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TECHNOLOGY, JAIPUR.
A SEMINAR REPORT
ON
“CARBON CREDITS”
in mechanical Engineering
1
MAHARISHI ARVIND INSTITUTE OF ENGINEERING
AND TECHNOLOGY,
JAIPUR.
CERTIFICATE
Mechanical Engineering, Class roll no. – 093 & Enrolment No. – 05/2282
2
PREFACE
In Accordance with the prescribe curriculum of Rajasthan University, Jaipur for the
four year B.E, every student has to undergo a seminar program at the end of final
mechanical Engineering.
RUDRAKSH KAKKAR
3
ACKNOWLEDGEMENT
4
CONTENT
1. Introduction 1
5
15. Certification Requirements 19
16. Carbon Credits save the planet 20
17. Financial Issues 20
17.1 Setting of market price 21
17.2 Carbon Credits can reduce emissions 22
17.3 Credits V/S Taxes 23
17.4 Creating real Carbon Credits 23
18. Additionality & Importance 24
19. Criticisms 24
20. Conclusion 26
21. References 27
1. INTRODUCTION
6
1.1 Carbon credits are a key component of national and international attempts to
mitigate the growth in concentrations of Greenhouse Gases (GHGs). Carbon trading is an
application of an emissions trading (Emissions trading is an administrative approach
used to control pollution by providing economic incentives for achieving reductions in
the emissions of pollutants approach) & Greenhouse gas emissions are capped and then
markets are used to allocate the emissions among the group of regulated sources. The
idea is to allow market mechanisms to drive industrial and commercial processes in the
direction of low-emissions or less "carbon intensive" approaches than are used when
there is no cost to emitting CO2 and other GHGs into the atmosphere. Since GHG
mitigations projects generate credits, this approach can be used to finance carbon
reduction schemes between trading partners and around the world.
There are also many companies that sell carbon credits to commercial and individual
customers who are interested in lowering their carbon footprint on a voluntary basis.
These carbon offsetters purchase the credits from an investment fund or a carbon
development company that has aggregated the credits from individual projects. The
quality of the credits is based in part on the validation process and sophistication of the
fund or development company that acted as the sponsor to the carbon project. This is
reflected in their price; voluntary units typically have less value than the units sold
through the rigorously-validated Clean Development Mechanism.
The CDM allows net global greenhouse gas emissions to be reduced at a much lower
global cost by financing emissions reduction projects in developing countries where costs
are lower than in industrialized countries. However, in recent years, criticism against the
mechanism has increased.
2. BACKGROUND
Burning of fossil fuels is a major source of industrial greenhouse gas emissions,
especially for power, cement, steel, textile, fertilizer and many other industries which rely
7
on fossil fuels (coal, electricity derived from coal, natural gas and oil). The major
greenhouse gases emitted by these industries are carbon dioxide, methane, nitrous oxide,
hydro fluorocarbons (HFCs), etc, all of which increase the atmosphere's ability to trap
infrared energy and thus affect the climate.
Figure.1
The concept of carbon credits came into existence as a result of increasing awareness of
the need for controlling emissions.
The mechanism was formalized in the Kyoto Protocol, an international agreement
between more than 170 countries, and the market mechanisms were agreed through the
subsequent Marrakesh Accords. The mechanism adopted was similar to the successful
US Acid Rain Program to reduce some industrial pollutants
.
Fig.2
3. EMISSION ALLOWANCES
8
The Protocol agreed 'caps' or quotas on the maximum amount of Greenhouse gases for
developed and developing countries, listed in its Annex I. In turn these countries set
quotas on the emissions of installations run by local business and other organizations,
generically termed 'operators'. Countries manage this through their own national
'registries', which are required to be validated and monitored. Each operator has an
allowance of credits, where each unit gives the owner the right to emit one metric tonne
of carbon dioxide or other equivalent greenhouse gas. Operators that have not used up
their quotas can sell their unused allowances as carbon credits, while businesses that are
about to exceed their quotas can buy the extra allowances as credits, privately or on the
open market. As demand for energy grows over time, the total emissions must still stay
within the cap, but it allows industry some flexibility and predictability in its planning to
accommodate this.
By permitting allowances to be bought and sold, an operator can seek out the most cost-
effective way of reducing its emissions, either by investing in 'cleaner' machinery and
practices or by purchasing emissions from another operator who already has excess
'capacity'.
