DRAFT REPORT INITIAL FRAMEWORK FOR CARBON OFFSET OPPORTUNITIES AND VERIFICATION OPTIONS€¦ · · 2014-06-034.3.3 Trading Platform ... Job Creation Potential ... These two points

DRAFT REPORT

INITIAL FRAMEWORK FOR CARBON

OFFSET OPPORTUNITIES AND

VERIFICATION OPTIONS

3 September 2012

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DOCUMENT HISTORY

Version Date Released Comments

0.3 Thursday 6 September 2012 Draft updated after discussion with JSE 0.2 Monday 13 August 2012 Draft updated after comments from BUSA

0.1 Wednesday 12 June 2012 Draft report released for key stakeholder comment to BUSA.

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TableofContentsDocument History ............................................................................................................... i 1. Introduction .............................................................................................................. 4 2. Background .............................................................................................................. 6

2.1 Drivers - Policy Background .................................................................................... 6 2.1.1 Climate Change Response White Paper .............................................................. 6 2.1.2 2012 Budget Speech of the Minister of Finance ................................................... 6 2.1.3 State Intervention in Mining ............................................................................. 7 2.1.4 National Development Plan 2030 ...................................................................... 7 2.1.5 SA Carbon Pricing Context ............................................................................... 8

2.2 Carbon Offset Mechanisms ..................................................................................... 8 2.2.1 Carbon Offset Definition .................................................................................. 8 2.2.2 International Carbon Offsetting Experience ........................................................ 9

2.3 Implementation of Offsetting Systems ................................................................... 10 2.3.1 Macro Economic Framework ........................................................................... 10 2.3.2 Micro Economic Framework............................................................................ 11 2.3.3 Global Economic Framework .......................................................................... 12

3. Potential for Carbon Offset Demand ............................................................................ 13 3.1 Demand under a Carbon Tax Scheme that allows offsets .......................................... 13 3.2 Demand in the Absence of a Carbon Tax Scheme .................................................... 15 3.3 Number of Market Participants on Demand Side ...................................................... 15

4. Potential for Carbon Offset Supply .............................................................................. 16 4.1 Potential Carbon Offset Opportunities .................................................................... 16

4.1.1 Existing Projects .......................................................................................... 16 4.1.1.1 Clean Development Mechanism ...................................................................... 16 4.1.1.2 Voluntary Carbon Standard (VCS) ................................................................... 16 4.1.1.3 Gold Standard (GS) ...................................................................................... 17 4.1.1.4 Climate, Community and Biodiversity Alliance (CCBA)........................................ 17 4.1.2 Potential Future Projects ............................................................................... 17

4.2 Sectoral Classification of Carbon Offset Projects ...................................................... 20 4.2.1 Sectoral Classification ................................................................................... 21 4.2.2 Sectoral Carbon Offset Opportunities .............................................................. 22

4.3 Factors affecting the availability of credits .............................................................. 24 4.3.1 Certified Emission Reduction Credits ............................................................... 25 4.3.2 Carbon Offsets in South Africa ....................................................................... 26 4.3.3 Trading Platform .......................................................................................... 30

4.4 Number of Market Participants .............................................................................. 30 5. Job Creation Potential ............................................................................................... 31 6. Assessment of Auditing standards .............................................................................. 33

6.1 Stages and Structure of the Offset Project Approval and Credits Issuance ................... 33 6.1.1 Administrator of the Scheme – Approval of Carbon Offsetting Projects ................. 33 6.1.2 Independent Validation and Verification of Projects ........................................... 34 6.1.2.1 Project Validation ......................................................................................... 34 6.1.2.2 Project Monitoring and Verification .................................................................. 34 6.1.3 Offset Registry ............................................................................................. 35

6.2 Carbon Offsetting Standards ................................................................................. 36 6.3 Methodological challenges .................................................................................... 36

6.3.1 Carbon Offsetting Principles ........................................................................... 36

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6.3.2 Eligibility of Project Types - Assessment of Additionality & Methodology ............... 37 6.4 Cost & Credibility of Carbon Offset Credits .............................................................. 38

6.4.1 Credibility Considerations .............................................................................. 38 6.4.2 Cost Considerations ...................................................................................... 38 6.4.3 Cost vs. Credibility ....................................................................................... 41 6.4.4 Project Registration Risk ............................................................................... 42

7. Barriers to Project Implementation ............................................................................. 44 8. Conclusions and Recommendations ............................................................................ 46 Appendix 1 – Projects Developed in South Africa to Date ....................................................... 47 Bibliography .................................................................................................................... 51

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1. INTRODUCTION

This document was prepared under a contract between Promethium Carbon and Business Unity South Africa (BUSA) in terms of a proposal submitted by Promethium on 4 May 2012. The context of the document is the reference to carbon offsets made in the Tax Proposals, Budget 2012 (SARS, 2012, p 8).

The brief was to perform a study to cover the following:

An assessment of the potential for and opportunity available for carbon offset projects: o Potential project types that would be suitable; o Sectors that could contribute; o Quantity of emissions reductions possible; o Projects attempted under the various schemes in South Africa to date; o High level job creation potential in the various projects; and, o Barriers to implement emission reduction projects in the near term.

An assessment of the auditing standards that will be required for carbon offset projects,

including: o What standards exists and could be compatible with existing carbon related

initiatives in South Africa; o Accreditation process to underpin the respective standards; and, o Job creation potential and skills development needed.

This report excludes two points as it was not possible to achieve credible results in the timeframes indicated: Estimated costs for achieving the emission reductions; and, Identification of the funding needs for the implementation of the projects.

These two points would fit into a subsequent phase and would build on this exploratory phase.

The report was prepared as a desktop study. Upon completion of a draft report BUSA intends to organize appropriate stakeholder consultation meeting(s) to discuss it.

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The report uses the following structure as a basis for analysis:

Taxpayer(buyer of offset credits)

SARS

Trading Platform

Registry

Clearing &settlement

Commercial Infrastructure

Market (such as the JSE)

Standard

Money

Offset credits

Offset Provider(seller of offset credits)

Payment for credits

Credits delivered

Credits delivered

Payment for credits

Reduction in tax payment

Credits surrendered to SARS

Credits retired from registry

Legend

Figure 1: Trading system structure

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2. BACKGROUND

2.1 DRIVERS - POLICY BACKGROUND

2.1.1 Climate Change Response White Paper

During the Copenhagen climate change conference, on the 6th of December 2009, South Africa announced that it would take nationally appropriate mitigation actions to enable a 34% deviation below the ‘Business as Usual’ emission growth trajectory by 2020, and a 42% deviation below the ‘Business as Usual’ emissions growth trajectory by 2025.

The National Climate Change Response White Paper stated:

“The key elements in the overall approach to mitigation will be: … The deployment of a range of economic instruments to support the system of desired emissions reduction outcomes, including the appropriate pricing of carbon and economic incentives, as well as the possible use of emissions offset or emission reduction trading mechanisms for those relevant sectors, sub-sectors, companies or entities where a carbon budget approach has been selected.” (Department of Environmental Affairs, 2011)

The Paper further recognises that “due to the current emissions-intense structure of the economy, many sectors require a flexible mitigation approach, which enables the development and use of lowest-cost options such as offset and other types of market-based mechanisms.” (Department of Environmental Affairs, 2011)

2.1.2 2012 Budget Speech of the Minister of Finance

National Treasury made the following statements with regard to the proposed design of a carbon emissions tax in the 2012:

”Following public consultation, government has revised its concept design for a carbon tax, and a draft policy paper will be published for comment in 2012. The proposed design features include - The use of offsets by companies to reduce their carbon tax liability” (SARS, 2012).

Proposed emissions offsets for individual sectors are shown in Table 1. Firms in sectors with a total potential tax-free allowance of 80 percent will be allowed to offset up to 5 percent of their emissions, while firms in sectors with a total potential tax free allowance of less than 80 percent will be allowed to offset up to 10 percent of their emissions.

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Table 1: Maximum Offsets Allowed

Sector Maximum Offset Percentage

Electricity 10%

Petroleum (coal to liquid) 10%

Petroleum (oil refinery) 10%

Iron and steel 5%

Aluminium 5%

Cement 5%

Glass & ceramics 5%

Chemicals 5%

Pulp & paper 10%

Sugar 10%

Agriculture, forestry and land use ‐

Waste ‐

Fugitive emission: coal 5%

Other 10%

(Source: SARS, 2012)

2.1.3 State Intervention in Mining

The ANC published a discussion document, State Intervention in the Minerals Sector (SIMS) Report, which provided provides a framework for debate at ANC’s National Policy Conference from 26 to 29 June 2012. This report said the following about the introduction of a carbon tax:

The putative carbon tax as currently proposed by Treasury could be extremely damaging to our economy and should be put on hold. A carbon tax as currently configured would add to costs, increase the cut‐off grade (on mining operations) and consequently sterilise mineral resources. It could also potentially render many energy‐intensive beneficiation operations unviable. The Carbon Tax should be reconfigured, possibly by having a higher RRT1 (above 50%) linked to carbon emissions and should also include a realistic basket of supply and demand side measures to reduce national carbon emissions.

2.1.4 National Development Plan 2030

The Government published its National Development Plan on 15 August 2012. The idea behind the plan is to provide a framework within which Government can eliminate poverty and reduce inequality by 2030. The plan has a section covering the conversion of the South African economy to a low carbon economy, it makes the following statement about a carbon tax:

1 RRT – Resource Rent Tax

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While the principle of a carbon tax as a mechanism for establishing a domestic price for carbon is accepted by the government, the National Treasury is still engaged in research and consultation on its implementation.

2.1.5 SA Carbon Pricing Context

In the Budget of 2012 National Treasury proposed a carbon tax of R 120 per ton of carbon dioxide equivalent CO2e above the permitted threshold of (CO2e) emissions to take effect during 2013 to 2014. The rate of tax would increase annually by 10% during the first phase of operation from 2013 to 2020 (SARS, 2012).

Given the basic 60 percent tax-free allowance, the proposed tax would be equal to an initial average cost of R 48 per tonne of CO2e before the efficiency adjustment is taken into consideration. Taking into account additional allowances (i.e. process emissions and offsets) for specific sectors, the initial average cost associated with the carbon tax could be as low as R 24 per tonne of CO2e for some companies.

Carbon offsets will enable companies to reduce their taxable emissions base by purchasing a carbon credit, not only purchase, direct investment also and thereby making a monetary investment in a project or activity that abates greenhouse gas (GHG) emissions or sequesters carbon from the atmosphere.

