Description
This is a document about carbon credits.
Greenhouse gases are gases in an atmosphere that absorb and emit radiation within the thermal infrared range. This process is the fundamental cause of the greenhouse effect. Common greenhouse gases in the Earth's atmosphere include water vapor, carbon dioxide, methane, nitrous oxide, ozone, and chlorofluorocarbons. Greenhouse gases, mainly water vapor, are essential to helping determine the temperature of the Earth; without them this planet would likely be so cold as to be uninhabitable. Although many factors such as the sun and the water cycle are responsible for the Earth's weather and energy balance, if all else was held equal and stable, the planet's average temperature should be considerably lower without greenhouse gases. What is the role of these greenhouse gases? The atmosphere carries out the critical function of maintaining life-sustaining conditions on Earth, in the following way: each day, energy from the sun (largely in the visible part of the spectrum, but also some in the ultraviolet and infra red portions) is absorbed by the land, seas, mountains, etc. If all this energy were to be absorbed completely, the earth would gradually become hotter and hotter. But actually, the earth both absorbs and, simultaneously releases it in the form of infra red waves (which are invisible but can be felt as heat). All this rising heat is not lost to space, but is partly absorbed by some gases present in very small (or trace) quantities in the atmosphere, called greenhouse gases (GHGs). Levels of all key greenhouse gases (with the possible exception of water vapour) are rising as a direct result of anthropogenic activities. Concentration of carbon dioxide (mainly from burning coal, oil, and natural gas), methane and nitrous oxide (due to agriculture and changes in land use), and CFCs (produced by industries) are changing at an unprecedented speed. The result is known as the "enhanced greenhouse effect". This could lead to greater warming, which in turn, could have an impact on world's climate leading to the phenomenon known as "climate change". Climate change refers to a statistically significant variation in either the mean state of the climate or in its variability, which is attributed directly or indirectly to anthropogenic activities that alter the composition of global atmosphere and which are in addition to natural climatic variability observed over comparable time periods. World's climate has always varied naturally, the vast majority of scientists now believe that rising concentrations of "greenhouse gases" in the earth's atmosphere, resulting from economic and demographic growth over the last two centuries since the industrial revolution, are overriding this natural variability and leading to irreversible climate change. Effects of Climate Change The most dramatic change has been in the temperature, with measurement records suggesting that warming by 0.3-0.6 °C has already taken place since the 1860s. Over the next hundred years, the earth's surface temperature is projected to increase by 1.4 to 5.8 °C. As a result of increased temperature, the large quantities of water locked in the polar ice caps and glaciers will be released as a consequence of warming. This, together with an increase in the thermal expansion of the oceans, will make the global mean sea level rise by 9 cm to 88 cm.
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A rise in sea level could inundate and erode coastal areas, increase flooding and salt-water intrusion; this will affect coastal agriculture, fisheries and aquaculture, freshwater resources, human settlements and tourism. The frequency and duration of heat waves will increase, which, combined with greater humidity and urban air pollution, will cause a greater number of heat related illness and deaths. A general reduction is expected in potential crop yields in most tropical and sub-tropical regions. Mid-continental areas -- such as the United States' "grain belt" and vast areas of Asia -- are likely to dry. Where dry land agriculture relies solely on rain, as in sub-Saharan Africa, yields would decrease dramatically even with minimal increases in temperature. Such changes could cause disruptions in food supply. Most of the world's endangered species -- around 25 per cent of mammals and 12 per cent of birds -- may become extinct over the next few decades as warmer conditions alter the forests, wetlands, and rangelands they depend on. Higher temperatures are expected to expand the range of some dangerous "vector-borne" diseases, such as malaria, which already kills 1 million people annually, most of them children. World's vast human population, much of it poor, is vulnerable to climate stress as millions live in dangerous places -- on floodplains or in shantytowns on exposed hillsides around the enormous cities of the developing world. Higher summer temperatures will increase the demand for energy for space cooling.
