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Climate change and a consequence global warming can be seen all around us. It has already started shaping each and every aspect of our lives in more than one ways: from how we travel to what products we buy to where we live. Hence, there is a concern that the use of non-renewable fuels and other human activities are increasing greenhouse gases in the atmosphere, contributing to global warming. To avoid this, enthusiasm is spreading for cap-and-trade systems to regulate the amount of CO2 emitted to Earth’s atmosphere.
A new currency is emerging in world markets. Unlike the dollars, Euros and yen that trade for tangible goods and human services, this new money exchanges for pollution–particularly emissions of carbon dioxide, which are caused by burning fossil fuels and are the leading cause of global climate change. Carbon credits, as they are called, are poised to transform the world energy system and thus the world economy.
Carbon credits are used as a currency that allows companies and individuals to compensate their carbon emissions. This is done by either reducing carbon dioxide release directly or through offsetting their GHG outputs. Carbon Credits originated historically from The United Nation’s Clean Development Mechanism which was under the Kyoto Protocol. It allows a fixed quantity of carbon credits to be traded. It is important for people to limit their impact on the environment and buy carbon credits to offset what they can’t reduce and work towards reducing their offsets.
Carbon trading as per the Clean Development Mechanism (CDM) is a big business in the open markets. Projects such as development of renewable energy, improving polluting industries, and planting carbon absorbing sinks are being funded by carbon credits. Companies and people are becoming carbon conscious by reducing their emissions.
Many types of events and workings can generate carbon offsets. Renewable energy such as the wind farms, solar panels, geothermal energy, bio energy and small hydro turbines can create carbon offsets by replacing fossil fuels. Other varieties of offsets available for sale in the market include those including methane capturing from landfills or livestock, destruction of harmful greenhouse gases such as halocarbons, and carbon removal projects (such as reforestation) that absorb carbon dioxide from the atmosphere.
Emission levels are increasing around the world and this has resulted in a number of companies wishing to buy more carbon credits. This would result in an increase in its market price and this would encourage businesses to perform more eco-friendly activities which would create more carbon credits to sell. Developed countries spend nearly $400-450 for every ton of reduction in CO2, as compared to $10-$25 spent by developing countries. India’s GHG emission is below the target and therefore, it can sell surplus credits to other countries. India is considered to possess about 31% of the total world carbon trade. This implies a trade opportunity of $25bn by 2010.This makes trading in carbon credits such a major business opportunity.
Indiahas emerged as the leading horse in this race. More than 300 Indian entities have proceeded with their application for registering their CDM Project to avail carbon credits. Currently,1 carbon credit is worth 14 Euros. Indian companies can pose higher incomes from carbon credits as compared to their core business. The global carbon credit market was estimated $30 billion last year andis it is growing at tremendous pace. There is a need and a consequent demand to reduce 1 billion ton of carbon emissions in the world, in order to deal with threats like global warming.
Indian companies have realized that money can be earned by becoming eco-friendly. With new infrastructure sector like power and steel developing in India, the carbon credit market will gain stature. The 800 million farming community in India also has an opportunity to sell Carbon Credits to developed nations.
Companies like Wal-Mart, Dell and GE are going GREEN and purchasing carbon credits. These companies are improving their brand name, consumer confidence in their products.
Global Warming – Some Facts
Global Warming Phenomenon
Global warming has brought about one of the biggest challenges for planet earth in the 21st century. There is a global concern about the adverse impact of the emission of greenhouse gas (GHG) on the planet earth’s climate.
Global warming is a phenomenon of gradual increase in earth’s temperature as a result of the increase in greenhouse gases. This is mainly due to two reasons: increase in human activities which have led to an increased production of Greenhouse Gases, and a reduction in the Earth’s natural Carbon Dioxide due to Deforestation.
