EMISSIONS Guidance on Regulation, TRADING Development, REGISTRIES and Administration © 2016 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 19 18 17 16 This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denomi¬nations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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EMISSIONS Guidance on Regulation, TRADING Development, REGISTRIES and Administration TABLE OF CONTENTS ACKNOWLEDGMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix BUILDING EMISSIONS TRADING REGISTRIES: A Guiding Framework for Policy Makers . . . . . . . . . . . x EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi LIST OF ACRONYMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xx PART I. Registries: Introduction and Design Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1. Basic Terminology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Registries: Experiences to Date and Future Needs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.1. Registries and domestic market-based policies pre-Kyoto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.2. International registries established in accordance with the Kyoto Protocol . . . . . . . . . . . . . . . . . . . . . . . 4 2.3. National registries established in accordance with the Kyoto Protocol . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.4. Jurisdictional registries established outside of the Kyoto Protocol . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.5. Registries in voluntary carbon markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.6. Registries as part of Results-Based Climate Finance programs and REDD+ . . . . . . . . . . . . . . . . . . . . . . . 7 2.7. Registries to be established for emerging market mechanisms in developing countries . . . . . . . . . . . . 8 2.8. Registries to be established after the Paris Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3. Key Questions for Policy Makers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 PART II. The Legal Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 1. Overview: Register versus Transaction Registry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 1.1. A sliding scale of platform functionality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 1.2. Proposed modular approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 2. Factors Influencing the Choice of Platform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 2.1. Purpose of policy-based market mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 2.2. Scope of market mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 2.3. Scale of market mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 2.4. Potential for international or domestic growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3. Building Blocks of the Legal Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3.1. Different levels within a legal framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3.2. Registers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 3.2.1. Reporting database functionality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 3.2.2. Carbon unit recording functionality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 3.2.3. Carbon unit end-of-life functionality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 3.2.4. Carbon unit transfer functionality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 iii TABLE OF CONTENTS 3.3. Transaction registries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 3.3.1. Laws and rules to be modified . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 3.3.2. Property law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 3.3.3. Tax and accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.3.4. Insolvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.3.5. Financial regulation and licensing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 4. Lessons Learned from Existing Mechanisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4.1. VAT fraud . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4.2. Phishing, cyber theft, and hacking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4.3. Management of market data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 5. Recommendations and Guidance on Development of a Legal Framework for Registries . . . . . . . 20 PART III. The Institutional Framework And Registry Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 1. Before You Begin: Assessing Registry Administration Needs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 1.1. Scale and scope of the market mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 1.2. Responsibilities and risks in registry administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 1.2.1. Responsibilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 1.2.2. Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 2. Mandating a Registry Administrator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 2.1. Key criteria for choosing a registry administrator. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 2.2. Possible approaches to mandating a registry administrator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 3. Administering a Registry: Operations and Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 3.1. Operational tasks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 3.2. Resources and costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 3.2.1. Registry fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 3.2.2. Operating cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 3.2.3. Staffing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 4. Ways to Reduce Registry Administration Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 4.1. Formalizing operational procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 4.2. Applying proportional control and monitoring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 4.3. Computerizing operational tasks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 4.3.1. Exchanges of information with registry users . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 4.3.2. Monitoring of account activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 4.4. Training material and communication supports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 5. Recommendations and Guidance on Development of an Institutional Framework for Registry Administration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 PART IV. IT System Procurement and Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 1. Overview of Four-Step Approach to Registry Procurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 1.1. Conducting a risk assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 1.2. Identifying potential registry vendors and their offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 1.3. Developing the functional and technical specifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 1.4. Preparing the Request For Proposal (RFP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 iv EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration 1.5. Implementation timeline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 1.6. Indicative list of providers of registry IT and services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 2. Preliminary Considerations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 2.1. Different registry procurement options: develop, adapt, share, or outsource . . . . . . . . . . . . . . . . . . . . 45 2.2. Registry connections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 3. Functional Specifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 3.1. Generic business rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 3.2. Generic configurable alerts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 3.3. Taking stock of the data to be managed by the registry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 3.4. Standardized nomenclatures and values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 3.5. Potential requirements to update DES reference nomenclatures based on registry developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 3.6. Transactions to be managed by a Registry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 3.7. Issuance without provision for risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 3.8. Issuance with risk buffer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 3.9. Internal transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 3.10. External transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 3.11. Cancellation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 3.12. Administrative events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 3.13. Traceability: audit logs, notifications, and messages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 3.14. Main reports produced by the registry. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 4. Technical Specifications. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 4.1. Technical requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 4.2. Security requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 5. Detailed Guidance on Registry Development from Scratch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 6. Recommendations and Guidance on the Design and Procurement of a Registry IT System . . . . . 78 PART V. Registry Requirements for Emerging Market Mechanisms and Results-Based Climate Finance Programs: The Example of REDD+ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 2. Registry Implications of Emerging Market Mechanisms and Results-Based Climate Finance Programs under The Paris Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 3. REDD+ Registries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 3.1. The role of carbon markets in REDD+ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 3.2. Scale of implementation of REDD+ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 3.3. REDD+ and land use-related risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 3.3.1. Risks specific to forest ERs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 3.3.2. Mitigating risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 3.4. Governance, administration, and legal issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 3.4.1. Governance issues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 3.4.2. Administrative issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 3.4.3. Legal Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 3.5. Decision guide for creation of a REDD+ registry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 v TABLE OF CONTENTS APPENDIX A: Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 Indicative List of Functions to Develop User Profiles that Have Access . . . . . . . . . . . . . 101 APPENDIX B: APPENDIX C: Accounting Models: Type of Accounts Debited or Credited by Type of Transaction . . 104 Proposed Workflow Diagram for an Issuance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 APPENDIX D: Proposed Workflow Diagram for an Issuance with Buffer Credits . . . . . . . . . . . . . . . . . 106 APPENDIX E: APPENDIX F: Proposed Workflow Diagram for an Internal Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 Proposed Workflow Diagram for an External Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 APPENDIX G: Proposed Workflow Diagram for a Cancellation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 APPENDIX H: Origins and Specifications of Kyoto Registries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 APPENDIX I: APPENDIX J: Analytical Framework to Compare Registries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 APPENDIX K: Forest Carbon Units and Existing Market Mechanisms. . . . . . . . . . . . . . . . . . . . . . . . . . . 112 LIST OF BOXES BOX 1. Types of Emissions Accounting Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xii BOX 2. An Expert View: Tracking Internationally Transferred Carbon Units . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii BOX 3. Emissions Trading Registries in the UK – From UK ETS to EU ETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 BOX 4. Registry Arrangements for Linking of California and Quebec Cap-and-Trade Programs . . . . . . . . . . . 7 BOX 5. China’s national registry system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 BOX 6. Carbon Markets and FCPF Emission Reduction Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 BOX 7. Status of REDD+ Countries: Scale of Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 BOX 8. Status of REDD+ Countries: Managing Non-Permanence Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 LIST OF FIGURES FIGURE 1: Different Types of Emissions Accounting Systems Compared . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xii FIGURE 2: Different Types of Emissions Accounting Systems Compared . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 FIGURE 3: Sliding Scale of Platform Functionality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 FIGURE 4: Building Blocks of the Legal Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 FIGURE 5: Deciding on Level of Complexity for the Registry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 FIGURE 6: Indicative Mapping of Registry Administration Processes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 FIGURE 7: Proposed Steps for Procurement of a Registry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 FIGURE 8: The Registry in its Environment: Potential Connections and Interfaces . . . . . . . . . . . . . . . . . . . . . . . . . 47 FIGURE 9: Domestic Chart of Accounts For “Mirror Accounting” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 FIGURE 10: Generic Chart of Accounts for a Registry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 vi EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration FIGURE 11: Accounting Models for Key Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 FIGURE 12: Issuance—Transaction Status and Status Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 FIGURE 13: Issuance of Buffer Credits—Transaction Statuses and Status Changes . . . . . . . . . . . . . . . . . . . . . . . . . 60 FIGURE 14: Accounting for Risk Buffer Release . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 FIGURE 15: Internal Transfer—Transaction Statuses and Status Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 FIGURE 16: External Transfer—Transaction Status and Status Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 FIGURE 17: Cancellation—Transaction Status and Status Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 FIGURE 18: Account Statuses and Change of Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 FIGURE 19: Example of Secured Network Deployment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 FIGURE 20: Potential Transfer of Units under the Paris Agreement (Scenario 1) . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 FIGURE 21: Potential Transfer of Units under the Paris Agreement (Scenario 2a) . . . . . . . . . . . . . . . . . . . . . . . . . . 81 FIGURE 22: Potential Transfer of Units under the Paris Agreement (Scenario 2b) . . . . . . . . . . . . . . . . . . . . . . . . . . 81 FIGURE 23: Potential Transfer of Units under the Paris Agreement (Scenario 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 FIGURE 24: Potential Transfer of Units under the Paris Agreement (Scenario 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 FIGURE 25: Registry Design Decision Steps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 LIST OF TABLES TABLE 1: Basic Relevant Terminology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 TABLE 2: Indicative Matrix of Responsibilities for Registry Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 TABLE 3: Indicative List of KYC Documents for Account Opening . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 TABLE 4: Overview of Fees Charged in Existing Registries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 TABLE 5: Comparing Registry Fee Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 TABLE 6: Breakdown of Workload Linked to Registry Administration (for an ETS) . . . . . . . . . . . . . . . . . . . . . . . . 33 TABLE 7: Security Measures for Different Types of Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 TABLE 8: List of the Main Information Systems Security Requirements for Registries . . . . . . . . . . . . . . . . . . . . . 41 TABLE 9: Indicative List of Registry Services Providers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 TABLE 10: Comparing Registry Procurement Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 TABLE 11: Comparing Central Hubs with Peer-to-Peer Architecture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 TABLE 12: Breakdown of Tasks to Determine Business Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 TABLE 13: Proposed List of User Authorization Profiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 TABLE 14: Procedures for Identifying Account Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 TABLE 15: Management of Blocks of Serial Numbers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 TABLE 16: List of Nomenclatures and Codes Reserved by the DES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 TABLE 17: DES Reference Nomenclature Updates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 TABLE 18: Issuance Accounting Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 TABLE 19: Accounting for Unit Buffers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 TABLE 20: Accounting for Internal Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 vii TABLE OF CONTENTS TABLE 21: Accounting for External Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 TABLE 22: Accounting Model for a Cancellation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 TABLE 23: Procedures for Determining Performance Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 TABLE 24: Examples of Stakeholders’ Concerns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 TABLE 25: Examples of Threats . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 TABLE 26: Examples of Security Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 TABLE 27: Steps Involved in the Design of Registry Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 TABLE 28: Procedures for Implementing System Demo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 TABLE 29: Procedure to Design Overall Software Architecture. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 TABLE 30: Procedure for Designing a Customized Data Exchange Protocol . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 TABLE 31: Procedure for Designing Database . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 TABLE 32: Considerations for Choosing Software Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 TABLE 33: Comparison of Three Technologies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 TABLE 34: Content of Software Design Specification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 TABLE 35: Role of Carbon Markets in Different REDD+ Implementation Strategies . . . . . . . . . . . . . . . . . . . . . . . . 83 TABLE 36: Levels of REDD+ Implementation and REDD Registry Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 TABLE 37: Summary of Registry Features and Scale of Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 TABLE 38: Risk Management Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 TABLE 39: Summary of Registry Features and Permanence Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 TABLE 40: Main COP and SMP Decisions with Relevance for the Design of Registry Systems . . . . . . . . . . . . . . 110 viii ACKNOWLEDGMENTS This report was prepared jointly by a team of experts Naomi Swickard and John Holler (VCS Association); Yves consisting of Frédéric Dinguirard (Andal Conseil), Charlotte Andre and Sik-Keat Lao (Caisse des Dépôts, France); and Streck, Paul Keenlyside, Franziska Haupt and Charlie Parker Chris Collins (CSRA). We also wish to acknowledge the (Climate Focus), Peter Zaman (Reed Smith), Zhang international experts who participated in the workshop Xiaoguang and Tang Jin (Sinocarbon Innovation & “Building Registries to Support the Next Generation of Investment), and Phil Brookfield (Triple Bottom Line). Carbon Markets,” organized by the PMR, which took place in The team was led by Pierre Guigon (World Bank), with Sacramento, California, in September 2015. The workshop substantive contribution from Alexander Lotsch and Marco gathered valuable insights and early guidance on the Van der Linden (World Bank). project.* The report benefited from valuable inputs and feedback We thank our colleagues from the World Bank Group from experts and country representatives from the who reviewed the report and provided helpful input and Partnership for Market Readiness (PMR) and the Forest feedback: Maja Murisic, Bianca Sylvester, Sameer Akbar, Carbon Partnership Facility (FCPF) participants. These Rama Chandra Reddy, Markus Pohlmann, and Klaus include Helen Plume (Ministry of Environment, New Oppermann. The report was edited by Inge Pakulski. Zealand); Christina Hood (International Energy Agency); * For more information on the workshop, see https://www.thepmr.org/ events/eventlist/workshop/technical-workshop-12-building-registries- support-next-generation-carbon. ix BUILDING EMISSIONS TRADING REGISTRIES: A Guiding Framework for Policy Makers The issues around the environmental integrity of inter- will require registries sufficiently elaborate and secure to national market mechanisms have gained a great deal of capture, manage, and record transactions. Prior to develop- attention in the wake of the Paris Agreement. In addition, ing or procuring the registry system, a needs assessment with the agreement on market-based measures for interna- must be conducted to find the right functional balance, tional aviation being reached, these issues are likely to gain including an analysis of risks and scalability requirements. even more prominence in countries’ efforts to prepare for the implementation of international market mechanisms. What legal and administrative arrangements need to In a context where inaccurate accounting is one of the be put in place? environmental integrity risks associated with market mecha- The legal and administrative arrangements necessary for nisms, an emissions trading registry is critical for avoiding the establishment and future operationalization of registries “double counting”—the situation where a single GHG emis- will largely depend on the type of registry that a country sion reduction (ER) or removal is used more than once to opts for. The more elaborate the registry’s structure, the demonstrate compliance with mitigation targets. larger the number of building blocks required to create its An emissions trading registry is an online database that legal and administrative framework. The legal framework issues, records, and tracks the carbon units that are may address issues such as data protection, confidentiality, exchanged within market mechanisms or financed through and disclosure; the legal nature of the carbon unit; the tax Results-Based Climate Finance (RBCF) programs. Given the implications of carbon unit transfers; and the rules to be length of time and capacity needed for the development of applied in the event of insolvency of account holders. Where a registry, it is essential for countries that are in the process the market is highly liquid and the number of transac- of designing market mechanisms to factor in specific regula- tions requires automation of processes, the national legal tory, administrative, functional, and technical aspects of framework will need to be adjusted to accommodate such registry development. Bearing in mind these factors, three an electronic environment. Similarly, policy makers will prob- guiding questions can facilitate the process of reconciling ably have to consider different alternatives when it comes multiple policy objectives and choosing between various to who should be made responsible for the administration design options. of the registry, as well as for its management, operational, and supporting processes. The responsibility for administer- What type of registry system would be the most ing a registry can be assigned internally—that is, to a public suitable? authority—or externally (contracted out to a third party) and should be subject to appropriate oversight. A number of different registry options are available to meet a wide range of country needs. The more complex What resources are required for implementation? the mechanism itself, the more complex the accompany- ing registry will be and, hence, the more administrative The selection of a specific type of registry that takes into and financial resources will be necessary for the registry’s account relevant national circumstances will also have cost implementation. For example, developing countries aiming implications, and thus likewise for the resources needed, for to access RBCF through bilateral or multilateral channels the registry’s development and administration. In principle, probably do not need more than a registry system in its where these costs are not (fully) covered by domestic or simplest form—one that supports basic accounting and international public funding sources, one option is to charge data management—to track carbon units and provide a fee for a range of registry operations and services. If a fee transparent information about underlying ERs. By contrast, is charged, it is important to duly consider several issues, countries considering market mechanisms that involve a including how to determine the ideal fee structure, differen- large number of sectors and participants, with the possibility tiated rates for various market participants, and the use of of progressively scaling up their efforts and linking up with revenues derived from fee payments, to name just a few. different market mechanisms in other regions or countries, x EXECUTIVE SUMMARY Inaccurate accounting is one of the environmental tions: (i) to determine the quantity of carbon units held by integrity risks associated with market and Results- account holders and (ii) to enable the exchange of carbon Based Climate Finance (RBCF) mechanisms and units between account holders.2 programs.1 The most significant accounting risk is that of “double counting”—where a single greenhouse gas (GHG) Beyond the need for commercial and legal certainty, accu- emission reduction (ER) or removal is used more than once rate accounting in carbon markets is imperative to to demonstrate compliance with mitigation targets. The safeguard the environmental integrity of the system, issues related to accounting have received considerable which is to say, that emissions levels accounted for through attention as a number of countries prepare the infra- a market mechanism reflect real world GHG emissions and structure necessary to engage in the international market removals from the atmosphere. Only a registry that gives mechanisms enabled by the Paris Agreement. policy makers an accurate and transparent picture of the real world emissions impact of a policy is environmentally An important building block for ensuring accurate robust. Inaccurate accounting is one of the environmen- accounting and safeguarding the environmental tal integrity risks associated with carbon markets and has integrity of these mechanisms is an emissions trading received considerable attention as a number of countries registry, which is an online database that issues, records, prepare the infrastructure necessary to engage in the and tracks the carbon units that are exchanged within mar- international market mechanisms enabled by the Paris ket mechanisms or financed through RBCF programs. Since Agreement. registries typically require significant technical and financial capacity for their design and implementation, it is essential Accurate accounting is important to avoid the risk of for countries in the process of designing market mecha- “double counting”—where a single GHG ER or removal is nisms and RBCF programs to plan their specific regulatory, used more than once to demonstrate compliance with miti- administrative, functional, and technical aspects adequately gation targets. This is acknowledged in the Paris Agreement and with sufficient lead time. which, with its accompanying decision, refers to the risk of double counting on multiple occasions. Double counting Against this backdrop, and to further facilitate future can be understood to consist of two main processes: dou- registry design and implementation, this report provides ble claiming, where two or more Parties claim the same ER policy makers and other stakeholders with technical to comply with their mitigation target, and double issuance, insights and step-by-step guidance on how to sup- where more than one carbon unit is registered for the same port country-specific decision making and activities mitigation benefit under different mitigation mechanisms. related to registry development. There is understandable confusion over the term “registry,” largely because of the many ways in which Defining Key Terms and Concepts the term is used. In common parlance, a registry is simply All markets require a trading place for buyers and a place for storing data. In the climate change policy con- sellers to hold and exchange assets. A carbon market is text, however, the term registry is used to refer to a whole no different, and a registry is an important element of that range of things—including a GHG emissions inventory, a list marketplace. It is a platform that performs two basic func- of project and program information, and carbon unit data- bases with varying levels of functionality. To help dispel the 1 Although RBCF programs are, in some cases, being introduced as a stepping stone to potential market-based mechanisms, they do not necessarily lead to the generation of a transferable carbon unit, and thus 2 A marketplace may also involve a trading platform or exchange for market do not require an emissions trading registry. All RBCF programs which participants to “clear” transactions—that is, to ensure that both delivery generate transferable carbon units, however, need to take measures and payment commitments are honored. Thus, a trading platform and to avoid instances of double counting including developing a registry to a registry may be linked to the extent that allows the trading platform to issue, transfer, and retire carbon units. send settlement instructions to the registry. xi EXECUTIVE SUMMARY confusion, this guide makes a clear distinction between four types of emissions accounting systems (box 1). FIGURE 1: Different Types of Emissions Accounting Systems Compared With that in mind, this guidance report covers the issues around the development of registers and trans- Register/ Data action registries—accounting systems that record GHG Transaction Management Inventory Registry System and track carbon units exchanged within market mechanisms or carbon units financed through RBCF Records Records carbon Records physical GHG units for market information on programs (Figure 1). The term register is used to describe emissions and mechanism/ carbon unit lower-end functionality accounting systems, where the removals results-based and policy/ exchange of carbon units is restricted to a limited number climate finance program/ of actors. The term transaction registry is used to describe programs project higher-end accounting systems that have all of the features of a register, as well as the capability to transfer carbon units between account holders in the transaction registry (internal transfer), and/or the capability to transfer carbon units to another transaction registry (external transfer). The further used for compliance purposes); and (iv) compensated term registry is used as an umbrella term to refer to both results (ERs paid for under RBCF programs). registers and transaction registries when it is not necessary to distinguish between the two. Outlining Policy Foundations for This report also uses “carbon units” as an umbrella Registry Development term for different carbon accounting instruments. It refers to the following four categories: (i) allowances (which International climate policy give a regulated entity the right to emit); (ii) carbon credits The Paris Agreement provides a platform for present (which are earned for undertaking an emissions reducing and future carbon market mechanisms. It establishes activity and sold to regulated entities for use instead of the basis for the potential transfer of the rights to emission an allowance); (iii) voluntary credits (which are not primar- reductions (ERs) without defining specific market mecha- ily issued under mandatory schemes, even if they may be nisms or carbon units, nor mentioning markets. This stands in contrast to the Kyoto Protocol, which assigned multiyear BOX 1. Types of Emissions Accounting Systems 1. GHG inventory: An inventory that records physical GHG emissions and removals. Accounting of GHG emissions must be distinguished from accounting of carbon units. 2. Register: A database that records serialized carbon units and any other information specific to the carbon unit required by policy. This could include the vintage of the carbon unit, the identity and location of the project for which the carbon unit was issued, the project funder, or verification details. A register may be used by a country that receives results-based climate finance for generating carbon units backed by emission reductions, to provide assurance that the same emission reduction is not paid for twice (double payment). A register could also be used for a simple emissions trading system (ETS) without multiple accounts, whereby a country “transfers” carbon units to a purchasing country through simple double-entry bookkeeping (a subtraction of a carbon unit in one register mirrored by an addition in another one). 3. Transaction registry: A database that has all of the features of a register, plus the capability to transfer carbon units between multiple account holders on the transaction registry (internal transfer), and/or the capability to transfer carbon units to another transaction registry (external transfer). The more complex the ETS, the more features the transaction registry will require. 4. Data Management System (DMS): A database that records and archives specific information about a carbon unit that is not stored in the transaction registry or register, but that for policy reasons is required to transparently demonstrate environmental integrity, and compliance with safeguards and other conditions. For example, to facilitate compatibility between registries, it may be desirable to limit the information that travels with a carbon unit when it is externally transferred. At the same time, it may be desirable to archive information about that carbon unit (for example, baseline information according to which a carbon unit was issued, or geographical information relating to a project boundary), and this can be recorded in a DMS. The serial number of a carbon unit should link it to the information in the DMS, so the latter can be retrieved if necessary. xii EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration BOX 2. An Expert View: Tracking Internationally Transferred Carbon Units By Christina Hood, International Energy Agency One key question for negotiators will be whether to make available (or even require the use of) a central UN architecture for the linking of national registries. The Kyoto Protocol’s International Transaction Log (ITL) could be adapted to provide a central hub to link both UN-led and domestic carbon pricing mechanisms, though this would require domestic systems to be designed to the UN specification. The central hub could also collect the relevant information on unit transfers needed to account for NDCs. Alternatively, registries of linked systems could link bilaterally in a peer-to-peer arrangement; in this case, the information needed for (UNFCCC) accounting would need to be submitted from the individual registries. This would potentially include information on issuances, retirements, international transfers, banking, and holdings (including vintages). The figure below compares the two systems. UNFCCC UNFCCC Secretariat Secretariat Reporting on GHE unit holdings and ITL transactions Central tool: policy-related Annex I and/or technical National checks Registry Annex I Annex I Non-Annex I Annex I Non-Annex I National National National National National Registry Registry Registry Registry Registry Central Hub Peer-to-Peer registry communication Source: Prag. A., C. Hood A. Asruned and G. Briner, “Tracking and Trading: Expanding on Options for International Greenhouse Gas Unit Accounting after 2012” Note: UNFCCC = United Nations Framework Convention on Climate Change; GHG = greenhouse gases; ITL = International Transaction Log. Although a peer-to-peer system may be simpler, there may be concerns about varying security standards and a lack of transparency: it would be difficult for outside observers to know that units and transactions are unique. This could potentially give rise to a separate UNFCCC process of reporting and review of the carbon pricing systems themselves, to demonstrate they are maintaining high environmental integrity. Under the Paris Agreement, the use of international transfers toward NDCs is voluntary and must be “authorized by participating Parties.” This does not preclude subnational systems from linking without approval from national authorities, but means that any unapproved flows of carbon units could not be counted toward NDCs. For example, if a plant covered by a linked subnational scheme chooses to buy carbon units from a plant covered by a linked scheme in another country, rather than reduce its own emissions, then the transaction would be “invisible” in term of progress toward the NDC. Subnational systems may therefore need to change (including changing registry arrangements to meet international standards, or aligning metrics and methodologies with the UNFCCC) if these systems want their units to be counted toward national NDCs. GHG emission budgets to developed countries. In addition Under the Paris Agreement, this landscape differs signifi- to capping the emissions of developed countries, the Kyoto cantly. First, Parties have submitted—and will continue Protocol defined carbon units and enabled the transfer to do so in the future—their GHG mitigation goals as of such carbon units between countries. Finally, the Clean formulated in their Nationally Determined Contribu- Development Mechanism (CDM), as stipulated in the Kyoto tions (NDCs). The implication is that the host countries of Protocol, allowed ERs originating in uncapped regions to be crediting mechanisms will need to account for the export of imported into the Kyoto-covered system. units against their own targets. Second, there is an inconsis- xiii EXECUTIVE SUMMARY tency between the ways targets are formulated in coun- international law. 3 In fact, a domestic ETS could operate as tries’ NDCs, with some using business-as-usual emissions a purely domestic mitigation measure without any linking to projections as the reference point (of zero mitigation), and international mechanisms. others using the emissions targets from a baseline year or emissions intensity per unit of economic output as the point In practice however, domestic ETSs may pursue “one- of reference. As a consequence, accounting issues become way” linking4 with international carbon markets— more complex. Third, it is expected that the different market such as in the case of the EU ETS, which allowed limited mechanisms will generate a great variety of carbon units import of credits from the CDM and Joint Implementation (JI) and unit flows, making it difficult to make them fungible. defined under the Kyoto Protocol. At the same time, domes- Finally, the Paris Agreement does not define accounting tic ETSs may pursue “two-way” linking5 with domestic ETSs of standards for NDCs, which raises a question about fungibil- other regions and jurisdictions—such as the linking sought ity, and creates the risk of oversupply and variable integrity between the EU ETS and Swiss ETS. Commonly heard of carbon units. arguments in support of linking are that it bolsters market liquidity, efficiency, and price stability. However, a hybrid Under the Paris Agreement, Parties are expected to system of domestic and international regulation, involving develop implementation rules to enable accurate both one-way and two-way links between multiple ETSs, will accounting of NDCs. The Paris Agreement allows for the require highly developed and interconnected registries to cooperation of countries in meeting their NDCs and intro- ensure accurate accounting. duces the concept of “Internationally Transferred Mitigation Outcomes” (ITMOs), which Parties can use toward achieving their NDC targets (Art. 6.2). Though the Paris Agreement Putting Theory into Practice: does not define ITMOs—which could potentially take some Developing Legal, Technical and form of carbon units—it does establish that as a condi- Institutional Frameworks for tion of their use, Parties musts “apply robust accounting Registries to ensure, inter alia, the avoidance which could potentially take some form of carbon units of double counting.” The Legal framework decision that accompanies the Paris Agreement notes that All market mechanisms are created through legisla- this should be done on the basis of a “corresponding adjust- tion or regulation. The GHG monitoring and reporting ment” by Parties (Para. 35), but what form this should take obligations of regulated entities (countries at the interna- to ensure that it accounts for the diverse range of NDCs is tional level, companies at the national/jurisdictional level) an open question. must be set out in guidance, regulation, or legislation. Ideally, the guidance and modalities are binding, and the Domestic climate policy legal instruments also establish and vest powers in bodies In case of any market mechanism implementation at authorized to verify, audit, and administer emissions data. the domestic level, registries are required for regulat- ed entities to demonstrate compliance by reconciling allowances held (what covered entities are allowed to emit) 3 In recent years, a number of developed countries/regions have with verified emissions (what covered entities actually emit). introduced jurisdiction-wide emissions trading systems as a means to That said, it is important to distinguish between domestic regulate GHG pollution from major emitters, such as power stations and industrial plants. As of 2016, ETSs in force include the European Union ETSs, whereby regulated entities trade carbon units to meet Emissions Trading System (EU ETS), the Swiss Emissions Trading System, an emissions cap set by national legislation, from the inter- the California Cap-and-Trade Program, the U.S. Regional Greenhouse national transfer of carbon units under the Kyoto Protocol Gas Initiative (covering Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont), or Paris Agreement for the purpose of compliance with the Quebec Cap-and-Trade System, the Kazakhstan Emissions Trading Scheme, the New Zealand Emissions Trading Scheme, the Korean Emissions Trading Scheme, Japan’s Saitama Target Setting Emissions Trading System, and Tokyo Cap-and-Trade Program. In addition, Alberta’s Specified Gas Emitters Regulation (SGER) sets a facility-level emissions intensity target (as opposed to an absolute cap). A range of regional, pilot ETSs are in force in China, with a view to absorbing these in an overall Chinese cap-and-trade system by 2017. Another 15 jurisdictions are currently considering implementing ETSs (see PMR, ICAP (2016), Emissions Trading in Practice: A Handbook on Design and Implementation, available at https://openknowledge.worldbank.org/handle/10986/23874). 4 Where entities in one ETS can buy units issued from one or more other systems, but not vice versa. 5 Where both systems recognize each other’s units. xiv EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration At the international level, overarching principles are often deemed a service provision, it may be subject to a sales or expressed in treaties, while concrete modalities are devel- service tax such as value added tax (VAT). The tax liability oped on the basis of decisions of the treaty’s governing will also require valuation of carbon units, which may be body. For example, the Paris Agreement obliges all Parties challenging, particularly if they were initially allocated for to account for their NDCs in a way that promotes environ- free. In the event of insolvency of an account holder, it will mental integrity, transparency, accuracy, completeness, be necessary to determine the treatment of transacted comparability and consistency, but does not formulate carbon units. Issues that may arise in this context include concrete accounting guidelines. the question of who has legal claims to the carbon units, and whether compliance and offset accounts are managed At the national level, obligations should be expressed in pri- differently. mary and secondary legislation. One example are the regu- lations under the United Kingdom’s Companies Act (2006), In highly sophisticated carbon markets with multiple which require companies quoted in the United Kingdom to participation levels and thousands of daily trades, report their GHG emissions. Moreover, the Act establishes a carbon unit may become subject to the same a body that is responsible for monitoring compliance of regulatory treatment as other financial products. company reports and accounts (The Conduct Committee of The creation of an expansive regulatory legal framework the Financial Reporting Council). will increase consumer protection and legal certainty. On the other hand, if this is established before the market is Where some form of emissions trading is undertaken, sufficiently mature, it may stifle its potential for growth by a legal basis is required for the establishment of a making participation too costly. Examples of additional registry as well as for the creation, issuance, transfer, regulatory safeguards include the introduction of a licens- and retirement of carbon units. Administrative rules or ing requirement for brokers, and extending existing laws on terms and conditions will be needed for account opening, market abuse, insider trading, and other financial crimes, to closing, and access. Specific rules may be required for the carbon unit trading. handling of sensitive data. If dealing with carbon credits, it may be necessary to distinguish between allowances and Institutional framework compliance accounts on the one hand, and carbon credits All market mechanisms involve the designation of a and automation accounts on the other. Where the market public authority, commonly within an environment or is highly liquid and the number of transactions requires energy department, to be responsible for the regis- automation of processes to ensure transfer settlement is try’s actual implementation. A registry can be admin- manageable, the legal framework of traditional national laws istered internally, by a public authority, or outsourced to a will need to be adjusted to accommodate such an electronic third party. Countries should conduct a cost-benefit analysis environment. before contracting a third-party service, and duly consider To ensure the smooth functioning of carbon trans- the specific expertise and level of service required, the risks actions, it is important that national policy makers and costs associated with outsourcing and the extent to define the legal nature of a carbon unit (e.g., whether which capacity already exists (or would have to be devel- it is an administrative grant, license, financial instrument, a oped) in-house. Registry administration comprises both good, or a service, and whether the holder of the unit has a management and operational processes. full and defendable property title). If a carbon unit is treated Management processes include staff and system manage- as property, its owner can derive specific rights that poten- ment; risk, budget, and resource management; and coop- tially allow use of that carbon unit in a broader range of eration with regulatory authorities. Operational processes transactions (e.g., as collateral to raise financing), not merely represent the bulk of the administrative tasks, and include in selling/purchasing or surrendering for compliance. The monitoring the relationship with users (e.g., entering and broader the use of the carbon unit, the wider its appeal will terminating a relationship with registry users), and manag- be to market participants and other investors, but the more ing registry operations (such as the issuance of carbon limited the ability of regulators to adjust the market (e.g., units). canceling carbon units in the event of oversupply) without incurring obligations to market participants. If a carbon unit Registry administrators are exposed to a number of is not considered property, it is likely to have a more limited risks, which require careful consideration and man- application beyond the market mechanism’s primary goal. agement. Residual risks may be covered by an insurance The legal status of the carbon unit will affect the tax implica- policy. tions on transfer. If it is deemed a transfer of property or an Risks include the accidental non-execution or late execution asset, it may attract a tax such as a stamp duty, whereas if of operations, entering into relations with an account holder xv EXECUTIVE SUMMARY or user who subsequently engages in fraudulent behavior, n Adapting, by contracting an IT services provider to failure to block violating accounts, and failure to report sus- adapt and implement an existing, open source or picious activities/incidents to the relevant authorities. licensed registry; A key risk mitigation measure available to registry adminis- n Outsourcing, by using the software as the basis for a trators is to set “know your customer” requirements, such as service model—the software vendor hosts and main- requiring that specific information and a number of support- tains the servers, databases, and code that constitute ing documents be provided about the prospective account the registry application. holder and each of the physical persons legally entitled to act on their behalf, before an entity may open a registry Any approach that involves the services of an IT company account. has specific pros and cons, and the final decision should duly take into account factors such as the cost of mainte- Registry administration requires financial resources nance, complexity, and flexibility of the system, and data and, where these costs are not covered with public ownership. funding, one option is to charge a fee for a range of registry operations and services. Where a fee is charged, A registry is unlikely to operate in isolation and, the fee structure should be as kept as simple as possible, depending on the type of market mechanism, is likely and all participants should be treated equally and pay to interface with several IT systems and databases. “acceptable” prices, with smaller market participants possibly Other systems and databases include the national GHG being charged lower fees. In addition, the amount and tim- inventory, a data management system that records offset ing of revenue derived from fee payments to cover registry projects and other crediting mechanisms, and other regis- costs should be predictable. tries where there is linking between jurisdictions. In the case of linking distinct registries between jurisdictions, basically Alternatively, several options could be considered to two interfacing options are available: (i) the use of a central cut administrative costs. Formalizing operational pro- communication hub (such as the ITL under the Kyoto Proto- cedures (e.g., the process by which new customers have to col) or (ii) the development of peer-to-peer network connec- be screened) can improve effectiveness and ensure equal tions; both options have pros and cons. treatment of all users, while also reducing the risk of opera- tional errors. Setting control and monitoring standards for A registry will be exposed to various security risks, participants in accordance with their size and level of market which can be mitigated by adopting the following involvement can reduce costs, without exposing the system technical security measures: to significant risks. Automating informational exchanges n Enhancing the strength of authentication and time-out with registry users (such as requesting missing documents) requirements can reduce the risk of identity usurpation. can significantly shorten the time needed for administrative processing and reduce the risk of human error. Similarly, n Limiting administrator access to normal working automating the monitoring of account activity can help hours, automatic system checks during data entry, and detect suspicious forms of behavior. Finally, providing train- multiple validation requirements can reduce the risk of ing materials and developing communication support tools fraudulent or accidental transfer. (e.g., video tutorials) can reduce the number of incoming calls on a Registry User Hotline. n Limiting administrator access to the registry by client IP address (i.e., administrator users may only log on to the Technical framework registry from networks known to be controlled by the responsible organization). When procuring a registry, countries basically have to consider four major options: n Restricting both physical and electronic access to regis- try hosting infrastructure/servers. n Sharing, by using a single common registry across jurisdictions; n Ensuring strong encryption of data transfer and data storage. n Developing, by drafting functional and technical specifications for an information technology (IT) services n Conducting regular penetration testing and operating provider to develop a registry system from scratch; system and software patching. n Adding detection and alert functions—which can be customized for individual account holders—to detect xvi EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration suspicious administrative events, such as an unusually ETSs (i.e., offsetting) or used in the context of international high number of transactions. transfers of carbon units. To enable identification and discrete tracking, each Sectoral crediting raises a number of accounting carbon unit will be issued with a unique serial num- questions that have implications for registry design ber. Serial numbers are made up of consecutive number when used alongside NDC accounting and flexibility blocks that record information such as carbon unit type, vin- mechanisms established by the Paris Agreement. tage, project identification, and project type. A serial number should create a permanent link between each unit created n Do certain sectors present particular challenges, such and the initiating project, and reflect any other relevant as permanence risk, or a degree of uncertainty in market information (such as environmental or social quality monitoring, reporting, and verification that require the labels associated with the unit) stored in a data manage- use of distinct carbon units with different accounting ment system. requirements? A registry is likely to require different account n Can a credited sector contribute toward a country’s types for different functions. Accounts can be split NDC target, but be accounted for separately? For into technical accounts (those managed by the registry example, if the credited sector in question generates administrator) and holding accounts for market participants. ERs, but a country fails to meet its NDC, are ITMOs still Technical accounts may include those for the issuance, available for transfer? surrender, and cancellation of carbon units, as well as n Can a credited sector be excluded from an NDC, so that buffer accounts for risk management. Holding accounts may ITMOs can be transferred that contribute to a purchas- include operator holding accounts (for capped entities under er’s NDC without detracting from the host country’s the market mechanism), project proponent holding accounts NDC accounting? (for carbon project developers), and trading accounts (for brokers and other intermediaries); each account is linked to The international incentive framework for reduced a different set of functions and, in some cases, restrictions. emissions from deforestation and forest degradation (REDD+) enables countries and subnational entities A web-based registry will require a service to host to generate quantified ERs. Through sectoral crediting, registry data, and rules for determining whether to these ERs can be linked to market-based transactions. As allow online access. Security measures will be required such, it is instructive to review the registry arrangements to restrict access to authorized users. The registry’s hours developed to date for the handling of forest carbon units. of operation—in other words, when will the registry be REDD+ countries wishing to transfer forest carbon units are available to users—will have to be determined. It will also be likely to use the registry infrastructure already developed for necessary to determine some technical standards related other sectors, to a large extent. However, in some respects, to the registry’s performance—for instance, the bandwidth, ERs from forest and land-use interventions differ from those CPU power, system memory, and capacity required for han- in other sectors, and registries dealing with the exchange of dling the volume and frequency of transactions anticipated forest carbon units will have to be designed accordingly. and for storing all the relevant data. One key consideration is the role of markets in the implementation of REDD+. Forest carbon units can in Registry Requirements for Sectoral principle be exchanged in the following markets: Crediting: A Case Study of REDD+ A number of emerging market mechanisms premised n Voluntary carbon markets; on the provision of international financial support n International, government-to-government carbon for domestic mitigation measures in developing markets; countries are currently under development. One modality of such mechanisms relies on the issuance of n Domestic carbon markets; and carbon units based on the ERs achieved by an entire sector. Such sectoral crediting allows for the fast-tracking of ERs n Linked domestic and international carbon markets. in sectors that have been prioritized for mitigation action, Another important category of REDD+ transactions refers to while country-wide accounting systems are still being built. RBCF Programs that reward REDD+ countries for reduc- Carbon units may be used as carbon credits under national ing emissions from deforestation and forest degradation. Although RBCF programs are, in some cases, being intro- xvii EXECUTIVE SUMMARY duced as a stepping stone to potential market-based mech- The legal, technical, and institutional frameworks anisms, they do not necessarily lead to the generation of a for REDD+ will be similar to those outlined above, be transferable carbon unit, and thus do not require an emis- it that some additional factors will have to be taken sions trading registry. All RBCF programs which generate into account. In land-use transactions, legal issues may transferable carbon units, however, need to take measures arise from uncertainty around legal and beneficial owner- to avoid instances of double counting including developing ship of transferred carbon units. However, a registry may a registry to issue, transfer, and retire carbon units. not be the place to resolve legal risks related to carbon unit ownership. The starting point for a registry should be the A second consideration is the scale of implementa- assumption that the entities holding forest carbon units are tion. REDD+ can be implemented at the national, subna- uncontested owners, and thus legally entitled to transfer tional, or project level, and in any combination of these and to benefit from the sale of their forest carbon unit. approaches. The complexity of a registry depends on the number of accounting levels that are part of the national The technical requirements for handling forest implementation, which of these levels are linked to carbon carbon units will only differ from those of standard markets, and whether such a link is direct (e.g., whether carbon unit trading systems to the extent that a credits can be issued to and traded by any level or if credits regulatory system defines forest carbon units as dis- can only be issued to/traded by national governments, with tinct from other carbon units. Forest carbon unit serial subnational benefit sharing/crediting arrangements). numbers may be required to convey information on quality markers, limitations, or ER activity associated with the for- Implementation on multiple scales will require the nesting est carbon unit in question, and may affect the type and of lower-level accounts within the higher-level accounts, number of accounts that the registry administrator must and/or the creation of separate levels of forest carbon units establish in the registry. Where buffer accounts are used, for trading at different scales. the IT system will need to develop a distinct buffer account- ing model. A third consideration is that registries will need a number of special features to hold and manage car- The development of an institutional framework for bon units related to land-use activities. REDD+ market handling forest carbon units will also have to duly systems need to manage the risk of reversal of emission consider a number of factors. For instance, low-capacity reductions—by the release of carbon stored in biomass into entities may require support with account registration, and the atmosphere (permanence risks)—which is a risk specific there might as well be a need for agents acting on behalf to land-use transactions. REDD+ is also exposed to the of groups that do not have access to information technol- potentially higher risk of emissions displacement (leakage) ogy