The implementation of this tax will bring the total cost of carbon in the South African economy to just over R 100 per ton. This is made up of:

• R 48/ton (R 120 per ton for 40% of emissions) carbon tax; • R 35/ton (3.5 c/kWhr included in Eskom tariff for non-renewable levy); and, • R 20/ton (RE allowance included in Eskom tariff to fund the purchase of renewable

energy in the IPP program as per Eskom multiyear price determination MYPD2).

As the carbon pricing in the electricity tariffs are already borne by business, the proposed carbon tax will double the cost of carbon currently borne by the SA economy.

2.2 CARBON OFFSET MECHANISMS

2.2.1 Carbon Offset Definition

Firms operating in an environment where they are forced to reduce their emissions are faced with costs to achieve these reductions. Given the central nature of energy, and therefore carbon in the world economy, these costs can be substantial. The diverse nature of firms operating in the economy leads to such mitigation opportunities and costs being unevenly distributed through the economy.

The design principle of any offset is that it should allow firms to access least cost mitigation options. This is an investment through which a firm can access GHG reduction options that are cheaper than what can be achieved by investment in its own operations. This can be achieved by allowing firms to fund mitigation measures implemented by other entities. This is most commonly achieved through the purchase of offset credits. These credits are then deducted from the emissions of the purchaser of the credits.

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Carbon offsets are sometimes described as project-based because they typically involve specific projects or activities that reduce, avoid, or sequester emissions (e.g. afforestation or reforestation projects, carbon or methane capture projects, switching to renewable energy or introducing energy efficiency measures). Because offset projects can involve different GHG’s, they are quantified and described with a standard form of measure; metric tons of CO2-equivalents (ton CO2e) (Ramseur, 2007).

Each offset project can be differentiated by its technology, location, and potential environmental and social contributions (or the so called ‘co-benefits’). Voluntary buyers emphasize these project aspects – the story behind the credits – to make their purchasing decisions. An ever-expanding variety of credits reflects voluntary buyers’ diverse tastes and motivations.

Offsets generally fall within the following four categories (discussed in greater detail later in the report):

• biological sequestration (e.g. establishment of plantation on degraded land); • renewable energy (e.g. solar (large scale or community based) and wind energy

production); • energy efficiency (e.g. improved industrial, residential or community based energy

efficiency, transport modal shifts, etc); and • reduction of fugitive or non-CO2 emissions (e.g. methane capture at landfill sites).

2.2.2 International Carbon Offsetting Experience

The use of carbon offsets to reduce the carbon tax liability for South African entities would mirror current trends within a number of national economies that employ economic instruments to reduce greenhouse gas emissions. Useful lessons can therefore be learned from a number of countries.

For instance, the Clean Energy Legislative Package recently introduced by the Government of Australia introduced a scheme imposing a carbon tax during the initial fixed price period and made provisions for carbon offsetting schemes. Lessons learned from the carbon offsets market will be used in the subsequent flexible price period starting in July 2015. This is when the carbon tax will be transformed into an emissions trading scheme (Government of Australia, 2011). The recently introduced cap-and-trade greenhouse gas (GHG) emissions scheme in the U.S. State of California also allows entities within the scope of the scheme to use offset emission credits to meet up to eight percent of its triennial compliance obligation (Air Resources Board, 2012).

Equally, participants in the EU Emissions Trading System (EU ETS) are allowed to use most categories of Joint Implementation (JI) and Clean Development Mechanism (CDM) credits from mechanisms established under the Kyoto Protocol towards fulfilling their obligations under the EU ETS (EU Commission, 2011). Furthermore, the EU supports the design of new sectoral crediting mechanisms for actions in developing countries, preferably within the UNFCCC framework, which can from 2013 onwards be used as substitutes for the project-based JI & CDM (EU Commission, 2011).

The Regional Greenhouse Gas Initiative (RGGI), incorporating a number of North East and Mid-Atlantic states the United States, is an additional example of a market-based regulatory program that enables its participants to purchase emission offsets. The program contains a sliding scale provision for offsets. Regulated emitters may use offsets to satisfy 3.3% of their compliance obligations at the start of the program. The offset ceiling rises to 5% and 10% of total emissions if the twelve-month rolling average allowance reaches $7 and $10 per ton (in 2005 dollars) respectively (RGGI, 2012).

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2.3 IMPLEMENTATION OF OFFSETTING SYSTEMS

The introduction of a carbon tax will serve as a significant incentive for business to engage in carbon offset projects. While carbon offsetting could reduce the carbon tax revenue, the carbon offset market would create direct investment in the low carbon economy and incentivise green job creation. Companies would also be able to cost effectively lower their carbon tax base. A national carbon market also has a potential to be linked to international carbon market initiatives in the future and thereby increase investment in South Africa.

2.3.1 Macro Economic Framework

The aim of an offsetting program is to minimise the cost to the economy by allowing firms to access least cost mitigation options. Care must however be taken that the cost saving due to such access achieved in the economy is not offset by the costs of implementing the system.

The costs to government relates to (a) administrative costs with respect to system design, implementation and operation, and (b) loss of carbon tax revenue.

The administrative costs can be minimised by outsourcing the system to private sector institutions such as the JSE.

The loss of revenue can however translate into valuable investment into the low carbon economy. The investment in low carbon projects will not only cost effectively reduce carbon emissions and contribute towards national mitigation targets, but will also encourage a greater uptake of cleaner-energy technologies, energy-efficiency measures and promote research and development into low carbon solutions.

Projects financed by revenue from carbon credits would face stringent financial criteria imposed by the price per tonne of carbon emissions imposed by the carbon tax. As carbon tax would effectively impose an efficiency benchmark, it can be expected that the carbon reduction achieved by carbon offset projects would be below the cost of the tax. Furthermore, if a floor price is set for the offset scheme, then the carbon price floor has a potential to introduce an effective carbon offset baseline. Figure 2 shows the effective carbon offsets band in a case where a floor price at the 50% rate of carbon tax has been introduced. Introduction of a carbon floor price is however only a proposed measure and has not been raised in any of the National Treasury documents. Providing a clear price signals for offset market participants would provide a clear price signal for developers of carbon offset projects.

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Figure 2: Effective Cost of Carbon Offsets Band

R 120Carbon Tax

Carbon Floor Price (% of tax)

Years2013 2020

Finally, a carbon offsetting scheme will contribute towards the country delivering on its international commitments with respect to the stated emission trajectories and the development of NAMA’s.

2.3.2 Micro Economic Framework

Introduction of the carbon tax will pose a considerable financial cost on a number of companies covered by the scheme. As an example, the cost of such a tax is estimated for the mining industry in South Africa based on an average cost of R 48 per ton calculated to be just below R 4 billion in Table 2 below (under the proposed carbon tax design, companies will be able to apply a basic tax free threshold of 60%, resulting with at most 40% of their emissions taxable at R 120 per ton).

The introduction of a carbon offsets market will allow liable firms to access least cost mitigation options. This will unlock a number of potential mitigation measures for such firms:

1) The use of offsets would enable organizations to access least cost mitigation options. The creation of a carbon offsets market would incentivise investment in GHG mitigation projects and thereby the supply of carbon credits that were generated at a cost lower to the carbon tax.

2) The option to purchase carbon offsets would enable organizations to investment in projects with measurable emissions reduction. Participation in the offsets market could also enable organisations to enhance their brand or differentiate products, and in some cases also offer their products at premium price. At the time when corporate social responsibility is becoming more important to the strategic planning of leading companies, the demand for products within the carbon offsets market is expected to grow steadily. There is an increasing overlap between corporate social responsibility and climate change adaptation issues specifically related to increased community vulnerability.

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3) Engagement in a carbon offset market will enable organisations to gain valuable carbon market experience. Higher awareness of the carbon market and offsetting opportunities will improve the organisation’s capability to internalise the cost of carbon, manage GHG emissions related risks and thereby increase their attractiveness to investors willing to invest in a low carbon economy. Equally, market expertise can translate into better informed negotiating positions for business in terms of understanding their options, increased authority and greater influence in discussions with regard to climate change mitigation and GHG regulation policies.

2.3.3 Global Economic Framework

The global carbon economy in 2012 is driven by two major trends:

1) The international climate negotiations are increasingly being frustrated and delayed by large players such as the USA who are protecting their investment in the fossil fuel economy

2) Many countries, states, provinces and cities are implementing regional schemes. These include countries (Australia, South Korea, Mexico, etc), states and provinces (California, Québec, Alberta, Rio de Janeiro, etc) and cities (Tokyo, Beijing, Shanghai, etc). It is estimated that 46% of the global GDP will be covered by a carbon scheme of some sorts by 2015.

The divergence in the world economy created by these 2 trends creates both risks and opportunities for the South African firms. The biggest risks and opportunities lie in the area of international competitiveness. Active participation in a trading scheme will enable BUSA members to enhance their international competitiveness in the coming carbon constrained world economy.

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3. POTENTIAL FOR CARBON OFFSET DEMAND

3.1 DEMAND UNDER A CARBON TAX SCHEME THAT ALLOWS

OFFSETS

According to the Long Term Mitigation Scenarios report published by the Department of Environmental Affairs (DEA, 2007), South Africa will have an estimated level of GHG emissions of 564 million tons of CO2e in 2012. Taking into consideration that the boundaries of the tax net is as yet unknown; one has to make certain assumptions in estimating the demand for offsets as it is extremely difficult to estimate the true extent of the potential demand. If we assume that half of the total emissions of the country is caught inside the tax net, and further that all the offset allowed is used, bringing the offsets to between 10% of the taxable emissions, then the annual demand for offsets would be in the order of 30 million tons per year. If we further assume that these offsets would sell for 50% of the level of the tax at R 120 per ton (or R60 per ton), then the revenue generated for investment in emission reduction projects would be R 1.8 billion per year. If the demand would only be to 5% of the taxable emissions, the revenue generated for investment in emission reduction projects would still be R 900 million per year.

Estimates for the mining industry based on disclosure of listed companies, on their South African based emissions, in the Carbon Disclosure Project are listed in the table below. This is based on the assumption that energy emissions will be taxed in either the hands of the energy generator or the consumer. However if it is taxed in the hands of the energy generator the cost will be passed through to the consumer. This will limit the opportunity to manage this cost liability through either direct reductions or offsetting.

