Global warming refers to the recent increase in the Earth’s temperature. The effects of this climate change are already being felt around the world. Scientists predict that temperatures will rise up to 6°C further over the next century. This may cause rises in sea level, extre,e weather events such as hurricanes and heat waves, and war and disease, particularly in developing countries.
It is generally agreed that global warming is caused by greenhouse gases emitted by humans into the Earth’s atmosphere. The biggest contributor is carbon dioxide, which is generated by burning fossil fuels such as coal, oil or gas. Every car or plane journey contributes directly to the Earth’s change in climate. Most of the world’s electricity is also generated from these fuels, despite renewable alternatives such as wind and solar power.
The ideal solution would be an immediate and drastic drop in global carbon emissions. However this is not going to happen in our lifetimes. In fact, rapid economic development in countries such as China and India, as well as ongoing growth in the rest of the world, mean that carbon emissions are still increasing year on year. The Kyoto protocol is a first international attempt to address the issue seriously, but it has met with limited success.
Enter Carbon Credits
Carbon credits (or carbon offsets) offer an interim solution for companies and individuals. After calculating the quantity of carbon emitted by flying, driving and using electricity, the carbon emitter pays for a project that reduces carbon emissions by this same amount. Since greenhouse gases circulate freely in the atmosphere, this project can be located anywhere in the world.
Carbon Catalog lists many different types of carbon project. Those involving solar, wind and hydroelectric power generate energy from renewable sources instead of fossil fuels.
By increasing efficiency, switching fuels or generating heat and electricity together. Many projects lower energy requirements via better lighting, materials, building or public transport.
After carbon dioxide, the second most important greenhouse gas is methane. While there is much less methane in the atmosphere, every tone causes 20-70 as much warming as a tone of carbon dioxide. Many projects capture industrial or agricultural methane and burn it to generate energy.
The money one pays to offset one’s remaining emissions goes to projects that need funding to stop the releasing of greenhouse gases ( like supportable energy developers and rubbish heap gas capturers ) or that remove greenhouse gases from the atmosphere ( like reforesters ). CO2 emissions emitted anywhere in the world contribute to global warming and climate change. The opposite is also correct, removing or reducing greenhouse gases anywhere helps stop climate change.
Kyoto protocol:
Launched in the winter of 1997, the protocol was designed to establish a broad agreement between countries around the world to restrict emissions of harmful greenhouse gases. Due to the too complex membership process and split ratification standards, it took until first quarter of 2005 before it became enforced. It took a long journey to its enforcement in 2005 since negotiations were not only lengthy and complex but was also factious.
Merely signing up to the Kyoto Protocol did not in itself carry any real weight. When a country agreed to ratify Kyoto Protocol’s conditions, it is then that it would actually come into force, and merely signing it did not mean anything. Ratification ensured that the country would actively participate in reducing emissions against a specified target. Those who were unable to do so would need to engage in emissions trading, buying credits from participating countries which had been able to reduce their emissions beyond the specification.
According to the Kyoto Protocol sponsor, the United Nations Framework Convention on Climate Change, this treaty aimed to stabilize greenhouse gas concentrations in air at a level that would not interfere with the natural climate system.” To this day, 183 parties have ratified the protocol with the latest major standout to sign up being Australia.
Launched in the winter of 1997, the protocol was designed to establish a broad agreement between countries around the world to restrict emissions of harmful greenhouse gases. Due to the too complex membership process and split ratification standards, it took until first quarter of 2005 before it became enforced. It took a long journey to its enforcement in 2005 since negotiations were not only lengthy and complex but were also factious.
Merely signing up to the Kyoto Protocol did not in itself carry any real weight. When a country agreed to ratify Kyoto Protocol’s conditions, it is then that it would actually come into force, and merely signing it did not mean anything. Ratification ensured that the country would actively participate in reducing emissions against a specified target. Those who were unable to do so would need to engage in emissions trading, buying credits from participating countries which had been able to reduce their emissions beyond the specification.
