Tuesday 3 April 2012

CARBON CREDIT


Burning of fossil fuels is a major source of industrial greenhouse gas emissions, especially for power, cement, steel, textile, and fertilizer industries. The major greenhouse gases emitted by these industries are carbon dioxide, methane, nitrous oxide, hydrofluorocarbons (HFCs), etc, which all increase the atmosphere's ability to trap infrared energy and thus affect the climate.
WHAT ARE CARBON CREDITS?
In accordance with the Kyoto protocol, consumers of fossil fuels are assigned CO2 emission levels. In many cases, achieving these emission levels require massive up gradation or revamping of facilities; incurring costs too huge to justify the investment. Such parties are allowed to pay others to store carbon for them in exchange for the right to release carbon in excess of their limits into the atmosphere. This forms the basis of carbon credits.
Carbon credits are a key component of national and international emissions trading schemes. They provide a way to reduce greenhouse effect emissions on an industrial scale by capping total annual emissions and letting the market assign a monetary value to any shortfall through trading. Credits can be exchanged between businesses or bought and sold in international markets at the prevailing market price. Credits can be used to finance carbon reduction schemes between trading partners and around the world.
Carbon sequestration can provide a country with both monetary and non monetary benefits. Currently, carbon credits are valued at approximately € 30 per metric tone. Even if a country generates 100,000 metric tons of carbon credits a year it can generate an additional € 3 million which is a quite significant amount especially for a debt ridden country like India.
INDIA’S PROSPECTS
India has a huge advantage when it comes to the carbon credits market. In the new regime, the country could emerge as one of the largest beneficiaries accounting for 25 per cent of the total world carbon trade, says a recent World Bank report. The country’s dominance in carbon trading is expected to be driven, not so much by the domestic industry, but more by its huge tracts of plantation land, estimated to be over 15 million hectares, much larger than Australia which aims to be a major player in emission trading by adding 2 million hectare plantation by 2020.
Seeing the importance of the prospects in the Indian market, World Bank entered into an agreement with Infrastructure Development Finance Company (IDFC) in 2002 wherein IDFC was given the task of handling carbon finance operations in the country for various carbon finance facilities. World Bank also earmarked an initial investment of $ 10 million aid carbon finance to IDFC-financed projects that meet all the required eligibility and due diligence standards.
Identifying the opportunities the Indian industry has already taken proactive measures. A large number of domestic companies have initiated projects in diverse areas such as energy efficiency, co-generation, natural gas alternative fuels and hydel power. But the potential is still untapped. Currently, there are only about 225 projects in India which are moving towards taking advantage of this concept as compared to the current global requirement of 350-500 million tones of additional carbon credits.
Much depends on how well India can capitalize on the current scenario. If the Indian industry and government cooperate Indian stands the chance of creating a $ 5 billion carbon credits market in the next seven years.
IN CONCLUSION
The carbon credits market is a liquid market as of now. And there is nothing to support the fact it will remain the same in the time to come. But India needs additional sources of revenue to finance its infrastructural requirements and feed its ‘100 billion’ population. Even if the market stops growing in the future or ceases to exist, the non monetary effects for an agricultural economy like ours are huge enough to make the risk worth while.

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), informally known as the Earth Summit, held in Rio de Janeiro in 1992. The treaty is aimed at reducing emissions of greenhouse gas in order to combat global warming.

Annex I parties

Annex II countries

(23 countries and separately the European Union; Turkey was removed from the annex II list in 2001 at its request to recognize its economy as a transition one.)
Carbon projects have become increasingly important since the advent of emissions trading under Phase I of the Kyoto protocol in 2005. They may be used if the project has been validated by a Clean Development Mechanism (CDM) Designated Operational Entity (DOE) according the United Nations Framework Convention on Climate Change. The resulting emissions reductions may become Certified Emissions Reductions (CERs) when a DOE has produced a verification report which has been submitted to the CDM Executive Board.

The mechanism was formalized in the Kyoto Protocol, an international agreement between more than 170 countries, and the market.

Developing a carbon project is appropriate for renewable energy projects such as wind, solar, low impact-small hydro, biomass, and biogas. Projects have also been developed for a wide variety of other emissions reductions such as reforestation, fuel switching, carbon capture and storage, and energy efficiency.

IPCC has provided estimates of air emissions from various CCS plant designs (see table below). While CO2 is drastically reduced (though never completely captured), emissions of air pollutants increase significantly, generally due to the energy penalty of capture. Hence, the use of CCS entails a reduction in air quality.