The green house effect has led to an increase in the temperature of the atmosphere near the earth’s surface. Shortwave light comes from the sun to the earth, and it passes unimpeded through a cover of greenhouse gases composed mainly of water vapor, carbon dioxide, nitrous oxide, and ozone. Infrared radiation reflects off the planet’s surface toward space but does not easily pass through the thermal blanket. Some of it is trapped and reflected downward, keeping the planet at an average temperature suitable to life, about 60°F (16°C).
Increase in the quantity of greenhouse gases is trapping more heat and increasing global temperatures, making a process that has been beneficial to life potentially disruptive and harmful.
The major natural greenhouse gases on Earth are
% of Greenhouse Effect
Carbon Dioxide (CO2)
The atmospheric concentrations of CO2 and methane have increased by 31% and 149% respectively above pre-industrial levels since 1750. These levels are considerably higher than at any time during the last 650,000 years.
Effects of Global Warming
Action must be taken against greenhouse effect, otherwise it could lead to an increase in average global temperature between 2 and 4 degrees and this could happen as early as the year 2030. This increase in temperature would be more towards the poles as compared to the tropics. This would also result in more winters becoming warmer. Such an increase will make the world hotter than it has ever been in the last 100,000 years. The rate of increase in temperature will also be faster than ever before. Just a comparison, a rise of approx 3 degrees Celsius after the ice age took many thousands of years. By the end of this century temperatures can reach those that were in the time of the dinosaurs making the survival of humans impossible. The effects can already be seen- the ten hottest years since the 18th century have been in the previous 15 years.
- Hurricanes will occur more frequently as oceans heat up resulting in increased water evaporation. Evidence is building at an dangerous rate.
- Droughts – Continental areas will dry out in summer.
- Floods – Sea levels are currently rising at a rate of around 1 mm each year due the top layer expansion of the oceans as they heat up and the polar ice caps melts. The predicted increase in the sea level by 2050 is between 20 and 50mm. This will cause greater flooding in coastal and low lying areas.
Carbon Emission – A major feature
One of the major greenhouse gases is the carbon dioxide gas (CO2). Trees grow and they absorb CO2 from the air. Forest clearance and the burning of wood (tropical rain forests) are adding the CO2 to the atmosphere. Deforestation is getting out of control. The loss of the forests implies that there are lesser trees to absorb CO2.
Despite deforestation making a large contribution towards global warming, it causes lesser contribution than half the yearly total CO2 released, the remaining and major part comes from burning coal, fossil fuels and oils. The fossil fuels are consumed in cars, power stations and factories. Nearly half of the CO2 which is released by burning fossil fuels is absorbed back by the oceans. It is taken up by sea life or it is dragged to the ocean depths by the circulation of water. Recent studies have suggested that as the earth heats up, the oceans will become less efficient in absorbing Carbon di-oxide, leaving more of CO2 in the atmosphere and hence adding further to global warming. The following Pie – Chart shows the various countries globally responsible for increasing shares of carbon dioxide emission.
Efforts to contain Global warming
It is imperative to slow down the global warming as much as possible. This would in effect happen by using less fossil fuel, eliminating the uses CFCs altogether, and stopping irregular deforestation.
This can be done through energy conservation, better use of public transport, more efficient cars, and energy efficiency by greater use of alternative sources of power which produces less CO2 than conventional sources and through renewable energy such as solar power. We have to stop deforestation of rain forests and start afforestation.
A United Nations research panel has estimated that we should reduce global fuel use by 60% immediately so that we can stabilize the climate changes. Current commitments by some governments participating in CO2 reduction will lower global CO2 by just 4 – 6%. The developed industrialized nations produce most of the CO2, the developing nations of South America and Asia are increasing their CO2 release at a much greater rate, and by 2012 they will overtake the Western countries as the major producers of CO2.