Since 2005, the Kyoto mechanism has been adopted for CO 2 trading by all the countries
within the European Union under its European Trading Scheme (EU ETS) with the
European Commission as its validating authority. From 2008, EU participants must link
with the other developed countries that ratified Annex I of the protocol, and trade the six
most significant anthropogenic greenhouse gases. In the United States, which has not
ratified Kyoto, and Australia, whose ratification came into force in March 2008, similar
schemes are being considered.
4. KYOTO PROTOCOL
The Kyoto Protocol to the United Nations Framework Convention on Climate Change
(UNFCCC) was adopted by more than 150 countries at the third session of the
Conference of the Parties to the UNFCCC in Kyoto, Japan, on 11 December 1997. It is
an international treaty containing binding constraints on greenhouse gas emissions and,
mechanisms aimed at cutting the cost of reducing emissions and establish global markets
for greenhouse gas (GHG) emission permits. Under the Kyoto Protocol, industrialized
countries and countries with economies in transition will reduce their combined GHG
emissions by at least five per cent below their 1990 levels by the first commitment 2008
to 2012. The most important GHG is carbon dioxide (CO2) whose emissions are mainly
related to combustion of fossil fuels.
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Union (the EU will meet its target by distributing different rates among its member
states); 7% by the US; and 6% by Canada, Hungary, Japan, and Poland. Russia, New
Zealand, and Ukraine are to stabilize their emissions, while Norway may increase
emissions by up to 1%, Australia by up to 8%, and Iceland 10%. The six gases are to be
combined in a "basket", with reductions in individual gases translated into "CO2
equivalents" that are then added up to produce a single figure.
Each country’s emissions target must be achieved by the period 2008-2012. It will be
calculated as an average over the five years. "Demonstrable progress" towards meeting
the target must be made by 2005. Cuts in the three most important gases – carbon dioxide
(CO2), methane (CH4), and nitrous oxide (N20) - will be measured against a base year of
1990 (with exceptions for some countries with economies in transition).
Cuts in three long-lived industrial gases – hydrofluorocarbons (HFCs), perfluorocarbons
(PFCs), and sulphur hexafluoride (SF6) - can be measured against either a 1990 or 1995
baseline. (A major group of industrial gases, chlorofluorocarbons, or CFCs, are dealt with
under the 1987 Montreal Protocol on Substances that Deplete the Ozone Layer.)
Actual emission reductions will be much larger than 5%. Compared with emissions
levels projected for the year 2000, the richest industrialized countries (OECD members)
will need to reduce their collective output by about 10%. This is because many of these
countries will not succeed in meeting their earlier non-binding aim of returning emissions
to 1990 levels by the year 2000; their emissions have in fact risen since 1990. While the
countries with economies in transition have experienced falling emissions since 1990,
this trend is now reversing.
Therefore, for the developed countries as a whole, the 5% Protocol target represents an
actual cut of around 20% when compared with the emissions levels that are projected for
2010 if no emissions-control measures are adopted.
Countries have a certain degree of flexibility in how they make and measure their
emissions reductions. In particular, an international "emissions trading" regime is
established allowing industrialized countries to buy and sell emissions credits amongst
themselves. They will also be able to acquire "emission reduction units" by financing
certain kinds of projects in other developed countries through a mechanism known as
Joint Implementation. In addition, a "Clean Development Mechanism" for promoting
sustainable development enables industrialized countries to finance emissions-reduction
projects in developing countries and receive credit for doing so.
The Protocol shall enter into force on the ninetieth day after the date on which not less
than 55 Parties to the Convention, incorporating Annex I Parties which accounted in total
10
for at least 55 % of the total carbon dioxide emissions for 1990 from that group, have
deposited their instruments of ratification, acceptance, approval or accession.
The Kyoto protocol and the states that ratified the protocol could be found at the
following.
The concepts of JI and CDM refer to project based co-operations between two countries,
where GHG emission reductions take place in the country with lower marginal abatement
costs. In other words, a country that has adopted a quantified GHG emission reduction or
limitation commitment under the Kyoto Protocol can fulfils parts of this commitment on
the territory of another country where the costs are lower. The CDM envisages a project
co-operation between industrialized countries with commitments (Annex I countries) and
developing countries (non-Annex I countries), which have exempted from quantified
commitments under the Protocol (JI refers to a project-based co-operation between two
industrialized countries).