According to the Kyoto Protocol sponsor, the United Nations Framework Convention on Climate Change, this treaty aimed to stabilize greenhouse gas concentrations in air at a level that would not interfere with the natural climate system.” To this day, 183 parties have ratified the protocol with the latest major standout to sign up being Australia.
How does it exactly work?
The goal is to stop the increase of carbon dioxide emissions. The Kyoto Protocol presents nations with the challenge of reducing greenhouse gases and storing more carbon. A nation that finds it hard to meet its target of reducing GHG could pay another nation to reduce emissions by an appropriate quantity. The carbon credit system was ratified in conjunction with the Kyoto Protocol.
For example, if an environmentalist group plants enough trees to reduce emissions by one ton, the group will be awarded a credit. If a steel producer has an emissions quota of 10 tons, but is expecting to produce 11 tons, it could purchase this carbon credit from the environmental group. The carbon credit system looks to reduce emissions by having countries honor their emission quotas and offer incentives for being below them.
What is Carbon Trade?
An idea presented in response to the Kyoto Protocol that involves the trading of greenhouse gas (GHG) emission rights between nations.
For example, if Country X exceeds its capacity of GHG and Country Y has a surplus of capacity, a monetary agreement could be made that would see Country X pay Country Y for the right to use its surplus capacity.
Credits versus Taxes
Credits were chosen by the signatories to the Kyoto Protocol as an alternative to Carbon taxes. A drawback of tax-raising schemes is that, they are not frequently hypothecated, and so some or all of the taxation raised by a government may be applied inefficiently or not used to benefit the environment.
By treating emissions as a ‘market commodity’ it becomes easier for business to understand and manage their activities, while economists and traders can attempt to predict future pricing using well understood market theories. Thus the main advantages of a tradable carbon credit over a carbon tax are:
1. 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.
2. The flexible mechanisms of the Kyoto Protocol ensure that all investment goes into genuine sustainable carbon reduction schemes, through its internationally-agreed validation process.
Key players:
• Bank of America is a leader in carbon-reduction strategies. The bank recently launched a $20 billion, 10-year initiative to finance emission-reduction projects, invest in green technology, and facilitate carbon-credit trading.
• BP is among the most well-known companies to implement an internal cap-and-trade system. The company assigned its 150 units an emissions quota and allowed them to buy and sell carbon credits among themselves.
• The European Union Emission Trading Scheme (EU ETS) is the mandatory cap-and-trade program for the EU.
• The Chicago Climate Exchange (CCX) is a U.S. carbon-trading scheme in which companies make a voluntary but legally binding commitment to meet emissions targets.
Impact on the environment and society:
The carbon credit system, though critical at the moment does pose a lot of advantages:
• The money from the purchases of carbon credits is used to create renewable energy projects and develop sources of renewable energy from wind turbines and solar panels for example.
• Energy saving initiatives are also created using carbon credits. People in the developing world are often given investment to help them save energy.
• The advantages of carbon credits mean that some of the schemes used like protecting rainforest have other environmental benefits. Though schemes like this are clearly flawed because they are not offsetting any carbon like they should be doing, but are merely stopping more being released by the cutting down of trees.
• Carbon credits system helps in ‘storing’ carbon in the soil which helps in green growth and purification of the atmosphere
• Energy saved means energy gained, saving energy will gradually put up for gaining it which will increase efficiency, plus make way for better avenues of energy
• The carbon credits idea greatly aids in putting a cap on the unchecked release of greenhouse gases across the world. Industries that pollute the atmosphere are penalized to do so and those who do not are incentivized. Hence companies and governments are persuaded to use eco-friendly means to ensure that unabated emissions of greenhouse gases don’t occur.
• An international market for carbon credits makes sure that companies can opt for and practise this system without difficulty. Trading is simple under this system as the regulations and methodologies are clear and simple, and this results in its popularity and effectiveness.
