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Carbon Credits

Presenter Meghana R. Jadhav
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Introduction
The concept of carbon credits came into existence as a result of increasing
awareness for controlling emissions of GHGs
Key component of national and international emissions trading schemes,
implemented to mitigate global warming
A way to reduce greenhouse effect:
by capping total annual emissions
letting the market assign a monetary value for trading
Certificates issued to countries that reduce their GHG emissions
Exchanged or bought and sold between businesses in the international markets at the
prevailing market price
One credit = 1 tonne of CO2 (or CO2 equivalent) reduced


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Carbon credits can be acquired through
Clean Development Mechanism (CDM): Project-based emission reduction
activities in developing countries
Joint Implementation (JI): Two developed countries can invest in emission
mitigation projects
International Emission Trading (IET): Credit deficient and credit surplus
countries (that have ratified the Kyoto Protocol) can trade carbon credits at
specialized exchanges (European Climate Exchange, Chicago Climate
Exchange, UKs CO2E Exchange)
Surplus credits result when a country overshoots its reduction target
These can be traded, with countries facing a shortfall in target, enables to buy
and meet their targets
Provides financial incentives to those who meet their target
Introduction
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Kyoto Protocol Overview
May 1992: UN FCCC* establishes framework for controlling global warming
Dec 1997: Following intense negotiations in Kyoto (Japan), a protocol is agreed
upon by over 100 countries
Feb 2005: 141 countries, including EU, Japan, Canada, and Russia sign the Kyoto
Protocol and it gets ratified w.e.f. 16-Feb-05 .The US remains a key non-signatory
The aim is to lower overall emissions of six greenhouse gases
Carbon dioxide
Methane
Nitrous oxide
Sulfur hexafluoride
HFCs (Hydrofluro Carbon)
PFCs (Perfluoro Compounds)
Note:- The emission is calculated as an average over the five-year period of
2008-12
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Kyoto Protocol Overview
The Kyoto Protocol sets legal binding targets for reducing greenhouse gases
(GHGs)
Developed countries have a target to reduce GHG emissions by
5.2%below 1990 levels, by year 2012
National targets range from 8% reductions for the European Union, 7%
for the US, 6% for Japan, 0% for Russia, and permitted increase of 8%
for Australia and 10% for Iceland.
India, China, and Brazil are classified as emerging countries and hence
exempted from this protocol


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Climate changes provide a Spot as well as Futures and Options market
Prices normally quoted in Euros per tonne of Co2
Currently there are five exchanges trading in carbon allowances:
The Chicago Climate Exchange
European Climate Exchange
Nord Pool
PowerNext
The European Energy Exchange
Two private electronic markets have been established in 2008:
CantorCO2e
Preserval Marketplace

Carbon Credit Markets
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Carbon Credit Markets
Buyers
EU and Japan main buyers (approx >60%) Private and government
Of total purchased volumes, private entities accounted for 69%
Govt of Netherlands single largest buyer, accounted for more than
16%
Sellers
Mainly HFC producing countries
Asia and Latin America main sellers (45% & 35%, respectively)
India, Brazil, and Chile together account for ~58%
India as of now the largest producer of carbon credits and highest
country rating

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Better approach than a direct carbon tax or direct regulation
Active participation in the futures market to manage the price risks
associated with trading in carbon credits
According to the World Bank's Carbon Finance Unit, 374 million metric
tonnes of carbon dioxide equivalent (tCO2e) were exchanged through
projects in 2005, a 240% increase relative to 2004 (110 mtCO2e) which was
itself a 41% increase relative to 2003 (78 mtCO2e).
In terms of dollars, the World Bank has estimated that the size of the carbon
market was 11 billion USD in 2005, 30 billion USD in 2006 and 64 billion
in 2007
Why trade in Carbon Credit ?
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Price Influencing Factors
In Non-Annexure B countries (the developing countries) across the world, prices
are influenced by various factors including electricity, natural gas, the level of
economic activities across Annexure I countries
Some of the major price influencing factors:
Supply-demand mismatch
Policy issues
Crude oil prices
Coal prices
CO2 emissions
Weather/Fuel prices
European Union Allowances (EUAs) prices
Foreign exchange fluctuations
Global economic growth
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Criticism
Companies and individuals spending millions on "carbon credit" projects
that yield few if any environmental benefits
A Financial Times investigation uncovered widespread failings in the new
markets for greenhouse gases, suggesting some organisations are paying for
emissions reductions that do not take place
Widespread instances of people and organisations buying worthless credits
that do not yield any reductions in carbon emissions.
Brokers providing services of questionable or no value.
A shortage of verification, making it difficult for buyers to assess the true
value of carbon credits.

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Indian Scenario
India comes under the third category of signatories to UNFCCC
Signed and ratified the Protocol in August, 2002
Emerged as a world leader in reduction of greenhouse gases by adopting
Clean Development Mechanisms (CDMs)
The total CO2-equivalent emissions in 1990 were 10, 01, 352 Gg
(Gigagrams), which was approximately 3% of global emissions
Well ahead in establishing a full-fledged system in operationalising CDM,
through the Designated National Authority (DNA)
The total registered CDM projects are more than 300, almost 1/3rd of the
total CDM projects registered with the UNFCCC
Analysts forecast that its trading in carbon credits would touch US$ 100
billion by 2010
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Story Till Date .
Kyoto Protocol started on 14
th
June 1992 in Japan, faced many oppositions
but now has more than 180 countries as its members.

Managing emissions is one of the fastest-growing segments in financial
services in the City of London with a market worth about Euros 30 Billion,
which could grow to Euro 1 Trillion within a decade.

Louis Redshaw, head of environmental markets at Barclays Capital predicts
that Carbon will be the world's biggest commodity market and it could be
the worlds biggest market overall.


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