A Study Carbon Credit

The

dramatic

imagery

of global

warming frightens

people.

Melting glaciers, freak storms and stranded polar bears - the mascots of climate change - show how quickly and drastically greenhouse gas emissions (GHG) are changing our planet. Such graphic examples, combined with the rising price of energy, drive people to want to reduce consumption and lower their personal shares of global emissions. But behind the emotional front of climate change lays a developing framework of economic solutions to the problem. Two major market-based options exist, and politicians around the world have largely settled on carbon trading to regulate GHG emissions.

It is estimated that 60-70% of Green House Gases emission is through fuel combustion in industries like cement, steel, textiles and fertilizers. They are released as by-products of certain industrial process, which adversely affect the ozone layer, leading to global warming. With growing concerns among nations to curb pollution levels while maintaining the growth in their economic activities, the emission trading (ET) industry has come to life. And, with the increasing ratification of Kyoto Protocol (KP) by countries and rising social accountability of polluting industries in the developed nations, the carbon emissions trading is likely to emerge as a multibillion1|Page

dollar market in global emissions trading. The recent surge in carbon credits trading activities in Europe is an indication of how the emissions trading industry is going to pan out in the years to come. Carbon credits seek to reduce these emissions by giving them a monetary value. One credit gives the owner the right to emit one ton of carbon dioxide. Such a credit can be sold in the international market at the prevailing market price. This means that carbon becomes a cost of business and is seen like other inputs such as raw materials or labor. LIST OF TOP 10 COUNTRIES BY CARBON DIOXIDE EMISSION (In „000 of metric tons)

Country

Annual CO2 emissions

% of total emissions

7,010,170

24.4 %

United States

6,049,435

22.2 %

European Union

4,001,222

14.7 %

03

Russia

1,524,993

5.6 %

04

India

1,342,962

4.9 %

05

Japan

1,257,963

4.6 %

06

Germany

860,522

3.1 %

07

Canada

639,403

2.3 %

08

United Kingdom

587,261

2.2 %

09

South Korea

465,643

1.7 %

10

Italy

449,948

1.7 %

01 02 -

China &

Taiwan

TABLE: 1. (Source: www.unfccc.org)

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Following diagram shows emission of carbon dioxide by different countries

FIGURE: 1. (Source: www.unfccc.org)

FACTS ABOUT CARBON EMISSION: Global greenhouse gas emissions rose 70 % between 1970 & 2004 and would rise another 25 to 90 % above 2000 levels by 2030 without new restraints.

The Intergovernmental Panel on Climate

Change 2007 assessment report said world temperatures are likely to rise between 1.1 to 6.4 degrees Celsius by 2100, triggering more frequent floods, droughts, melting of icecaps and threatening species extinction. Carbon emissions from the next five years of burning rainforests will be greater than that for the entire history of aviation up to 2025, according to the Global Canopy Programme. An estimated 30 per cent of the world‟s total greenhouse emissions in 1997 came from wildfires in Borneo, which destroyed one million hectares of forests. Since 1751 roughly 315 billion tonnes of carbon have been released to the atmosphere from the consumption of fossil fuels and cement production. Half of these emissions have occurred since the mid 1970s.

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Worldwide carbon dioxide emissions in 2005 are estimated to be slightly more than 24 billion tonnes. Every litre of gasoline or petrol used in motor vehicles produces 2.4 kilograms of carbon dioxide emissions. For diesel fuel, every litre produces 2.7 kilograms carbon dioxide. The average US citizen emits as much carbon dioxide in one day as someone in China does in more than a week, or someone in Tanzania, one of the world's poorest countries, emits in seven months, according to International Energy Agency (IEA) statistics. The World Health Organization has estimated that climate change leads to more than 150,000 deaths every year and at least 5 million cases of illness. Global sea levels will increase by 11 to 13 inches by 2100, according to 2006 estimates by Australia's science research agency CSIRO. According to International Energy Agency statistics, world energyrelated CO2emissions in 2004 were 16.4 per cent above their 1990 level. In 2002 alone, they increased by 2%. Ten countries account for two-thirds of global forest area, according to the UN Food and Agriculture Organization: Australia, Brazil, Canada,

China,

The

Democratic

Republic

of

Congo,

India,

Indonesia, Peru, Russia and United States. China says its reforestation and afforestation programmes over the last two decades have it on track to lift forest cover to 20 per cent of its land mass by 2010, compared to just 8.6 per cent in 1949. The United States is the world's leading greenhouse-gas emitter, accounting for 22 % of total emissions. US annual greenhouse emissions per capita are about 20 tonnes.