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Table 2: Estimate of Carbon Tax Cost for Companies Operating in the Mining Industry Disclosing Companies (CDP 2011 disclosure)

Scope 1+2 Emissions2 (estimated emissions

in SA in tons CO2e)

Carbon Tax on Scope 1&2

Potential offset at 10% of emissions

(tons CO2e) BHP Billiton 16 million R 776 million 1.6 million Anglo American 11 million R 520 million 1.1 million AngloGold Ashanti 3.4 million R 165 million 0.3 million Gold Fields 5.8 million R 281 million 0.6 million Anglo Platinum 5.6 million R 268 million 0.6 million Impala Platinum 3.4 million R 162 million 0.3 million Harmony 3.4 million R 167 million 0.3 million Exxaro 2.7 million R 131 million 0.3 million ARM 2.4 million R 114 million 0.2 million Lonmin 1.6 million R 75 million 0.2 million Kumba 0.7 million R 33 million 0.1 million Northam 0.7 million R 31 million 0.1 million

Total from disclosing companies

57 million R 2 724 million 5.7 million

Estimated Emissions from non-CDP companies

19 million R 899 million 1.9 million

Total 75 million R 3 622 million 7.5 million

(Source: Carbon Disclosure Project and Promethium Carbon estimates)

2 This is based on the assumption that energy emissions will be taxed in either the hands of the energy generator or the consumer. However if it is taxed in the hands of the energy generator the cost will be passed through to the consumer. This will limit the opportunity to manage this cost liability through either direct reductions or offsetting.

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3.2 DEMAND IN THE ABSENCE OF A CARBON TAX SCHEME

In the event that a carbon tax is not implemented in SA, the demand will be driven by voluntary offsets and will be significantly reduced. Globally the size of the compliance market in 2011 was $ 176 billion while the voluntary market was $ 600 million. This places the global voluntary market at 0.35% of the compliance market. If the same ratio is applied to South Africa, the potential market size would be reduced to below R 10 million per year.

3.3 NUMBER OF MARKET PARTICIPANTS ON DEMAND SIDE

If we work on a limit above which companies have to pay tax of 100,000 tons of CO2e per year, the number of companies in the JSE that will have to pay carbon tax, and are therefore potential buyers of credits, is 52. This amount could double if all the JSE listed companies are included, and double again if all the private companies are included. It is therefore possible that the total amount of companies looking to buy credits in the market will exceed 100.

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4. POTENTIAL FOR CARBON OFFSET SUPPLY

There are various carbon offset opportunities still to be explored in South Africa and this section will examine their overall potential. Analysing the existing projects will serve as a useful starting point to assess the future potential for such projects. Consequently, economic sectors in South Africa will be examined separately to assess the type and quantity of projects that could be developed within the different economic sectors.

4.1 POTENTIAL CARBON OFFSET OPPORTUNITIES

4.1.1 Existing Projects

Currently, all carbon offset projects that were undertaken in South Africa have been designated either for the voluntary carbon market or developed under the Kyoto Protocol’s Clean Development Mechanism (CDM). Table 3 details the number of projects developed under key carbon offset standards and the section below outlines the type of projects implemented.

Table 3: Carbon Offset Projects Registered from South Africa

Standard Number of Projects Registered in South Africa

Clean Development Mechanism (CDM) 20

Voluntary Carbon Standard (VCS) 2

Gold Standard (GS) 14

Climate, Community and Biodiversity Alliance (CCBA) 2

(Source: Promethium Carbon research)

4.1.1.1 Clean Development Mechanism

The Clean Development Mechanism produces offsets under the Kyoto Protocol in developing countries. To date South Africa has twenty registered projects under the CDM, with an additional 56 projects in the validation stage. The energy industries (renewable-/non-renewable sources) sectoral scope includes eleven of the listed projects. The waste handling and disposal sectoral scope is responsible for five registered projects and four projects are registered under the chemical industries sectoral scope. The manufacturing industries sectoral scope has a total of three registered projects. The agriculture, fugitive emissions from fuels (solid, oil and gas) and metal production sectoral scopes each contain one registered project.

4.1.1.2 Voluntary Carbon Standard (VCS)

The VCS is a recognised GHG accounting programme that can be used by projects to verify and issue carbon credits in the voluntary market. The VCS registry has two South African projects listed, one under the transport sector scope and the other from the waste handling and disposal sectoral scope.

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4.1.1.3 Gold Standard (GS)

In order for a project to be certified under the GS, the project must positively impact on the environment and the local community hosting the project. Fourteen projects have been registered in South Africa under the Gold Standard to date. One of the projects is a biomass to energy project in Tzaneen that uses sawdust and wood chip waste from a local sawmill to displace the use of coal in their coal fired boilers that are used to create steam for the fruit peel drying process. The other thirteen Gold Standard projects registered in South Africa have introduced an alternative ignition technique.

4.1.1.4 Climate, Community and Biodiversity Alliance (CCBA)

The CCBA has developed voluntary standards to help identify land management activities that minimise climate change, support sustainable development and conserve biodiversity. There are only two South African projects registered under the CCBA. Nineteen registered project in total across the African continent. The scope of these projects falls under the afforestation and reforestation sectoral scope.

4.1.2 Potential Future Projects

The estimation of potential emission reduction offsets will by its very nature be speculative and must be seen in this context. This section looks at the possible supply and demand of such offsets.

The first step in estimating the amount of offsets that can be generated is to look at the projects already in the pipeline. Considering the registered CDM projects listed in Appendix, the CER’s currently in the pipeline are in the order of 15.5 million tons of CO2e per year. If we however take into consideration the fact that 8.5 million of these CER’s are from renewable energy power generation projects and part of the current Independent Power Producer process and could be outside the applicability criteria for offset projects (to avoid government supported projects decreasing the expected revenue stream), the potential supply is reduced to 7 million tons per year. The figures are summarised in Table 4 below and their distribution is shown in Figure 3.

Table 4: CER's in the South African CDM pipeline Sector CER’S

Agriculture 32 660 Manufacturing industries 75 441 Energy demand 505 473 Mining/mineral production 572 525 Waste handling and disposal 1 335 579 Metal production 1 440 260 Chemical industries 3 065 914

Subtotal 7 027 852 Energy industries (renewable - / non-renewable sources) 8 522 177

Total 15 550 029

(Source: UNFCCC)

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Figure 3: Distribution of CER's in the CDM pipeline

(Source: UNFCCC)

If we extrapolate from the data given above, Table 5 below shows the estimated potential to generate offsets in the country as a whole.

Agriculture32 660 tpa

0%

Manufacturing industries,75 441 tpa

1%

Energy demand505 473 tpa

7%

Mining/mineral production572 525 tpa

8%

Waste handling and disposal1 335 579 tpa

19%

Metal production1 440 260 tpa

21%

Chemical industries3 065 914 tpa

44%

Emission Reductions from Projects in CDM Pipeline

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Table 5: Estimation of Offset Potential in SA

Sector Comments

Potential roll-out multi-

plication factor

Potential offsets that

can be generated

(t CO2e/year)

Agriculture

Only one project implemented in agriculture sector, the Kanhym manure to energy project. Significant potential is predicted as there is a large agricultural industry in South Africa and several project types that could be implemented.

100 3 200 000

Manufacturing industries

Three projects are listed in this sector two coal to gas projects and one biomass to energy project. As this is also a large sector in the economy, the roll-out potential is good.

20 1 500 000

Energy demand

Energy demand projects account for less than 0.005% of the country’s energy demand. If these projects are scaled up by a factor of 20 it will still represent only a 0.1% energy saving in SA.

20 10 000 000

Mining/mineral production

The 6 projects listed are implemented by two mining companies. Given the size of the mining industry in SA it is possible to roll out these projects by a factor of 10.

10 5 700 000

Waste handling and disposal

Although there is huge potential for methane extraction from landfill sites, the challenges of implementing these projects within the current regulatory framework have prevented these projects from being developed on a large scale.

5 6 700 000

Waste is not currently used as energy source in South Africa due to legislative restrictions. Should these restrictions be removed, a significant amount of credits can be generated in this field

5 6 700 000

Metal production

The 11 projects listed as implemented represent a small portion of the total number of metal production furnaces operating in South Africa. It should be possible to roll these projects out by a factor 5.

5 7 200 000

Chemical industries

The projects implemented in this sector have all been nitrous oxide destruction projects. No further opportunity in this regard.

- -

Estimated Total

- 41 000 000

(Source: Promethium Carbon estimates)

It is therefore estimated that, if these projects currently being developed are rolled out within reasonable parameters, the demand of 30 million tons could potentially be met. This calculation however assumes that the credits generated can be traded in terms of the boundaries of the tax net.

The analysis above excludes the development of opportunities in the Land Use, Land Use Change and Forestry (LULUCF) sector. The reason for this is that LULUCF credits are not tradable in terms of the existing CER markets, and the sector has therefore not developed to the same extent as other sectors. It is however becoming the norm in the newer markets to include these sectors. Some examples are in California, (Forest Offset Protocol), British Columbia (The Forest Carbon Offset Protocol), the Australian Carbon Faming Initiative (CFI) and Alberta (Tillage Management System, Conservation Cropping and Soil Carbon Protocols). Worldwide 87 afforestation projects are in the CDM pipeline with an emission reduction potential of 6.5 million tons per year.

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Table 6 below identifies a number of LULUCF project types and the sequestration potential. It appears from the analysis below that there is sufficient sequestration potential to supply the demand for carbon tax offsets in South Africa.

Table 6: Potential land based projects and their sequestration potential Project Type

Description Sequestration and roll-out potential

Potential offset

generated (t CO2e/y)

Mining land rehabilitation

A project done by Promethium involved the estimation of the sequestration potential through improved land use management practices on rehabilitated mine land.

10 million tons CO2e over a 10 year period. This project can be rolled out to at least ten such mining companies.

10 000 000

Oilseed tree planting project

A project done by Promethium involved the registration of a CDM project to plant oilseed bearing trees for bio fuel production.

20 tons of CO2e per hectare per year over a ten year period. Similar projects can be implemented on an estimated 100,000 hectares.

2 000 000

Spekboom farming

It has been estimated by the Department of Agriculture, Forestry and Fisheries that spekboom farming in the Eastern Cape can sequestrate significant amounts of carbon.

5 tons of CO2e per hectare on a potential 1.4 million hectares. We assume that this can be achieved over a ten year period.

700 000

Soil carbon increase due to low/no tillage farming practice

Carbon is sequestered if farming practices are converted from conventional to low or no till farming.

A total 2 million hectares of land was planted in SA in 2006/07 for maize production. If this land is converted to low tillage, carbon sequestration of 0.1 tons /ha/yr can be achieved.

200 000

Biochar (charcoal used for agricultural purposes)

Biochar can be added to agricultural land to improve soil characteristics.

We assume that 5 tons of carbon can be added per ha and that this is done only on high value land, i.e. the 1.3 million hectares that is under irrigation in SA. Further assume that this is achieved over a ten year period.