KYOTO PROTOCOL OVERVIEW
Kyoto Protocol – A response to curtail Global Warming
The Kyoto Protocol acts as an amendment to the international treaty of the United Nations Framework Convention on Climate Change (“UNFCCC”). It pledges mandatory emission norms to the nations who have signed the protocol for the reduction of greenhouse gas emissions. It was established December 11, 1997 in Kyoto, Japan.
Countries that ratify this protocol pledge to reduce their CO2 and five other greenhouse gases emissions, and/or engage in emissions trading if they increase emissions of these gases.
The Kyoto Protocol now encompasses more than 160 countries around the globe and more than 60% of countries in terms of global greenhouse gas emissions. The Kyoto Protocol works upon a collective reduction of 5% compared to 1990 levels by 2008-2012. This treaty expires in 2012 and international talks have already begun in May 2007 to chalk out a new future treaty to succeed the current one.
Source: IPCC Third Assessment Report. 2001 Climate Change : The Scientific Basis. Intergovernmental Panel on Climate Change
Green house gases have a disastrous effect on global warming with varying proportions. This intensity is measured by the “global warming potential” of the gas. The GWP of carbon dioxide is one. One tonne of HFC-23 gas, for example, has 11,700 times more green house effect as compared to CO2. CER’s are awarded on the basis of global warming potential of the gas.
CER to a gas = Tonnes of green house gas reduced X Global Warming Potential of the Gas
Features of Kyoto Protocol
As per the Kyoto Protocol, Governments have been divided into two broad categories:
- Developed countries (they have accepted GHG emission reduction obligations and they are mandated to submit an annual greenhouse gas inventory report)
- Developing countries (they have no GHG emission reduction obligations but they can participate in Clean Development Mechanism)
As per the rules, Any Annex I country which fails to meet the Kyoto obligation would be penalized by been mandated to submit 1.3 times its emission allowances in the second commitment period for every ton of GHG emissions cap they exceed in their first commitment period.
The objective of the protocol is the “stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system.” It aims to
- Put a limit onclimate change and global warming
- Reduce arbitrary usage of fossil fuels and encourage development and use of renewable energy
- Encourage sustainable development
Operation of Emission Trading System
Mechanisms under Kyoto Protocol
The Kyoto Protocol pioneered by defining three innovative and distinct “flexibility mechanisms” to reduce the overall costs of achieving the set emissions targets. These mechanisms enable countries and organizations to adopt cost-effective opportunities to reduce emissions and/or to remove carbon from the atmosphere. While the cost of putting a cap on emissions varies considerably from region to region, thebenefit for the atmosphere is the same, no matter where the action is taken.
Joint Implementation (JI):
The Kyoto Protocol provides clauses for developed countries to implement projects that reduce emissions, and/or remove carbon from the atmosphere as per the Emission Reduction Units (ERUs). These ERUs can be potentially used to meet the emission reduction targets.
A JI project may involve, for example, replacing a coal-fired power plant with a more efficient combined heat and power plant. JI projects must have a prior approval of all the entities involved, and must lead to emissions reductions or removal that are additional to any that would have occurred without the project.
International Emission Trading (IET):
The Kyoto Protocol also provides that developed countries can get carbon units from other developing parties and use them for meeting their emissions target. This enables developed countries to use low cost opportunities to reduce emissions. Such countries must, consequently, be prepared to transfer units when they do not require them for compliance with their own emission targets.CER: Certified Emission Reduction
Clean Development Mechanism (CDM):
Developed countries can take up GHG reduction project activities in developing countries where the cost of greenhouse gas reduction project activities is lower. The developed country would get the credits for meeting its emission targets. The developing country would get the capital and technology to implement the project. This technique is called Clean Development Mechanism.
CDM covers projects in countries without any set targets, i.e. developing countries. Credits would be issued only for reductions if a project provides real and long-term climate change benefits. The main advantages for countries hosting CDM or JI emission reduction projects are the transfer of technology, attraction of foreign investment, and the contribution to the country’s sustainable development.