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2.1 CARBON CREDITS: The carbon market is the most visible result of early regulatory efforts to mitigate climate change. Regulation constraining carbon emissions has spawned an emerging carbon market that was valued at €47 billion in 2007. Its biggest success so far has been to send market signals for the price of mitigating carbon emissions. This, in turn, has stimulated innovation and carbon abatement worldwide, as motivated individuals, communities, companies and governments have cooperated to reduce emissions. Allowance Markets: Market has been successful in its mission of reducing emissions, and stimulating emission reductions abroad. The European Commission, learning from the experience of Phase I, has strengthened several important design elements for EU ETS Phase II. Along with recent EU proposals for Phase III, these improvements include tighter emission targets, stronger flexibility provisions for compliance more attention to internal EU harmonization and, most importantly, longer-term visibility for action to reduce emissions until 2020. These proposed reforms create confidence in emissions trading as a credible and cost-effective tool of carbon mitigation. CDM delivers on clean energy: Carbon contracts from clean energy projects accounted for nearly twothirds

of

the

transacted

appropriately reflecting the

volume CDM‟s

in

the

mission

project-based

market,

of supporting

emission

reductions and sustainable development. These project types typically use sound, road-tested technology, are operated by utilities or experienced operators, and have predictable performance, resulting in CER issuances that are expected to yield between 70-90% of expected Project Design Document (PDD) volumes, based on current expectations.

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Prices and price differentiation: The growth in transacted values reflected higher prices for primary forward contracts, which had an average price of €10 in 2007. Prices for primary market forward transactions were in the range of €8-13 in 2007 and early 2008. The generally higher prices reflected the intense competition and activity in the global market to encourage projects that reduce global emissions. Prices in the higher end of that range typically rewarded projects that were further along in the CDM process (such as registered projects), projects that were being developed by experienced and established sponsors (low credit risk and performance risk), and/or for projects with high expected issuance yields. Spot contracts of issued Certified Emission Reductions were transacted at €16-17, a nice premium to the primary CER, but still at a discount to the EUA, reflecting a combination of the impact of the European Commission‟s 2020 proposal, the time value of money, and some remaining procedures related to the delay in connectivity of the International Transaction Log (ITL) to the EU. Climate-friendly investment: Analysts estimated that US$9.5 billion were invested in 2007-08 in 58 public and private funds that either purchase carbon directly or invest in projects and companies that can generate carbon assets. The total capitalization of carbon vehicles could reach US$13.8 billion in 2008-09, with 67 such carbon funds and facilities. This capital inflow was characterized by a substantial increase in the number of funds seeking to provide cash returns to investors and by more funds getting involved earlier in the project development process, taking larger risks through equity investment in expectation of larger returns. The authors estimated that in 2007-08 alone, CDM leveraged US$33 billion in additional investment for clean energy, which exceeded what had been leveraged cumulatively for the previous five years since 2002.

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Secondary markets: The biggest overall market development in 2007-08 and early 2008 was the emergence of the secondary markets. A segment of the secondary markets that the authors had discussed in the 2007 report had largely involved primary project developers providing project-specific guarantees, often along with credit enhancement. In 2007-08, as a wide range of procedural delays and risks of CER registration and issuances grew, the carbon market innovated by providing portfolio-based guarantees. In these transactions, a secondary seller, typically a market aggregator sold guaranteed CER (gCER) contracts that were secured through a slice of its carbon portfolios. These guarantees were also usually credit-enhanced through the balance sheet of a highly-rated bank engaged by the secondary seller for this purpose.