650 000

Plantations

South African plantation area varies between 1 million and 1.5 million hectares. Additional plantations can be established to capture carbon.

Assume that an additional 500 000 ha is established over a 20 year period capturing 500 tons per hectare.

12 500 000

Total 26 050 000 (Source: Promethium Carbon estimates)

4.2 SECTORAL CLASSIFICATION OF CARBON OFFSET PROJECTS

The assessment of various carbon offset projects that were developed in South Africa for the international carbon market, illustrates the potential for investment in mitigation projects across a range of sectors. This section describes the carbon mitigation potential within various sectors. Firstly, the sectoral classification of the economy will be introduced. Secondly, opportunities in individual sectors will be assessed.

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4.2.1 Sectoral Classification

The National Climate Change Response White Paper (2011) introduces the concept of mitigation actions across a number of economic sectors. For the purpose of carbon emissions tax design proposal, the Budget of 2012 introduced a sectoral classification of the economy as detailed in Table Table 7 below.

Table 7: Sectoral Classification of the Economy According to the 2012 Budget Carbon Tax Proposal

Sector Included in tax net?

Electricity Yes

Petroleum (coal to liquid) Yes

Petroleum (oil refinery) Yes

Iron and steel Yes

Aluminium Yes

Cement Yes

Glass and ceramics Yes

Chemicals Yes

Pulp & paper Yes

Sugar Yes

Agriculture, forestry and land use No

Waste No

Fugitive emission: coal Yes

Other Yes

(Source: SARS, 2012)

All but two economic sectors (i.e. waste and agriculture, forestry & land use) will be eligible to pay carbon tax. In order to understand specific opportunities within the economic sectors as classified in the Budget, it is necessary to take the sectoral classification and redefine the proposed sectors on the basis of their emission sources.

Table 8 below schematically shows the relationship between the different systems of classification.

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Table 8: Linking Sectoral Classifications Department of Environmental Affairs Classification: Intergovernmental Panel on Climate Change (IPCC) guidelines for national GHG inventories

Department of Energy Classification: Standard Industrial Classification Codes (SIC)

Carbon Credits Classification: Kyoto Protocol Annex A

Energy Electricity, gas and water supply

Energy industries (renewable & non‐renewable sources)

Energy distribution

Energy demand

Industrial Processes and Product Use (IPPU) excl emissions from fuel combustion

Manufacturing

Manufacturing industries subcategory for cement, iron and steel, aluminium and refineries

Chemical industry

Construction Construction

Transport, storage & communication

Transport

Mining Mining/Mineral production

Metal production

Energy Fugitive emissions from fuels (solid, oil and gas)

Industrial Processes and product Use (IPPU) excl emissions from fuel combustion

Fugitive emissions from production and consumption of halocarbons and sulphur hexafluoride

Industrial Processes and Product Use (IPPU)

Solvents use

Waste Community, social and personal services


Agriculture, Forestry and land use (AFOLU)

Agriculture Afforestation and reforestation

Agriculture.

4.2.2 Sectoral Carbon Offset Opportunities

As no offset scheme can be successful without a sufficient supply of offset credits it is important to estimate where the offsets will come from. The table below presents a non-exhaustive list of carbon offset projects that could be developed along the carbon credits classification above.

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Table 9: Project types by sector Department of Environmental Affairs Classification

Department of Energy classification

Carbon credits classification

Potential Project Types

Energy Electricity, gas and water supply

Energy industries (renewable ‐ non‐renewable sources)

Energy efficiency in power generation

Renewable energy

Fuel switch (fossil fuels & Biofuels)

Waste to power

Energy distribution

Energy efficiency in distribution

Energy demand Energy efficiency

Alternative energy


Manufacturing

Manufacturing industries subcategory for cement, iron and steel, aluminium and refineries

Process emission reduction

Recycling

Process efficiency

Chemical industry

Energy efficiency

Process optimisation & emission reduction

Process efficiency

Advanced process technology

Construction Construction

Energy efficient buildings

Infrastructure such as rapid rail, BRT and route optimisation

Concrete mix design

Transport, storage & communication

Transport

ICT enabled mitigation

Infrastructure such as rapid rail, BRT, route optimisation, etc

Biofuels

Mining

Mining/Mineral production

Energy efficiency

Process optimisation & emission reduction

Recycling

Fuel switch

Metal production Energy efficiency

Advanced process technology

Energy Fugitive emissions from fuels (solid, oil and gas)

Waste to energy

Capturing of fugitive emissions

Prevention of fugitive emissions

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Department of Environmental Affairs Classification

Department of Energy classification

Carbon credits classification

Potential Project Types


Fugitive emissions from production and consumption of halocarbons and sulphur hexafluoride


Industrial Processes and product Use (IPPU)

Solvents use


Waste Community, social and personal services


Waste to energy


Prevention of fugitive emissions

Agriculture, Forestry and land use (AFOLU)

Agriculture

Afforestation and reforestation

Afforestation

Reforestation

Soil carbon

Rehabilitation of mining land

Biochar

Agriculture

Soil carbon

Biochar

Animal waste management

Fertiliser use

Energy efficiency

Biofuels

Low tillage & alternative cultivation methods

Rehabilitation of degraded agricultural land

4.3 FACTORS AFFECTING THE AVAILABILITY OF CREDITS

The availability of offset credits can be influenced by a number of aspects. Some of these are linked to the economy and lie outside the influence of the designers of the offset system, but some lie within the boundaries of carbon tax net and need to be taken into consideration. A non-exhaustive list of such issues is presented below:

Definition of the tax net: The availability of offsets will depend greatly on what is included in the tax net and what is not. Some examples are:

o The emissions associated with the production of both electricity and liquid fuels can be taxed in either the hands of the producer or in the hands of the consumer. If it is taxed in the hands of the producers, the tax will be passed on as a cost to all the consumers in the country. Such a tax will shift the incidence disproportionately to those people in the economy with lower ability-to-pay. Even though it may be possible to manage the

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progressive nature of the tax through tariffs, such control will not be under the control of National Treasury and its efficiency may therefore be compromised. The emissions associated with production could, on the other hand, be taxed in the hands of the consumers. Whereas this system will be more complex than the option mentioned above, the impact of the tax can accurately be managed. As a significant amount of offsets can be generated in the energy sector, the drawing of the tax net boundaries can significantly impact the quantity or availability of credits (eg if IPP projects are excluded the available offset options are reduced).

o Certain countries, like Australia, only impose the carbon tax on entities that emit more than a certain amount of GHG’s. The National Climate Change Response White Paper mentioned a limit for mandatory reporting of GHG emissions of 100,000 tons of CO2e per year. As one cannot pay tax on what you do not report, it seems that only companies with emissions of over 100,000 tons will therefore have to pay tax. If one further assumes that there should be a margin between where a company starts reporting and where a company starts paying tax, then only companies emitting more than (say) 120,000 tons would be liable for the carbon tax. The availability of offsets will be impacted by the boundaries of the tax net in this respect.

o Should the Government decide to implement the carbon tax as a proxy tax as described in the original carbon tax discussion paper, the opportunities for offsets will be significantly reduced. This is due to the supply volume being less.

Eligibility of offsets with respect to the boundaries of the tax net: In principle an offset project that is implemented in an activity that is taxable in terms of the carbon tax could result in double dipping of the carbon reduction benefit. If such a project is however implemented on a non-taxable activity, no such double counting should occur. This principle is fundamental to the environmental integrity of the system. Many lessons on the handling of this issue can be learnt from the CDM and JI. The issue is analysed in more detail in the next section. There are several possible sources of carbon offset credits to be included in the carbon offset scheme in South Africa. Firstly, Certified Emission Reduction (CER) credits generated under the Clean Development Mechanism (CDM) could be included in the scheme. In addition to carbon offset credits generated under the auspices of the Kyoto mechanism, the carbon offsetting scheme could give rise to a domestic carbon offset standard to incentivise the growth of projects within South Africa. Issues associated with the establishment of a carbon trading scheme and an accounting standard are dealt with in subsequent sections, but possible mechanisms behind the carbon exchange are examined below.

4.3.1 Certified Emission Reduction Credits

South Africa is a signatory to the United Nations Framework Convention on Climate Change (UNFCCC) and has ratified the Kyoto Protocol. The country therefore has a moral obligation to support the offset mechanism created by the Kyoto Protocol and Certified Emission Reduction (CER) credits generated under the Clean Development Mechanism (CDM)

The CDM is the benchmark of all offset schemes as it is the most rigorous and complete scheme available. The scheme has delivered 1.1 billion tons of emission reduction worldwide between 2008 and 2012 with an additional 7 billion tons of emission reduction foreseen for the 2013 to 2020 period (UNEP Risoe, 2012).

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Even though it has been successful, the CDM is often criticized for a number of reasons. The most important criticisms that are relevant to the topic under discussion is the cost associated with registration of CDM projects (around R 1 million per project) and CER issuance, the significant administrative overhead associated with the mechanism, and the high risk of registration failure of eligible projects.

Many jurisdictions allow only for restricted access to CERs. As an example, the European Union is restricting eligibility of CERs into the EU ETS to CERs only generated in Least Developed Countries (LDCs). Similarly Australia will not allow CERs generated from afforestation/reforestation projects.

Considering South Africa’s allegiance to Africa and its desire to make a positive contribution to the development of the continent, we believe that South Africa will consider limiting use of CERs as offsets to CERs generated from projects implemented in South Africa and Africa. This will achieve the diplomatic objectives while preventing the flooding the SA market with the large volumes of credits available from the countries like India and China, as has recently happened in New Zealand.

4.3.2 Carbon Offsets in South Africa

Activities that could be eligible to generate offset credits can be implemented either inside the carbon tax net or outside the net. The final configuration will depend hugely on the design of the tax system and how the tax net is defined.

Carbon Offset Projects Originating Outside the Carbon Tax Net

Under the first scenario only companies emitting more than a certain amount of greenhouse gas are taxed and electricity generation is excluded from the tax net. This is so in order to ensure that electricity is taxed in the hands of the consumer.

Emission reduction projects that are implemented outside the tax net can be used as an offset into the net as shown in Figure 4. In a simple version of the offset mechanism this would suffice as offset opportunities.

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Figure 4: Carbon Offsets Originating Outside the Tax Net (only large companies liable for tax)

In a second scenario shown in Figure 5 all companies in the targeted sectors are liable to pay the tax, irrespective of their emissions. Figure 5: Carbon Offsets Originating Outside the Tax Net (all companies liable for tax)

In this case the offsets will be implemented according to the principles established in the CDM of the Kyoto Protocol, as can be seen in Figure 6 below.