The main benefits that can be expected from the project-based Kyoto mechanisms are, on
the one hand, that they potentially reduce industrialized countries’ costs of meeting the
Kyoto Protocol targets, whereas, on the other hand, they are to support the host countries
objectives regarding sustainable development.
With the help of CDM, countries which have set themselves an emission reduction target
under the Kyoto Protocol (Annex I countries) can contribute to the financing of projects
in developing countries (non-Annex I countries) which do not have a reduction target.
Contributing to the sustainable development of the host country, the project should
reduce the emission of greenhouse gases. The achieved emission reductions can be used
by the Annex I country in order to meet its reduction target.
5. FINANCING IMPACT
11
5.1 Revenue side
The return of CDM investments depends on how emission permits are used by the
investor.
A third option might be banking or saving of emission permits for future use.
Depending on the specific circumstances, renewable energy projects may generate
emission permits, thus increasing the expected return. Market prices for emission permits
are estimated to be between 5 to 20 EUR per ton CO2 [Janssen (2001)]. Overall financial
risk of renewable energy projects may be reduced by engaging in emissions trading and
the Kyoto Mechanisms.
Along the CDM project cycle may arise a variety of different transaction costs. This
includes the following:
Project identification and selection: Search costs incurred by project developers and
potential investors in identifying prospective projects. The costs for developing project
selection criteria, costs of ranking projects according to the preferences of investors are
also encompassed
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Project certification: Certification is the written assurance by a designated operational
entity that, during a specific time period, a project activity achieved the emission
reductions as verified.
Transfer and use of emission permits: Transactions costs at that stage include reporting
of transfers of emission permits to dedicated registries.
Figure.3
13
Note: Boxes shaded in grey indicate the stages in the CDM project cycle when you can
apply for a letter of approval from the NZ DNA.
Figure.4
14
7. CDM Project Cycle
Figure.5
7.1. OVERVIEW OF CDM PROJECT CYCLE
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1. Planning a CDM CDM project participants plan a CDM project activity
project There are several conditions in order to be registered as a CDM project
activity and CDM project participants should consider those conditions
form a planning stage
2. Prepare the project CDM project participants prepare the project design document (PDD)
design for a CDM project activity
document (PDD) There is the standard format for the PDD and CDM project participants
must fill in all the contents as necessary
3. Getting approval CDM project participants shall get written approvals of voluntary
from host Party and participation form the designated national authority (DNA) of a host
Annex I Party Party and an Annex I Party
The written approval from host Party should include confirmation by the
host Party that a project activity assists it in achieving sustainable
development.
The details of approval procedure is up to each Party
4. Validation and Validation is the process of independent evaluation of a project activity
registration against the requirements of the CDM on the basis of the PDD.
Validation is carried out by a designed operational entity (DOE).
There is a formal procedure for validation
Registration is the formal acceptance of a validated project as a CDM
project activity.
Registration is done by the CDM Executive Board
There is a formal procedure for registration
5. Monitoring a CDM CDM project participants collect and archive all relevant data necessary
project activity for calculating GHG emission reductions by a CDM project activity, in
accordance with the monitoring plan written in the PDD.
6. Verification and Verification is the periodic independent review and ex post
certification determination of the monitored GHG emission reductions
Verification is carried out by a designated operational entity (DOE).
There is a formal procedure for verification.
Certification is the written assurance by a DOE that a project activity
achieved the reductions in GHG emissions as verified.
A DOE also does certification.
7. Issuance of CERs CDM Executive Board (EB) will issue certified emission reductions
(CERs) equal to the verified amount of GHG emission reductions.
There is a formal procedure for issuance of CERs
GHG emission reductions since 2000 may be eligible to claim CERs.
Among issued CERs, 2% of those will be deducted for “the share of
proceeds” to assist developing countries that are particularly vulnerable
to climate change.
Among issued CERs, X% of those will be deducted for “the share of
proceeds” to cover administrative expenses of the CDM.
COP upon the recommendation of the EB shall determine the level of X.
8. Distribution of CERs will be distributed among CDM project participants
CERs The decision on the distribution of CERs from a CDM project activity
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shall exclusively be taken by project participants.
17
Gas Global Warming Potential
Carbon dioxide (CO2) 1
Methane (CH4) 21
Nitrous oxide (N2O) 310
Hydrofluorocarbons (HFCs) 140-11,700
Perfluorocarbons (PFCs) 7,000-9,200
Sulphur hexafluoride (SF6) 23,900
CER's or Certified Emissions Reductions are a "certificate" just like a stock. A CER is
given by the CDM Executive Board to projects in developing countries to certify they
have reduced green house gas emissions by one tonne of carbon dioxide per year. For
example, if a project generates energy using wind power instead of burning coal, it can
save 50 tonnes of carbon dioxide per year. There it can claim 50 cers (as one cer is
equivalent to one tonne of carbon dioxide reduced).
