The effect of industrialization on the world has been noted more significantly in the last ten years with awareness campaigns like “an inconceivable truth” and others by environmentalists. Earlier versions of these campaigns drew the interest of the United Nations who, in 1997 constituted a team of 37 industrialized countries and the European community to meet in Kyoto, Japan. The main objective was to set binding targets for these countries with the goal of reducing green house gas (GHG) EMISSIONS. This became known as the Kyoto Protocol. The protocol was adopted in Kyoto, Japan on December 11, 1997 and entered into force on February 16, 2005. To date, 182 parties of the convention, including Nigeria have ratified its protocol. The detailed rules for the implementation of the protocol went through many stages before it was adopted in 2001 and became known as the “Marrakesh Accords”.“Historically, the first ever certified emission certificate was issued in October 2005 to two hydroelectric projects in Honduras. Since the n, many projects around the world have worked to comply with the Kyoto Protocol, and register for the certification, with the least entrants from Africa.
Categorization of Countries
Group two brings together countries that will provide financial resources for the developing nations. Predominantly made up the OECD countries, these include Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom and United States of America. The third group comprises developing nations (including Nigeria). These are countries with no immediate restrictions but they serve purposes which include avoiding restriction on growth, limitation to selling emission credits to industrialized nations to permit them to over-pollute and they can get money and technology from the developed countries.
How can Nigeria Benefit?
“An arrangement under the Kyoto Protocol known as the Clean Development Mechanism (CDM) allows developing countries like Nigeria to benefit from industrialized countries with a greenhouse gas reduction commitment via direct investments in projects that reduce emissions in the developing country”. Based on the protocol, an investment in a project in the developing country is more viable and supported in the group 1 countries due to lower costs. An incentive for the developing nation is the monetary compensation for the monitored reduced emissions. An important prequalification step for an approved CDM project is that the planned carbon reduction would not have occurred without the “additional” incentive provided by certified emission reduction credits. The credit is issued by a branch of the United Nations in countries that have signed the Kyoto protocol, and is currently, the value of a carbon credit (which is a financial contract representing a verifiable annual reduction or avoidance of one metric ton of greenhouse gas emissions) ranges between a few euros to 22 euros per ton of carbon or its equivalent, depending on many factors.
With this understanding, Nigera and most African nations can benefit directly by developing programs which “go beyond” the “conceived goals” or lead to an additional reduction in generating emissions. A hypothetical case is if the government instituted a legislation that all oil companies should reduce their emissions by 20% in year X, Any corporation that decides to reduce emission by 50% can theoretically go through the process of applying for CER once it can defend its “additionality” clause for its project because it has gone beyond the line of duty. The corporation can then request carbon credits for the additional 30% reduction in emission. Clearly, a good argument can be made for this. The issue of additionality remains a controversial one fraught with many interpretations and definitions. Some of the leading ones are defined based on the environmental point of view or the project point of view. The environmental point of view looks at the additional environmental issues that will arise if the project was not initiated while the project additionality looks at it in the sense that the project will not be initiated in the absence of CDM. The Federal Ministry of Environment, Housing and Urban Development (Special Climate Change Unit) (which is the Designated National Authority, DNA) can play a role in clarification of qualifying programs to the appropriate ministries when permits are received for new projects by the Department of Petroleum Resources, Energy, manufacturing projects, etc.Utilization of the Protocol
Distribution of CDM emission reductions by Country
Purpose
Following the setting up of the Protocol, a clear transparent way of monitoring the transfer of credit needed to be developed. This led to the development of an international emission trading/ commodities market that traded the carbon credits generated. Initially, it was actually opposed by environmentalists, NGO and by developing nations which felt the group 1 countries were trying to limit their development. In addition, there was a general feeling of, “this was propaganda of the developed nations trying to police the world”. The purpose of the CDM was basically defined under Article 12 of the Kyoto Protocol in that apart from helping group 1 countries comply with their emission reduction commitments, it has a role to assist developing countries in achieving sustainable development while contributing to stabilization of GHG concentration in the atmosphere. From group 1 countries’ point of view, the system could be fraught with abuse in the sense that the highest bidder can buy up all the credits. To avoid this, Article 6.1d mandates that the use of CDM should be supplemental to domestic action to reduce emissions. This in itself leaves room for interpretation, and this remains an issue for monitoring. Prior to 2005 when the Protocol went into force, the believers were minimal as it was considered a variable market. It was after 2005 that the Adaptation Fund was established to finance approved projects in developing countries, with the fund getting its financing from proceeds from the CDM project activities.