or for other reasons lack the capacity to access a digital and uncertainties in measuring and reporting emissions. registry. The sensitivity to information barriers faced by potential REDD+ participants may also be recognized when Leakage risk can be managed by large-scale accounting designing user guides and communicating registry func- and emissions monitoring. Uncertainties in the measuring tions. The fee structure should be established taking into of emissions should be managed by adopting conservative account the needs of participants with limited financial accounting approaches. Many additional risk management resources. strategies exist, three of which (buffer accounts, discount- ing, and temporary credits) have implications for registry design. In the case of buffer accounts, a portion of the ERs Looking Ahead: the Role of Registries generated is set aside rather than being sold. In the event of in the Post-Paris Regime reversal, leakage, or underestimation, emission reductions in the buffer can be used to compensate for this loss. Buf- The Paris Agreement is the first-ever universal cli- fer accounts may also be pooled to ensure that there are mate treaty that requires both developed and devel- suffi cient buffer credits to account for any reversal that any oping countries to contribute to the efforts in limiting one project or program may experience. This also contrib- global warming to 2°C above pre-industrial levels. utes to diversifying the risk profile of the pool. Discounting Unlike the Kyoto Protocol, the Paris Agreement reinforces permanently sets aside a portion of the emission reductions the principles of voluntary cooperation and bottom-up generated and allows only the remainder to actually be approaches, thereby presenting a largely self-implementing used. Temporary credits are units that expire at a set time framework for climate change mitigation and adaptation. To after issuance and at that time need to be replaced by the this end, and in the wake of the INDCs submitted ahead of holder, either with another temporary unit or a permanent the COP, Parties will have to continue demonstrating politi- unit. cal will and even increase their ambition by developing and xviii EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration communicating voluntary, domestically defined, increasingly of registries. Therefore, emissions trading registries are ambitious mitigation contributions every five years. These likely to become even more important in the frame- national mitigation strategies will likely cover a wide array of work of the Paris Agreement. While these registries policies, including the intention to use carbon pricing and will need to reflect the diversity of instruments and market market-based instruments as a way to achieve countries’ transactions, as well as differences in country capacities, a mitigation targets. certain degree of standardization is likely to be required if the countries intend to use international market mecha- Besides the fact that all countries have assumed a respon- nisms or cooperate by connecting their national registries to sibility for reducing GHG emissions, the Paris Agreement those of other jurisdictions. has more distinct features than the Kyoto Protocol. While the Kyoto Protocol with its internationally governed Striking the right balance between these two market-based approaches and related institutions purposes—that is, creating a registry that is has provided a common framework for GHG account- both nationally appropriate and internationally ing, the Paris Agreement is not calling for the estab- compatible—will be one of the registry’s biggest lishment of one centrally coordinated or interlinked design challenges. That said, future developments in emissions trading architecture. The practical implica- regard to registry design in the Paris framework will benefit tions of these differences is the evolution from the Kyoto- greatly from already existing registry infrastructure, as well regime registry infrastructure that allowed the transfer of as knowledge and experience that have been gained over largely fungible carbon assets among Parties, both pri- the years. vate and public entities, to the fragmented, Paris-regime approach whose distinctive feature will be diverse and Against this backdrop and to further facilitate future country-driven systems. registry design and implementation, this report pro- vides detailed guidance for policy makers and other Despite the bottom-up and fragmented nature of these stakeholders on a number of issues related to regula- country systems, it will be critical to ensure that the mitiga- tory, administrative, and technical aspects of regis- tion outcomes generated and potentially transferred inter- tries that will need to be in place before emissions nationally are environmentally robust, real, and measurable. trading is implemented. International accounting standards will surely be key to achieving that, as will be the country-driven infrastructure xix LIST OF ACRONYMS AAU Assigned Amount Unit  ITMO Internationally Transferred Mitigation Outcome ACR American Carbon Registry JCM  Joint Crediting Mechanism  AFOLU Agriculture, Forestry, and Other Land Use JI  Joint Implementation  ANREU Australian National Registry of Emissions Units JNR Jurisdictional and Nested REDD+ ARB California Air Resources Board MRV  Monitoring, Reporting and Verification  ARBOC Air Resources Board Offset Credit (California) Mt  Megaton  CCER  Chinese Certified Emission Reduction  MtCO2e  Megaton of Carbon Dioxide Equivalent  CDM  Clean Development Mechanism  NAMA Nationally Appropriate Mitigation Action CER  Certified Emission Reduction  National Emission Reduction Plan (United NERP Kingdom) CITSS Compliance Instrument Tracking System Service NZ ETS  New Zealand Emissions Trading Scheme  Conference of the Parties serving as the Meeting of CMP  the Parties to the Kyoto Protocol  NZEUR New Zealand Emissions Unit Register CO2  Carbon dioxide  NZU New Zealand Units CO2e Carbon dioxide equivalent  OPR Offset Project Registries COP  Conference of the Parties  OS Operating System CPM  Carbon Pricing Mechanism  PES Payment for Ecosystem Services CRM Customer Relationship Management PFSI Permanent Forest Sink Initiative (New Zealand) DES Data Exchange Standards PIU Pending Issuance Unit (United Kingdom) EPA Environmental Protection Agency (United States) PMR  Partnership for Market Readiness  ER Emission Reduction RBCF Results-Based Climate Finance ERF Emissions Reduction Fund (Australia) Reducing Emissions from Deforestation and Forest REDD Degradation Emission Reductions Program Idea Note (Forest ER-PIN Carbon Partnership Facility) REDD plus Conservation, Sustainable Management of Forests, and Enhancement of Forest Carbon ERU  Emission Reduction Unit  REDD+ Stocks ETS  Emissions Trading System/Scheme  REM REDD Early Movers EU  European Union  RFI Request for Interest EU ETS  European Union Emissions Trading System  RFP Request for Proposal EUTL European Union Transaction Log RGGI  Regional Greenhouse Gas Initiative  FCPF  Forest Carbon Partnership Facility  RMU Removal Unit (Kyoto Protocol) GHG  Greenhouse gas  Renewable Obligation Certificate (United Kingdom) Intended Nationally Determined Contribution or Registry Offset Credit (California Cap-and-Trade INDC ROC Program) IT Information Technology ROE Recognised Offsets Entity (Australia) ITL International Transaction Log xx EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration Ton (ton in this report refers to a metric ton = t  1,000 kg)  tCO2e  Ton of carbon dioxide equivalent  UK  United Kingdom  UN  United Nations  United Nations Framework Convention on Climate UNFCCC  Change  US  United States VCS  Verified Carbon Standard  VCSA Verified Carbon Standard Association VPN Virtual Private Network VVB Validation/Verification Body (VCS) WB World Bank WCC Woodland Carbon Code (United Kingdom) WCI Western Climate Initiative WCU Woodland Carbon Unit (United Kingdom) xxi PART I. Registries: Introduction and Design Options All markets require a trading place for buyers and sellers to for its implementation; and (iii) the resources available for hold and exchange assets. A carbon market is no different, implementation. and an emissions or “carbon” registry is typically required to perform two basic functions: (i) determine the quantity of carbon units held by account holders and (ii) enable the 1. Basic Terminology exchange of carbon units between account holders. There is understandable confusion over the term “registry,” However, not all carbon markets are the same and, the largely because of the many ways in which it has been used. more complicated the rules of the market, the greater the In common parlance, a registry is simply a place for stor- number of features a registry will need to have to accom- ing data. In the climate change policy context, the term has modate these rules. Furthermore, jurisdictions that intend been used to refer to a whole range of things—including a to engage in carbon markets but presently lack the capacity GHG emissions accounting system, a list of project and pro- or experience to do so, may wish to develop some form of gram information, and carbon unit databases with varying accounting of carbon units as a stepping stone to registry levels of functionality. development. To help dispel the confusion, this guidance report makes This guidance report is intended to provide countries with a distinction between four types of emissions accounting technical insights and step-by-step guidance to support systems, briefly described below: country-specific decision making and activities on registry 1. GHG inventory: An inventory that records physical development. It is targeted at countries in the process of GHG emissions and removals. Accounting of GHG emis- designing domestic, market-based policies to reduce green- sions must be distinguished from accounting of carbon house gas (GHG) emissions. Part I is primarily meant for units. policy makers, while parts II, III, and IV are directed at both policy makers and specialists likely to play a technical role in An example is the United States National Greenhouse Gas registry design and implementation, ranging from IT special- Inventory, which tracks total annual U.S. emissions and ists to legal experts. removals by source, economic sector, and GHG. The inven- tory is prepared by the Environmental Protection Agency Part I is structured as an introductory primer, aimed at (EPA) and submitted to the United Nations Framework demystifying the terminology on registries, and giving policy Convention on Climate Change (UNFCCC) Secretariat and makers a clear, practical explanation of what registries are other Parties in Annex I to the Convention. and how they cater to different market mechanisms. It gives some background on the development of registries to sup- 2. Register: A database that records serialized carbon port environmental market mechanisms, from the domestic units and any other information specific to the carbon Emission Trading Systems (ETSs) of the 1990s to the Kyoto unit required by policy. This could include the vintage of Protocol and the post-2020 climate regime outlined in the the carbon unit, the identity and location of the project Paris Agreement, illustrated by a handful of case studies for which the carbon unit was issued, the project of registry arrangements in key jurisdictions. The aim is funder, and verification details. A register may be used to show how registry design relates to the specific market by a country that receives RBCF for generating emission mechanism adopted by a jurisdiction, and to highlight not reductions (ERs), to ensure that one and the same ER is only the legal and institutional frameworks, but also the not paid for twice (double payment). technical infrastructure required for registry implementa- tion. Part I concludes with guidance in a nutshell on three Participants in the REDD Early Movers (REM) program led key questions for policy makers: (i) the type of accounting by Germany must develop an accounting platform to track, system their countries require; (ii) the optimum framework retire, and cancel, but not transfer, ERs. This is an example 1 PART 1. Registries: Introduction and Design Options of what is referred to as a register in this guide. Forest This guidance report concerns the development of registers Carbon Partnership Facility (FCPF) Carbon Fund partici- and transaction registries—accounting systems that record pants must develop an accounting platform to transfer and track carbon units exchanged through market mecha- carbon units to the World Bank (WB). This is also referred nisms or carbon units financed through RBCF programs to as a register, even while the transfer is not sophisticated (Figure 2). The term registry is used as an umbrella term to because it only requires one account holder (the national refer to both registers and transaction registries whenever authority) in the register. it is unnecessary to distinguish between those two terms. This guidance report also distinguishes between different 3. Transaction registry: A database that has all the types of “carbon units,” an umbrella term used to refer to features of a register, plus the capability to transfer the following three categories: carbon units between account holders in the transac- tion registry (internal transfer), and/or the capability to 1. Allowance: Similar to a permit, an allowance is issued transfer carbon units to another transaction registry by a central authority and gives a regulated entity the (external transfer). Any emissions trading system (ETS) right to emit, up to the maximum of the allowance, will require a transaction registry in some form. The without being subject to a penalty. more complex the trading system, the larger the num- ber of features the transaction registry will require. An example is the European Emission Allowance (EUA), which is issued to fixed installations and gives the holder An example is the Union Registry, a single E.U. registry the right to emit one ton of carbon dioxide (or equivalent) operated by the European Commission to enable participa- under the EU ETS. tion in the European Union Emissions Trading System (EU ETS), which has more than 20,000 account holders and 2. Carbon credit: A credit that is earned for undertaking thousands of daily trades. Security measures include pre- an activity that reduces emissions against a baseline, ventive measures to avoid fraud (e.g., two-factor authen- according to a regulated standard. Credits are issued to tication and out-of-band confirmation of transactions), authorized project developers upon verification. Credits measures to quickly respond to fraud (e.g., the ability of are sold as offsets to be used by regulated entities seller to cancel transactions within 24 hours of a sales instead of an allowance. transaction), and measures to avoid market disruption if fraud does occur (e.g., buyers who acted in good faith will An example is the Certified Emission Reduction (CER), acquire full entitlement to purchased allowances). issued by the CDM Executive Board for a CDM project activ- ity. CERs can be purchased, to a limited extent, by Kyoto 4. Data Management System (DMS): A database that Protocol Annex B countries to comply with their targets records and archives information about a carbon unit under the Protocol, and by regulated entities under the that is not stored in the transaction registry or register, EU ETS. but that for policy reasons is required to transparently demonstrate environmental integrity, compliance with safeguards, and other conditions. For example, to facili- tate compatibility between registries, it may be desir- able to limit the information that travels with a carbon FIGURE 2: Different Types of Emissions Accounting unit when it is externally transferred. At the same time, Systems Compared it may be desirable to archive information about that carbon unit (e.g., baseline information according to Register/ Data which a carbon unit was issued, or geographical infor- GHG Transaction Management mation relating to a project boundary), and this can Inventory Registry System be recorded in a data management system. The serial Records Records Records carbon number of a carbon unit should link it to the informa- physical GHG units for market information on tion stored in the data management system, so this can emissions and mechanism/ carbon unit be retrieved if necessary. removals results-based and policy/ climate finance program/ programs project An example is the database of registered Clean Develop- ment Mechanism (CDM) project activities, which for each project records, inter alia, project design document, infor- mation on methodologies used, and validation reports. 2 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration 3. Voluntary credit: As with a carbon credit, voluntary An example are the Verified Carbon Units (VCUs), which are credits are earned for undertaking an activity that issued, tracked, and retired on the “VCS registry system,” reduces emissions against a baseline. However, volun- which consists of the two transaction registries (APX and tary credits are issued according to a “private” (i.e., vol- Markit) and a central project database. untary) standard. They may be recognized by regulated trading systems for compliance purposes. Other basic terms used in this guide are briefly defined in Table 1; more elaborate definitions are presented in appendix A. TABLE 1: Basic Relevant Terminology Types of Emission Accounting System GHG inventory An inventory that records physical GHG emissions and removals Register A database that records serialized carbon units and any other information specific to the carbon unit , as required by policy Transaction A database that has all of the features of a register, plus the capability to transfer carbon units between multiple registry account holders Data A database that records information about emission reductions (e.g., the type of carbon unit, relevant method- Management ologies, the policies, and programs) and, more generally, any information that is not stored in the transaction System (DMS) registry or register, but that for transparency purposes should be recorded and archived Types of Emissions Trading Systems Cap-and-trade Creates a fixed ceiling on total emissions for a compliance period, and then distributes allowances (usually through free allocation or auctioning) to regulated entities that are subject to the cap Baseline-and- Entities that are not subject to an emissions cap are issued credits for voluntarily undertaken projects that reduce credit emissions compared to a baseline or counterfactual projection. Credits are sold as offsets to entities subject to an emissions cap Purely Entities that are not subject to an emissions cap generate and sell offset credits to other entities that are likewise voluntary not subject to an emissions cap Types of Carbon Units Carbon unit An umbrella term to refer to the three types of carbon units distinguished by this report Allowance Similar to a permit, this gives a regulated entity the right to emit without being subject to a penalty Carbon credit A credit that is earned for undertaking an activity that reduces emissions against a baseline, according to a regu- lated standard Voluntary credit Similar to a carbon credit, except that it is issued according to a voluntary standard Registry Functions Issuance The creation of a carbon unit by a registry administrator and its allocation to an account holder External The transfer of a carbon unit from an account in one registry to an account in another registry transfer Internal The transfer of a carbon unit from one account to another one within a registry transfer Retirement The disposal of a carbon unit for compliance with an emissions target ; in some contexts, retirement is referred to as “surrender” Cancellation The disposal of a carbon unit where the unit is not used for compliance with an emissions target, and cannot be used by others for compliance either Conversion The transformation of one carbon unit type to another Banking The carrying over of unused carbon units from one compliance period to the next Borrowing The use of carbon units from future compliance periods to meet obligations in the current compliance period (CONTINUED) 3 PART 1. Registries: Introduction and Design Options TABLE 1: Basic Relevant Terminology (CONTINUED) Market Participants Regulator A public authority appointed by law to oversee and enforce the market mechanism Registry A body responsible for the day-to-day operations of the registry; this can be a public or private body administrator Regulated A body that is legally subject to an emissions limit or other obligation; this could be a country under international entity law or a company under domestic law Project An organization that voluntarily engages in a project to reduce emissions in order to sell carbon units developer Verifier Responsible for ensuring, among others, that the emission reductions reported by project developers are real and additional Broker Engages in carbon unit transactions on behalf of a client Intermediary Purchases a carbon unit on its own behalf for a purpose other than compliance (e.g., resale) Trading Levels Primary market Where allowances or carbon credits enter the market and are acquired by regulated entities for compliance purposes Secondary Where allowances or carbon credits are resold and purchased, either for resale or compliance market International Where countries/jurisdictions acquire carbon units to comply with caps or targets expressed in international market legislation Domestic Where entities, such as power stations and industrial facilities, acquire carbon units to comply with caps estab- market lished through domestic legislation 2. Registries: Experiences to Date but not for compliance purposes. General accounts can be used by covered utilities to pool their allowances, by and Future Needs intermediaries wishing to purchase allowances for resale, or by public interest groups wishing to remove a portion 2.1. Registries and domestic market- of available allowances from the market. Each allowance is based policies pre-Kyoto identifiable through a unique serial number that, among The most prominent example of emissions trading in the other things, reflects the first year in which the allowance era preceding the Kyoto Protocol emerged through amend- can be used for compliance. ments to the United States Clean Air Act to control sulfur dioxide emissions (known as the Acid Rain Program). The Originally, the Allowance Tracking System did not automati- Acid Rain Program being a cap-and-trade program, allow- cally record allowances transferred between accounts. ances are allocated (and later auctioned) by the United Rather, transfers were reported to the EPA by the “autho- States EPA to power plants, in line with a predetermined rized account representatives” of the buyer and seller in formula, and plants that emit less sulfur dioxide than their question, using an allowance transfer form. More recently, allowances permit, can sell excess allowances to other, an electronic trading platform has been developed (the higher emitting plants that are short of allowances. CAMD Business System), which records the horizontal trans- fer of allowances between account holders. The registry (“Allowance Tracking System”) developed by the U.S. Environmental Protection Agency (EPA) to account for 2.2. International registries established allowances creates two types of account: (i) unit accounts, opened by utilities regulated by the Acid Rain Program to in accordance with the Kyoto determine compliance, and used for the issuance, hold- Protocol ing and deduction of allowances to cover emissions; and In 1997, the Kyoto Protocol introduced the concept of (ii) general accounts, which can be opened by any individual emissions trading into the climate regime. By capping the or group, and used for holding and transferring allowances, emissions of developed countries, it created the conditions 4 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration for a harmonized GHG accounting that, in turn, allowed the vices using a Simple Object Access Protocol (SOAP) and a transfer of units between Parties with an emission cap. The hardware-based Virtual Private Network (VPN)).7 Kyoto Protocol features a cap-and-trade aspect, as trading of allowances (Assigned Amount Units or AAUs) is permitted 2.3. National registries established in between developed Parties subject to emissions targets. It accordance with the Kyoto Protocol also features a baseline-and-credit aspect, project devel- To help meet their Kyoto commitments, a number of opers being allowed to generate and sell carbon credits developed countries have introduced market mechanisms through ER projects in developed countries (through “Joint as a means to regulate pollution from major emitters, such Implementation” (JI) and the trading of Emission Reduction as power stations and industrial plants. These mechanisms Units or ERUs) and developing countries not subject to include New Zealand’s Emissions Trading Scheme and emissions targets (through the “Clean Development Mecha- Australia’s Carbon Farming Initiative, though the largest nism” (CDM) and the trading of “CERs”). and longest lived of these ETSs is the EU ETS. Currently The involvement of multiple participants and types of car- covering the 28 member states plus Iceland, Lichtenstein, bon units necessitated the development of multiple regis- and Norway, the EU ETS began life as a largely decentral- tries, all linked to one another, and able to issue, hold, trans- ized system of mostly independent but interlinked trading fer, convert, replace, carry over, and retire/cancel/surrender systems of the EU member states, member states being various types of carbon units. Developed country Parties responsible for issuing carbon units, setting emission caps, had to establish national registries to track their holdings and operating their respective registries. This led to signifi- of and transactions (additions/subtractions) of Kyoto units cant coordination problems and consequently, in 2012, the (including AAUs). AAUs can be transferred between national various Member State registries were replaced with a single registries, thereby giving flexibility to developed countries EU registry operated by the EU Commission. The EU registry in meeting their Kyoto commitments. In addition, national records national implementation measures, company or registries can convert AAUs into ERUs for issuance to ER physical person accounts, transfers of allowances, verified project developers in developed countries under JI. Project GHG emissions from installations, and annual reconciliation developers can sell ERUs to other developed countries. of allowances and verified emissions.8 Developing countries are not subject to emissions targets The EU ETS is a cap-and-trade system in which allowances under Kyoto and have not established national registries. (“EUAs”) are traded between market participants. Moreover, Hence a CDM registry was established to issue CERs to qual- the EU ETS Linking Directive allows the limited import of ifying emissions reduction projects in developing countries. Kyoto credits (e.g., CERs) for compliance purposes. Origi- Authorized project developers can instruct the CDM registry nally, EUAs were linked to Kyoto AAUs—each EUA issued by administrator to transfer these CERs to accounts in Annex I a Member State registry through the conversion of an equal registries. quantity of AAUs. In fact, the transfers of EUAs between Member State registries under the EU ETS were shadowed To ensure that transactions are consistent with the rules of by the transfers of AAUs under the Kyoto Protocol. In the the Kyoto Protocol and that one and the same unit is not current phase of the EU ETS, however, EUAs issued by the used in multiple accounts simultaneously (which would lead Commission are no longer linked to AAUs, and the EU reg- to “double counting”), an International Transaction Log (ITL) istry and Kyoto registries are only linked to the extent that was developed to connect registries and oversee transac- CERs and ERUs can be traded between the two platforms. tions. The ITL is administered by the UNFCCC secretariat.6 The European Union Transaction Log (EUTL) automatically To ensure that communication between registries is secure checks, records, and authorizes all transactions that take and processed in real time, the UNFCCC maintains a special place between accounts in the Union registry. communication protocol (the Data Exchange Standards or DES) with specific technical specifications (e.g., web ser- 7 For more information, see UNFCCC, Data Exchange Standards for Registry Systems under the Kyoto Protocol, Technical Specifications (version 1.1.10), available at https://unfccc.int/files/kyoto_protocol/registry_ systems/application/pdf/des_full_v1.1.10.pdf. 6 For more information on systems and processes that support registry integration under the Kyoto Protocol, see the presentation given by Jean- 8 For more information, see World Bank. 2012. State and Trends of Francois Halleux of UNFCCC at the PMR Workshop held in Sacramento, the Carbon Market 2012, available at http://siteresources.worldbank. September 23–25, 2015, available at https://www.thepmr.org/sites/ org/INTCARBONFINANCE/Resources/State_and_Trends_2012_Web_ wbpmr/files/2.%20UNFCCC_PMR_IntegratingReg%20v0.9.pdf Optimized_19035_Cvr&Txt_LR.pdf#page=29. 5 PART 1. Registries: Introduction and Design Options Box 3 reviews milestones in the use of Emissions Trading 2.4. Jurisdictional registries established Registries in the United Kingdom.9 outside of the Kyoto Protocol Following the United States’ decision not to ratify the Kyoto Protocol and in the absence of a national carbon pricing BOX 3. Emissions Trading Registries in the UK— policy and emissions targets, a number of U.S. states have from UK ETS to EU ETS developed regulations to limit GHG emissions internally. The most prominent of these regulations is California’s Global In 2002, the United Kingdom launched a voluntary Emissions Trading Scheme (UK ETS). It pioneered the Warming Solutions Act, also known as AB32, which laid the reverse auction format, whereby companies “bid” for basis for the development of California’s Cap-and-Trade public money (an “incentive payment”) with emission Program, operational since 2012. reduction commitments. Successful companies were then issued with allowances, which they could trade among In 2007, California entered into the Western Climate Initia- themselves to meet their commitments. The Department tive (WCI), together with four other subnational jurisdic- for Environment and Rural Affairs (DEFRA) established tions in the United States and Canada (British Columbia, and administered the U.K. Emissions Trading Registry (UK ETR) to serve the UK ETS. Given the small number Manitoba, Ontario, and Quebec). The WCI is a non-binding of participants involved (32) and the limited number of commitment to certain ER goals, and includes an agreement trades, DEFRA undertook registry transactions on behalf to develop a linked set of multisectoral ETSs. The WCI has of participants and facilitated any transfers of allowances gained the support of seven US states and four Canadian between participants. provinces, though to date, only California and Quebec have The UK ETS was designed to be compatible with the linked their ETSs. EU ETS, and the U.K. government-designed software (Greenhouse Gases Registry for Emissions Trading Beyond the WCI, a group of northeastern U.S. states (Con- Arrangements) was shared with 16 other EU member necticut, Delaware, Maine, Maryland, Massachusetts, New states for participation in the EU ETS. Hampshire, New York, Rhode Island, and Vermont) have For phases I and II of the EU ETS, the “U.K. national formed the Regional Greenhouse Gas Initiative (RGGI), registry” was administered by the U.K. Environment Agency. The national registry enabled account holders to a cap-and-trade program to reduce emissions from the hold, transfer, cancel, or acquire EU Allowances (EUAs) power sector. Participating states have developed the RGGI as well as Kyoto units that could be used for compliance CO2 Allowance Tracking System (RGGI COATS), a registry with the EU ETS. The U.K. national registry was reconciled that records and tracks data for each state’s CO2 Budget on a periodic basis with the Community Independent Trading Program. Both allowances and carbon credits can Transaction Log (CITL) of the EU and the UNFCCC be traded as part of the RGGI. International Transaction Log (ITL), to ensure consistency of records across the EU and Kyoto systems. Alberta, which has introduced emissions regulation requir- In June 2012, the EU member states’ registry systems ing existing facilities to immediately reduce their GHG were brought together into a single registry system, output, has also developed a registry to enable regulated operated and managed by the European Commission. As the member states remained severally responsible entities to engage in compliance flexibility mechanisms, for their Kyoto targets in the event that the EU does including the use of “emission performance credits” and not meet its collective target, each member state has a Alberta-based carbon credits.10 national registry section within the single Union Registry. The United Kingdom’s Environment Agency remains Box 4 outlines what arrangements California and Quebec responsible for the administration and maintenance of had to make to be able to formally link their programs in the U.K. national registry section. The accounts in the U.K. January 2014.11 national registry section are governed by U.K. laws and fall under the jurisdiction of the United Kingdom, and the units held in these accounts are considered to be situated in the United Kingdom. 10 For more information, see presentation given by John Storey-Bishoff of Alberta Environment and Parks at the PMR Workshop held in Sacramento, September 23–25, 2015 (available at https://www.thepmr.org/sites/ wbpmr/files/3.WB%20PMR%20-%20Alberta%20Registry%20-%202015-09- 23.pdf). 9 See the Department for Environmental and Rural Affairs (DEFRA), 11 Based on the presentation given by Jason Gray of the California Air Appraisal of Years 1–4 of the U.K. Emissions Trading Scheme, available Resources Board (ARB) at the PMR Workshop held in Sacramento, at http://webarchive.nationalarchives.gov.uk/20090908171815/http:// September 23–25, 2015 (available at https://www.thepmr.org/ www.defra.gov.uk/environment/climatechange/trading/uk/pdf/ukets1-4yr- sites/wbpmr/files/4.%20Sept%2025%202015%20ARB%20PMR%20 appraisal.pdf. Presentation.pdf). 6 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration BOX 4. Registry Arrangements for Linking of California and Quebec Cap-and-Trade Programs Following considerable joint planning, the California and Quebec cap-and-trade programs were formally linked in January 2014, with the first joint auction held in November 2014. A number of differences exist between the two programs, not least the fact that California’s emissions target is for 2020 levels to equal 1990 levels, whereas Quebec’s target is for emissions by 2020 to be 20 percent below 1990 levels. The ambition of Quebec’s target suggest that it will be a net importer of carbon units. High-level rules for linking are set out in an agreement between the California Air Resources Board (ARB) and the government of Quebec on the harmonization and integration of cap-and-trade programs. This agreement contains, inter alia, a commitment of the parties to work together to develop and use common electronic platforms in order to ensure program compatibility, integrity, and integration. The registry supporting the California-Quebec linked program is the Compliance Instrument Tracking System Service (CITSS), which functions as a single, linked registry. Covered entities, project operators generating offsets, and any other bodies holding or trading compliance instruments on the secondary market, must register an account with the CITSS. CITSS is used to issue, trade, and retire compliance instruments with unique serial numbers. California and Quebec had begun using CITSS separately, prior to formal linking, and thus a number of technical, administrative, and legal hurdles had to be overcome for linking to function (e.g., for data security and monitoring purposes, both parties’ regulations had to be aligned, and new processes and procedures jointly developed). The use of a single registry by multiple jurisdictions reduces the threat of security breaches, simplifies accounting of cross- border transfers, and creates clear requirements for new participants (a consideration in the case of CITSS, Ontario having signaled its intent to join). On the other hand, a challenge of this approach is that it requires policy alignment from participating jurisdictions, which in turn requires coordination to resolve differences arising from variant legal structures, regulatory timetables, and processes. 2.5. Registries in voluntary carbon entities to use offset credits to meet a portion of their com- markets pliance obligation. Offset credits issued by Offset Project Registries must be converted into Compliance Offset Credits Voluntary carbon markets emerged in the late 1990s, largely before they can be used for compliance with the Cap-and- driven by demand from private companies to “offset” their Trade Program. emissions, often as part of corporate social responsibility (CSR) programs or to gain experience in carbon trading, in anticipation of the introduction of regulated markets. Vol- 2.6. Registries as part of Results-Based untary carbon units are created through private contracts, Climate Finance Programs and REDD+ with ERs commonly verified to an offset standard by an RBCF programs are a financing tool that condition payment independent accredited entity (validation/verification body) on the achievement of particular results, and typically to provide quality assurance. Certification to a voluntary describe donor country aid programs that pay for outcomes standard allows the issuance of verified emission reductions rather than inputs such as capacity building and action plan (VERs) into emission registries established by independent development. In recent years, a number of donors have third parties. Major voluntary standards include, among oth- developed bilateral and multilateral RBCF programs. While ers, the Verified Carbon Standard (VCS), the Gold Standard, using ERs as a performance metric, most of these programs and the American Carbon Registry (ACR). Voluntary standard do not issue and transfer carbon units and therefore do not bodies determine the methodologies for quantifying the require an emissions trading registry. Those RBCF programs GHG ERs of specific project activities. Project proponents that generate transferable carbon units, however, need to must open an account with a registry operator. In the case take measures to avoid instances of double counting includ- of the VCS, registry operators are the private companies ing developing a registry to issue, transfer, and retire carbon APX and Markit, both of which are directly linked to the VCS units. Project Database. Voluntary credits are issued into regis- tries upon verification, which is conducted by an approved The Carbon Fund of the WB’s Forest Carbon Partnership project validation/verification body. Facility (FCPF) makes payments for REDD+ results measured against a national baseline or “reference level.” The fund Entities involved in voluntary standards have also played requires host countries to either maintain a national trans- a role in regulated carbon markets. For example, the VCS, action registry, or use a transaction registry managed by a ACR, and CAR operate “Offset Project Registries” within the third party on its behalf. This reflects the fact that Carbon California Cap-and-Trade Program, which permits regulated Fund payments are made in exchange for the transfer of 7 PART 1. Registries: Introduction and Design Options carbon units from the host country to the Carbon Fund, and tion of a domestic ETS, and an ETS has been operational in a transaction registry is required for the appropriate issu- South Korea since 2015.12 ance, serialization, transfer, retirement, and/or cancellation of carbon units. Although carbon taxes do not themselves require the development of transaction registries, taxes introduced in By contrast, Norway’s bilateral results-based agreements, Mexico and planned for South Africa include an offsetting such as those with Brazil, Guyana, and Indonesia, do not component, according to which taxed entities can reduce involve the transfer of carbon units but rather the financ- their tax liability by purchasing project-level offset credits. ing of compensated results, and thus the development of a These offsetting programs have yet to be operationalized, transaction registry has not been necessary. For example, and accounting rules and infrastructure have not yet been Norway’s contributions to Brazil’s Amazon Fund are defined developed. Nonetheless, some form of registry system as grants for which personal, nontransferable and nonne- will likely be required, through which entities are able to gotiable diplomas that do not grant ownership rights or any acquire, hold, and surrender offsets credits instead of pay- kind of credit are issued. ERs corresponding to these diplo- ing taxes.13 mas will not be sold on carbon markets, and an inventory of payments received and corresponding ERs is published Sectoral crediting refers to the process by which carbon online. units (for domestic or international use) are issued to a sector as a whole, rather than to individual projects or pro- The REDD Early Movers Program (REM) led by Germany, grams, for reducing emissions against a baseline. Jurisdic- meanwhile, requires participating countries and jurisdictions tional-level, market-based REDD+, with carbon units sold by to permanently retire ERs (to avoid double counting), and a jurisdiction for forest ERs across that jurisdiction or biome, cancel additional ones in order to, inter alia, mitigate per- would be an example of sectoral crediting. Sectoral crediting manence and leakage risks. This requires that participating would require some form of registry development, either countries and jurisdictions develop an accounting system for holding and retiring carbon units at the national level to track, retire, and cancel ERs. However, the development (e.g., for compliance with an emissions cap) or for the sale of a transaction registry is not necessary, as REM does not of carbon units at the international level. However, sectoral involve the transfer of carbon units. For example, the Brazil- crediting is yet to be implemented and no international or ian jurisdiction of Acre selected the Markit Environmental domestic framework exists so far. Registry platform, a private financial information services company, to develop a platform to account for ERs compen- Nationally Appropriate Mitigation Actions or NAMAs sated under the REM Program, though this does not involve are a policy tool for developed countries to define the the transfer of carbon units to Germany. mitigation actions for which they seek financial, technical, and capacity-building support from developed countries. Through the NAMA process, a number of countries, includ- 2.7. Registries to be established for ing Mexico and Colombia, have begun to explore the pos- emerging market mechanisms in sibility of developing “credited NAMAs”, that is, NAMAs for developing countries In recent years, a number of developing countries have begun to develop market mechanisms to tackle domes- tic emissions, and these require varying levels of registry sophistication. 12 The developing countries that are considering an ETS are Thailand, China, Cap-and-trade schemes are under development in a num- Turkey, Ukraine, Mexico, and Chile (see World Bank Group. 2015. Carbon ber of developing countries. Seven regional pilots have been Pricing Watch, available at http://www-wds.worldbank.org/external/default/ introduced in China since 2013, aimed at creating a national WDSContentServer/WDSP/IB/2015/08/26/090224b08309a09a/4_0/ Rendered/PDF/Carbon0pricing0e0released0late02015.pdf). Information ETS by 2017. Transaction registries have been developed on registry infrastructure developed to support market mechanisms for each pilot region to issue, hold, transfer, and retire allow- in Kazakhstan and Thailand has been presented at the PMR Workshop held in Sacramento, September 23–25, 2015, available at https://www. ances. In addition to allowances, domestically produced thepmr.org/system/files/documents/4.Kazakhstan%E2%80%99s%20 offset credits are accepted across all seven pilots. China is Carbon%20Units%20Registry.pdf and https://www.thepmr.org/system/ already exploring the possibility to link these regional pilots files/documents/3.TGO_Registry_23Sep15.pdf respectively. (and eventually a national ETS) with other ETSs. In total, six 13 For more information on the use of international offsets in domestic programs, see PMR (2015), Technical Note 10, Options to Use Existing developing countries are currently considering implementa- International Offset Programs in a Domestic Context, available at http://www-wds.worldbank.org/external/default/WDSContentServer/ WDSP/IB/2015/08/27/090224b08309d7dd/1_0/Rendered/PDF/ Options0to0use0n0a0domestic0context.pdf. 8 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration which carbon units are issued in exchange for investment.14 Credited NAMAs would require the development of transac- BOX 5. China’s national registry system tion registries for the issuance and international transfer In 2012, the government of China began developing of carbon units. Unlike sectoral crediting, credited NAMAs a national registry system to support both a national would generate carbon units for ERs from specific projects, voluntary carbon market, launched in 2015, and a rather than measured across a sector as a whole. national, allowance-based carbon market. Although the allowance-based market is still in the design phase, it is Box 5 gives an overview of the development of China’s expected to use the same registry infrastructure as the national registry system.15 voluntary carbon market. The registry IT system has been developed by the Chinese government from scratch. 2.8. Registries to be established after the The Chinese national ETS is envisioned as an allowance- based system in which allowances will be either allocated Paris Agreement or auctioned. Moreover, the use of offsets, termed Negotiated in December 2015, the Paris Agreement creates Chinese Certified Emission Reductions (CCERs), will be a framework for international climate policy post-2020. permitted for compliance purposes. Governance is split between the central government and provincial Unlike the Kyoto Protocol, which was built around bind- governments, and it is expected that participants will ing emissions targets for developed countries only, the include regulated entities, project developers generating Paris Agreement is structured around volunteered Nation- offsets, brokers, and other intermediaries. As such, the ally Determined Contributions (NDCs), which express the national registry system will comprise multiple types of bottom-up feature of the climate goals of developed and accounts and holders: developing countries. National management accounts: accounts held and managed by national authorities, including a total The Paris Agreement sets the groundwork for a number quantity account, national allocation account, national of market mechanisms. First, the Paris Agreement allows auction account, and national cancellation account. Parties to exchange “internationally transferred mitigation Provincial management accounts: accounts held and outcomes” (ITMOs), which can be used to account toward managed by provincial authorities. In addition to national NDC implementation. types of management accounts, provincial management accounts include an offset (CCER) compliance account. The sum total of NDCs does not represent a “cap” in the Holding accounts: accounts for regulated entities traditional sense, as NDCs are self-determined and the Paris and project developers. These include compliance Agreement does not oblige countries to meet their NDCs. holding accounts, general holding accounts, and trading accounts. Hence, the trading mechanism, if leading to the generation of transferable carbon units, would more closely resemble a Others: Includes an auction platform delivery account and an exchange delivery account. Auction agencies baseline-and-credit system—with ITMOs taking some form certified by the authorities will manage the auction of carbon credits for reductions against a baseline—than a delivery accounts. Exchange delivery accounts are to be system based on allowances. One major challenge, how- used for the indirect transfer of carbon units between ever, is that NDCs are not formulated consistently across account holders. countries, with the targets in some NDCs expressed as Account management within the national registry system absolute emission cuts compared with baseline years, and will be conducted by administrators appointed by the other NDCs expressing targets relative to projected busi- national authorities, and to be responsible for opening, ness-as-usual scenarios. As such, it is not clear, at the time blocking, and closing of accounts, and information editing. of writing, how the equivalence (and fungibility) of ITMOS will be established, and Parties to the Paris Agreement will need to It is conceived that the Chinese ETS may be linked to other compliance regimes under the UNFCCC in the future. For this reason, the national registry system will implement a connection interface with ITL under the UNFCCC Data Exchange Standards (DES). 14 For more information, see PMR (2015), Crediting-Related Activities under the PMR, available at http://www-wds.worldbank.org/external/default/ WDSContentServer/WDSP/IB/2015/08/12/090224b08306caff/1_0/ Rendered/PDF/Crediting0rela0t0for0implementation.pdf. 15 Information taken from presentations given at the PMR Workshop held in Sacramento, September 23–25, 2015, available at https://www.thepmr. org/sites/wbpmr/files/2.%20WB_Sacramento_Sino_Day1_Session4.pdf, https://www.thepmr.org/system/files/documents/2.%20WB_Sacramento_ Sino_Day1_Session3.pdf and https://www.thepmr.org/sites/wbpmr/ files/2.201509%20China%27s%20ETS%20registry%20-NCSC.pdf. 9 PART 1. Registries: Introduction and Design Options develop further rules to clarify the nature of ITMOs and how the questions in mind while working through the more detailed trade in ITMOs is to be structured. guidance presented in parts II, III, IV, and V of this report. At the same time, the Paris Agreement seems to have Question 1: What type of registry does my established a further baseline-and-credit system, modeled country require? after the CDM, in the form of a “mechanism to contribute To comply with the Paris Agreement, all Parties will have to to the mitigation of greenhouse gas emissions and sup- account for anthropogenic emissions and removals corre- port sustainable development.” Modalities that guide these sponding to their NDCs, which will require the development mechanisms have still to be established. The reference to of a GHG inventory. authorized public and private entities that may participate in mitigation activities in the host country, and the creation Developing countries intending to access RBCF through of ERs that can be counted by another country to meet its bilateral or multilateral channels will likely have to develop NDC but must be subtracted by the host country in its own a register to track compensated results, and a data man- NDC accounting (to avoid double counting) suggest similari- agement system if the tracking of detailed, project-level ties with existing baseline-and-credit mechanisms. information is required. For RBCF that require the transfer of carbon units (such as envisaged under the FCPF Carbon Under the Paris Agreement, countries must account for Fund or credited NAMAs), a register with the capacity to their NDCs. This will require each country to develop an issue and transfer units will be required. emissions accounting system to monitor and report on its emissions and removals. Further, NDCs will be recorded in a „ See Part II, Section 2, for a discussion of fac- “public registry,” maintained by the UNFCCC Secretariat and tors influencing the choice of platform; see serving as a compendium of published NDCs). Countries part III, Section 1.1, on the scale and scope of wishing to exchange ITMOs would need to ensure the same market mechanisms. “mitigation outcome” is not reported by more than one country, which may require transaction registries with an Countries intending to implement ETSs will require a trans- interface to their emissions accounting systems, or, alterna- action registry. tively, a simple double-entry bookkeeping and tracking tool built into the national inventories of countries. Countries Parties to the Paris Agreement that intend to exchange wishing to host activities under the “mitigation and sustain- “international transferred mitigation outcomes” (Art.6.2) will able development mechanism” will need to develop transac- have to apply robust accounting to ensure, among other tion registries that, in addition, link project-level “emission things, the avoidance of double counting. This will require reductions” to national emissions accounting systems, so the development of transaction registries to issue, hold, and that “emission reductions” transferred abroad can be sub- externally transfer ITMOs. tracted from national accounts. „ See Part V, Section 2, for a discussion of emerging market mechanisms under the Paris Agreement. 3. Key Questions for Policy Makers A key theme of this report is that registry requirements Parties to the Paris Agreement intending to engage in the will vary according to the market mechanism they sup- “mitigation and sustainable development mechanism” port. The more complex the market mechanism, the more (Art.6.4) will need to develop transaction registries that complex the accompanying registry, and hence the greater feature subaccounts for the issuance of carbon units to resources, both administrative and financial, that will be mitigation activity proponents. Carbon units from mitigation necessary for its implementation. It is thus important activities that are externally transferred to entities in other that decision makers have a clear picture at the outset of countries must be excluded from the national accounts of resource requirements, so that design choices are informed the host country (for the purpose of NDC reporting) and by resource availability and constraints. credited to the national accounts of the purchasing country. As the chapter above indicates, registry design is not „ See Part V, Section 2, for a discussion of straightforward, and for policy makers faced with multiple emerging market mechanisms under the policy objectives and design choices, knowing where to Paris Agreement. begin can be difficult. A good starting point is addressing Parties to the Paris Agreement that intend to implement the the three questions posed below, for which we provide flexibility mechanisms described above and implement a some initial guidance. Policy makers should keep these domestic ETS that is linked to another or multiple ETSs, will 10 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration require a highly developed transaction registry that ensures share, or outsource a registry; see part IV, reconciliation between different accounting levels. Section 5, for detailed guidance on registry development from scratch. „ See Part V, Section 2, for a discussion of emerging market mechanisms under the „ See Part IV, Section 2.2.2, for an introductory Paris Agreement. discussion on potential it systems and data- bases interfacing with a registry; see Part IV, Question 2: What are the legal, institutional, and Section 2.2.4, on the technical infrastructure technical frameworks for the required registry? for establishing connections. As noted throughout the accompanying guidance materials, „ See Part IV, Section 1.1, for an overview of the degree of sophistication of the registry, and hence the security risk assessment measures; see Part required legal, technical, and institutional arrangements, IV, Section 4.2, for a detailed discussion of will depend on the choice of market instrument(s). There is security requirements. a sliding scale of registry functionality, from basic account- ing and data management all the way up to sophisticated Although a public authority will ultimately be responsible international crime detection and prevention. for the implementation of an ETS, a registry may be admin- istered internally, by a public authority, or externally, by a „ See Part II, Section 1.1, for a discussion of the third party contracted. Registry administration involves man- sliding scale of functionality between a regis- agement processes, operational processes, and supporting ter and a transaction registry. processes. The responsibilities for these various processes The legal framework should address, among other things, may be divided among different institutions/entities. the monitoring and reporting obligations of regulated enti- „ See Part III, Section 2, on criteria for selecting ties; the creation, issuance, transfer, and retirement of car- a registry administrator. bon units; the administrative rules or terms and conditions relating to account opening, closing, and access; the legal „ See part III, Section 3.1, for an overview of nature of the carbon unit; the tax implications of carbon registry administrative tasks. unit transfer; relevant financial instrument regulations; and rules in the event of insolvency of account holders. Question 3: What resources are available for the development of registries? „ See Part II, Section 3.2.2 and 3.2.3, for a discussion of carbon unit creation, issuance As part of the Paris Agreement, developed country Parties transfer, and retirement. have committed to provide financial resources to develop- ing countries. Beyond general climate finance commitments „ See Part II, Section 3.3.2, and Part V, section (set out in Article 9), the Paris Agreement also determines 3.4.3, for a discussion of the legal nature of that support shall be provided to developing countries for carbon units. the purpose of anthropogenic emissions reporting (Article 13), NDC implementation reporting (as part of Article 4 and „ See Part II, Sections 3.3.3, 3.3.4, and 3.3.5, for Article 13), and for the “timely and accurate communica- a discussion of tax, financial regulation, and tion of information” (Article 11) as part of the transparency insolvency rules. framework. Taken together, these commitments can be interpreted to form the basis of financial and capacity- In building a registry, countries have four major options: (i) building support for the development of GHG accounting to share a registry with other jurisdictions; (ii) to develop an systems, registers, and transaction registries. IT system from scratch; (iii) to adapt existing systems; or (iv) to commission a software vendor to host and maintain the Outside the Paris Agreement, a number of multilateral and registry. Transaction registries may need to be interfaced bilateral funds are already providing support to developing with other databases (e.g., a GHG inventory) and potentially countries for registry development. The WB’s Partnership be linked to other transaction registries through a central for Market Readiness (PMR) provides grant funding for hub or peer-to-peer network connections. A registry is building market readiness components, including regis- exposed to a number of security risks, and technical secu- try development. Other potential WB sources include the rity options will need to be developed to address these. Carbon Asset Development Fund of the Carbon Partnership Facility (CPF) and the Readiness Fund of the Carbon Initiative „ See Part IV, Section 2.1, for an introductory for Development (Ci-Dev). More specifically, the Forest Car- discussion on whether to develop, adapt, 11 PART 1. Registries: Introduction and Design Options bon Partnership Facility’s Readiness Fund provides support domestic market instruments, authorities may wish to for the development of REDD+ registries. Bilateral sources impose a fee on market participants that covers the cost of of support for registry development include Germany’s REM registry development and administration. However, the fee Program and Norway’s International Climate and Forest structure should take into account the resources available Initiative. to market participants. „ See Part V, Section 3.1, for a discussion of „ See Part III, Section 3.2.1, for a discussion of international multilateral and bilateral registry fee structures. REDD+ initiatives. „ See Part III, Section 4, for ways in which the Where public financial resources, international or domes- registry administration costs can be reduced. tic, are not available for the development of registries for 12 PART II. The Legal Framework 1. Overview: Register versus ment platform (referred to in this report as a “transaction registry”) that may at some point be connected to a trading Transaction Registry platform. 