Developed countries buy CER's from developing countries under the CDM process to
help them achieve their Kyoto targets.
18
FIG.7 EXPECTED AVERAGE ANNUAL CERs BY HOST PARTY
The Kyoto Protocol provides for three mechanisms that enable countries or operators in
developed countries to acquire greenhouse gas reduction credits.
1. Under Joint Implementation (JI) a developed country with relatively high costs of
domestic greenhouse reduction would set up a project in another developed country.
2. Under the Clean Development Mechanism (CDM) a developed country can 'sponsor' a
greenhouse gas reduction project in a developing country where the cost of greenhouse
gas reduction project activities is usually much lower, but the atmospheric effect is
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globally equivalent. The developed country would be given credits for meeting its
emission reduction targets, while the developing country would receive the capital
investment and clean technology or beneficial change in land use.
3. Under International Emissions Trading (IET) countries can trade in the international
carbon credit market to cover their shortfall in allowances. Countries with surplus credits
can sell them to countries with capped emission commitments under the Kyoto Protocol.
These carbon projects can be created by a national government or by an operator within
the country. In reality, most of the transactions are not performed by national
governments directly, but by operators who have been set quotas by their country.
Climate exchanges have been established to provide a spot market in allowances, as well
as futures and options market to help discover a market price and maintain liquidity.
Carbon prices are normally quoted in Euros per tonne of carbon dioxide or its equivalent
(CO2 e). Other greenhouse gasses can also be traded, but are quoted as standard multiples
of carbon dioxide with respect to their global warming potential. These features reduce
the quota's financial impact on business, while ensuring that the quotas are met at a
national and international level.
Currently there are five exchanges trading in carbon allowances: the Chicago Climate
Exchange, European Climate Exchange, Nord Pool, PowerNext and the European Energy
Exchange. Recently, NordPool listed a contract to trade offsets generated by a CDM
carbon project called Certified Emission Reductions (CERs). Many companies now
engage in emissions abatement, offsetting, and sequestration programs to generate credits
that can be sold on one of the exchanges. At least two private electronic markets have
been established in 2008:
The first commitment period of the Kyoto Protocol excluded forest conservation/avoided
deforestation from the CDM for a variety of political, practical and ethical reasons.
However, carbon emissions from deforestation represent 18-25% of all emissions, and
will account for more carbon emissions in the next five years than all emissions from all
aircraft since the Wright Brothers until at least 2025. Forests First in the Fight against
Climate Change] Global Canopy Programme, 2007. This means that there have been
growing calls for the inclusion of forests in CDM schemes for the second commitment
period from a variety of sectors, under the leadership of the Coalition for Rainforest
Nations, and brought together under the Forests Now Declaration, which has been signed
by over 300 NGOs, business leaders, and policy makers. There is so far no international
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agreement about whether projects avoiding deforestation or conserving forests should be
initiated through separate policies and measures or stimulated through the carbon market.
One major concern is the enormous monitoring effort needed in order to make sure
projects are indeed leading to increased carbon storage. There is also local opposition.
For example, May 2nd 2008, at the United Nations Permanent Forum on Indigenous
Issues (UNPFII), Indigenous leaders from around the world protested against the Clean
Energy Mechanisms, especially against Reduced Emissions from deforestation and
degradation.
Combating global warming has broadly two components: Decreasing the release of green
house gases and sequestering the green house gases, of which CO2 is the component,
from atmosphere. Battle has to be fought on both the fronts but it is found that emphasis
is only on the former. There is not sufficient emphasis on the later. It must be understood
that even with best efforts we can only reduce the emission of greenhouse gas but we
cannot eliminate it altogether. So the amount of green house gases in the atmosphere will
only increase with time. Hence we need to concentrate on sequestering the green house
gases also. When it comes sequestering CO2 there is nothing on the planet, it is repeated
nothing, except a growing tree that can do it. The fact that one and only way to
sequestrate CO2 is through trees, is a very important fact that must be understood if we
want to fight global warming in a realistic way. It is a well-known fact that a plant
purifies environment but we need to understand how after all a plant does purifies
environment. And is there any way to quantify the amount of purification done by
various plants? There is nothing magical or unknown about the process. The process
which purifies the environment is a well known process i.e. photosynthesis and there is
an unambiguous way to measure the amount of purification done by a plant.