UNFCCC The United Nations Framework Convention on Climate Change (UNFCCC or FCCC) is an international environmental treaty produced at the United Nations Conference on Environment and Development (UNCED), The treaty is aimed at stabilizing greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system. Signatories to the UNFCCC are split into three groups: • • • Annex I countries (industrialized countries) Annex II countries (developed countries which pay for costs of developing countries) Developing countries.
Annex I countries agree to reduce their emissions of greenhouse gasses to targets that are mainly set below their 1990 levels. They may do this by allocating reduced annual allowances to the major operators within their borders. These operators can only exceed their allocations if they buy emission allowances which represent the right to emit a specific amount, or offset their excesses through a mechanism that is agreed by all the parties to the UNFCCC.
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Annex II countries are a sub-group of the Annex I countries. They comprise the OECD members, excluding those that were economies in transition in 1992. Developing countries are not expected to de-carbonize their economy unless developed countries supply enough funding and technology. Setting no immediate restrictions under the UNFCCC serves three purposes: 1. It avoids restrictions on their development, because emissions are strongly linked to industrial capacity, 2. They can sell emissions credits to nations whose operators have difficulty meeting their emissions targets, 3. They get money and technologies for low-carbon investments from the developed countries in Annex II. Developing countries may volunteer to become Annex I countries when they are sufficiently developed in terms of certain levels of per capita income levels as prescribed by the OECD. Some opponents of the Convention argue that the split between Annex I and developing countries is unfair, and that both developing countries and developed countries need to reduce their emissions unilaterally. Some countries claim that their costs of following the Convention requirements will stress their economy. The treaty as originally framed set no mandatory limits on greenhouse gas emissions for individual nations and contained no enforcement provisions; it is therefore considered legally non-binding. Rather, the treaty included provisions for updates (called "protocols") that would set mandatory emission limits. The principal update is the Kyoto Protocol, Kyoto Protocol The Kyoto Protocol is an agreement made under the UNFCCC.It was adopted in Kyoto, Japan, on 11 December 1997 and entered into force on 16 February 2005.The goal is to lower overall emissions from six greenhouse gases - carbon dioxide, methane, nitrous oxide, sulfur hexafluoride, HFCs, and PFCs - calculated as an average over the five-year period of 2008-12. And for this the industrialized countries will reduce their collective emissions of greenhouse gases by 5.2% compared to the year 1990 (but note that, compared to the emissions levels that would be expected by 2010 without the Protocol, this target represents a 29% cut). 184 Parties of the Convention have ratified its Protocol to date. The major feature of the Kyoto Protocol is that it sets binding targets for 37 industrialized countries and the European community for reducing greenhouse gas (GHG) emissions. National targets range from 8% reductions for the European Union and some others to, 7% for the US, 6% for Japan, 0% for Russia and permitted increases of 8% for Australia and 10% for Iceland . Kyoto Mechanisms 1) Greenhouse gas emissions – a new commodity
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Parties with commitments under the Kyoto Protocol (Annex B Parties) have accepted targets for limiting or reducing emissions. These targets are expressed as levels of allowed emissions, or “assigned amounts,” over the 2008-2012 commitment period. The allowed emissions are divided into “assigned amount units” (AAUs). Emissions trading, as set out in Article 17 of the Kyoto Protocol, allows countries that have emission units to spare - emissions permitted them but not "used" - to sell this excess capacity to countries that are over their targets. Thus, a new commodity was created in the form of emission reductions or removals. Since carbon dioxide is the principal greenhouse gas, people speak simply of trading in carbon. Carbon is now tracked and traded like any other commodity. This is known as the "carbon market." 2) Joint Implementation (JI) The mechanism known as “joint implementation,” defined in Article 6 of the Kyoto Protocol, allows a country with an emission reduction or limitation commitment under the Kyoto Protocol (Annex B Party) to earn emission reduction units (ERUs) from an emission-reduction or emission removal project in another Annex B Party.Each ERU is equivalent to one tonne of CO2, which can be counted towards meeting its Kyoto target. Joint implementation offers Parties a flexible and cost-efficient means of fulfilling a part of their Kyoto commitments, while the host Party benefits from foreign investment and technology transfer. 3) Clean Development Mechanism (CDM) The Clean Development Mechanism (CDM), defined in Article 12 of the Protocol, allows a country with an emission-reduction or emission-limitation commitment under the Kyoto Protocol (Annex B Party) to implement an emission-reduction project in developing countries. Such projects can earn saleable certified emission reduction (CER) credits. Each CER is equivalent to one tonne of CO2, which can be counted towards meeting Kyoto targets. A CDM project activity might involve, for example, a rural electrification project using solar panels or the installation of more energy-efficient boilers. The mechanism stimulates sustainable development and emission reductions, again giving industrialized countries some flexibility in how they meet their emission reduction or limitation targets.