It seems likely that in the initial stages of the use of the Credit, every nation is going to want them to offset their CO2 production (the Kyoto agreement states that all parties should be able to account for their CO2 output by investing in carbon sinks and buying an equal number of Carbon Credits) and the money used to buy Credits is essentially going to go towards the increased use of alternative energy sources. This is exactly what is happening right now, because the terms of the Kyoto Protocol dictate that monies are to be used in nations that do not have the resources to invest in alternatives. As weather patterns become more obviously disruptive, the need to counter CO2 emissions will increase and the demand for Carbon Credits will become greater. Essentially the Carbon Credit market will be about buying credits to ensure against extreme weather events. Since the Carbon Credit is so inextricably connected to CO2 and we need something to actually value, CO2 should be considered to be the currency, it has to be. But how much is CO2 worth and ultimately what do we have to buy to actually reduce our CO2 levels?

Let’s look at trees. Most people see trees as the solution to the CO2 problem. The tree is the only known thing we can “control” that absorbs CO2. I want to see how many trees a Credit is worth so that I can grasp the size and scale of a Credit. The oceans absorb a lot of CO2 (there are lots of shells) but we have no control over this constant. Our farming methods and the way we handle our waste affect levels of CO2 but if you try to imagine what one Credit looks like, a tree or number of trees is a great way to give it context. So what is the market value of a tree and how much CO2 does it absorb?
Since the terms of the Kyoto agreement are that trees should be left to stand for 25 years before being felled, I have used the example below to calculate how many 25 year old maple and pine trees are needed to absorb 1 Tonne of CO2.
Typically, a tree reaches a size of around 14” dbh (diameter at breast height and depends on species) at the age of 25 and according to forest charts this tree has a marketable volume of 130 board feet. With prices varying from US$300 – 700 per thousand board feet, this one tree can be worth anything from about US$35 – 75.

According to www.tufts.edu an average 25 year old maple tree absorbs 2.52lbs (1.1kg) of CO2 per year. Over 25 years that’s 27.5 kgs. It means that 36 trees are needed to absorb one Tonne (1000kg) of CO2 and with each tree costing $50, each Carbon Credit should cost at least 50 x 36 trees = US $1800. Otherwise there is more value in felling the trees. Using these trees to give estimates to their carbon value gives very expensive Carbon Credit prices. Clearly these particular trees are not very good at absorbing high levels of CO2.

According to the same website, an average 25 year old pine absorbs 15lbs (6.82kgs) of CO2 per year which means that the cost of a Carbon Credit when measured with this tree is approximately 6 times cheaper at US$300. In other words it takes $300 dollars (6 trees) worth of lumber of this type of tree to absorb 1 Tonne of CO2. If these trees are used as a benchmark for prices the Credit would cost $300.
It was a significant and happening year for environment economy. And this is not only in terms of global acknowledgement with the Nobel Peace Prize for climate change movement. India is signing off the year 2007 with over 21 million certified emission reduction (CERs) credits generated by clean development mechanism (CDM) projects during the year. This is nearly double compared to what was generated in 2006, that is, over 12 million CERs.

A significant jump in carbon credits generated over the previous year may project a cleaner image of the country’s polluting industries, however, experts feel we could have done better.

"Considering the CDM potential in India, this growth rate should have been even more. The major part of the issued CERs have happened from limited sectors (mostly from renewable energy, waste heat recovery etc) and in the coming years, we expect wider sectoral coverage and more participation leading to a growth of around 80-100%," said Ernst & Young partner (risk advisery services) Sudipta Das. Given that a majority of CERs are from the first issuance, the industry expects repeat issuance from projects in 2006, 2007 & 2008, next year. This has raised expectations from what the country generates in 2008.
"In the carbon market, the doubling of growth is expected next year too and in further years the growth will be decelerated to reach may be up to 100 million per year of issued CERs in 2012. The clarity on next commitment period, by 2009 can impact the acceleration. And in case commitments in the next period are more stringent, we could reach up to 120 million per year of issued CERs by 2012," said Ram Babu, India MD, CantorCO2e.

However, Ram Babu warned that in 2008 we may see lesser activity in the market from buyer’s side. "As of now there are no clear indications from Canada and Japan with regard to either government buying or ETS (emissions trading schemes) leading to activity involving private players.

The year 2008 will also see EUETS (EU Emissions Trading Scheme) driving the markets and only liquid destination for CERs. As the players in EUETS start perceiving that the maximum CER quotas are approaching, the buyers’ appetite for CERs will reduce. Government buying programmes, as they are, will not be able sustain the present prices. The later part of the 2008 could be a darker patch in the CER market," he added.
Justin Mundy, the energy and environment advisor with the foreign & Commonwealth office of the UK government, said Britain has already extended an assistance of 1.8 million pound to India for developing the CDM in 22 projects. The UK government would give another 700,000 pounds in 2007-08, and projects that can adopt the CDM were being identified, he added.
According to terms of the UNFCCC, having received over 50 countries' instruments of ratification, it entered into force March 24, 1994. Since the UNFCCC entered into force, the parties have been meeting annually in Conferences of the Parties (COP) to assess progress in dealing with climate change, and beginning in the mid-1990s, to negotiate the Kyoto Protocol to establish legally binding obligations for developed countries to reduce their greenhouse gas emissions.