1.1. A sliding scale of platform While largely the same requirements apply to the legal functionality framework of a transaction registry and a register, the In the context of environmental market mechanisms, the former has some additional, more complex requirements terms database, reporting platform, and register have often deriving from legal and fiscal considerations. The main been used interchangeably, as have the terms register and reason for this is the recognition that at the top end of our registry. The purpose of this chapter is to clarify the differ- sliding scale, the carbon asset held in the transaction reg- ences between a “transaction registry,” which refers to a istry will be treated as a financial asset. As with all financial type of transaction platform, and a “register,” which refers assets, its holder will want to make sure the asset maintains to a data and reporting management tool. The key differ- its value and can be used like any other financial asset—for ence between these two terms derives from a sliding scale instance, be sold freely, pledged, or used as collateral. of legal and functional considerations. At the lower end of the scale is an electronic database that records carbon or 1.2. Proposed modular approach other environmental units (referred to in this report as a Whether under the framework of a new international cli- “register”) and, at the other end, a multifunctional settle- mate change agreement or as part of the “solution” inde- FIGURE 3: Sliding Scale of Platform Functionality Transaction Registry Register Reporting & Offset Cap & Trade Compliance Schemes Degree of functionality Issuance Transfer Transfer, Recording Trade Settlement Reporting Canellation (real time) Surrender Surrender Retirement 13 PART II. The Legal Framework pendently chosen by each PMR/FCPF participant country, 2.3. Scale of market mechanism it is impossible to prescribe a “one size fits all” approach in The larger the proposed trading market, the more likely this report. Where exactly a country’s preferred domestic it is that automated processes will be required to capture, market-based policy for GHG mitigation sits on the sliding manage, and record transactions. Such automation will be scale, will determine the functional, technical, and legal lay- accompanied by an increased level of risk commensurate ers of sophistication needed for its framework to support with the functionality of the platform, and specific rules or that choice. For example, a country that commits to adopt laws will be needed to ensure the legal rights and liabilities a self-reporting regime for its GHG emissions will not need of the underlying asset subject to electronic dealings are much more than a register, whereas a country that adopts duly protected.17 E-commerce laws, cyber security laws, and an offset mechanism may require something closer to a other property rights legislation will need to be recognized, transaction registry. This chapter presents the options slightly modified, and applied in the context of an intangible through a modular approach so it is easier for the reader to asset. Moreover, as carbon units held in registries may have establish the degree of sophistication most suitable for their financial value, they may be a target for theft. Establishing country’s legal framework in this context. security arrangements through legislation helps lower that risk. 2. Factors Influencing the Choice of 2.4. Potential for international or Platform domestic growth 2.1. Purpose of policy-based market If a market mechanism intends to progressively scale up by linking with market mechanisms in other regions (e.g., mechanism with Chinese pilot markets) or countries, this process The purpose of the underlying market-based mechanism can be facilitated by using platforms that operate under adopted by a given PMR/FCPF participant country (hereaf- compatible legal frameworks. It would be difficult to link ter referred to as the “market mechanism”) is an important mechanisms, for example, if a carbon unit is recognized as consideration in determining the most suitable platform. property under the laws of one mechanism but not in the The more elaborate the market mechanism envisioned, the other mechanism, and might require a country to adopt a greater the number of building blocks that will be necessary law similar to the one adopted by the other mechanism as to create the supportive legal framework. For example, a a condition for linkage. Just as the use of minimum interna- “cap-and-trade” mechanism, where the ability to cap emis- tionally accepted standards for verification, reporting, and sions and establish a successful trading market will be the compliance will facilitate such functional linkage, so will the key to success, is likely to require greater sophistication use of platforms that have similar supporting legal frame- than an offset scheme that simply aims to register offsets works. In the more fragmented, “bottom-up” approach as and record their purchases and retirements. suggested by the Paris Agreement, which discusses whether such scaling up or linkage is possible, it is important to 2.2. Scope of market mechanism ensure that legal rights are treated similarly among linked The scope of the market mechanism is also important. A registers/transaction registries to avoid a patchwork of market mechanism that covers a relatively large number legally incompatible platforms.18 of sectors—energy generation, forestry, transportation (including road, aviation, and shipping), manufacturing, medium and large industrial operations, etc.—will attract a larger number of participants, potentially more transactions and therefore, by necessity, require more automation. The wider the scope of participants in the market mechanism, the harder it will be to find the right functional balance for the platform, as the varying levels of experience, knowledge, and familiarity of those actors will affect the platform’s design.16 17 Higher technology requirements will also increase the cost of implementation and maintenance of the market mechanism. 18 For more information, see Zaman, P (2016), The Regulatory Framework 16 Understandably, a lack of sophisticated participants will result in a less to Support Carbon Market, available at. http://pubdocs.worldbank.org/ sophisticated and less functional platform, until the market has matured en/680061461687518813/The-Regulatory-Framework-to-support-the- enough. NCM-Linking-Model.pdf 14 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration 3. Building Blocks of the Legal many instances, primary legislation will only provide the broad framework to be supplemented by secondary or Framework enabling legislation that authorizes bodies to set the rules, regulations, or terms and conditions that allow the primary 3.1. Different levels within a legal legislation to be implemented. As such, references to a legal framework framework in this context should be interpreted as the pub- This section discusses the legal framework necessary to lication of that which is necessary to make that legal frame- support the functions of the register/transaction registry. work effective in a given PMR/FCPF participant country. Keeping in mind that the nature of a register or transaction registry is functional or transactional, a legal framework must At the end of the analysis, it should be possible to deter- be designed so that it supports the functions and transac- mine whether an appropriate framework is in place for tions of the register/transaction registry. This means broad protecting the integrity of the market mechanism. The areas of legislation must be addressed to ensure the func- assessment should consider the overall market regulation tional and transactional outcome of the register/transaction and oversight rules that apply, the country’s definition and registry are supported. legal status of the carbon unit, and the register/transaction registry system for recording and disclosing data. The legal framework may draw on several sources of legislation; not all outcomes require primary legislation. In FIGURE 4: Building Blocks of the Legal Framework Criminal / white collar crime prevention Financial regulation Cyber security Consistency of cross-border laws Property Property Insolvency Insolvency Market abuse Market abuse Tax / VAT Tax / VAT Tax / VAT Accounting Accounting Accounting Civil / Criminal Civil / Criminal Civil / Criminal penalties penalties penalties Civil / Criminal Civil / Criminal Civil / Criminal penalties penalties penalties Laws establishing Laws establishing Laws establishing Laws establishing the mechanism the mechanism the mechanism the mechanism Compliance Compliance Compliance Compliance Authority of Authority of Authority of Authority of Reporting Agency Reporting Agency Reporting Agency Reporting Agency Register Register / Transaction registry Transaction registry 15 PART II. The Legal Framework 3.2. Registers trade mechanism. The collected data may or may not be Starting at the lower end of the sliding scale, the functions released or distributed by the Register/Transaction Registry that the legal framework will need to support are likely to operator but there will need to be a clear recognition of include the following: the sensitivity and value of that data based on the type of market mechanism. n To serve as a reporting database; The legal status of the register/transaction registry adminis- n To be able to record the creation (registration) or issu- trator should be clearly enshrined in law. In order to oper- ance (serialization) of a carbon unit; ate and maintain the registry, the administrator will need to take actions and ad hoc decisions. It will be necessary to n To facilitate the unit’s surrender, cancellation, and empower the administrator with discretion, for example to retirement; and refuse or block an account or to suspend the operations of the register/transaction registry as necessary. The success- n To facilitate transfers of the underlying unit (including ful operation of the register/transaction registry requires tracking). sound governance structures, with appropriate segregation of IT and business duties in the internal organization of the 3.2.1. Reporting database functionality administrator, as well as adequate resources. The register must be able to function as a reporting data- base for the market mechanism to be transparent. Ideally, 3.2.2. Carbon unit recording functionality there should be national or state-level19 laws that detail the A database where a unit is issued to reflect the underlying necessary monitoring and reporting obligations (such as the environmental benefit achieved (e.g., a reduction of GHG obligation to report all CO2 emissions) and enabling legisla- emissions against a baseline) reduces the risk of double tion to authorize a specific body to develop the necessary counting, particularly if the information about the units is rules and tools, including a database, to support the report- transparent, and provides accountability to registry users. ing requirements. Where this is the case, the legislation may Such a database may also serve as a repository for informa- also need to ensure that the data is subject to a specific tion about offsets issued from activities recognized by a level of audit or quality control,20 for example, through a market organization (e.g., Verified Carbon Standard and the requirement for verification of data prior to reporting by Pennsylvania Emission Reduction Credit (“ERC”) system21). As third parties that are qualified, independent, pre-approved, this information is public, interested parties can make sure or accredited. that the offset that they are being sold has environmental The use of that data would similarly be dictated by the integrity and has not already been used for compliance. primary legislation, for example, to whom the compiled However, how to ensure transparency should not be left reported data must be sent and whether its disclosure to the discretion of the platform administrator; details on should be public or private. However, questions on specific when, how, and to whom the data will be reported could be data formatting, such as is required by international report- reflected in secondary legislation, while the transparency ing standards or international treaties, could be determined requirements themselves could be established in primary by the appointed authorities. legislation. The sensitivity of data collection and management will also 3.2.3. Carbon unit end-of-life functionality be driven by the nature of the market mechanism and the A register may have several types of accounts; for example, data in question. For example, data on whether an entity if dealing with offsets, the register could distinguish between has met its compliance obligation are sensitive for the the accounts for project operators (from which offsets are compliance entity concerned but perhaps less significant traded) and the accounts that can be used for the surren- for other market participants. By contrast, information on der or cancellation of offsets. Thus, administrative rules or whether a covered sector’s overall emissions levels have terms and conditions of the register will have to be estab- decreased because fewer units had to be surrendered lished for opening, closing, and accessing an account. These will be highly sensitive in the context of a full cap-and- could include “Know Your Client” (KYC) requirements for 19 Depending on the scope of the mechanism. 21 The Federal Clean Air Act creates an offset requirement but there are no 20 To be compliant for use in the California Cap-and-Trade Program, U.S. federal rules on ERC generation. Each state has its own rules. The ERC American Carbon Registry offset projects need to be approved and offsets rules require the Pennsylvania Department of Environmental Protection generated by the project need to be verified by an approved party before (DEP) to maintain a statewide registry of ERCs and deduct ERCs from the they are issued in the California Registry. registry when ERCs are consumed in issuance of a construction permit. 16 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration account opening, fees to be paid for account maintenance, 3.3. Transaction registries and limiting the register administrator’s liability. At the lower end of the scale, the American Carbon Regis- try (ACR) is a voluntary offset scheme whose credits may The account opening process may involve the platform be sold between account holders. The sale and transfer of operator collecting a large amount of data—including offset credits are not driven by any compliance deadline. personal data—about individuals. Account holders will want Sales occur outside the platform and are settled via direct assurance that their confidential information is not publicly confirmation of a change in each of the relevant account disclosed. To that end, it should be clear what rules govern holders’ records. As this registry is voluntary, the registry the protection of personal and confidential information, and operates outside any legislative framework and is entirely how the register’s legal framework is linked to data protec- contractual. The legal certainty associated with the value of tion laws already in force. an offset credit issued by the ACR will be very different from 3.2.4. Carbon unit transfer functionality the same offset reissued in the California Air Resources The specific purpose of a carbon unit transfer may affect Board registry (CITSS)22 as an ARB Offset Credit (ARBOC),23 the degree of sophistication of the supporting legal frame- where it is recognized as a compliance unit under state leg- work required for the register/transaction registry. If the islation. The legislation confirms that the compliance entity market mechanism contemplates unit trading, the purpose holding an ARBOC is entitled to a limited authorization to of a transfer is different than in the case of a transfer for emit up to one metric ton of CO2e. However, it also confirms surrender or compliance purposes. For example, if a unit that an ARBOC does not constitute a property right.24 That is used to trade, it obtains the character of an asset that kind of certainty cannot be accorded to an ACR offset. The has an associated value. Such transfers may therefore difference between a legislatively supported and a contract- carry urgency, and have a need for additional security and based CO2 reduction will be reflected in different market settlement finality. By contrast, if the purpose of a trans- prices and in different degrees of certainty regarding the fer is merely compliance, the unit’s value derives from nature and value of that offset for its investor or holder. the avoidance of a penalty for non-compliance. While the former entails the need to provide greater transactional 3.3.1. Laws and rules to be modified The legal framework for a registry may sometimes require certainty, the latter only requires receipt by the regulat- that a PMR/FCPF participant country extend or revise ing authority before a particular cut-off point, for example, some of its general laws (e.g., its property, insolvency, tax, to avoid a penalty. In the United Kingdom, the power and accounting, and regulatory laws) so they are able to rec- gas market regulator Ofgem (Office of Gas and Electricity ognize and handle the transaction registry activities, while Markets) maintains an electronic, web-based system called in other instances entirely new legislation will have to be the Renewables and CHP Register (“R&CHP Register”), which created. enables the issuance and trading of Renewable Obligation Certificates (“ROCs”), among other similar certificates. This is Market participants will look to laws and rules that are clear, presently a relatively illiquid product with few transactions internally coherent, and unambiguous. While PMR and FCPF occurring, unless the ROCs’ compliance deadline is very participants should aspire to such clarity in all legislation, close. ROCs can be transferred directly between two parties it is especially important for the development of a market using the online R&CHP Register, provided the parties have mechanism because market participants often have no accounts at the register. At the time of compliance, the prior experience with carbon markets in their country. administrator will automatically redeem the required ROCs from the compliance entity’s account and cancel them. The following sections illustrate how several types of exist- ing laws and rules could be modified to address key ques- Where the market is highly liquid and the number of trans- tions associated with a carbon market. actions requires automation of processes to ensure transfer settlement is manageable, the traditional legal framework 3.3.2. Property law of national laws will need to evolve to accommodate an The specific legal nature of a carbon unit—more specifically, electronic environment. Even where such laws currently whether it is an administrative grant, a license, or property exist, they may have been designed to support electronic share trading and not necessarily be fit for the trading of carbon units. 22 The Compliance Instrument Tracking System Service (CITSS). 23 Air Resources Board Offset Credit. 24 As this differs from the legal treatment of a carbon unit within the EU ETS, the different legal frameworks would need to be resolved should the EU ETS ever wish to link with AB32. 17 PART II. The Legal Framework —is a major determinant of the degree of certainty it pro- Upon the insolvency of the transaction registry account vides market participants. holder, who has rights to the carbon units held in the account? If the account holder is a company and has credi- If a carbon unit is legally considered property, specific rights tors, can the creditors demand that the carbon units be become associated with it, potentially allowing its owner sold to them to cover their claims against the account hold- to use it in transactions other than selling/purchasing or er? Is the answer to this question any different if the registry surrendering for compliance (e.g., as a collateral for a loan). account holder is a compliance entity? If security has been On the other hand, if the carbon unit is not deemed prop- granted over that account in favor of a particular creditor, erty, it is likely to have a more limited application beyond the can that secured creditor’s claim outrank the claims of the market mechanism’s primary purpose. Where the legislative general creditors? Although this may be as much a ques- framework does not address this issue, the result could tion of company law as of insolvency law, where the account be speculative and opportunistic speculation, which could holder is an individual, the question is equally applicable but have an adverse effect on the market mechanism in the with additional considerations. For example, will inheritance longer term. laws allow parents to bequeath carbon credits to a benefi- ciary in the same way they may bequeath their shares? Will Treating a carbon unit as property raises additional ques- a registry administrator recognize carbon units that are held tions, for example, whether security can be granted over the on trust as distinct from those held in another capacity? property right. The larger the number of uses a carbon unit has, the wider its appeal will be to market participants, other 3.3.5. Financial regulation and licensing investors, financiers (e.g., banks and hedge funds), insur- Potentially, at the upper end of the scale, a carbon unit may ers, intermediaries, and brokers. A wider appeal increases be considered subject to the same regulatory treatment as potential participation in the carbon market. other financial products.25 Therefore, would a participant who transacts in carbon units require a license the way a 3.3.3. Tax and accounting broker who transacts in stocks and shares would be? There Several questions regarding tax and accounting have to be are both positive and negative aspects to such a classifica- addressed. For example, should the transfer of a carbon tion. On the one hand, treating a carbon unit in the same unit between two account holders be treated as a service way as other financial products will envelop the carbon unit provision? If so, should it be charged with a sales or service within a heavier regulatory framework, thereby increasing tax (such as a VAT)? If so, who should pay the VAT: the buyer consumer protection and legal certainty.26 However, if this or the seller? Alternatively, does the transfer involve a prop- is introduced before the market is sufficiently mature, it erty or an asset that attracts a tax such as a stamp duty? Do will stifle the market’s growth potential by excluding some all entities have to pay those duties or should compliance investors, making it more costly for participants and deter- entities be exempted, given that they have not voluntarily ring smaller businesses from participating in the carbon chosen to engage in the activity but do so on account of a markets. regulatory requirement? Treating participation in the market mechanism the same Moreover, what rules should the holder of a carbon unit as participation in financial markets risks failing to recog- apply for accounting purposes? If the unit currently has nize the underlying environmental purpose associated with a certain market value but had been allocated under the the establishment of the scheme. In most financial mar- market mechanism for free, how should that unit be val- kets, those who participate do so voluntarily. On the other ued—at nil or market value? In case of the latter, do daily hand, in the context of a compliance-driven cap-and-trade movements in the market value of the carbon unit adversely market, the key actors—that is, the compliance entities— affect the overall financial accounting of the entity in are not participating by choice. A mix of compliance and question? non-compliance participants is necessary for a healthy, liquid mechanism, but mixing the financial regulatory legal 3.3.4. Insolvency framework with the environmental compliance framework is Insolvency legislation also raises issues. National insolvency very likely to lead to significant issues. These include specific laws often provide for transactions carried out before an insolvency to be set aside in certain circumstances. Under those circumstances, would a transaction between party A and party B involving the sale of carbon units be voided if it 25 As will be the case of the EU allowance in the EU member states under the took place 24 hours prior to party A’s insolvency? MiFID II (Markets in Financial Instruments Directive II) from 2017 onward. 26 In many countries, financial products benefit from increased protection against creditor adverse but debtor friendly insolvency laws (e.g. by having a carver out for netting). 18 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration exemptions from licensing requirements, capital controls, for VAT fraudsters perpetuating carousel fraud.29 Europol reporting regimes, and the extension of laws on market estimated that the loss to carbon credit fraud (through VAT abuse, insider trading, and other financial crimes to carbon carousel fraud) between June 2008 and December 2009 unit trading. amounted to approximately EUR 5 billion. Where the transaction registry includes trade settlement 4.2. Phishing, cyber theft, and hacking functions, such as real-time transfers of carbon units, addi- tional questions regarding transaction settlement finality Although the EU ETS is a creature of EU law, the establish- must be addressed. For example, at what point in time does ment of an ambitious multicountry, single trading market the risk associated with a carbon unit transfer from party would have to fit within the legal frameworks of existing A to party B? Similarly, if, under a transaction with party national laws. Given sensitivities on national sovereignty and B, party A has initiated a transfer that was not completed the jurisdictional limitations of the European Commission’s by the registry administrator before party A’s insolvency, mandate, it was not possible for the EU ETS to prescribe should the transaction registry administrator nonethe- for many of the legal issues that have been discussed in less continue with the transfer to party B? If the news of this chapter. This resulted in each member state having party A’s insolvency arrives only after the transfer has been the freedom to establish its own registries using different completed, can the transfer be unwound and the carbon software platforms, with different degrees of functional unit clawed back? What happens if the transaction registry and security arrangements. This, in turn, led to a patchwork administrator or account holder transfers or cancels carbon of linked but not harmonized registries with a common units in error? What remedy should be provided to an asset being traded that had a single market value across all account holder for these mistakes? member states. As a consequence, in order to recover the value of valuable carbon units acquired through phishing or hacking, cyber attackers merely had to identify and use the weakest point of entry (i.e., account establishment) to 4. Lessons Learned from Existing transfer and transact the carbon allowances. The lack of Mechanisms prescribed KYC requirements and equally strong registry The EU ETS illustrates some of the problems arising from account access requirements led to EU carbon credits the creation of a market mechanism with an incomplete being hacked and then traded on a cross-border basis. legal framework. As the pioneer in the establishment of a Ultimately, this forced the EU to shut down the registries cap-and-trade market, the EU ETS has borne the brunt of of all 2730 member states for up to 3 months to raise the the consequences of “learning by doing.” Although many security standards to a common level across all registries. more valuable lessons could be cited, the following sections In addition, the lack of certainty under the laws of most provide some of the more significant ones.27 member states regarding the type of property a carbon unit represented and whether established laws relating to stolen 4.1. VAT fraud goods applied to carbon units led to such uncertainty that trading in the top exchange traded spot EU carbon contract Until 2010, the EU ETS tax regime treated the transfer of a was suspended for more than a year. carbon unit as a service for which a VAT is charged, which is collected by the seller and paid to the local tax authorities. Trading of carbon units was also possible on exchanges 4.3. Management of market data offering carbon unit spot products,28 which, along with the During the first phase of the EU ETS, although there was “real-time” (i.e., instant) transfer and settlement capability a fixed date in which the annual emissions compliance of EU Registries, allowed multiple transactions involving the data were meant to be released, the ministries of certain one and the same carbon unit changing hands to be carried member states, without notice, disclosed these data on out within a short time span. These elements, along with lax their website in advance of that fixed date. These data were registry account opening procedures, including KYC require- very significant as it was the first time market participants ments, combined to make the EU ETS an attractive space would be able to compare the actual emissions of compli- 29 Fraudsters legally acquired carbon units without paying VAT (because of 27 Cap-and-trade regimes introduced later, for instance, California’s AB32, the cross-border nature of the transactions), then sold the carbon units made a conscious effort to apply the painful lessons learnt by the EU ETS in the same country at a price that included VAT, and then “disappeared” in the design of their schemes. before the tax had been handed over to the tax authorities. 28 These are exchange traded products with physical settlement by way of 30 At the time the member state registries had to be temporarily shut down, delivery of a carbon unit within 1–3 days of the transaction date. the EU had 27 members. 19 PART II. The Legal Framework ance entities against the estimated data on which carbon n Do not ignore the hard issues (e.g., what is the legal credit allocations were based. As a result, the market posi- nature of the carbon credit) because, sooner or later, tions (i.e., whether to go “long” or “short”) of many active the issue is bound to arise via a market incident and traders would turn on this information. The leakage of this the fallout then will be far more difficult to manage. sensitive information in a haphazard manner meant that some trading entities with prior access to this information n Ensure the allocation of responsibility, and specify the were able to take better trading positions than those who roles of regulators and administrators in clear and were unaware of this information. Ultimately, by the fixed unambiguous terms. It is important that along with the date on which the information was published, the market allocation of roles and responsibilities, sufficient bud- had already anticipated the outcome and taken positions gets are provided to enable their discharge.33 accordingly.31 n If the purpose (scope) of the market mechanism is to create a tradable carbon asset, recognize the success of a market product depends on the market partici- 5. Recommendations and Guidance pants’ confidence in it and provide what is necessary to on Development of a Legal achieve that confidence. Framework for Registries n Build the register/transaction registry in a manner commensurate with the nature, scope, and scale of the proposed market mechanism. n Identify what is required to establish the immediate legal framework necessary to support the role of the register/transaction registry in the context of the mar- ket mechanism and the time frame required to achieve that. n Identify the other areas of legislation likely to be affect- ed by the intended market mechanism and identify the necessary responsible entity to address those laws (Ministry of Environment, Ministry of Finance, Ministry of Trade, etc.). n Establish a plan to coordinate and consult on issues, obstacles to achieving the necessary changes (e.g., delays, lack of expertise, budget authority). The changes determined need to be consistent and not conflict with each other, with a view to implementing the policy objectives of the market mechanism.32 n Recognize limitations—seek expertise and support where required (including from other government agencies) and do so in a timely manner. 31 Incidentally, the information showed that the EU ETS had been overallocated in Phase 1, causing the carbon unit price to drop from above EUR 25 to EUR 0.05 in a relatively short period of time. 32 A recent special report produced by the European Court of Auditors (the “EU Audit Report”), titled ”The integrity and implementation of the EU ETS,” concluded that “At the Commission, the development and operation 33 The same EU Audit Report concluded that “that the organizational of the Registry has been a complex project which was hindered by internal structure and available resources in the Commission services did not coordination issues and resource constraints.” sufficiently facilitate the management and development of the Registry.” 20 PART III. The Institutional Framework and Registry Administration The registry administrator is the body responsible for the For ease of guidance, and based on real-life observations, day-to-day operations of the registry system, which includes roughly three levels of registry administration can be distin- managing users and accounts and the issuance and cancel- guished by degree of sophistication (in increasing order): lation of carbon units in accordance with the regulations of the market mechanism. Registry administrators also n Level 1: Few users and transactions; no interaction monitor transfers and, where appropriate, report issues with any other IT system (e.g., MRV database); only the and irregularities to relevant authorities and take follow- administrator can access the registry system (i.e., users up action. While these operations must be performed have no online access to their accounts). The registry with a concern for effectiveness and equitable treatment can be paper-based, or supported by an Excel spread- of all participants, clear and robust procedures—such as sheet or other basic accounting tools; reports (e.g., on KYC requirements—are nonetheless necessary to ensure account holdings and transactions) are issued, pub- smooth registry operations and compliance with related lished, and audited periodically. The financial value of regulation. Building on existing experience, this section the units and related market and/or fraud risks are low. provides an overview of the key aspects of registry admin- istration, including the responsibilities, risks, processes, LEVEL 1 EXAMPLE: The National Emission resources and costs involved. Reduction Plan (United Kingdom)a Main characteristics: • The “Register holder” is the U.K. Environment Agency 1. Before You Begin: Assessing (public authority). Administration is performed by one Registry Administration Needs person on a part-time basis • No IT system: quarterly reports made available online 1.1. Scale and scope of the market via Excel spreadsheets mechanism • The registry only includes compliance participant account (i.e., 79 large combustion plants) As is the case for the legal framework (Part II), the scale and • A total of 42 transactions in 2014. Transfers are initi- scope of the market mechanism considered will significantly ated by compliance participants filling out a dedicated affect the complexity of institutional arrangements for its form sent by e-mail to the administrator registry. The number of necessary arrangements is gener- a See https://www.gov.uk/government/publications/national- ally proportionate to the number of participants in the emission-reduction-plan-nerp-quarterly-registry. market mechanism, and thus to the number of accounts to manage, the value of the units held in these accounts, and n Level 2: Communication with other systems is possible the number of transactions these units are subject to. At but exchanges are limited; the registry is computerized the upper end of the scale, the registry administrator may with little automation; user interfaces are provided and have to operate an electronic IT system with fully automated accessible through the Internet (e.g., check on account functions, manage fraudulent activity risks, and cooperate balances and related reporting). The execution of oper- with a range of authorities (e.g., the Ministries of Environ- ations requires the involvement of the administrator, ment, Finance, and Justice). at least to validate the operations. The value of account holdings and their related risks are moderate. 21 PART III. The Institutional Framework and Registry Administration Over time, market-based mechanisms can evolve, a simple registry becoming increasingly costly and complex (hence moving from the center to the outer edges of the decision LEVEL 2 EXAMPLE: National Registera of White diagram). To identify the most appropriate level of com- Certificates (France) plexity that the registry should initially have, this decision diagram offers two sets of criteria: Main characteristics: • A register administered by a private company, selected n In blue (upper part of the diagram), criteria linked to via a call for tender operational management issues: • The register holds named accounts by users, available online „ Volume of transactions; • The vendor and the purchaser both sign a transfer order that is then mailed (by snail mail) to the register „ Number of connections with registries from other administrator. Upon receipt, the administrator validates jurisdictions/systems (in case of linking); the transfer, notifies the transaction counterparts, and updates the balances of the accounts „ Communication with other IT systems, such as • An average of 40 transactions per month is registered GHG reporting platforms, project/program a See https://www.emmy.fr/front/accueil.jsf. databases, and so on.  n In orange (lower part of the diagram), criteria associated with risks: n Level 3: The registry is automated and exchanges a large volume of information with a number of other „ Type of transactions (i.e., compliance or pure systems, databases, and potentially other registries. It trading) ; supports a large market with frequent and numerous transactions; users perform operations directly online, „ Risk of unit theft; with no intervention by the registry administrator. A „ Need for market supervision and regulation. range of intermediaries hold accounts, which makes registry administration procedures more complex. Depending on the features of each market-based policy (e.g., use of offset projects and degree of openness to inter- LEVEL 3 EXAMPLE: Consolidated System of national market participants) and national circumstances, European Union Registries (CSEUR)a additional criteria can be added to this decision diagram, as long as they are associated with all three levels of cost and Main characteristics: complexity. • Each EU member state appoints a national administra- tor for its national registry This report covers institutional and administrative • A single IT system manages both each member state’s approaches under level 3 registries (i.e., transaction regis- independent registry under the Kyoto Protocol and a unique Union registry supporting the EU ETS operations tries) and, hence, level 1 and level 2 (i.e., registers) are de facto also covered. • Transfers are directly made online by the users, without any intervention by the registry administrator • Up to thousands of transactions daily, mostly driven by 1.2. Responsibilities and risks in registry the EU ETS (very few transactions are sovereign trans- administration actions under the Kyoto Protocol) 1.2.1. Responsibilities a Public link: https://ets-registry.webgate.ec.europa.eu/euregistry/ FR/index.xhtml The effective administration of a registry requires a decision on the allocation of responsibilities among the following registry stakeholders: the regulator, the registry administra- Figure 5 represents a decision diagram that features three tor, and the account holders—as illustrated in Table 2. Such concentric circles, corresponding to three different levels of responsibilities can be allocated through legislation and cost and complexity for a registry—going from the simplest possibly supplemented by contractual agreements involving kind of registry (i.e., register), at the very center, to the most the registry administrator and each registry user. complex one (i.e., transaction registry) on the edges of the outer circle . 22 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration FIGURE 5: Deciding on Level of Complexity for the Registry Link to other registries? Data exchanged with 3 or more registries other IT systems and databases Transaction volume? Requires 2 High volume Users Automated instruct and processes validate and IT logs transactions Can be handled 0 Medium volumes manually Admin. Validates No IT Connectivity Low volumes transactions The Admin. manually Operations required instructs on behalf of users Managment Register Transaction Registry Risks Only (and few) compliance Limited oversight Managment transactions No possibility Manual to monetize monitoring Mostly compliance (resell) stolen transactions and controls units Automated Mostly trading monitoring Limited opportunities and controls transactions to monetize stolen units Transaction type? Compensation of victims affordable Supervision and High price of the units oversight of registry High liquidity of the market operation? Risk of unit theft? 1.2.2. Risks n Mistakenly maintaining the account in an active state, Registry administrators are subject to a number of risks, or maintaining a user’s authorization while the account with risks proportional to the size and financial value of the should have been blocked or the user’s authorizations market. The most significant risks include: revoked; n Non-execution of operations, late execution of an n Failure to report suspicious activities/incidents to the operation, or other operational errors as part of the relevant authorities. execution of an operation, leading to: Measures can be taken at all levels to mitigate these risks „ An opportunity cost for the account holder (e.g., a and reduce the impact and cost of potential incidents. At delay in issuing or allocating a unit) the legislative level, regulation must ensure that regulators have the resources and powers necessary to investigate „ A noncompliant status for the account holder and intervene where appropriate. In terms of registry man- agement and administration, the following actions can help „ Reputation damage (e.g., featuring the holder in a mitigate risks: public noncompliance report, either mistakenly or because the operation for achieving compliance n Raising the awareness of the registry administrator’s was made impossible due to an action by the regis- staff regarding the stakes and risks; try administrator or the system); n Training staff regarding control procedures and compli- n Entering into relations with an account holder or with a ance with requirements related to updating documents, user who subsequently engages in fraudulent behavior; monitoring transactions, and reporting suspicions; 23 PART III. The Institutional Framework and Registry Administration TABLE 2: Indicative Matrix of Responsibilities for Registry Administration Owner Registry Account of the Central Responsibilities Examples Regulator administrator holders system hub Registry Ensuring the registry complies with architecture regulation. Registry IT Ensuring the registry system (hardware system and software) is fit for purpose. Accounts Account opening, freezing, closing; administration suspending access. Customer Hotline, help desk, etc. relation management GHG-related Entering verified GHG emissions reports, data entry allocation tables, etc. Legal Carrying out periodic activities such as obligations performing calculations to check compli- ance with regulatory obligations. Monitoring of Detecting errors and anomalies, resolv- registry activity ing incidents, including security-related ones. Issuance of Issuance of carbon units to a customer carbon units account or to an account dedicated to provisions for risks. Allocation of Allocation of quotas in ETS. carbon units Transfers Transfer of carbon units between a vendor and a purchaser. Regulatory Conversion of units, release of units in a operations buffer account Cancellation of Ensuring any form of elimination (end of * units life) of a unit. Cancellation of Explicit decision to cancel an operation transactions in accordance with the arrangements for * the workflow. IT/technical Availability; security; execution of the aspects computerized processes; management of data confidentiality; management of authorizations for processing operations and data, etc. Control checks Formatting of data, exchange protocol, compliance with the accounting plans, etc. * Under the circumstances created by the applicable regulations. 24 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration n Formalizing operational procedures and checkpoints; „ Definition of what information is considered confi- envisaging validation by a second agent for sensitive dential, and when and under what circumstances operations; it may be made public (e.g., to law/tax authorities, legal courts, government institutions, and insol- n Rigorously managing user authorizations for the regis- vency administrators and regulators); try’s data and processing operations; n An insurance policy that the registry administrator may n Allowing for peer review: key public accounting reports purchase to cover various risks. Alternatively, the regu- should be reviewed by competent third parties before lator—or the registry administrator, when distinct from publication; the regulator—may assume financial responsibility as the bank of last resort. n Implementing procedures for managing incidents and continually improving the service; n KYC requirements: In terms of registry IT system, the following features can „ Requiring information and supporting documents help mitigate risks: about the account holder and each of the physi- cal persons who may act on their behalf helps n Automatic alerts triggered upon detection of or to pre- to secure the “entry door” to the registry system. vent events in breach of regulatory requirements; The registry administrator checks the informa- n Strong (two-factor) authentication measures and, more tion received (“Know Your Customer checks”) on generally speaking, IT security features (session time- initial contact, and may request regular updates. out, periodic mandatory renewal of passwords, etc.); Depending on the number of users, using an auto- mated IT system to collect and manage data may n Measures allowing for emergency shutdown of the be helpful. registry; Table 3 includes an indicative and non-exhaustive list of n Periodic checks to ensure the robustness of the sys- the potential information to be requested from applicants. tem’s protection, such as intrusion tests and external Applicable regulation may require that such information be audits. made public or remain confidential, and be updated on a regular basis. n Good faith buyer protection measures to ensure clarity over ownership of units, such as control and validation stages before accounting for a transaction. 2. Mandating a Registry In terms of contract agreements, measures that can miti- Administrator gate risks include: 2.1. Key criteria for choosing a registry n Account agreements that specify: administrator „ Scope and limits of the registry administrator’s The regulator of the market mechanism acts as the compe- responsibilities; tent authority on registry issues, and can mandate a third party to administrate the registry. Registries in existing „ Clear ownership rules for any units in case of a systems are administered by various types of entities. While dispute arising from an insolvency or other special some regulators have assigned the registry to a government circumstances; agency—generally in charge of environmental issues (e.g., the United Kingdom, Germany, and New Zealand)—others „ In case of an incident, rules for calculating and have mandated a range of independent third parties on capping compensatory payments for the aggrieved which to rely. parties; A cost-benefit analysis should be conducted to weigh the „ Operational provisions for the beneficiary of units appointment of third parties against delivering registry ser- received mistakenly to return them; vices publicly. If appointing a third party to administer the „ Exhaustive inventory of the information to be made registry, regulators will require such third party to demon- public, the publication calendar also being made strate specific expertise in markets and related infrastruc- available; ture, experience delivering similar levels of service, a track 25 PART III. The Institutional Framework and Registry Administration TABLE 3: Indicative List of KYC Documents for Account Opening Document or • Checks to perform information Identity documents • Minimum validity period • Nationality and associated country risk • Document number • Person with or without a political profile, public figure or not • Public notoriety of the user (e.g., web and social networks) Proof of address • Reliability of the document as a “proof of address” • Country of residence and associated country risk Copy of cell phone bill • Invoice is effectively in the name of the user • Telephone number should be identical to the one recorded in the registry for sending SMS notifications Bank account • The document refers by name to the user identification number (IBAN) • The bank should be subject to financial regulation in the country where the bank account is held E-mail address • Confirmation of the e-mail address through a confirmation request • Eligibility of the e-mail address (e.g., no Gmail) Company registration • Via public database and/or request to competent authorities number, VAT number (or equivalent) • Documents are recent and/or still valid Activity of the company • Discretionary interpretation of the statuses and activity of the company by the registry administrator • Questionnaire on motivations and experience Company financials • Income statement, balance sheet, cash flow statement, financial ratio, etc. Proof of authorization • Certificate of incorporation, corporate organigram, power of attorney declaration Criminal record • Criminal records—especially regarding terrorism, money laundering, or other fraudulent activities in financial markets Authenticating • Certification requirements applicable to the country are observed documents • Certificating authority is legitimate • Date of certification is sufficiently recent Acceptance of registry • Documents duly completed and sent/approved electronically terms and conditions record of risk management, and sufficient resources to public institutional long-term investor—to act as the Nation- dedicate to the required tasks. al GHG Registry Administrator under Kyoto’s International Emissions Trading and the EU ETS. The same goes for Spain, 2.2. Possible approaches to mandating a where the company Iberclear was appointed by the Spanish Office of Climate Change,34 based on its experience building registry administrator and managing the clearing and settlement systems for the The following examples illustrate how countries consider Spanish Stock Exchange Market. the above criteria in practice, depending on local priorities and resources. The Verified Carbon Standard Association (VCSA), which manages the Verified Carbon Standard (VCS) Program, Specific expertise in market finance—and particularly for appointed two private entities (APX United States and Markit environment-related commodities —as well as experience in market infrastructure management and development have been the primary driver of the French government’s 34 The Spanish Office of Climate Change is a General Directorate of the decision to mandate Caisse des Dépôts et Consignations—a Ministry of Agriculture, Food and the Environment. 26 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration United Kingdom) through a competitive tender, based on n Operational processes, those representing the core the experience, reliability, and sustainability of their ser- registry administration activities such as monitoring the vices and related IT infrastructure. The decision to appoint relationship with users and managing registry opera- multiple and competing registry providers was particularly tions; motivated, in part, by the need to keep costs down. Both entities must ensure continued compliance with the registry n Supporting processes, those representing the activi- procedures35 published by the VCSA, which include collect- ties that support the operational processes with the ing fees on behalf of the VCSA in addition to their own. resources required for their proper execution. In the Czech Republic, the government appointed OTE, 3.2. Resources and costs a joint-stock company (fully owned by the state), which Depending on the contribution level from the public budget, operates the country’s electricity and gas market. Such an financial arrangements for registry administration may vary. approach was mandated under the Czech Emissions Trad- Proceeds from potential sales and/or auctions of emissions ing Act and overseen by the Ministry of the Environment allowances by the regulator (e.g., ETS) may also provide as the regulator. By doing so, the regulator caps registry resources to cover costs incurred. The structure of the costs in the EU context, where registry regulation and IT registry fee scheme, which represents the costs borne by have experienced turbulences and undergone significant registry users or account holders, can also take different changes in the last 10 years. forms, such as flat rate, transaction-based, or differentiation Denmark has transferred responsibility for the EU ETS by user categories. Registry to the Danish Business Authority,36 which enables the Danish registry administrator to have access to all com- 3.2.1. Registry fees panies registered in the country. Because registry access Charging for a range of registry operations and services can is only granted to Danish resident entities, data collection generate resources for administration and maintenance. is done systematically, through an electronic system, which However, charging for registry services will also generate brings down costs while also ensuring the information col- a specific workload to produce and mail invoices, monitor lected is reliable and up-to-date. payments received, and in some cases, handle conten- tious situations. Table 4 provides an overview of opera- tions and services for which registry users can be charged, and includes examples from existing registries. It should 3. Administering a Registry: be noted that the fees listed in Table 4 are not necessarily Operations and Resources related to the operation of registries, but rather to the over- all management of the standard and program. 3.1. Operational tasks This chapter provides an overview of the tasks that are Moreover, it should be noted that administrators of other involved in registry administration. In the design and IT systems connected to transaction registries, such as implementation phase of a market mechanism, mapping project databases or repositories of agreed verifiers, may these processes helps to delineate the overall organization also charge registration or listing fees that are not included of the registry administrator, and to mobilize the appropri- in the table 4. Lastly, regulators may also charge compli- ate resources and skills to execute such processes. In the ance participants for services related to the reporting of operational phase, more precise mapping may be needed GHG emissions. For example, the UK regulator charges a to improve the efficiency of execution, especially if certain fee for collecting monitoring plans (e.g., aircraft operators). tasks are computerized. A part of those fees is meant to cover registry costs. Some regulators (in Scotland, Northern Ireland, etc.) collect such Figure 6 identifies three types of processes: fees and use the resulting proceeds to pay the Environment Agency for its registry services. n Management processes, those that result in deci- sions from the registry administrator on operational A review of the fee structures used by a number of existing strategy and business directions; registries shows that: n Not all registry fee schedules are publicly available (e.g., the VCS Registries supported by APX and Markit); 35 See: http://www.v-c-s.org/sites/v-c-s.org/files/Registration%20and%20 n Some registries provide their services for free (e.g., New Issuance%20Process,%20v3.6%280%29.pdf Zealand) while other registries charge a fee; in Belgium, 36 See: http://danishbusinessauthority.dk/the_eu_ets_registry 27 PART III. The Institutional Framework and Registry Administration FIGURE 6: Indicative Mapping of Registry Administration Processes MANAGEMENT PROCESSES OPERATIONAL MANAGEMENT BUSINESS MANAGEMENT • Managing teams • Managing budget and financial planning • Defining, analyzing and reporting • Implementing regulation activity indicators • Communicating with authorities and regulators • Developing and updating operational procedures CUSTOMER ON-BOARDING Collecting User setup Establishment of information and Examining, deciding on (e.g., authorizations, relationship with supporting documentation profiles, accounts, registry users on-boarding (KYC) tests, etc.) Managing and updating user information Termination of Suspending and/or revoking user relationship with Blocking and/or closing account registry users Hotline Registry user support CUSTOMER SUPPORT Providing documentation, informing, managing incidents. etc. & OVERSIGHT OPERATIONAL PROCESSES Registry user Monitoring transactions and administrative events, Managing and activity Detecting suspicious behaviors, updating user monitoring Taking corrective action, information If applicable, refer to “Ending relationship with registry users” Unit issuance Examining issuance requests Issuing units Notifying the holder Entering the Unit allocation allocation plan Issuing units Allocating units into the system SYSTEM OPERATIONS Entering the Comparing the quantity of Management of GHG emissions verified verified GHG emissions data Publishing compliance reports into the system with the number of units emissions data surrendered Unit cancellation Cancelling/ withdrawing Controlling, Updating account balances, and/or units (if not Approving Notifying account holders withdrawal done by user) Sharing reports and audits Producing registry Analyzing activity with competent authorities, Reporting activity reports, reports and audits Publishing reports Commissioning audits (if applicable) SUPPORTING PROCESSES IT support: IT Business Legal Finance • System maintenance, • Information enquiries • Contracts (accounts • Invoicing operations, and hosting agreements, suppliers • Staff payroll • Policy developments etc.) • Hardware management (international, domestic) • Registry fee (servers, etc.) • Litigation scheduling • Training and capacity building • Regulatory affairs • Budget and financial planning 28 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration TABLE 4: Overview of Fees Charged in Existing Registriesa Service and cost range Registries and fees charged illustrated Opening an account • Climate Action Reserve: USD 500 (one-time fee) • France: EUR 600 (USD 666) to EUR 1,800 (USD 2,000) • Max./min. ratio: 18 • Min.—max. values:b USD • Ireland: EUR 350 (USD 388.9) 110–2,000 • Croatia: KN 750 (USD 110.5)c • UK: GBP 190 (USD 297.2), none for compliance entitiesd • No fee in Belgium Account management • Climate Action Reserve: USD 500 per account and per yeare (annual fee) • France: between EUR 360 (USD 400) and EUR 3,000 (USD 3,333)f • Max./Min ratio: 54 • Values: USD 55–3,000 • Austria: fixed fee (USD 278 to USD 1,666, depending on the type of account holder) plus a variable fee proportional to verified emissionsg • Germany: EUR 400 (USD 444) per account for the 2013–20 commitment period (except for operators account), that is, USD 55.6 per account and per yearh • Norway: NOK 1,200 (USD 146.2) per account and per year (except for operators account, for which no fee is paid)i • Belgium: EUR 548.99 (USD 610) per account and per year, without any exemptionj • United Kingdom: annual fee of GBP 380 (USD 594.5) except for compliance entitiesk • Some other EU countries such as Ireland have no annual feel • Gold Standard Foundation: USD 500 per account per year Issuance/Labelling of unit(s) • Climate Action Reserve charges USD 0.22 per unit • Max./Min ratio: 11 • Gold Standard Foundation: USD 0.65 per credit issued (including registration fee)m • Values: USD 0.06–0.65 • VCSA (collected by registry administrators, who may also apply their own, additional fees): USD 0.05 per unit converted from another GHG program into VCUs • USD 0.05 per VCU for a CCB label (in addition to issuance fee)n • USD 0.10 per VCU for the first 1 million VCUs • USD 0.09 per VCU for an additional 1 million VCUs • USD 0.08 per VCU for the subsequent 2 million VCUs • USD 0.06 per each VCU issued over 4 million Holding • Slovakia: EUR 0.015 (USD 0.023) per unit held on each account • Max./Min ratio: NA • Values: NA Transfer • Climate Action Reserve: USD 0.03 per unit paid by the transferor (i.e., seller) • Max./Min ratio: 4 • Alberta Emission Performance Credit Registry: CAD 0.02 (USD 0.02) per unit transferred. No fee • Values: USD 0.01–0.04 per for intra-company transfers. Export: CAD 0.05 (USD 0.04) per unit. There is a minimum of CAD 50 unit (USD 38) per transaction • Gold Standard Foundation: USD 0.01 per credit, paid by the transferor Retirement • Alberta Emission Performance Credit Registry: CAD 0.05 per unit retired for compliance purpose; • Max./Min. ratio: NA no fee for voluntary retirements • Values: NA • Climate Action Reserve: no fee for retirement Verified Emissions • France: EUR 0.0104 (USD 0.0116) to EUR 0.056 (USD 0.562) per tCO2e emitted • Max./Min ratio: NA • Austria: variable account maintenance fees (USD 0.00001 to USD 1.991 per ton) based on verified • Values: NA emissions (CONTINUED) 29 PART III. The Institutional Framework and Registry Administration TABLE 4: Overview of Fees Charged in Existing Registriesa (CONTINUED) Service and cost range Registries and fees charged illustrated Change in authorized • Ireland: EUR 100 (USD 111.1) per application to change account details and/or authorized representativeso representatives further to account openingp • Max./Min ratio: 1.3 • United Kingdom: GBP 55 (USD 86), except for compliance entities • Values: USD 86–111 • Most other EU member states (e.g., France): no fee Periodical Review of • France: 1,250 EUR (USD 1,389) to EUR 3,792 (USD 4,213) per account holder and EUR 300 Documentation (KYC) (USD 333) per user for each documentation review • Max./Min ratio: NA • Values: NA Note: CCB = Climate, Community & Biodiversity; KYC = Know Your Customer; NA = Not available; VCSA = Verified Carbon Standard Association; VCU = Verified Carbon Unit. a. Source for currency exchange rates: http://www.xe.com/fr/currency/hrk-croatian-kuna?c=EUR; average rate as of year 2015 calculated on 15th August, 2015. b. Minimum value will be considered as the lowest but different from zero applicable fee. c. Source: http://www.azo.hr/HowMuchIs d. Operators and aircraft operators. e. Source: http://www.climateactionreserve.org/how/program/program-fees/ f. Source: http://www.seringas.caissedesdepots.fr/sites/www.seringas.caissedesdepots.fr/IMG/pdf/5.fr_tarif2014.pdf g. Source: http://www.emissionshandelsregister.at/ms/emissionshandelsregister/en/en_ehr_unionregistry/ehren_fees/ h. Source: http://www.dehst.de/SharedDocs/Downloads/EN/Registry/Account-person-holding-trading.pdf?