MARKETS FOR CARBON CREDITS: Emerging carbon credit markets offer enormous opportunities for the upcoming manufacturing/public utility projects to employ a range of energy saving devices or any other mechanisms or technology to reduce GHG emissions and earn carbon credits to be sold at a price. The carbon credits can be either generated by project participants who acquire carbon credits through implementation of CDM in Non Annexure I countries or through Joint Implementation (JI) in Annexure I countries or supplied into the market by those who got surplus allowances with them. The buyers of carbon credits are principally from Annexure I countries. They are: 

Especially European nations, as currently European Union Emission Trading Scheme (EU ETS) is the most active market;



Other markets include Japan, Canada, New Zealand, etc



The major sources of supply are Non-Annexure I countries such as India, China, and Brazil.

Emission trading is a mechanism that enables countries with legally binding emissions targets to buy and sell emissions allowances among themselves. Currently, futures contracts in carbon credits are actively traded in the European exchanges. In fact, many companies actively 7|Page

participate in the futures market to manage the price risks associated with trading in carbon credits and other related risks such as project risk, policy risk, etc. Keeping in view the various risks associated with carbon credits, trading in futures contracts in carbon allowances has now become a reality in Europe with burgeoning volumes. Currently, project participants, public utilities, manufacturing entities, brokers, banks, and others actively participate in futures trading in environment-related instruments. The European Climate Exchange, a subsidiary of Chicago Climate Exchange, remains the leading exchange trading in European environmental instruments that are listed on the Intercontinental Exchange, previously known as International Petroleum Exchange. Carbon Credit Trading is a process whereby organizations purchases carbon credits to neutralize their Carbon Dioxide impact on global warming. The two types of markets for carbon credits are: 1. Compliance Market and 2. Voluntary Market 1. COMPLIANCE MARKET: Compliance markets have set 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. Those producers who exceed their emission reductions can trade their credits to others in the marketplace who have not reached their emission goals. 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. The compliance markets are mainly a result of the Kyoto Protocol, a cap and trade system that resulted from the international Framework

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Convention on Climate Change. The protocol was adopted at the 3

rd

Conference of the Parties in Kyoto, Japan, on December 11, 1997. The treaty required ratification by no less than 55 countries & enough industrialized countries to represent at least 55 % of the total carbon dioxide emissions. 55 countries agreed by May 23, 2002, but the 55 percent requirement was not met until Russia agreed on November 18, 2004. The treaty came into force 90 days later on February 15, 2005. As of May 2008, 182 countries had ratified the protocol. Of these 182 countries, 36 developed countries are required to reduce greenhouse gas emissions to the levels specified in the treaty. The U.S. has not ratified the Kyoto Protocol. Brazil, China, India, and 134 other developing countries have ratified the protocol, but have no obligation beyond monitoring and reporting emissions. The Kyoto Protocol created specific rules for registering and certifying carbon credits. Carbon credit markets have been developing for several years, especially in Europe. 2. VOLUNTARY MARKET: The number of voluntary markets has been increasing. Trading prices have been variable. For the Chicago Climate Exchange, the price per metric ton of CO2 in 2008 went from $2 in early 2008 to $7 in midsummer, and back to $2 in the fall. The price rose dramatically during mid-2008

in

anticipation

of

legislation,

but

dropped

just

as

dramatically when legislation stalled. In 2008 in North Carolina, NC Green Power initiated a program for selling carbon offsets. The initial price was $4 per 500 pounds of carbon

dioxide

equivalent

offset.

Under

the

program,

certain

participating utilities offer their customers the option to subscribe to available

tariffs

to

support

carbon

offsets.

These

tariffs

allow

customers to subsidize the mitigation of greenhouse gases. These carbon offsets will be offered on a monthly basis for a premium. Each 9|Page

block of carbon offset subsidized by a consumer or business will allow the NC Green Power carbon offset program administrator to buy an equivalent block of carbon dioxide equivalents mitigated by an emission reduction project and sourced directly from the project or from the voluntary carbon offset market. Some of the requirements for the emission reduction projects are that there be no renewable energy credits, the reduction must be permanent, and the project must have “additionality”. Interest in reducing GHG emissions is increasing worldwide, and this has led to attempts to create new markets for carbon credits. The potential for having cap and trade programs in various states or potentially for the entire United States under an agreement such as the Kyoto Protocol leads to speculation that the price of carbon credits could increase substantially. 2.2

