Glossary of Carbon Finance Terms

According to the Kyoto Protocol, gas emission reductions generated by Clean Development Mechanism and Joint Implementation project activities must be additional to those that otherwise would occur. Additionality is established when there is a positive difference between the emissions that occur in the baseline scenario, and the emissions that occur in the proposed project.

The process of establishing and growing forests on bare or cultivated land, which has not been forested in recent history.

Assigned Amount
The quantity of greenhouse gases that an Annex I country can release in accordance with the Kyoto Protocol, during the first commitment period of that protocol (08-12).

Assigned Amount Unit (AAU)
Fraction of the assigned amount equalling one metric tonne of greenhouse gas.

The emission of greenhouse gases that would occur without the contemplated policy intervention or project activity.

Biomass Fuel
Combustible fuel composed of a biological material, for example, wood or wood by-products, rice husks, or cow dung.

Carbon Asset
The potential of greenhouse gas emission reductions that a project is able to generate and sell.

Carbon Finance
Resources provided to projects generating (or expected to generate) greenhouse gas (or carbon) emission reductions in the form of the purchase of such emission reductions.

Carbon Dioxide Equivalent (CO2e)
The universal unit of measurement used to indicate the global warming potential of each of the six greenhouse gases. Carbon dioxide— a naturally occurring gas that is a byproduct of burning fossil fuels and biomass, land-use changes, and other industrial processes— is the reference gas against which the other greenhouse gases are measured.

Certified Emission Reductions (CERs)
A unit of greenhouse gas emission reductions issued pursuant to the Clean Development Mechanism of the Kyoto Protocol, and measured in metric tons of carbon dioxide equivalent.

Clean Development Mechanism (CDM)
The mechanism provided by Article 12 of the Kyoto Protocol, designed to assist developing countries in achieving sustainable development by permitting industrialized countries to finance projects for reducing greenhouse gas emission in developing countries and receive credit for doing so.

Conference of Parties (COP)
The meeting of parties to the United Nations Framework Convention on Climate Change.

Emission Reductions (ERs)
The measurable reduction of release of greenhouse gases into the atmosphere from a specified activity or over a specified area, and a specified period of time.

Emission Reductions Purchase Agreement (ERPA)
Agreement which governs the purchase and sale of emission reductions.

Emission Reduction Units (ERUs)
A unit of emission reductions issued pursuant to Joint Implementation. This unit is equal to one metric tonne of carbon dioxide equivalent.

Greenhouse gases (GHGs)
These are the gases released by human activity that are responsible for climate change and global warming. The six gases listed in Annex A of the Kyoto Protocol are carbon dioxide (CO2), methane (CH4), and nitrous oxide (N20), as well as hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride (SF6).

Host Country
The country where an emission reduction project is physically located. Internal rate of return. The annual return that would make the present value of future cash flows from an investment (including its residual market value) equal the current market price of the investment. In other words, the discount rate at which an investment has zero net present value.

Joint Implementation (JI)
Mechanism provided by Article 6 of the Kyoto Protocol, whereby a country included in Annex I of the UNFCCC and the Kyoto Protocol may acquire Emission Reduction Units when it helps to finance projects that reduce net emissions in another industrialized country (including countries with economies in transition).

Kyoto Protocol
Adopted at the Third Conference of the Parties to the United Nations Convention on Climate Change held in Kyoto, Japan in December 1997, the Kyoto Protocol commits industrialized country signatories to reduce their greenhouse gas (or “carbon”) emissions by an average of 5.2% compared with 1990 emissions, in the period 2008-2012.

Millennium Development Goals (MDGs)
Commit the international community to an expanded vision of development, one that vigorously promotes human development as the key to sustaining social and economic progress in all countries, and recognizes the importance of creating a global partnership for development. The goals have been commonly accepted as a framework for measuring development progress.

Monitoring Plan (MP)
A set of requirements for monitoring and verification of emission reductions achieved by a project.

Operational Entity (OE)
An independent entity, accredited by the CDM Executive Board, which validates CDM project activities, and verifies and certifies emission reductions generated by such projects.

Project-Based Emission Reductions
Emission reductions that occur from projects pursuant to JI or CDM (as opposed to “emissions trading” or transfer of assigned amount units under Article 17 of the Kyoto Protocol).

Project Design Document (PDD)
A project specific document required under the CDM rules which will enable the Operational Entity to determine whether the project (i) has been approved by the parties involved in a project, (ii) would result in reductions of greenhouse gas emissions that are additional, (iii) has an appropriate baseline and monitoring plan.

This process increases the capacity of the land to sequester carbon by replanting forest biomass in areas where forests have been previously harvested.

The formal acceptance by the CDM Executive Board of a validated project as a CDM project activity.

Sequestration refers to capture of carbon dioxide in a manner that prevents it from being released into the atmosphere for a specified period of time.

United Nations Framework Convention on Climate Change (UNFCCC)
The international legal framework adopted in June 1992 at the Rio Earth Summit to address climate change. It commits the Parties to the UNFCCC to stabilize human induced greenhouse gas emissions at levels that would prevent dangerous manmade interference with the climate system.

The assessment of a project’s Project Design Document, which describes its design, including its baseline and monitoring plan, by an independent third party, before the implementation of the project against the requirements of the CDM.

Verification Report
A report prepared by an Operational Entity, or by another independent third party, pursuant to a Verification, which reports the findings of the Verification process, including the amount of reductions in emission of greenhouse gases that have been found to have been generated.