The international CDM market has entered a high phase, having grown steadily after the Kyoto Protocol came into effect. The emission reduction targets during the first commitment phase of 2008 -12 for Annex – II countries, are 713 Million tone CO2 eq. The initial national communication submitted by Annex I countries indicates a total demand of 846 Million tonne CO2 eq. per year based on the individual country commitment and action to reduce emissions.
The Past highlights of the International carbon market are:
- In 2006, market traded an estimated 1.6 billion tonnes of carbon dioxide equivalent (tCO2e) in all market segments compared to approximately 799 million tCO2e in 2005.
- Similarly, the financial value more than doubled from 2005 to 2006, with a total estimate of USD 22.5 billion for all market segments.
- In 2007, the market traded an estimated 2.6 billion tonnes of CO2e, at a total financial size of USD 23.6 billion.
The projection for carbon market towards 2010 indicates
- With a high scenario, wherein the private sector predominates, the global carbon market can reach around USD 200 billion.
- With limited private sector participation and some speculations, it can be restricted to as low as USD 4.6 billion.
- It is estimated that the real market will be somewhere in between these two extremes with a forecasted carbon trade of USD 30 billion.
India is presently one of the world leaders in development of CDM projects. It is due to the Indian Designated National Authority that more than 297 project proposals with an emission reduction potential of over 297 million t CO2 have received the approval of the official host country. A wide range of project sizes and types in India help international buyers find the project of their choice or work upon a project portfolio to reduced risks.
- There is a huge evident potential for renewable energy generation from natural factors such as agriculture wastes, hydro and wind.
- Thermal electricity generation offers unlimited opportunities to improve energy efficiency. One example is the coal-fired power plants and the related transmission and distribution system.
- The chemical industry also allows reductions of industrial GHG which have large warming potentials
The Carbon RUSH – JSW Steel:
The CDM has made environmental responsibility acceptable for India Industries. Recycle, reuse and reduce have become commercially viable as companies reprocess waste and heat, and cut down carbon emissions.
India’s JSW Steel has been awarded about 5.4 million carbon credits, which includes 4 million carbon credits obtained from the single largest issuance of emissions permit by the U.N. to a Kyoto Protocol project. The 4 million credit issuance accounted for 6.5 % of the total 62 million CERs which were allocated by the UN. A total of around with 42 % of all issued credits have been assigned to ongoing projects in India.
CERs were issued to two projects owned by JSW Steel for reducing greenhouse gas emissions between 2001 and 2006. Their CDM projects cut gases emitted through power generation from imported coal and waste gases from JSW’s steel manufacturing operations.
Current Problems with the Environment Integrity of CDM – a practical perspective
Unfortunately, despite pressure from the environmental community and other sectors, the CDM rules and the project design document still offer little guarantee of environmental integrity. The main weaknesses of CDM procedures in that regard include:
- The contribution to sustainable development – including a transition away from ‘carbon dirty’ technologies and an emphasis on positive social and environmental impacts – is often treated as an optional extra rather than a central project feature.
- Demand reform in CDM procedures so that there is transparency; accountability of different players (penalties on consultants and DOEs)
- Demand price negotiations have to be made public, otherwise will lead to corruption
- Demand simpler procedures (less convoluted methodologies for additionality…etc) so that meaningful projects can work
- Large public companies (GAIL, SAIL, IOCL, etc)are yet to take off with CDM business, due to lack of knowledge of CDM opportunities
- Potential in small and medium enterprises yet to be tapped
- Lack of transparency in CDM market
- Limited bilateral investment for project funding
- Government’s role critical as a facilitator with different bilateral /multilateral organizations in organizing Carbon trade fairs or expos
- Number of Bilateral CDM projects need to be increased with more foreign investment for project funding
- Lack of awareness about CDM
- Tedious process
- High cost involved for documentation, validation and Monitoring & Verification of emission reductions
- Inability of new promoters to bring in equity to be able to avail of financing
As mentioned above, these problems stem in part from the weaknesses in the existing rules. At the same time, while it is possible that these flaws will be rectified by the CDM Executive Board in the near-future, the extreme pressure from investors to keep carbon prices at their lowest is forcing the project developers to cut corners.