Photosynthesis is natural processes that uses CO2, releases O2 and produces various forms
of sugar i.e. C6H12O6.The amount of carbon sequestered by a plant can actually be
measured without any ambiguity as explained below. The byproduct of the
photosynthesis is cellulose or C6H12O6 or wood. Hence the physical manifestation of the
photosynthesis is the increase in volume and weight of the plant. It is possible i.e. the rate
of sequestration of CO2 may differ from plant to plant ,which is also evident from that
fact that different tree/plants grow at different rates , but the sum total of the CO 2
sequestered has to be proportional to dry biomass i.e. the biomass from which the water
has been removed. In fact empirically it can be said that for every 180 tons of dry wood
produced, 264 tons of CO2 is consumed and 192 tons of O2 is given out. Not so evident
but another important contribution of a growing tree is that apart from conversion of CO 2
to O2 a growing plant also absorbs heat. This is nothing but the sunlight that would have
otherwise converted into heat had it not been used for photosynthesis. This is why we feel
cooler under a tree. So a tree also helps the global warming by storing heat. Above stated
facts can be understood by the reverse logic like as follows. Suppose we cut a tree and
burn it. We get mainly two things: CO2 and heat. By simple logic of conservation of
21
energy and chemical constituents it can be safely assumed that this was the amount of
heat and CO2 absorbed by the plant while growing. Now the issue comes that if
photosynthesis is the key to carbon sequestration then why emphasis on tree only as
every plant does photosynthesis. Here it is important to understand that though there are
various form of C6H12O6 like sugar, cellulose, carbohydrate, oil (as happens in say pine
trees) etc but timber is the only way CO2 remains blocked for a longer period of 5-100
years. In all other forms either it is burnt, consumed or decomposed within a year or so
releasing the entire CO2. Hence though all the plants excluding CO2 can sequester CO2
but the form in which it does, the same cannot be stored for long period of more than
maximum 5 years and on average 1 year. Inferences that can be drawn from above
analysis is as follows: There is nothing on the planet other than a growing tree that can
reduce CO2. Meaning thereby that tree has to central to any program of combating global
warming. For long term it is much more beneficial to promote use of timer rather than
substituting as it is the only meaningful way to store CO 2.If an item which is substituting
wood consumes less energy during its production than what is produced by burning the
equivalent amount of wood, then only it is beneficial to environment else it is more
harmful, at least from environmental point. There is a need to promote plywood industry
in big way which helps in using even the inferior quality of wood to be used as timber
which otherwise would have been used as fuel-wood. A fully grown tree which is not
growing in volume may be good for wild life but is doing no good to the environment as
the sum total of CO2 taken in and given out almost balances each other. Hence felling of
mature tree, using it as timber (not fuel-wood) and planting new trees is the best solution
to global warming. But unfortunately this point is not being given its due importance in
the CDM mechanism.
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Companies in countries buy the emission reduction achieved (carbon credits) that are
realized through investment in JI or through CDMs and that otherwise would not have
existed. Prices are realized by process of competitive bidding.
Carbon credits may be generated from Investments and Projects in renewable energy,
energy efficiency, fuel switch and waste management projects.
FIGURE.8
Energy Supply:
Renewable energy (e.g. wind mills) - biomass (heat and/or power) and cogeneration.
Fuel switch:
Switching the fuel for Boilers, Furnaces or Power Plants from Coal or Conventional fuel
Oils to biomass or Eco-friendly fuels)
Energy demand:
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Replacement of existing electrical equipment with more efficient units and improvement
of energy efficiency of existing production equipment.
Transport:
Using more efficient engines for transport (e.g. replacing old diesel trains by modern
diesel trains) or through transport model shift (e.g. from plane to train) and fuel switch
(e.g. public transport buses fuelled by natural gas or Bio-fuels)
Waste management:
Capture of landfill methane emissions & utilization of waste and wastewater emissions.
Domestic Utilities:
Improving energy efficiency by replacing existing equipment and installing new efficient,
new water pumps etc.
Forestry:
Afforestation & Reforestation or Plantation of Eco-friendly plants.
