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Glossary of Carbon Finance
and Climate Change Terms
Adaptation
Adjustment in natural or human systems in response to actual or expected climatic stimuli or their effects, which moderates harm or exploits beneficial opportunities.
Adaptation Fund
The Adaptation Fund was established to finance concrete adaptation projects and programmes in developing countries that are Parties to the Kyoto Protocol. The Fund is to be financed with a share of proceeds from clean development mechanism (CDM) project activities and receive funds from other sources.
Additionality: According to the Kyoto Protocol, gas emission reductions generated by Clean Development Mechanism and Joint Implementation project activities must be additional to those that otherwise would occur. Additionality is established when there is a positive difference between the emissions that occur in the baseline scenario, and the emissions that occur in the proposed project.
Afforestation: The process of establishing and growing forests on bare or cultivated land, which has not been forested in recent history.
Annex I Parties
The industrialized countries listed in this annex to the UNFCCC which were committed return their greenhouse-gas emissions to 1990 levels by the year 2000. They include the 24 original OECD members, the European Union, and 14 countries with economies in transition.
Annex B Countries
Annex B countries are the 39 emissions-capped countries listed in Annex B of the Kyoto Protocol. In practice, Annex I of the UNFCCC (see below) and Annex B of the Kyoto Protocol are often used interchangeably.
Assigned Amount: The quantity of greenhouse gases that an Annex I country can release in accordance with the Kyoto Protocol, during the first commitment period of that protocol (20\08-12).
Assigned Amount Unit (AAU): Fraction of the assigned ammount equalling one metric tonne of greenhouse gas.
Baseline: The emission of greenhouse gases that would occur without the contemplated policy intervention or project activity.
Biomass Fuel: Combustible fuel composed of a biological material, for example, wood or wood by-products, rice husks, or cow dung.
Cap and Trade
A design for emissions trading systems under which total emissions are limited or 'capped'. Tradable emission allowances corresponding to the total allowed emission volume are allocated to participants for free or through auctioning. Contrasts with baseline-and-credit approaches where only deviations from a baseline are tradable.
Carbon Asset: The potential of greenhouse gas emission reductions that a project is able to generate and sell.
Carbon Finance: Resources provided to projects generating (or expected to generate) greenhouse gas (or carbon) emission reductions in the form of the purchase of such emission reductions.
Carbon Dioxide Equivalent (CO2e): The universal unit of measurement used to indicate the global warming potential of each of the six greenhouse gases. Carbon dioxide— a naturally occurring gas that is a byproduct of burning fossil fuels and biomass, land-use changes, and other industrial processes— is the reference gas against which the other greenhouse gases are measured.
Carbon Neutrality
The practice of purchasing and retiring emission credits or allowances corresponding to the amount of GHG emissions from for instance an activity, company or country.
Certified Emission Reductions (CERs): A unit of greenhouse gas emission reductions issued pursuant to the Clean Development Mechanism of the Kyoto Protocol, and measured in metric tons of carbon dioxide equivalent.
Clean Development Mechanism (CDM): The mechanism provided by Article 12 of the Kyoto Protocol, designed to assist developing countries in achieving sustainable development by permitting industrialized countries to finance projects for reducing greenhouse gas emission in developing countries and receive credit for doing so.
Conference of Parties (COP): The meeting of parties to the United Nations Framework Convention on Climate Change.
Emission Reductions (ERs): The measurable reduction of release of greenhouse gases into the atmosphere from a specified activity or over a specified area, and a specified period of time.
Emission Reductions Purchase Agreement (ERPA): Agreement which governs the purchase and sale of emission reductions.
Emission Reduction Units (ERUs): A unit of emission reductions issued pursuant to Joint Implementation. This unit is equal to one metric ton of carbon dioxide equivalent.
European Union Allowances (EUA)
EU Allowances, the tradable unit under the EU ETS. Each allowance equals 1 tonne of CO2. EUAs are bankable from Phase 2 to Phase 3 of the EU ETS.
European Union Emissions Trading Scheme (EU ETS)
Trading Scheme within the European Union, which was launched on January 1, 2005. The scheme is based on Directive 2003/87/EC, which entered into force on 25 October 2003. The Phase I (2005 - 2007) has received much criticism due to oversupply of allowances and the distribution method of allowances (via grandfathering rather than auctioning), Phase II (2008-2012) links the ETS to other countries participating in the Kyoto trading system.