__blob=publicationFile i. Source: http://www.kvoteregister.no/docs/Terms%20and%20conditions.pdf j. Source: http://www.climateregistry.be/EN/BE/accounts.htm k. Source: https://www.gov.uk/guidance/eu-ets-charges l. Source: http://www.epa.ie/climate/emissionstrading/union%20registry/access/#.VctPNPnDHhE m. Source: http://www.goldstandard.org/wp-content/uploads/2013/01/v2.2_ANNEX-L.pdf n. CCB Standard fee schedule as of 1 July, 2015. o. Some Registries may provide functions enabling account holders to manage users’ authorizations and privileges on their own and at their own risk. p. Applicable to aircraft operators only, see: http://www.epa.ie/climate/emissionstrading/union%20registry/access/#.VctPNPnDHhE for instance, the registry’s total costs are divided by the n [P&T] Predictability and timing of revenue to total number of accounts to derive an annual fee, which recover registry costs: the first fees to be charged is revised each year; during the life cycle of a carbon unit are the registration fees, possibly proportional to the expected issuance n Registries supporting the same market mechanism volumes (e.g., in the CDM registry38). Up to several years and using the same IT tools (e.g., the EU ETS national later, issuance fees and/or transfer fees will be charged registries37) may apply fee schedules that differ sig- to either the transferor or the transferee. Lastly, nificantly: the same service may be provided for free retirement fees may be charged to the transferor. For in one registry, while other registries charge different the registry administrator, it may be very challeng- fees for this service and sometimes also apply different ing to predict the respective volumes (of units issued, exemption rules. transferred, and retired) and when these transactions will occur, especially compared with the predictability of When deciding on the fee structure, the following param- incomes deriving from account maintenance fees. eters could be considered: n [C] Complexity: the more complex the fee structure, n [E&A] Equitable treatment and acceptable prices: the more difficult it is to manage invoicing and, thus, a balance may have to be found, so that entities par- the more likely it is operational mistakes will be made. ticipating in the market mechanism in a less active way Some registries decided to keep it simple by introduc- pay less than the major market players. However, if this ing one unique fee to recover their costs. approach leads to disproportionate prices, acceptability issues may arise. n [Et] Declination of ethical choices: the right balance between having “each citizen pay” to tackle climate 37 See: http://ec.europa.eu/clima/policies/ets/registry/documentation_en.htm 38 https://cdm.unfccc.int/Reference/Guidclarif/reg/reg_guid07.pdf 30 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration change (e.g., New Zealand39 does not charge any n Representing the registry outside the department—in registry service), which includes covering registry costs national and international bodies—at the request of (e.g., through tax and hence the national budget), and the regulatory authorities; “the polluters pay principle” has to be considered. An alternative approach involves charging for participation n Producing activity statistics for the registry every month; in the market mechanism as a whole, but not for any n Managing execution of the KYC processes: entering additional, registry-specific fee (e.g., Shenzhen, China). into and monitoring relations, particularly updating Table 5 outlines the pros and cons of different fee struc- supporting documentation and monitoring compliance tures (as listed in Table 4) with reference to these para- operations; meters. It also highlights the complexity in establishing a n Periodically doing a statistical check of the accounts fee structure that provides certainty on timing and revenue, based on their historic profiling (e.g., detection of a avoids complicating registry administration, and ensures typical activity levels); that transaction costs paid by users remain appropriate. In most cases, fee schedules are reviewed periodically and n Supervising tests of new tools and exchanges with the subject to change, allowing for progressive improvement of supplier of the registry, in the context of the develop- the balance between those criteria. ment of the IT system; 3.2.2. Operating cost n Supervising management of customer relations, and Staff costs are a substantial cost component of a registry monitoring any incidents and disputes; administration (see Table 6 for a tentative estimate of the workload involved). n Proposing improvements (e.g., rules of the mechanism and functioning of the registry); Below 500 users, it is estimated that at least two or three persons are necessary to ensure ongoing availability during n Identifying and managing major malfunctions; the hotline operating hours. Above and beyond 500 users, n Identifying and managing suspicious activities such as additional staff may be required to provide hotline services. tax avoidance, evasion, or fraud; money laundering; 3.2.3. Staffing sanctions avoidance; and theft. When discussing the tasks and skills required for registry To be able to perform these tasks successfully, the administration, it is important to distinguish between man- following skills are essential: agement and operational staff. n Legal skills; Management Managing the registry administration team may involve the n Rigorousness in maintaining the confidential nature of following tasks: the information; n Daily supervision of management operations for the n Very good interpersonal relationship skills, organiza- registry processed by the team of managers, carrying tional skills, and document drafting skills; out arbitrages and determining the management ori- n Managerial capacity, ability to make decisions; entations, ensuring compliance with the administrative deadlines for dealing with requests and, more gener- n Passion for team work; ally, dealing with the quality of the registry administra- tor’s provision of service; n Ability to adapt to peak periods of activity; n Being the direct contact person for the regulatory n Knowledge of the stakes linked to sustainable authorities to whom the activity is reported, and for the development; other ministerial entities that have relations with the n Knowledge of how a registry or something similar operates registry; (e.g., accountancy and maintaining/keeping an account); n Ability to use IT systems and mastery of standard office software tools; 39 www.eur.govt.nz/how-to/guides-hmtl/guide-to-registering-as-a-user see n Knowledge of back-office management methods; Q&A: “Will registering cost me anything? No.” 31 PART III. The Institutional Framework and Registry Administration TABLE 5: Comparing Registry Fee Schedules Registry Service Pros Cons Opening an account • [E&A] Incomes are correlated with the costs of • [P&T] Low predictability of incomes (one-time fee) account opening (KYC checks) • [P&T] No contribution to ongoing operational costs Account management • [E&A] Can be based on expected use of the • [E&A]Acceptability: Not always correlated with the (annual fee) account use of registry services by account holders • [P&T] Predictable incomes Issuance of unit(s) • [E&A] If fee is proportional to the amount issued, • [E&A] This fee is charged while market partici- it contributes to a proportionate share of registry pants may not yet have found a buyer for the costs among market participants units issued, as opposed to retirement fees • [E&A] Likely to affect obligated more than market participants • [P&T] Low predictability of incomes Conversion of unit • [E&A] Incomes correlated with the intervention of • [E&A] Likely to affect compliance participants the registry administrator more than market participants • [P&T] Low predictability of incomes Holding • [E&A] If fee is proportional to the amount held, it • [P&T] If registries are connected, it may incentiv- contributes to an equitable share of registry costs ize users to pool the units they hold within the among market participants cheaper registry • [P&T] High predictability of incomes Transfer • [E&A] If fee is proportional to the amount trans- • [E&A] Likely to affect market participants more ferred, it contributes to a proportionate share of than compliant participants registry costs among market participants • [P&T] Low predictability of incomes Retirement • [E&A] Acceptability: the value of the retirement • [E&A] Likely to affect compliance participants (either regulatory compliance, possibly avoiding a more than market participants penalty, or voluntary offset) is presumably signifi- • [P&T] Timing: incomes occur at the end of the cantly higher than applicable registry fees units’ life cycle, whereas registry costs occur • [P&T] High predictability of incomes in the case mainly at the beginning of units’ life cycle of an ETS Verified Emissions • [Et] Complies with the “polluters pay principle” • [E&A] Acceptability: not directly linked to the use of registry services • [P&T] Predictable incomes • [E&A] Likely to affect compliance participants • [E&A] Contributes to a proportionate share of more than market participants registry costs among market participants • [P&T] While aiming to reduce GHG emissions, this source of income is intended to diminish over time Change authorized • [E&A] Incomes are correlated with the interven- • [C] Accounting for such interventions may be representatives tion of the registry administrator complex • [P&T] Low predictability of incomes Periodic Review of • [P&T] Incomes are predictable and correlated • [C] Accounting for such interventions may be Documentation (KYC) with the intervention of the registry administrator complex and contribute to the system’s security n Understanding of quality assurance mechanisms; Operational staff n Independence and rigorousness. Operating registry administration under the management authority requires both multitasking of everyday tasks and specialization for certain tasks—such as the checks per- formed prior to account opening or unit issuance. 32 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration n Keeping accounts: updating, activating, or deactivating TABLE 6: Breakdown of Workload Linked to Registry an open account and the accounts to be opened in Administration (for an ETS) the registry: Man- Opera- aging tional „ Periodically checking movements in the context of Administration staff staff risk prevention (e.g., fraud, money laundering, and category (%) (%) Example of key tasks theft) and normal surveillance of operations, Users 10 30 Documentation application collection, control, and „ Updating, improving, and drawing up the proce- management updating, etc. dures applicable to the activity, Users hotline 0 50 System upgrades, orgotten passwords, „ Managing authorizations to use the registry, guidance, etc. „ Applying the procedures (e.g., for opening accounts), Day-to-day 10 20 Manual system registry operations, reporting, etc. „ Advising management when procedures need operations updating, Management 80 0 Managing teams, regulatory monitoring, „ Providing feedback on anomalies in the software in relations with the relation to the supplier of the registry, authorities, etc. „ Providing support and technical advice to users of The operational staff may perform the following tasks: the registry; n Managing the operations set out in regulations: n Managing assistance provided to customers: „ Handling administrative tasks: setting account param- „ Drawing up and updating Frequently Asked Ques- eters, and opening, closing, and updating accounts, tions (FAQ) to be put together, in particular with a view to starting up the registry system, „ Informing customers of changes in regulations, „ Ensuring telephone hotline services and e-mail ser- „ Managing relations with the regulatory authorities vices during opening hours: answering customers and inspection bodies, and enhancing the FAQs where necessary, „ Where applicable, producing specific reports „ Quickly reporting incidents and keeping up-to-date (e.g., for monitoring sensitive operations and a summary report of past incidents; handling disputes); n Ensuring regular reporting to the manager of the regis- n Updating documentation (requested from customers) try (and possibly the assistant), and referring matters to and making updated documents available; them if an issue arises; n Ensuring compliance checks on customer files by imple- n Taking part in team meetings (e.g., to discuss regulatory menting the KYC criteria: or IT changes); „ Checking the comprehensiveness of each of the n Suggesting ways to improve the quality and perfor- customer files concerned (pre-existing customers mance of the service. or requests for opening new accounts), These tasks require continuous communication with mul- „ Making individualized requests for additional docu- tiple external contacts and with support services. In order ments required, where applicable, to perform these tasks successfully, the following skills are essential: „ Monitoring the use of procedures and following up as appropriate, n Demonstrate great rigorousness and keep the informa- tion confidential; „ Checking the compliance of documents received, n Follow the confidentiality rules and, where applicable, „ Reporting inconsistencies and instances of non- the professional ethics measures specific to the activity; compliance; 33 PART III. The Institutional Framework and Registry Administration n Be on duty within the department as agreed; 4. Ways to Reduce Registry n Demonstrate an interest in issues relating to environ- Administration Costs mental goals; This chapter provides a number of technical options that can help reduce the administrative burden and associated n Show proven experience in terms of middle-office and/ costs of registry administration. It should be noted, howev- or back-office control procedures; er, that none are substitutes for the diligence and involve- n Demonstrate good personal relations and organiza- ment of the registry administrator’s management and staff. tional qualities; 4.1. Formalizing operational procedures n Demonstrate a feel for good customer relations; Each of the activities making up registry management may n Demonstrate an ability to adapt to cyclic activity and to be subject to a formalized procedure. Applying formal qual- a market environment exposed to specific risks; ity assurance systems demands resources, but can help structure the internal processes, procedures, and operating n Demonstrate an ability to use, and a passion for, IT sys- instructions. The presence of an externally audited quality tems and mastery of standard office software tools; assurance system is also useful as a source of good prac- tices and helps maintain standards without investing in any n Demonstrate independence, rigorousness, and the formal certification. capacity to take the initiative and work in a team. For example, the UNFCCC Secretariat is developing a quality management scheme based on ISO 2700040 for informa- tion security management. ISO 900141 is another qual- ity management standard used by a number of registry administrators (e.g., France’s CDC and the United Kingdom’s Environment Agency). It is important to note, however, that currently none of these registries are required by law to comply with quality management standards such as ISO 9001 or ISO 27000. 4.2. Applying proportional control and monitoring As part of the application process, the prospective account holder may be asked to provide an estimate of its activity in the registry, such as number of transactions and amount of units held. Such information will allow the administrator to perform KYC checks and transactions monitoring in a way that is proportional to the risk related to the estimated user’s activity. This may in turn reduce costs for the registry administrator, but also for applicants, which is important for small and medium-sized entities. This option may require that the registry IT record these estimated figures and block the account when limits are reached. 40 Source: http://www.iso.org/iso/home/standards/management-standards/ iso27001.htm?= 41 Source: http://www.iso.org/iso/iso_9000 34 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration 4.3. Computerizing operational tasks used by the U.S. government’s visa waiver system42 and the U.K. Financial Conduct Authority.43 Final decisions will still be 4.3.1. Exchanges of information with registry made by the registry administrator. users Part of the workload when setting up new users or periodi- cally updating files consists of follow-ups to obtain missing, 4.4. Training material and incomplete, or noncompliant documents. Such administra- communication supports tive workflow generates a significant workload, which is pro- Providing registry users with guidance documents and other portionate to the number of users and to the variety of their training material reduces the number of calls to the registry profiles (e.g., compliance entities vs. banks) and jurisdictions user hotline. Initial activity and feedback from the hotline of origin. can help estimate the need for such material. Several options exist for the development of training and commu- Computerizing these tasks enables some of this workload nication support material, which may include step-by-step to be transferred to the user, and enables automation of operating procedures, screenshots, and video tutorials or exhaustive controls (e.g., missing documents) and follow-up live training sessions that allow for real-time interactions notification (e.g., out-of-date documents). Another advan- between users and the registry administrator. tage of workflow automation is that it facilitates monitoring of progress, such as the identification of the files requiring Some interesting examples in this context include the user high processing time, or the allocation of files to staff for guides and user reference documents provided by the processing. Finally, connecting supporting IT systems to the ARB, which are available online, with additional training registry further increases the efficiency of business process- webinars,44 or the first time registry user video45 produced es and data consistency. by the European Commission, which is likewise available online. REMA (Registry Management) is one example of a Customer Relationship Management (CRM) tool, developed by the Belgian Registry Management team (part of the Belgian Ministry of Food and the Environment). It is licensed free of charge to several EU member states. 4.3.2. Monitoring of account activity If the volumes of transactions and administrative events— such as changes in users or opening/closing of accounts— are substantial, monitoring them to detect suspicious behavior may be complex and time-consuming, particularly in the case of linked registries. Using tools to monitor trans- actions, as some countries are doing, may address both issues. Germany has created a German Transaction Analysis Module (GYM) used to monitor transactions and identify fraudulent ones. Denmark has automated its risk analysis procedure for new accounts and users. This module cross- checks the information received by the registry with that held in the Danish Business Authority, and person and tax registers, to ensure the reliability and accuracy of the infor- mation held. The United Kingdom is developing an online application process that will check the integrity of requests to open accounts, appoint users, or alter registered data. The system will use a mix of public, commercial, and gov- ernment sources to confirm the accuracy of more than 80 percent of the submitted data. The objective is to reduce the administrative burden of having to manually check the 42 https://esta.cbp.dhs.gov/esta/ supplied documentation. The process will be similar to that 43 https://www.gov.uk/registration-with-the-financial-conduct-authority 44 Source: http://www.arb.ca.gov/cc/capandtrade/markettrackingsystem/ markettrackingsystem.htm 45 http://ec.europa.eu/clima/sites/registry/media/1-FirstTimeUser.mp4 35 PART III. The Institutional Framework and Registry Administration 5. 1. Recommendations and n Formalize exchanges and reporting (regular meetings, expert groups, etc.) Guidance on Development of an Institutional Framework for n Consider user criteria and processes related to registry access in order to benefit from the protection Registry Administration of existing applicable regulations n Consider specific features related to registry use and n Assess risks facing registry management and identify activity (e.g., limit on the transfers for certain user potential mitigation measures categories) n List the tasks and operations to be performed by the n Estimate the resources and costs associated with registry administrator registry administration, and identify relevant measures and options to reduce them, if necessary n Mandate an appropriate entity to administer the registry (possibly third party) n Consider options for ensuring the financial viability of registry administration (budget, fee schedule, etc.) n Empower the registry administrator to perform operations (e.g., refuse to open an account, block an n Set up robust monitoring and oversight of registry account, or revoke a user’s right) activities n Facilitate cooperation between the registry administrator and relevant authorities (financial regulator, energy regulator, etc.) 36 PART IV. IT System Procurement and Development This section provides guidance for the specification and pro- 1.1.1. Registry security—issues and options curement of a registry. It gives: (i) an overview of the steps In assessing risk, the following key questions arise: What is involved in registry procurement; (ii) preliminary consider- the probability of a security breach and what are its likely ation of the steps required prior to delineation of the ser- consequences? Who underwrites the risks of a security vices requested; (iii) a detailed description of the functional breach? As a consequence, what is the acceptable cost specifications of a registry; and (iv) a detailed description of that can be borne by the host to ensure the security of the the technical specifications of a registry. system? The following types of risk should be assessed: 1. Overview of Four-Step Approach n Financial risk: run by account holders in the case of to Registry Procurement fraud, theft of units, or operational error. This risk may This guide proposes a stepwise approach to registry pro- be proportional to the number of units held and to curement. A volumes and risks assessment is first required their market price. to analyze security issues and options related to the n Market risk and/or reputational risk: including registry. A Request for Interest (RFI) document can then be registry transactions instructed for other purposes issued to potential suppliers, including estimated volumes than those authorized, and the failure to respect the and clarifications on security-related requirements. rules of communication of information that should Based on answers to the RFI, the participant country should have remained confidential or not been made public take into consideration the delivery model, registry connec- before a certain date. This can result from unintended tivity, and accounting options for imported/exported units. or fraudulent modification, or disclosure of confidential At that stage, both functional and technical specifications data. This risk is proportional to the number of transac- can be drafted, to be subsequently attached to a proposal tions. request for registry development. n Reputational risk: run by all participants in the car- The proposed process is illustrated in Figure 7. bon market, by the authority in charge of the carbon market, and by the registry administrator in case of a security failure, fraud, or theft, or general improper 1.1. Conducting a risk assessment use of the market mechanism, as well as in the case of This section is dedicated to security in the design and func- operational error, noncompliance with rules, or simple tionality of the registry and is broken down into three parts. data entry error. The risk assessment should first outline the general security issues and options, next review risk mitigation measures, These risks may result in liabilities for the entity in charge of and finally focus on how the DES deal with more technical IT the registry’s administration, as well as, in some cases, the security issues. personal liability of management staff or other personnel. FIGURE 7: Proposed Steps for Procurement of a Registry Functional Risk Request for Request for and technical assessment interest proposal specifications 37 PART IV. IT System Procurement and Development A quantitative evaluation46 of the cost of these risks enables useful at a later stage, when determining registry IT perfor- scoping of the security measures that should be imple- mance requirements: mented to mitigate these risks, reduce their impacts if they do materialize, and limit financial compensation to the n Number of units held and their estimated monetary aggrieved parties, as needed. equivalent; Note that the reputational risk in certain cases may lead n Number of transactions each year; to higher costs than the cost of the units involved. This n Number of users expected; could be the case, for example, of a company that meets its corporate social responsibility commitments by purchasing n Number of accounts to open each year; carbon credits. If credits are issued improperly because of a lack of control by the issuing registry administrator, the n Expected peaks of activity (e.g., transactions by type company may seek compensation not just for the amount and account opening) during the year. of units involved, but also for the reputational damage it may have incurred. 1.1.2. Possible risk mitigation measures Table 7 proposes security measures to address the vari- The indicative list below shows key volume estimates that ous risks identified above. It demonstrates that the security may be considered in the risk analysis and that will also be measures adopted have implications for all aspects of regis- try IT and administration. Some of these measures will affect the way functional and technical specifications are drafted. 46 For example, based on a Business Impact Assessment (BIA). TABLE 7: Security Measures for Different Types of Risks Effect of Risk measures Security options Financial risk Mitigation Terms of Use of registry services: Require users to adhere to Terms of Use, including security following fraud guidelines involving users’ participation (e.g., regularly change password and the use an up-to- or theft of units date antivirus program). Registry functions: Two-factor authentication, session time-out, out-of-band notification of users; limit the registry’s opening hours to open days’ working hours to facilitate a quick intervention in case of a security breach; require that the password be entered again and/or an SMS code (or security token) be used to confirm sensitive operations; allow for limited time frame between the last stage of validation of an operation by the transferor and completing the transfer, during which time an operation can be canceled through an emergency procedure; enable the registry with emergency stop functions, revoke users, block accounts, and reverse operations. IT/Technical: Require the registry provider to accept independent security audits performed upon request; dedicated URL and dedicated IP to access registry administrator functions. Impact Registry functions: Automatic alerts following detection of suspect movements and based on reduction registry emergency service stoppages, security protection for bona fide members. Rectification Account convention: Measures forcing the unintended receiver of units to return them. IT/Functional: The registry may require transferee’s explicit acceptance of units received, prior to completing any transfer. Compensa- Account convention: Calculation rules setting a maximum value on compensation for victims, tion thereby limiting the responsibility of the registry administrator. (CONTINUED) 38 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration TABLE 7: Security Measures for Different Types of Risks (CONTINUED) Effect of Risk measures Security options Financial and Mitigation Contract between the registry administrator and each user:a explicitly specify the information Reputational risks made public. following opera- Awareness and training for registry administrator staff. tional errors by the registry Operational procedures: Instructions and validations to be performed by various users. administrator Registry functions: Rigorous management of users’ authorizations (privileges). Dedicated machine, without Internet access, except for a dedicated URL required for administration of the registry; dedicated machine with fixed IP that is recognized by the registry system; dedicated machine with no peripherals; impossibility to connect as registry administrator via the URL used by other users; strong authentication: login, password, and security token; physical access secu- rity: office badge access required, security-guarded premises outside working hours. Peer-review procedures: The main public (accounting) reports issued by the registry may be peer-reviewed by administrators of connected registries (if any) prior to publication. Impact Subscribe to an insurance policy: Associated with the operational risks of a registry administra- reduction tor. Continuous improvement procedures: Incorporates lessons from experience into the opera- tional registry administration procedures and into requirements applicable to the IT. Rectification As above Compensa- As above tion Financial risk Mitigation Awareness of users: Via the registry web page (tutorials, video, FAQ). following user Contract between the registry administrator and the user:a limit the responsibility of users (in operational errors relation to registry functions). Registry functions: “Push-push-pull” principle: two distinct users instruct and validate an opera- tion, and an explicit approval is required from the acquiring account holder; checks during data entry; alerts in the case of an operation where quantities entered are greater than a certain limit or in the case of a compliance operation, entering quantities different from the regulatory obligation (e.g., return credits greater or smaller than verified emissions). Impact As above Reduction Rectification As above Compensa- As above tion Market risk follow- Mitigation Regulation: Registry operations and related banking operations to be placed under surveillance ing unauthorized of a market monitoring authority; facilitate the cooperation between registry administrator and use of the system any authorities carrying out police investigations; ensure that personal data protection rules do not hinder legal investigations. Registry functions (transactions oversight): Develop detection and alert functions to detect suspicious administrative events (e.g., frequency of change of authorized registry users) or sus- picious transactions (e.g., where the same unit serial numbers are exchanged in high numbers, at unusual frequency or volume); repeated transfers between counterparts ruled by different fiscal buy/sell regulations (e.g., buying without VAT—offshore or reverse-charge—and selling with VAT). Compensa- As above tion (CONTINUED) 39 PART IV. IT System Procurement and Development TABLE 7: Security Measures for Different Types of Risks (CONTINUED) Effect of Risk measures Security options Correlated Mitigation Demands on the entity that administers the registry: Solvency, capitalization, risk scoring, subcontractor/ submission of audited accounts each year to the relevant authority. supplier Prevention of conflicts of interest: The registry administrator (all staff included) will not hedge transactions a position on the purchase or sale of units (outside own obligations or commitmentsb), nor bring buyers and sellers into contact with each other, nor develop projects that generate credits. Obligations of the registry administrator: ensure that staff and contractors respect the rules of confidentiality. Contractual clause by which the registry administrator accepts unscheduled audits by the com- petent authority and conducts independent audits on a regular basis. Rectification Registry Administration Mandate: Build in the possibility to terminate or bring to an end the mandate of the entity responsible for registry administration. Compensa- Registry Administration Mandate: Building an exit clause (e.g., timescale, data transfer, and tion knowledge transfer). Obligations of Mitigation Contact: Required documentation, document monitoring (KYC), and an escalation procedure account owners or for suspicious activities. More stringent requirements for market intermediaries and other authorized repre- voluntary participants. Regulatory instruments allowing the registry administrator to refuse the sentatives (users opening of an account and limiting the possibility of appeal. Computerize the administrative of the registry) workflow of initial contact and CRM. Impact Supervision of the relationship: Supervision of daily transactions, detection of suspect behav- reduction ior; reporting to the relevant authorities able to investigate or intervene. Develop CRM functions with alerts in the case of obsolete documents or checks not done; com- puterize the risk-profiling of users; subscription to external databases of company information, companies’ owners and managers. Rectification Terminate the relationship: Legal instruments allowing the registry administrator to refuse to open an account, block or close an account, and freeze or revoke a user’s access to the registry. a. A contract or other document detailing the mutual obligations of the parties. b. For example, buying and canceling units for the purpose of offsetting one’s own GHG emission 40 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration 1.1.3. Addressing IT security The feedback received from interested providers may bring The “Data Exchange Standards” (DES published by UNFCCC valuable first-hand information and insight, in particular describes a set of security measures for registry informa- related to: tion systems. Certain measures are generic while others specifically address the connection between a registry and n Offering and prices; a central hub. Table 8 lists the main information systems n Experience and level of expertise; security requirements for registries, independent of their connection to a central hub such as ITL, according to DES n Quality of their project management; and version of December 2013. n Capacity to cooperate closely and deliver expected results in a common working language. TABLE 8: List of the Main Information Systems The RFI also allows a first assessment to be made of the Security Requirements for Registries suitability of different types of delivery models for registry Paragraph Security measures product and services, including Software as a Service (SaaS, see section 2.1), the application or adaptation of existing 3.1.1 Registry systems have fixed public IP addresses software, or development from scratch. 3.1.3 The use of SSL will protect any communications that may pass over the networks at the registry Following the RFI, a Request for Proposal (RFP) can be site drafted. An RFP is a comprehensive document providing all 3.1.4 Use of a trusted certificate authority the information needed to make an informed purchasing decision. 9. Documentation to show that the registry will be operated in a manner consistent with excellent operating practices. These requirements ensure RFI/RFP Specify volumes expected and security the registry has an adequate plan for addressing building measures required the operational and security requirements of block 1 the application This first building block is intended to synthesize the volumes 9.1.1 Database and Application Backup of data to be managed by the registry (to be further detailed in technical specifications), and the security measures required. 9.1.2 Disaster Recovery Plan Providers will use this information to estimate the need for IT scale and security performances. 9.1.3 Security Plan Expected volumes could especially specify: 9.1.4 Application Logging Documentation • Number of units held and their estimated monetary equiva- 9.1.5 Time Validation Plan lent; • Number of transactions each year; 9.1.6 Version Change Management • Number of users expected, including simultaneous accesses 9.1.7 Test Plan and Test Report to the registry system; 9.1.8 Operational Plan • Number of accounts to open each year; • Expected peaks of activity (seasonality). The list of security measures recommended, to be listed here, is the result of decisions made on the basis of due consider- 1.2. Identifying potential registry vendors ation of Table 8. and their offer Outcome The scope and objectives of the services sought are defined. A RFI—based on clear functional specifications—can be issued and shared with several preselected IT/registry pro- viders. The RFI could include: n A regulation applicable to the registry; n An estimate of volumes and a list of security measures (see building block 1 below); n A description of the registry and services sought (see building block 2 below). 41 PART IV. IT System Procurement and Development RFI/RFP 1.3. Developing the functional and building Delineate the nature of expected services technical specifications block 2 Functional specifications are an inventory of business This building block lists the services sought from the supplier requirements, including users’ interfaces, expected and associated volumes and security measures expected. A range of services and delegation of responsibilities can be functions, and data to be managed by the registry. These recommended over and above the provision of the registry requirements are derived from the regulation in place. system. The list of services expected could be taken from the Security requirements have an impact on functional indicative list suggested below. specifications (e.g., users’ authorization profiles and Regarding the IT system (i.e., the registry): transactions workflows). • The procurement of the registry, in accordance with the functional and technical specifications; Technical specifications are related to the IT aspects of the • The reversible hosting of data and processing services, and registry, and thus give particular attention to the descrip- the registry site; tion of the technical environments, and performance and • A secure and confidential infrastructure; security requirements. • Maintenance in operational condition of the IT system: concerns corrective and upgrade maintenance for both the 1.3.1. Functional specifications—a bird’s eye registry and the underlying software component versions; view • A service level agreement, which details the level of com- Comprehensive functional requirements should be based mitment to quality and security management, including on the functional requirements suitable for a core generic reactivity to change. registry. Key components of functional specifications are Regarding auxiliary services: illustrated below, in the third building block of the final RFP. • First-level hotline and support for users; • Training material, user guides, operating manuals, and train- RFP ing courses; building Specify registry functional requirements block 3 • The drawing up of “Terms of Use” of the registry, including security measures and any limitations (web browsers); This includes the need to: • Translate the regulation into business rules that must be • Management of requests for opening accounts: formal checks, respected by the registry; due diligence, account opening upon confirmation by the registry administrator, and assigning user authorization; • Describe, as necessary, automatic or planned events (issuing reports or notifications, calculating compliance figures); • Regular update and review of users’ related documentation; • Establish a list of user authorization profiles, and the cor- • Invoicing users. responding table with associated list of functions; The scope and objectives of the services • List the types of units required, and specify the need for Outcome sought are defined. additional labels and the format of serial numbers; • Formalize accounting models for each transaction; • Describe the workflow applicable to each transaction; • List all reports and notifications to be issued by the registry; • Detail the registry website structure, and requirements for animation and design. Business requirements are specified and reflect functional needs. Outcome The functional specifications of the registry are completed. 42 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration 1.3.2. Technical specifications—a bird’s eye view RFP Specify registry technical requirements (2/2): The key components of technical specifications are illus- building “IT environment” of the registry trated below, in RFP building blocks 4 and 5. Detailed guid- block 5 ance is provided on how to draft comprehensive technical This stage details the technical requirements for IT architec- requirements, based on the technical requirements suitable ture, security, and confidentiality. for a core generic registry. The following requirements need to be described: • Data hosting, taking account of appropriate personal data RFP building Specify registry technical requirements (1/2): protection and data confidentiality legislation; block 4 “scale” of the registry • Encryption in data exchange processes via the web interface This building block is intended to “size” the processing capacity and systems that make files available for download; required for the registry. • Information systems environments to implement; Putting the registry IT in context: • Data archiving; • Based on the map of information systems to connect to the • Performance expected from the information system; registry (e.g., central hub and MRV), draw up an inventory of IT interfaces between the registry and those other systems; • Management of data confidentiality; • Exchanges between registries: detail the technical architec- • Authentication factors required; ture to be implemented for the transfer of units between • Transaction traceability (audit trail). registries (via a central hub, peer-to-peer, or both); • Stipulate whether the registry needs to use a particular com- Based on specific IT circumstances such as the registry admin- munications protocol for certain interfaces, and don’t fail to istrator’s existing IT security strategy and IT environments, the specify if the registry must conform to the DES for handling following requirements may also need to be specified: exchanges between registries. • Systems solutions favored and solutions excluded; • Consistency between the organization and administration of • Quality service level and monitoring of quality service level. the registry and data processing services: The technical specifications are completed and • Determine working hours and holidays, hotline opening Outcome can be attached to a RFP. hours, and the times the registry will be available online (distinguishing as necessary, the hours available for users and those available for administration); determine the number of staff required for the hotline and for registry 1.4. Preparing the Request For Proposal administration. (RFP) • Provide detailed estimates of the following elements (most The last step consists of soliciting potential registry provid- of them have been used earlier to assess risks, see building block 1): ers through a competing or bidding process, such as an RFP. In all cases, there is a need to delineate the services • Number of users expected; sought and specify the functional and technical require- • Number of simultaneous user accesses to the registry; ments for the registry and its associated services. • Number of transactions and number of accounts to open each year; The RFP can be structured using the above building blocks to: • Expected peaks of activity (e.g., due to compliance transac- tions) during the year; n Specify the volumes of data expected and to be • For each connection, volume and frequency of data managed by the registry, and the security measures exchanged with the registry; required (see RFP building block 1) • Number of units held and their estimated monetary equivalent; n Delineate the nature of the services expected to be • Minimum number of technical environments required (e.g., delivered by vendors, based on basic registry needs production, preproduction, testing); (see RFP building block 2); • List of data to archive (logging, audit trail, history available online) and the duration for which the archive must be kept n Specify the registry’s functional requirements (RFP (taking into consideration regulatory constraints). building block 3); The “scale” of the registry is specified: registry/ Outcome IT providers are able to “size” the performance n Specify the registry’s technical requirements (RFP build- and service level of the solution they can offer. ing blocks 4 and 5). Note: If the registry is developed from scratch, the functional specifications will have to provide additional details such as prototypes of user interfaces, web page cinematics, and a detailed workflow for each registry function. 43 PART IV. IT System Procurement and Development 1.5. Implementation timeline 1.6. Indicative list of providers of registry The selection of a registry provider may take several months IT and services to a year. One to two additional years may be required to Table 9 provides an indicative (non-exhaustive) list of suppli- start operating the registry, depending on the complexity of ers of registry transaction solutions. the solution and on the level of specificity of the IT compo- nents required (as compared to the re-use or integration of existing software modules.) TABLE 9: Indicative List of Registry Services Providers Country Supplier Service offering Registry Experience References for IT systems connected to registries Belgium Trasys • Integration • ETS • Transaction logs • Development Canada CSA Group • Development • ETS • Project database • Voluntary offset China ZBX • Developer • ETS • Reporting platform • Trading platform China Sinocarbon • Specifications • ETS • Project database • Development • Voluntary offset • Communication protocol • Reporting platform France Powernext • SaaS • Powera • Hotline and administration France Andal Conseil • Specifications • ETS • Registry administration • Procurement • Voluntary offset • Project databases approach • Power Germany LiWa GmBH • Integration • ETS • Registry suspicious patterns detection • Workflow automation Japan NTT Data • Development • ETS • — United SFW • Integration • ETS • Administrative workflow automation Kingdom • Development • Voluntary offset United Markit • SaaS • Voluntary offset • Project databases Kingdom • Auction platform • Platform for initial buyer seller contact United Noumenal • None • Voluntary offset • Project databases Kingdom • Communication protocol United CSRA • Development • ETS • Transaction logs States • Project databases • Auction • CRM United APX • SaaS • Voluntary offset • Project databases States Note: ETS = Emissions Trading System; SaaS = Software as a Service; VCSA = Verified Carbon Standard Association; — = not available. a. Examples: registries for capacity regulation and for guarantees of origin. 44 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration 2. Preliminary Considerations ability [F], data ownership and linking [SV], and documenta- tion and training material [D]. Table 10 compares each of 2.1. Different registry procurement the above registry procurement options on the basis of options: develop, adapt, share, or these eight criteria. outsource Notes: The main procurement options for registries are the n When comparing costs, it is useful to bear in mind that following: any IT system generally has a limited lifespan, and that costs have to be compared over a time period that is at n Share: involves using a single, common registry. One least equal to the lifetime of each option; example is the Western Climate Initiative, which has developed a single registry IT shared by its mem- n The cost of adapting existing software is sometimes bers (California and Quebec). Another example is the higher than the cost of developing from scratch; partic- Consolidated System of European Union Registries ularly adapting the presentation layers (user interfaces) (CSEUR)—a shared registry IT that replaced all national to a specific language can be very costly; EU ETS registries formerly hosted in each EU Member State and the EEA EFTA states (i.e., Norway, Iceland, and n Open-source code can be vulnerable to hackers. In Liechtenstein), as well as the Kyoto Protocol national addition, long-term support and maintenance for open- registries of these countries, which have their distinct source IT technologies may be an issue, especially if the obligations and connections to the UNFCCC system.47 community of contributing developers is small. n Software as a Service (SaaS): is based on a software Some general conclusions can be drawn from the above: licensing and delivery model in which the software n If the priority lies on data ownership and sovereignty in vendor—based on a subscription/fee—hosts and main- decision making, the registry’s capacity to respond to tains the servers, databases, and code that constitute specific requirements, and the ability to respond quickly the registry application. Registry management services to requests, then the development and integration may also be offered (e.g., operating the hotline and options seem preferable; user operation management). In addition to the sub- scription/fee, other potential costs to consider under n If the priority lies on lower costs, rapid delivery, a low this option include: workload and a low level of internal expertise, then the use of a third-party registry (“share” option) or paying „ Initial specific personalization and configuration; for registry as a service (SaaS) seem preferable. „ Secure hosting (e.g., annual subscription); 2.2. Registry connections „ Upgrade maintenance (based on specific esti- Depending on the scale of the market mechanism and the mates) and upgrades imposed by [suppliers of] sophistication of the registry, a number of IT systems and underlying technologies (databases, etc.). databases can interface with the registry—including other n Adapt: involves having an IT services provider adapt registries. and implement an existing open-source registry (e.g., Open Registry) or a registry solution under license (e.g., 2.2.1. Registry connectivity requirements “Greta” or “Seringas,” which are under SFW license). The connectivity requirements of the registry system will be determined at the policy level and reflect the level of n Develop: requires the drafting of very detailed func- data and extent of market linking that policy makers deem tional and technical specifications for an IT services appropriate. Connections can be established to: provider to develop a registry system from scratch. n Transfer units from/to another registry; Deciding on one of the above options involves assessing them against their cost of maintenance [C], timescale [T], n Settle trades, upon request from a trading platform; required know-how [S], complexity [X], performance, secu- n Access external databases related to users or documents; rity, and continuity plan [PS], flexible functionality and scal- n Update MRV data, e.g., periodic verified GHG emissions, thereby enabling the registry to calculate compliance 47 See the EU ETS Handbook, available at: http://ec.europa.eu/clima/ figures and status; publications/docs/ets_handbook_en.pdf. 45 PART IV. IT System Procurement and Development TABLE 10: Comparing Registry Procurement Options Advantages Disadvantages Share [C] Cost is probably low [F] No possibility to implement specific functionality [X] Lower level of registry complexity (implementation and [SV] To some degree, lower control of data (ownership), maintenance) no influence on decisions to link market mechanisms and subsequently connect registries [PS] Level of reliability and security inherited from the host system [X] Legal issue linked to the physical location of units held [S] No specific requirement for technical registry expertise [D] Potentially a problem of interface language [T] Operational immediately (if the registry used already exists) [D] Existing documentation and training material SaaS [C] Cost is spread over time and predictable (contractual) [SV] Lower data ownership, unless databases are hosted in the same country [S] No specific requirement for technical registry expertise (the basic functions exist already) [F] Little scope to respond to specific requirements, lower responsiveness to requirements for change [T] Operational once the personalization and configuration project is complete [X] Less of a need for registry expertise and information systems project management [D] Existing documentation and training material can be adapted Adapt [F] Flexibility: possibility to implement specific require- [S] Expertise required in registries and information systems ments (lower than for a development from scratch) project management [SV] Ownership of data and linking [T] Takes time to implement (be it less than for a develop- ment) [D] Existing documentation and training material can be adapted [PS] Risk of non-quality in a new development, including for security Develop [F] Flexibility: possibility to implement specific require- [C] Development costs potentially higher than for other ments options [SV] Ownership of data and sovereignty regarding linking [PS] Risk of non-quality in a new development, including for decisions security [S] Expertise required in registries and Information Systems project management [T] Takes time to implement [D] Documentation and training material to be designed and produced 46 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration In listing systems to be connected, there is a need to: The upper middle box “GHG Inventories” refers to the systems that record physical GHG data (e.g., emissions and n Identify the relevant system(s) to connect. The informa- removals) at the national, program, or project levels. tion available in various systems should be obtained from the “originating” system, owned by the entity The bottom middle box “Data Management Systems” refers responsible for this information; to the systems that records specific information on GHG (and also potentially non-GHG) policies, programs, and/or n Specify for each connection, rules, timing, checks, and projects. applicable IT protocols—file transfer protocols, encryp- tion requirements, technical specifications for exchang- The central part of the diagram shows the actual registry, ing information, data exchange standard, and other and other (domestic or international) registries it may be web services-based protocols. connected to—through a central hub or a peer-to-peer con- nection. The diagram also shows other systems that provide 2.2.2. IT systems and databases potentially a range of auxiliary registry services, which may include: interfacing with a registry Figure 8 shows a generic functional architecture of the dif- „ Information database on market participants, ferent IT systems and databases that can share connections including CRM tools and exchange information with a registry: „ Market infrastructure such as trading and auc- tioning platforms that match supply orders with demand orders and send settlement instructions to the registry; FIGURE 8: The Registry in its Environment: Potential Connections and Interfaces MEASURE/CALCULATION AGGREGATION AND ACCOUNTING REPORTING, COMMUNICATION AND ANALYSIS DATA DATABASES DATA SOURCES USES GHG INVENTORIES Record physical GHG emissions and removals National/subnational level National International statistics reporting Program/project level (e.g. UNFCCC) Companies REGISTER / Market National, TRANSACTION infrastructure subnational Facilities Supporting REGISTRY (e.g. trading reporting GHG data IT systems platform) Records carbon units for GHG data (verified) and related (e.g., Customer market mechanism and (processed) Relationship reults-based payments and related Products information Management information identification Management, Carbon Other Policy workflow Unit Register automation) compliance Account Account /Transaction Projects Registry (e.g. Tax, ETS, etc.) DATA MANAGEMENT SYSTEMS Records information on policy/program/project activities, carbon units, and additional information (e.g., safeguards, data on other air pollutants) 47 PART IV. IT System Procurement and Development „ Data analysis tools for detection of suspicious n “Mirror” accounting: under this option, there is no behavior and fraud; cancellation/re-issuance of the exported unit. It is instead stored in a special account of the exporting reg- „ Reporting, logging, and archiving services; istry and is virtually reflected in the importing registry, where it can subsequently be transferred from and/ „ Automation of administrative workflow between or canceled, as long as these operations are reflected registry administrator and account holders (e.g., in the special account of the exporting registry. In fact, account opening procedure and the subsequent this is how accounting is managed for the VCS program periodic documentation update) ; and when transfers take place between the two VCS reg- „ Identify and access management) (IDAM) system istries: units never actually leave the registry in which such as Single Sign On (SSO) capabilities for they were initially issued. administrator users wishing to use the same access credentials as for other systems within the organization. 2.2.3. Accounting issues and options when importing or exporting units The following two options exist for registries to ensure robust accounting when units are imported (exported) from (to) another registry: n Definitive transfer: consists of canceling the units in the exporting registry to re-issue them in the importing registry. Such re-issuance may be done against a “proof of cancellation” generated by the exporting registry (administrator), to avoid double counting issues. FIGURE 9: Domestic Chart of Accounts For “Mirror Accounting” Registry A Registry B Registry C Account Holder X Account Holder Y Account Holder Z Cancellation Cancellation Cancellation Competent Competent Competent Authority Authority Authority q1 q2 q3 Domestic Scheme : imported units Account Holder D Account Holder E Account Holder F Account Holder G q4 q5 q6 q7 Account Holder H Account Holder J Account Holder K Cancellation Manual Reconciliation q8 q9 q10 q1+q2 q3 qi Exit qe 48 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration 2.2.4. Technical infrastructure for connection: TABLE 11: Comparing Central Hubs with Peer-to- central hub vs. peer-to-peer Peer Architecture The technical infrastructure connecting distinct registries can be centralized around a communication hub (e.g., the ADVANTAGES DISADVANTAGES ITL for Kyoto registries) or consist of peer-to-peer network Central • Centralizes costs and • Potential sovereignty connections. hub complexity related issues deriving from to communication registry data being Other types of infrastructure are also possible to connect management and made available to the registries but may require stronger institutional and regula- transaction controls administrative entity (i.e., central hub) tory coordination: • No impact when add- ing a new registry to • Costs may be high if n A single IT platform that consolidates distinct registries the registries already few registries are con- connected nected (e.g., the consolidated system of EU registries); • Integrity of account- • Any failure of the hub n A single registry where each jurisdiction administers ing is ensured (i.e., paralyzes the whole its own chart of accounts (e.g., issuance account, automatic detection registry network of errors) scheme participants holding accounts, and cancellation • Maintenance opera- • Identical treatment for tions on the central accounts). all transactions hub may require network-wide coordi- Table 11 lists the main advantages and disadvantages of • Imposes the same nation central hub and peer-to-peer connections. level of security on all registries From a technical, financial, and security perspective, the • Each registry has only central hub solution may be favored, especially if more than one connection: with the central hub two registries are to be connected. However, from a techni- cal control and sovereignty perspective, a peer-to-peer • Single communica- tion protocol (e.g., architecture may be preferable. UNFCCC’s Data Exchange Standards) Under the Kyoto system, the ITL currently connects regis- tries administered by different countries, developed using a Peer-to- • If few registries are • Complexity and costs peer connected, costs may increase with the range of different technologies, and connected at different be lower number of registries points in time. Since implementation, it has overseen the connected transfer of billions of units through hundreds of accounts. • Responsiveness to change will become The ITL presents the following characteristics:48 challenging as the number of registries n An architecture built around a centralized hub as connected rises opposed to peer-to-peer connections between regis- • A security flaw in the tries; connection between two registries poses n A standardized and secured data exchange protocol a risk to the whole (i.e., the Data Exchange Standard); network • Transaction checks n Real-time monitoring of transactions; may differ from one registry to the other n Ex post checks: reconciliation and peer-review process. • Network-wide recon- ciliation (i.e., checking These characteristics have allowed the ITL to offer security, for accounting consis- reliability and credibility, operational and cost efficiency, tency in all registries) is complex and impartiality of treatment across the entire Kyoto regis- try network. 