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A validation or certification organization, acting as an independent third party, validates
the baseline you have drawn up. This organization must work according to the
"Accreditation Guidelines on the Application of EN 45004 (ISO/IEC Guide 17020) for
the Validation and Verification of JI projects" or according to the guidelines of the
UNFCCC Executive Board Accreditation Panel for CDM projects.
The host country's government must give approval for the transaction in carbon credits
through a Letter of Approval. However, even if there is a MOU with the country in which
you want to invest, you will have to obtain this letter from this country's government
yourself or through an Accredited Agency.
The payback mechanism under the Kyoto Protocol is a system called carbon credits that
are traded like stocks and bonds. The ones who are selling are companies that use clean
technology and those doing the buying are the world's polluters like the Industries, Power
Plants, Aviation and the energy sector.
A company that wants to earn from reducing green house gas emissions can get it
certified from the Indian government and the UN body monitoring climate change.
Then it can sell the credit it earns from reducing emissions to another company that's
failed to achieve the Kyoto target or to a company that trades using the generated Carbon
Credits. Thus the idea behind carbon trading is quite similar to the trading of securities or
commodities in a marketplace. Carbon is given an economic value, allowing companies,
agencies or governments to buy sell, bank and trade Carbon Credits called Certified
Emission Reductions or CERs..
25
Figure.9
With costs of emission reduction typically much lower in developing countries than in
industrialized countries, industrialized countries can comply with their emission
reduction targets at much lower cost by receiving credits for emissions reduced in
developing countries as long as administration costs are low.
While there would always be some cheap domestic emission reductions available in
Europe, the cost of switching from coal to gas could be in the order of €40-50 per tonne
CO equivalent. CERs from CDM projects were in 2006 traded on a forward basis for
between €5 and € 20 per tonne CO equivalent. The price depends on the distribution of
risk between seller and buyer. The seller could get a very good price if it agrees to bear
26
the risk that the project's baseline and monitoring methodology is rejected; that the host
country rejects the project; that the CDM Executive Board rejects the project; that the
project for some reason produces fewer credits than planned; or that the buyer doesn't get
CERs at the agreed time if the international transaction log (the technical infrastructure
ensuring international transfer of carbon credits) is not in place by then. The seller can
usually only take these risks if the counterparty is deemed very reliable, as rated by
international rating agencies.
Unchecked, energy use and hence emission levels are predicted to keep rising over time.
Thus the number of companies needing to buy credits will increase, and the rules of
supply and demand will push up the market price, encouraging more groups to undertake
environmentally friendly activities that create carbon credits to sell.
An individual allowance, such as a Kyoto Assigned Amount Unit (AAU) or its near-
equivalent European Union Allowance (EUA), may have a different market value to an
offset such as a CER. This is due to the lack of a developed secondary market for CERs,
a lack of homogeneity between projects, which causes difficulty in pricing, as well as
questions due to the principle of supplementarity, and its lifetime. Additionally, offsets
generated by a carbon project under the Clean Development Mechanism are potentially
limited in value because operators in the EU ETS are restricted as to what percentage of
their allowance can be met through these flexible mechanisms.
Yale University economics professor William Nordhaus argues that the price of carbon
needs to be high enough to motivate the changes in behavior and changes in economic
production systems necessary to effectively limit emissions of greenhouse gases.
Raising the price of carbon will achieve four goals. First, it will provide signals to
consumers about what goods and services are high-carbon ones and should therefore be
used more sparingly. Second, it will provide signals to producers about which inputs use
more carbon (such as coal and oil) and which use less or none (such as natural gas or
nuclear power), thereby inducing firms to substitute low-carbon inputs. Third, it will give
market incentives for inventors and innovators to develop and introduce low-carbon
products and processes that can replace the current generation of technologies. Fourth,
and most important, a high carbon price will economize on the information that is
required to do all three of these tasks. Through the market mechanism, a high carbon
price will raise the price of products according to their carbon content. Ethical consumers
today, hoping to minimize their “carbon footprint,” have little chance of making an
accurate calculation of the relative carbon use in, say, driving 250 miles as compared
with flying 250 miles. A harmonized carbon tax would raise the price of a good
proportionately to exactly the amount of CO2 that is emitted in all the stages of
production that are involved in producing that good. If 0.01 of a ton of carbon emissions
results from the wheat growing and the milling and the trucking and the baking of a loaf
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of bread, then a tax of $30 per ton carbon will raise the price of bread by $0.30. The
“carbon footprint” is automatically calculated by the price system. Consumers would still
not know how much of the price is due to carbon emissions, but they could make their
decisions confident that they are paying for the social cost of their carbon footprint.