What is Carbon Credit As the world has developed and nations have progressed, we have been emitting carbon and other gases which result in the warming of the globe. Thus came the greenhouse effect and eventually the Kyoto protocol as discussed.
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Under Kyoto protocol, countries voluntarily decided to reduce the carbon emissions and bring it to levels of early 1990’s. Developed countries, mostly European, had said that they will bring down the level in the period from 2008 to 2012 A company has two ways to reduce emissions. One, it can reduce the GHG (greenhouse gases) by adopting new technology or improving upon the existing technology to attain the new norms for emission of gases. Or it can tie up with developing nations and help them set up new technology that is eco-friendly, thereby helping developing country or its companies 'earn' credits. India, China and some other Asian countries have the advantage because they are developing countries. Any company, factories or farm owner in India can get linked to United Nations Framework Convention on Climate Change (UNFCCC) and know the 'standard' level of carbon emission allowed for its outfit or activity. In a developing country, the extent to which a company is emitting less carbon (as per standard fixed by UNFCCC) it gets credited. This is called carbon credit. These credits are bought over by the companies of developed countries -- mostly Europeans -because the United States has signed but not ratified the Kyoto Protocol. How does it work in real life? Assume that British Petroleum is running a plant in the United Kingdom. Say, that it is emitting more gases than the accepted norms of the UNFCCC. It can tie up with its own subsidiary in, say, India or China under the Clean Development Mechanism. It can buy the 'carbon credit' by making Indian or Chinese plant more eco-savvy with the help of technology transfer. It can tie up with any other company say Indian Oil, in the open market. In December 2008, an audit will be done of their efforts to reduce gases and their actual level of emission. China and India are ensuring that new technologies for energy savings are adopted so that they become entitled for more carbon credits. They are selling their credits to their counterparts in Europe. This is how a market for carbon credit is created. Every year European companies are required to meet certain norms, beginning 2008. By 2012, they will achieve the required standard of carbon emission. So, in the coming five years there will be a lot of carbon credit deals. What is a CER and who allocates them The most widespread case is that of Kyoto Protocol certified projects known as "clean development mechanisms" (CDM) that issue a certain type of carbon credit called CER (certified emission reduction). CER type carbon credits are allocated by the United Nations (to be exact, by the ..."Clean Development Mechanism Executive Board of the United Nations Framework Convention on Climate Change"), in line with a very precise mechanism:
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1. Project sponsors must use a methodology certified by the United Nations to show that their project meets certain criteria (measurability, additionality, absence of double accounts, a monitoring plan). 2. It is then necessary to have calculations checked by a consultant accredited by the United Nations. To date, there are some ten firms accredited by the United Nations... This procedure is called validation and it gives rise to a validation report sent to the UN. 3. The project must then be registered by the United Nations. 4. Once the project is registered, the reality of the reductions generated by the project must be checked once a year. This check must also be performed by a consultant accredited by the United Nations. In concrete terms, this consists in examining how much the hydroelectric power station really produces in the year in question. For example, if the year was very rainy, the plant will have had a lot of water to process and therefore will have produced a lot of electric power thus avoiding a large quantity of CO2 emissions that would have resulted had the same electricity been generated in a coal-powered plant. On the other hand, if the year was relatively dry, fewer CO2 emissions would have been avoided (since the coal-powered plant would have operated in its place). This procedure is called verification and gives rise to a verification report sent to the UN. 5. On the basis of the verification report, the UN allocates carbon credits to the project sponsor. In concrete terms, it credits the sponsor's "carbon account" just like a bank account except it does not contain euros or dollars but rather carbon credits. 