The CarbonNeutral Protocol Index

4.1 Emission reduction project types excluded under The CarbonNeutral Protocol


The CarbonNeutral Protocol supports carbon credits that meet the highest quality standards available in the market and avoids or excludes carbon credits that may fail to meet these standards.

Destruction of HFC-23 and N2O industrial gases


HFC-23 is an unwanted by-product in the manufacture of HCFC-22, a refrigerant and temporary substitute for CFCs. The destruction of HFC-23 in HCFC-22 plants in developing countries is eligible under the Clean Development Mechanism (CDM) and leads to the issuance of a large amount of credits due to the high GWP of such gases. As it is relatively cheap to install a destruction facility, HFC-23 destruction CDM projects have created a perverse incentive structure to increase the production of HCFC-22 to earn money from destroying the resulting HFC-23. This perverse incentive undermines the Montreal Protocol on Substances that Deplete the Ozone Layer, an international treaty designed to protect the ozone layer by phasing out the production of numerous substances believed to be responsible for ozone depletion.

CDM crediting rules for HFC-23 projects were suspended in 2010 and made more stringent in 2011. The revised rules do not apply until projects have to renew their crediting period. This means that from 2012 until the end of the first crediting periods (seven years after a project started), over 240 million credits are estimated to be issued under the old rules. The European Union (EU) banned HFC-23 credits from use in the EU-ETS starting from April 2013.


N2O is also an unwanted by-product in two different industrial processes; the production of:

  • Adipic acid, usually turned into nylon
  • Nitric acid, usually turned into fertiliser

In 2010, an independent study commissioned by CDM Watch provided evidence that the high profits from CDM N2O destruction projects at adipic acid facilities had led to carbon leakage. It was found that these projects had such high profit margins that a shift in production from non- CDM plants to CDM plants occurred. This carbon leakage caused an estimated increase in emissions of 13 million tonnes of CO2e.

CDM Watch research has shown that nitric acid CDM projects do not generally cause carbon leakage. However, this project type is problematic for other reasons: N2O is normally an unwanted by- product of nitric acid production. Evidence suggests the existing CDM methodologies (AM0028 and AM0034) cause a perverse incentive not to adopt an already widely available technology that would minimise N2O formation because it is more lucrative for project developers to maximise N2O production so that it can then be destroyed to earn credits. The EU has banned N2O credits from use in the EU-ETS starting from April 2013.

The CarbonNeutral Protocol recognises the concerns associated with HFC-23 and N2O industrial gas destruction projects, and excludes credits from these project types.

Large hydro

Hydropower is the largest source of renewable electricity globally. This has been made possible, in large part, by the cost-competitiveness of large hydro plants, which often represent lucrative well- established investments. Despite their attractive economics, large hydro projects can have severe negative social and environmental impacts such as displacement of local populations, loss of livelihoods and cultural heritage, and degraded ecosystem services.

Concerns over the additionality and potential social and environmental impacts of large hydropower projects under the CDM have led to calls for reform, including restrictions on credits from such projects under the EU ETS and the potential elimination of large hydro from the CDM altogether (alongside industrial gas projects).

The CarbonNeutral Protocol defines large hydro projects as those with generating capacities greater than or equal to 20MW. This is consistent with the requirements imposed under the EU ETS.

The CarbonNeutral Protocol recognises the concerns associated with large hydropower, and excludes credits from this project type, unless a qualified independent third party assures that a specific large hydropower project fulfils the World Commission on Dams (WCD) sustainability criteria or equivalent assessment introduced by the underlying carbon standard (For example, in 2017, VCS (now Verra) consulted on the use of the Hydropower Sustainability Assessment Protocol as an alternative assessment tool with a view to setting guidance on the issue (see

4.2 Evaluating internal GHG reduction projects

CarbonNeutral® certification is an action that represents immediate positive impact on GHG emissions. Clearly over time the goal of each organisation should be to reduce GHG emissions to zero, through the application of energy efficiency, switching to renewable energy and through technological innovation. It is our experience that leading organisations use external environmental instruments in parallel with internal reductions as part of the transformation journey and to bridge the gap towards stretching and impactful reduction targets.

The CarbonNeutral Protocol recommends that for all subjects the client should develop a GHG reduction plan to deliver internal emissions reductions, taking into consideration the main sources of GHGs from the subject and the likely cost-effectiveness of alternative emission reduction projects. With time, technological innovation has the ability to make low carbon projects viable. Understanding this project landscape and how much an organisation can invest in low-carbon transformation without impacting competitive performance are important inputs to an effective carbon reduction plan.

