
Please find more information on this PoA and other UPM projects in the carbon portfolio section.
In contrast to CDM, Joint Implementation (JI) only covers such emission reductions projects that are carried through in partnership between two developed countries, each with Kyoto reduction or limitation targets (Annex I countries).
If a developed country develops or funds a JI project in another developed country, it may use the generated Emission Reduction Units (ERUs) to meet its Kyoto obligations. This enables countries with relatively high specific abatement costs to achieve their targets by investing in countries with less expensive reductions.
The JI framework is project based and in this respect is similar to the Clean Development Mechanism in relation to the implementation process to be followed. The JI Supervisory Committee (JISC) was established at the first Meeting of the Parties (MOP1) to the UNFCCC which took place in Montreal in December 2005. It is responsible for overseeing the JI and held its first meeting in February 2006.
ERUs from JI projects are issued by the governments of Annex I countries and each ERU is therefore backed by an equivalent Assigned Amount Unit (AAU), the unit of compliance with targets under the Kyoto Protocol. This is a key difference between the JI and CDM as ERUs do not represent new supply into the international emissions trading market.
Countries eligible to issue ERUs are divided into Track 1 and Track 2 based on certain criteria laid down by the JI Supervisory Committee. ERUs from Track 1 countries are governed by procedures to be adopted within the Annex I country whereas Track 2 ERUs require an external regulatory and compliance regime closer to that used for the Clean Development Mechanism.
The JI market is highly dependent on Russia and the independent states of the former Soviet Union. The highly energy and emissions intensive economic structure of these countries makes them very suitable for JI projects. In addition, these countries are expected to have a surplus of AAUs to sell as their economies and emissions have contracted relative to those from the baseline year in the Kyoto Protocol (1990).
So far, UPM has not been active in the field of Joint Implementation. Notwithstanding, we may also develop JI projects going forward, if the risk/return profile and the GHG reduction effects meet our criteria.
Emissions trading, as proposed by the Kyoto Protocol, is based on the following idea of environmental economics:
The use of natural resources for the supply with goods as well as for the deposition of non-required waste products shall be expressed in commercial value so that benefits and costs of using the environment can be measured and then be assigned to certain users via adequate prices in environmental markets. This enables environmental policy to influence the utilization of natural systems in the desired way, by decreasing or increasing prices for environment services.
In the view of climate protection, GHG emissions represent such an exploitation of natural resources. Emitters of harmful substances for the climate, must dispose of the necessary emission allowances. The permits are allocated by regulatory authorities via emissions trading systems and their total volume is limited in line with reduction targets based on the most advanced scientific assessments. In the case that a polluting entity does not dispose of enough emission allowances, it can either choose to reduce its emissions or purchase the required additional permits at a certain cost from another market participant with a surplus because of successful reductions exceeding its target. Extra purchases of emission rights are therefore always equivalent to corresponding decreases of atmospheric GHG releases elsewhere.
However it needs to be stressed that emissions trading systems can only meet their climate protection purpose if they are designed and implemented in a way that ensures a sufficiently high level of market prices for emission permits irrespective of changing market conditions such as economic booms or recessions. Otherwise there will not be enough economic incentives for market participants to introduce the desired amount of climate friendly technologies and energy solutions in due time.
Kyoto emissions trading is restricted to the national level but emissions can also be traded by companies. Both market segments are explained in more detail in the carbon markets section.