Rajarshi Shahu College of Engineering

S.no. 80, Near Mumbai Pune Bypass Highway Tathawade Pune 33

PAPER

PRESENTATION

ON

CARBON CREDITS

BY
Neeraj Prabhu Nikhil Agrawal
Mob-9890037047 Mob-9420439569
Email: [email protected] Email: [email protected]

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 Introduction
The 20th century's last two decades were the hottest in 400 years and possibly the warmest for
several millennia, according to a number of climate studies.
Arctic ice is rapidly disappearing, and the region may have its first completely ice-free
summer by 2040 or earlier. Polar bears and other creatures are already suffering from the
sea-ice loss.
Coral reefs, which are highly sensitive to small changes in water temperature, suffered the
worst bleaching or died, with some areas seeing bleach rates of 70 percent, and these
consequences are just the tip of the iceberg.

Sea level could rise between 7 and 23 inches (18 to 59 centimeters) by century's end, the IPCC's
February 2007 report projects. Rises of just 4 inches (10 centimeters) could flood many South
Seas islands and swamp large parts of Southeast Asia.
Some hundred million people live within 3 feet (1 meter) of mean sea level, and much of the world's
population is concentrated in vulnerable coastal cities.

Therefore to avoid any further damage due to global warming the United Nations Framework
Convention on Climate Change (UNFCCC) laid down a protocol in December 1997 in one
of their meets at Kyoto, Japan. This came to be called the Kyoto protocol and its major
achievement was the concept of a Carbon Credit. The concept of carbon credits came into
existence as a result of increasing awareness of the need for pollution control. It was
formalized in the Kyoto Protocol, an international agreement between 169 countries.

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The Concept of Carbon Credits

Carbon credits are certificates awarded to countries that are successful in reducing emissions of
greenhouse gases. Carbon credits are a tradable permit scheme. They provide a way to reduce
green house emissions by giving them a monetary value. They certify the removal of
greenhouse gas from the air or the prevention of future greenhouse gas emission; each carbon
credit is associated with a single ton of carbon dioxide.

A credit gives its owner the right to emit one ton of carbon dioxide. A credit can be an
emissions allowance which is allocated or auctioned by the administrators of a cap-and-trade
program or an offset of greenhouse gas equivalent carbon dioxide emissions.

Kyoto protocol
The treaty was negotiated in Kyoto, Japan in December 1997, opened for signature on March
16, 1998, and closed on March 15, 1999
The Kyoto Protocol to the United Nations Framework Convention on Climate Change is
an amendment to the international treaty on climate change, assigning mandatory
emission limitations for the reduction of greenhouse gas emissions to the signatory
nations.The objective of the protocol is the "stabilization of greenhouse gas
concentrations in the atmosphere at a level that would prevent dangerous
anthropogenic interference with the climate system."
As of December 2006, a total of 169 countries and other governmental entities have ratified the
agreement.
"The Kyoto Protocol is an agreement under which industrialized countries will reduce their
collective emissions of greenhouse gases by 5.2% compared to the year 1990 (but note that,
compared to the emissions levels that would be expected by 2010 without the Protocol, this
limitation represents a 29% cut). The goal is to lower overall emissions of six greenhouse gases
- carbon dioxide, methane, nitrous oxide, sulfur hexafluoride, HFCs, and PFCs - calculated as
an average over the five-year period of 2008-12. National limitations range from 8%

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reductions for the European Union and some others to 7% for the US, 6% for Japan, 0% for
Russia, and permitted increases of 8% for Australia and 10% for Iceland.

Objectives

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The objective is the "stabilization of greenhouse gas concentrations in the atmosphere at a level
that would prevent dangerous anthropogenic interference with the climate system."

The Intergovernmental Panel on Climate Change (IPCC) has predicted an average global rise
in temperature of 1.4°C (2.5°F) to 5.8 °C (10.4°F) between 1990 and 2100).

How do carbon credits save the planet?

The only way to avoid Greenhouse emissions would be to go live in a cave without power or
heat and make everything by hand; You can't have any livestock either as one ton of methane
contributes to the greenhouse effect as much as 21 tons of carbon dioxide!

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The alternative is to remove the greenhouse gases from the atmosphere in the short term while
trusting that, globally, people are working to develop new, more Earth-friendly technologies in
the mid to long term.

There are many companies that sell carbon credits to commercial and individual customers
who are interested in lowering their carbon footprint. These offset marketers 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 are based in part on the
sophistication of the fund or development company that acted as the carbon project sponsor.

