CARBON CREDIT

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Table of Contents 1. Global Warming and Climate Change 1.1. What is Global Warming and Climate Change ? 1.2. What are Greenhouse Gases (GHGs)? 2. Introduction to Carbon Credits 2.1. Concept of Carbon Credits 2.2. Kyoto Protocol: Birth of Carbon Credits 3. How Does Carbon Credit Save the Planet? 4. Advantages and Disadvantages of Carbon Credits 5. Carbon Credit in India 6. Conclusion

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1. Global Warming and Climate Change 1.1 What is Global Warming and Climate Change? Global warming and climate change both refer to an increase in average global temperatures. Records of surface temperatures over the last century show that there has been a gradual increase in average temperatures around the world. Although some of this is due to natural causes, it has also been argued that human activities that produce greenhouse gases and that alter the earth’s surface may be accelerating the warming process. One of the environmental threats our planet faces today is the potential for long term changes in the earth’s climate and temperature patterns known as global climate change. Scientists estimate that as a result of global climate change, the earth’s average temperature could increase as much as six and a half degrees Fahrenheit by the year 2100. While this may not sound like much of an increase, if the temperature increase approaches the six and a half degree mark, the earth will be a much different place than we know it today. To prevent this sort of disruption to the many natural and human systems that everyone on our planet depends on, we must all work to control global climate change. Determining the potential causes of global climate change has been a long term process that has involved the work of thousands of scientists around the world.

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An important step in this process was made in 1995 when over 2500 scientists from around the world agreed for the first time that emissions of greenhouse gases from human activities have influenced the global climate when, and how much . The great importance of this scientific conclusion is that we now know that in order to prevent the onset of catastrophic changes to the earth’s climate, humans must reduce their emissions of greenhouse gases. ate. As a result, the question is no longer whether humans are altering the world’s climate, but where, 1.2 What are Greenhouse Gases (GHGs)? GHGs are chemicals present in the atmosphere that have certain radiation blocking properties which trap the sun’s energy in the earth’s atmosphere, creating a type of insulation. This leads to higher temperatures on earth than would otherwise occur. They are defined by UNFCCC as “those Gaseous constituents of the atmosphere, both natural and anthropogenic, that absorb and re-emit infrared radiation ”. Annex A of the Kyoto Protocol lists six main greenhouse gases that urgently need to be reduced or limited : - Carbon dioxide (CO2) - Methane (CH4) - Nitrous oxide (N2O) - Hydrofluorcarbons (HFCs) - Perfluorcarbons (PFCs) - Sulphur hexafluoride (SF6)

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The groups of such gases, which are responsible for removing greenery from our planet, are called greenhouse gases. Global Anthropogenic Greenhouse Gas Emissions

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2. Introduction to Carbon Credits Carbon credits have emerged as an important instrument in the financial markets. The primary goal is to reduce emission of green house gases. 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. 2.1. Concept of Carbon Credits Carbon credits are a key component of national and international emissions trading schemes that have been implemented to mitigate global warming. 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 customers7 who are interested in lowering their carbon footprint on a voluntary basis. These carbons 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. This is reflected in their price; voluntary units typically have less value than the units sold through the rigorously-validated Clean Development Mechanism.

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2.2. Kyoto Protocol: Birth of Carbon Credits The issue of climate change and global warming became the topic of International concern in the 1980s and since then has been subject to debate and several agreements on scientific issues, voluntary actions, legally binding greenhouse gas emission targets, rules for implementation and mechanisms . At the 1997 Climate Change Convention in Kyoto, the primary topic of discussion was the reduction of greenhouse gases (GHG), which are believed to be the principal cause of Global warming. Kyoto Protocol is a voluntary treaty signed by 141 countries, including the European Union, Japan and Canada for reducing GHG emission by 5.2% below 1990 levels by 2012 . However, US who accounts for one-third of the total GHG emission, is yet to sign the treaty. The preliminary phase of the Kyoto Protocol ends in 2007 while the second phase starts from2008 . The penalty for non-compliance in the first phase is Euro 40 per ton of carbon dioxide ( CO2) equivalent . In the second phase, the penalty is hiked to Euro 100 per ton of CO2. Carbon credits are certificates issued to countries that reduce their emission of GHG ( greenhouse gases ) which causes global warming. Carbon credits or Certified Emissions Reductions (CER) 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 ton of carbon dioxide per year. For example, if a project generates energy using wind power instead of burning coal , it can save 50 tons of carbon dioxide per year. There it can claim 50 CERs (one CER is equivalent to one ton of carbon dioxide reduced).

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Ideally, Carbon credits can essentially be viewed as a means of empowering the market to care for the environment. The legislations can set inflexible environmental targets for the industry with the flexibility to meet the objectives in any manner, it chooses to. The industry must find the lowest cost solutions to meet these objectives with all the flexibility at their disposal. The emissions cap is decided under the Kyoto Protocol and the level of reductions by time frames has been specified. The emissions are easily tradable and thus results in lower abatement costs. All this allows permanent reduction in emissions from a certain decided baseline. However, a certain industry can purchase emission credits to offset its emissions from somewhere else at a lower cost. 3. How Does Carbon Credit Save the Planet?