Agriculture, forestry and land use

Waste

Electricity production

Electricity distribution

Electricity use

Petroleum (coal to liquid)

Petroleum (oil refinery)

Iron and steel

Aluminium

Cem

ent

Glass & ceram

ics

Chem

icals

Pulp & paper

Sugar

Fugitive emission: coal

Other

Emissions (ton CO2e per year)

Offset Opportunities

Taxable Activities

TaxPayable

Tax free

Emission reduction project

Tax liability offset




Waste



Electricity use



Iron and steel

Aluminium

Cem

ent

Glass & ceram

ics

Chem

icals

Pulp & paper

Sugar


Other


Offset Oppor‐tunities

Taxable Activities

TaxPayable

Emissi

on

Tax

liabilit

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Figure 6: Offset Principle of the CDM

The CDM allows for countries that do not have a cap to implement offset projects and for those offsets to be used inside countries that do have a cap. The principles described above are analogue to this if companies with a carbon tax liability are viewed in a way similar to countries with an emissions cap. This principle differs from the JI principle as described below.

Carbon offset projects originating within the carbon tax net

An arrangement where only carbon offsets from outside the tax net would be allowed, might however limit a number of offset projects. Examples where offset opportunities can be implemented through companies where both the buyer and seller are inside the tax net are:

Example 1: Company A, which is liable for carbon tax and has the monetary resources to implement emission reduction initiatives can, due to the nature of its operations, not reduce its emissions. Company B can reduce its emissions, but does not have the monetary resources to do so. Company A can then buy emission reduction offset credits from company B, who can use the revenue from the offset trading to implement the emission reduction initiatives.

Example 2: In this example a company may have the opportunity to reduce its process emissions, but there is no incentive to do so because the process emissions are not taxed. The implementation of an offset project on the process emissions will ensure that the opportunity to reduce emissions is not lost.

Double counting of tax benefits is prevented in the situation where both parties to the offset trade is inside the tax net by adding a negative offset credit to the carbon footprint of the seller. As an example, if both companies A & B have emissions of 100 units. Company A implements an emission reduction project and sells the offset credit to company B. Company A now has actual emissions of 90 units and sold 10 units worth of offsets to Company B. In calculating the tax Company A would pay tax on its actual emissions of 90 plus the emissions it sold of 10, bringing its total tax bill to the tax on 100 units. Company B will pay tax on 100 units less the 10 unit’s worth of offsets it bought from company A. The principle is demonstrated in Figure 7 below.

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Figure 7: Offset by Companies Inside the Tax Net

Figure 8: Impact of the Extent of Tax Net on Offset Options

Figure 8 above shows how the extent of the tax net can impact on the availability of offset options. The principles of this scenario are consistent with the principles of the Joint Implementation (JI) mechanism of the Kyoto Protocol, as illustrated in Figure 9 below:


Waste



Electricity use



Iron and steel

Aluminium

Cem

ent

Glass & ceram

ics

Chem

icals

Pulp & paper

Sugar


Other


Offset Opportunities

Taxable Activities

TaxPayable

Tax free




Waste



Electricity use



Iron and steel

Aluminium

Cem

ent

Glass & ceram

ics

Chem

icals

Pulp & paper

Sugar


Other


Offset Oppor‐tunities

Taxable Activities

TaxPayable



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Figure 9: Principles of Joint Implementation

4.3.3 Trading Platform

A credible trading facility is required to enable the entities included within the scope of the SA carbon tax legislation outlined above to purchase carbon credits to lower their carbon tax liability. The Johannesburg Stock Exchange (JSE) is well place to serve as a primary trading platform for carbon credits of a guaranteed quality, for the following reasons:

There is a precedent for the State giving the JSE regulatory powers for trading activities in its role in securities trading.

The JSE has the systems and infrastructure to trade commodities. The JSE has the knowhow and experience to trade commodities. Access to and interface with existing regulatory platforms

Examples of how this can work can be found in the many markets world-wide. For example: Trading of the European Allowances and CER’s for the European market is done on

exchanges such as Blue Next and the European Climate Exchange Trading for the Californian Scheme is done on the Intercontinental Exchange, Green

Exchange and Carbon Trade Exchange. Trading in South America is done around privately owned exchanges in both Brazil and

Chile.

4.4 NUMBER OF MARKET PARTICIPANTS

The number of market participants on the demand side has been estimated in 3.3 above as potentially exceeding 100. Taking into consideration that these represent the companies with emissions exceeding 100,000 tons per year, in sectors targeted to pay carbon taxes, number of market participants on the supply side will probably exceed this amount.

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5. JOB CREATION POTENTIAL

Establishment of a carbon offsetting programme will further expand the potential of new economies. There are considerable business and employment opportunities related to the domain of developing carbon offsetting projects to be exploited in a number of areas. Technological innovation associated with the transformation into the low carbon economy opens the opportunity for substantial employment creation. The detail in the respective sectors are described below.

The development of voluntary carbon offsetting system would support the Government’s job creation objectives. The Government’s “New Growth Path” has specifically identified the “Green Economy” as a key sector with the potential to add 300 000 direct jobs by 2020 (Economic Development Department, 2010). 80 000 of these would be in manufacturing, with the rest in construction, operations and maintenance of new environmentally friendly infrastructure. By 2030 the Government has indicated that job creation from this sector should be well over 400 000. Unfortunately there are no other current studies supporting these numbers yet.

Internationally the evidence shows that the economic sectors directly related to the move to a low carbon economy are sources of steady economic growth and employment creation. For example California’s economy shows that the seven sectors they considered to be the main drivers of a Green Economy have consistently outpaced overall growth trend within California (EDF, 2012). These seven sectors are: energy generation; energy efficiency; clean transportation; energy storage; finance and investment; advanced materials; and, energy infrastructure. From January 1995 to January 2010 these sectors more than doubled in size, experiencing a 109 percent rise in job numbers, while total employment in the whole of California grew only by 12 percent. In addition while the state economy lost significant ground during the national and global recession (from January 2009 to January 2010), as reflected in a seven percent decline in employment, the key low carbon economic sectors in California were remarkably resilient, holding steady or even growing in terms of employment.

Additional jobs would be created through the development of the services needed to support the development of such projects e.g. emission reduction verification needs and engineering related service. However the bulk of the jobs would be created in the construction and ongoing operation of such projects.

The greatest potential for job creation in the long-term is what the IDC report refers to as the natural resource management sector i.e. activities linked to biodiversity conservation, ecosystem restoration and soil\land management. In the IDC report the potential net direct employment of this sector is 232 926 jobs in the long-term (up till 2025). The carbon offsets envisaged (e.g. rehabilitation of land degraded by mining) would provide a direct incentive for natural resource management type projects as a result of the income that would come from the carbon they sequester.

The analysis above reflects the fact that the thinking and associated research with regard to “Green Economy” employment impacts is still very much at an early stage. However there are clear indications that the voluntary offset mechanism envisaged would provide an incentive for the development of projects with employment creation potential and support Government objectives in this regard.

The following sectors seem to be the most likely areas of opportunity:

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Manufacturing: New jobs will be required in the manufacturing sector as the demand for green products increases. Increased investment in low carbon technology will boost low carbon manufacturing in South Africa. There is a potential of growth in areas related to green buildings, machinery, energy efficiency technologies, alternative energy. Construction: Jobs will be required for the construction of green and energy efficient buildings as well as climate mitigation and adaptation infrastructure. Agriculture: While the agricultural sector is not covered by the carbon tax, there is a high potential for carbon offsetting projects within the sector. Additional opportunities for income generation within the sector will translate into increased labour force demand. Science and Engineering: The technology underpinning the transformation into a low carbon economy requires research and engineering to develop industrial scale infrastructure. This is for instance true for the energy sector, where considerable scope exists. Areas include developing new technologies for renewable energy, reducing energy consumption and improving energy efficiency by retro-fitting existing buildings with water saving devices and smart technologies such as blinds that move with the sun amongst others. The new Growth Path sets the target of at least 30 000 additional engineers by 2014 through enhanced educational measures. Changing subsidy formulae for universities as appropriate to boost low carbon economy will be crucial. Strengthen measures to ensure greater and more equitable access to science and maths education at secondary level and expand bridging programmes to tertiary courses. Entrepreneurs and Project Developers: Entrepreneurs with carbon project ideas can use the opportunity to take green projects (often, but not necessarily, as the project owner) from pre-feasibility through the various development stages to commercial operation. Auditing, Accounting and Validation/Verification: Accounting firms can assist clients with verifying their carbon footprint calculations and carbon disclosure reporting. Personnel with ISO 14000 and ISO 9000 experience could re-train in the ISO 14064 standard to become a third party verification auditor. Broking and Trading: There will be a lot of scope for those who are knowledgeable of the carbon markets and registries and can advise clients how to buy and sell carbon credits, and undertake such trades on behalf of the vendor and/or purchaser. Financing and Investing: People with financial and accounting backgrounds can move into the field of arranging the financing of clean technologies and carbon projects. The ability to register Clean Development Mechanism (CDM) projects can be allied to the financiers and investor groups but can also be an independent consultant who fills this specific function. Government Policy-making and Regulation: The current technical infrastructure can be used, however there might be a need to oversee the process of carbon offsetting projects approval and credits issuance. An administration of the programme will require employment of new skills within a variety of areas, including engineering, science, finance, management and economics. Consulting: Given the complexity of the carbon offsetting projects there will be extensive opportunities for specialist carbon consultants to provide advice and services to both sides of the market spectrum - project developers and buyers of credits. Specialist services can range from carbon strategy advice to carbon foot-printing, carbon project development or advising to specific industry sectors.

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6. ASSESSMENT OF AUDITING STANDARDS

6.1 STAGES AND STRUCTURE OF THE OFFSET PROJECT APPROVAL

AND CREDITS ISSUANCE

In order to enable the effective functioning of the carbon offset scheme and facilitate the supply of carbon credits to the market, a technical infrastructure for verification and approval of credits must be established within South Africa.

A technical infrastructure should consist of the administrator of the programme, accredited independent third party verifiers and carbon offset registry. A credible administrator of the scheme will have to be appointed to oversee the programme and to approve issuance of credits, accreditation procedures for carbon offset verifiers will need to be established to generate carbon offset projects verification reports for project developers and a carbon offset registry will need to be created to maintain credible carbon offset records.

Lessons regarding efficient structures can be learned from international carbon offset trading schemes (e.g. the CDM) as well as countries that use carbon offset schemes to complement their carbon pricing instruments (e.g. Australia and California).