The London financial marketplace has established itself as the center of the carbon finance market as a market for trading of the carbon emissions as per the Kyoto Protocol. This was estimated at $60 billion in 2007.
The irony in the carbon trading endeavor could be noticed from the fact that it was the major multinational corporations who came together in the G8 Climate Change Roundtable, at the January 2005 World Economic Forum. This group was primarily a business group formed by 23 companies. Since, these corporations are the ones who have been chief proponents of ‘overconsumption’, it seemed like a method by way of which they could clear their conscience of the damage that they were causing to the environment and planet earth. In June 2005 the Group published a statement stating that there was a need to act on climate change and the stress was on market-based solutions. The business in the UK and elsewhere have come out strongly in support of emissions trading as a key tool to limit the effects of climate change, and these efforts have been supported by Green NGOs.
As per the Unites Nation’s Food and Agricultural Organisation – FAO, approx 32 million acres of forests vanish each year, majority of them are in the tropics. The most important reason for forest clearing is the increasing need for agricultural land. The WWF has warned that if appropriate steps are not taken, more than 60 percent of the rain forests in the Amazon basin could disappear by 2030.
Carbon trading was introduced by the Kyoto Protocol as a possible solution of the efforts to reduce GHG emissions to below 1990 levels by 2012. The mainstream idea was that the countries whose emissions are below the prescribed emissions could then sell those excess carbon credits to countries that do not meet their own caps.
The caps are proposed to decrease over time and the price of carbon credits would rise due to scarcity. These signals towards a changing trend of carbon emission trading which would include a new global carbon emission based investment market, where companies and countries have incentives to invest in developing projects across the globe. All this is happening for the wrong reasons, as this is a method of obtaining the highly coveted carbon credits.
This seems to be a sore point for those against carbon trading. As an example, Google has a market value of $200 billion, while all the world’s great forests are valued at nothing. The economic argument says that it makes it financially more appealing to countries not to allow their forests to be cut down.
Some critiques of Carbon Emission Trading believe that there is a huge moral trade off in place. A study on child care centres in Israel showed that imposing monetary fines on late coming parents did not teach them a lesson in punctuality; in fact, this created an economic trade off as now the parents could voluntarily come late and get away by paying fines. Drawing an analogy from it, the carbon credit trading is on similar lines except that one firm can be willing to pay for extra emissions by compensating the other firm which reduces its carbon emissions. This increases a scarcity and hence the price of carbon pollution.
Can the interests of both the rich & the poor be served?
The major concern about the entire carbon credit trading evolution is the belief that the carbon emission trading really serves rich nations only; the main stream issue being that carbon trading could put the vital resources of the developing world in the hands of developed nations who can then use carbon credits as a way to counter the reductions of their own GHG emissions at the same time.
The World Bank recently launched the Forest Carbon Partnership Facility (FCPF), a fund which is financed by the leading countries such as UK, Germany, the Netherlands, France, Switzerland, Denmark and Finland. The $160 million fund would be used to “support programs targeting the drivers of deforestation and develop concrete activities to reach out to poor people who depend on forests to improve their livelihoods. It will also help developing countries build the technical, regulatory, and sustainable forestry capacity to reduce emissions from deforestation and degradation.”
There has always been confusion over the exact role that the World Bank is trying to play in carbon trading market. The World Bank claims to be aiming at reducing global deforestation by 10 percent by 2010. But its critics claim the World Bank has traditionally been an exponent of deforestation.