• More than the penalty awarded to erring companies, the rewards and appreciation given to green firms is what makes this system so popular and exclusive. This means that organizations with limited emissions will come up with strategies to further curtail emissions so that they can sell more carbon credits in the international market and thereby increase their profits. Hence, this system leads to a cleaner and greener environment.
• A majority of nations across the world have welcomed and embraced the method of carbon credits trading, and this is probably its most important benefit. Many projects fail because they are not able to generate widespread acceptance. By getting this aspect right, carbon credits look all set to bring about a significant improvement in the environment.
• trading may also allow a relocation of fuel intensive industries closer to fuel sources while maintaining or decreasing the total greenhouse gas output
• trading allows flexibility to innovate, develop appropriate technologies for developing countries and make technological advances in effective greenhouse gas emission reduction or carbon sinks
Disadvantages:
• The Kyoto mechanism is the only internationally-agreed mechanism for regulating carbon credit activities, and, crucially, includes checks for additionality and overall effectiveness. Its supporting organisation, the UNFCCC, is the only organisation with a global mandate on the overall effectiveness of emission control systems, although enforcement of decisions relies on national co-operation. The Kyoto trading period only applies for five years between 2008 and 2012. The first phase of the EU ETS system started before then, and is expected to continue in a third phase afterwards, and may co-ordinate with whatever is internationally-agreed at but there is general uncertainty as to 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, 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.
• The biggest drawback of carbon trading is lack of a comprehensive global structure for trading. Since majority of trade in carbon credits is conducted in the global market, it is difficult for regional enterprises to make use of this system.
• several small enterprises are not capable of affording the expenditure on buying the machinery or implementing sophisticated techniques that would reduce their emissions. As a result, the smaller businesses are made to repeatedly buy carbon credits in this system which leads to lowering of their capability to compete with bigger organizations.
• Theoretically, this scheme must bring down the overall level of carbon emissions. In reality, what credit trading does at best is to shift pollution from one place to another, in fact from one company to another.
• In countries where it is a lot cheaper for companies to simply shift to green technology than paying carbon/abatement taxes, companies will keep earning credit. When a substantial number of companies go green and earn credits, the value of credits in the market will go down because of increased supply. Non-green companies will enjoy this supply surplus and simply buy cheap credits. There will be less and less incentive for non-green companies to shift to green technology/practices, the preferred and ideal way to environmental protection.
• A lot of third parties appear in the system and a global regulatory body lacks
Although theoretically, carbon credits system is supposed to reduce the atmospheric pollution by getting rid of the greenhouse gases, practically it does not. It may seem, What a cool idea! But instead of reducing our own carbon emissions, we are paying other people to reduce theirs.
Carbon offsets — and emissions-trading schemes, their industrial-scale siblings — are the environmental version of subprime mortgages. They both started from some admirable premises. Developing countries like China and India need to be recruited into the fight against greenhouse gases. And markets are a better mechanism for change than command and control. But when those big ideas collide with the real world, the result is hand-waving at best, outright scams at worst. Moreover, they give the illusion that something constructive is being done.
A few fun facts: All the so-called clean development mechanisms authorized by the Kyoto Protocol, designed to keep 175 million tons of CO2 out of the atmosphere by 2012, will slow the rise of carbon emissions by … 6.5 days. Depressed yet? Kyoto also forces companies in developed countries to pay china for destroying HFC-23 gas, even though Western manufacturers have been scrubbing this industrial byproduct for years without compensation. And where’s the guarantee that the tree planted in Bolivia to offset $10 worth of air travel, for instance, won’t be chopped down long before it absorbs the requisite carbon?
Nationally managed emissions-trading schemes could do a better job than Kyoto’s we-are-the-world approach by adding legal enforcement and serious oversight. But many economists have a safer way: a tax on fossil fuels. A carbon tax would eliminate three classes of parasites that have evolved to fill niches created by the global climate protocol: cynical marketers intent on greenwashing, blinkered bureaucrats shoveling indulgences to powerful incumbents, and deal-happy Wall Streeters looking for a shiny new billion-dollar trading toy.