6. Once in possession of the carbon credits, the project sponsor can sell them and obtain revenue to help finance his project. CERs are the only carbon credits usable by players having regulatory obligations concerning greenhouse gas emissions. Who allocates carbon credits and how (case of VERs)? VER (verified emission reductions) are "unofficial" carbon credits, i.e. not allocated by the UN. They correspond to reductions in emissions that have not followed the entire UN procedure. For example, a project that meets the UN's technical criteria (measurability, additionality, a monitoring plan,...) but located in a country that has not ratified the Kyoto protocol ( Turkey for example), will not be allocated carbon credits by the UN in the form of CERs. It may however follow the same technical procedure and be assigned VERs. Similarly, the UN only recognizes reductions in emissions generated by a project after its registration date. However the UN's administrative procedures are unwieldy and it may happen that a project starts to operate (and therefore generate emission reductions) before it is registered. In this case, reductions of emissions generated before registration will not give rise to allocation of CERs, but may give rise to allocation of VERs.
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VER are not allocated by the United Nations but result from an agreement between the project sponsor and the buyer. Innovation and Future Developments Today, in the Annex 1 nations various caps have been put on companies about the emission levels, the companies which exceed these norms can make for the excess emission through purchase of carbon credits. Today Carbon Credits are traded somewhere in the range of $ 5 to $ 30 per tonne (varying from place to place) of carbon emission. But due to increase in the demand for carbon credits over time, the credits would become more expensive, so companies could be more inclined for investing for developing technologies to reduce emission rather than go for carbon credits. Take for example a French company wanted to prune its emission by switching over to a greener technology, it would have to spend $ 25 to $ 150 per tone of carbon reduction, but as this gap starts to narrow due to the carbon credits becoming more expensive, the companies would think of alternatives by investing in greener technology to reduce emission themselves, and further setting up there own technology would help in the long run by reduced cost and also government support. Another way is that the developing countries can built a group among themselves to set a Research & Development Department and can jointly fund the research operations. The low carbon technology so developed can be shared amongst them. This will provide a means to research at a relatively low cost. This technology would be implemented in the new and existing projects which would ultimately provide carbon credits to the industry. These credits would then be traded internationally to developed countries and would lead to generation of revenue to developing countries. Market Appetite And Future Trends The global business in carbon trading under the clean development mechanism alone is currently valued at $ 5 Billion a year. According to an estimate this can easily go up to $ 100 Billion if the recommendations of the Intergovernmental Panel on Climate Change (IPCC) for a 50 per cent reduction in carbon emission are implemented. Currently the international market for carbon trading is not fully developed and once it matures fully there could be more transparency and scope for more players to enter. The average prices of the carbon credit would increase due to the constant demand by the developing countries and countries would increase their operations in developing countries in order to decrease the green house gases and ultimately earn carbon credits. There could be some political uncertainty whether the Kyoto Protocol needs to be extended beyond 2012 and this could provide hinders on the development of the free carbon trading. Currently, there is no potential link between the different emission trading schemes but in the future as the market develops more and new rules are brought in, there could be valuations on a more standard level and the different schemes can be linked. Conclusion
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Carbon trading provides a commercial way of dealing with the problem of carbon dioxide emissions. There are various emission trading schemes but there are minimal of linkages amongst them. The carbon trading market provides various opportunities for new technology and business and at the same time provides threat to some of the industries due to intense competition. Furthermore, the carbon trading market is in its growth stage and in the coming years it can be developed and also there is a possibility of a centrally traded emission traded schemes.
Page | 8
doc_183267287.doc
This is a document about carbon credits.
