Carbon Credits

n Carbon Credits are certificates issued to countries that reduce their emission of greenhouse gases (GHG) which causes global warming.

n One Carbon Credit is equal to one ton of Carbon Dioxide or its equivalent in other greenhouse gases such as methane and nitrous oxide.

n Methane and nitrous oxide have approximately 21 times and 310 times, respectively, the heat-trapping capacity of carbon dioxide.

n Reducing methane by one ton is equivalent to reducing carbon dioxide by 21 tons.

Kyoto Protocol

n United Nations Framework Convention on Climate Change (UNFCCC or FCCC)

n Goal is “stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system.“

n Includes 4 greenhouse gases

¨ Carbon dioxide

¨ Methanea

¨ Nitrous oxide

¨ Sulphur hexafluoride

n and two groups of gases

¨ Hydrofluorocarbons

¨ Perfluorocarbons

n Average reduction of 5.2% from 1990 levels by the year 2012

n Signatories to the UNFCCC are split into three groups:

¨ Annex I countries: industrialized countries that agreed to reduce their emissions of greenhouse gases e.g. Australia, France, Hungary, Germany, Spain, Turkey, USA etc.

¨ Annex II countries: sub-group of the Annex I countries. They pay for the cost of developing countries e.g. Australia, France, Germany, Spain, USA etc.

¨ Developing countries: not expected to de-carbonize their economy unless developed countries supply enough funding and technology e.g. India, China etc.

The Kyoto Protocol provides three mechanisms for the countries to acquire greenhouse gas reduction credits:

¨ International Emissions Trading (IET)

¨ Clean Development Mechanism (CDM)

¨ Joint Implementation (JI )

1 ]International Emissions Trading

n Countries can trade in the international carbon credit market to cover their shortfall in allowances.

n Countries with surplus credits can sell them to countries with quantified emission limitation and reduction commitments under the Kyoto Protocol.

n Developed countries that have exceeded the levels can either cut down emissions, or borrow or buy carbon credits from developing countries.

2 ]Clean Development Mechanism

n 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 globally equivalent.

n The developed country would be given Carbon 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] Joint Implementation

How buying carbon credits can reduce emissions?

n Carbon credits create a market for reducing greenhouse emissions by giving a monetary value to the cost of polluting the air.

n Emissions become an internal cost of doing business and are visible on the balance sheet alongside raw materials and other liabilities or assets.

Markets for Carbon Credits

n For trading purposes, one carbon credit is considered equivalent to one metric tonne of Carbon dioxide emissions.

n These allowances can be sold privately or in the international market at the prevailing market price. These trade and settle internationally and hence allow allowances to be transferred between countries.

n As per World bank, the size of the carbon market was 11 billion USD in 2005, 30 billion USD in 2006, and 64 billion USD in 2007.

n There are 2 types of carbon markets:

¨ Compliance Markets

¨ Voluntary Markets

n Compliance markets:

¨ sets a “cap and trade” system whereby the total annual emissions for an industry or country are capped by law or agreement, and carbon credits can be traded between businesses or sold in trading markets.

¨ result of the Kyoto Protocol. It created specific rules for registering and certifying carbon credits.

¨ In 2006, about $5.5 billion of carbon credits were purchased in the compliance market, representing about 1.6 billion metric tons of CO2 equivalent reductions.

n Voluntary markets

¨ exist for businesses or individuals to lower their “carbon footprint” by voluntarily purchasing carbon credits from an investment fund or company that has aggregated credits from individual projects that reduce emissions.

¨ Its number has been increasing. In the United States, some of the companies involved in carbon credit trading are the Chicago Climate Exchange, the Environmental Credit Corporation etc.