6.1.1 Administrator of the Scheme – Approval of Carbon Offsetting Projects

An entity to oversee the offset scheme needs to be appointed. Responsibilities of an administrator of the scheme would be primarily to evaluate methodologies to undertake proposed projects, to endorse them for use in South Africa, and to approve projects and issuance of carbon credits.

Firstly, an administrator would be responsible for the design and approval of methodologies and project types to be included within the scheme. Should a positive list approach be adopted, the administrator would be responsible for the management of the list of projects and its regular updating.

Secondly, an administrator of the programme should provide the approval of verification report prior to credits being issued. While most of the current voluntary offset market standards require independent auditors for to carry out project validation and verification, not all standards administrators carry out a final check over verification prior to issuing credits3. In this regard, as

3 Under the CDM, the final approval of credits carried out by the CDM Executive Board adds a layer of quality control. Except for the Gold Standard and the CCX, the evaluated voluntary offset standards do not employ an additional approval process and it is auditors themselves who approve the projects (SEI, 2008).

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auditors are generally contracted by project developers, there might be a risk of a conflict of interest.

6.1.2 Independent Validation and Verification of Projects

The majority of emissions offsetting standards require an accredited third-party verifier to submit a verification report on behalf of the project developer. Rigorous monitoring and third-party validation and verification of offset projects, which is required by most standards, creates the system of checks and balances between buyers and sellers in the offset market. A network of independent verifiers is therefore needed for carbon offset projects validation and verification.

The Department of Trade and Industry is responsible for the technical infrastructure in South Africa. Both South African Bureau of Standards (SABS) and the South African National Accreditation System (SANAS) will play an important role in the carbon offset market.

Firstly, a series of GHG standards has been adopted by the SABS Standards as part of the South African technical infrastructure. Secondly, SANAS has prioritized a work programme to accredit companies for Greenhouse Gas (GHG) validations and verification under ISO 14065. It is expected that SANAS will be accepting applications for accreditations for ISO 14065 from 2013. Accredited ISO verifiers will also be able to carry out Verified Carbon Standard (VCS) verifications. GHG data verification is therefore expected to be an area for growth, creating local ‘green jobs’ through skills development in the GHG development and auditing sector.

6.1.2.1 Project Validation

The validation process takes place during the planning and early implementation phase of a project. It confirms the sound planning of a project developer and the compliance with the chosen offset standard’s rules and regulations. The project has usually not been implemented at this stage and the validation neither comments on the actual performance of a project nor certifies any emissions reductions.

Validation is an ex-ante confirmation that the project, if implemented according to design, will generate the expected amount of emission reductions and comply with rules and regulations. The final validation report does not guarantee the amount of carbon reductions that will be generated.

One of the major criticisms of the CDM is that the validation step amounts to a duplication of work that needs to be done. The VCS on the other hand does not require validation as everything is checked at the first verification that must happen within two years from the date of commissioning of the project. For offsetting only actual reductions can be used and the validation cost can therefore be saved. Without validation cost the project cost from idea to implementation is reduced. However, a validation might assist in obtaining funding for project ideas, increasing supply.

6.1.2.2 Project Monitoring and Verification

Monitoring and verification standards are required to ensure that offset projects perform as expected. Verification confirms that the project was implemented and is performing according to design and quantifies the amount of emission reductions.

Verification only confirms that the methodologies and monitoring standards have been implemented according to what was specified in the validation documents. If these methodologies

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and monitoring standards are weak, the verification process will not rectify this and the credibility of the offset project will remain low.

6.1.3 Offset Registry

A carbon offset registry is required to generate reliable records of carbon offsets for carbon trading. Carbon offset registries keep track of offsets and are vital in minimizing the risk of double-counting. Registries also clarify ownership of offsets by assigning a serial number for each verified offset. When an offset is sold, the serial number and “credit” for the reduction is transferred from the account of the seller to an account for the buyer. If the buyer “uses” the credit by claiming it as an offset against their own emissions, the registry retires the serial number so that the credit cannot be resold (SEI, 2008). Registration and Enforcement Systems should include (Broekhoff, 2007):

A registry with publicly available information to uniquely identify offset projects. Serial numbers for each offset credit generated by each project. A system to transparently track ownership of offsets which makes it possible to track each

offset to the project from which it originated. A system to easily check on the status of an offset (e.g. whether an offset has been retired). Contractual or legal standards that clearly identify the original “owner” of the emission

reductions. Contractual or legal standards that spell out who bears the risk in case of project failure or

partial project failure (e.g. who is responsible for replacing the offsets that should have been produced by the failed project).

An offset registry to manage records of carbon offset credits within the South African scheme needs to be established. An alternative to the development of a new registry in South Africa could be contracting one of the international voluntary carbon market registries to manage the records for the scheme.

A number of registries are available worldwide. During 2010 the use of registries for non-Kyoto credits were mainly focussed on the Markit Registry.

Figure 10: Offset Registries

(Source: Diaz, Hamilton, & Johnson, 2011)

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6.2 CARBON OFFSETTING STANDARDS

Carbon offset markets currently exist both under compliance schemes and as voluntary carbon offset schemes. Compliance markets are created and regulated by mandatory regional, national, and international carbon reduction regimes, such as the Kyoto Protocol and the European Union’s Emissions Trading Scheme. Voluntary offset markets function outside of the compliance markets and enable companies and individuals to purchase carbon offsets on a voluntary basis. An offset trading scheme linked to the carbon taxation in South Africa will qualify as a compliance market.

Understanding of internationally recognised carbon offset standards can provide valuable information to be used in order to devise a standard that would be suitable within the South African context. This study will therefore examine features of the most utilised carbon offset standards by the over-the-counter (OTC) carbon market, but will also take into account the Clean Development Mechanism (CDM), used under the Kyoto Protocol, as it serves as a benchmark for many other market standards. In addition to the third party standards, there is a rising trend of country or region specific standards, which can only be used within a specific carbon offset programme and that now represent around 7% of the open market (OTC market).

6.3 METHODOLOGICAL CHALLENGES

There are a number of methodological challenges to be taken into account in order to devise a suitable carbon offset standard for the South African Context. Firstly, there is a set of carbon offsetting principles that should guide the development of a standard. Secondly, there is the issue of additionality assessment and methodology to be used in the process of generating and awarding carbon credits.

6.3.1 Carbon Offsetting Principles

It is important to introduce a variety of principles that are used by various carbon offset standards prior to their detailed examination. Depending on a specific standard, a set of principles will need to be fulfilled for a project to be awarded a tradable credit.

Additionality - GHG emissions reduction that the carbon offset project delivers are additional or surplus, they would not have occurred under ‘business as usual’.

Permanence – GHG emissions reduction delivered by the project are permanent and unlikely to be reversed. Additional guarantees that potential reversals will be compensated.

Real – Delivered GHG emissions offsets originate within tangible physical projects with proof that they have occurred or will occur at a specific point in time.

Measurability – Delivered GHG emissions reductions are quantifiable by accepted methodologies.

Monitoring & Verification – Delivery of the GHG emissions reduction should be monitored by an independent third-party verifier with appropriate local and sector expertise. Accreditation requirements for potential validators/verifiers should be strict so as to ensure they have sufficient expertise and competencies to fulfil their tasks.

Leakage – The carbon offset project should guarantee that the reduction of GHG emissions that it delivers does not cause leakage (that is additional or higher emissions outside the project boundary).

Double counting – Is should be guaranteed that the project to deliver GHG emissions reduction occurs outside the carbon tax net to prevent double counting of emissions. Projects should be registered within a specific registry to avoid use of the same offset twice.

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Synchronisation (Timing of emissions reduction) – Time periods of emissions offset flows are matched to the emission flow, or emissions vintage. Rigorous and conservative accounting must be used to calculate baselines and establish boundaries.

Enforceability – Offsets delivered by the project are backed by legal instruments that recognise the validity of the offsets creation, provide for transparency of MRV and ensure exclusive ownership.

Co-benefits – In addition to reducing GHG emissions and mitigating the effects of the climate change, offset projects have a potential to deliver additional social and economic benefits. Within the South African context offsets can contribute towards charting the pathway to a low carbon economy, creation of green jobs or investment in non-fossil fuel based energy generation.

(Sources: SEI, 2008; Ecosystems Market Place and Bloomberg New Energy Finance, 2011)

6.3.2 Eligibility of Project Types - Assessment of Additionality & Methodology

Determination of additionality and methodology is an important element of all carbon offsetting standards. There are two main approaches to determine the additionality: standardization (or positive list) approach and a project based (case-by-case) approach.

- Standardised approach - Approach in which accrediting or registering organisation would establish a list of approved project types before the start of the program and periodically update it. Project methodologies would also be developed before the start of the program and adopting additional methodologies would be added after the start of the program.

- Project based additionality - Approach in which there is no set of “pre-approved” project

types that are eligible. Carbon offset methodologies would also be developed by project proponents and reviewed and approved on a case-by-case basis by the offsets program administrator.

Assessment of additionality might often prove difficult without internal financial information from project developers. The main issue associated with project-based additionality assessment is therefore its potentially high degree of subjectivity. Under the Kyoto Protocol’s Clean Development Mechanism, a project-by-project approach to determine additionality, using a multi-tiered additionality test that includes a financial additionality test, has been employed. This can however involve considerable cost and cause delays for an approval process.

Performance standards aim to address some of the weaknesses of project-based additionality tests in that they do not rely on examining each individual project, but typically use aggregated data on project or technology characteristics to establish a threshold (e.g. a performance indicator such as an emissions rate or a market indicator such as a penetration rate) that must be met or exceeded in order for a project to be deemed additional. This approach is associated with simpler procedures and lower transaction costs for project developers. Equally, it is the easiest to administer by regulatory authorities.

A positive list is therefore considered as more cost effective for project developers. Adoption of a standardised positive list approach will thus provide added certainty to project developers that can stimulate investment decisions and project development that will facilitate offset market development. Allowing the offset program administrator to develop offset methodologies before the start of the program might also enhance the credibility of offset projects.

38

A standardised approach which is not sufficiently flexible to accept additional methodologies could however limit the variety of projects that can be added once the offset program has been launched. It is therefore considered that it might be a viable proposition to introduce a positive list as a starting point for the programme to provide a list of projects that can be developed. Allowing for the list to be expanded as the programme matures might however be a sensible proposition to allow new project types to be included should they satisfy required criteria.

6.4 COST & CREDIBILITY OF CARBON OFFSET CREDITS

6.4.1 Credibility Considerations

To be considered a credible offset, the emissions reduced, avoided, or sequestered need to be additional to business-as-usual (i.e. what would have happened anyway). Besides the crucial additionality principle, definition of credibility of an offset very much depends on the selection of other principles that an offset would need to adhere to. Monitoring & verification, leakage or double counting principles are considered as important to determine credibility by most of the internationally recognised standards. Co-benefits are not required for all standards.

