A carbon project refers to a business initiative that receives funding because of the cut the emission of greenhouse gases (GHGs) will result. To prove that the project will result in real, permanent, verifiable reductions in Greenhouse Gases, proof must be provided in the form of a project design document and activity reports validated by an approved third party.
Carbon projects are developed for reasons of voluntary environmental stewardship, as well as legal compliance under a Greenhouse Gas Cap & Trade program. Voluntary carbon (GHG) reducers may wish to monetize reductions in their carbon footprint by trading the reductions in exchange for monetary compensation. The transfer of environmental stewardship rights would then allow another entity to make an environmental stewardship claim. There are several developing voluntary reduction standards that projects can use as guides for development.
Carbon projects have become increasingly important since the advent of emissions trading under Phase I of the Kyoto Protocol in 2005. They may be used if the project has been validated by a Clean Development Mechanism (CDM) Designated Operational Entity (DOE) according to the United Nations Framework Convention on Climate Change. The resulting emissions reductions may become Certified Emissions Reductions (CERs) when a DOE has produced a verification report which has been submitted to the CDM Executive Board (EB).
There may be new project methodology validated by the CDM EB for post phase II Kyoto trading.
In the United States standards similar to those of the Kyoto Protocol schemes are developing around California's AB-32 and the Regional Greenhouse Gas Initiative (RGGI). Offset projects can be of many types, but only those that have proven additionality are likely to become monetized under a future U.S. Cap & Trade program.
One example of such a project, the Valley Wood Carbon Sequestration Project, receives funding from a partnership that was developed by Verus Carbon Neutral that links 17 merchants of Atlanta's Virginia-Highland shopping and dining neighborhood retail district, through the Chicago Climate Exchange, to directly fund the thousands of acres of forest in rural Georgia. The unique partnership established Virginia-Highland as the first Carbon-Neutral Zone in the United States.
An entity whose greenhouse gas emissions are capped by a regulatory program has three choices for complying if they exceed their cap. First, they could pay an alternative compliance measure or "carbon tax", a default payment set by the regulatory body. This choice is usually the least attractive given the ability to comply by trading.
The second option is to purchase carbon credits within an emissions trading scheme. The trade provides an economic disincentive to the polluter, while providing an incentive to the less polluting organisation. As fossil fuel generation becomes less attractive it will be increasingly unattractive to exceed a carbon cap because the financial disincentive will grow via market forces. The price of a carbon allowance would go up because supply would decline while demand stays constant (assuming a positive growth rate for energy consumption).
The final option is to invest in a carbon project. The carbon project will result in a greenhouse gas emission reduction which can be used to offset the excess emissions generated by the polluter. The financial disincentive to pollute is in the form of the capital expenditure to develop the project or the cost of purchasing the offset from the developer of the project. In this case the financial incentive would go to the owner of the carbon project.
The most important part of developing a carbon project is establishing and documenting the additionality of the project - that the carbon project would not have otherwise occurred. It is also essential to document the measurement and the verification methodology applied, as outlined in the project development document.
Developing a carbon project is appropriate for renewable energy projects such as wind, solar, low impact-small hydro, biomass, and biogas. Projects have also been developed for a wide variety of other emissions reductions such as reforestation, fuel switching, carbon capture and storage, and energy efficiency.