In addition to the burning of fossil fuels, major industry sources of greenhouse gas emissions
are cement, steel, textile, and fertilizer manufacturers. The main gases emitted by these
industries are methane, nitrous oxide, hydrofluorocarbons (HFCs), etc, which increase the
atmosphere's ability to trap infrared energy.
For trading purposes, one credit is considered equivalent to one tonne of CO2 emissions. Such
a credit can be sold in the international market at the prevailing market price. There are at least
four exchanges for carbon credits: the Chicago Climate Exchange, European Climate
Exchange, NordPool, and PowerNext. Other companies, such as Green Horizons engage in
reforestation programs to generate credits.
The Kyoto Protocol provides for three mechanisms that enable developed countries with
quantified emission limitation and reduction commitments to acquire greenhouse gas reduction
credits. These mechanisms are Joint Implementation (JI), Clean Development Mechanism
(CDM) and International Emission Trading (IET). Recently, NordPool listed a contract to trade
offsets generated by a CDM carbon project called Certified Emission Reductions (CERs).

Under JI, a developed country with relatively high costs of domestic greenhouse reduction
would set up a project in another developed country that has a relatively low cost.
Under CDM, a developed country can take up a greenhouse gas reduction project activity in a
developing country where the cost of greenhouse gas reduction project activities is usually
much lower. The developed country would be given credits for meeting its emission reduction
targets, while the developing country would receive the capital and clean technology to
implement the project. Under IET, countries can trade in the international carbon credit market.

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

How buying carbon credits attempts to reduce emissions

Carbon credits create a market for reducing greenhouse emissions by giving a monetary value
to the cost of polluting the air. This means that carbon becomes a cost of business and is seen
like other inputs such as raw materials or labor.
By way of example, assume a factory produces 100,000 tonnes of greenhouse emissions in a
year. The government then enacts a law that limits the maximum emissions a business can
have. So the factory is given a quota of say 80,000 tonnes. The factory either reduces its
emissions to 80,000 tonnes or is required to purchase carbon credits to offset the excess.

A business would buy the carbon credits on an open market from organizations that have been
approved as being able to sell legitimate carbon credits. One seller might be a company
that will plant so many trees for every carbon credit you buy from them. So, for this
factory it might pollute a tonne, but is essentially now paying another group to go out
and plant trees which will, say, draw a tonne of carbon dioxide from the atmosphere.

Financial Prospects AND Emissions Trading

International treaties such as the Kyoto Protocol set quotas on the amount of greenhouse gases
countries can produce. Countries, in turn, set quotas on the emissions of businesses.
Businesses that are over their quotas must buy carbon credits for their excess emissions,
while businesses that are below their quotas can sell their remaining credits. By allowing
credits to be bought and sold, a business for which reducing its emissions would be
expensive or prohibitive can pay another business to make the reduction for it. This
minimizes the quota's impact on the business, while still reaching the quota.

A credit can be exchanged between businesses or can be bought and sold in the international
market at the prevailing price.

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As emission levels are predicted to keep rising over time, it is envisioned that the number of
companies wanting/needing to buy more credits will increase, which will push the
market price up and encourage more groups to undertake environmentally friendly
activities that create for them carbon credits to sell. Another model is that companies that
use below their quota can sell their excess as 'carbon credits.' The possibilities are
endless hence making it an open market.

Since Carbon Credits are tradeable instruments with a transparent price, financial investors
have started buying them for pure trading purposes. This market is expected to grow
substantially, with banks, brokers, funds, arbitrageurs and private traders eventually
participating. Emissions Trading PLC, for example, was floated on the London Stock
Exchange's AiM market in 2005 with the specific remit of investing in emissions
instruments.

Next to the unrelated-to-Kyoto EU ETS, the most important sources of Kyoto-related credits
are the Clean Development Mechanism (CDM) and the Joint Implementation (JI)
mechanism. The CDM allows the creation of new Carbon Credits by developing
emission reduction projects in Non-Annex I countries, while JI allows project-specific
credits to be converted from existing credits in Annex I countries.

Kyoto is a ‘cap and trade’ system that imposes national caps on the emissions of Annex I
countries. On average, this cap requires countries to reduce their emissions 5.2% below
their 1990 baseline over the 2008 to 2012 period. Although these caps are national-level
commitments, in practice most countries will devolve their emissions targets to
individual industrial entities, such as a power plant or paper factory.