The Project ProcessFor a project to benefit via financing from the CDM pathway, a group 1 country that wishes to get the credits must first establish contact and obtain consent from the developing country hosting the project, Designated National Authority (DNA). Most importantly, the project must be noted to contribute to sustainable development in the country. Next (using clearly defined methodologies approved by the CDM executive board) a case is made for the “additionality” value of the carbon project as well as establishing a baseline estimating the future emissions of the registered project if the project was not introduced. This is then sent to an independent third party agency (designated, operational entity) for validation as well as ensuring that the project results in real, measurable and long term reduction in emission. A decision is then made by the Executive Board on whether to register the project or not; If a decision is made to register the project, Certified Emission Reductions (CER) OR “carbon credits” are issued. Each unit is equivalent to the reduction of one metric ton of carbon dioxide or its equivalent. These units are calculated as the differential between the baseline and the monitored actual emissions as verified by the independent third party. Baseline determination is done via:
- - Using emission data from similar projects in the same country or
- -- Collection of emission data prior to the CDM funded project
CDM funded project
It is not unusual for investors to attempt to manipulate data at this stage which will reflect high baseline emission. Clearly, a practice as such is discouraged and the independent third party actively ensures that this data is verifiable.
CDM Projects- to date
Concerns
One of the biggest concerns for environmentalists with CDM is the fact that credit has evolved into the deforestation market. In Nigeria, paper products are in high demand most especially stationery and rest room paper. Ideally a toilet roll maker would only buy grade A white paper from newly cut down trees/ deforestation (thus depleting the tree population and reducing the role of carbon absorption). If the company strategically decides to invest in the accumulation of recycled paper and the processing/ treating to produce the same/ similar grade product, it should be able to apply for carbon credit because carbon emission from deforestation represents 18-25% of all emissions. While there are proponents and opponents of this initiative, the evolving market is yet to set its standards right in this area.Going forward
As stated by the government, penalties for flaring will continue to increase, and this will cripple most of the smaller upstream oil and gas companies while the international oil companies can afford to survive due to their ability to take advantage of the economies of scale with regard to their production. “The right approach to a sustainable emission reduction timeline is to gradually increase the percentage of reduction in emission over 10 years, as this will be more sustainable and easier to implement without additional punishment to indigenous companies”. With an implementation target of emission reduction project so designed, emission liable companies have an incentive for earlier implementation of the emission reduction program because they can seek out project funding assistance following the Kyoto Protocol and linking it to a group 1 country. Once the project is on-stream, they then have the additional benefit of obtaining additional income via the issuance of carbon credits by the CDM which is then traded on the commodities marketArea of Controversy
-Taxes and Carbon Credit
Is this a taxable sale? Is it a tax exempt sale? These are easy questions to answer and the answers are justifiable. While the government may erroneously look at it as income, it has to look at the big picture of the long term capital expenditure of corporations put in place to implement these projects. Royalties have been paid at source, Petroleum Profit tax has also been paid to the government. Withholding Tax and Value Added Tax have already been imposed on the company. An additional tax burden may remove the incentive to protect our environment especially for a commodity that is not stored, piped, cargoed or shipped to the industrialized nations.
NUTSHELL:
CDM is not strange to Nigeria. A few organizations such as Carbon Limits are championing the pursuit of clean energy in Nigeria. However the concept is yet to gain a major foothold in mainstream policy. Gas flaring is relatively rampant in the country and there seems to be a weak appetite in policy cirlces to take ownership the real issues on global emissions. Nigeria must draw inspiration from other nation blocs such as the ASEAN with its revolutionary Carbon Capture and Sequestration (CCS), Clean Coal Technology (CCT) programmes as it aims to achieve reduction in Green House Gases. The European Emissions Trading Scheme (ETS) is the most comprehensive approach to the issue of emissions. It will be a good thing for the policy makers to adopt an emissions reduction target to place Nigeria on the path to more sustainable development and energy security. This article is written by Dr. Bolaji Ogundare- a Patron of 'The Mix: Oil and Water!' and the article is posted in timely fashion as The Lagos Oil Club will be hosting Paul Parks today- September 5, 2011 in a Q&A session at Victoria Island Lagos. Paul Parks will be speaking on CDM.
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