Nordhaus has suggested, based on the social cost of carbon emissions that an optimal
price of carbon is around $30 (US) per ton and will need to increase with inflation.
The social cost of carbon is the additional damage caused by an additional ton of carbon
emissions. ... The optimal carbon price, or optimal carbon tax, is the market price (or
carbon tax) on carbon emissions that balance the incremental costs of reducing carbon
emissions with the incremental benefits of reducing climate damages. ... If a country
wished to impose a carbon tax of $30 per ton of carbon; this would involve a tax on
gasoline of about 9 cents per gallon. Similarly, the tax on coal-generated electricity
would be about 1 cent per kWh, or 10 percent of the current retail price. At current levels
of carbon emissions in the United States, a tax of $30 per ton of carbon would generate
$50 billion of revenue per year.
Carbon credits create a market for reducing greenhouse emissions by giving a monetary
value to the cost of polluting the air. Emissions become an internal cost of doing business
and are visible on the balance sheet alongside raw materials and other liabilities or assets.
By way of example, consider a business that owns a factory putting out 100,000 tonnes of
greenhouse gas emissions in a year. Its government is an Annex I country that enacts a
law to limit the emissions that the business can produce. So the factory is given a quota of
say 80,000 tonnes per year. The factory either reduces its emissions to 80,000 tonnes or is
required to purchase carbon credits to offset the excess. After costing up alternatives the
business may decide that it is uneconomical or infeasible to invest in new machinery for
that year. Instead it may choose to buy carbon credits on the open market from
organizations that have been approved as being able to sell legitimate carbon credits.
One seller might be a company that will offer to offset emissions through a project in the
developing world, such as recovering methane from a swine farm to feed a power station
that previously would use fossil fuel. So although the factory continues to emit gases, it
would pay another group to reduce the equivalent of 20,000 tonnes of carbon dioxide
emissions from the atmosphere for that year.
Another seller may have already invested in new low-emission machinery and have a
surplus of allowances as a result. The factory could make up for its emissions by buying
20,000 tonnes of allowances from them. The cost of the seller's new machinery would be
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subsidized by the sale of allowances. Both the buyer and the seller would submit
accounts for their emissions to prove that their allowances were met correctly.
Credits were chosen by the signatories to the Kyoto Protocol as an alternative to Carbon
taxes. A criticism of tax-raising schemes is that they are frequently not hypothecated, and
so some or all of the taxation raised by a government may be applied inefficiently or not
used to benefit the environment.
The price is more likely to be perceived as fair by those paying it, as the cost of carbon is
set by the market, and not by politicians. Investors in credits have more control over their
own costs.
the flexible mechanisms of the Kyoto Protocol ensure that all investment goes into
genuine sustainable carbon reduction schemes, through its internationally-agreed
validation process.
The principle of Supplementarity within the Kyoto Protocol means that internal
abatement of emissions should take precedence before a country buys in carbon credits.
However it also established the Clean Development Mechanism as a Flexible Mechanism
by which capped entities could develop real, measurable, permanent emissions reductions
voluntarily in sectors outside the cap. Many criticisms of carbon credits stem from the
fact that establishing that an emission of CO2-equivalent greenhouse gas has truly been
reduced involves a complex process. This process has evolved as the concept of a carbon
project has been refined over the past 10 years.
The first step in determining whether or not a carbon project has legitimately led to the
reduction of real, measurable, permanent emissions is understanding the CDM
methodology process. This is the process by which project sponsors submit, through a
Designated Operational Entity (DOE), their concepts for emissions reduction creation.
The CDM Executive Board, with the CDM Methodology Panel and their expert advisors,
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review each project and decide how and if they do indeed result in reductions that are
addition.
It is also important for any carbon credit (offset) to prove a concept called additionality.
Additionality is a term used by Kyoto's Clean Development Mechanism to describe the
fact that a carbon dioxide reduction project (carbon project) would not have occurred had
it not been for concern for the mitigation of climate change. More succinctly, a project
that has proven additionality is a beyond-business-as-usual project.