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4. Advantages and Disadvantages of Carbon Credits Advantages • Better technologies for the company which is benefiting from generation of CERs. • Technology transfer from developed to developing countries (Due to low cost structure in developing countries). • Additional source of foreign investment in developing countries which act as a catalyst in developing cleaner technologies. • Channel CDM funds to investment priorities – The CDM funds can be channelized into building or improving projects, thus reinvesting it for higher growth. • Development of cleaner technologies leading to sustainable development where countries have a strategic advantage from now in terms of pollution. • Environmental benefits due to lesser GHG emissions. Disadvantages • Provision of cheapest way of purchasing climate destroying right. • Due to nature and process of complexity involved, foreign players may dominate domestic industries for the incentive if CERs. • CDM investment could affect national development strategies, possibly adversely affecting national decision-making processes. Until future commitment periods are agreed, the CDM may not provide incentives for financing long-term development projects and strategies.

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• CDM timeframe may not assist long-term development strategies as the timeframe is foreseeable till 2012 only. (Most projects - developed with short term perspective). • No opportunity for less developed countries under this framework. • Still the mechanism leads to developed countries emitting more GHG in spite of their KYOTO caps. Historically they are the culprits for GHG emissions. The developed countries purchase CERs rather than finding new ways of reducing emissions by technological development. • Pressure to accept technologies which have adverse local impacts - CDM may attract unfavourable or unwanted technologies which adversely impact local people. The technologies should allow for sustainable development in social as well as economic and environmental terms. 5.Carbon Credit in India The certified emission reduction (CERs) issued for a cut in the release of greenhouse gases into the environment is set to triple in India over the next three years, due to a rising number of claims from rapidly growing renewable energy (RE) projects. According to the latest report by research firm CRISIL, Indian projects are estimated to receive 246 million CERs by December 2012, a three-fold rise from 72 million in November 2009. This will cement India's second position in the global CER market, the report said.

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Each tonne of obnoxious gases -- including CO, CO2, NOx, SO2, etc -- saved from being released into the environment amount to one CER. Developing countries generate CERs by installing emission-cut machineries and developed countries, mainly from Europe, buy CERs for releasing more of gases than they are supposed to. Of India's 1,846 RE projects as of November 2009, only 15 per cent were registered with the UN Framework Convention on Climate Change (UNFCCC) under the clean development mechanism (CDM). These projects had generated around 13.5 million CERs up to November 2009. Assuming a price of 10 for one CER and an exchange rate of Rs 65 per euro, these CERs are estimated to be worth Rs 8.7 billion. As of November 2009, RE projects in India accounted for about 19 per cent of the total CERs issued in India. With capacity additions in RE projects and registration of more of these, the share of CER issuance of RE projects was expected to increase to 31 per cent of the total CERs issued in India in December 2012. As of early November 2009, the installed RE power capacity in India was around 15,500 Mw, accounting for only 10 per cent of the country's total installed power generation capacity. Crisil believes that CER issuance, purely from registration of existing and new RE projects, will increase to 76 million by December 2012, from 13.5 million in November 2009. Assuming a price of ¤10 for one CER, additional issuances of CERs from RE projects will be worth about Rs 40 billion by December 2012.

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In 2009, 64 per cent of CERs issued in India were for hydro- fluoro -carbon (HFC) reduction projects , mainly in refrigerant-producing factories. However, CER issuance growth in HFC reduction projects is expected to be relatively small, as most players in this industry have gradually moved to non-HFC refrigerants. This would lead to a halving in the share of CERs issued for HFC reduction projects, to 33 per cent, by 2012. 6.Conclusion The Indian market is extremely receptive to Clean Development Mechanism (CDM). Having cornered more than half of the global total in tradable certified emission reduction (CERs), India’s dominance in carbon trading under the CDM of the UN Convention on Climate Change ( UNFCCC) is beginning to influence business dynamics in the country. Despite all the research, carbon credit cannot be a standardised system as it is basically a policy created commodity . But it would allow for a great deal of policy and project level experimentation over the next few years until the various systems converge on some accepted modalities. It is expected that it will be the electricity companies, on the one (selling) side, and the cement companies , on the other (purchasing) side, to first explore the market. Some of the companies or projects that could benefit from carbon credits are: Renewable energy; biomass; hydropower; geothermal ; wind and solar energy; co-generation; fuel switch; waste processing; landfill gas extraction ; biogas applications; aforestation / reforestation, and so on. Carbon credit is thus expected to redefine global trade and may bring about a drastic change

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in the ratings of various countries in the global market in the near future. India and China are likely to emerge as the biggest sellers and Europe is going to be the biggest buyers of carbon credits. Websites: References • www.unfccc.int • www.carboncredits.com • www.carbonplanet.com • www.wikipedia.com • www.livemint.com • www.zeroyourcabon.com • www.ncdexspot.com • www.pewclimate.org • www.worldbank.org • www.mcxindia.com