Greenhouse gases are gases in an atmosphere that absorb and emit radiation within the thermal infrared range. This process is the fundamental cause of the greenhouse effect. Common greenhouse gases in the Earth's atmosphere include water vapor, carbon dioxide, methane, nitrous oxide, ozone, and chlorofluorocarbons. Greenhouse gases, mainly water vapor, are essential to helping determine the temperature of the Earth; without them this planet would likely be so cold as to be uninhabitable. Although many factors such as the sun and the water cycle are responsible for the Earth's weather and energy balance, if all else was held equal and stable, the planet's average temperature should be considerably lower without greenhouse gases. What is the role of these greenhouse gases? The atmosphere carries out the critical function of maintaining life-sustaining conditions on Earth, in the following way: each day, energy from the sun (largely in the visible part of the spectrum, but also some in the ultraviolet and infra red portions) is absorbed by the land, seas, mountains, etc. If all this energy were to be absorbed completely, the earth would gradually become hotter and hotter. But actually, the earth both absorbs and, simultaneously releases it in the form of infra red waves (which are invisible but can be felt as heat). All this rising heat is not lost to space, but is partly absorbed by some gases present in very small (or trace) quantities in the atmosphere, called greenhouse gases (GHGs). Levels of all key greenhouse gases (with the possible exception of water vapour) are rising as a direct result of anthropogenic activities. Concentration of carbon dioxide (mainly from burning coal, oil, and natural gas), methane and nitrous oxide (due to agriculture and changes in land use), and CFCs (produced by industries) are changing at an unprecedented speed. The result is known as the "enhanced greenhouse effect". This could lead to greater warming, which in turn, could have an impact on world's climate leading to the phenomenon known as "climate change". Climate change refers to a statistically significant variation in either the mean state of the climate or in its variability, which is attributed directly or indirectly to anthropogenic activities that alter the composition of global atmosphere and which are in addition to natural climatic variability observed over comparable time periods. World's climate has always varied naturally, the vast majority of scientists now believe that rising concentrations of "greenhouse gases" in the earth's atmosphere, resulting from economic and demographic growth over the last two centuries since the industrial revolution, are overriding this natural variability and leading to irreversible climate change. Effects of Climate Change The most dramatic change has been in the temperature, with measurement records suggesting that warming by 0.3-0.6 °C has already taken place since the 1860s. Over the next hundred years, the earth's surface temperature is projected to increase by 1.4 to 5.8 °C. As a result of increased temperature, the large quantities of water locked in the polar ice caps and glaciers will be released as a consequence of warming. This, together with an increase in the thermal expansion of the oceans, will make the global mean sea level rise by 9 cm to 88 cm.
Page | 1
A rise in sea level could inundate and erode coastal areas, increase flooding and salt-water intrusion; this will affect coastal agriculture, fisheries and aquaculture, freshwater resources, human settlements and tourism. The frequency and duration of heat waves will increase, which, combined with greater humidity and urban air pollution, will cause a greater number of heat related illness and deaths. A general reduction is expected in potential crop yields in most tropical and sub-tropical regions. Mid-continental areas -- such as the United States' "grain belt" and vast areas of Asia -- are likely to dry. Where dry land agriculture relies solely on rain, as in sub-Saharan Africa, yields would decrease dramatically even with minimal increases in temperature. Such changes could cause disruptions in food supply. Most of the world's endangered species -- around 25 per cent of mammals and 12 per cent of birds -- may become extinct over the next few decades as warmer conditions alter the forests, wetlands, and rangelands they depend on. Higher temperatures are expected to expand the range of some dangerous "vector-borne" diseases, such as malaria, which already kills 1 million people annually, most of them children. World's vast human population, much of it poor, is vulnerable to climate stress as millions live in dangerous places -- on floodplains or in shantytowns on exposed hillsides around the enormous cities of the developing world. Higher summer temperatures will increase the demand for energy for space cooling.