The voluntary offset industry has recognized the need for quality assurance in order to maintain the credibility of the offset market. There is a range of carbon offset standards used to issue credits for carbon offset projects around the world. Yet no single standard has so far managed to establish itself as the industry standard.

Each standard has a slightly different focus. Some standards closely mirror compliance market standards, such as the VER+ standard that closely follows the CDM requirements. Others take a more lenient approach in order to lessen the administrative burden and enable as many credits as possible to enter the market, such as the VCS. Certain standards are limited to particular project types (e.g. forestry); while others exclude some project types in order to focus on the social benefits of carbon projects.

While most of the current voluntary offset market standards require independent auditors to carry out project validation and verification, not all standards administrators carry out final check of verification reports prior to issuing credits.

Under the CDM, the final approval of credits carried out by the CDM Executive Board adds a layer of quality control. Except for the Gold Standard and the CCX, the evaluated voluntary offset standards do not employ an additional approval process and it is the accredited auditors themselves who approve the projects (SEI, 2008).

6.4.2 Cost Considerations

In this discussion the prices achieved for different offsets are used as proxy for the costs, as it is assumed that the market would not implement projects if the cost is higher than the prices achieved.

The cost to implement an offset project has two main components: the cost of registering the project as an offset project and the cost of physical implementation. The figure below gives the cost of registration relative to the total cost of implementation, as well as relative to the CER revenue of the first year of operation for 4 South African CDM projects.

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Figure 11: Projected Registration Costs for CDM Projects

(Source: Promethium Carbon)

As can be seen above, the registration costs, relative to the size of the project, varies from very low for large industrial projects to very high for smaller projects implemented on a domestic level.

Prices of offsets on voluntary markets are widely spread across the range of available third party standards. In comparison, the average J-VER price in 2011 was $ 115/t CO2e, while the price of VCS credits was $ 4/t CO2e and the price of CCX credits only $ 0.1/t CO2e (Ecosystems Marketplace and Bloomberg New Energy Finance, 2012).

In a competitive market, offset prices are a function of supply and demand. The attractiveness of a project depends on the buyer’s objectives. These are different for a compliance buyer than for a voluntary buyer:

Compliance buyers are interested in obtaining credits reliably and cheaply in order to fulfil their regulatory requirements. Yet, the latest trends show that carbon prices within carbon offset schemes designed and implemented locally to complement a carbon pricing instrument might increase carbon prices.

Most organisations that voluntarily use offsets for their climate neutralization efforts want to communicate that effort to the public and choose projects that specifically suited for the target group.

There are numerous reasons for price differences among different standards. Firstly, transaction costs associated with a particular standard play an important role in the final price of the credit, but might also be closely related to the perceived quality/credibility of the credit. Over the past few years there has been a drive for a simplification of the fee and verification/validation structure to make it suitable also for smaller scale projects.

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Regsitration cost as % of first year CER

revenue

Regsitration cost as % of Implementation cost Registration cost as % of first year CER revenue

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In the quest for simplification, several standards revisited the way they bring projects into the system. The discourse lies within the argument whether it is simpler to credit any activities that meet a technology requirement or benchmark – or to evaluate them on a project-by-project basis. It could be argued that the first approach reduces the time and money required to bring projects online. According to experts in the field, moving on from the idea that you have to operate on a project-by-project basis will allow scaling up of small projects (Ecosystems Marketplace and Bloomberg New Energy Finance, 2011).

Prices however also greatly vary within each standard, depending on specific project characteristics. Buyers seeking co-benefits to be associated with the credit are prepared to pay the premium, while buyers willing to offset their mandatory cap are generally looking at more cost-effective options.

Market price of carbon credits will play an important role within the scheme in South Africa. In order to generate sufficient demand, suppliers will need to ensure a price which is cost effective in terms of the proposed level of carbon tax. The proposed rate of carbon tax at R 120/t CO2e, is equal to about $ 15/t CO2e, which is expected to be a market price ceiling.

In order to mobilise demand for carbon credits, suppliers will have to generate credible and yet cost effective credits. It is expected that market prices will be closely aligned with the level of carbon tax, which might therefore pose as an efficiency benchmark.

Figure 12: Average Market Price per Standard

(Source: Ecosystems Marketplace and Bloomberg New Energy Finance, 2012)

Market prices displayed in Figure 12 show a clear correlation of prices with type of standard. On the upper end of the price spectrum, standards are primarily associated with pure voluntary buyers and domestic programme standards.

41

The highest average price of carbon has been achieved by credits generated by domestic program standards. The average price across all domestic standards was $ 17.3/t CO2e, while J-VER reached a remarkable $ 115/t CO2e and NZ ETS $ 17/t CO2e. These high prices can generally be attributed to the high cost of projects within developed countries as well as high demand for credits from local projects.

Equally, standards requiring the certification of co-benefits were associated with buyers willing to pay premiums. For instance the market priced carbon standards such as Gold Standard or CCB (in combination with ISO or VCS) on average between $ 6/t CO2e and $ 10/t CO2e.

Looking at the lower end of the price spectrum, carbon offsets issued under the VCS standard transacted on average at the price of $ 4/t CO2e. VCS can also be accounted for the largest market volume, 58% of carbon offsets accredited by an independent third party standard were produced under the VCS standard.

6.4.3 Cost vs. Credibility

In order to develop a standard that is suitable for the South African context, it is important to evaluate key features of existing standards from both a cost and credibility perspective and strike the right balance between the two. Assessment of the trade-off between the cost and credibility issues will enable a variety of stakeholders within South Africa to establish the suitable standard.

On one hand, the Clean Development Mechanism (CDM) used under the Kyoto Protocol as well as the VER+ standard closely following the CDM methodology are considered to be of a high cost, but also of a high credibility due to a thorough project assessment. Equally, standards that were developed for voluntary market buyers who require the carbon credit to fulfil the co-benefits criteria for their CSR objectives are generally priced at the upper segment of the market.

On the other hand, the Verified Carbon Standard aims to be a universal, base-quality standard with reduced administrative burden and costs in comparison to the CDM. Yet, its credibility is not as high as the credibility of the CDM.

Within the South African context, the Demand Side Management programme that has been developed to evaluate energy efficiency performance has to be noted. As the program is funded by Eskom and efficiency reporting indicators that have been developed serve specific purposes of Eskom, it has credibility for Eskom, but indicators are not as relevant for third parties. Equally as the cost is being picked up by a state owned enterprise, the cost for the state is relatively high. The program can therefore be characterised as high cost and low credibility.

Credibility of carbon offsets will be of considerable importance for the offset scheme within South Africa as carbon offsets will be used by companies to lower their taxable carbon baseline. In order for the SARS and National Treasury to consider the scheme as credible in regard to tax payment reduction, a set of checks and balances should be introduced. In spite of its added costs, final check of verification prior to issuing credits by an official authority is an effective measure to enhance the credibility of credits. Therefore it is suggested as suitable that the administrator of the schemes should approve the verification report conducted by independent auditors prior to issuing credits.

There is a scope for a higher price of emissions reductions. The average price of offsets in Africa in 2011 was $ 8/t CO2e. The average price across all domestic standards in 2011 was $ 17.3/t CO2e, which represented the price of credits generated in developed countries. Considering the proposed rate of the carbon tax of R 120/t CO2e, or $ 15/t CO2e, it is expected that there will be the scope

42

for credits of higher credibility to be generated across a range of project types, which will still offer a cost effective alternative to paying carbon tax.

The figure below plots various standards according to their balance between cost and credibility. A balance will need to be achieved in order to maximise the effectiveness of a South African offset trading scheme.

Figure 13: Schematic trade-off between cost and credibility of key standards

Credibility

Cost J‐VER

CDM

VCS

CCX

SA‐VERRealistic

SA‐VERIdeal

6.4.4 Project Registration Risk

There are 2 risks that need to be balanced in the registration process:

Type 1 - The risk of erroneous inclusion: Here projects that does not have either additionality or real emission reduction will be included in the system

Type 2 - Risk of erroneous exclusion: Here projects that comply with the requirements of the offset system are excluded because of too stringent administrative requirements.

In the CDM the high profile of Type 1 errors have lead the system to develop in a way that Type 1 errors extremely low but Type 2 errors are very common. This design flaw in the CDM system has a low visibility as erroneous exclusions never get the public exposure as erroneous inclusions. This situation causes huge losses to the CDM system as it acts as a barrier to project implementation and many of the mitigation opportunities are excluded from the system.

One of the ways to quantify the risks is to look at the time delays in project registration. The figure below shows the timing delays in CDM project registration

43

Figure 13: Registration delays for CDM projects

(Source: UNEP Risoe)

The design of any new offset system must address the balance of risks in the system. The figure below shows the balance of the risks with the ideal position of a newly designed system.

Risk of erroneous exclusion

Risk of erroneo

us inclusion

CDM

CCX

SA‐VERIdeal

Figure 14: Balance of risks in offset regulatory framework

The design of the offset regulatory framework needs to balance the risks in the system with the cost of registration.

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7. BARRIERS TO PROJECT IMPLEMENTATION

The need for a quick start to a voluntary offset mechanism is driven by the current understanding of the proposed start date of the Carbon Tax i.e. the 2013/2014 financial year. In order to ensure that it is able to assist companies in mitigating the effect of the proposed carbon tax, the proposed mechanism will have to overcome a number of barriers to implementing emission reduction projects.

These barriers include:

Table 10: Barriers to project implementation

Barrier Potential mitigation measures

Regulatory risk: Potential participants in the offset market will assess the risk associated with the production, registration, trading and retirement of offset credits prior to participating. This risk could include issues such as uncertainty about eligibility of offsets, registration requirements, methodological uncertainty, etc. These risks must be seen as being manageable in order to entice participants to enter the market

Regulatory risk must be managed in the design of the system. Care must be taken to reduce regulatory uncertainty to a minimum without compromising the environmental or commercial integrity of the system. Many lessons in this regard can and has been learnt from both the CDM and the other regional schemes world-wide. Sufficient experience is available to ensure that it is possible to design a balanced system.

Administrative risk: Potential market participants will assess the administrative risk in the system before participating. This risk can include issues such as administrative delays, high administrative costs, etc. Market participants will require a good understanding of these risks before participating.