There has also been concern over the consequences of carbon trading scheme on local forest communities that earn their daily living from the forests. Substantiating with an example -In the Democratic Republic of Congo (DRC) the World Bank is facing opposition from Pygmy groups and local communities which rely on the Congo basin for their living. There have been reports that accuse the Bank of encouraging commercial logging practices while ignoring sustainable forestry and conservation. The report also claims that the financial benefits of logging have gone to foreign firms, not the local ones. This makes one wonder what the real intentions of the World Bank are.
The Million Dollar Question!!!
EMISSIONS’ TRADING COMMODIFIES Carbon. Does this Really Help Solve Climate Change problem?
Exponents of carbon trading see markets as the best mechanism for reducing emissions. The critics, on the other hand, believe that carbon trading is a devil’s bargain that navigates the profits to polluters.
You can’t solve problems just by using money, the old saying goes. Capitalists have a monetary solution to problems and they believe that the markets are the solutions to everything. They reverse this equation by turning problems from money-hoarding pits to money-makers. Essentially, they try to seek the profit motive to ‘cure’ society’s woes by transforming problems into commodities. This is the set strategy behind the emerging carbon trading markets.
The Solution as per the Carbon Trading Proponents
By trading the capped carbon emission rights, the rights become scarcer and hence more valuable. Cap-and-trade markets help solve climate change by lowering carbon emissions while generating wealth for the developing nations!
If only it were so simple!!!
The first contentious question is about how to distribute carbon emission rights: auction or allocation.
In 2006, the experiment with carbon credit pricing came to a collapse when it became known that the EU was, either naively or corruptly, handing out too many emission rights to companies based on their estimates. Obviously, their emissions came out to be much lower which gave them a right to trade the left over unconsumed carbon credits. There seemed no real intention of reducing the carbon emissions.
“The dirtier you are, the bigger your entitlement . . . the polluter was paid.”… British journalist George Monbiot.
The second problem with carbon trading is about mandatory versus voluntary markets. The US, the largest carbon emitter in the world has not signed onto the Kyoto Protocol. To fill this regulatory gap, voluntary carbon markets such as the Chicago Climate Exchange have sprouted up. With proper market design – which implies no price cap and a financial penalty for non-compliance -carbon trading forces the movement to cleaner technology and consequent emissions reductions. Carbon trading critics charge and claim that the financial benefits overshadow environmental concerns.
With the carbon price suppressed and lowered, polluters – energy providers, utilities, oil companies etc have little incentive to curb the rising GHG emissions, thus making the current system undermine the environment and the planet. Also, critics see it as an extension of colonialist exploitation.
The third problem relates to the monetary and economic aspect. In reality ‘cap and trade’ carbon markets have done little to reduce emissions and are plagued by corruption and inefficiency. The world’s carbon trading markets are becoming increasingly complex and this threatens another “sub-prime” style financial crisis that could again destabilise the global economy.
There is also a distinct smell of middlemen involvement. The majority of the trade is carried out not between polluting industries and factories covered by carbon trading schemes, but by banks and investors who profit from speculation on the carbon markets – packaging carbon credits into increasingly complex financial products.
A rational reasoning
Even as they gain popularity as a carbon mitigating solution, carbon offsets have often been dubbed under considerable criticism for diluting collective action against global warming. The truth, however, exists in between. Proponents exist on both sides of the debate.
We all participate in the consumption of fossil-fuel energy. These emit large amounts of climate-changing CO2 and other GHG gases. The terms “carbon offset” and “carbon neutral” have been used as a misnomer – it is actually the idea of “erasing” the negative impact of our daily carbon emissions which drives the carbon offset market – and its related controversy.
A rational reasoning says that “You cannot make up for the use of carbon buying the power of money to leverage yourself into a position of freedom from responsibility for emitting it – once the damage is done, it’s done.”
Ultimately what it all boils down to is the question of choosing from the rich display of effective opportunities that can be adopted if necessary actions are taken while ignoring, at the same time, the capitalistic monetary ‘solutions’ like offsets.
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