Monday, August 10, 2009

Renewable Energy Update: Carbon Credits

Carbon credits create a market for reducing greenhouse emissions by giving a monetary value to the cost of polluting the air, and are openly traded in many countries. Currently, Oman is taking steps to enable the Sultanate to be a potential player in the international market and to promote renewable energy investment in Oman through the establishment of a new governmental authority.

The Oman Ministry of Environment and Climate Affairs announced that it is in the process of setting up a new authority for administering “clean development mechanisms” (“CDMs”) in Oman. CDMs are part of the Kyoto Protocol, which is an international agreement linked to the United Nations Framework Convention on Climate Change. The Kyoto Protocol sets binding targets for the reduction of greenhouse gas emissions. Oman became a member of the Kyoto Protocol in January of 2005.

CDMs are one of the Kyoto Protocol’s three flexibility mechanisms designed to assist countries to meet their greenhouse gas emission reduction targets. CDMs allow an industrialized country with an emission-limitation commitment to implement an emission-reduction project in a developing country. The implementation of a CDM project, e.g., a rural electrification project using solar energy, can earn saleable certified emission reduction credits or carbon credits which can be counted towards meeting Kyoto targets.

A developing country like Oman could host CDM projects that would attract investments from foreign companies seeking to earn carbon credits. These carbon credits can then be sold and traded on the open market.

In Oman, these CDM projects will be regulated by the Designated National Authority (“DNA”). The DNA will determine what CDM projects that it wishes to propose to the CDM Executive Board for accreditation. The process of establishing the DNA also coincides with the overwhelming response generated for the government’s recent solar energy initiatives in the power sector.

In accordance with the substantial national interest in renewable energy, it is hoped that the DNA will develop rules for audit and certification of CDMs so that Omani companies, as well as foreign companies, can fully participate in the creation of CDMs and the chance to sell carbon credits in the open market. Omani companies should be aware that CDMs present a potential revenue source, as carbon credits are traded internationally. The constitution of the DNA is the first step towards the establishment of clear mechanisms for companies to participate in such programs.