48 For more information, see UNFCCC: http://unfccc.int/kyoto_protocol/ registry_systems/itl/items/4065.php. 49 PART IV. IT System Procurement and Development The EU has implemented its own central hub—the EUTL TABLE 12: Breakdown of Tasks to Determine (European Union Transaction Log). EU ETS units are transferred Business Requirements between EU member states’ registries through the EUTL and not through the ITL. Only transactions involving Kyoto units are Market mechanism checked by both the ITL and the EUTL. Therefore, the EU ben- authority IT consultant Task responsibilities responsibilities efits from a central hub while also ensuring that no other entity has access to EU ETS transactions and data. Transpose Determine the regu- Provide suggestions the policy lation and rules the on issues relevant and market registry shall comply to IT. 2.2.5. Language for connection: communication mechanism’s with. protocols design into business rules Review IT consul- Regardless of the technical options chosen for connection, tants’ specifications a communication protocol is needed for registries to be List eligibility regarding users and List types of users able to exchange information (e.g., UNFCCC DES). Although criteria their privileges. and profiles/level of for users privilege of parties the need for a “common language” may only emerge in the participating using the registry. future, it may be anticipated in the early phases of registry in the market development. A communication protocol imposes a specific mechanism data nomenclature, value, and format for account, unit, Determine Review IT consul- Determine registry transactions, and the design of workflows. Using the DES connectivity tants’ specifications connectivity require- from the start may make it easier for registries to connect requirements regarding users and ments. their privileges. in the future, but without any kind of commitment to ever actually connect to the ITL. Determine Further clarify mech- List account types, account anism’s accounting chart of accounts, arrangements specificities. and transactions and transfer with their respective 3. Functional Specifications rules Review IT consul- tants’ specifications accounting models. Determining the functional specifications of a registry system regarding users and is a key first step, driven by regulation and the business pro- their privileges. cesses associated with registry administration. It consists of Finalize Review IT consul- Produce func- a description of the system operations that could be applied functional tants’ specifications tional specifications, specifications regarding users and aligned with the to registry administration, with or without an IT system. their privileges. regulation, with reg- istry administration Business requirements are determined on the basis of a few Officially approve/ processes, and with key tasks involving both the authority in charge of the validate final func- business require- tional specifications, market-based mechanism and business analysts or IT con- prior to ordering any ments. sultants. The tasks proposed in this context are presented IT development. in Table 12. n With the exception of the registry administrator, a user 3.1. Generic business rules cannot modify the date of a transaction; Business rules indicate the behavior expected of the reg- istry system. The ones listed below are generic, and may n A user number (identifier) is unique and never changes therefore have to be adjusted somewhat. (consider whether this needs to align with identifiers used in other systems); n The registry must comply with the legal regulations in force; n A transaction number (identifier) is unique and never changes; n An account holder number (identifier) is unique and never changes (consider whether this needs to align n A transaction must simultaneously debit one account with identifiers used in other systems); and credit another; n The registry applies user authorization before any con- n An account number (identifier) is unique and never sultation, edit, or modification is made possible; changes. An account with a “closed” status retains its account number; n With the exception of the registry administrator, a user cannot enter a predated transaction; n An account that holds serial numbers may never have a negative balance; 50 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration „ The technical account debited on issuance does n Number of administrative operations on hold for more not hold serial numbers; its balance is structurally than “x” days (configurable time lapse); “debit;” n Anomalies: differences (total amount and/or sign) n A closed account cannot be reopened; between: n The serial number of a unit cannot change; „ The sum of all account balances and the sum of all issued quantities; n At any given time a unit may be credited only to one account; „ The sum of all credits and the sum of all debits. n The registry does not allow the use of out-of-date units, 3.3. Taking stock of the data to be nor does it allow for the use (i.e., the surrender for compliance purposes) of credits issued by ineligible managed by the registry projects; The business analyst/IT consultant inventories the data and specifies the relations between those data. If it is decided n An ETS registry may limit the maximum number of that the registry should be developed from scratch, this credits authorized for the conformity of each market inventory should be much more detailed. In the following participant; sections, the focus lies on data that do not (yet) exist in all registries or require clarification. n The registry enables parameterization of restrictions on the use of certain types of units: 3.3.1. Data related to registry users „ For certain types of transaction; The registry administrator establishes a relation (eventually a contract) with the account holder, preferably49 a company „ On certain types of accounts; rather than a natural person. The account holder is the responsible entity and the owner of the units held in the „ Depending on criteria related to projects (e.g., host account. The account holder designates natural persons country, sectoral scope, and registration year). as “authorized representatives,” that is, the users of the registry system. 3.2. Generic configurable alerts Each account belongs to one and only one account holder. To make sure that business requirements are fulfilled, auto- At least two persons may be authorized to enter and matic alerts can be specified to detect the occurrence of validate transactions on this account (i.e., the “authorized situations that should not have occurred. Alerts are brought representatives”). to the attention of the registry administrator or registry users. Some examples of events that may generate alerts In order to properly monitor risks and carry out the checks are the following: required by regulations, including those related to money laundering and terrorism financing, it is necessary to iden- n Regulatory transactions expected but not yet com- tify the “beneficial owners,”50 that is, natural persons who pleted; effectively benefit from the transaction, such as the majority n Accounts with a debit balance (other than the techni- shareholder of a company. cal issuance account “-Q”). This situation should never occur and, if it does, represents a technical system 3.3.2. Categorization of registry users error; The users of the registry system are determined by the busi- ness analysts/IT consultants in accordance with the relevant n Pending transactions: transactions for which the last market mechanism’s regulation, especially considering the status in the workflow was not attained within “x” days of being entered or imported into the registry (configu- rable time lapse) or for units that will expire in less than “y” working days (configurable time lapse); 49 Checks can be performed on a company, to control its liability, through mandatory and public documents. n Transactions for which the accounting date differs from 50 FATF (Financial Action Task Force) definition: “Beneficial owner refers to the date entered (later or earlier); the natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted. It n Discrepancies in compliance figures; also includes those persons who exercise ultimate effective control over a legal person or arrangement. (…)” 51 PART IV. IT System Procurement and Development eligibility criteria for participation in the mechanism and the accounts used for the account holder be distinguished from responsibilities assumed by the execution of processes. accounts opened for third parties. This can be achieved by also using subtypes of accounts (“proprietary” accounts vs. Registry administrators’ users can be categorized by admin- “third-party” accounts), as per recommendation no. 9 of the istration process and by management structure of the Prada Report on CO2 Markets regulations.52 competent authorities. 3.3.4. User authorization profiles It is suggested that other registry users be grouped in the Not all data on a registry will be public or accessible to all following way: authenticated users, and all functions are not available n Divide the market participants (account holders) into to authenticated users. Registry functional specifications two categories: voluntary participants and compliance should be in place to clarify users’ authorization profiles. participants; Regulation, registry administration processes and transac- tion workflows provide the grounds enabling the business n Categorize account holders by type of units they are analyst/IT consultant to: allowed to hold and transfer, and by type of transac- tions they are granted access to; n List users’ authorization profiles; n Create different categories depending on the kind of n Propose a corresponding table, associating user autho- relationship between account holders and users, and rization profiles with data and with functions. various levels of users’ privilege; A list of suggested user authorization profiles is presented n Create different categories based on distinct user profiles. in Table 13. However, to configure the registry, it is neces- sary to detail whether a user profile has access to a function If the registry is shared by different jurisdictions, it may or not. To that end, a comprehensive list of core registry be necessary for the registry system to manage several, functions and related authorized user profiles is presented distinct registry administrators, ensuring that each account in appendix B. In practice, it is beneficial for a registry to be is associated with one and only one registry administrator, designed with the ability to configure the permissions of a and that the data for each registry administrator area are given user role (the access needs for various user roles may kept confidential. evolve over time and sometimes, new roles are needed). 3.3.3. “Beneficial” owners 3.3.5. Account arrangements and transaction The “beneficial owner” is defined by the FATF51 recom- rules mendations R24 and R25 (and their respective explanatory Accounts can be classified by “type of management” account notes, available on the FATF official website). The measure (allocation, retirement, cancellation, and buffer accounts) proposed here to protect the carbon market from being and by “type of participant” (operator, trading, and third- used for criminal activity (e.g., money laundering or to party accounts). Accounts arrangements are summarized in finance terrorism) depends upon transparency of the identi- Table 14. ty of the person benefitting from units held and from trans- actions involving a given account. The expected outcome The rules for transferring units are derived from the is to detect fraudulent use/users likely to be hiding behind arrangements of accounts described above. Carbon unit one or more front organizations. To this end, the registry transfers include: allocation, buffering/release, transfers administrator should request that the natural persons who between account holders within the registry or involving are the beneficial owners of companies holding accounts in another registry, settlements of trades, and all kind of end- the registry be identified. of-life cycle transactions (cancellation, deletion). Similarly, the registry administrator may request that For each type of transaction, except for end-of-life cycle beneficial owners of transactions carried out on behalf transactions, a dedicated “reversal transaction” should of third parties be identified. Therefore, over and above be created. For each type of transaction, the functional the information requested on initial account opening and specifications should mention restrictions regarding which documentation renewal, it is also recommended that the account may or may not be debited/credited. 51 Financial Action Task Force, an organization created in 1989 with the objective of developing and promoting policies against money laundering 52 Source: Prada Report, 2010: http://www.ladocumentationfrancaise.fr/var/ and the financing of terrorism. storage/rapports-publics/104000201.pdf 52 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration TABLE 13: Proposed List of User Authorization TABLE 14: Procedures for Identifying Account Profiles Arrangements User Account identification authorization Access to Account type Purpose procedure profile Data access functions Management Manage the • List events and describe Information All All account issuance, processes triggering any system allocation, kind of unit issuance (e.g., administrator import, and project verification and export of administrative decision to Registry All All carbon units issue or buffer units) administrator • List events and describe Registry operator All All except validation processes triggering imports/ exports of units Authorized Designated holder Entering transfers representative accounts and and cancellations • List events and describe transactions on processes triggering the Additional these accounts Validation of trans- “end-of-life cycle” of any authorized fers and cancella- type of units (e.g., deletion representative tions and cancellation) Account auditor Read only • List specific account types needed to account Sole Entering and vali- for these events. Where representativea dation of transfers needed, specific account and cancellations types can be used for spe- Any user Public reports Read only cific units (e.g., an account dedicated to the conver- a. An account holder who may not designate more than one person to sion of international credits manage his registry account. into domestic credits) Holding Transfer of • List events and describe accounts carbon units processes triggering a transfer of credits debit- 3.3.6. Different types of accounts for accounting ing or crediting a market purposes participant’s account Figure 10 shows a generic chart of accounts. The different • List characteristics that account types proposed are described below. can prompt the applica- tion of different market rules or different checks to Technical accounts managed by the authority in participants’ accounts or charge of the market mechanism (or the Regulator) transactions (e.g., account include: held for proprietary trading or account held for third- n The issuance account (and its counterpart, the “-Q” party trading) account) will receive units issued, before transferring Accounts Security and • Define a specific type of them to a client’s holding account; dedicated to balance reli- account for each type of third-party ability regard- third-party platform n The surrendering account is used, in the case of an ETS, platform ing accounts to receive units surrendered by liable parties in the associated with third- same quantity as their verified emissions; party trading platform n A deletion account and a cancellation account. This dis- tinction enables the following: if an operational error is made, for example an overissuance, units will be trans- n The exit account is a technical account that is credited ferred to the deletion account, whereas units canceled for any unit leaving the registry. This allows the registry to comply with the market mechanism regulation will to apply double-entry bookkeeping (the debit of an be transferred to the cancellation account; account transferring units to another registry is bal- n The risk buffer account is dedicated to managing risk anced by the credit to this technical account). through buffered units; 53 PART IV. IT System Procurement and Development Holding accounts required for compliance scheme surrender/compliance. The administrator can then run participants include: a “batch compliance” process and the required units are deducted/debited from the compliance account to n The auction delivery account is needed if the authority in the central surrender account (this is done across the charge of the market mechanism sells units; entire set of compliance entities for the period). The administrator can also run a “draft batch compliance” n The national/jurisdictional holding account is needed if to give an early indication of the state of compliance the market mechanism is established at the national/ across the scheme; jurisdictional level and requires national/jurisdictional holding of units; n The operator holding account is required for persons required or encouraged to adhere to the market n Whether a trading platform account is required depends mechanism; on whether a trading platform is in place, and how trades are to be settled within the registry (directly n The project proponent holding account is needed for on the market participant accounts or on the trading project developers receiving credits issued based on platform account, ensuring opaque counterparts, and project verification reports. to be followed by an end-of-day net clearing among the participants’ registry accounts); Holding accounts for those who participate voluntari- ly in the system (e.g., intermediaries) include: n The compliance account (e.g., US EPA systems, as well as RGGI) is held by the account holder (with a compli- n The natural person holding account is for natural per- ance obligation). By transferring units to their “compli- sons, as required; ance account,” account holders still hold these units but send the signal that these units are available for FIGURE 10: Generic Chart of Accounts for a Registry Technical Accounts Scheme’s Holding Accounts Voluntary Participants’ Accounts Auction Delivery Pooled Buffer Account Account -Q National Person Issuance Account Holding Account Holding Account Trading Platform Deletion Account Holding Account Operator Cancellation Account Holding Account Trading Account Project Proponent Surrendering Account Exit Account Holding Account Note: The black circle marked “-Q” represents the structurally in-debit technical account that is debited in quantity (without serial number) on each issuance. 54 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration n The trading account is specifically for brokers and other ited to an account (including at issuance) must have a market intermediaries. counterpart debit in another account. Notes: 3.3.7. Accounting models n Holders of “operator accounts” may also wish to open a For the chart of accounts presented in Figure 10, the corre- trading account; sponding accounting models for the main types of trans- actions that a domestic registry must manage (excluding n It may be necessary to determine whether it is appro- transfers between registries) are illustrated in Figure 11. priate to allow accounts to be opened for natural persons. In a relatively complex and financially risky Each transaction within the registry debits an account and mechanism, it may be difficult to make sure that natural credits another account. It is recommended that restrictions persons are fully aware of the rules and risks related to be implemented regarding account type debited or cred- trading. It may also be difficult for the registry admin- ited. Appendix C details the accounts eligible for debit and istrator to assess the reliability of a natural person (as credit for each type of transaction. compared to the ways and means available to assess the reliability of a legal entity with public records). 3.3.8. Data related to accounts and units n The black circle marked “-Q” represents the structurally Type of holding in-debit technical account that is debited in quantity The type of holding characterizes each account, and can (without serial number) on each issuance. Indeed, a take two forms: holding for own use (proprietary trading) registry uses double-entry bookkeeping because it is a or holding for a third party. In the case of units held for generally accepted accounting principle: any unit cred- own use, the account holder declares himself the beneficial owner of any transaction on the account. Where an account FIGURE 11: Accounting Models for Key Transactions Technical Accounts Compliance Holding Accounts Clients’ Account Auction Delivery Pooled Buffer Account Account Auctioning -Q Issuance + Provision National Person Issuance Account Holding Account Holding Account Trading Platform Deletion Account Holding Account Operator Cancellation Account Holding Account Trading Account Cancellation or retirement Internal Transfer Project Proponent Surrendering Account Exit Account Holding Account Note: The black circle marked “-Q” represents the structurally in-debit technical account that is debited in quantity (without serial number) on each issuance. 55 PART IV. IT System Procurement and Development is held for a third party, the account holder declares that n User’s choice: the user chooses the serial numbers all transactions are carried out on behalf of a third-party for the transaction. The user can select a rule (FIFO or “beneficial owner.” LIFO) for the selection process or choose individual serial numbers. Serial numbers Notes: Serial numbers are managed by blocks of consecutive num- n The registry allows the user entering a transaction to bers (e.g., the block 501–1,500 is a block made up of 1,000 select a given project, a given label, or a specific vintage similar units, of the same type label, vintage, and project). or year of issuance associated with the units involved in However, a transaction can break up this block, for instance, the transaction (e.g., transfer or cancellation). The FIFO/ if a block of 500 units is to be debited from the account that LIFO rule then applies. holds the block 501 to 1,500 (T a able 15). n Over time, large unit blocks can be broken down to The registry archives the history of breakup of blocks of progressively smaller and smaller blocks, creating a serial numbers. This allows an audit or, in the case of a higher and higher total number of blocks. This has reconciliation error, a serial number to be traced back to its the potential to lead to performance issues if a given original block. transaction includes large amounts of blocks (e.g., thou- sands of blocks). In order to mitigate this performance Label risk, transactions can be designed in a way that they automatically select blocks that minimize the number of The label represents a quality certificate that could be asso- block splits required. ciated with a serial number. The CCBA (Climate, Community & Biodiversity Alliance) and Social Carbon are examples of labels that can be borne by carbon credits. 3.4. Standardized nomenclatures and values FIFO, LIFO, or “undetermined” As described earlier, there is a need to list data and orga- When a transaction debits an account within a range of nize those data based on the relationship between them. serial numbers, the registry must select serial numbers to In addition, for some data it may be necessary to specify be taken from the block of available serial numbers. eligible values (e.g., by limiting “transaction type” to a few eligible values such as “issuance” and “allocation”). Several options are possible: Bearing in mind the aim of connecting together registries n LIFO: Last in First Out. The serial numbers to be deb- in the future, it is recommended that the DES and their ited first are the latest, by date, to have been added to nomenclatures and lists of values, in accordance with the account. To choose between serial numbers cred- annexes F and G in the November 2013 version of the ited on the same date, a second criterion is required DES,53 be adhered to from the start. (for example, serial number); n FIFO: First In First Out. The serial numbers to be deb- ited first are those that were first added to the account, by date. To choose between serial numbers credited on the same date, a second criterion is required (for 53 Available at http://unfccc.int/files/kyoto_protocol/registry_systems/itl/ application/pdf/data_exchange_standards_for_registry_systems_under_ example, serial number); the_kyoto_protocol.pdf. TABLE 15: Management of Blocks of Serial Numbers Transferor Account Beneficiary Account Debit Credit Debit Credit Block of serial numbers before transfer 501–1,500 Accounting model of a transfer of 500 units 500 500 Account balance after transfer 501–1,000 1001–1,500 Note: Underlying assumption is LIFO (= Last In First Out). 56 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration Note: Where the DES does not provide a value for a given TABLE 16: List of Nomenclatures and Codes type of transaction, it is recommended to “subtype” an Reserved by the DES already existing (i.e., listed) type of transaction. Reference to DES Reserved Table 16 lists the main nomenclature and codes that have the DES Code values been standardized by the DES. Annex G, fig. 1 Type of account Discrete values between 100 and 3.5. Potential requirements to update 423 DES reference nomenclatures based Annex G, fig. 3 Guarantee period 0 to 4 on registry developments Annex G, fig. 4 LULUCF activity 1 to 7 Whether connecting to the ITL in the future or not, market Annex G, fig. 5 Notification status 1 to 3 mechanisms may choose to use the DES, an existing stan- dardized communication protocol to exchange information Annex G, fig. 6 Type of notification 1 to 11 between registries (see page 30, particularly footnote 6, for Annex G, fig. 7 Participant status 1; 2 more information). Annex G, fig. 8 Reconciliation status 0 to 11; 98; 99 Procedures could be implemented at the UNFCCC level, Annex G, fig. 9 Transaction status 1 to 16 enabling authorities in charge of market mechanisms to Annex G, fig.10 Transaction type 1 to 10 reserve and share supplemental reference values for codes and nomenclatures laid out by the DES (even to create new Annex G, fig.11 Type of unit 1 to 7 reference nomenclatures, e.g., for labels). This would be Note: DES = Data Exchange Standards; LULUCF = Land Use, Land-Use particularly useful where subtyping of existing nomenclature Change and Forestry. is not enough to address a mechanism’s connectivity needs. Table 17 gives several examples. Specific requirements of a given market mechanism may make it necessary to specify other types of transactions 3.6. Transactions to be managed by a and/or alternate workflows, which can be specified by the Registry cloning and adaptation of those suggested below. The life cycle of a unit is often determined by three main stages: 3.7. Issuance without provision for risk n Its initial creation (issuance); Units are issued in accordance with applicable rules and under the responsibility of the registry administrator. Some n Transfer of ownership (allocation, auction, transfer) examples are the issuance of quotas in accordance with a or even intermediate transformation (such as adding commitment to cap GHG emissions; and the issuance of a label, conversion from one unit type to another, or credits in accordance with the procedure in force and con- change of expiry date in the case of temporary units sistent with the project’s verification reports. such as tCERs and lCERs54); 3.7.1. Accounting for unit issuance n Irrevocable unit’s “end of life” (e.g., cancellation, surren- Issuances may be initiated by a manual instruction (e.g., der, deletion, restitution, or retirement). receiving a verification report for a project) or by an import- The registry offers different transactions for accounting ed file handled automatically (e.g., for an ETS, the validation and recordkeeping at each of these stages, serial number of an “allocation table” that determines the amount of quota by serial number. For each transaction described below, a each compliance participant will receive). workflow is suggested as well as an accounting model, and a The registry will credit the units on the beneficiary account, summary diagram of status changes presented. unless the account’s status precludes the registry from doing so (e.g., if the account status is “blocked” or “closed”). n At issuance, the units are created in the registry with a unique serial number; in the case of Kyoto units, 54 tCER (temporary CER), a CER issued for an afforestation or reforestation uniqueness is defined by the combination of the origi- project activity under the CDM, which expires at the end of the commitment period following the one during which it was issued; ICER nating Party and the serial number (in the case of CERs, (long-term CER), a CER issued for an afforestation or reforestation project activity which expires at the end of its crediting period. 57 PART IV. IT System Procurement and Development TABLE 17: DES Reference Nomenclature Updates Where in the Reserved DES Code values Example of new values that may be required Annex G, fig. 1 Type of account 100... 423 • Risk buffer account • Project proponent account • Surrendering account (by liable parties) • Nostro account • Vostro account Annex G, fig. 4 LULUCF activity 1 to 7 • Types used by REDD+, by voluntary standards, and by market mechanisms Annex G, fig. 5 Notification status 1 to 3 • No requirements identified Annex G, fig. 6 Type of notification 1 to 11 • Question not asked Annex G, fig. 7 Participant status 1; 2 • Source registry (for the case of a transfer between Nostro/Vostro non-emitting [accounting] registries) Annex G, fig. 8 Reconciliation status 0 to 11; 98; 99 • Question not asked Annex G, fig. 9 Transaction status 1 to 16 • Question not asked Annex G, fig.10 Transaction type 1 to 10 • No requirement identified if the risk buffer account has its own type. Otherwise, requirement for a dedicated type of transaction for buf- fer provision and buffer release Annex G, fig.11 Type of unit 1 to 7 • Types of units of voluntary standards and of each new market mechanism Note: DES = Data Exchange Standards; LULUCF = Land Use, Land-Use Change and Forestry; REDD+ = REDD plus Conservation, Sustainable Management of Forests, and Enhancement of Forest Carbon Stocks. the originating Party is the project host Party); in the 3.7.2. Issuance statuses and status changes case of credit issuance: The registry keeps an audit trail of statuses and status changes of all issuances. The diagram presented in Figure „ A permanent link associates each unit created with 13 shows the changes in status for an issuance according to the initiating project. This link is created by combin- the workflow proposed above. ing the project identifier and the respective units’ serial numbers; 3.7.3. Options and variants Possible security measures related to the instruction of an „ A quality label (e.g., CCBA, Social Carbon) may be issuance: associated with the units issued; n The issuance is the responsibility of the registry n The units may be associated with one or more specific administrator. Therefore, the above workflow assumes periods: vintage of emission reductions (as is the case that it is not necessary to provide the same level of under the VCS), year of credits’ issuance (as is the case security and cancellation period as for transfers, but for credits issued under the CDM), commitment period other choices are possible. Notably, the same workflow at the time of issuance, applicable commitment period and timescale may apply to all transactions, issuances limiting the eligibility of units used for compliance included. purposes; n Similarly, it is deemed unnecessary to require that reg- n The registry automatically notifies the users associated istry administration staff confirm their passwords and with the beneficiary account. data entry (by SMS), for security purposes. Table 18 represents the accounting model for an issuance. n An alternative to these security measures would be For the workflow involved in an issuance, see appendix D. to assign a third user over and above the first two to check the issuance. 58 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration issued in his favor and reduces the adverse conse- FIGURE 12: Issuance—Transaction Status and Status quences of operational error. Changes Step 1 Step 3.A 3.8. Issuance with risk buffer Instructed Terminated Certain standards manage the risk of non-permanent ERs in agricultural and forestry sectors by withholding credits on a Step 3.B dedicated account. Validated At each issuance, up to four operations may need to be accounted for: Step 4 n The units issued to the project proponent; Proposed n The units issued to a risk buffer account. The buffer Step 5.A account may be common to all projects or one man- Rejected aged specifically for a set of projects, for a sector, or for Step 5.B a country/jurisdiction; Cancelled Step 5.C n Under certain conditions, a release of buffer units (buffered at former issuances), to be accounted for as Completed credits to the project proponent’s account; n Another option is to issue all project units to the buffer account to make sure that the required buffer is in place before issuing units to beneficiary accounts. Measures to ensure the responsibility of the beneficiary: The verification report provides the quantities concerned n The registry can automatically notify the beneficiaries of for each operation: an issuance. This notification can be delivered by e-mail or “out of band,” via SMS, for additional security. n “q” is the quantity to credit to the beneficiary account; n Explicit validation may be required by the beneficiary. n “b” is the quantity to buffer; and After a certain time lapse, an issuance not explicitly vali- dated by the beneficiary can be automatically validated n “r” is the quantity to release from the buffer account (or rejected, but the risk is that the registry administra- and to credit to the beneficiary account (r can be zero). tor may have to reenter issuances). n The GHG emissions avoided/sequestered during the n These nonexclusive measures ensure that the ben- verification period triggering the issuance amount to “q eficiary takes responsibility for the reception of units + b” tCO2eq. TABLE 18: Issuance Accounting Model “-Q” Account Beneficiary account Debit Credit Debit Credit Account balance before transfer Quantity Q2 T/P/L/t Accounting model for issuance of “q” units of type “T” Quantity: q Quantity: q Account balance after transfer Quantity: Q2+q T/P/L/t Note: T/P/L/t represent characteristics of the unit; T = type; P = Project; L =Label; and t = validity period or vintage. 59 PART IV. IT System Procurement and Development TABLE 19: Accounting for Unit Buffers “-Q” Account Buffer account Debit Credit Debit Credit Account balance before transfer Quantity Q2 of T/P/L/t Accounting model for issuance of “q” units of type “T” Quantity: q Quantity: q Account balance after transfer Quantity: Q2 + q of T/P/L/t Note: T/P/L/t represent characteristics of the unit; T = type; P = Project; L =Label; and t = validity period or vintage. The registry creates a link between these operations. All of have been proposed be issued to the beneficiary account. these operations link to the same project and to the same Such an alternate approach is similar to how the DES 2.0 verification report, and all credits and debits to the buffer proposes managing the 2 percent share of the proceeds account are linked to the issuance. requirement. 3.8.1. Issuance of “q” units credited to the 3.8.5. Allocation project proponent account Allocation is specific to ETSs: this operation transfers entitle- The accounting model and workflow for issuance of credits ments to emit GHGs (i.e., GHG allowances to a list of compli- are identical to those described above for issuance transac- ance participants committed to comply with the ETS regula- tions without a risk buffer. tion adopted. Therefore, allocation will occur after issuance and consist of a “batch” of internal transfers debiting the 3.8.2. Issuance of “b” buffer credits to a risk account of the authority in charge of the market mechanism buffer account (or the regulator) and crediting installations. Table 19 represents the accounting model for “crediting” a risk buffer account. The transaction is very similar to an issuance, but credits a “technical” (risk buffer) account. FIGURE 13: Issuance of Buffer Credits—Transaction Appendix E presents the workflow involved in crediting a Statuses and Status Changes risk buffer account. Step 1 Step 3.A 3.8.3. Transaction statuses and status changes Instructed Terminated The registry keeps the history of the statuses and status changes of each transaction in the audit trail. Figure 13 Step 3.B shows these status changes in the case of issuance of buf- fer credit based on the workflow presented in appendix E. Validated 3.8.4. Release of “r” buffer credits Step 4 The risk buffer release transaction is an internal transfer, Proposed initiated by the registry administrator debiting the buffer account and crediting the project proponent account. The Step 5.A workflow is that of an internal transfer. The corresponding Rejected accounting model is presented in Figure 14. Step 5.B Cancelled It should be noted that another approach is to issue units Step 5.C first to a buffer account and then to the beneficiary account, Completed with additional checks to ensure that the project has suf- ficient units in the buffer account to cover the units that 60 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration FIGURE 14: Accounting for Risk Buffer Release Buffer account Beneficiary account Debit Credit Debit Credit Account balance before transfer Quantity: Q1 Quantity Q2 T/P/L/t Accounting model: release of risk buffer of “r” units Quantity r Quantity r Account balance after transfer Quantity: Q1-r Quantity: Q2+r (unchanged) T/P/L/t Note: T/P/L/t = characteristics of the unit; T = type; P = Project; L = Label; t = validity period or vintage. Handling allocation manually may be an issue if a lot of In accounting terms, an internal transfer subtracts a certain installations have to be credited in a limited time frame. To quantity of units from the inventory of the transferor’s deal with such a situation, two options are available: account to add the same quantity to the inventory of the transferee’s account. The transferred units retain their n The registry can propose a dedicated function, allocat- unique serial number, and the registry automatically noti- ing units based on an imported “allocation table;” fies the authorized users linked to both accounts. Table 20 shows the accounting model for an internal transfer. n Allocation can be accounted immediately, without requesting beneficiaries to explicitly accept allocated Appendix F proposes a workflow for internal transfers. The units first, thus reducing the risk of automatic rejection optional security measures proposed and their variants are because of late approval. subsequently discussed. 3.9. Internal transfers 3.9.2. Transaction statuses and status changes 3.9.1. Accounting for internal transfers The registry stores the history of the statuses and status Internal transfers involve two account holders: the transfer- changes of each transaction in the audit trail. Figure 15 or and the transferee. Upon request of the transferor, the shows these status changes for an internal transfer based registry transfers a certain quantity of units from its account on the workflow proposed in appendix F. to that of the transferee, unless the account status of the transferor or the account status of the transferee is incom- patible with such transfer (blocked or closed accounts). TABLE 20: Accounting for Internal Transfers Transferor’s account Transferee’s account Debit Credit Debit Credit Inventory of the account before the transfer Quantity: Q1 Quantity: Q2 Unit type: T Unit type: T Accounting scheme for the transfer of “q” units of “T” Quantity: q Quantity: q type Unit type: T Unit type: T Serial numbers: Serial numbers: from x to y from x to y Inventory of the account after the transfer Quantity: Q1-q Quantity: Q2+q Unit type: T Unit type: T Note: T/P/L/t = characteristics of the unit; T = type; P = Project; L = Label; t = validity period or vintage. 61 PART IV. IT System Procurement and Development n An explicit approval by the transferee may also be FIGURE 15: Internal Transfer—Transaction Statuses required for any transfer. After a certain time lapse, a and Status Changes transfer received but not expressly approved by the transferee may be automatically approved or rejected, Step 1 Step 3.A Instructed Cancelled depending on the design chosen by the designers of the registry’s computer system. These measures, which are not mutually exclusive, not only Step 3.B Step 4 serve to enhance system security, but also explicitly engage Validated the responsibility of the transferor and the beneficiary in recognition of an internal transfer. By doing so, the out- comes expected are to protect “good faith buyers” against the risk of claims being made against them for units they Step 5 hold, and to reinforce the reliability of the registry as a proof Step 6.A / 6.B Proposed Terminated of ownership of units. 3.10. External transfers An external transfer is an operation initiated by the trans- Step 7 feror, to transfer units to a third party (the transferee), Completed whose account is held in another registry. In the simplest case, both accounts are open and the transfer is accounted for. However, at the time the transfer is initiated, the trans- 3.9.3. Options and variants ferring registry has no knowledge of the existence, or the A transferor’s security and accountability measures can status, of the transferee’s account in the receiving registry. include: Therefore, a dialogue is required between registries for the completion of the transfer in both registries. n Prior to debiting the transferor’s account, various security measures may be considered to limit the risk An external transfer deducts units from the balance of the of mistaken or fraudulent transfers. transferor’s account in order to add the same quantity to the balance of the transferee’s account held in the receiv- n These can range from an “out of band” notification (by ing registry. The units transferred retain their unique serial sending an SMS) to the requirement of an explicit con- number. Each registry automatically notifies the authorized firmation. The latter may involve reentering the user’s users linked to the account it manages. password, approval by an authorized representative— other than the one who instructed the internal transfer Two different IT architectures may be used to link registries: (the four-eye principle)—or entry of a confirmation (i) each registry is linked to every other registry (peer-to- code from a security token or sent automatically by the peer, as was initially the case of the VCS registry system) and registry by SMS to one of the authorized representa- (ii) each registry is linked to a central communication hub (as tives associated with the transferor’s account. is the case via the ITL for Kyoto Protocol national registries, and via the European Union Transaction Log for EU ETS Other options, prior to notifying the transferee, include: registries). More details are presented in Table 11. n Automatic cancellation of any internal transfer entered Only the central hub approach will be referred to in the next but not approved, after a defined time lapse; section. n A cancellation period offered to the transferor’s autho- 3.10.1. Accounting for external transfers made rized representatives; through a central hub When a central hub is in place, each registry communicates Transferee accountability measures include: with the hub and no registries are in direct communication n The registry may automatically notify the transferee of with another registry. Table 21 represents the accounting any internal transfer credited to one of its accounts. model for such an external transfer. These notifications can be issued by email, or “out of band” via SMS for enhanced security; 62 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration TABLE 21: Accounting for External Transfers Transferring registry Receiving registry Transferor account Account of the transferee Debit Credit Debit Credit Account balance before transfer Quantity Q1 Quantity Q2 T/P/L/t T/P/L/t Accounting model of a transfer of “q” units of type “T” Quantity: q Quantity: q T/P/L/t T/P/L/t Serial numbers: Serial numbers: from x to y from x to y Account balance after transfer Quantity: Q1-q Quantity: Q2+q T/P/L/t T/P/L/t Note: T/P/L/t = characteristics of the unit; T = type; P = Project; L = Label; t = validity period or vintage. Once the transfer is completed, the units associated with 3.10.3. Options and variants the serial numbers transferred are no longer held in the n Possible security measures and responsibilities of the transferring registry, but in the receiving registry. transferor: The diagram shown in appendix G proposes a workflow for „ Before debiting the transferor’s account, various external transfers. security measures can be implemented to limit the risk of operational error or fraud. These measures 3.10.2. Statuses and status changes in case of an can vary from a simple “out of band” notification external transfer (sending an SMS) to an explicit confirmation. The The registry keeps an audit trail of the statuses and status latter may involve reentering the password, valida- changes of all transactions. Figure 16 shows the status tion by an authorized representative distinct from changes for an external transfer according to the workflow the initiator of the internal transfer (four-eyes), proposed in appendix G. or entering a confirmation code received by SMS or a security token by one of the authorized representatives. FIGURE 16: External Transfer—Transaction Status and Status Changes n Other options can be implemented before the transfer is proposed to the receiving registry: Step 1 Step 3.A Instructed Terminated „ Automatic cancellation of any internal transfer entered but not validated before a certain configu- Step 3.B rable time lapse; Validated „ Retraction period offered to the authorized rep- resentatives of the transferor’s account prior to Step 4 proposing the transfer to the receiving registry. Proposed n Measures to ensure accountability of the beneficiary: Step 5.A „ The registry can automatically notify the transferee Rejected of any transfer credited to one of his accounts. Step 5.B These notifications can be effected by e-mail or Cancelled “out of band” via SMS, for increased security. Step 5.C Completed „ Moreover, an explicit validation by the transferee can be requested for any transfer. Or, after a cer- 63 PART IV. IT System Procurement and Development tain time lapse, a transfer received but not explic- Opening different types of cancellation accounts allows for itly validated by the transferee can be automatically clearer accounting of different cancellation motives (volun- rejected. tary cancellation, cancellation in accordance with regulation, cancellation following operational errors). „ A pre-approved remote account list can also be implemented at the account level (by transferring Once completed, a cancellation is definitive and irrevers- account) or at the registry level. ible: canceled units and their serial numbers can no longer change accounts. Canceled units retain their unique serial As above, these measures are not only designed to rein- number. The registry automatically notifies authorized users force the security of the system, but also to reinforce and linked to the transferor’s account. Table 22 presents the make explicit the responsibility of both the transferor and accounting model for a cancellation. the transferee in the completion of transfers. 3.11. Cancellation Cancellation, in the wider sense, represents the last stage in the life cycle of a unit. The triggering event may be a manual FIGURE 17: Cancellation—Transaction Status and instruction to cancel (or delete, withdraw, retire, surrender, Status Changes restitute…) units, initiated by an authorized representative to comply with the regulation (surrender units against veri- Step 1 Step 3.A fied emissions) or for voluntary offset, or a request from an Instructed Terminated authority (e.g., following the detection of overissuance). The triggering event may also be a planned event, such as the Step 3.B automatic cancellation of temporary or out-of-date units. Step 4 Validated 3.11.1. Accounting for unit cancellation The cancellation will involve only one account holder: the Step 5 transferor, the owner of the units to cancel. The registry Proposed allows the user to choose the units to cancel, by select- ing the type of unit, the project, the label, and the period. The registry debits a quantity of units from the transferor’s account, unless the status of the account prohibits this (e.g., account blocked or closed), and credits these units to the cancellation account, specific to various types of Step 6 cancellation. Completed TABLE 22: Accounting Model for a Cancellation Transferor account Cancellation account Debit Credit Debit Credit Account balance before transfer Quantity Q1 Quantity Q2 Type of unit: T T/P/L/t Accounting model for cancellation of “q” units of type Quantity: q Quantity: q “T” Unit type: T Unit type: T Serial numbers: Serial numbers: from x to y from x to y Account balance after transfer Quantity: Q1-q Quantity: Q2+q Unit type: T T/P/L/t Note: T/P/L/t = characteristics of the unit; T = type; P = Project; L = Label; t = validity period or vintage. 64 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration The diagram shown in appendix H proposes a workflow for Closure is permanent (no account may be opened in the a cancellation, including optional security measures. These future using the same account identifier as a formerly options and their variants are subsequently discussed. closed account). 3.11.2. Statuses and status changes in case of a An account may show the following statuses: open, blocked, cancellation or closed (Figure 18). In the case of an ETS, the status The registry keeps an audit trail of statuses and status “excluded” can also be used, which embodies an account changes of all transactions. Figure 17 shows the status initially—but no longer—committed to regulatory compli- changes for a cancellation according to the workflow pro- ance obligations. By way of example, a market compliance posed in appendix H. participant suffering from a significant economic downturn shows GHG emission levels dropping below the regulatory 3.11.3. Options and variants threshold for being obliged to participate in the market Possible security measures and responsibilities of the mechanism. The account would remain open, but is no transferor: longer subject to compliance calculations. n Security measures can vary from a simple notification A blocked account can no longer carry out operations, by e-mail or “out of band” (by sending an SMS) to the except when depending on regulation in force, to comply requirement of an explicit additional confirmation such with regulatory obligations. A closed account can no longer as reentering a password, validation by an authorized be debited or credited, shows a zero balance, and cannot representative distinct from the initiator of the cancel- be reopened. lation (four-eye principle), or entering a confirmation code received by SMS or a security token by one of the 3.12.2. User management authorized representatives. Registry users are natural persons who represent the account holder and are authorized to carry out transactions Automatic termination of any transaction entered but not on the account. These “authorized representatives” have validated after a certain configurable time lapse can also be authorization profiles that give them more extensive or implemented. fewer rights on a given account such as: n Read only; 3.12. Administrative events The registry offers several non-accounting functions to n Consultation and entering transactions; or manage administrative events. These functions are made available only to users in charge of registry administration. n Consultation, entering, and validating transactions. The following sections propose functional specifications for The registry administrator, subsequent to document control generic administrative events required in any registry to be (“KYC checks”), may attribute an authorization profile to a adapted to any specific circumstances. user. Within the scope of the periodical review of user docu- mentation, the registry administrator will update informa- 3.12.1. Managing accounts tion relative to authorized representatives, including their The registry administrator can open (or refuse to open) profile and the list of accounts to which they are attached. an account, modify the status of an account, authorize or revoke user account authorization, and close an account. It should be noted that certain users may be mandated to manage the accounts of several account holders and may have different privileges for each account. The registry FIGURE 18: Account Statuses and Change of Status will therefore manage multiple authorizations for a single authenticated user. Blocked 3.12.3. Management of GHG verified emissions Open In the case of an ETS, the registry administrator receives and enters manually (or imports by file) the verified emis- sions of each compliance market participant. The registry Excluded is therefore able to compare the verified emissions of a compliance market participant with the amount of units sur- Closed rendered for the same year, and thus can: 65 PART IV. IT System Procurement and Development n Produce a conformity report for each compliance par- 3.14. Main reports produced by the ticipant (“compliance figures”); registry n Produce a report of compliant and noncompliant partic- The registry should generate a set of reports for users, and ipants with the compliance shortfall (for the latter); and provide the registry administrator with a catalogue of ad hoc, predefined, and/or configurable queries. n Alert the relevant authorized representatives (users) of the compliance participant during surrender transac- If the registry is to be developed from scratch, the reports tion entry, in the case of either a shortfall or an excess have to be specified in a very detailed manner. An example in surrendered units. of such a specification for registry reports can be found in UNFCCC Conference of the Parties (COP) decision 13/ 3.12.4. Management of allocation tables CMP.156 In the case of an ETS, the registry administrator can enter or import a file, listing the quotas to be allocated to each instal- 3.14.1. Reports to account holders lation (to be credited to each installation’s account). The (nonmodifiable) registry offers a function that enables entry or import of this The following reports can be generated: “allocation table.” The registry may also, upon instruction n Transaction notification: made available to users received from the regulator, execute an allocation process authorized on both accounts affected by the transac- that consists of a set of internal transfers debiting the issu- tion. It shows the characteristics of the transaction ance account and crediting installations’ accounts. reported (date, amount, accounts, unit types, and serial numbers); 3.13. Traceability: audit logs, notifications, and messages n Account balance on date: shows the balance of an account, split by unit type; The registry must retain, with no time limit, all transactions 55 and administrative events executed, with all their character- n History of “end of month” account balances istics, at each stage of the workflow. In particular, records between two dates: shows a table listing balances by will be kept for the following data: who entered them and at unit type, on a given account; what time, who validated them, values, notifications issued, and whom these notifications were sent to and through n History of transactions between two dates: shows which media. Some particularly sensitive data require the a table listing all transactions completed on a given archival of value change history, the date of each value account; change, the identity of each user who made a change, and the previous value. n Transaction status change history: shows a table listing all status changes for a given transaction. This applies in particular to the following: 3.14.2. Library of predefined queries n Verified emissions of an installation and, more gener- The registry administrator may filter the database using ally, the level of obligation of a compliance participant queries. These queries should be developed in such a or a liable party (in the case of an ETS); way that the registry administrator does not require the intervention of IT personnel. Queries can be run on a copy n Account status and account balances; of the database, so that the registry IT performances will n The status of transactions; not be altered. To that end, a library of queries could be developed, each with its title, delivery dates, and a comment n The type of account; that describes the result. The result of the query is generally downloadable in CSV format. n The user authorization profile associated with each account to which the user is authorized. Some of the common queries that should be developed are the following: More in general, the registry update logs, which record all processes executed and all data changes. 56 See UNFCCC website: http://unfccc.int/resource/docs/2005/cmp1/ 55 Unless otherwise specified by regulations in force. eng/08a02.pdf#page=23. 66 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration n List of users and all their attributes: identifier, title, 4.1. Technical requirements name, first name, address, login, cell phone number, 4.1.1. Location of registry data hosting e-mail, fax number, identifier and title of authorization The contact person responsible for service and data hosting profile, and identifier and business name of employer. and for the designation of the domain name (the contract n List of accounts and all their attributes: identifier, des- holder, the competent authority, or another entity) should ignation, type of account, status of accounts, identifier be specified. Restrictions on the location of data centers and business name of account holder, identifier and and the conditions required to change the data center dur- business name of lead manager, identifier and business ing the life of the contract should be detailed. name of the authorized representative, identifier, name and first name of each user, user rights on the account 4.1.2. Online access to registry services (RAA, RA, Auditor), and account balance on query date All users must be able to securely access the registry by for each delivery year. Internet. To ensure access to the registry is duly protected and reserved to authorized users, specific requirements n List of account holders and all their attributes: identi- may be implemented such as the requirement to secure fier, identifier of contract with registry administrator, https protocol on port 443 (with robust encryption algo- contract date of effect, contract end date, login, and rithms: SSLv3/TLSv1 mandatory) and mandatory strong account holder business name. authentication for all users. n List of blocks of serial numbers held by year of issu- Other measures may be required, such as limiting access to ance, site, credit account on which the blocks are held the registry to access via a standard Internet browser (i.e., on the query date, label, vintage or year of issuance, a “thin client”). In this case, clarifying which versions of the and type of unit. main internet navigators must be fully supported by the reg- istry may prove useful in limiting the scope of maintenance n Unit block history query. For an input unit serial and testing. number (or range), show the full history of the unit block from issuance through current time. To ensure compatibility of the registry provided by the con- tract holder, the computing environment for access to the n List of transactions with all attributes, notably those registry by the registry administrator should be described, reported on the transaction notification. including the following details: n Configuration tables: table of correspondence n Type of workstation and operating system (OS); between functions and profiles; and list of accounting schemes by type of operation and all other exports of n Browser(s) used IT tables. n Notification period required by the contract holder before any change is made to this environment; 4. Technical Specifications n Mode of access to the Internet: network and security This chapter refers to the contract holder and the com- equipment, mandatory servers (proxies); petent authority. The “contract holder” is defined as the supplier appointed to provide registry services. The “compe- n Requirements for functional tests of user technologies tent authority” is defined as the entity contracting with the in the registry environment. “contract holder” (e.g., the regulator or the registry adminis- Depending on the competent authority’s specific require- trator). ments, including requirements derived from the regulation The chapter may be used as a technical guide—it gives or from the IT security strategy, certain technologies may be instructions for specifying security, performance, and other banned; these should be listed explicitly. For example, regis- technical IT requirements. However, it is assumed that each tries requiring or using the following technologies might not competent authority will adapt the following proposals to fit be accepted:  their specific regulation, IT security strategy requirements, n Installation and configuration of software on the work- and other specificities. station; The security measures applied to production data similarly n Specific user rights on a workstation (e.g., administrator apply to archived data. rights); 67 PART IV. IT System Procurement and Development n Runtime execution environment such as Java (JRE: „ Synchronization of data in real-time and the guar- Java Runtime Environment), applets, ActiveX, “plug-ins” antee that no information will be lost in the case of (Flash/Flex), with the exception of plug-ins for format- failure of the main hosted site; ting and printing documents (such as Acrobat Reader); „ A test of the registry backup, before commission- n Personal Homepage Tools (PHP tools). ing the registry, with a test report submitted to the competent authority. Finally, whether access from mobile devices is required or accepted should be specified. 