Fuel Switching
The process of moving from a higher carbon content fuel, such as coal, to a lower carbon content fuel, such as natural gas, in power generation and industrial process for purposes of reducing carbon emissions.
Global Warming Potential (GWP)
The global warming potential is the impact a greenhouse gas (GHG) has on global warming. By definition, CO2 is used as reference case, hence it always has the GWP of 1. GWP changes with time, and the IPCC has suggested using 100-year GWP for comparison purposes. Below is a list of 100-year GWPs used in the Kyoto Protocol for the six Kyoto gases:
| Carbon dioxide (CO2) |
GWP: 1 |
| Methane (CH4) |
GWP: 21 |
| Nitrous oxide (N2O) |
GWP: 310 |
| Hydrofluorcarbons (HFCs) GWP: |
GWP: 150 – 11 700 |
| Perfluorcarbons (PFCs) |
GWP: 6500 – 9 200 |
| Sulphur hexafluoride (SF6) |
GWP: 23 900 |
Gold Standard
Initiated by WWF, SSN and Helio International, the Gold Standard for CDM projects was launched in 2003 after a wide-ranging stakeholder consultation among key actors of the carbon market as well as governments. It offers project developers a tool with which they can ensure that CDM, JI and VER projects have real environmental benefits and, in so doing, give confidence to host countries and the public that projects represent new and additional investments in sustainable energy services. Eligible project types are renewable energy and energy efficiency.
Grandfathering
Method for allocation of emissions credits/allowances to companies or other legal entities, usually free of charge, on the basis of their historic emissions.
Greenhouse gases (GHGs): These are the gases released by human activity that are responsible for climate change and global warming. The six gases listed in Annex A of the Kyoto Protocol are carbon dioxide (CO2), methane (CH4), and nitrous oxide (N20), as well as hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride (SF6).
Host Country: The country where an emission reduction project is physically located. Internal rate of return: The annual return that would make the present value of future cash flows from an investment (including its residual market value) equal the current market price of the investment. In other words, the discount rate at which an investment has zero net present value.
International Emissions Trading (IET)
International emissions trading, one of the three flexible mechanisms under the Kyoto Protocol, allows for transfer of AAUs across international borders or emission allowances between companies covered by a cap-and-trade scheme. See emissions trading.
Joint Implementation (JI): Mechanism provided by Article 6 of the Kyoto Protocol, whereby a country included in Annex I of the UNFCCC and the Kyoto Protocol may acquire Emission Reduction Units when it helps to finance projects that reduce net emissions in another industrialized country (including countries with economies in transition).
Kyoto Protocol: Adopted at the Third Conference of the Parties to the United Nations Convention on Climate Change held in Kyoto, Japan in December 1997, the Kyoto Protocol commits industrialized country signatories to reduce their greenhouse gas (or “carbon”) emissions by an average of 5.2% compared with 1990 emissions, in the period 2008-2012.
Millennium Development Goals (MDGs): Commit the international community to an expanded vision of development, one that vigorously promotes human development as the key to sustaining social and economic progress in all countries, and recognizes the importance of creating a global partnership for development. The goals have been commonly accepted as a framework for measuring development progress.
Mitigation
In the context of climate change, a human intervention to reduce the sources or enhance the sinks of greenhouse gases. Examples include using fossil fuels more efficiently for industrial processes or electricity generation, switching to solar energy or wind power, improving the insulation of buildings, and expanding forests and other "sinks" to remove greater amounts of carbon dioxide from the atmosphere.
Monitoring Plan (MP): A set of requirements for monitoring and verification of emission reductions achieved by a project.
Non-Annex I countries
Countries that have ratified or acceded to the UNFCCC, but not included in Annex I and have no emission reduction targets. Annex I is an Annex in the UNFCCC listing those countries that are signatories to the Convention and committed to emission reductions.
Offset credits or offsets
Emission reduction credits from project-based activities that can be used to meet compliance or corporate objectives as a supplement or alternative to reducing one’s own emissions. In a cap-and-trade scheme, offsets may be used instead of allowances, sometimes up to a limit (see credit limit). CERs and ERUs are types of offset credits.