UNFCCC The United Nations Framework Convention on Climate Change (UNFCCC or FCCC) is an international environmental treaty produced at the United Nations Conference on Environment and Development (UNCED), The treaty is aimed at stabilizing greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system. Signatories to the UNFCCC are split into three groups: • • • Annex I countries (industrialized countries) Annex II countries (developed countries which pay for costs of developing countries) Developing countries.
Annex I countries agree to reduce their emissions of greenhouse gasses to targets that are mainly set below their 1990 levels. They may do this by allocating reduced annual allowances to the major operators within their borders. These operators can only exceed their allocations if they buy emission allowances which represent the right to emit a specific amount, or offset their excesses through a mechanism that is agreed by all the parties to the UNFCCC.
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Annex II countries are a sub-group of the Annex I countries. They comprise the OECD members, excluding those that were economies in transition in 1992. Developing countries are not expected to de-carbonize their economy unless developed countries supply enough funding and technology. Setting no immediate restrictions under the UNFCCC serves three purposes: 1. It avoids restrictions on their development, because emissions are strongly linked to industrial capacity, 2. They can sell emissions credits to nations whose operators have difficulty meeting their emissions targets, 3. They get money and technologies for low-carbon investments from the developed countries in Annex II. Developing countries may volunteer to become Annex I countries when they are sufficiently developed in terms of certain levels of per capita income levels as prescribed by the OECD. Some opponents of the Convention argue that the split between Annex I and developing countries is unfair, and that both developing countries and developed countries need to reduce their emissions unilaterally. Some countries claim that their costs of following the Convention requirements will stress their economy. The treaty as originally framed set no mandatory limits on greenhouse gas emissions for individual nations and contained no enforcement provisions; it is therefore considered legally non-binding. Rather, the treaty included provisions for updates (called "protocols") that would set mandatory emission limits. The principal update is the Kyoto Protocol, Kyoto Protocol The Kyoto Protocol is an agreement made under the UNFCCC.It was adopted in Kyoto, Japan, on 11 December 1997 and entered into force on 16 February 2005.The goal is to lower overall emissions from six greenhouse gases - carbon dioxide, methane, nitrous oxide, sulfur hexafluoride, HFCs, and PFCs - calculated as an average over the five-year period of 2008-12. And for this the industrialized countries will reduce their collective emissions of greenhouse gases by 5.2% compared to the year 1990 (but note that, compared to the emissions levels that would be expected by 2010 without the Protocol, this target represents a 29% cut). 184 Parties of the Convention have ratified its Protocol to date. The major feature of the Kyoto Protocol is that it sets binding targets for 37 industrialized countries and the European community for reducing greenhouse gas (GHG) emissions. National targets range from 8% reductions for the European Union and some others to, 7% for the US, 6% for Japan, 0% for Russia and permitted increases of 8% for Australia and 10% for Iceland . Kyoto Mechanisms 1) Greenhouse gas emissions – a new commodity
Page | 3
Parties with commitments under the Kyoto Protocol (Annex B Parties) have accepted targets for limiting or reducing emissions. These targets are expressed as levels of allowed emissions, or “assigned amounts,” over the 2008-2012 commitment period. The allowed emissions are divided into “assigned amount units” (AAUs). Emissions trading, as set out in Article 17 of the Kyoto Protocol, allows countries that have emission units to spare - emissions permitted them but not "used" - to sell this excess capacity to countries that are over their targets. Thus, a new commodity was created in the form of emission reductions or removals. Since carbon dioxide is the principal greenhouse gas, people speak simply of trading in carbon. Carbon is now tracked and traded like any other commodity. This is known as the "carbon market." 2) Joint Implementation (JI) The mechanism known as “joint implementation,” defined in Article 6 of the Kyoto Protocol, allows a country with an emission reduction or limitation commitment under the Kyoto Protocol (Annex B Party) to earn emission reduction units (ERUs) from an emission-reduction or emission removal project in another Annex B Party.Each ERU is equivalent to one tonne of CO2, which can be counted towards meeting its Kyoto target. Joint implementation offers Parties a flexible and cost-efficient means of fulfilling a part of their Kyoto commitments, while the host Party benefits from foreign investment and technology transfer. 3) Clean Development Mechanism (CDM) The Clean Development Mechanism (CDM), defined in Article 12 of the Protocol, allows a country with an emission-reduction or emission-limitation commitment under the Kyoto Protocol (Annex B Party) to implement an emission-reduction project in developing countries. Such projects can earn saleable certified emission reduction (CER) credits. Each CER is equivalent to one tonne of CO2, which can be counted towards meeting Kyoto targets. A CDM project activity might involve, for example, a rural electrification project using solar panels or the installation of more energy-efficient boilers. The mechanism stimulates sustainable development and emission reductions, again giving industrialized countries some flexibility in how they meet their emission reduction or limitation targets.