4.1.5. Registry launch phase The tests required for commissioning the registry should 4.1.3. Documentation be specified in detail, as well as the timescale required to Obligations should be imposed on the contract holder correct any defects detected, against the general functional regarding the frequency with which documentation is specifications. updated with the competent authority. Key documentation includes architecture documentation and production docu- The warranty period after commissioning (launching) of the mentation, which cover all hosting solutions. registry, during which defects will be corrected, should also be specified. The architecture documentation describes the computing hardware, the software used and its versions, data flows 4.1.6. Registry availability and volumes, implemented redundancy, and the environ- The following aspects regarding the registry’s availability ment and hosting infrastructure that achieve the levels of should be clarified: service expected. It should also describe the mechanisms implemented to guarantee AICT (Availability, Integrity, Confi- n The working hours during which the registry will be dentiality, Traceability) service levels and all security require- available to users; distinguish access by the registry ments, including compliance with an industry security administrator from that of other users, as necessary. standard (e.g., ISO 2700x). Determine if releases of functionalities will occur during or outside these working hours; The production documentation describes backup plans, data purging and archiving processes, monitoring and internal n The notification period for any requests for availability escalation of incidents, and escalation procedures to the outside these working hours; competent authority in case of crisis. n The conditions that the registry must adhere to, to be 4.1.4. Environment and production considered effectively available; implementation process n The effective availability rate required for the registry, The following procedures are recommended at this stage: detailing the formula used to calculate this service level n Detail expectations regarding accesses to the various indicator; computing environments required: training environ- n The Maximum Tolerable Period of Disruption (MTPOD) ment, test environment, preproduction environment, during working hours, in number of consecutive hours. and production environment. The reliability of the registry requires that the Recovery n Stipulate that any IT release must pass through the test Point Objective (Maximum Acceptable Data Loss rate) be environment and requires prior, explicit approval from equal to zero. the application owner, to move into production. n Stipulate whether “volume tests” (i.e., benchmark) are 4.1.7. Data archiving required with real-life data. Where real-life data are Detailed rules should be specified for online accessing of required, it is advisable to clarify whether those data archive data by the registry administrator. should be encrypted. 4.1.8. Performance n Indicate whether a distinct backup site is required and, Performance requirements refer to data storage volume if so, clarify whether the following requirements should requirements, system access volume requirements, system be met: operation time frame requirements, and system reliability requirements: 68 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration n Data storage volume requirements refer to the TABLE 23: Procedures for Determining Performance required data storage capacity of the system; Requirements n System operation time frame requirements refer to Performance the required system response speed; requirement Performance requirement determination type procedure n System access volume requirements refer to the Data storage • Estimate the annual volume of data access volume requirement of the system; volume expected regarding: requirement n System reliability requirements refer to the reliability • Compliance and voluntary participants information; of the system. • Users information; Table 23 sets out in detail how to define the performance • Unit management (number of transac- requirements. tions, including all transaction types and number of units, including all unit In addition to those set out in Table 24, the following perfor- types); mance indicators should be defined: • Number of other operations to be managed each year such as compli- n Measured availability rate of registry functions; ance management by the registry administrator. n CPU usage rate; • Estimate the data volume of audit logs required to store the volumes mentioned n Number of inputs/outputs; above in the registry system. • Specify the amount of peaks in volume n Bandwidth used; of data expected within a year (e.g., peak in transaction volumes expected close n Memory capacity used; to regulatory issuance or retirement milestones). n Volumes and frequency of transactions, in a day and System access • Determine the peak user load or the over the course of a year; volume maximum concurrent user load, which requirements is directly related to the consumption of n Measure of average, minimum, and maximum response system resources: period of concern, total time over the period of the report. number of user sessions, and average length of user session. 4.1.9. Data exchange between the registry and System • Determine the response time required other information systems operation and the longest response time accepted, Information systems with which the registry will exchange response time under average system access volume for requirements transactions, administrative events, and data should be listed in the “preliminary considerations” parameterization and configuration func- section. Beyond preliminary considerations, the technical tions. specifications should further specify the format and com- System • Determine when the system must be munication protocol applicable to these data exchanges. reliability operating for the users’ access, and when requirements the system can be upgraded. If the registry exchanges files via the Internet, a file server should be used. Detailed requirements should be provided on data encryption of any data exchange, for example, the from the registry), these APIs should be explicitly defined. use of SFTP secure protocol (SSH File Transfer Protocol) and APIs may be used for: encryption and authentication for interconnected systems. n Transaction message data exchange; The security and confidentiality requirements applicable to the registry must also apply to the data exchange folders. n Reconciliation with transaction hub; Finally, the list of files exchanged with the registry must be included in monitoring reports produced by the contract n Receiving auction results or allocation plans; holder. n Synchronizing with IdAM (Identify and Access Manage- If the registry is expected to support application program- ment system)/SSO (Single Sign-On) for authentication; ming interfaces (APIs) for consumption by other systems (i.e., for either pushing data to the registry or querying data n Receive issuance instructions; 69 PART IV. IT System Procurement and Development n Receive/query project data; TABLE 24: Examples of Stakeholders’ Concerns n Receive/query emissions data; Stakeholders Examples of concerns Competent Actions taken by registry administrator n Any other defined query. authorities • Fraudulent activities, including theft of units; 4.2. Security requirements • Conflict of interests; The security requirements for a registry system can be • Operational errors. defined in three steps: (i) a risk analysis, (ii) the identification Usurpation of administrators’ identity: of security goals, and (iii) the formulation of security mea- • Fraudulent issuance or transfers (theft of sures. Risk analysis involves the identification of stakeholder units); concerns and the business, functional, and technical threats • User information theft; faced by each stakeholder. Security goal identification • Account information theft; involves evaluating threat severity and determining which threats can be handled within the registry system. Security • Compliance information theft; measures can be divided into application-level security mea- • Confidential information theft or disclo- sures and technical-level security measures. sure; • Key system information modified. A few typical stakeholder concerns are shown in Table 24 and possible threats are listed in Table 25. In addition, it is Others: highly recommended to consult and address the OWASP • Mismatch of accounting information between local registry and external regis- (Open Web Application Security Project) list of 10 Most Criti- tries; cal Web Application Security Risks.57 Examples of possible • Mismatch of accounting information security measures to address those threats are presented between local registry and third-party in Table 26. Figure 19 illustrates the possible configuration platforms; of a secured network. • System data losses. Market • Account representative operational errors. 4.2.1. Integrity and confidentiality of data participants The contract holder should be required to describe the • Account representative authentication information theft; computing and organizational facilities implemented to guarantee the integrity and confidentiality of data, the • Ditto competent authorities. protection against disclosure, and the unauthorized modification of data, notably between users and between applications hosted on the same server. The contract holder TABLE 25: Examples of Threats should also be prohibited from using client or user data for Threat type Threats any purpose other than those stipulated in the contract. In particular, data must not be transmitted to a third party for Application- • Social attack (denial-of-service attack); level threats commercial ends. • Deliberate fraud activities; • Operational errors; 4.2.2. Availability • Disasters. The contract holder must adopt elaborate measures to pro- tect against all types of denial-of-service (DOS) attacks. Technical- • Buffer overflow; level aspects • Malicious software; 4.2.3. Traceability • Brute force password cracking; In addition to the traceability requirements described • Network monitoring; above, the contract holder should be required to ensure the • SQL injection; traceability of all technical events such as: • Cross Site Scripting (XSS); n The connection and disconnection of technical • Cross Site Request Forgery (CSRF); accounts ( e.g., system accounts, application accounts, • Back doors; and administrative accounts); • System code theft attack; • Data file theft attack. 57 See https://www.owasp.org/index.php/Category:OWASP_Top_Ten_Project. 70 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration n Actions carried out through technical accounts; TABLE 26: Examples of Security Measures n All individual accesses to databases; Level at which security n Password changes on technical accounts; measures are applied Security measures n Creation, deletion, and modification of access rights to technical accounts. Application • Two-factor authentication; security • Four eyes principles; The length of time that these elements will be held in measures • E-mail notifications; archive by the contract holder should also be specified. • SMS/out-of-band notifications; • Trusted list of accounts; 4.2.4. Authentication Two authentication factors should be required: one related • Transfer time frame; to something that the user knows (password, secret ques- • Reverse operations; tion) and one related to something that the user pos- • Allowance allocation time frame; sesses (e.g., SMS, token, PKI certificate). Use of a password • Credit issuance time frame; update service should also be required. This service should • Verification code; allow users to request the reinitialization of their personal • Session time-out and password manage- password and immediately receive a request confirmation ment measures. e-mail. The e-mail will contain an unblocking code (or one- time password) that allows the user to choose a new pass- Technical • Https protocol; security word once he connects again. A password policy must also • Encrypted data transmissions between measures be established, requiring that the password chosen should system layers; not be easy to guess and should be changed frequently. • Multiple database access authorities; • Encrypted database authentication infor- 4.2.5. Management of security incidents mation; The contract holder should be required to implement • Stored procedure-based database access; security system and incident management procedures, • Parameterized SQL; including: • Encrypted database; n Detection of security alerts; • Divide the network into multiple zones; • Use VPN to control network access; n Keeping track of each incident until its effective closure; • Deploy modules of the system in servers of different zones in accordance with user n Implementing the recommendations made following a authorities; security incident; • Close unnecessary ports through hardware firewall and software firewall; n Informing immediately and coordinating with the com- petent authority, in the event of any major incident; • IP access control through hardware firewall and software firewall; n Supplying a monthly dashboard reporting security inci- • Use IDS and IPS; dents to the competent authority; • Use other network security hardware; • Use antivirus software; n Managing platform vulnerabilities and security patches made available by the software’s editors. • Port access control on switches; • Point-to-point network service; 4.2.6. Security audits • Hot backups; The contract holder should be required to describe the • Disaster recovery system. information system security strategy, such as the choice of standards adhered to, performance monitoring indicators, system availability, quality of service, and security architec- ture (e.g., firewalls, DMZ, application and data layer report- ing, VPN, WAN/LAN, and redundancy of critical services). 71 PART IV. IT System Procurement and Development FIGURE 19: Example of Secured Network Deployment Internet APM Network Vulnerability IDS Audit Scaner Fire Wall Web Server Anti-virus Getway Security Monitor IPS VPN Web Server Web Server Fire Wall Switch Fire Wall Switch Web Server Note: IPS = Intrusion Prevention System; VPS = Virtual Private Server; APM = Application Performance Management; IDS = Intrusion Detection System. The contract holder should authorize the competent Audits may include configuration audits, intrusion tests, authority to proceed with, or contract a third party to carry organizational audits, and physical audits on the service out, regular audits of the registry in order to: provider’s site. They should be carried out before the com- missioning of the registry to implement monitoring and n Ensure that practices adhere to the contract specifi- control processes. Security and penetration tests should cations and requirements of the general functional be performed before each production release of registry specifications; software. If releases are infrequent, security and penetra- tion tests should be performed on at least an annual basis n Ensure that the registry is not vulnerable to events that in recognition of the fact that security threats are constantly could affect the availability, integrity, confidentiality, and evolving. traceability of data; n Ensure that recommendations from previous audits have been correctly implemented. 72 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration 5. Detailed Guidance on Registry and required to clarify and stabilize requirements. Develop- ers meanwhile are responsible for producing detailed speci- Development from Scratch fications and prototypes of the registry, and for ultimate Developing a registry from scratch requires more knowl- registry delivery and maintenance. edge and experience with IT project management than other delivery models. This chapter provides further guid- The software should be designed in accordance with well- ance for competent authorities opting for development defined functional and technical specifications. The software from scratch. design can be based on a six-step approach, involving par- ticipation of the registry owners, IT consultants, and devel- Close cooperation between the regulator, the registry opers. The suggested approach—consisting of six steps—is administrator, and the developers is critical. Business ana- summarized in Table 27 and elaborated in the main text. lysts/IT consultants are also key stakeholders in the process, TABLE 27: Steps Involved in the Design of Registry Software Role Business analysts/IT Step Registry owner consultants Developers 1. Visualize function • Express requirements • Complement functional Implement visualized function requirements specifications with visualiza- design. • Validate the results pro- tion requirements; duced by IT consultants and developers. • Manage the implementation project; • Test the result. 2. Design software • Test the registry IT delivered. • Validate design, choices, and Design overall software archi- architecture detailed technical specifi- tecture in accordance with the cations proposed by the software requirements. developers. 3. Customize data exchange Design customized data protocols • Test the IT and manage the exchange protocol in accor- process for correcting bugs, dance with the relevant con- prior to requesting registry nectivity requirements. owner testing. 4. Design the Database Design database in accordance with the visualized system design and required data exchange protocols. 5. Choose software Choose software implementa- implementation tion according to the software technology requirements. 6. Produce the software Produce software design speci- design detailed fication in accordance with the specification software design. 73 PART IV. IT System Procurement and Development Step 1: Visualize function requirements. The require- TABLE 29: Procedure to Design Overall Software ments of the system’s functions should be visualized by Architecture implementing a demo of the system. The demo should show all user interfaces of the system and their transitions Overall software architecture triggered by operations. Procedures for implementing a Task design procedure system demo are illustrated in Table 28. System access mode • Estimate the number of users of the system; TABLE 28: Procedures for Implementing System • Choose between browser-based Demo access mode (B/S) and dedicated cli- ent access mode (C/S) depending on Task Demo implementation procedure the estimated number of users; • If external connections are required, Implement user • Design the style of the system user interfaces of the choose access mode for data interfaces; system demo exchange interfaces. • Assign user interfaces to each func- tion; Layer arrangements • Arrange user interface layers in accordance with system access • Design tables associated with each mode; user interface in accordance with function requirements; • Arrange an application service layer to process requests received from • Design objects triggered by each user interface layers; function of each user interface, in accordance with function require- • Arrange a database layer for the ments; system to provide data storage and data operations. • Design each notification that can be triggered on each user interface; Modules in each • Arrange modules of user interface layer layers in accordance with the func- • Implement the user interfaces. tions of the system; Implement the • Design all transitions between user • Arrange modules of application transitions of user interfaces (triggering function and service layer in accordance with the interfaces triggered triggered user interface); functions of the system; by operations • Implement the transition between • Arrange modules of database layer user interfaces. in accordance with the functions of Consistent and • Modify the functional specifications the system (stored procedures and reciprocal upgrade of the software based on feedback functions). of system demo received using the system demo; Deployment • Determine the deployment require- and functional • Further modify the system demo requirements of the ments of the modules of each layer specifications in accordance with the modified modules of each and each module in accordance functional specifications. layer with security requirements and performance requirements. Inner operational • Determine the inner operational Step 2: Design the software architecture. The software mechanism mechanism requirements of each requirements of layer in accordance with the perfor- architecture of an IT system includes the access mode, the each layer mance requirements of the system. layer arrangement, the modules in each layer and commu- nication requirements between layers, the inner operational Communication • Determine requirements applicable requirements to communications between the mechanism requirements of each layer, and the deploy- between layers user interface layers and the appli- ment requirements of the modules of each layer. The steps cation service layer, in accordance involved in designing the overall software architecture are with system performance require- illustrated in Table 29. ments, system security require- ments, and modules deployment requirements; • Determine requirements appli- cable to communications between the application service layer and the database layer, in accordance with the security and performance requirements. 74 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration Step 3: Customize data exchange protocols. It may be TABLE 31: Procedure for Designing Database necessary to customize a data exchange protocol, especially if the registry IT needs to connect to registries or other sys- Task IT Database design procedure tems, without an existing data exchange protocol. Designing Identify entities • List and define the associated data a customized data exchange protocol requires determining (entities and their characteristics) data exchange operations, designing data package format, for each of the following elements: and determining security measures for connectivity, as • Accounts, account representatives, shown in Table 30. users, roles, and privileges; • Unit types; TABLE 30: Procedure for Designing a Customized • Transaction types and transaction Data Exchange Protocol states; • Transaction logs and audit logs; Data exchange protocol design Task procedure • Registry reports, notifications, and compliance figures; Determine • List operations and messages to be data exchange exchanged through the connection, • Registry connections; operations/ including reversal of errors; • Data required to parameterize and messages • For each operation/message, configure the registry; describe the communication work- • Metadata. flow; Identify relations • Describe the relations between • Determine the constraints and between entities entities and the primary/foreign key requirements for each opera- used for each relation. tion/message: frequency, timing, consistency checks, and criteria for Represent entity- • Establish a comprehensive entity- rejection or repair. relations chart relationship chart of the IT data- base. Design data package • For each operation/message, list format and describe format and values of associated data. Determine security • Determine connectivity architecture Step 5: Choose software technology. Software technol- measures (central hub or peer- to-peer); ogy should be chosen based on a range of criteria—includ- • Determine reconciliation methods ing reliability, maintenance, performance, development cost, (check for inconsistencies, process technology constraints, security, and the ability to realize the to repair); software architecture needed. Table 33 suggests key points • Determine application-level security to consider in relation to those criteria. measures (data encryption strat- egy); TABLE 32: Considerations for Choosing Software • Determine requirements related to hardware connectivity security (VPN, Technology separate connection server, deter- mined IP, determined port). Criteria Key aspects to take into account Reliability • Operational reliability requirements • Serviceability requirements Step 4: Design the IT Database. The IT database must Performance • Performance requirements be designed on the basis of the software requirements Development cost • Budget and data exchange standards. Designing the IT database requires identifying the system’s entities and the relations Technology • Compatibility of the chosen technol- between them, and producing an entity-relationship constraints ogy with registry IT environment, OSs, and other systems to be linked chart.58 A possible procedure for designing the IT database with the registry is presented in Table 31. Security • Ability to address the security threats identified Potential to • Compatibility with the registry sys- realize software tem access mode architecture • Compatibility with the inner opera- tional mechanism requirements of 58 Several methods and tools exist to establish entity-relationship models the registry system (e.g., Merise, Chen, Bachman, and UML). 75 PART IV. IT System Procurement and Development The main technologies for implementing a registry system advantages and disadvantages of three suitable technolo- are C/C++, Java EE (Java Enterprise Edition), and Dot Net. gies are listed in Table 33. PHP is another server-side scripting language designed for web development. Hence, in principle it is also a technology In terms of performance, C/C++ is more advanced than Java suitable for implementing a registry system. EE technology and Dot Net technology. Conceptually, the performance (computational speed) of a software system However, as PHP is an interpreted language, it may raise implemented using C/C++ will be twice the performance additional concerns if used for a registry system. The source of the same software system implemented using a tech- code of PHP interpreters can be downloaded from the nology based on a virtual machine. However, the cost of Internet and, as a result, the security of the system imple- implementing a registry system using the C/C++ technol- mented through PHP may be compromised relatively easily. ogy is much higher, due to both its lengthier development In addition, as most of the popular PHP solutions execute process (higher number of workdays required) and higher PHP script directly, without first compiling the scripts, an personnel cost (C/C++ programmers). In addition, particu- attacker can easily access and read the source code of the larly complex IT development procedures are required to system implemented by PHP directly. By doing so, an attack- ensure the robustness of a registry system implemented er might be able to breach the system’s security measures. using C/C++ technology. The maintenance and upgrade of Moreover, attackers can leverage the direct interpretation of a registry system implemented through C/C++ technology is script source code to inject malicious code into the system also difficult, in particular for a browser/server (B/S)-based server to breach the system’s security; attackers often use registry system. More specifically, the cost of implementing this method. In addition to these security considerations, a registry system using Java EE technology will be no more some limitations in the implementation of PHP interpreters than half the cost of implementing the same registry system result in PHP’s performance being inferior to that of other using C/C++ technology. Lastly, implementing a registry sys- technologies, such as Java EE or Dot Net. tem using C/C++ requires that the OS be determined before any development can start. In view of these security and performance considerations, PHP is not recommended for the implementation of a reg- Although the performance of a software system imple- istry system. The registry technical specifications can make mented using Java EE is inferior to the performance of the sure that PHP will not be part of any offer received. The same software system implemented with C/C++, the added advantage of supporting the development of a B/S-based TABLE 33: Comparison of Three Technologies Criteria C/C++ Java EE Dot Net Reliability • Difficult to ensure the reliability • Easy to ensure the reliability of • Easy to ensure the reliability of of the system the system the system • Difficult to ensure the service- • Easy to ensure the serviceability • Easy to ensure the serviceability ability of the system of the system of the system Performance • High system operation perfor- • Relatively low system operation • Relatively low system operation mance performance performance Development cost • High development cost, high • Relatively low development cost • Relatively low development cost and timeline development timeline and timeline and timeline Technology • OS-dependent • OS-independent • OS-dependent constraints Security • Capable of implementing secu- • Capable of implementing secu- • Capable of implementing secu- rity mechanisms rity mechanisms rity mechanisms • Deployed code is difficult to • Deployed code is relatively easy • Deployed code is relatively easy analyze to analyze to analyze Potential to • Difficult to implement browser-/ • Capable of implementing • Capable of implementing realize software server-based system browser-/server-based system browser-/server-based system architecture • Capable of implementing any • Advanced inner operational • Advanced inner operational inner operational mechanism mechanism provided by a vir- mechanism provided by a vir- tual machine tual machine 76 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration registry system by leveraging an application server for Java technical optimizations. Between Java EE and Dot Net, the EE technology more than make up for its inferior perfor- latter shows higher compatibility with Windows Server OSs. mance: Java EE is thus preferable to C/CC++. However, if Dot Net is chosen, requirements will have to be imposed to ensure that the registry is also fully operational Leveraging a high-performance application server, a high- for users of non-Microsoft browsers. performance OS, and high-performance hardware can, to a certain degree, mitigate the drawbacks inherent in (rela- Step 6: Formulate the detailed specifications for the tively) poor performance. In fact, a properly equipped and software’s design. Table 34 shows how the detailed soft- configured registry system implemented using Java EE can ware specifications of a registry system can be structured. duly support 300 to 400 concurrent system accesses, which The information should reflect all previous decisions in this is suitable for the operation of a market mechanism with trajectory and be included in the reference documents the scale of the EU ETS. specifying the IT registry requirements. Therefore, Java EE technology is preferable for implement- TABLE 34: Content of Software Design Specification ing a registry system to C/C++ technology in many respects: costs, timeline, and responsiveness to changes. Aspect Content Visualized function • Inventory of all the user interfaces; As it is based on a virtual machine, Dot Net compared with design C/C++ shows the same advantages and disadvantages as • Description of the objects contained in the user interfaces; the Java EE technology in terms of performance, develop- ment complexity, development costs, and timeline. In a reg- • Description of transitions between the user interfaces; istry system implemented using Dot Net technology, these factors are similar to those of the same registry system • A demo of the system. implemented with Java EE technology. However, since the Overall software • Description of system access mode; ASP.net technology of Dot Net technology for implementing architecture • A list of layers of the system; B/S- based systems is only practically available on the ISS • A list of modules in each layer; application server for the Windows OS, the use of Dot Net • Requirements applicable to the to implement a registry system is constrained. deployment of modules; The selection of a specific technology for implementing a • Description of inner operational mechanism of the system; registry system should be based on the software require- ments of the registry system and the scale of the market • Requirements applicable to com- munications between layers; mechanism. If the registry system has to be able to support a market mechanism comparable to a large-scale stock • A graph showing the sketch of over- all software architecture. market, such as the Chinese stock market (20–30 million transactions per day), the C/C++ technology should be Data exchange • Specifications related to existing protocol data exchange protocols; employed. On the other hand, for a market mechanism with a scale similar to the EU ETS (maximum of 5,000 transac- • Detailed specifications of each customized data exchange protocol tions per day), the Java EE and Dot Net technologies are the and any required APIs. appropriate choices. Database design • Inventory of entities of the system; Before opting for Java EE or Dot Net technology, the OS • Detailed description of relations used for the registry system’s deployment should be consid- between entities; ered. If the Windows Server cannot be used for this pur- • Detailed description of tables asso- pose, it is not practical to select Dot Net technology. If the ciated with each entity; Windows OS is to be used for deploying the registry system, • A comprehensive entity-relationship it is preferable to select Dot Net technology because of chart. the high compatibility of the IIS application server with the Software • Description of software implemen- Windows OS. implementation tation technology. technology The costs and delays associated with C/C++ technologies are twice as high as those associated with Java EE or Dot Net. Moreover, experience shows that, for most registries, the relative disadvantage of Java EE or Dot Net in terms of performance is not significant and can be mitigated through 77 PART IV. IT System Procurement and Development 6. Recommendations and Guidance „ Describe the workflow related to each type of transaction; on the Design and Procurement of a Registry IT System „ List any other function required and define user authorization profiles; n Assess risks and volume, and determine security „ Describe reports and notifications; measures and performance requirements. „ Describe the web pages of the registry’s website. n An RFI to improve knowledge of existing offers and potential providers, but also to assess which solutions n Draft technical specifications, including: are available in practice in a given context. „ Technical architecture, including hosting and n Decide on: archiving; „ The scope and nature of the service sought; „ IT security requirements, including authentication, confidentiality, traceability, and security audits; „ Procurement options (i.e., shared IT platform, SaaS, adaptation of an existing solution, or development „ IT performance requirements and a description of from scratch); IT environment and deployment OS in use; „ Accounting model for imported/exported units, „ IT technologies preferred/banned. considering reversibility and the need for credibility n Issue an RFP. regarding the double-counting issue; „ Registry connectivity; If the registry is developed from scratch, additional time and effort will be required to develop the functional and techni- „ Organization of the IT project, considering the cal specifications, and the final IT reference documents will option of hiring an independent business analyst/ accordingly be more comprehensive and detailed. IT consultant. n Draft functional specifications: „ Translate the regulation into business rules; „ Inventory the data related to users, accounts, transactions, and units; 78 PART V. Registry Requirements for Emerging Market Mechanisms and Results- Based Climate Finance Programs: The Example of REDD+ 1. Introduction generate carbon units for emission reductions from specific projects, rather than measured across an entire sector. This part considers how emerging market mechanisms and the market-based concept of Results-Based Climate At the international level, the recently negotiated text of the Finance (RBCF) Programs (i.e., those that generate transfer- Paris Agreement leaves the door open to market mecha- able carbon units) could fit in the context of the flexibility nisms, outlining three flexibility mechanisms according to mechanisms outlined in the Paris Agreement, and discusses which Parties can meet their national targets (expressed potential registry requirements associated with these in Nationally Determined Contributions or NDCs). These arrangements. As REDD+ is a relatively advanced example mechanisms are: (i) the formulation of joint NDCs; (ii) the of an emerging market mechanism (in theory, if not in prac- exchange between Parties of “internationally transferred tice) and vehicle for RBCF, this part focuses on the registry mitigation outcomes” (ITMOs); and (iii) the generation of requirements specific to REDD+. emission reductions by authorized public and private enti- ties resulting from activities that contribute to both mitiga- Market-based instruments for environmental protection tion and sustainable development. have been in place in a small number of developing coun- tries for some years, the Payment for Ecosystem Services As the rules, modalities of and procedures for these flex- (PES) programs in Costa Rica and Vietnam being two ibility mechanisms are currently being developed by the notable examples. Some developing countries are currently UNFCCC Subsidiary Body for Scientific and Technologi- in the process of designing carbon taxes and/or domestic cal Advice (SBSTA) for consideration and adoption by the ETSs as market instruments to tackle domestic emissions. UNFCCC’s Conference of the Parties serving as the Meet- ing of the Parties to the Paris Agreement, it remains to At the same time, a number of market mechanisms pre- be seen to which extent these flexibility mechanisms will mised on the provision of international financial support for include elements or allow for the use of not fully devel- domestic mitigation measures are under development. Two oped market-based mechanisms, and much of the detail examples of this are sectoral crediting and compensated remains to be determined, in particular regarding REDD+. Nationally Appropriate Mitigation Actions (NAMAs). Sectoral However, assuming that the use of marked-based and RBCF crediting refers to the process by which carbon units are approaches will be allowed—given the work already under- issued to a sector as a whole, rather than to individual proj- way with emerging market instruments in developing coun- ects or programs, for reducing emissions against a baseline. tries as well as results-based approaches to climate finance The market-based concept of REDD+, according to which a under these flexibility mechanisms—it is useful to consider jurisdiction can generate carbon units for reducing forest- how the flexibility mechanisms of the Paris Agreement could based emissions across that particular jurisdiction, is an accommodate these different approaches, and what the example of sectoral crediting. registry implications would be under the various scenarios. NAMAs are a policy tool that emerged from the United It is also worth considering the registry requirements associ- Nations Framework Convention on Climate Change ated with specific emerging market mechanisms. (UNFCCC) process, through which developing countries Alongside the development of market-based approaches, a define the mitigation actions for which they seek finan- number of developed countries have set up or are funding cial, technical, and capacity-building support from devel- results-based payment approaches to climate finance. RBCF oped countries. Through the NAMA process, a number of programs are financing tools that condition payments on countries, including Mexico and Colombia, have begun to the achievement of particular results, and typically describe explore the possibility of developing “credited NAMAs,” that donor country aid programs that pay for outcomes rather is, NAMAs for which carbon units are issued in exchange for than inputs such as capacity building and action plan investment. Unlike sectoral crediting, credited NAMAs would development. Numerous bilateral and multilateral RBCF 79 PART V. Registry Requirements for Emerging Market Mechanisms and Results-Based Payments: The Example of REDD+ programs have emerged over the last decade, largely in the REDD+ context, from Norway’s International Climate FIGURE 20: Potential Transfer of Units under the Paris Forest Initiative (NICFI) to the Forest Carbon Partnership Agreement (Scenario 1) Facility’s Carbon Fund. Recently, the Green Climate Fund has $ $ adopted a logic model for results-based REDD+. Article 5 of National authority Credited sector the Paris Agreement acknowledges RBCF as an approach to International /NAMA/ purchases PES program supporting the implementation of REDD+. National registry ITMO National Although RBCF programs are, in some cases, being intro- carbon unit duced as a stepping stone to potential market-based mech- anisms, they do not necessarily lead to the generation of a transferable carbon unit, and thus do not require an emis- sions trading registry. All RBCF programs which generate transferable carbon units, however, need to take measures to transfer? If all sectors are accounted for as inseparable to avoid instances of double counting including developing components of an NDC, then ITMOs would not be available a registry to issue, transfer, and retire carbon units. under this scenario. An alternative option is that sectoral accounting, though a component part of NDC accounting, could be separable from NDC accounting. For instance, 2. Registry Implications of each sector has a target emissions level with performance Emerging Market Mechanisms measured on a sectoral basis, so that ITMOs would be avail- able in high-performing (i.e., low-emitting) sectors, irrespec- and Results-Based Climate tive of performance in other sectors and aggregate NDC Finance Programs under The performance. This would require national registries to develop Paris Agreement sectoral subaccounts that could externally transfer carbon units. This approach could prove controversial, however, as At first glance, it seems relatively straightforward how it would allow for the cherry picking of high-performing sec- sectoral crediting and credited NAMAs could align with the tors to generate ITMOs. transfer of ITMOs under the Paris Agreement (as illus- trated in Figure 20); crediting by the host country could Of course, a country may opt to include only a limited num- take the form of ITMOs, deducted from the host country’s ber of sectors within its NDC. In this case, there would not NDC accounting and added to the donor/purchaser’s NDC be an accounting overlap between emissions from covered accounting; for subnational crediting (e.g., jurisdictional sectors and emissions from noncovered sectors, in which REDD+ programs), any carbon unit transfers would need case ITMOs would be available for emission reductions the consent of the country in order to qualify as ITMOs. from covered sectors despite emissions outside of the NDC This scenario is illustrated in Figure 20, and could equally coverage. This would require a separate registry (or separate apply to international contributions toward domestic PES account types) in the host country for noncovered and covered programs. If an RBCF program requires the exchange of a sectors, and an ITMO that would contribute to the donor/pur- carbon unit from host country to donor country, the same chaser country NDC without detracting from the host country setup would be sufficient. In the case of an RBCF program NDC. However, it remains to be seen whether the Parties to where the donor country “cancels” the carbon unit,59 the the Paris Agreement would sanction such an arrangement registry of the donor country/institution would need an and, in any case, such partial NDC coverage is unlikely to be account in which to cancel carbon units not counted toward acceptable beyond Least Developed Countries. an NDC. The linking of domestic ETSs to international trans- However, a number of questions would need to be resolved. fers under the Paris Agreement will be more complex, For one, in the case that the credited sector (e.g., forestry) but two potential scenarios can be envisaged. In the generates emission reductions, but the country does not first, an allowance under a domestic ETS is converted into meet its NDC or fails to reduce emissions beneath its the equivalent number of ITMOs and, instead of being baseline because of high emissions elsewhere (e.g., in the available to regulated entities under the domestic ETS, it is transport sector), would the host country still generate ITMOs transferred to an international purchaser (Figure 21). This will increase the level of ambition of the domestic ETS by restricting allowance availability (in much the same way 59 The rationale of this approach would be to increase the ambition of the collective NDC “cap” by reducing the availability of emission reductions for as voluntary purchases of allowances by citizens groups), use as ITMOs. though national authorities may wish to limit the number 80 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration FIGURE 21: Potential Transfer of Units under the Paris FIGURE 23: Potential Transfer of Units under the Agreement (Scenario 2a) Paris Agreement (Scenario 3) $ -1 Allowance $ -1 Offset National authority Authorized International Domestic ETS International public/private Domestic ETS purchases purchases developer National registry +1 ITMO ITMO or other National registry +1 Offset “SDM” credit of allowances available for conversion to ITMOs, in order to limit exposure to international competition. The second scenario in this context (Figure 22) is similar to able to convert domestic carbon units into ITMOs according the first, except the international purchaser pays a regu- to double-entry bookkeeping methods, with ITMOs held in lated entity directly for an allowance, which is converted to a specific account type separate from that for carbon units an ITMO for international transfer. used for domestic compliance (e.g., a “national” account). In the third scenario (Figure 23), carbon credits generated RBCF under the Paris Agreement may have registry require- by project developers for use by regulated entities under ments even where RBCF programs do not require a transfer a domestic ETS will also be available for transfer to inter- of a carbon unit from host country to donor country. For national purchasers. This exchange could occur through example, restrictions may be attached to payments, such the conversion of domestic carbon credits to ITMOs by the that emission reductions (ERs) for which a country has national registry, but also potentially through the mitiga- received financial support in the past cannot be compensat- tion and sustainable development mechanism of the Paris ed, or that compensated ERs should not be paid for again in Agreement. In either case, national registries would need to the future or sold on carbon markets. In this scenario (Fig- deduct externally exported carbon units to ensure against ure 24), the host country would require a register to ensure double counting60 by host and purchaser country. that compensated results are assigned a unique identity that distinguishes between restricted and unrestricted In linking a domestic ETS with the international transfer carbon units, and conveys the nature of any restrictions. of ITMOs or credits from the “mitigation and sustainable Restrictions on the sale of carbon units could restrict access development mechanism,” as described in the above sce- to the flexibility mechanisms of the Paris Agreement. narios, measures would need to be taken to avoid the risk of double counting. One option would be for a registry to be What form registries take post-Paris will ultimately depend on how the Paris Agreement flexibility mechanisms are implemented, and on the landscape of RBCF programs put in place by donor countries, in particular whether or 60 In this context, when the same ER is used as a domestic carbon unit for compliance with a domestic ETS, at the same time that it is used as an not RBCF programs lead to the generation of carbon units. ITMO or “mitigation and sustainable development mechanism” credit for However, the example of REDD+ (and more broadly the NDC accounting at the international level. use of forest carbon units to contribute to governments’ mitigation targets), which has been implemented through FIGURE 22: Potential Transfer of Units under the Paris Agreement (Scenario 2b) FIGURE 24: Potential Transfer of Units under the Paris $ -1 Allowance Agreement (Scenario 4) Regulated International entity in National purchases domestic authority ETS Register $ +1 ER Donor country Host country Restricted carbon units +1 ITMO National registry +1 Allowance Unrestricted carbon units 81 PART V. Registry Requirements for Emerging Market Mechanisms and Results-Based Payments: The Example of REDD+ both RBCF programs and (to a more limited extent) market 3.1. The role of carbon markets in REDD+ mechanisms, provides an illustrative example of what these REDD+ was originally conceived as a market-based flexibility mechanisms and accompanying registry require- system.61 Today, however, REDD+ as established within the ments could look like in practice. The following chapter UNFCCC allows for market- and nonmarket-based trans- works through multiple REDD+ implementation scenarios to actions.62 Multilateral and bilateral programs pioneering shed light on the registry arrangements that could become REDD+ rely on a mix of grant financing, loans, and RBCF. relevant for emerging market mechanisms and market- Private sector entities invest in REDD+ projects that certify based RBCF post-Paris. ERs according to voluntary standard rules. Initiatives are financed by multiple sources through a variety of financial The implementation of REDD+ presents a number of chal- modalities and mechanisms. lenges, from both the technical perspective (e.g., refer- ence-level formation, the accuracy of monitoring of forest All national REDD+ systems require a Data Manage- emissions, and the permanence of forest carbon) and the ment System (DMS), but only market-based systems policy perspective (e.g., establishing forest tenure and the require the establishment of a registry. DMSs ensure right to forest resources). However, these challenges should that the same ER is not claimed, issued, or sold more than not be confused with the narrower accounting challenge of once. Ensuring that no form of double counting occurs is recording and tracking forest carbon units. As the discus- essential for the environmental credibility of any ER pro- sion below illustrates, a number of straightforward regis- gram. Countries that do not wish to issue carbon units can try options are readily available to address the particular manage this risk through an information system combined accounting challenges presented by REDD+, should policy with a legal approval requirement for all subnational and makers wish to integrate forest carbon units into broader national, project- and program-based carbon transactions. market mechanisms. This includes situations where governments decide to retire ERs without further use, or where they use and report them only to meet their mitigation commitments. 3. REDD+ Registries Where countries wish to engage in market-based Countries that engage in REDD+ are in the process of transactions, they will need a registry with the abil- developing greenhouse gas (GHG) accounting and tracking ity to uniquely identify and track carbon units. This systems to approve and report on REDD+ programs and includes situations where the country does not wish to ensure consistency between national, jurisdictional, and implement a national carbon market involving forest carbon project-level processes and results. These systems consist, units, but allows the selling of carbon units from its domes- at a minimum, of data management systems that systemati- tic ER programs to international buyers. Countries may, cally record and monitor information to ensure transpar- however, implement national incentives for REDD+ that ency and consistency and to avoid double counting of ERs. are market-based and include the issuance and transfer If countries seek to engage in market-based transactions of carbon units. A number of developed countries have that include REDD+ or other forest carbon units, they will established mechanisms for trading forest carbon units also need a registry to allow for the unique identification as part of domestic mitigation strategies. For example, the and tracking of carbon units. Such tracking is important for New Zealand Emissions Trading Scheme (NZ ETS) links for- transactions between different accounts of one registry as est carbon units to both a domestic regulated market and well as between different national or international registries. an international regulated market (see appendix K). The The decision on the need for a registry and the level of Kyoto mechanisms (e.g., CDM Afforestation and Reforesta- required complexity depends on three key implementation tion) and voluntary markets also provide some precedent. choices: There is currently no framework for trading carbon units n The role of carbon markets in REDD+ implementation; n The scale of implementation of REDD+ (national, subna- tional, projects); 61 See Papua New Guinea and Costa Rica submission to United Nations n Measures adopted for mitigating forest-specific risks. Framework Convention on Climate Change (UNFCCC) Conference of the Parties (COP) 11, held in 2005, on Reducing Emissions from Deforestation The following sections discuss these implementation in Developing Countries: Approaches to Stimulate Action, U.N. Doc FCCC/ choices and their impact on the design of REDD+ registries. CP/2005/Misc.1, at 8. 62 See Warsaw Framework on REDD+, UNFCCC COP 19, Decisions 9/CP.19- 15/CP.19, U.N. Doc FCCC/CP/2013/10/Add.1. 82 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration related to REDD+ at a global scale, 63 and very few countries TABLE 35: Role of Carbon Markets in Different contemplate linking REDD+ to carbon markets in the short REDD+ Implementation Strategies term. Table 35 summarizes different market approaches of REDD+ implementation and provides examples. Forest-relevant Approach Description examples For REDD+ RBCF that does not rely on the issuance RBCF not International public • Results-based REDD+ of a carbon unit, there may be no need for a registry. related RBCF for ERs in initiatives such as In cases where the acquiring entity does not purchase a to carbon which no carbon the bilateral REDD+ carbon unit but only pays for the right to use the ER as part markets unit is issued or agreements of Norway (public transferred. ERs are and Germany, and of its mitigating or financing pledges, management of the sector) used as a perfor- the REDD Early Mov- transaction by the REDD+ DMS would be sufficient. The mance metric to ers Program in Acre DMS would be required to assign an identity to ERs, for increase the effec- (Brazil), Colombia, and example, tracking location (ER program) and vintage (year of tive use of public Ecuador. finance. generation), to avoid the risk of double payment. This also applies where payment conditions require an “own con- Regulated Countries in an • The Paris Agreement tribution” of the REDD+ country, that is, the retirement of interna- international, allows for the coop- tional treaty-based ETS, eration of countries more than one ER for every ER paid for. markets are allowed to pur- in meeting their NDCs (public and chase forest carbon and for the transfer of If REDD+ units are exchanged between nations, a private units (from private mitigation outcomes. It registry will be required. In its simplest form, such a sector) or public sellers) also foresees a mecha- registry—referred to as "register" in Part I of the report—will to meet national nism to contribute to targets. GHG mitigation and not have to accommodate multiple accounts, and a simple sustainable develop- REDD+ subaccount in an existing GHG registry where REDD+ countries ment that appears use their registry carbon units from other sectors are managed would be suf- similar to the CDM, to identify ERs and ficient. The REDD+ country may, however, choose to open which may include avoid double selling. forestry as eligible accounts for authorized private or public sector entities that ERs may be used for activity. assist with the marketing and sale of sovereign REDD+ car- reporting purposes by the host country • Afforestation and bon units. The registry would continue to serve the public reforestation credits (or jurisdiction) to sector only. Transfers undertaken would be limited to those the UNFCCC. under the CDM of the among government subaccounts (if they exist) and between Kyoto Protocol. sovereign accounts of participating countries. Such a simple • FCPF Carbon Fund, version of a registry must: Tranche A, which allows the use of n Be able to issue forest carbon units with unique serial carbon units to meet mitigation targets. numbers to prevent the multiple sale of the same unit. Regulated Regulated forest • National trading n Have the capacity to add forest carbon units to the national owners can buy and schemes that allow registry on verification, and remove from the registry on markets sell forest carbon for the trading of for- (private units to meet their est carbon units, for international transfer. sector) obligations. Regu- instance, South Africa lated entities in a or New Zealand (New n Record information on liabilities, in particular relating national ETS can off- Zealand Emissions to the nonpermanence risk (see section 3.3). In most set their obligations Trading Scheme or NZ cases, the purchasing country will need to be assured by purchasing forest ETS). carbon units. that the selling country has in place a strategy (e.g., • Jurisdictional systems through buffers) that addresses risks specific to forest- such as California’s Cap-and-Trade Pro- based ERs. gram. n Receive periodic information from the national forest Voluntary Private entities • Major voluntary stan- monitoring system. The flow of information between markets voluntarily purchase dards include: (private forest carbon units the national MRV system and the registry is needed to • Verified Carbon Stan- sector) that are issued dard across voluntary standards. • The Gold Standard • American Carbon 63 The International Civil Aviation Organization is, however, discussing a Registry potential link between mitigation requirements for the aviation industry • Climate Action and REDD+. Reserve. 