Operational Entity (OE): An independent entity, accredited by the CDM Executive Board, which validates CDM project activities, and verifies and certifies emission reductions generated by such projects.
Over-the-counter market (OTC)
A market where products such as stocks, foreign currencies, and other cash items are bought and sold by telephone and other means of communications.
Project-Based Emission Reductions: Emission reductions that occur from projects pursuant to JI or CDM (as opposed to “emissions trading” or transfer of assigned amount units under Article 17 of the Kyoto Protocol).
Project Design Document (PDD): A projectspecific document required under the CDM rules which will enable the Operational Entity to determine whether the project (i) has been approved by the parties involved in a project, (ii) would result in reductions of greenhouse gas emissions that are additional, (iii) has an appropriate baseline and monitoring plan.
Reforestation: This process increases the capacity of the land to sequester carbon by replanting forest biomass in areas where forests have been previously harvested. Registration: The formal acceptance by the CDM Executive Board of a validated project as a CDM project activity.
Registries, registry systems
Electronic databases that will track and record all transactions under the Kyoto Protocol's greenhouse-gas emissions trading system (the “carbon market”) and under mechanisms such as the Clean Development Mechanism.
Removal unit (RMU)
A Kyoto Protocol unit equal to 1 metric tonne of carbon dioxide equivalent. RMUs are generated in Annex I Parties by LULUCF activities that absorb carbon dioxide.
Sequestration: Sequestration refers to capture of carbon dioxide in a manner that prevents it from being released into the atmosphere for a specified period of time.
Sink
Any process, activity or mechanism which removes a greenhouse gas, an aerosol or a precursor of a greenhouse gas from the atmosphere. Forests and other vegetation are considered sinks because they remove carbon dioxide through photosynthesis.
Sustainable development
Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.
United Nations Framework Convention on Climate Change (UNFCCC): The international legal framework adopted in June 1992 at the Rio Earth Summit to address climate change. It commits the Parties to the UNFCCC to stabilize human induced greenhouse gas emissions at levels that would prevent dangerous manmade interference with the climate system.
Validation: The assessment of a project’s Project Design Document, which describes its design, including its baseline and monitoring plan, by an independent third party, before the implementation of the project against the requirements of the CDM.
Verification Report: A report prepared by an Operational Entity, or by another independent third party, pursuant to a Verification, which reports the findings of the Verification process, including the amount of reductions in emission of greenhouse gases that have been found to have been generated.
Verified Emission Reductions (VERs)
VERs are generated by carbon reduction projects that are assessed and verified by third party organisations rather than through the UNFCCC.
Voluntary carbon market
The sum of all transaction of carbon credits in non-compliance markets. The generation of non-compliance credits — or voluntary offset credit supply — comprises the reduction of GHG emissions for the purpose of selling them to voluntary end users and not to compliance buyers. Voluntary markets for emissions reductions include generation and transaction of carbon credits in non-compliance markets. The voluntary market permits the use of credits such as verified emission reductions (VERs), non-verified emission reductions (ERs) and prospective emission reductions (PERs), as well as the non-compliance use of CERs, ERUs, EUAs and other credits and allowances generated for the compliance market.
Voluntary standard
Any standard that aims to ensure the quality of carbon credits in the voluntary carbon market. It sets various requirements for project developers, such as third-party verification and measures to avoid double counting of carbon offsets, e.g. the use of registries.
Voluntary Carbon Standards (VCS)
VCS is a certification standard for offset credits in the voluntary market. The standard provides for for project-level quantification, monitoring, and reporting, validation, and verification of greenhouse gas emission reductions or removals. The VCS is an initiative of the World Business Council for Sustainable Development, International Emissions Trading Association, The Climate Group, and the World Economic Forum.
Voluntary Offset Standard (VOS)
VOS was launched in June 2007 and is based on the existing standards promoted by the UNFCCC, bringing voluntary market to the level of the regulated and standardized procedures of the compliance market. VOS endorses the existing gold standard methodology.
Voluntary Gold Standard
A voluntary standard, launched in May 2006 by WWF-UK and endorsed by 45 environmental NGOs. It is a simplified version of the CDM Gold Standard and is only available for projects in developing countries.
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