The administrative system of the offset trading regime must be well designed and must operate efficiently. This risk can be minimised by building on an existing system such as the JSE, which has the following in place:

Trading system Registry Infrastructure Commercial framework Clearing and settlement system

Lack of Skills to Service the System Requirements – there will be a need to develop new sets of skills to service the requirements of such a system e.g. verifying emission reductions against different offset methodologies.

This barrier will be removed most effectively by building on the existing base of ISO auditors in South Africa. Work with SANAS to ensure that this well established infrastructure can effectively be adapted to serve such an offset trading system is well underway and it is envisaged that the first auditors can be accredited by early 2013.

Pricing risk: Market participants will only make the significant investment required to make the market as success if a certain degree of pricing certainty can be achieved.

The carbon tax rate will effectively be a ceiling on the price, which will provide certainty to the buyers, while a floor price will serve to provide certainty to the sellers.

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Barrier Potential mitigation measures

Financing constraints: Certain potential market participants may have financing constraints with respect to the availability of capital to implement emission reduction projects

Significant funding sources are already available through the local institutions such as the IDC and DBSA, as well as international sources such as the IFC, however this funding is not accessible to project implementers. The most effective way to remove financing constraints will be by ensuring that the offset market is operated in an efficient and transparent manner as this will inspire confidence from financiers and unlock the capital required.

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8. CONCLUSIONS AND RECOMMENDATIONS

Based on the information presented in the report,

A carbon offset scheme appears to be viable in South Africa as part of a carbon tax regime. The supply and demand identified is sufficient to support a viable scheme with respect to number of market participants, volume of credits, cost of generating credits, and the pricing dictated by the level of the carbon tax.

Such an offsetting scheme will assist the South African economy in achieving least cost mitigation options. Offset trading will support the private sector by minimising the cost impact of carbon tax on the economy.

The viability of an offset trading scheme in South Africa will depend on a number of issues:

Size of the market: The demand for offset credits will depend largely on the definition of the tax system, which is not known yet. We did however estimate that the demand could be as much as 30 million tons per year. The supply of offsets will also depend on the design of the tax system, but indications are that sufficient offset credits can be generated inside South Africa to satisfy the demand.

Potential pricing in the market: The pricing of the proposed offset market will be capped by the level of the carbon tax (initially at R 120 per ton). It is suggested that a floor price be considered in the system in a way similar to the Australian system, in order to prevent a market melt-down, as has occurred in Europe in early 2012. Should the price range in the system be between R 60 per ton CO2e and R 120 per ton CO2e, then a viable supply of offsets is possible based on the current supply and demand balance in both the South African and international arenas.

Number of participants: The number of potential buyers will be dictated by the design of the tax system. The number of sellers will however be unconstrained. The actual number of market entrants over time will depend on the ability of the offset system designers to minimise the barriers to entry. It is the view of the authors of this report that an optimum balance between access to the system and integrity of the system is possible within the constraints of the South African situation as sketched in this report.

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APPENDIX 1 – PROJECTS DEVELOPED IN SOUTH AFRICA TO DATE Registered CDM projects South African projects registered as CDM projects Emission reduction

(ton CO2e per year)

Kuyasa low-cost urban housing energy upgrade project 6 580 Lawley Fuel Switch Project 19 159 PetroSA Biogas to Energy Project 29 933 Rosslyn Brewery Fuel- Switching Project 100 941 Durban Landfill-gas-to-electricity project 68 833 Tugela Mill Fuel Switching Project 55 912 EnviroServ Chloorkop Landfill Gas Recovery Project. 188 390 Omnia Fertilizer Limited Nitrous Oxide (N2O) Reduction Project 473 338 Mondi Richards Bay Biomass Project 184 633 Sasol Nitrous Oxide Abatement Project 960 322 Transalloys Manganese Alloy Smelter Energy Efficiency Project 55 044 African Explosives Ltd catalytic reduction of N2O emissions 116 779 N2O abatement project at African Explosives Ltd. (AEL), South Africa 265 460 Kanhym Farm manure to energy project 32 660 Durban Landfill Gas Bisasar Road 342 705 Alton Landfill Gas to Energy Project 25 893 Bethlehem Hydroelectric project 32 688 Ekurhuleni Landfill Gas Recovery Project – South Africa 282 349 Fuel switch project at Tongaat Hulett Starch Germiston Mill 5 807 The Capture and Utilisation of Methane Beatrix Mine in South Africa 249 409

CDM project in validation South African projects in validation to be registered as CDM projects

Emission reduction (ton CO2e per

year) Grahamstown Invasive Biomass Power Project 22 562 Manufacture and utilization of bio-coal briquettes in Stutterheim 134 189 Installation of energy efficient ventilation fans at the KDC East Gold Mine 48 117 Installation of energy efficient ventilation fans at the KDC West Gold Mine 48 117 Compressed air energy efficiency at Harmony Gold Mining Company 34 445 Installation of energy efficient ventilation fans at South Deep and Beatrix 30 795 Rheboksfontein Wind Energy Facility 327 982 Grid Connected Wind Power Plant in Nelson Mandela Bay, South Africa 74 400 The Capture of Mine Methane at the Beatrix West Shaft 161 642 West Coast 1 Wind Farm in South Africa 280 754 Neusberg Grid Connected Hydroelectric Power Plant 66 826 Bokpoort CSP (Concentrating Solar Power) Project 230 537 Tubatse Chrome 30 MW Waste Energy Recovery & Power Generation 163 753 Dassieklip Wind Energy Facility in South Africa 70 925 Langa Energy Photovoltaic Solar Energy Facility, South Africa 134 310 Red Cap Kouga Wind Farm 305 220

48

South African projects in validation to be registered as CDM projects

Emission reduction (ton CO2e per

year) Hernic’s Electricity Generation from Waste Gas Project 165 240 Distributed Energy Generation’s Waste Heat to Power Project at XAWO 254 653 Lomati Biomass Power Generation Project in Mpumalanga Province 54 295 Market Coke Waste Heat Recovery Project 491 904 Dundee Biogas Power (Pty) Ltd 29 999 Samancor Chrome Witbank Electricity from Waste Gas 133 739 Samancor Chrome Middelburg Electricity from Waste Gas 196 161 Amakhala Emoyeni Grid Connected 750 MW Wind Farm 369 563 Kathu Grid Connected 100 MW Solar Park 190 407 De Aar Grid Connected 10 MW Solar Park 19 041 Caledon Wind Farm in South Africa 422 252 Olifantsrivier Wind 719 604 Karoo Renewable Energy Facility (Nobelsfontein Wind) 846 960 Karoo Renewable Energy Facility (Nobelsfontein Solar PV) 91 785 Waste energy to electricity at ArcelorMittal’s Vanderbijlpark Steel 252 925 Silicon Smelters Energy Efficiency Improvement Project (Furnace F) 22 749 Introduction of Vertical Shaft Brick Kiln (VSBK) Technology 26 052 Dorper Wind Energy Facility 1 010 698 Indwe Wind Project 154 833 Hopefield Wind Energy Facility 153 608 The Consteel energy efficiency project at Cape Gate 20 751 North West, KwaZulu-Natal & Eastern Cape CFL Replacement Project 31 431 Gauteng CFL Replacement Project 31 431 Coega IDZ Windfarm 143 384 Springbok Grid Connected 55.5 MW Wind Farm 128 733 De Aar Grid Connected 100.5 MW Wind Farm 227 892 Prieska Grid Connected 20 MW Solar Park 38 081 Trigeneration at Mobile Telephone Networks (MTN) 15 284 Grid Connected Wind Power Plant in Witberg 527 137 Grid Connected Wind Power Plant in Klawer 81 451 Cookhouse Wind Farm in South Africa 1 139 349 IFM Integrated Clean Energy Project 129 995 SA Calcium Carbide Furnace Waste Gas to Electricity CDM Project 45 250 Joburg Landfill Gas to Energy Project 427 409 NCP fuel switch and energy efficient boiler project 45 573 Sasol Gas Turbine Co-generation at Sasol Secunda Synfuels plant 1 204 442 Fuel Switch at Corobrik’s Driefontein Brick Factory in South Africa 41 608 Body Coal and Clamp Kiln Fuel Switch at Allbrick, South Africa 7 781 Boskor Renewable Electricity Plant (BREP) 14 010 Clanwilliam Hydro Electric Power Scheme 11 160 Projects registered in the voluntary market Standard Project Description Emission

reduction (ton CO2e per year)

Gold Standard Letaba Biomass to Energy Project

Reduces methane emissions from the sawmill & displaces inorganic fertilizer.

20 960

Highveld Air Quality-Wesseldon Project

Alternative ignition technique for household fires

4 000

49

Standard Project Description Emission reduction (ton CO2e per year)

Highveld Air Quality-Seme Project


4 000

Highveld Air Quality-Standerton Project


4 000

Highveld Air Quality-West Alternative ignition technique for household fires

4 000

Highveld Air Quality-East Alternative ignition technique for household fires

4 000

Highveld Air Quality-Saklink Project


4 000

Gold Standard: Highveld Air Quality-EMM Project


4 000

Highveld Air Quality-EMM Central Project


4 000

Highveld Air Quality-EMM North Project


4 000

Highveld Air Quality-Emfuleni Project


4 000

Highveld Air Quality-NFS Project


4 000

Highveld Air Quality Project-Phumula Project


4 000

Maluti Air Quality Project-South


4 000

VCS: BRT Rea Vaya Ohase 1A and 1B

Bus rapid transit system 39 829

Durban Landfill-Bisasar Road-eThekwini Municipality

Landfill gas 378 623

Peri-urban bamboo planting around South African townships

Aforestation

Zamdela Air Quality Project


No Standard Soil & More Reliance Cape Town Composting

Composting of municipal organic waste at three Green Waste Transfer Stations.

60 000

Electricity from Sewerage Gas in South Africa-Sebokeng

Sewerage gas capture used as fuel for power generation.

58 000

Fuel Switching from Coal to Biomass in South Africa, Northern Province

Fuel switching from coal to biomass. 16 000

The Eskom National Efficient Lighting Programme

Historical roll-out projects-30 million CFL's installed.

7 000 000

Dissemination of Fuel Efficient Biomass Stoves in South Africa

Fuel efficient biomass cook stoves

Credible Carbon:

Welbedacht-Low Income Energy Efficient Housing Project

SWH, PV panels, CFL light bulbs & bio ethanol gel stoves.

86

Trash-back Waste recycling & composting. 1 100 Umdoni Energy efficient woodstoves

(burning of bio ethanol gel in fuel stoves), PV panels and SWH.

3 900

50

Standard Project Description Emission reduction (ton CO2e per year)

Cato Manor SWH, efficient lighting, insulated ceilings & Wonder bags.

111

CCB Tree Planting in South African townships

51

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