The BM&FBOVESPA carbon market is an electronic trading environment developed for agile, secure and transparent trading within the ambit of the voluntary market, in credits that have been created by Clean Development Mechanism (CDM) projects.
Did you know?
- Convention stipulates that a ton of carbon (CO2) corresponds to a carbon credit.
- Humans emit 35.5 billion tons of carbon dioxide (CO2) into the atmosphere annually.
Voluntary Markets
These are carbon credit markets whose rules are not binding or related to the targets and/or mechanisms established by the Kyoto Protocol.
What is Clean Development Mechanism?
The CDM is one of the flexibility mechanisms established by the Kyoto Protocol with the purpose of facilitating attainment of the targets for greenhouse gas (GHG) emission reduction that were defined for each of the ratifying countries. In short, the CDM proposal (described in Article 12 of the Protocol) states that each tonne of CO2 equivalents1 (tCO2e) which is not emitted or which is removed from the atmosphere by a developing country (non-Annex I) may be traded in the form of carbon credits in world markets, thereby providing an additional incentive to further the reduction of global GHG emissions.
Brazil has a clean energy matrix that has obtained a high level of technological development in the case of biofuels. Counterpointing this, the “Low Carbon Study for Brazil” developed by the World Bank and published in July 2010, demonstrated that the country still faces a range of challenges, while having good local opportunities for cutting greenhouse gas emissions.
Since 1992, when the country hosted the United Nations Conference on Environment and Development (the Earth Summit), Brazil’s commitment in regard to climate change has become ever more apparent. This was reinforced by the December 2009 announcement of Brazil’s National Climate Change Policy, and consequently from the adoption of a national voluntary commitment to cut estimated greenhouse gas emissions up to 2020 by around 36%.
Brazil has also proved proactive in the global carbon market. However, discussions about the post-2012 scenario have led us to identify a need to develop the country’s carbon credits market, as an effective tool for mitigating global warming.
What is the Kyoto Protocol?
It is a UN-sponsored agreement signed in 1997 by 59 countries in the city of Kyoto, Japan. The protocol is listed on the United Nations Framework Convention on Climate Change (UNFCCC), whose objective is to reduce emissions of greenhouse gases (GHGs) in industrialized nations through targets which correspond on average to a 5% reduction over the amount of gases emitted in 1990 on a country by country basis and to establish a sustainable development model for emerging countries. The full text of the Protocol is available.
What is the greenhouse effect?
It is a phenomenon caused by the accumulation of certain gases in the atmosphere, known popularly as greenhouse gases (GHGs), which hold heat within the surface of the Earth and contribute to its warming. The Kyoto Protocol states that the following GHGs should be regulated: Carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbon (HFC), perfluorocarbon (PFC) and sulfur hexafluoride (SF6). The increase in the concentration of these gases in the atmosphere is a direct result of man-made emissions, mainly through the following activities: Burning of fossil fuels and biomass (CO2 e N2O); organic matter decay(CH4); industrial activities, refrigeration processes, use of propulsors, expanded foams and solvents (HFCs, PFCs, and SF6); and the usage of fertilizers (N2O).
What is the United Nations Framework Convention on Climate Change?
It is a treaty signed in 1992 on the occasion of the UN Conference on Environment and Development during the Rio de Janeiro Earth Summit, which aims to stabilize atmospheric GHG concentration so as to prevent anthropogenic interference (i.e. resulting from human activity) that is harmful to the climate system. The convention establishes common but differentiated responsibilities from participating countries (the parties) hence the different treatment given to Annex B countries (a Kyoto Protocol document which lists the developed countries for which emission reduction targets were set) and to emerging market countries.
What does COP stand for?
Conference of the Parties (i.e. the United Nations Framework Convention on Climate Change signatory countries). It represents the UNFCCC's supreme body responsible for reviewing the implementation of the Convention. The COP has met regularly since 1995 in one after another of the participating countries. The 3rd COP session in 1997 led to the adoption of the Kyoto Protocol. The 12th COP session was held in Nairobi, Kenya, in November of 2006.
When did the Kyoto Protocol go into effect?
On February 16, 2005, 90 days after Russia ratified the Protocol. The Russian ratification led to the Protocol's entry into force, once the condition of being ratified by 55 parties responding for at least 55% of global emissions was met. After that date, with the addition of the Russian Federation, a total of 141 countries had signed the treaty, corresponding to 61.6% of total global GHG emissions.
When should the parties comply with their emission reduction targets?
The industrialized nations (listed on Annex B of the Kyoto Protocol) must comply with their emission reduction targets-on an average of 5% of their 1990 levels-during the first commitment period, which runs from 2008 to 2012. For the second period, which begins after 2012, the corresponding emission reduction targets have not yet been set.
What are the Protocol's flexibility mechanisms?