So we again come to the point where we ask, credits or taxes? Taxes have the following advantages:
1. Carbon taxes will lend predictability to energy prices, whereas cap-and-trade systems will aggravate the price volatility that historically has discouraged investments in less carbon-intensive electricity generation, carbon-reducing energy efficiency and carbon-replacing renewable energy.
2. Carbon taxes can be implemented much sooner than complex cap-and-trade systems. Because of the urgency of the climate crisis, we do not have the luxury of waiting while the myriad details of a cap-and-trade system are resolved through lengthy negotiations.
3. Carbon taxes are transparent and easily understandable, making them more likely to elicit the necessary public support than an opaque and difficult to understand cap-and-trade system.
4. Carbon taxes can be implemented with far less opportunity for manipulation by special interests, while a cap-and-trade system’s complexity opens it to exploitation by special interests and perverse incentives that can undermine public confidence and undercut its effectiveness.
5. Carbon taxes address emissions of carbon from every sector, whereas some cap-and-trade systems discussed to date have only targeted the electricity industry, which accounts for less than 40% of emissions.
6. Carbon tax revenues would most likely be returned to the public through dividends or progressive tax-shifting, while the costs of cap-and-trade systems are likely to become a hidden tax as dollars flow to market participants, lawyers and consultants.
How can carbon credits help improve the environment and society?
Carbon credits 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.
However, if we look at the non monetary benefits, carbon credits are a gold mine as they lead to positive changes in the soil property and environmental quality. Carbon credits, in general, leads to improved soil structure, with surface structure becoming more stable and less prone to erosion. Especially significant is the subsequent increase in soil organic matter. As soil organic matter increases, soil water and nutrient capacity increases significantly. And crops will fare better during drought because infiltration and water holding capacity have improved. Also, organic matter and the associated soil biological population will increase in vigor and numbers with more diverse crop rotations. Organic matter also may bind pesticides, suppress disease organisms, and improve crop health and vigor as soil biological activity and diversity increase. These changes could become a boon for agricultural economies.
With respect to environmental changes, improvements can be expected in air quality as dust, allergens, and pathogens in the air decline; in water quality as sediment and nutrient loads decline in surface water from better soil aggregation; and in agricultural productivity. Wildlife habitat also is improved with higher residue levels.
However, benefits always come at a cost and these should be analyzed before the benefits are praised.
COST OF CARBON CREDITS
Carbon credits is not an investment free avenue. Though generating carbon credits incur very low production costs, the subsequent costs can be high. The major challenge is in measuring the quantity of carbon in trees. A range of simple to complex techniques is available for the purpose. In general, the techniques are more reliable for plantations of species such as radiata pine and certain eucalypts, but less so for plantations of other species or of mixed ages and mixed species. Other things remaining the same, measurement of carbon with higher statistical accuracy results in higher cost for the grower.
Growers also incur costs in the steps leading to the sale of the carbon credits. The steps form a lengthy and costly process. Some of the key points in the process include aggregation of individual growers’ carbon into a sizeable pool; verification of the pool; issuance of carbon credit certificates by an independent agent; registration of certificates and their lodgment with an authorized market clearing house for sale; and exchange of the certificates and the monies. Also as the cost of services and transactions associated with selling carbon are subject to economies of scale; small scale growers end up paying higher cost per unit of carbon.
Recently concerns have risen over the long term effects of carbon credits. Kyoto forests consist of big trees which use a lot of water. Water use by plantations, cause a reduction of approximately 38 per cent in the stream flow. This may prove fatal in the long run, especially in populated areas. Shortage of water will start a cycle which will ultimately lead to the rotting of the forests themselves thereby defeating the purpose of the effort.