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National governments, some of whom may not have devolved responsibility for meeting Kyoto
obligations to industry, and that have a net deficit of Allowances, will buy credits
for their own account, mainly from JI/CDM developers.
According to IETA, the market value of CDM/JI credits transacted in 2004 was EUR 245 m; it
is estimated that more than EUR 620 m worth of credits were transacted in 2005.
Managing emissions is one of the fastest-growing segments in financial services in the City of
London's financial district with a market now worth about $30 billion, but which could grow to
$1 trillion within a decade. Louis Redshaw, a former trader at Enron and now head of
environmental markets at Barclays Capital predicts that ‘Carbon will be the world's biggest
commodity market, and it could become the world's biggest market overall.’
The Protocol also reaffirms the principle that developed countries have to pay billions of
dollars, and supply technology to other countries for climate-related studies and projects. This
was originally agreed in the UNFCCC

CREATING REAL CARBON CREDITS

An allowance like the European Union Allowance(EUA) generally has more value than an
offset such as a Certified Emissions Reduction(CER). This is due to lack of a developed
secondary market for CER’s. An offset generated by a carbon project under Clean
Development Mechanism (CDM) or Joint Implementation (JI) is limited in value by the fact
that regulated entities in the EU ETS are limited as to what percentage of compliance can be
accomplished via these flexible mechanisms.

The first step in determining whether or not a carbon project has legitimately lead to the
reduction of real, measurable, permanent emissions is understanding the CDM methodology
process. This is the process by which project participants submit, through a Designated
Operational Entity (DOE) their concepts for emissions reduction creation. The Clean
Development Mechanism Executive Board (CDM EB), along with the CDM Methodology
Panel decide which environmental proofs do indeed result in reductions that are additional.

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VARYING NATIONAL POLICIES
The United Nations Framework Convention on Climate Change agreed to a set of a "common
but differentiated responsibilities." The parties agreed that
The largest share of historical and current global emissions of greenhouse gases has originated
in developed countries;
Per capita emissions in developing countries are still relatively low;
The share of global emissions originating in developing countries will grow to meet their social
and development needs.
In other words, China, India, and other developing countries were exempt from the emission
reduction target of the Kyoto Protocol because they were not the main contributors to the
greenhouse gas emissions during the industrialization period that is believed to be causing
today's climate change. However, even without the commitment to reduce according to the
Kyoto target, developing countries do share the common responsibility that all countries have
in reducing emissions.

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Carbon emissions from various global regions during the period 1800-2000 AD

Benefits of the Carbon Trade to India

Among the major world economies, India's economy is the least energy intensive.
India signed and ratified the Protocol in August, 2002. Since India is exempted from the
framework of the treaty, it is expected to gain from the protocol in terms of
transfer of technology and related foreign investments. At the G-8 meeting in
June 2005, Indian Prime Minister Manmohan Singh pointed out that the per-
capita emission rates of the developing countries are a tiny fraction of those in the
developed world.
As it is binding to the developed countries to invest in carbon-saving projects in the
underdeveloped countries, India can gain access to the latest technology through
the Annexe-I countries.
Each carbon project undertaken is capable of generating a large number of carbon credits
depending on the size of the project. These carbon credits can help generate funds
for the country or company undertaking the project. The credits can be sold
immediately or after a period of time when its price is expected to increase.

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Opposition
Some public policy experts who are skeptical of global warming see Carbon Credits as a
scheme to either slow the growth of the world's industrial democracies or to
transfer wealth to the third world in what they claim is a global socialism
initiative. Others argue the protocol does not go far enough to curb greenhouse
emissions.

Cost-benefit analysis
Economists have been trying to analyse the overall net benefit of Kyoto Protocol through cost-
benefit analysis. Just as in the case of climatology, there is disagreement due to
large uncertainties in economic variables. Some of the estimates indicate either
that observing the Kyoto Protocol is more expensive than not observing the
Kyoto Protocol or that the Kyoto Protocol has a marginal net benefit which
exceeds the cost of simply adjusting to global warming. However, a study in
Nature found that "accounting only for local external costs, together with
production costs, to identify energy strategies, compliance with the Kyoto
Protocol would imply lower, not higher, overall costs."

Increase in greenhouse gas emission since 1990

countries which are large contributors(but are not required to meet numerical limitations.

Change in greenhouse gas

Emissions (1990-2004)

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China +47%

India +55%

Change in greenhouse gas EU Assigned Objective Treaty Obligation 2008-

Country
Emissions (1990-2004) for 2012 2012

Germany -17% -21% -8%

Canada +27% N/A -6%

Australia +25% N/A +8%*

Spain +49% +15% -8%

United States +16% N/A -7%*

Norway +10% N/A +1%

New Zealand +21% N/A 0%

France -0.8% 0% -8%

Greece +27% +25% -8%

Ireland +23% +13% -8%

Japan +6.5% N/A -6%

United Kingdom -14% -12.5% -8%

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Portugal +41% +27% -8%

EU-15 -0.8% N/A -8%

REFRENCES
1.Wikipedia.com
2.Carbonplanet.com

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3.Yeomansplow.com
4.Herald Newspaper

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