They are technical operational arrangements regulated by the Kyoto Protocol which allow countries or companies to use carbon credits, thus creating additional facilities that the parties listed on Annex B can use to help meet their emission reduction commitments. These mechanisms are also meant to encourage emerging countries to reach an adequate model of sustainable development. The Protocol's three mechanisms are: Emissions Trading (between Annex B parties, in which a country that has reduced emissions to a level below its required amount may transfer its excess of emission reduction to another party who has not yet met its emission reduction target); Clean Development Mechanism (CDM); and Joint Implementation (JI) - which relate to the implementation of GHG emission reduction projects in Annex B countries. The CDM is the only mechanism applicable to Brazil.
What is the Clean Development Mechanism (CDM)?
The concept underlying the CDM is that of the voluntary reduction of GHGs emitted by an industrial process or their sequestration from the atmosphere by a company based in an emerging country, creating credits which can be traded in the global carbon market with industrialized countries (or with their companies) in need of these "credits" to meet their emission reduction targets in accordance with Kyoto Protocol. This flexibility mechanism, therefore, enables countries to reduce their global GHG emissions while also providing an attractive alternative method to foster sustainable development in the emerging market countries.
What are the steps for the implementation of a CDM project?
In order to qualify for recognition under the Kyoto Protocol and generate carbon credits (Certified Emission Reductions, or CERs):
- The project participant (i.e. a company) must prepare a Project Design Document (PDD) (see question 10);
- The Designated Operational Entity must validate the methodology used in the PDD (see question 14);
- The Designated National Authority must approve the proposed project (see question 15);
- The project activity must then be registered with the CDM Executive Board (see question 13);
- The project participant must carry out the monitoring of the CDM activity (see question 18);
- The Designated Operational Entity performs the verification and certification of the GHG emission reduction resulting from the project;
- The CDM Executive Board issues the CERs.
What is the Project Design Document (PDD)?
It is a document prepared by the CDM participant (a company) containing the following information: General description of the project; crediting period; baseline and monitoring methodologies (see question 11); calculation of GHG emission reductions by sources; environmental impacts; stakeholders' comments; and information on public funding sources from Annex I parties (i.e. developed countries listed on the UNFCCC) for the project. The PDD forms are available at http://cdm.unfccc.int/Reference/PDDs_Forms/PDDs/index.html.
What is the CDM project's baseline methodology?
The baseline-or reference scenario-of a CDM project comprises the current level and the projection of GHG emissions which might occur if the CDM activity were not implemented. This scenario is used for calculating carbon credits (emission reductions) to be generated by the project. The baseline follows a pre-approved methodology as set by the CDM Methodology Panel (a group of scientists from various countries whose aim is to provide technical support to the CDM Executive Board, as well as evaluate and suggest recommendations on new baseline and monitoring methodologies, which are forwarded to the Board for approval within the CDM framework). An updated list of approved baseline methodologies can be found at http://cdm.unfccc.int/methodologies/PAmethodologies/approved.html.
Does a CDM project have a predetermined crediting period?
Yes, it does. When preparing the Project Design Document (PDD), the participant must indicate the crediting period the project is applying for, and choose from one of the following alternatives:
- In the case of afforestation and reforestation projects, a maximum of 20 years-renewable two times at the most-or a maximum of 30 years without the possibility of renewal;
- For CDM projects which pertain to other sectoral scopes, a maximum of 7 years-renewable two times at the most-or a maximum of 10 years without renewal.
What is the CDM Executive Board?
It is a UNFCCC body which supervises the Clean Development Mechanism. The CDM Executive Board is composed of representative members from parties to the Kyoto Protocol. In addition to accrediting Designated Operational Entities, the Board also issues CERs for the projects which meet all CDM requirements.
What is a Designated Operational Entity (DOE)?
It is an entity qualified by the Conference of the Parties (COP) by recommendation of the CDM Executive Board with the purpose of validating proposed CDM projects or verifying and certifying the GHG reductions resulting from project-based activities. To be eligible to operate in Brazil, the DOE must be recognized by the National Designated Authority (DNA) (see question 15) and be fully established in the country. The updated list of DOEs accredited by the CDM Executive Board can be obtained at http://cdm.unfccc.int/DOE/list.
What is the Designated National Authority (DNA) of the Clean Development Mechanism?
It is a governmental body formally appointed by a country in order to approve projects proposed in its territory within the scope of the CDM. The DNAs authorize the entities located in their countries to participate and receive credits from a CDM project. In the case of countries not included in Annex B e.g. Brazil the DNA will revise and approve the projects proposed in its territory, in accordance with the scope of the CDM. This approval is one of the basic requirements for the project to be submitted to the CDM Executive Board. The DNA in Brazil is an Interministerial Committee for Global Climate Change composed of the Chief of Staff of the President of the Republic and the following Brazilian Ministries: Science and Technology (the Committee coordinator); Foreign Affairs; Agriculture, Livestock and Supply; Transportation; Mines and Energy; Planning, Budget and Management; Environment; Development, Industry and Foreign Trade; Municipalities; and Finance.