In spite of the multiple problems and issues, the carbon credits market is growing at a very fast rate.
WORLD CARBON CREDITS MARKET
The world carbon credits market is the one fastest growing market in the world. According to estimates, the market is expected to grow to between € 4.6 to € 100 billion by 2010, with the former estimate based on purchases of carbon credits limited to compliance only, and the latter estimate subject to international political developments. However, the Kyoto deadline of 2012 for compliance is being pegged as the accelerator for market growth and estimates say that as end of the compliance period approaches, trading will go up exponentially with the market capable of reaching as high as € 150 billion.
The largest current market is the European carbon credits market (EU ETS) which opened on 1st of January 2005 and began trading at € 6.7 per ton of CO2. Both, prices and volumes have gone up since then and currently carbon credits are being traded at approximately € 30 per ton of CO2.
The volumes are expected to rise up with massive demand coming from US, Germany, China and Japan in the near future. US which has not yet ratified the protocol is one of the largest generators of emissions, generating up to 25 per cent of the world CO2 emissions every year.
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.
PROTOCOLS FOR THE GENERAL PUBLIC:
No matter who does what, it is advisable for general public to do small things that would definitely help fight the climate crisis and purify the environment.
Drive Smart!
A well-tuned car with properly inflated tires burns less gasoline—cutting pollution and saving you money at the pump. If you have two cars, drive the one with better gas mileage whenever possible. Better yet, skip the drive and take public transit, walk, or bicycle when you can.
Buy Local and Organic vegetables.
Did you know the average urban Indian meal travels more than 1,500 miles from the farm to your plate? Think of all the energy wasted and pollution added to the atmosphere – not to mention all the pesticides and chemicals used to grow most produce! So go to your local organic farmer to get your fruits and veggies.
Support clean, renewable energy.
Renewable energy solutions, such as wind and solar power, can reduce our reliance on coal-burning power plants.
Replace incandescent light bulbs with compact fluorescent bulb:
Compact fluorescents produce the same amount of light as normal bulbs, but use about a quarter of the electricity and last ten times as long. Each switch you make helps clean the air today, curb global warming, and save our money on our electricity bill.
Become a smart water consumer.
Install low-flow showerheads and faucets and you’ll use half the water without decreasing performance. Then turn your hot water heater down to 120°F and see hot-water costs go down by as much as 50 percent.
Buy energy-efficient electronics and appliances.
Replacing an old refrigerator or an air conditioner with an energy-efficient model will save you money on your electricity bill and cut global warming pollution. Look for the Energy Star label on new appliances.
Plant a Tree, protect a forest.
Protecting forests is a big step on the road to curbing global warming. Trees “breathe in” carbon dioxide, but slash-and-burn farming practices, intensive livestock production, and logging have destroyed 90 percent of the native forests in the United States. And you can take action in your own backyard — planting shade trees around your house will absorb CO2, and slash your summer air-conditioning bills.
Reduce! Reuse! Recycle!
Producing new paper, glass, and metal products from recycled materials saves 70 to 90 percent of the energy and pollution, including CO2 that would result if the product came from virgin materials. Recycling a stack of newspapers only 4 feet high will save a good-sized tree. Please…buy recycled products!
As the clichés go “Better late than never” and “Better safe than sorry”, think about the fact that these very banal statements were thought of for a reason in the first place and were based on common observations. Thus, it is now time to be prudent rather than judgmental.
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. Considering the environmental benefits of carbon credits system, the idea is still in smoke, there is no clear picture as there lacks a global regulatory body that would control all activities and hence monitor every trade that happens and provide a much clear picture whether results are coming out of it or not.
I would say that the world should start off with carbon taxes as it would initiate the seriousness and the thought process, and in the meanwhile, create a global general regulating body omitting majority of third parties and come up with a strong regulated and networked body of the carbon credit system. If proper monitoring is done, and positive results are indicated, the carbon credit system can pave way for a great future.