83 PART V. Registry Requirements for Emerging Market Mechanisms and Results-Based Payments: The Example of REDD+ ensure that forest carbon units issued into the registry California); or (ii) the creation of offset accounts (held by are based on reconciled emission data reporting. offset project developers and possibly intermediaries) within the main registry, from which forest carbon units can be To allow the transfer of carbon units between regis- transferred. tries, there needs to be either (i) peer-to-peer linking of registries or (ii) a link to a central hub or Interna- Depending on national laws, there may be quantita- tional Transaction Log (ITL) to ensure secure, cross- tive and qualitative limitations on the use of forest registry transfer of forest carbon units. The linking carbon units. Where there is a percentage limit to the use between registries needs to ensure the smooth transfer of of offset credits permitted in a cap-and-trade system, either units between registries and allow a number of compliance across the system as a whole or for individual regulated checks to be conducted that ensure regulatory legitimacy entities, forest carbon units must be identifiable as such of the transfer. Forest carbon units will need to meet the from their serial numbers, and the registry must be able specifications of the market into which the forest carbon to automatically (or through manual operations) calculate units are transferred, and a peer-to-peer link or central the percentage of forest carbon units held collectively or hub must be able to ensure that the unit is accepted in the individually, and may automatically prevent transactions that market into which it is sold. would exceed the permitted percentage limit. Registries become significantly more complex where Where forest carbon units are not transferred REDD+ is linked to regulated subnational or national between market participants, but from participants ETSs. The involvement of private entities in REDD+ means to the government or vice versa, registries can be that such a registry—referred to as "transaction registry" much simpler. An example of this type of transfer is Aus- in Part I of the report—will have to be able to hold many tralia’s Carbon Farming initiative, in which credits are sold accounts and transfer units internally to provide the neces- to the government through reverse auctions (see appendix sary security and legal protection, and manage risks specific K). Where forest carbon units are used as a performance to REDD+ (e.g., permanence, see section 3.3), within or with metric in programs that financially incentivize landowners to a link to the registry. maintain or increase tree cover (e.g., a payment for ecosys- tem services subsidy), a registry is not required and a DMS In addition to the features described above, a full private will be sufficient to ensure environmental integrity. sector-enabled REDD+ transaction registry must: The most complex implementation scenario is where n Allow for a high number of connected accounts; national or subnational trading systems are imple- mented with links to international markets, in partic- n Check and approve private account holders (automated ular where private account holders are authorized to and nonautomated checks of eligibility and security); make international transfers of forest carbon units. n Allow the transfer of carbon units between account This requires a harmonization of publicly available program holders according to double-entry bookkeeping meth- rules not only at the national but also at the international od, and possibly the retirement or surrender of forest level, including comparable risk management strategies and carbon credits for compliance purposes; harmonized standards that govern the creation of REDD+ carbon units, to ensure comparability and environmental n Check that all traded forest carbon units held in the integrity. registry meet the legal specifications that they are either defined or recognized by national law. Those In addition to the features described above, in the context defined by law are generated according to the same of international carbon markets it is recommended that the methodology (e.g., harmonized rules for reference-level registry: formation, harmonized safeguards standards) in order n Have the facility to either recognize units issued in to create standardized, fungible units. In addition, the linked registries as accepted for compliance or convert registry may accept units from accredited and accepted forest carbon units traded internationally into forest standards. units traded in domestic markets. For every national Where forest carbon units are created as offset units, forest carbon unit converted to an international unit for two potential options exist for linking the offsets international sale, the relevant number of carbon units to the regulated ETS: (i) the creation/accreditation of a must be deducted from national emissions reporting parallel offset registry from which forest carbon units can to avoid double counting (though in the case of fully be transferred to account holders in the main registry (e.g., integrated domestic and international markets using 84 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration the same communication protocol, conversion would n The private entity opens an account under the national not be necessary). registry, cancels carbon units corresponding to REDD+ units generated in the country in the private registry n Data and information exchange between linked regis- where they are held and receives an equivalent number tries allows mutual compliance checks. of units in the registry. Note that this option may only be favored by private entities if the registry is linked to n Be linked to a transaction log to enable international other registries and enables international transfers. transfers, or be able to transfer units into other regis- tries through peer-to-peer linking. n The national regulator records the serial numbers of the privately held carbon units, confirms their validity, n Be enabled to undertake the relevant compliance and cancels an equivalent number from its accounts. checks. Depending on national laws, there may be Note that the voluntary standard may require a confir- quantitative and qualitative limitations on the import mation of cancellation to ensure that the carbon units and export of forest carbon units. To enforce limits are not subject to double counting. (whether applied to individual account holders or across the system as a whole), the registry should track n The registry could also formally be linked to the private the amount or percentage of international sales/pur- carbon registry and allow the transfer of units between chases, and could automatically prevent transactions the registries. Note, however, that such linking would that exceed permitted limits. require significant resources and administrative capaci- ties, would present additional risks, and would thus Voluntary efforts to reduce deforestation track forest require a careful cost-benefit analysis. carbon units through private registries. Standards of the voluntary carbon market, such as the Verified Carbon Finally, a registry must also make sure that there Standard (VCS) or the American Carbon Registry, often is no double claiming and consequent issuance for operate their own tracking systems or cooperate with REDD+ ER programs that overlap with mitigation pro- approved GHG registry operators. ERs generated and veri- grams of the agriculture or wood fuel sectors. REDD+ fied according to the program rules of these standards are differs from other sectors in that land-use emissions can issued as carbon units in these private registries. To avoid be avoided (or sequestered) through other projects that double counting of these ERs, the host country of the volun- are typically not considered REDD+. Projects that gener- tary carbon project will have to deduct the same number of ate ERs through sparing biomass (e.g., biogas, clean cook units that are issued to voluntary registries from its national stoves, and water purification) implicitly have an overlap accounts. This consolidation of national and project-level ER with REDD+ emissions. These ERs have been captured to accounts can happen in the DMS or a registry where one date using a factor known as the fraction of nonrenewable exists. For more details on the consolidation of national and biomass but, under a national system, these ERs should be subnational accounts, see section 3.2. aligned with REDD+ accounting systems to avoid double counting of emissions. Thus, even REDD+ countries that do When establishing national REDD+ systems, governments not have project-level REDD+ may need to take into account can also decide to grandfather voluntary forest carbon units non-REDD+ project-level activities that have implications for into REDD+ registries. To do so, governments will need forest emissions. to define the conditions under which forest carbon units tracked through the voluntary carbon market registries are Box 6 provides a summary of the FCPF-submitted proposals acceptable and will be recognized by the national system. on REDD+ implementation choices. The recognition of carbon units issued under the rules of voluntary standards can follow different operational approaches: 85 PART V. Registry Requirements for Emerging Market Mechanisms and Results-Based Payments: The Example of REDD+ monly referred to as “nesting” or following a “nested BOX 6. Carbon Markets and FCPF Emission approach.”65 The strategic importance of the nested Reduction Programs approach lies in its ability to coherently integrate various levels of GHG accounting and incentive allocation into the Of the 18 Emission Reductions Program Idea Note national system while maintaining accounting and envi- (ER-PINs) accepted into the FCPF Carbon Fund pipeline, none indicate a plan to integrate forest carbon units ronmental integrity. Nested REDD+ has several potential into a national regulated carbon market. Chile’s ER-PIN advantages to a purely national approach. Integration of proposes a platform for trading of forest carbon credits, REDD+ activities at multiple scales can provide for flexible though this is with a view to selling into international approaches based on local circumstances, promote private voluntary markets. Costa Rica’s ER-PIN notes that REDD+ sector investment, facilitate benefit sharing, and support finance will be used to build on their existing PES scheme, but this is not part of a regulated carbon market. A phased implementation of a national REDD+ scheme led by number of ER-PINS propose the domestic private sector REDD+ projects and subnational programs. While national as a source of finance for ERs, though private sector systems and capacities are being developed and consoli- incentives to invest are unclear. Of the 18 ER-PINS, dated, subnational activities can continue to support forest 14 indicate an intention to sell forest carbon units on investments while providing valuable lessons learned. international markets, but no concrete details have been provided. Only one ER-PIN (Nicaragua) expressly rules Finally, nested approaches to REDD+ provide a potentially this out. To date, there are no examples of REDD+ units smooth transition from the current patchwork of voluntary being sold into compliance markets. REDD+ projects to national‐level accounting. If a country chooses to have nesting of subnational account- ing systems within the national system, it is necessary to 3.2. Scale of implementation of REDD+ ensure that:66 REDD+ under the UNFCCC is designed as a national system, which means that ERs will be accounted n There is consistency in how GHG emissions, ERs, and under a national reference level (RL). Considering that removals are measured within projects and programs it can take years to gather all the data needed to establish in a given country. a national reference level, UNFCCC Decision 12/CP.17 rec- n Double counting of ERs can be avoided, to preserve ognized that subnational reference levels can be used “as environmental integrity where there is overlap with the an interim measure.”64 In many countries, subnational and scope of the national carbon accounting system. project- level REDD+ activities are being established to fulfill different aims, such as building capacity and experience n Payments based on performance can be fairly allocated in REDD+ implementation or generation of early ERs and to those who have achieved them. removals in defined geographical or administrative areas. These subnational and project-level activities may prove to Countries that consider nesting for forest carbon projects be pilot or demonstration activities that are eventually sub- or carbon projects more in general will have to adopt rules sumed into a national REDD+ approach. However, countries that define the modalities under which nesting is possible may choose to pursue REDD+ in the long term as a series and allowable. Such rules include the adoption of harmo- of subnational and project-level interventions, which retain nized definitions, rules for baseline setting, MRV standards, independence but in sum constitute the national approach. and approval requirements. While not forming part of reg- Cases could exist where multiple layers of integration are istries, such rules are a prerequisite to ensure that nesting required; for example, a project operating in a jurisdiction creates incentives for private investments while protecting that is itself integrated into a national accounting scheme. the environmental integrity of the national REDD+ system. These rules will also form part of the DMS. The process of consolidating different levels of accounting systems and integrating projects and Models for nested REDD+ systems, including in the subnational efforts into the national system is com- land sector, already exist. The Kyoto Protocol allows the nesting of Joint Implementation (JI) systems in national 64 “[S]ubnational forest reference emission levels and/or forest reference 65 Creating Incentives for Avoiding Further Deforestation: The Nested levels may be elaborated as an interim measure.” UNFCCC (2012): FCCC/ Approach. 2009. Lucio Pedroni, Michael Dutschke, Charlotte Streck, CP/2011/9/Add.2. Decision 12/CP.17: Guidance on systems for providing Manuel Estrada Porrua, in Climate Policy, 9: 207–220. information on how safeguards are addressed and respected and modalities relating to forest reference emission levels and forest reference 66 Adam Gibbon, Timothy Pearson, Sarah Walker, Ken Andrasko. 2014. levels as referred to in decision 1/CP.16, available at: http://unfccc.int/ Planning Guide: Integrating REDD+ Accounting within a Nested Approach. meetings/durban_nov_2011/session/6294/php/view/decisions.php. USAID LEAF. 86 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration accounting frameworks of developed countries operating and apply fair and transparent program rules that handle under an emissions cap. Voluntary carbon market stan- overlapping programs or projects that maintain the environ- dards, such as the VCS and the American Carbon Registry, mental integrity of the ERs claimed. Such approaches could have also developed nested accounting systems and can deduct ERs earned by lower-level programs from a national provide some guidance on what is expected from participat- total, cap the ERs that lower-level programs can claim, ing governments and third parties under these systems.67 exclude areas covered by subnational programs or projects By contrast, ETSs that cover whole sectors and allocate from national accounting, or incorporate lower-level data allowances to private entities often ban additional project- temporarily. level activity and prohibit the generation of credits at the project level. The DMS will apply the program rules and communicate the number of units to be issued and canceled to the registry. The complexity of a registry depends on how many The DMS ensures that the total aggregated amount of ER accounting levels form part of the national implemen- units issued out of all REDD+ ER programs or projects, tation of REDD+ and which of these levels are linked irrespective of the issuing scheme and registry, remains to carbon markets. Carbon accounting and incentive below the total amount of REDD+ performances claimed by allocation frameworks are a central component of REDD+ the country. The registry then consolidates the accounts, mitigation programs and, in structuring these frameworks, by either issuing units to project/subnational accounts decisions need to be made on how to reach REDD+ objec- and deducting the equivalent number from higher-level tives in a timely, economically efficient, and socially and envi- accounts, or converting higher-level units into lower-level ronmentally sustainable manner. Establishing accounting units. The latter approach finds its precedent in the Kyoto frameworks at the project and program level may form part Protocol program rules for JI and the conversion of Assigned of the public system of benefit sharing or facilitate direct Amount Units (AAUs) or Removal Units (RMUs) into Emission private sector investments into voluntary carbon market Reduction Units (ERUs). projects. Where private sector entities implement REDD+ but A registry that tracks REDD+ activities and outcomes are not issued with forest carbon units, the registry is essential to a well-functioning system that involves will not feature accounts for private sector project crediting at the subnational, program, or project proponents. Information about ERs achieved by specific level. The registry must, at a minimum, track credits for ERs entities can be stored on the DMS and used to calculate or removals or any similar instrument to reduce the risk of the level of payment through, for instance, a benefit-sharing double counting. The registry complements the DMS, which system. fulfills a number of project-level tracking functions, such as collecting overlaying basic information about project‐level Where private sector entities implement REDD+ and activities or subnational programs, recording applicable are issued with forest carbon units, private sector safeguards and technical requirements, land use rights, accounts will need to be integrated (nested) into or other information. Based on the DMS, the registry may the national or subnational REDD+ framework. This evolve over time alongside REDD+ development and imple- requires significant administrative capacity and resources mentation. Registries may be created at subnational levels and should be done only after a careful cost-benefit analy- instead of, or in addition to, at the national level. sis, and the extent to which the benefits of private sector involvement outweigh the added transaction costs. Nested REDD+ requires the consolidation of data from projects and programs at the subnational and nation- The integration of private accounts into national registries al levels and the checking of compliance with nesting calls for enhanced security and data protection. Private rules. Most of these checks will be done at the level of the accounts require: DMS, which may serve to fulfill a number of tracking func- n Enhanced confidentiality of account holder informa- tions, overlay basic information about project‐level activities tion to protect commercially confidential holdings of or subnational programs, verify applicable safeguards and private entities. This may require the registry to restrict technical requirements, land use rights, or other informa- the amount of publicly accessible information on, for tion. Nesting will also have to consolidate MRV information instance, the number of forest carbon units held by a specific entity, and the volume and value of transac- tions. 67 VCS Nested Program documents and the new 2016 VCS nesting rules: http://www.v-c-s.org/just-released-new-guidance-for-nesting-redd- n Enhanced security options to mitigate the risk of fraud projects/. or theft of units, which increases with the number of 87 PART V. Registry Requirements for Emerging Market Mechanisms and Results-Based Payments: The Example of REDD+ TABLE 36: Levels of REDD+ Implementation and REDD Registry Implications Approach Description Forest-relevant examples Registry implications National REDD+ The government records REDD+ implementation in • A simple, single account system, implementation: ERs at the national level and Ecuador, where forest carbon where the national government is Implementation at the may decide to issue carbon units are only issued at the the sole owner and beneficiary of national level with a credits and transfer them to national level. forest carbon units. national RL and without international accounts. The • Where forest carbon units are any lower accounting government is the sole owner transferred to international levels. of REDD+ benefits and reserves sovereign buyers, a link to the the right to market and trans- registries of buyer countries. fer ERs/carbon units. National and Subnational RLs and MRV sys- Subnational systems may cover • Possibly subaccounts for public or subnational REDD+ tems are implemented in most jurisdictional units, such as private intermediaries that hold implementation: REDD+ countries in parallel departments or states, such as and manage forest carbon units Implementation with with or in advance of national Madre de Dios in Peru or Acre on behalf of the government. subnational RL/MRV in REDD+ systems. In some coun- in Brazil. They may also cover • Where forest carbon units are advance of or parallel to tries, they represent interim biomes, such as the Amazon transferred to international national RL/MRV. strategies that will be replaced Region in Colombia. sovereign buyers, a link to the by national systems. In others, registries of buyer countries. subnational approaches will also be important as a perma- nent measure to enable REDD+ to be implemented through existing governance frame- works. It matches the legal framework in many countries that have delegated land-use decision making to subnational states or municipalities. National/subnational REDD+ projects as part of Most REDD+ countries rec- • Facility for private entities to implementation with the implementation strategy, ognize private sector REDD+ open accounts in a national or REDD+ Projects: Project- nesting of projects into the initiatives. Countries that allow subnational registry. level accounting in national RL or the subnational the nesting of private projects • Projects must be “nested” within addition to the above. RL. REDD+ projects can be include Peru, Kenya, the Demo- both national and subnational registered under a volun- cratic Republic of Congo, and accounts. tary standard or a regulated Colombia. standard such as CDM. In • As an interim step, a country may the future, this may include allow REDD+ projects to be reg- project-level activities under istered under voluntary carbon the mechanism to contribute to market standards and credits to GHG emissions mitigation and be issued to accredited regis- support sustainable develop- tries of these standards. Once a ment (i.e., under Art. 6.4 of the national (or subnational) registry Paris Agreement). is in place, the regional registries could either be linked or integrat- ed into the national registry.a a. The registries of voluntary standards could continue to exist. account holders on a registry. Risks include fraudulent n IT links to potential trading platforms to facilitate mar- transfer of credits and identity usurpation on the reg- ket transactions. istry. Risk mitigation measures could include enhanced authentication requirements for registry access (e.g., Table 37 gives an overview of registry features in the context increasing strength of password protection) or the facil- of different scales of REDD+ implementation. Box 7 provides ity to automatically detect suspicious account activity a summary of the FCPF-submitted proposals on the scale of and suspend account functionality. implementation of participating REDD+ countries. 88 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration TABLE 37: Summary of Registry Features and Scale BOX 7. Status of REDD+ Countries: Scale of of Implementation Implementation National, National subna- Of the 18 ER-PINS accepted into the FCPF Carbon and sub- tional, and Fund pipeline, four propose exclusively using national National national project reference levels, with one of these proposing a process REDD+ REDD+ REDD+ for eventual consolidation of subnational reference levels implemen- implemen- implemen- within the national reference level. Eight ER-PINS propose Registry features tation tation tation exclusively subnational reference levels, though seven of these propose transitioning toward a national reference A national account- ing system level, and consolidation of subnational reference levels within this. Five ER-PINs propose a combination of Subaccounts for national and subnational reference levels from the outset entities marketing of the ER-Program, with subnational reference levels units on behalf of aggregating into a national reference level. government A total of 13 of the 18 ER-PINS propose that project-level Link to registry of activities form part of the ER Program. Of these, seven ER- acquiring country PINS expressly indicate that projects will be nested within either national or jurisdictional programs. National and mul- tiple subnational accounts Possible creation of 3.3. REDD+ and land use-related risks regional registries Forest-related activities differ in a number of ways from as transitional step to national registry activities in other sectors. The risks related to the release of sequestered carbon through deforestation, the displace- Private sector ment of emissions, and uncertainties in the estimation of accounts in subna- tional or national ERs all constitute challenges specific to the forest sector. registries These risks, in particular the risk of reversal of ERs, have to be managed by REDD+ programs and, depending on Nesting of project accounts in nation- the management strategies, will have a bearing on REDD+ al or subnational registries. accounts Optional creation 3.3.1. Risks specific to forest ERs of separate levels A number of risks that are associated with the environmen- of forest carbon tal integrity of forest-based ERs are either not relevant or far units (e.g., national less pronounced for other sectors. These risks are briefly units and subna- tional units) described below. The estimation of all ERs is subject to uncertainty due to a lack of data and natural disturbances. While data on forests have become a lot more accurate and granular in recent years, forest inventories still have many uncertainties attached. Hence, uncertainty is particularly significant in the REDD+ context, given the scale of implementation and the fact that many REDD+ countries have very poor data inform- ing their MRV systems. Where systems are still being estab- lished, there is a significant risk that with improved methods and data, estimates from previous years will appear to be too high. Statistical uncertainty can be addressed by adopt- ing conservative assumptions regarding forest reference levels or forest emission factors. These assumptions will need to be recorded in the DMS, but do not require specific registry features. An uncertainty assessment may, however, 89 PART V. Registry Requirements for Emerging Market Mechanisms and Results-Based Payments: The Example of REDD+ inform the size of the REDD+ buffer (see section 3.3.2) and the environmental integrity of the system unless insurance the number of carbon units issued and available for sale. measures are in place. Further, land-based ER projects involve the risks of 3.3.2. Mitigating risks leakage, that is, the risk that emitting activities are Two basic strategies exist to manage the risks of simply shifted outside of the credited project, juris- insecurity, leakage, and non-permanence: countries diction, or country. While this risk is not unique to the can decide to either issue less carbon units for REDD+ land sector, the dispersed nature of emission sources in than measured or retire a certain number of REDD+ REDD+ often make the displacement of emissions often carbon units that would no longer be available for more difficult to manage and monitor than for energy or sale. A number of variations of these options—mainly in the industry. Leakage can occur indirectly—through the dis- context of permanence—have been proposed to address placement of activities that previously led to deforestation these risks (Table 38).71 in the project area. For example, where REDD+ projects lead to a decline in the local supply of wood products, this can The strategies adopted to address risks depends on a lead to increased deforestation elsewhere to meet wood number of factors; some strategies are harder to implement demand. Leakage can be addressed through the imple- than others, with discounting simpler and easier to admin- mentation of REDD+ at large scales, or by simply canceling a ister than maintaining buffer accounts, and thus probably quantity of ERs achieved according to the displacement risk preferable for REDD+ countries with lower administrative (as proposed, for example, by Mozambique, as part of its ER capacity. Strategies also depend on whether the private PIN68). The leakage risk should always be managed through sector is authorized to generate and hold carbon units and the design of ER programs. The residual leakage needs to on whether permanence management occurs on more than be accounted for and recorded in the DMS. With few excep- one accounting level. Some measures transfer the risk to tions, leakage management and monitoring do not require the buyer (e.g., the use of temporary credits), reducing the specific registry features. market value of a forest carbon unit, whereas other mea- sures (e.g., buffer accounts or discounting) transfer the risk The third and final differentiation between REDD+ to the REDD+ project or program developer, increasing the and other carbon accounting systems is that carbon cost of generating forest carbon units. removals can be reversed and the climate benefits can be lost. There is a risk that carbon may be released Buffer accounts provide a robust system of address- due to human or natural causes (known as a “reversal ing risks that can be tailored to individual program event”), before it is often considered permanent—after and project needs. In the context of projects, the most approximately 100 years of storage, although atmospheric common mechanism adopted to address reversals is the reality is more complex.69 Carbon sequestered in biomass creation of a buffer account, to which project develop- may be released because of non-anthropogenic hazards ers must assign a number of forest credits that can be (e.g., fire, wind, and floods) or anthropogenic causes (e.g., canceled in the event of a reversal. Other systems such as the conversion of land to agriculture). A number of mea- discounting and mandatory cancellations also provide a sures can be taken to address the non-permanence risk, means to ensure against risk. If discounts are to be used to some of which require specific registry features, and these account for reversals, it is important to set a sufficiently high are discussed in the next section. This risk of reversal or discount rate to ensure that any unforeseen reversals are “non-permanence” is often considered one of the main covered. The compulsory cancellation of ERs by the project, differences between biological sequestration projects on for example, in the case of a reversal (as used, for instance, the one hand and projects that reduce emissions on the in New Zealand) or leakage (e.g., as required by the ACR72) other.70 If forest carbon has been surrendered for compli- places the burden on individual project owners. ance within an ETS, then a reversal event will undermine Buffers will likely emerge as an important risk miti- gation strategy for sovereign REDD+ transactions, addressing risks related to non-permanence, uncer- tainty, and reversal. The FPCF, for example, proposes 68 See ER-PIN Zambézia Integrated Landscapes Management Program, available at: https://www.forestcarbonpartnership.org/sites/fcp/files/2015/ September/Mozambique%20ER%20PIN_Zamb_18Sep2015_FINAL.pdf 69 This is how long it takes for CO2 to leave the atmosphere. The natural 71 See, for instance, http://unfccc.int/resource/docs/2013/sbsta/eng/misc18. carbon fluxes in mature forests make standing forests under natural pdf, http://unfccc.int/resource/docs/2013/sbsta/eng/misc18a01.pdf. conditions carbon neutral. 72 See http://americancarbonregistry.org/carbon-accounting/standards- 70 Chomitz, K., 2002. Baseline, Leakage, and Measurement Issues: How Do methodologies/american-carbon-registry-nested-redd-standard/acr- Forestry and Energy Projects Compare? Climate Policy 2: 35–50. nested-redd-standard_v1-0.pdf. 90 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration TABLE 38: Risk Management Strategies Risk Management Description Example Buffer accounts A portion of ERs generated can be set aside in a “buf- Buffers are common features of voluntary and private fer account” instead of being sold. In case of reversal, carbon programs (VCS, ACR). FCPF MF developed a buf- leakage, or underestimation, ERs within the buffer can fer guideline to address both uncertainty and reversal, be used to compensate for this loss. Buffer accounts and the FCPF draft guidelines for buffers also foresee may additionally be pooled to ensure that there are the establishment of a “pooled reversal buffer” at the sufficient buffer credits to account for any reversal that fund level; the ACR has approved a Nested REDD+ any one project or program may experience. Standard’s “leakage buffer account” and “performance reserve account,” in which the jurisdiction deposits and/or requires nested projects to deposit a portion of their credits at each issuance; the VCS uses a buffer that allows the release of units from the buffer based on effective management of risks creating additional performance incentives. Discounting Permanently sets aside a portion of generated ERs and The German REM program requires 1:1 matching and only the remainder are actually used. For example, if subsequent cancellation of ERs compensated by RBCF a project generates 100 ERs, only 80 will be entered as to mitigate the various risks associated with ERs. forest carbon units on a registry. ERs are not held in a buffer in this case; they are simply retired or remain unaccounted. Conservative REDD+ agreements or financing modalities require Conservative approaches are used to manage the risk approaches conservative definitions of REL, MRV systems, or other in regulated ETSs, both on the national level (New Zea- elements. land) and international level (LULUCF accounting under the Kyoto Protocol). Temporary Temporary carbon units can be issued for forest ERs. Temporary credits were introduced for CDM afforesta- units These are units that expire at a set time after issuance tion/reforestation projects to take account of the fact and need to be replaced by the holder, with either that sequestered carbon can eventually be released another temporary or permanent unit. Temporary units through harvest or decay. will typically be usable for one crediting period, but expire in the subsequent crediting period. Legal Those selling REDD+ carbon units can be asked to Strategy to address non-permanence under the New replacement replace them in the case of reversal. Zealand Emissions Trading Scheme. obligation Adjustments on ERs lost in a reversal event are subtracted in equal In the Norway-Brazil REDD+ agreement, future pay- future issuance quantity from any future issuance of forest carbon ments will be reduced where emissions exceed RLs. of units units to the project developer. Note: ACR = American Carbon Registry; ERs = Emission Reductions; ETS = Emissions Trading System; FCPF MF = Forest Carbon Partnership Facility Methodological Framework; LULUCF = Land Use, Land-Use Change, and Forestry; RBCF = Results-Based Climate Finance; REL = Reference Emission Level; RLs = Reference Levels; REM = REDD Early Movers; REL VCS = Verified Carbon Standard. to cover both uncertainty and non-permanence risks with age the risk of overestimation and to create incentives for a buffer. Buffers will be established at the level of an ER addressing the uncertainty associated with MRV systems. program and to mitigate risks that go beyond those buffers, The reversal buffer seeks to insure against potential rever- an additional buffer will be established at the level of the sals of ERs. The ACR proposes a “Leakage Buffer Account” to Carbon Fund, pooled across all ER Programs for which an account for the time difference between the jurisdictional Emission Reductions Payment Agreement (ERPA) has been assessment of leakage and the crediting of nested projects. signed.73 The purpose of the uncertainty buffer is to man- Under this account, nested projects calculate leakage based on project methodology and create “leakage tons,” which will be retired in case a subsequent jurisdictional assess- 73 See draft Buffer Guideline: https://www.forestcarbonpartnership.org/sites/ ment detects and attributes leakage to specific projects. If fcp/files/2015/October/DRAFT%20FCPF%20ER%20Program%20Buffer%20 Guidelines%20final.pdf. 91 PART V. Registry Requirements for Emerging Market Mechanisms and Results-Based Payments: The Example of REDD+ the buffer is exceeded, the project is required to deposit n For the issuance of temporary forest carbon units, the additional ERs in the buffer. registry must: Where it includes a buffer, the registry must: n Assign serial numbers that distinguish temporary forest carbon units. n Issue buffer carbon units into a buffer account, some- thing that often occurs simultaneously with the issu- n Establish and maintain either (i) a temporary carbon ance of forest carbon units.74 unit account that is separate from but linked to a stan- dard holding account from which units are canceled or n Establish buffer accounts at the entity or project level, retired or (ii) a holding account that automatically debits or pooled across all registered projects and programs. the same number of carbon units that were credited A pooled buffer account reduces the risk that the under the previous accounting period using temporary amount of emissions released or reductions offset is credits. greater than the corresponding number of carbon units set aside by the responsible account holder. A pooled n Put in place a system that notifies holders of temporary buffer implies an additional insurance that risks at the units of the requirement to replace units a set time project or program level can be managed. prior to their expiration. n Account for buffer carbon units in a way that links them n Program the automatic expiration of units at a prede- to the project and account holder to which related termined time, combined with a note to the issuance or forest carbon units are issued. To ensure transpar- user of the unit to replace it. ency, it should be possible to determine the number of buffer credits deposited in a pooled account by any Table 39 provides an overview of registry specifications for one account holder. The buffer account need only be different risk management strategies. Box 8 summarizes the accessible by the registry administrator. risk management choices expressed by FCPF participants. n Be able to cancel buffer carbon credits following a reversal event and have in place a process for the responsible account holder to adjust the number of BOX 8. Status of REDD+ Countries: Managing carbon units that need to be put into the account to Non-Permanence Risk replenish the buffer account. Of the 18 ER-PINS accepted into the FCPF Carbon Fund n Have a process for the automatic release of buffer car- pipeline, 14 propose the use of buffer accounts. Of these, bon credits after a number of years without a reversal two ER-PINS expressly indicate that buffer accounts will be pooled. event occurring, if the rules of the system so determine. In a nested system with national accounting, there may be need for a separate sovereign buffer that insures the country against risks at the national level (i.e., not covered by project- or program-level buffers). For the discounting of forest carbon units, the regis- try must: n Automatically cancel a proportion of ERs for which for- est carbon units are issued. n Link forest carbon units to identifiable canceled ERs (i.e., ERs that are location- and date- specific) to prevent the resubmission of canceled ERs for verification. Infor- mation about canceled ERs should ideally be stored on a DMS. 74 The VCS, for example, says in its guidelines: “At first VCU issuance, buffer credits shall be deposited into the jurisdictional pooled buffer account.” 92 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration 3.4. Governance, administration, and TABLE 39: Summary of Registry Features and Permanence Measures legal issues 3.4.1. Governance issues Registry features Buffer Discount- Temporary accounts ing credits Voluntary market mechanisms are typically created by voluntary standards and administered by a non- Issuance of buffer credits to buffer governmental body. National or jurisdictional ETSs account meanwhile are created by legislation or regulation, with a public authority, commonly within an environ- Possible pooling of buffer reserves ment or energy department, ultimately responsible for their implementation and accountable for the Possible sovereign buffer reserve manner of their implementation. While the responsible line ministry is in charge of designing mitigation programs, Cancellation of the integrity of registries depends on the neutrality of the buffer credits on reversal event and administrator as well as its ability to manage complex IT for account holder systems and uphold standards of confidentiality. to replenish A REDD+ registry may be integrated within an existing Release of buffer registry or established separately. If a registry already exists credits (where policy in place) for other emissions trading in other sectors, the manag- ing entity may also take responsibility for REDD+ registries Automatic cancella- management. tion of ERs Preventing Before the government decides to establish a separate resubmission of REDD+ registry, it should conduct a careful cost-benefit canceled ER for assessment. If it concludes that a separate REDD+ registry is verification needed, it can decide to either delegate the task of adminis- Serial numbers to trating the registry to a public authority or contract a private distinguish tempo- service provider. Where registry services are contracted out, rary forest carbon units retaining public, regulatory oversight will be important for accountability reasons. Creation of sepa- rate temporary The following are relevant governance considerations accounts or debit- ing facility specific to the development of registries that handle forest carbon units: Automated expira- tion of units, with n For countries implementing REDD+ programs with advanced notifica- limited scope and limited capacities, for example, a tion of account holders nonmarket-based system or an international market- based system with only one or a small number of pur- chasers (e.g., the FCPF Carbon Fund), REDD+ countries may wish to establish simple registries or use existing registries developed and operated by third parties. A number of independent carbon registries already exist, with established IT systems and administrative capaci- ties, and contracting these services, rather than seeking to develop this capacity in-house, may reduce costs with the added benefit of increasing standardization across ETSs. For example, FCPF ER Program countries will have the option to use the FCPF registry. n For countries implementing, or planning to implement REDD+ programs linked to international or domestic ETSs, the development of a dedicated national REDD+ registry, or the development of a national emissions 93 PART V. Registry Requirements for Emerging Market Mechanisms and Results-Based Payments: The Example of REDD+ registry within which forest carbon units are housed documents from prospective account holders, including (i.e., among other types of units) will be necessary. details on company financials, authenticating docu- The development and operations of such a dedicated ments, and criminal record background checks.75 How- registry could be outsourced to a private operator ever, some entities that wish to participate in REDD+ or managed by the public sector, depending on the programs may be unable to provide all supporting national capacities to manage complex and confidential documentation, and provisions will have to be in place IT systems. (e.g., simplified procedures or additional third-party support) to facilitate account registration. n For highly complex ETSs, outsourcing of subregistry ser- vices can be a way to reduce the administrative burden n The implementing regulation may also require commu- on the government. An example of a complex ETS is a nities to be represented by a single entity with proven cap-and-trade system with the use of offsets generated sophistication to be able to interact with the registry. according to a baseline-and-credit methodology, where Groups that do not have access to IT or for other offsets are held in subregistries that must be converted reasons lack the capacity to engage in a digital registry in order to be traded on a parent registry (see appen- may require agents to act on their behalf, and registries dix D, the California Cap-and-Trade system and the use should be designed to authorize such agents. of “offset registries”). n In providing information about registry features and Whether operations are outsourced or not, in both cases participation, registry administrators will need to standard operational procedures must be formulated to consider the additional information barriers faced by guide the administration and use of the registry. potential REDD+ participants. This may require produc- ing informational brochures in a wide number of lan- 3.4.2. Administrative issues guages and engaging in outreach, for example, through The administration of REDD+ registries may require a community workshops. Alternatively, participants could number of additional skills and competences that go be required to act through a legal representative. beyond general registry administration. The adminis- trative processes and required competencies for operating n In desiging registry fee structures, registry administra- a REDD+ registry resemble those for registries in general. tors will need to consider financial barriers faced by Registry administrators may, however, need to support potential REDD+ participants, particularly of those the registration and management of forest carbon units, operating at smaller scales. This may require the in particular where individual landowners, communities, or development of varied fee structures, or the use of ex other actors that lack the sophistication of commercial mar- post administrative fees as an alternative to up-front ket participants, are authorized to engage in transactions. payment. Actors participating in REDD+ and other forest mitigation acvitities (e.g., through benefit-sharing programs) often lack 3.4.3. Legal Issues the legal knowledge and financial standing that is common It is important to consider and regulate the ownership of among actors in industrial or energy sectors. Without some carbon units held in a registry. aggregation, they may not have the standing that would Depending on the legal system, the account holder may allow them to participate in transactions involving carbon always be the owner (whether legitimately or not) units, and without training they may not be able to manage and the holding of units in an account is constitutive their account to their benefit. for ownership. Such treatment of ownership is typical for REDD+ programs that authorize “non-sophisticated” market financial markets and, in some jurisdictions (e.g., England, participants to hold carbon units will need additional assis- Germany, Switzerland), also for land ownership. Registration tance programs. Non-sophisticated market participants are of carbon units in an account would then be equated with those that lack the ability to weigh the risks and benefits of a the possession of bearer documents. This means that the carbon transaction and are finacially exposed to the risk of holding of units on an account confers similar legal effects market and transaction failures. In REDD+ such participants as the holding of a bearer’s document. The owner of an are individual owners, rural or indigenous communities, or account then has the right to dispose of the carbon units small and local NGOs. In these cases, a number of consider- registered on his or her account. Assigning constitutive ations specific to REDD+ should be taken into account: n To open new accounts, registry administrators gener- ally require information and a number of supporting 75 Id p. 12. 94 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration effect to the registration of carbon units in a registry facili- question of who can engage and benefit from an activity tates transactions and may help to build a market place. related to a piece of forest land is often complicated and controversial. Alternatively, the registration of carbon units may be merely declaratory. In that case, the account holder is not A registry is not the place to resolve legal risks related autmatically the owner of the carbon units and a transaction to tenure. A registry must start from the assumption that of carbon units may not be protected by bona fide (good entities holding forest carbon units are uncontested own- faith) if the owner turns out to be illegitimate. Examples of ers with the right to transfer and benefit from the sale of such declaratory effects of land and real estate registra- the forest carbon unit. Verification of a project developer’s tion exist in Portugal, Spain (with bona fide protection), and legal right to undertake an ER project should occur before Belgium and France (without bona fide protection). Where a forest carbon unit is issued onto a registry, and relevant the registration of carbon units is declaratory, the transfer documentation establishing this right should be available in of carbon units could require the accompanying transfer of a DMS. a physical certification, and it is that bearer certificate that serves as evidence of ownership. Similarly to the transfer of registered shares in a company, the transfer requires 3.5. Decision guide for creation of a an endorsement or a written assignment in addition to the REDD+ registry delivery of carbon units. Two key considerations should guide decision makers in the complex process of REDD+ registry design: (i) the policy The decision on the legal effect of registration of car- objectives sought from REDD+ and (ii) the level of capacity bon units in a registry is independent from the way a to implement and administer REDD+ projects and pro- carbon unit has been acquired. Acquistion can come via grams. allocation (allowances), certification against baseline emis- sions (credits), or puchase (of an allowance or credit). The The design considerations required for the creation of a government putting in place a registry would also have to REDD+ registry are summarized in Figure 25 (at the end decide whether account holdings could be used as security of this chapter). In addition, we present three hypotheti- for other transactions. cal scenarios to illustrate how REDD+ policy objectives and REDD+ implementation capacity can influence registry In land use transactions, the right to benefit from design choices. emission reductions may be contested. In many coun- tries land and resource tenure rights as well as rights to Scenario 1 applies to a small, least developed country, with emission reductions are not well defined and, therefore, limited administrative capacity; scenario 2 applies to a lower- subject of conflict. Where ownership is unclear, more than middle-income country with a relatively developed adminis- one entity participating in an environmental service may trative capacity; and scenario 3 applies to an upper-middle- expect to benefit from it (or claim ownership of resulting income country with high administrative capacity. emission reductions/carbon units). In these cases, the 95 PART V. Registry Requirements for Emerging Market Mechanisms and Results-Based Payments: The Example of REDD+ Scenario 1: a small least developed country with limited administrative capacity, is currently receiving REDD+ readiness finance and expects to access RBCF for reducing emissions from forest loss against a national reference level, with no transfer of carbon units. Country 1 is interested, however, in eventually transferring forest carbon units internationally under the flexibility mechanisms of the Paris Agreement. There is no project-level REDD+. Role of carbon Country 1 will need to develop a DMS to be able to track ERs for which RBCF are sought. Once a DMS is in markets in REDD+ place, a simple registry (i.e., a register) can be developed to issue forest carbon units for international transfer. Scale of Country 1 has no project-level REDD+ and, as a small country, does not have subnational jurisdictional REDD+ implementation programs. A simple, single account system will be sufficient, where the national government is the sole owner and beneficiary of forest carbon units. Risk management Country 1 should aim to develop the simplest risk management strategy that is compatible with the rules for strategies the international transfer of forest carbon units. Governance The registry will be created by national law in accordance with international standards. The REDD+ registry will be stand-alone as carbon units will not be transferred from other sectors. Where complex risk management functions are required, country 1 should consider using a private sector contractor with existing capacity. Administration With only a single account holder, limited administrative capacity is required to manage the registry. Legal issues It will probably be assumed that the government is the uncontested owner of carbon units with the right to transfer and benefit from their sale at the international level. Technology and IT A single national holding account may be sufficient. specification Scenario 2: a lower-middle-income country with a relatively developed administrative capacity, intends to establish a domestic cap- and-trade system in which forest emissions are not covered, but in which project-level forest carbon units can be used as offset credits by covered entities. Indigenous and community groups are expected to benefit from the sale of forest carbon units. Country 2 is currently receiving international RBCF for reducing forest emissions with no transfer of carbon units and does not intend to engage in the international transfer of forest carbon units, as it wishes to count all domestic ERs toward its NDC under the Paris Agreement. Role of carbon Country 2 will need to develop a DMS and transaction registry for a domestic regulated market in forest carbon markets in REDD+ units, but no international linking to other registries is required. There is no double counting risk with RBCF, as there is no transfer of carbon units internationally, though ERs for which RBCF are received will need to be tracked in a DMS. Scale of Project-level implementation only of REDD+, and no nesting requirements. implementation Risk management The use of buffer accounts for forest carbon units traded as offsets is a likely option. strategies Governance The registry will be created by national law, and could operate as a stand-alone offset registry, managed by a public or private body. Alternatively, limited offset accounts (without a surrendering function) could be created within the registry used for the cap-and-trade system. Administration Possible support required for individual landowners, communities, or other actors that lack the sophistication of commercial market participants and the ability to assess the risk of engaging in carbon transactions. Legal issues Verification of a project developer’s legal right to undertake an ER project should occur before a forest carbon unit is issued onto a transaction registry. Technology and IT Possible requirement for issuance, holding, cancellation, buffer, trading, and/or natural person accounts. For- specification est carbon units will need to be distinguished from allowances issued under the cap-and-trade system. Where forest carbon units are issued onto a stand-alone offset registry, there will have to be a facility to convert offset credits into units that can be surrendered for compliance with the cap-and-trade system. 96 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration Scenario 3: an upper-middle-income country with high administrative capacity, intends to establish a domestic ETS in which some forest emissions are capped and project-level activities in noncapped forest areas can generate offsets to be used by capped entities. At the same time, it is expected that carbon units (including forest carbon units) can be transferred internationally by both the government and project-level participants (e.g., through the sustainable development mechanism of the Paris Agreement). Role of carbon Country 3 has chosen the most complex implementation scenario in which forest carbon units can be traded markets in REDD+ as allowances within a domestic cap-and-trade system, and offset credits can be traded within a domestic cap-and-trade system, and transferred internationally at both the government-to-government level, and by domestic non-governmental entities. Scale of Project-level implementation for domestic cap-and-trade system. At the international level, it is likely that implementation the government will wish to transfer carbon units on the basis of national accounting, as any internationally transferred carbon units will need to be deducted from national accounting toward country 3’s NDC. This may require multiple levels of forest carbon unit, with carbon units for the domestic ETS distinguished from interna- tionally transferrable forest carbon units. Risk management As with scenario 2, the use of buffer accounts is a likely option. Buffer accounts may be required for forest strategies carbon units traded at the domestic ETS level and for forest carbon units traded at the international level. Governance The registry will be created by national law. Although contracting out of registry services to the private sector is an option, the government may wish to retain day- to-day control because of the need to reconcile trades within the domestic ETS with international transfers. Administration As with scenario 2, possible support required for low-capacity participants. Legal issues As with scenario 2, verification of a project developer’s legal right to undertake an ER project. In addition, the multiple types of carbon unit and the rights associated with each, should be defined in law. Technology and IT In addition to the accounts listed under scenario 2, deletion, exit, and auction delivery accounts may also be specification required. There are multiple scenarios in which double counting could arise (e.g., a non-governmental entity in country 3 transfers a carbon unit internationally without the transfer being registered by the government of country 3, in which case the unit may be counted in two countries). Double-entry bookkeeping will be required to avoid this. The conversion of domestic offset credits into domestic allowances and the conversion of both types of domestic forest carbon units into internationally transferrable forest carbon units may be necessary to avoid double counting. 97 PART V. Registry Requirements for Emerging Market Mechanisms and Results-Based Payments: The Example of REDD+ FIGURE 25: Registry Design Decision Steps What is the role of carbon markets in REDD+ implementation No role. Results-based Voluntary International Domestic International markets regulated regulated and domestic climate markets markets reg. markets finance Data management Data management system and registry required. Functionality system required of registry determined by complexity of the market What is the scale of implementation of REDD+ Subnational National National/ National/ Project level only subnational level only level only subnational and project Multiple accounting levels Single accounting level, no nesting required and nesting required Which REDD+ risk management strategies are required Conservative Legal Future issuance replacement Discounting Temporary units Buffer accounts approaches adjustment obligation No implications for the registry Registry features required for these strategies Note: For RBCF programs generating carbon units, the data management system could assume the function of a simple register, thereby avoiding double counting. Where a transaction registry exists, ERs and payments could be recorded in such a registry. 