COP-1, The Berlin Mandate

The UNFCCC Conference of Parties met for the first time in Berlin, Germany in the spring of 1995, and voiced concerns about the adequacy of countries' abilities to meet commitments under the Convention. These were expressed in a U.N. ministerial declaration known as the "Berlin Mandate", which established a 2-year Analytical and Assessment Phase (AAP), to negotiate a "comprehensive menu of actions" for countries to pick from and choose future options to address climate change which for them, individually, made the best economic and environmental sense. The Berlin Mandate exempted non-Annex I countries from additional binding obligations, in keeping with the principle of "common but differentiated responsibilities" established in the UNFCCC­ even though, collectively, the larger, newly industrializing countries were expected to be the world's largest emitters of greenhouse gas emissions 15 years hence.

 COP-2, Geneva, Switzerland

The Second Conference of Parties to the UNFCCC (COP-2) met in July 1996 in Geneva, Switzerland. Its Ministerial Declaration was adopted July 18, 1996, and reflected a U.S. position statement presented by Timothy Wirth, former Under Secretary for Global Affairs for the U.S. State Department at that meeting, which
  1. Accepted the scientific findings on climate change proffered by the Intergovernmental Panel on Climate Change (IPCC) in its second assessment (1995);
  2. Rejected uniform "harmonized policies" in favor of flexibility;
  3. Called for "legally binding mid-term targets."

COP-3, The Kyoto Protocol on Climate Change

The Kyoto Protocol to the United Nations Framework Convention on Climate Change was adopted by COP-3, in December 1997 in Kyoto, Japan, after intensive negotiations. Most industrialized nations and some central European economies in transition (all defined as Annex B countries) agreed to legally binding reductions in greenhouse gas emissions of an average of 6 to 8% below 1990 levels between the years 2008-2012, defined as the first emissions budget period. The United States would be required to reduce its total emissions an average of 7% below 1990 levels, however neither the Clinton administration nor the Bush administration sent the protocol to Congress for ratification. The Bush administration explicitly rejected the protocol in 2001.

COP-4, Buenos Aires

COP-4 took place in Buenos Aires in November 1998. It had been expected that the remaining issues unresolved in Kyoto would be finalized at this meeting. However, the complexity and difficulty of finding agreement on these issues proved insurmountable, and instead the parties adopted a 2-year "Plan of Action" to advance efforts and to devise mechanisms for implementing the Kyoto Protocol, to be completed by 2000.

COP-5, Bonn, Germany

The 5th Conference of Parties to the U.N. Framework Convention on Climate Change met in Bonn, Germany, between October 25 and November 5, 1999. It was primarily a technical meeting, and did not reach major conclusions.

COP-6, The Hague, Netherlands

When COP-6 convened November 13-November 25, 2000, in The Hague, Netherlands, discussions evolved rapidly into a high-level negotiation over the major political issues. These included major controversy over the United States' proposal to allow credit for carbon "sinks" in forests and agricultural lands, satisfying a major proportion of the U.S. emissions reductions in this way; disagreements over consequences for non-compliance by countries that did not meet their emission reduction targets; and difficulties in resolving how developing countries could obtain financial assistance to deal with adverse effects of climate change and meet their obligations to plan for measuring and possibly reducing greenhouse gas emissions. In the final hours of COP-6, despite some compromises agreed between the United States and some EU countries, notably the United Kingdom, the EU countries as a whole, led by Denmark and Germany, rejected the compromise positions, and the talks in The Hague collapsed. Jan Pronk, the President of COP-6, suspended COP-6 without agreement, with the expectation that negotiations would later resume [2]. It was later announced that the COP-6 meetings (termed "COP-6 bis") would be resumed in Bonn, Germany, in the second half of July. The next regularly scheduled meeting of the parties to the UNFCCC - COP-7 - had been set for Marrakech, Morocco, in October-November, 2001.