What is Carbon Credit As the world has developed and nations have progressed, we have been emitting carbon and other gases which result in the warming of the globe. Thus came the greenhouse effect and eventually the Kyoto protocol as discussed.
Page | 4
Under Kyoto protocol, countries voluntarily decided to reduce the carbon emissions and bring it to levels of early 1990’s. Developed countries, mostly European, had said that they will bring down the level in the period from 2008 to 2012 A company has two ways to reduce emissions. One, it can reduce the GHG (greenhouse gases) by adopting new technology or improving upon the existing technology to attain the new norms for emission of gases. Or it can tie up with developing nations and help them set up new technology that is eco-friendly, thereby helping developing country or its companies 'earn' credits. India, China and some other Asian countries have the advantage because they are developing countries. Any company, factories or farm owner in India can get linked to United Nations Framework Convention on Climate Change (UNFCCC) and know the 'standard' level of carbon emission allowed for its outfit or activity. In a developing country, the extent to which a company is emitting less carbon (as per standard fixed by UNFCCC) it gets credited. This is called carbon credit. These credits are bought over by the companies of developed countries -- mostly Europeans -because the United States has signed but not ratified the Kyoto Protocol. How does it work in real life? Assume that British Petroleum is running a plant in the United Kingdom. Say, that it is emitting more gases than the accepted norms of the UNFCCC. It can tie up with its own subsidiary in, say, India or China under the Clean Development Mechanism. It can buy the 'carbon credit' by making Indian or Chinese plant more eco-savvy with the help of technology transfer. It can tie up with any other company say Indian Oil, in the open market. In December 2008, an audit will be done of their efforts to reduce gases and their actual level of emission. China and India are ensuring that new technologies for energy savings are adopted so that they become entitled for more carbon credits. They are selling their credits to their counterparts in Europe. This is how a market for carbon credit is created. Every year European companies are required to meet certain norms, beginning 2008. By 2012, they will achieve the required standard of carbon emission. So, in the coming five years there will be a lot of carbon credit deals. What is a CER and who allocates them The most widespread case is that of Kyoto Protocol certified projects known as "clean development mechanisms" (CDM) that issue a certain type of carbon credit called CER (certified emission reduction). CER type carbon credits are allocated by the United Nations (to be exact, by the ..."Clean Development Mechanism Executive Board of the United Nations Framework Convention on Climate Change"), in line with a very precise mechanism:
Page | 5
1. Project sponsors must use a methodology certified by the United Nations to show that their project meets certain criteria (measurability, additionality, absence of double accounts, a monitoring plan). 2. It is then necessary to have calculations checked by a consultant accredited by the United Nations. To date, there are some ten firms accredited by the United Nations... This procedure is called validation and it gives rise to a validation report sent to the UN. 3. The project must then be registered by the United Nations. 4. Once the project is registered, the reality of the reductions generated by the project must be checked once a year. This check must also be performed by a consultant accredited by the United Nations. In concrete terms, this consists in examining how much the hydroelectric power station really produces in the year in question. For example, if the year was very rainy, the plant will have had a lot of water to process and therefore will have produced a lot of electric power thus avoiding a large quantity of CO2 emissions that would have resulted had the same electricity been generated in a coal-powered plant. On the other hand, if the year was relatively dry, fewer CO2 emissions would have been avoided (since the coal-powered plant would have operated in its place). This procedure is called verification and gives rise to a verification report sent to the UN. 5. On the basis of the verification report, the UN allocates carbon credits to the project sponsor. In concrete terms, it credits the sponsor's "carbon account" just like a bank account except it does not contain euros or dollars but rather carbon credits. 