An excellent framework to assist organisations in evaluating a range of internal GHG reduction projects is marginal abatement cost analysis, an economic concept that measures the cost of reducing one more unit of GHG emissions. Marginal abatement costs are presented on a marginal abatement cost curve or MAC curve, a graphical representation of the cost and scale of GHG reduction projects. While there are many more aspects to consider beyond scale and cost, they are useful tools to guide corporate decision making among a variety of GHG reduction projects.

Figure 9 illustrates a MAC curve. Each rectangle on the MAC curve represents a different project to reduce GHG emissions. The width of each box represents the emission reduction potential a project can deliver compared to business-as-usual, and the height of each box represents the average cost of reducing one tonne of GHGs through that project. The MAC curve is ordered left to right on a per tonne basis from the lowest cost to the highest cost projects. Projects that appear below the horizontal axis have a negative cost, meaning the low carbon project saves more money than it costs. Projects that appear above the horizontal axis have a positive cost. Corporate MAC curves often rise steeply as more GHGs are reduced.

To plot a project on a MAC curve you need to perform a calculation that considers the lifetime costs and GHG reductions of the project. Table 18 illustrates the calculation for a project to replace desktops with laptops. For this project the marginal abatement cost is $50 per tonne, which would be the height of the box on the MAC curve. The width of the box illustrates the scale of the reduction, which in this case is determined by the number of desktops replaced. Each laptop saves 0.4 tonnes of CO2, so a business replacing 2,000 desktops would save 800 tonnes of CO2. This reduction in GHG emissions is measured relative to the business-as-usual baseline of running desktops for the next four years.

Figure 9: Illustrative MAC Curve

Table 18: Illustrative MAC Calculation

Replacing a desktop PC with a laptop PC has a MAC of ~$50 / tCO2e.

For most subjects, the client will have a number of projects with a negative cost of carbon. The more reduction projects a client has implemented the greater the marginal cost of further reduction becomes. Optimising heating and cooling temperatures is a project with a negative cost of carbon: simply questioning if the heating needs to be so high, or if the air- conditioning needs to be so low, can yield savings and setting temperature policies can then lock in these savings without incurring significant costs.

When it comes to selecting projects to implement, aspects beyond the scale of the reduction and cost per tonne should be considered, and each project will have a unique set of considerations. Keeping with the laptop example, the ability to work remotely and the impact on data security policies, should feature within decision making and may impact the cost if data security resources need to be increased. The administrative burden of implementing a project is another important dimension to consider and such costs can be factored into MAC data. The scale of reductions from introducing laptops is determined by the number of employees that receive new laptops, which is a function of the number of employees, while the administrative burden of adapting policies to facilitate remote working and data security is relatively constant. On this basis, the project might only make sense for a company with a large number of desktop computers to replace where the aggregate reductions are sufficient to justify the administrative burden of implementing the project.

It stands to reason that projects with a negative cost of carbon should be implemented as they improve the bottom line. As clients implement the low-hanging fruit and progress towards their emission reduction target, it becomes increasingly expensive to achieve incremental reductions and there is a point on the MAC curve where it becomes more cost effective to look externally for emissions reductions. The use of environmental instruments, including carbon credits, is the mechanism for implementing external emissions reductions, where an organisation sources and retires credits from verified emission reduction projects.

An impactful carbon reduction plan is a plan that meets a GHG reduction target in the most cost effective way through a combination of internal and external reductions. Marginal abatement cost analysis is a tool to support decision making as part of that planning process. GHG reduction plans should be reviewed periodically to assess progress against planned actions and to assess the feasibility for further reductions, taking into account the availability of new technologies and enabling policies and incentives. GHG reduction plans should be reviewed periodically and where applicable a director or senior manager should be given responsibility for overseeing the development and ensuring the implementation of the plan for reducing emissions.

4.3 Insetting

Insetting is a specific application of offsetting when emission reduction projects are sited within a corporate’s supply chain and sphere of influence. The focus on location-specific mitigation actions enables the corporate to gain multiple benefits, often delivering against both commercial and sustainability objectives. Carbon credits generated from insetting projects may be used for CarbonNeutral certifications only when they are generated in accordance with the Approved Carbon Credit Standards recognised in the CarbonNeutral Protocol (Annex C), and are retired in publicly accessible registries.