COP-6 "bis," Bonn, Germany


When the COP-6 negotiations resumed July 16-27, 2001, in Bonn, Germany, little progress had been made on resolving the differences that had produced an impasse in The Hague. However, this meeting took place after President George W. Bush had become the U.S. President, and had rejected the Kyoto Protocol in March; as a result the United States delegation to this meeting declined to participate in the negotiations related to the Protocol, and chose to act as observers at that meeting. As the other parties negotiated the key issues, agreement was reached on most of the major political issues, to the surprise of most observers given the low level of expectations that preceded the meeting. The agreements included:
  1. Flexible Mechanisms: The "flexibility" mechanisms which the United States had strongly favored as the Protocol was initially put together, including emissions trading; Joint Implementation (JI); and the Clean Development Mechanism (CDM) which allow industrialized countries to fund emissions reduction activities in developing countries as an alternative to domestic emission reductions. One of the key elements of this agreement was that there would be no quantitative limit on the credit a country could claim from use of these mechanisms, but that domestic action must constitute a significant element of the efforts of each Annex B country to meet their targets.
  2. Carbon sinks: ­Credit was agreed to for broad activities that absorb carbon from the atmosphere or store it, including forest and cropland management, and re-vegetation, with no over-all cap on the amount of credit that a country could claim for sinks activities. In the case of forest management, an Appendix Z establishes country-specific caps for each Annex I country, for example, a cap of 13 million tons could be credited to Japan (which represents about 4% of its base-year emissions). For cropland management, countries could receive credit only for carbon sequestration increases above 1990 levels.
  3. Compliance: ­ final action on compliance procedures and mechanisms that would address non-compliance with Protocol provisions was deferred to COP-7, but included broad outlines of consequences for failing to meet emissions targets that would include a requirement to "make up" shortfalls at 1.3 tons to 1, suspension of the right to sell credits for surplus emissions reductions; and a required compliance action plan for those not meeting their targets.
  4. Financing: ­Three new funds were agreed upon to provide assistance for needs associated with climate change; a least-developed-country fund to support National Adaptation Programs of Action; and a Kyoto Protocol adaptation fund supported by a CDM levy and voluntary contributions.

COP-7, Marrakech, Morocco

At the COP-7 meeting in Marrakech, Morocco October 29-November 10, 2001, negotiators in effect completed the work of the Buenos Aires Plan of Action, finalizing most of the operational details and setting the stage for nations to ratify the Protocol. The completed package of decisions are known as the Marrakech Accords. The United States delegation continued to act as observers, declining to participate in active negotiations. Other parties continued to express their hope that the United States would re-engage in the process at some point, but indicated their intention to seek ratification of the requisite number of countries to bring the Protocol into force (55 countries representing 55% of developed country emissions of carbon dioxide in 1990). A target date for bringing the Protocol into force was put forward: ­the August-September 2002 World Summit on Sustainable Development (WSSD) to be held in Johannesburg, South Africa.

COP-8, New Delhi, India

COP-9, Milan, Italy

COP-10, Buenos Aires, Argentina

COP-11, Montreal, Canada

The meeting, the 11th Conference of the Parties (COP) to the United Nations Framework Convention on Climate Change (UNFCCC), was also the first Meeting of the Parties (MOP) to the Kyoto Protocol since their initial meeting in Kyoto in 1997. It was therefore one of the largest intergovernmental conferences on climate change ever. The event marked the entry into force of the Kyoto Protocol.
The Montreal Action Plan is an agreement hammered out at the end of the conference to "extend the life of the Kyoto Protocol beyond its 2012 expiration date and negotiate deeper cuts in greenhouse-gas emissions."

COP-12, Nairobi, Kenya

The second meeting of the Parties to the Kyoto Protocol (COP/MOP 2), in conjunction with the twelfth section of the Conference of the Parties to the Climate Change Convention (COP 12), was held in Nairobi, Kenya from 6 to 17 November 2006. At the meeting, the phrase climate tourists was coined to describe some delegates who attended "to see Africa, take snaps of the wildlife, the poor, dying African children and women".

COP-13, Bali, Indonesia

Main: 2007 United Nations Climate Change Conference

Bali Silat Grand Master Made Sujana Balok in Traditional Costume preparing a traditional Silat display to welcome world leaders to Bali, Indonesia Dec
COP-13 and MOP-3 took place at Nusa Dua, in Bali, Indonesia, between December 3 and December 15, 2007. Agreement on a timelined negotiation on the post 2012 framework (a successor to the Kyoto Protocol) was achieved. These negotiations will take place during 2008 (leading to COP-14 and MOP-4 in Poznan, Poland)and 2009 (leading to COP-15 and MOP-5 in Copenhagen).

COP-14, Poznań, Poland

COP-15, Copenhagen, Denmark

The COP-15 TOOK PLACE in Copenhagen, Denmark in 2009. According to Danish Minister for the Environment, Connie Hedegaard, the summit's primary focusED to obtain an agreement about CO2 and other greenhouse gas reductions after 2012 when the first commitment period under the Kyoto Protocol expires.

2010: COP 16/MOP 6, Cancún, Mexico

COP 16 was held in Cancún, Mexico, from November 29 to December 10, 2010.

2011: COP 17/MOP 7, Durban, South Africa

The 2011 COP 17 was held in Durban, South Africa, from November 28 to December 9, 2011.

2012: COP 18/MOP 8, Qatar

Qatar will be the host of COP 18 which will take place from 26 November to 7 December 2012

AMAR
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