It is generally agreed that voluntary carbon offset projects must also prove additionality
in order to ensure the legitimacy of the environmental stewardship claims resulting from
the retirement of the carbon credit (offset). According the World Resources
Institute/World Business Council for Sustainable Development (WRI/WBCSD): "GHG
emission trading programs operate by capping the emissions of a fixed number of
individual facilities or sources. Under these programs, tradable 'offset credits' are issued
for project-based GHG reductions that occur at sources not covered by the program. Each
offset credit allows facilities whose emissions are capped to emit more, in direct
proportion to the GHG reductions represented by the credit. The idea is to achieve a zero
net increase in GHG emissions, because each tonne of increased emissions is 'offset' by
project-based GHG reductions. The difficulty is that many projects that reduce GHG
emissions (relative to historical levels) would happen regardless of the existence of a
GHG program and without any concern for climate change mitigation. If a project 'would
have happened anyway,' then issuing offset credits for its GHG reductions will actually
allow a positive net increase in GHG emissions, undermining the emissions target of the
GHG program. Additionality is thus critical to the success and integrity of GHG
programs that recognize project-based GHG reductions."
19. CRITICISMS
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what will be agreed in Post-Kyoto Protocol negotiations on greenhouse gas emissions. As
business investment often operates over decades, this adds risk and uncertainty to their
plans. As several countries responsible for a large proportion of global emissions (notably
USA, Australia, and China) have avoided mandatory caps, this also means that
businesses in capped countries may perceive themselves to be working at a competitive
disadvantage against those in uncapped countries as they are now paying for their carbon
costs directly.
A key concept behind the cap and trade system is that national quotas should be chosen to
represent genuine and meaningful reductions in national output of emissions. Not only
does this ensure that overall emissions are reduced but also that the costs of emissions
trading are carried fairly across all parties to the trading system. However, governments
of capped countries may seek to unilaterally weaken their commitments, as evidenced by
the 2006 and 2007 National Allocation Plans for several countries in the EU ETS, which
were submitted late and then were initially rejected by the European Commission for
being too lax.
A question has been raised over the grandfathering of allowances. Countries within the
EU ETS have granted their incumbent businesses most or all of their allowances for free.
This can sometimes be perceived as a protectionist obstacle to new entrants into their
markets. There have also been accusations of power generators getting a 'windfall' profit
by passing on these emissions 'charges' to their customers. As the EU ETS moves into its
second phase and joins up with Kyoto, it seems likely that these problems will be reduced
as more allowances will be auctioned.
Establishing a meaningful offset project is complex: voluntary offsetting activities
outside the CDM mechanism are effectively unregulated and there have been criticisms
of offsetting in these unregulated activities. This particularly applies to some voluntary
corporate schemes in uncapped countries and for some personal carbon offsetting
schemes.
There have also been concerns raised over the validation of CDM credits. One concern
has related to the accurate assessment of additionality. Others relate to the effort and time
taken to get a project approved. Questions may also be raised about the validation of the
effectiveness of some projects; it appears that many projects do not achieve the expected
benefit after they have been audited, and the CDM board can only approve a lower
amount of CER credits. For example, it may take longer to roll out a project than
originally planned, or an afforestation project may be reduced by disease or fire. For
these reasons some countries place additional restrictions on their local implementations
and will not allow credits for some types of carbon sink activity, such as forestry or land
use projects.
20. CONCLUSION
Carbon credits have become entrenched in the broader climate change debate; however,
fundamental scientific and methodological problems persist. While these remain
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unresolved, they have the potential to seriously undermine the financial and
environmental value of any carbon credits scheme. The danger is that reducing emissions
at source and re-capturing carbon through sequestration are being treated by government
and industry as equivalent policy options. ET should not be a mechanism that facilitates
the transfer of fossilized carbon locked away for millions of years over to short-term
biotic sinks. For this reason, the issue of carbon sinks is currently undermining the
integrity of carbon credits and the creation of a carbon trading market.
Carbon credits are now 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.
There are also many companies that sell carbon credits to commercial and individual
customers who are interested in lowering their carbon footprint on a voluntary basis.
These carbon off-setters purchase the credits from an investment fund or a carbon
development company that has aggregated the credits from individual projects. The
quality of the credits is based in part on the validation process and sophistication of the
fund or development company that acted as the sponsor to the carbon project.
Carbon credits create a market for reducing greenhouse emissions by giving a monetary
value to the cost of polluting the air. Emissions become an internal cost of doing business
and are visible on the balance sheet alongside raw materials and other liabilities or assets.
The ultimate objective of regulating pollution through MBIs is improved environmental
quality.
21. REFRENCES
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2. Green wealth by Kevin Francis Noon.
5. http//www.preserval.com
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