98 APPENDIX A: Glossary Types of Accounting Systems Types of Emission Trading Systems Data Management System (DMS): A database that Baseline-and-credit: Under a baseline-and-credit system, records information about a carbon unit that is not stored entities that are not subject to an emissions cap are issued in the transaction registry or register, but that should credits for voluntarily undertaking projects that reduce remain archived for policy reasons. For example, to facilitate emissions. These emission reductions are commonly mea- compatibility between different registries, it may be desir- sured against a counterfactual scenario in which the project able to limit the information that travels with a carbon unit would not have taken place (the “business as usual” sce- when it is externally transferred. It may also be desirable to nario or baseline). Thus, emission reduction projects do not archive information about that carbon unit (e.g., baseline have to be carbon negative, but simply emit less than would information according to which a carbon unit was issued otherwise have been the case. Project developers can then or geographical information related to a project boundary) sell credits as offsets to entities subject to an emissions cap, and this can be recorded in a DMS. The serial number of a which use those offset credits to meet their emissions cap. carbon unit should link it to the information stored in the Project developers may also be able to transfer or retire DMS, so the information can be retrieved if needed. credits with a government body in exchange for a rebate or some other form of subsidy. GHG inventory: An inventory that records physical green- house gas (GHG) emissions and removals. It is important to Cap-and-trade: A cap-and-trade system creates a fixed distinguish between accounting of emissions and removals, ceiling on total emissions for a given compliance period, and and accounting of carbon units. then distributes allowances (usually through free allocation or auctioning) to regulated entities that are subject to the Register: A database that records serialized carbon units cap. Entities subject to the cap can then trade allowances and any other information specific to the carbon unit that among themselves. At the end of the compliance period, is required by policy. This can include the vintage of the the number of allowances held by a capped entity must carbon unit, the identity and location of the project for cover their actual emissions over that period. Entities with which the carbon unit was issued, the project funder, and actual emissions in excess of their respective allowances are verification details. A register may be used by a country that subject to a penalty. receives Results-Based Climate Finance (RBCF) for generat- ing emission reductions (ERs), to provide assurance that Purely voluntary: In a purely voluntary system, entities one and the same ER is not paid for twice (double payment). that are not subject to an emissions cap generate and sell A register may also be used as part of a simple Emissions offset credits to other entities that are likewise not subject Trading System (ETS) without multiple accounts, so a coun- to an emissions cap. try can “transfer” carbon units to a donor country through simple double-entry bookkeeping (the subtraction of one Types of Carbon Unit carbon unit in one register being mirrored by the addition Carbon unit: An umbrella term for allowances, carbon of one carbon unit in another registry). credits, and voluntary credits. Transaction registry: A database that has all the fea- Allowance: Analogous to a permit, an allowance is issued tures of a register, plus the capability to transfer carbon by a central authority and gives a regulated entity the right units between account holders in the transaction registry to emit, to the extent of the allowance, without being sub- (internal transfer), and/or the capability to transfer carbon ject to a penalty. units from one transaction registry to another one (external transfer). Every ETS requires a transaction registry in some Carbon credit: A credit is earned for undertaking an activ- form. The more complex the trading system, the more fea- ity that reduces emissions against a baseline according to a tures the transaction registry will require. regulated standard. Carbon credits are issued to authorized 99 APPENDIX A: Glossary project developers upon verification, under voluntary or Project developer: an organization that voluntarily regulated systems. engages in a project to reduce emissions, in order to be issued with carbon units for sale to either regulated entities Voluntary credit: As with a carbon credit, voluntary credits or voluntary purchasers. are earned for undertaking an activity that reduces emis- sions against a baseline. However, voluntary credits are Registry administrator: a body responsible for the day- issued according to a voluntary standard. to-day operations of the registry; it may be a public or a private body. Registry Functions Regulated entity: an organization that is legally subject to Banking: the carrying over of unused carbon units from an emissions cap. one compliance period to the next compliance period. Regulator: a public authority appointed by law to oversee Borrowing: the use of carbon units from future compli- and enforce the market mechanism. ance periods to meet obligations in the current compliance period. Verifier: a body tasked with verifying, among others, that the emission reductions reported by project developers are Cancellation: the disposal of a carbon unit through, for real and additional. example, its transfer to a cancellation account, where the unit is not used for compliance with an emissions target and cannot be used by others for compliance either. Trading Levels Domestic market: the home (national) market, as Conversion: the transformation of one type of carbon unit opposed to the international market. Some entities, such as to another type. power stations and industrial facilities, have emissions caps expressed in domestic legislation. These entities can acquire External transfer: the transfer of a carbon unit from an carbon units to comply with these caps, in accordance with account in one registry to an account in another registry, the domestic legal framework. using either an independent transaction log or peer-to-peer linking of registries. International market: Countries (or jurisdictions such as the EU) have international emission reduction limitations Internal transfer: the transfer of a carbon unit from one or goals; countries can acquire carbon units to comply with account to another. these caps or targets in accordance with treaty rules. Issuance: the creation of a carbon unit by a registry admin- Primary market: refers to the market that allowances istrator and its allocation to an account holder. (distributed by regulators) or carbon credits (created from ER projects) enter first. For example, the sale of a carbon Retirement: the disposal of a carbon unit through, for credit generated by a project developer to a regulated entity example, its transfer to a retirement account for compliance for compliance with an emissions cap would take place on with an emissions target. In some contexts, retirement can the primary market. be referred to as “surrender.” Secondary market: refers to the market on which Market Participants carbon units are resold, either for further resale or for Broker: an entity that engages in carbon unit transactions compliance purposes. The secondary market can include on behalf of a client (where the client is the beneficial owner various options for future sales of carbon credits or other of the carbon unit). derivatives. Intermediary: an entity that purchases a carbon unit on its own behalf for a purpose other than compliance. This could include entities that speculatively purchase carbon units for resale, or entities that purchase carbon units for cancella- tion to reduce the number of carbon units available on the market. 100 APPENDIX B: Indicative List of Functions to Develop User Profiles that Have Access Specific process Type of process Process (as necessary) A B C D E F G H Administration Registry administration dashboard Administration Configure the system Functional Administration Configure the system Technical Administration Manage an alert (function provided to The whole registry the registry administrator) Administration Manage an alert (function provided to the users) Administration Open an account Administration Modify the status of account Administration Create a new authentication profile Administration Change an authentication profile Administration Consult an authentication profile Administration Export authentication profiles Users Change a password Administration Revoke a password Account Modify an account Account Consult the list of accounts (for which the user is authorized) Account Consult the detail of account Account Consult the history of account balances Administration Create a user Administration Modify a user Administration Authorize a user Administration Modify user authorization Administration Authorize an administrator or registry operator Administration Modify the authorization of an adminis- trator or registry operator Account Authorize an account user 101 APPENDIX B: Indicative List of Functions to Develop User Profiles that Have Access Specific process Type of process Process (as necessary) A B C D E F G H Users Revoke a user Transactions Enter an operation Issuance Transactions Enter an operation Allocation Transactions Enter an operation Cancellation Transactions Enter an operation Internal transfer Transactions Enter an operation External transfer Transactions Enter an operation Unit surrendering (ETS) Transactions Enter the verified emissions of an instal- lation Transactions Import a file of verified emissions Transactions Import an “allocation table” Transactions Validate verified emissions Transactions Validate a transaction Transactions Cancel a validated transaction Transactions Cancel a transaction Transactions Approved a transaction Transactions Refuse a transaction Transactions Consult the list of transactions awaiting further action Transactions Consult the list of posted transactions Transactions Consult the detail of a transaction Administration Consult alerts and notifications Administration Cancel an alert/notification Transactions Consult the history of operations between two dates Administration Emergency stop: registry unavailable for customers Administration Emergency stop: registry unavailable for all users and the public Administration System restart Transactions Consult/Download a transaction receipt/account balance Administration Enter information to publish on the public registry welcome page Administration Enter information to publish on the welcome page for authenticated users 102 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration Specific process Type of process Process (as necessary) A B C D E F G H Administration Export the list of natural persons and companies (e.g., name, first name, title, company name, address, e-mail, landline/mobile/fax number, formatted postal address) Administration Upload documents to make available on the public website Note: A = System administrator profile; B = Registry administrator profile; C = Registry operator profile; D = Authorized representative profile; E = Additional authorized representative profile; F = Account auditor profile; G = Unique representative profile; and H = MRV report verifier profile. 103 APPENDIX C: Accounting Models: Type of Accounts Debited or Credited by Type of Transaction Type of transaction Provi- Buffer Surren- Technical With- sioning release Issuance Transfer der deletion drawal Type of Type of Account account holding holder DB CR DB CR DB CR DB CR DB CR DB CR DB CR “-Q” Proprietary CE/Sa Yes Yes Issuance Proprietary CE/S Yes Yes User Proprietary Customer Yes Yes Yes Yes Yes Project Proprietary Customer Yes Yes Yes Yes Yes proponent Buffer Third-party CE/S Yes Yes Yes Other All Customer Yes Yes Yes holdingb Return Third-party CE/S Yes Yes Withdrawal Proprietary CE/S Yes Cancellation Third-party CE/S XX c XX Yes XX XX XX XX Deletion Proprietary CE/S XX XX XX XX XX XX Yes Note: DB = Debit; CR = Credit. “-Q” represents the structurally in-debit technical account that is debited in quantity (without serial number) on each issuance. a. CE/S: Competent authority or State. b. Trading account, personal holding account. c. Debit is not permitted on this account for any transaction. 104 APPENDIX D: Proposed Workflow Diagram for an Issuance Registry Transaction 1 – The administrator of the registry is Administrator Registry Transferee States responsible for the issuance: he authorizes it as necessary by approving an integrated 1 file. The date of the transaction is Instructed automatically set to current date. Serial numbers are created. 2 – Four-eye principle (optional): the issuance is monitored by a user different from the Cancellation one who authorized it. 2 3. A – The issuance is cancelled. Approval Notify 3. B – The issuance is approved. Depending on Reg. Admin optional security options, approval may 3.A Terminated require a password or code sent by SMS to be entered. Approval of the issuance is 3.B Validated notified to authorized representatives of the transferee account. 4 – If applicable, the issuance is proposed to the central hub which carries out checks. The registry receives a response from the platform. If there is no discrepancy, the Checked transfer may be finalized, otherwise it is + Discrepancy code Notify cancelled. Reg. Admin + 4 Proposed 5 – Option: explicit approval may be Transferee required for the issuance from one of Checked No Discrepancy the authorized representative of the Rejet transferee account. explicite 5 5. A – In the case of an explicit rejection, the system cancels the issuance. Notify Transferor 5. B – Option: an issuance may be cancelled 5.A Rejected automatically after a specific time lapse Rejet Implicite without explicit approval. 5. C – The issuance is accepted (explicitly or Cancelled 5.B implicitly according to the design of the system). The transferee account inventory Acceptation is updated. 6 – The registry produces notifications of 5.C Completed issuance which can be downloaded online. The administrator of the registry and authorized representatives of the Notify Notify Reg. Transferee transferee account are notified. Admin. 6 6 - 105 APPENDIX E: Proposed Workflow Diagram for an Issuance with Buffer Credits Registry Buffer Transaction 1 – The administrator authorizes the issuance. Administrator Registry Account States The date of the transaction is automatically set to the current date. 1 2 – Four-eye principle (optional): the issuance Instructed is monitored by a user different from the one who authorized it. 3. A – The issuance is cancelled. 3. B – The issuance is approved. Depending on Cancellation 2 optional security options, approval may require a password or code sent by SMS Approval to be entered. Serial numbers are created. Optional: The transaction can be cancelled 3.A Terminated (delay before completion, or request to enter a SMS code or password following 3.B Notify Validated Reg. incorrect entry) Admin 4 – If applicable, the issuance is proposed to Checked + Discrepancy the central hub which carries out checks. code If there is no discrepancy, the transfer may 4 Proposed be finalized, otherwise it is cancelled. Checked No 5 – Option: explicit approval may be Discrepancy required for the issuance from one of Rejet the authorized representative of the explicite 5 transferee account. 5. A – In the case of an explicit rejection, the 5.A Rejected system cancels the issuance. Notify 5. B – Option: an issuance may be cancelled Reg. Admin. Rejet Implicite automatically after a specific time lapse 5.B Cancelled without explicit approval. Notify 5. C – The issuance is accepted (explicitly or Reg. Admin. Acceptation implicitly according to the design of the system). The transferee account inventory 5.C Completed is updated. Notify 6 – The registry produces notifications of Reg. Admin. issuance which can be downloaded online. The administrator of the registry is notified. 6 6 106 APPENDIX F: Proposed Workflow Diagram for an Internal Transfer Registry Transaction 1 – An authorized representative instructs the Transferor Transferee System States transfer to debit the transferor's account. The date of the transaction is automatically 1 set to the current date. Instructed 2 – Four-eye principle (optional): the transfer is reviewed by an authorized representative different from the one who Cancellation instructed the transfer. 2 3. A – The transfer is cancelled. Approval 3. B – The transfer is approved. (Based on Notify optional security measures, such approval 3.A Cancelled may require entering a password or an SMS code.) The serial number affected by this transaction are no longer available for any transaction. 3.B Validated Notify 4 – Option: after a certain time, an automatic Transferor decision may cancel or confirm the transfer. Inaction 5 – If applicable, transfer to the central hub for a check (e.g. internal transfer between Cancellation 4 accounts bearing distinct account types). Checked: discrepancy 6 – Option: explicit approval of the transfer 5 Proposed may be required by one of the authorized representatives of the transferee's Checked: No Discrepancy account. 6. A – In case of rejection of the transfer by the transferee, the system cancels the Rejection 6 transaction and restores the inventory Inaction of the transferor's account to its position Notify Transferor prior to the transfer. 6.A Terminated 6. B – Option: the rejection of the transfer can be performed automatically after a certain period without explicit approval 6.B Terminated by an authorized representative of the transferee's account. 6. C – The transfer is approved (either explicitly or automatically depending on the system Acceptation design). The inventories of the accounts involved in the transfer are updated. 6.C Completed 7 – The registry produces transfer notifications that are downloadable online. The authorized representatives of the Notify Notify 7 Transferor Transferee 7 transferor's account and the transferee's account are both notified. 107 APPENDIX G: Proposed Workflow Diagram for an External Transfer Transferring Central Hub Acquiring Transaction 1 – An authorized representative instructs the Transferor Registry Registry Transferee States transfer to debit the transferor's account. The date of the transaction is automatically Instructed 1 set to the current date. 2 – Four-eye principle (optional): the Cancellation transfer is reviewed by an authorized 2 Inaction representative different from the one Approval who authorized the transfer. Notify 3. A – The transfer is cancelled. 3.A Terminated 3. B – The transfer is approved. (Based on optional security measures, such approval may require entering a password or an 3.B Validated SMS code). The serial numbers affected by Notify Transferor this transaction are no longer available for any transaction. Cancellation 4 – Option: after a certain time, an automatic 4 Terminated decision may cancel or confirm the transfer. Checked 5. A – The central hub rejects the transfer. + Discrepancy Proposed code 5 6 – The central platform proposes the transfer Checked No 5.A Discrepancy Terminated to the rejection of the transfer proposal which notifies the payer (6A.A) who Rejected 5 confirms receipt. Accepted 6. B – The destination registry accepts the proposal 6.A for transfer and notifies the platform. 6.A.A 7 – The central platform notifies both registries. Terminated 8 – Both registries post the transfer and 6B Accepted produce notifications of successful transfer. The authorized representatives 7 Completed of the payer account and transferee account are notified by their respective 8 8 registries. The central platform is notified Notify Notify of the successful completion of the Transferor Transferee transaction by each registry. 108 APPENDIX H: Proposed Workflow Diagram for a Cancellation Transaction 1 – An authorized representative authorizes Transferor Registry Central Hub States the cancellation of the withdrawal from the payer account. The date of the transaction 1 is automatically set to the current date. Instructed 2 – Four-eye principle (optional): the transfer is reviewed by an authorized representative different from the one who Cancellation instructed the transfer. 2 3. A – The transaction is cancelled. Approval 3. B – The transaction is approved. (Based on Notify optional security measures, such approval 3.A Terminated may require entering a password or an SMS code.) The serial number affected by this transaction are no longer available for 3.B any transaction. Validated Notify 4 – Option: after a certain time limit without Transferor approval or explicit cancellation, the transaction can be automatically cancelled or non approval automatically recorded. Cancellation 4 5 – Option: the cancellation may be under the control of the central platform which may block or finalize it. Checked + Discrepancy code 6 – Once posted, the debited and credited account journals are updated. 7 – The registry produces notifications of 5 Proposed issuance which can be downloaded online. The authorized representatives of the payer account are notified. Checked No Discrepancy 6 Completed Notify Transferor 7 109 APPENDIX I: Origins and Specifications of Kyoto Registries National registries have been established under the Kyoto ance with the Data Exchange Standard (DES) is required Protocol by the Parties listed in Annex 1 of the UNFCCC, for any national registry to be able to connect to any other in accordance with the Kyoto Protocol, article 7.4: “The Kyoto registries through the International Transaction Log Conference of the Parties serving as the meeting of the (ITL). It should be noted that Annex H to the DES provides Parties to this Protocol shall also, prior to the first commit- a comprehensive and detailed test plan for registries: each ment period, decide upon modalities for the accounting of registry transaction must pass these tests prior to connect- assigned amounts,” and article 17: “The Conference of the ing to the ITL. Parties shall define the relevant principles, modalities, rules and guidelines, in particular for verification, reporting and Table 41below provides a list of the main Conference of the accountability for emissions trading.” Parties (COP) and Conference of the Parties serving as the Meeting of the Parties to the Kyoto Protocol (CMP) decisions National registries have been developed and upgraded over that are relevant to the design of Kyoto registry systems. time, in accordance with COP and CMP decisions. Compli- TABLE 40: Main COP and CMP Decisions with Relevance for the Design of Registry Systems Decision Year Purpose 24/CP.8 2005 a. Technical standards for data exchange between registries. 16/CP.10 2004 a. Define content and standard electronic format of reports issued by registries; b. Consistency between national registries, CDM registry, ITL; c. Specific operations (replacement of expired units) and calculation of the commitment period reserve; d. Disclosure of information. 13/CMP.1 2005 a. Modalities for the accounting of assigned amounts under Article 7, paragraph 4, of the Kyoto Protocol; b. Registry requirements. 14/CMP.1 2005 a. Specify standard electronic format requirements applicable to reports issued by registries. Note: COP = Conference of the Parties; CMP = Conference of the Parties serving as the meeting of the Parties to the Kyoto Protocol ; CDM = Clean Development Mechanism; ITL = International Transaction Log. 110 APPENDIX J: Analytical Framework to Compare Registries The table below provides a generic list of key characteristics that can be used to compare registries. Id. CHARACTERISTIC Id. CHARACTERISTIC ADMINISTRATION FUNCTIONS AND DATA 1. Is the administrator of the registry a public or private 14. Does the registry manage types of transactions other entity? than issuance, allocation, transfer, and cancellation (e.g., buffer provisions, buffer release, or surrendering)? 2. Is the registry administered at different jurisdictional levels (i.e., national, provincial, regional)? 15. Does the registry manage accounts other than holding accounts? For example, accounts for specific participants 3. How many users does the registry have? (e.g., subnational government or financial players) or 4. How many accounts are open in the registry? accounts for specific purposes (e.g., cancellation or auc- tions)? 5. How many full-time staff (or equivalent) administer the registry? 16. What types of units does the registry account for? 6. How many accounts are held by compliance entities (as 17. What are the add-on labels managed by the registry opposed to intermediary and financial sector accounts)? (e.g., co-benefits)? 7. What are the operational hours and days of the registry? 18. What are the authentication profiles available to registry users (e.g., data entry, entry and validation, read only)? 8. What are the main security measures adopted for the DELIVERY MODEL registry? 19. Was the registry IT system developed from scratch, CONNECTIVITY adapted from existing solutions, or “rented” on use 9. What other systems is the registry connected to (e.g., (SaaS)? GHG reporting platform, trading platform)? 20. What kind of external support has been sought to imple- 10. Is the registry connected to other registries? How many? ment an operational registry: 11. In case of connection to one or more registries: how are Synthetize business requirements and prepare func- external transfers accounted for? tional specifications? Prepare IT technical specifications? 12. In case of connection to one or more registries: is the connection based on peer-to-peer or a central hub? Provide development, hosting, and maintenance ser- vices? 13. In case of connection to one or more registries: is the communication protocol used tailor- made or standard Provide hotline services? (e.g., Swift, DES)? Provide all or part of the registry administration services (initial contact, following up on and updating of docu- ments pertaining to account holders)? 111 APPENDIX K: Forest Carbon Units and Existing Market Mechanisms Given the limited experience with the implementation of Australia’s Carbon Farming Initiative (CFI) is a mecha- REDD+ programs in developing countries, it is helpful to nism to generate carbon credits through land- use activi- review the market mechanisms established in developed ties.76 The CFI was originally designed as an offset mecha- countries and voluntary markets to reduce forest emissions, nism within Australia’s Carbon Pricing Mechanism (CPM), and the transaction registries put in place to handle forest which enabled covered entities to avoid fixed charges carbon units. This appendix reviews five systems: Australia’s on carbon by purchasing credits generated by voluntary Carbon Farming Initiative (CFI), the New Zealand Emissions projects, priced according to supply and demand. Forestry Trading Scheme (NZ ETS), the United Kingdom Woodland projects are a major part of the CFI, farmers and landown- Carbon Code, California’s Cap-and-Trade Program, and the ers being allowed to earn carbon credits through revegeta- Verified Carbon Standard (VCS). tion and reforestation of their land. It had been anticipated that up to 5 percent of an entity’s liability under the CPM These systems are reviewed according to five criteria: (i) could be met with offsets for an initial period (2012–15), the role of carbon markets; (ii) the scale of implementa- rising to all of an entity’s liability under the CPM in a subse- tion; (iii) the role of the private sector; (iv) permanence quent period. measures; and (v) governance. The main design features of each system according to these five criteria are outlined in Following the repeal of the Carbon Pricing Mechanism in five tables, and followed by a detailed description of each 2014, and its replacement with an Emissions Reduction system and its relevant registry arrangements. Fund (ERF) to finance voluntary emission reductions (ERs), the CFI was amended to function more like a compensa- tion scheme, where credits generated through projects are 1. Role of Carbon Markets “sold” to the government through reverse auctions.77 New Zealand’s Emissions Trading Scheme (NZ ETS) Australia The CFI originally created a regulated Carbon Farming national market in forest carbon units, was introduced in 2008 to help New Zealand meet its ER Initiative where forest carbon units can be pur- targets under the Kyoto Protocol. Participants with obliga- chased as offset credits. The CFI has been tions under the NZ ETS must acquire and surrender New reformed into a quasi-market, where the Zealand Units (NZUs) or other eligible units in an amount government purchases forest carbon units from landowners through a reverse proportional to GHG emissions released.78 The NZ ETS auction. covers emitters in the forestry, liquid fossil fuels, electricity New Zealand The NZ ETS links forest carbon units to production, industrial processes, synthetic gases, and waste Emissions both a domestic regulated market and an sectors, with biological emissions from, and agriculture sub- Trading Scheme international regulated market. ject to reporting obligations. To prevent loss of international U.K. Woodland The WCC created a regulated national Carbon Code market in forest carbon units, where forest carbon units can be purchased to offset GHG reporting obligation. 76 See http://www.environment.gov.au/climate-change/emissions-reduction- fund/cfi/about. California Created a regulated subnational market in 77 See Carbon Farming Initiative Amendment Act 2014. Cap-and-Trade forest carbon units, where forest carbon Program 78 The following units can also be purchased by participants in the NZ units are used as offset credits in a cap- ETS and canceled or surrendered to meet their obligations: Emission and-trade system. Reduction Units (ERUs), generated by Joint Implementation (JI) projects that reduce emissions or create forest sinks in so-called Annex B Verified Carbon The VCS is a program through which countries; Removal Units (RMUs), awarded to Annex B countries on the Standard forest carbon units are marketed as vol- basis of net removals by carbon sinks in the land use, land-use change, untary offsets. and forestry sector; and Certified Emission Reductions (CERs), generated by the Clean Development Mechanism (CDM). However, since June 1, 2015, Kyoto Protocol units have no longer been eligible for use to meet obligations under the ETS. 112 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration competitiveness from the NZ ETS and ease the financial has not been possible in practice because trading in Kyoto cost of compliance, NZUs were initially freely allocated to Protocol first commitment period units has been closed off. participants in the fishing and forestry sectors, as well as to New Zealand took its emission reduction target for 2013–20 firms whose activities are emissions-intensive and who are under the UNFCCC rather than adopt a Kyoto Protocol exposed to international trade. Allocation rates of NZUs are target for the second commitment period. Therefore, New based on the size and emissions intensity of operations, and Zealand will not issue any second commitment period AAUs the amount of free NZUs provided each year is indexed to and none will become available. production.79 Participants can also purchase NZUs directly from the government at a fixed price or from other entities United Kingdom’s Woodland Carbon Code (WCC) was with surplus NZUs, or that have generated NZUs voluntarily. launched in 2011, as a voluntary standard for forest projects that generate and sell credits (known as Woodland Carbon Under the NZ ETS, landowners of “post-1989 forest land”80 Units or WCUs) for carbon sequestration. Although project do not face legal obligations, but may voluntarily participate developers and purchasers cannot use WCUs in any compli- in the NZ ETS, receiving NZUs for increases in the carbon ance scheme and WCUs are not internationally tradable, stock of their forest, which can then be sold to other par- U.K. companies can use WCUs when reporting on their GHG ticipants. However, they are also treated as an emitter so if emissions (since 2013, all United Kingdom-based quoted they harvest or deforest their land, they must repay units to companies have had to report on their GHG emissions as the government. Landowners of post-1989 forest land may part of their annual Director’s Report83) and in claims of also earn NZUs by participating in the government’s Perma- carbon neutrality of an organization’s activities, products, nent Forest Sink Initiative (PFSI), which is similar to the NZ services, buildings, projects, or events.84 WCUs will also be ETS, except for some minor differences, described below. accounted for at the national level toward the United King- Landowners of pre-1990 forests face legal obligations under dom’s national targets for reducing GHG emissions under the NZ ETS for deforesting land. Moreover, they cannot earn the Kyoto Protocol and the U.K. Climate Change Act 2008. NZUs for increases in forest carbon stocks, do not have surrender obligations for loss of carbon stocks provided the California’s Global Warming Solutions Act of 2006 (AB32) land remains forest, and cannot participate in the PFSI. requires the state to reduce GHG emissions to 1990 levels by 2020. As one tool to achieve this, AB32 authorized The Climate Change Response Act (2002)—the legislation the Air Resources Board (ARB) to develop a state-wide that established the NZ ETS—also allows account holders to cap-and-trade program, which went into effect in January exchange NZUs for NZ-originated Assigned Amount Units 2013. Forestry emissions are not directly regulated (AAUs), a unit that can be traded internationally under the under California’s Cap-and-Trade Program. However, Kyoto Protocol. Conversion takes place via the New Zealand covered entities (those organizations with GHG compliance Emissions Unit Register (NZEUR) platform. The legislation obligations under the Cap-and-Trade Program) may use committed the government to convert units, and is contin- offset credits for up to 8 percent of their total compliance gent on the availability of AAUs and the Commitment Period obligation, and the ARB has approved U.S. forestry projects Reserve.81 Where an AAU is transferred to an overseas as a source of compliance offset credits. registry, the transaction is made via the International Trans- action Log (ITL). The overseas registry must be linked to the The Verified Carbon Standard (VCS), established in 2006, ITL for the transaction to be completed.82 Since 2009, only is a global program that offers standardized methodologies NZUs transferred for forestry removal activities have been for voluntary ER projects and programs, and provides a plat- eligible for conversion to AAUs so they can subsequently be form through which to track the ERs generated (called Veri- transferred to an overseas registry. Since 2015, conversion fied Carbon Units or VCUs). The purpose of the VCS program is to provide quality assurance to companies, governments, and other entities looking to voluntarily offset their GHG emissions. The VCS was one of the first global standards to 79 http://www.climatechange.govt.nz/emissions-trading-scheme/participating/ develop crediting for agriculture, forestry, and other land-use industry/allocation/how-it-works/. (AFOLU) projects, and has developed the world’s first frame- 80 Areas that were not forest land on December 31, 1989, or were forest land work for Jurisdictional and Nested REDD+ (JNR). on December 31, 1989, but were deforested between January 1, 1990, and December 31, 2007. Landowners of pre-1990 forest have a legal obligation under the NZ ETS to surrender units. 81 Account holders will not be able to transfer Kyoto units internationally if their transfer would cause the minimum number of Kyoto units held within 83 Companies Act 2006 (Strategic Report and Directors’ Report) Regulations the NZEUR to fall below the Commitment Period Reserve (CPR), currently 2013. set at 90 percent of New Zealand’s initial assigned amount. 84 PAS2060: 2014 http://shop.bsigroup.com/ProductDetail/?p 82 http://www.eur.govt.nz/about-us/transfer-units. id=000000000030286698. 113 APPENDIX K: Forest Carbon Units and Existing Market Mechanisms 2. Scale of Implementation VCS’s approach to scale is set out in its JNR Requirements, which offers three different accounting and crediting sce- Australia Carbon Project-level crediting only narios. Under the first scenario, individual projects within Farming Initiative the same jurisdiction (i.e., in the same region or country) are credited relative to reductions against a jurisdiction-wide New Zealand Project-level crediting only Emissions Trading baseline. This scenario is appropriate where there is no Scheme jurisdictional REDD+ program, but only stand-alone projects. U.K. Woodland Project-level crediting only Under the second scenario, individual projects are “nested” Carbon Code within jurisdictional programs, with the option for VCUs to be credited directly to individual projects, or to the jurisdic- California Cap-and- Currently project-level crediting only. Trade However, nesting options would be tion itself, if removals take place outside the boundaries of considered in the event that ARB any individual projects. This scenario is appropriate where would decide to allow international nested projects exist within jurisdictional REDD+ programs. REDD+ credits. Under the third scenario, VCUs cannot be credited to Verified Carbon Three accounting and crediting sce- individual projects, but only to the jurisdictional proponent Standard narios: (i) crediting to projects only; (ii) for removals across the entire jurisdiction. This scenario is crediting to jurisdictions only; and (iii) crediting to both projects and jurisdic- appropriate where there are no well-developed, indepen- tions with nesting of projects. dent REDD+ projects, or where REDD+ interventions are planned at the jurisdictional level and implemented by rep- resentatives of jurisdictional authorities. Under scenarios Australia’s CFI, the NZ ETS, and the United Kingdom two and three, the jurisdictional proponent is responsible WCC are implemented at the project level only. There is no for monitoring, and leakage and risk assessments. Jurisdic- jurisdictional issuance or accounting and, hence, no nesting tions are able to transition—for instance, from scenario 1 to arrangements are in place. scenario 2, or from scenario 2 to scenario 3, depending on evolving preference and the level of development of their Under California’s Cap-and-Trade Program, U.S. forestry REDD+ programs. projects are only credited at the project level, so no nesting arrangements are in place either. However, the Cap-and- Scenario 2 potentially involves the registration of three Trade regulation does consider nesting arrangements in levels of implementing body with a VCS registry: (i) national the case that international REDD+ credits would be per- authorities (the highest level); (ii) lower jurisdictional-level mitted for use in the Cap-and-Trade Program (though to authorities; and (iii) project-level operators. Lower-level date ARB has yet to authorize the use of such credits). The programs or projects must be reviewed and approved staff’s report accompanying the Cap-and-Trade regulation or receive no-objection by the higher-level jurisdictional considers two crediting pathways for crediting programs: (i) proponents in order to be registered. Scenario 2 will thus an ARB-approved program achieves sector-wide ERs from require a more sophisticated registry arrangement to track mitigation policies undertaken by or in coordination with and account for ERs at different scales. There must also be the jurisdiction; or (ii) an ARB-approved program issues a clear allocation of rights between the various levels, to credits to project developers for project-level activities that request issuance of VCUs from a VCR registry. are “nested” within a jurisdiction-wide sectoral program.85 The assessment of double counting of ERs is performed at If following a nested approach, projects must follow a project validation and verification. When the Validation/Veri- methodology that ensures the inventorying, quantification, fication Body (VVB) is actually verifying, they must ensure monitoring, verification, enforcement, and accounting for that the jurisdiction or project is attempting to verify only all project-level activities, and also includes a system for those ERs that they are able to verify. The JNR Registration reconciling offset project-based GHG reductions in sector- and Issuance Process document sets out all the registry level accounting from the host jurisdiction. Hence, the host procedures relevant to JNR REDD+.87 Once VCUs are issued state’s REDD+ program would need to define how credits at either the jurisdictional or project level, they are treated will be allocated between projects and the jurisdictions.86 in much the same way within the registry. The exception is the buffer account; VCS keeps a separate buffer for jurisdic- tional ERs, given the potentially overwhelming effect that a 85 See http://www.arb.ca.gov/regact/2010/capandtrade10/capisor.pdf. 86 For discussion, see http://greentechleadership.org/documents/2013/07/ 87 http://www.v-c-s.org/sites/v-c-s.org/files/JNR%20Registration%20and%20 row-final-recommendations-2.pdf. Issuance%20Process,%20v3.0.pdf. 114 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration reversal at the jurisdictional level could have on the project 4. Permanence measures AFOLU buffer. Australia Automatic deduction of 5% of credits. Carbon Farming No separate buffer account. Relinquish- Initiative ment of credits in the event of significant 3. Role of Private Sector reversal. New Zealand Requirement to surrender credits in event Australia Originally forest carbon units issued to Emissions of reversal. No separate buffer account. Carbon Farming private landowners and developers, and Trading Scheme Initiative purchased by private sector entities. Currently, forest carbon units issued to U.K. Woodland Contribution to pooled buffer account private landowners or private project Carbon Code based on risk assessment. No process for developers and sold to the government. release of credits in buffer account. New Zealand Forest carbon units are purchased by pri- California Contribution to a pooled buffer account Emissions vate sector entities and issued to private Cap-and-Trade based on risk assessment. No process for Trading Scheme landowners and project developers, and Program release of credits in buffer account. can also be traded on secondary markets. Verified Carbon Contribution to pooled buffer account U.K. Woodland Forest carbon units purchased by private Standard based on risk assessment. Buffer credits Carbon Code sector entities and generated by private become eligible for release where projects landowners and project developers. meet VCSA risks-related requirements and show a reduced risk over time. California Forest carbon units purchased by private Cap-and-Trade sector entities and issued to private land- Program owners and project developers. Offset credits can also be traded on secondary For forest offset projects in the Australia CFI, a risk of markets. reversal buffer applies, in which five percent of the credits Verified Carbon Forest carbon units on voluntary markets sequestered by a project are deducted from the net num- Standard are generated by private developers and ber of tons reduced.88 This buffer is automatically deducted can be purchased by public or private entities, though the bulk of purchasers are and does not do into a separate buffer account. from a small pool of private companies. In the event of a significant reversal due to a natural disturbance or conduct beyond the control of the proj- ect proponent, and where the project proponent has not In all five systems reviewed, ERs are generated by private taken reasonable steps to mitigate the effect of that natural landowners or project developers with the permission of disturbance or conduct, the project proponent may be private landowners, and forest carbon units are issued to required to relinquish a certain number of carbon credits.89 accounts held by private landowners/project developers for The relinquishment requirement also applies in the event marketing. This approach is possible thanks to the clarity of an intentional reversal.90 The project proponent remains and security of land tenure regimes in the implementing liable for reversals throughout the permanence period (the countries, and may be harder to replicate in REDD+ coun- maximum permanence period being 100 years)91 and must tries where tenure is contested. Interestingly, data in the notify the Clean Energy Regulator (Regulator) in the event New Zealand registry, including unit holdings and transac- of a reversal. The registered holder of an Australian Carbon tions, are publicly available and can be searched online. Credit Unit (ACCU) can relinquish units by electronic notice In three of the four national systems reviewed, the domes- transmitted to the Regulator, specifying the number of units tic private sector is the main purchaser of forest carbon relinquished and the reason for it.92 If the project proponent units. Private sector entities are incentivized to purchase does not relinquish sufficient ACCUs to comply with the forest carbon units to either meet an emissions cap (as requirement, it becomes liable to pay the government for in the California Program) or improve public reporting of every unit not relinquished.93 GHG emissions (as in the U.K. WCC). REDD+ countries that expect the domestic private sector to invest in forest carbon units must also be willing to create the necessary incentive 88 CFI 2011, arts. 16–17. structures, for instance, an emissions cap (or some other 89 Ibid., art. 91. liability such as an emissions tax) to create private demand 90 Ibid., art. 90. for such units. 91 Ibid., art. 87. 92 Ibid., art. 175. 93 Ibid., art. 179 115 APPENDIX K: Forest Carbon Units and Existing Market Mechanisms New Zealand’s PFSI and ETS do not require forest all credits canceled before additional WCUs can be issued. landowners to contribute units to a buffer account. Under Where the reversal is unavoidable (e.g., due to extreme the PFSI, landowners earn units for every additional ton weather events), the project must only reimburse the WCC of carbon dioxide stored in forest. If carbon stocks sub- Buffer for carbon units canceled in excess of the contribu- sequently fall below a previously reported level, whether tion the project had previously made.97 due to planned or unplanned deforestation, landowners become liable to surrender a corresponding number of At the end of a project’s duration, all remaining buffer units units to make up the shortfall. The landowner is not liable to contributed by a project are canceled (the project dura- surrender more units than the number of units transferred tion can be up to 100 years from the project’s start date). to the landowner’s account for a given area of forest.94 There is no process for the release of credits held in buffer Similarly, under the ETS, participants become liable to sur- accounts. render units when harvest or deforestation occurs in forest As noted in the paragraphs above on tenure requirements, for which units have already been issued, or where forest additional permanence safeguards include the Forestry land participants choose to deregister an area of post-1989 Commission’s ability to withhold a felling license where forest from the ETS. In the ETS, all deforestation in both pre- planned felling has not been part of the WCC project’s 1990 and post-1989 forests (with a few minor exemptions) management plan, and the requirement to conduct an Envi- incurs surrender obligations.95 ronmental Impact Assessment for all deforestation covering For the United Kingdom WCC, landowners must calculate more than one hectare. the level of risk of a reversal according to the guidance on In the California Cap-and-Trade Program, to ensure WCC Risk Assessment, taking into account legal, project against the risk of forest reversals, a portion of the ARB management, and financial risks in addition to natural credits issued to forest project operators are transferred disturbance risks.96 Based on the risk assessment score to a Forest Buffer Account.98 When Offset Project Registries (which will lie between 15 and 40 percent of net carbon (OPRs) issue Registry Offset Credits (ROCs), they also issue sequestered), project developers contribute a proportion of buffer account credits. When a project seeks ARB credit the project’s net carbon sequestration to the WCC Buffer, a issuance, all credits (including buffer account credits) are single account held in the Markit Registry and managed by retired by the OPR, and the ARB issues an equal number the Forestry Commission. There should be sufficient units to the operator and the ARB Buffer Account. The portion in the “pooled” buffer to cover any losses from individual of credits transferred to the Buffer Account is based on a project reversal events. project-specific risk rating of reversals, which is conducted At the validation stage, Pending Issuance Units (PIUs) are by project operators.99 transferred to the WCC PIU buffer account. Upon verifica- In the event of an unintentional reversal,100 ARB will retire tion, these PIUs will be canceled, and the same number of ARB offset credits from the Forest Buffer Account equivalent WCUs transferred to the WCC buffer account. to the amount of carbon lost in the reversal. In the event of In the event of a “loss” (defined as “the woodland losing an intentional reversal,101 the forest owner must, within six some of its trees and standing volume because of avoidable months, replace the ARB offset credits by submitting addi- or unavoidable circumstances”), the project must submit a tional compliance instruments equivalent to the amount of Loss Event Report and the relevant number of WCC buffer carbon lost in the reversal, for placement in a Retirement units to cover the loss will be put on hold. In the event of Account. Failure to do so renders the forest owner subject a “reversal” (i.e., when the net GHG benefit of the project to enforcement action; retiring offset credits from the Buffer is negative in a given monitoring period), WCC buffer units already put on hold (and additional buffer units if required) will be canceled and the Project Design Document reviewed with the aim of taking Corrective Actions to compensate 97 http://www.forestry.gov.uk/forestry/infd-8vxmlf. the losses in a reasonable time frame. Where the reversal 98 http://www.arb.ca.gov/regact/2014/capandtrade14/ is avoidable, the project must reimburse the WCC Buffer for ctusforestprojectsprotocol.pdf. 99 http://www.arb.ca.gov/regact/2014/capandtrade14/ ctusforestprojectsprotocol.pdf. 100 Any reversal, including wildfires or disease, that is not the result of the 94 http://www.mpi.govt.nz/document-vault/6940. forest owner’s negligence, gross negligence, or willful intent. 95 https://www.climatechange.govt.nz/emissions-trading-scheme/ 101 Any reversal caused by a forest owner’s negligence, gross negligence, or participating/forestry/obligations/. willful intent, including harvesting, development, and harm to the area 96 http://www.forestry.gov.uk/forestry/INFD-8J5B82#legal. within the offset project boundary. 116 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration Account to make up for the difference also constitutes a pooled buffer account are canceled to the extent of the violation.102 GHGs released in the reversal event. Under the VCS, the non-permanence risk associated with Where the reversal is a catastrophic reversal (“caused land-use projects is addressed through an AFOLU pooled by disasters such as hurricanes, earthquakes, flooding, buffer account that holds buffer credits, which are different drought, fires, tornados or winter storms, or man-made from VCUs in that they cannot be traded.103 The number events over which the project proponent has no control”108), of buffer credits placed in a buffer account is based on a the baseline may be reassessed, though no VCUs will be non-permanence risk report prepared by the project pro- issued for any increased rate of sequestration from natu- ponent and assessed by a (VVB) at both project validation ral regeneration and any shortfall in buffer credits must and ER verification. Given that risk ratings may change over be deposited in the buffer account. Where the reversal is time, a risk analysis must be conducted every time ERs are the result of poor management or overharvesting (non- verified. Where the non-permanence risk rating is verified catastrophic), no further VCUs can be issued until the deficit to be equal to or less than the previously verified non- is remedied. permanence risk rating,104 the project becomes eligible for the release of buffer credits from the AFOLU pooled buffer account.105 Released buffer credits become VCUs that can 5. Governance be traded like any other VCU. Australia CFI is governed by Australia’s Clean Energy On the occurrence of a “loss event” (any event that results Carbon Farming Regulator (a public body), which is respon- in a loss of more than five percent of carbon stocks in pools Initiative sible for issuing credits and maintaining included in the project boundary but not planned for in the a register of projects. The Regulator also administers the Australian National Regis- project description106), the VCS registry administrator must try of Emissions Units (ANREU), that is, the put a number of buffer credits (equivalent to the amount registry. lost as stated in a “loss event report”) on hold.107 If, at the New Zealand The New Zealand Emissions Unit Register next verification event, the net GHG profile of the project is Emissions (NZEUR) is administered by the New Zea- negative (i.e., more GHGs have been released than seques- Trading Scheme land government. tered), a reversal has occurred. If, on the other hand, the U.K. Woodland WCC is governed by the Forestry Commis- net GHG emission reductions or removals are positive at Carbon Code sion, a quasi-autonomous non-govern- the time of verification, a reversal is deemed not to have mental organization, or “quango.” occurred and buffer credits are released from their hold Registry services have been contracted status. Where the total reversal is less than the number of out to Markit, a private company. credits put on hold, the VCS registry administrator cancels California The California Air Resources Board (ARB), buffer credits equivalent to those released in the reversal Cap-and-Trade a public body, is the governing authority. event and removes the remaining buffer credits from their Program Offset Project Registries (OPRs) are run by hold status. Where the total reversal is greater than the third parties (e.g., VCS), which verify, issue, and track credits on a separate registry number of credits put on hold, all buffer credits put on hold before OPR credits can be converted for are canceled and additional buffer credits from the AFOLU use within the ARB registry. Verified Carbon VCS is a private, non-profit group. The Standard VCS project database is managed by the VCS Association. Information is fed into the database from “VCS registries.” Markit 102 http://www.arb.ca.gov/cc/capandtrade/guidance/chapter6.pdf and APX, private operators, are contracted 103 VCS Agriculture, Forestry and Other Land Use (AFOLU) Requirements, by the VCS Association (VCSA) to provide version 3, 3.7, available at http://www.v-c-s.org/sites/v-c-s.org/files/ registry services. AFOLU%20Requirements%2C%20v3.4.pdf. 104 That is, their “longevity, sustainability and ability to mitigate risks.” 105 VCS Jurisdictional and Nested REDD+ (JNR) Registration and Issuance Process, Version 3, 5.2, available at http://www.v-c-s.org/sites/v-c-s.org/ Under Australia’s CFI, the Clean Energy Regulator (the Reg- files/JNR%20Registration%20and%20Issuance%20Process%2C%20 ulator) issues ACCUs to projects generating ERs according v3.0.pdf. to approved methodologies. To run a project, the project 106 Defined by VCS as “any event that results in a loss of more than five percent of carbon stocks in pools included in the project boundary but is not planned for in the project description,” see http://www.v-c-s.org/ sites/v-c-s.org/files/Program%20Definitions%2C%20v3.5.pdf. 107 VCS Agriculture, Forestry and Other Land Use (AFOLU) Requirements, 108 http://www.v-c-s.org/sites/v-c-s.org/files/Program%20Definitions%2C%20 Version 3, 3.7.7. v3.5.pdf. 117 APPENDIX K: Forest Carbon Units and Existing Market Mechanisms participant must become a Recognized Offsets Entity (ROE). must entities wishing to hold and trade units to take advan- Once this is done, the Regulator can approve Eligible Offsets tage of market opportunities. Forest landowners wishing Projects (EOPs) submitted by the ROE, which may then gen- to receive NZUs under the PFSI must also set up a NZEUR erate ACCUs. There are two types of ACCUs: Kyoto ACCUs, holding account.114 NZEUR records the title of units held in a generated from projects within Australia’s Kyoto Protocol holding account and allows for the transfer of units between emissions reporting inventory (e.g., reforestation projects), NZEUR holding accounts. Data in the registry are publicly which can be sold for compliance with the CPM; and non- available and can be searched online.115 Kyoto ACCUs, for use in voluntary markets. The Regulator can only issue ACCUs to entities holding an account with The U.K. Woodland Carbon Registry (WCR) is the ANREU (Registry). ACCUs can subsequently be traded responsible for project registration and the issuance, between entities within the Registry. tracking, and retirement of WCUs.116 The Markit Registry has been contracted to provide these services, though The Regulator must maintain an up-to-date electronic Reg- the Forestry Commission (a quasi-autonomous non- ister of Offsets Projects (the Register).109 For each eligible governmental organization) retains overall responsibility. offset project, the Register must set out, among other In addition to project registration and WCU management, things, the name, location, and description of the project, the registry provides a “request for information” platform the project proponent, the applicable methodology for the on which projects or brokers can offer any unretired project, and the number of Kyoto ACCUs and non-Kyoto units for sale. The WCR is publicly available and provides ACCUs (with further details including vintage, transfers, etc.) information on account holders, projects, unit issuances, issued for the project.110 holdings, and retirements. The information listed includes a project’s name, type, status, validator, developer, and An ACCU is personal property under Australian law and can location, as well as a link to the Project Design Document be transferred between Registry account holders by assign- (PDD) and validation/verification statements. ment. On transfer, entries should be removed from the transferor’s account at the same time they are credited to The Compliance Instrument Tracking System Service (CITSS) the transferee’s account, with all transfers recorded in the is the main registry system of the California Cap-and- Registry. The 2011 legislation contained provisions for the Trade Program, used to hold, transfer, and retire com- international transfer of units in and out of the Australian pliance instruments. Covered entities, project operators Registry, provided such units met required specifications,111 generating offsets, and any other bodies holding or trading but the CPM was repealed before Australia’s program was compliance instruments on the secondary market, must linked to other trading systems. According to the Clean register an account with the CITSS. However, it is important Energy Act 2011, Kyoto ACCUs (and certain non-Kyoto to note that offset credits are initially tracked in separate ACCUs112) can be surrendered by an entity holding the authorized Offset Project Registries (OPRs), and must be ACCUs to meet any liabilities under the CPM. converted to “ARB credits” before they can be used for com- pliance with the Cap-and-Trade Program. Established by the Climate Change Response Act (2002), the New Zealand Emissions Unit Register (NZEUR) is OPRs are independent bodies, approved and overseen by responsible for accounting, reporting, and reconciliation of ARB, that monitor offset projects and issue Registry Offset emissions and unit holdings and transactions under the NZ Credits (ROCs) to operators. To date, ARB has approved ETS, which is done by way of an online registry.113 The New three OPRs: Verified Carbon Standard, American Carbon Zealand government is responsible for issuing NZUs. Enti- Registry, and Climate Action Reserve. Project operators ties with obligations under the NZ ETS must open a holding must list their projects with one of these OPRs. Following account with the NZEUR through which to surrender units third-party project verification performed pursuant to ARB to the government. Entities wishing to voluntarily participate regulatory requirements, the OPR must determine whether in the NZ ETS as post-1989 forest landowners to receive an operator has satisfied the regulatory criteria for ROC units must also open a holding account with NZEUR, as issuance. On issuance, OPRs will create a unique serial num- ber for each ROC. 109 CFI 2011, art. 167. 110 Ibid., art. 168. 111 CEA 2011, art. 108 & 109 114 See http://www.mpi.govt.nz/document-vault/6940. 112 That is, those that would have been issued as Kyoto ACCUs if the reporting 115 See https://app.eur.govt.nz/eats/nz/index.cfm?fuseaction=search. period for the project had ended before the Kyoto abatement deadline. home&clearfuseattribs=true. 113 See http://www.eur.govt.nz/about-us. 116 http://www.forestry.gov.uk/forestry/infd-8vxmlf. 118 EMISSIONS TRADING REGISTRIES: Guidance on Regulation, Development, and Administration Information submitted by project operators to OPRs The Cap-and-Trade Regulation Order118 (the Regulation) (company information, project type and description, project determines that ARB offset credits must be “real, additional, status, location, and so on) are uploaded to OPR registries, quantifiable, permanent, verifiable, and enforceable.” The which maintain front- facing websites that track all project Regulation further specifies measures to deal with the risk data.117 Once verification is complete, verification bodies of forestry offset reversals. These rules are elaborated at upload verification statements and reports to the OPR length in the Compliance Offset Protocol developed by ARB platform, which are reviewed by the OPR and, if successful, for U.S. forest projects. The Protocol must be followed by ROCs are issued to the account of the project operator. The project operators119 when quantifying and reporting GHG number of serialized ROCs issued by the OPR per project reductions and GHG removal enhancements.120 is then displayed on the OPR website. ROCs can also be traded between account holders using the OPR platform; a To convert ROCs to ARB credits, ARB must determine that small fee is charged for each ROC transferred. ROCs submitted by operators meet all relevant require- ments as set out in the Regulation. If approved, ARB will Leveraging the administrative expertise of independent issue ARB offset credits in CITSS to project operators and OPRs for conducting registry services for offset projects inform the OPR to retire or cancel the corresponding ROCs reduces the public cost and administrative burden on ARB. from its system. At that point, the ARB credits can be pur- Only once credits have been verified and registered in the chased by covered entities for compliance purposes. OPR system are they eligible for conversion into ARB credits (once ROCs have been issued, the project can seek ARB offset credit issuance, which requires ARB and the opera- tors to be acting within CITSS). This means that ARB does not expend resources monitoring and overseeing projects in the earlier stages, which may not lead to the generation of verified credits. 118 http://www.arb.ca.gov/cc/capandtrade/capandtrade/ unofficial_c&t_012015.pdf 119 The official term for entities with legal authority to implement a project is Offset Project Operator (OPO). OPOs may also designate an entity as an Authorized Project Designee (APD). 117 See, for instance, https://acr2.apx.com/myModule/rpt/myrpt.asp?r=111 120 http://www.arb.ca.gov/regact/2014/capandtrade14/ and https://thereserve2.apx.com/myModule/rpt/myrpt.asp?r=211. ctusforestprojectsprotocol.pdf. 119