6. Once in possession of the carbon credits, the project sponsor can sell them and obtain revenue to help finance his project. CERs are the only carbon credits usable by players having regulatory obligations concerning greenhouse gas emissions. Who allocates carbon credits and how (case of VERs)? VER (verified emission reductions) are "unofficial" carbon credits, i.e. not allocated by the UN. They correspond to reductions in emissions that have not followed the entire UN procedure. For example, a project that meets the UN's technical criteria (measurability, additionality, a monitoring plan,...) but located in a country that has not ratified the Kyoto protocol ( Turkey for example), will not be allocated carbon credits by the UN in the form of CERs. It may however follow the same technical procedure and be assigned VERs. Similarly, the UN only recognizes reductions in emissions generated by a project after its registration date. However the UN's administrative procedures are unwieldy and it may happen that a project starts to operate (and therefore generate emission reductions) before it is registered. In this case, reductions of emissions generated before registration will not give rise to allocation of CERs, but may give rise to allocation of VERs.
Page | 6
VER are not allocated by the United Nations but result from an agreement between the project sponsor and the buyer. Innovation and Future Developments Today, in the Annex 1 nations various caps have been put on companies about the emission levels, the companies which exceed these norms can make for the excess emission through purchase of carbon credits. Today Carbon Credits are traded somewhere in the range of $ 5 to $ 30 per tonne (varying from place to place) of carbon emission. But due to increase in the demand for carbon credits over time, the credits would become more expensive, so companies could be more inclined for investing for developing technologies to reduce emission rather than go for carbon credits. Take for example a French company wanted to prune its emission by switching over to a greener technology, it would have to spend $ 25 to $ 150 per tone of carbon reduction, but as this gap starts to narrow due to the carbon credits becoming more expensive, the companies would think of alternatives by investing in greener technology to reduce emission themselves, and further setting up there own technology would help in the long run by reduced cost and also government support. Another way is that the developing countries can built a group among themselves to set a Research & Development Department and can jointly fund the research operations. The low carbon technology so developed can be shared amongst them. This will provide a means to research at a relatively low cost. This technology would be implemented in the new and existing projects which would ultimately provide carbon credits to the industry. These credits would then be traded internationally to developed countries and would lead to generation of revenue to developing countries. Market Appetite And Future Trends The global business in carbon trading under the clean development mechanism alone is currently valued at $ 5 Billion a year. According to an estimate this can easily go up to $ 100 Billion if the recommendations of the Intergovernmental Panel on Climate Change (IPCC) for a 50 per cent reduction in carbon emission are implemented. Currently the international market for carbon trading is not fully developed and once it matures fully there could be more transparency and scope for more players to enter. The average prices of the carbon credit would increase due to the constant demand by the developing countries and countries would increase their operations in developing countries in order to decrease the green house gases and ultimately earn carbon credits. There could be some political uncertainty whether the Kyoto Protocol needs to be extended beyond 2012 and this could provide hinders on the development of the free carbon trading. Currently, there is no potential link between the different emission trading schemes but in the future as the market develops more and new rules are brought in, there could be valuations on a more standard level and the different schemes can be linked. Conclusion
Page | 7
Carbon trading provides a commercial way of dealing with the problem of carbon dioxide emissions. There are various emission trading schemes but there are minimal of linkages amongst them. The carbon trading market provides various opportunities for new technology and business and at the same time provides threat to some of the industries due to intense competition. Furthermore, the carbon trading market is in its growth stage and in the coming years it can be developed and also there is a possibility of a centrally traded emission traded schemes.
Page | 8
doc_183267287.doc