What are the Brazilian DNA approval procedures?
In Brazil, the DNA only receives for approval projects which were previously validated by an accredited DOE. The submission rules are described in the resolutions of the Brazilian Interministerial Committee for Global Climate Change. These regulatory instruments are available at http://www.mct.gov.br/index.php/content/view/16167.html. The updated list of projects approved by the Brazilian DNA is at http://www.mct.gov.br/index.php/content/view/16361.html.
What is the significance of a project's registration with the CDM Executive Board?
The registration represents the formal acceptance and recognition of a project by the CDM Executive Board as a validated CDM activity. An updated list of registered projects can be downloaded from http://cdm.unfccc.int/Projects/registered.html.
What does the monitoring of a CDM project activity entail?
It involves the collection of information about the project which is carried out by the project participant during the execution of the underlying activities. The objective of this collected information is to measure the project's anthropogenic emissions of greenhouse gases. The consistency of the data collated in the monitoring report must be verified and certified by an independent entity (the Designated Operational Entity) and further submitted to the CDM Executive Board, thus allowing the corresponding CERs to be issued.
What is the carbon market?
It is a popular term used to describe the trading systems for GHG emission reduction credits. There are two types of carbon markets: Markets in line with the Kyoto Protocol (Kyoto markets) and voluntary markets (Non-Kyoto markets). Under the first type, credits are traded so as to facilitate the abatement of the emission reduction targets, established by the Kyoto Protocol; whereas under to the second type, trading is aimed at the abatement of emission reduction targets voluntarily established by local industries and governments which have not signed the Kyoto Protocol. These Kyoto and Non-Kyoto markets trade credits generated by emission reduction projects (e.g. Clean Development Mechanism and Joint Implementation Projects) and/or by the allowance market (see question 20).
What is a GHG allowance market?
It is a trading system which is more applicable to the Annex B countries since it relates to the limits set on total GHG emissions within a determined geographical area. For example, the government of an Annex B country establishes maximum limits of allowed emissions for various industrial sectors in that country. In this context, companies are allowed to sell their spare allowance to other companies that have failed to achieve their reduction targets. The first model of this system to enter into force worldwide was the European Emissions Trading Scheme (EU ETS), which went on stream on January 1st, 2005, in line with the Kyoto Protocol propositions.
What is the Certified Emission Reduction (CER) market?
It is the market related to the purchase and sale of CERs, which can also be traded by companies established in Annex B countries as a means to abate their emission reduction targets. The CER is a unit issued by the CDM Executive Board as a result of the CDM project activities. One CER represents the non-emission or sequestration of one tonne of carbon dioxide equivalent from the atmosphere.
What is the Brazilian Carbon Market (MBRE)?
It is a composite of institutions, regulations, project registration systems and a business center, all undergoing consolidation in Brazil via BM&FBOVESPA. MBRE seeks to stimulate the development of emission reduction projects and to make business in the environmental market viable in an organized and transparent manner. BM&FBOVESPA supplies participants in this market with a CDM projects bank and an electronic auction system for trading in emission reductions.
What is the BM&FBOVESPA Carbon Facility?
An electronic system for the registration of information related to CDM projects that have been validated by a Designated Operational Entity (DOI). What is more, qualified investors preregistered by the Exchange can announce their intention to acquire credits already created on the market, or credits in the process of being created by CDM projects. To access the Projects Bank click here.
What are the procedures to register a project in the BM&FBOVESPA Carbon Facility?
Applicants should register with the Exchange system via Internet. After application is approved they should fill and submit an electronic project approval form, offered on the BM&FBOVESPA site. A Project Concept Document and a Validation Report should be submitted with this project approval form.
What kind of investors can register their Expressions of Interest (EOI) in the BM&FBOVESPA Carbon Facility?
Government entities, multilateral entities, NGOs and companies and other categories of investor to be specified by BM&FBOVESPA, can use the Projects Bank to announce their intention to buy ERCs (emission reduction credit certificates) on the spot and forward markets. This is upon registration and forwarding of the appropriate electronic form offered on the BM&FBOVESPA site.
How will Certified Emission Reductions (CERs) be traded at BM&FBOVESPA/BVRJ?
In the first phase, CERs will be traded, in the spot market, through a Web-based auction trading system developed by BM&FBOVESPA specifically for this market. The rules for auction trading and participant registration will be disclosed by BM&FBOVESPA through public notices, which will be available on its Website before each auction date.
How does carbon credit trading take place on BM&FBOVESPA?
At present, carbon credits can be traded on the spot market through the electronic auction system developed for this market by BM&FBOVESPA. The Exchange will announce trading and registration rules for participants in each auction, via offer notices to be published on the BM&FBOVESPA site before the date of the auction in question.