KYOTO PROTOCOL:

2.2.1: INTRODUCTION: The Kyoto Protocol, an international treaty on climate change that came into force in 2005,

dominates

the

mandatory

carbon

market. It serves as both a model and a warning for every emerging carbon program. The major feature of the Kyoto Protocol is that it sets binding targets for 37 industrialized countries and the European community for reducing greenhouse gas (GHG) emissions .These amount to an average of five per cent against 1990 levels over the five-year period 2008-2012. The major distinction between the Protocol and the Convention is that while the Convention encouraged industrialized countries to stabilize GHG emissions, the Protocol commits them to do so. 10 | P a g e

Recognizing that developed countries are principally responsible for the current high levels of GHG emissions in the atmosphere as a result of more than 150 years of industrial activity, the Protocol places a heavier burden on developed nations under the principle of “common but differentiated responsibilities.” In

the

early

1990s,

Nations resolved

to

nearly

every

confront global

member

state

of

warming and

the United

manage

its

consequences. Although the resulting United Nations Framework Convention

on

Climate

Change

(UNFCCC)

international

treaty

recognized a unified resolve to slow global warming, it set only loose goals

for

lowering

emissions.

In

1997,

the

Kyoto

amendment

strengthened the convention.

Under the Protocol, members of the convention with industrialized or transitional economies (Annex I members) receive specific reduction targets. Member states with developing economies are not expected to meet emissions targets -- an exception that has caused controversy because some nations like China and India produce enormous levels of GHG. The Protocol commits Annex I members to cut their emissions 5 percent below 1990 levels between 2008 and 2012. But because the Protocol does not manage the way in which members reduce their emissions, several mechanisms have arisen. The largest and most famous is the European Trading Scheme (ETS), still in its two-year trial phase.

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2.2.2. INDIA AND KYOTO PROTOCOL:

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 G8 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. Following the principle of common but differentiated responsibility, India maintains that the major responsibility of curbing emission rests with the developed countries, which have accumulated emissions over a long period of time. However, the U.S. and other Western nations assert that India, along with China, will account for most of the emissions in the coming decades, owing to their rapid industrialization and economic growth.

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3.1. INTRODUCTION:

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. Individual companies will purchase credits directly from another party with excess allowances, from a broker, from a JI/CDM developer, or on an exchange. The Kyoto Protocol shares the ultimate objective of the Convention to stabilize atmospheric concentrations of GHGs at a level that will prevent dangerous interference with the climate system. Each Annex I Party has a binding commitment to limit or reduce GHG emissions and innovative mechanisms have been established for Parties to facilitate compliance with this commitment. Other commitments include: 

Each Annex I Party must undertake domestic policies and measures to reduce GHG emissions and to enhance removals by sinks & they must provide additional financial resources to advance the implementation of commitments by developing countries;



In implementing these policies and measures, each Annex I Party must strive to minimize any adverse impact of these policies and measures on other Parties, particularly developing country Parties;

Both Annex I and non-Annex I Parties must co-operate in the areas of: a) The development, application and diffusion of climate friendly technologies; b) Research on and systematic observation of the climate system; c) Education, training, and public awareness of climate change; and d) The improvement of methodologies and data for GHG inventories.

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Under the Treaty, countries must meet their targets primarily through national measures. However, the Kyoto Protocol offers them an additional means

of

meeting

their

targets

by

way

of

three

market

based mechanisms.

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.

Since allowances and carbon credits are tradable instruments with a transparent price, financial investors can buy them on the spot market for speculation purposes, or link them to futures contracts. This market has grown substantially, with banks, brokers, funds, arbitrageurs and private traders now participating in a market valued at about $60 billion in 2007. 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.

Although Kyoto created a framework and a set of rules for a global carbon market, there are in practice several distinct schemes or markets in operation today, with varying degrees of linkages among them.

The Kyoto mechanisms are: 

Emissions trading – known as “the carbon market"



Clean development mechanism (CDM)



Joint implementation (JI).

The mechanisms help stimulate green investment and help Parties meet their emission targets in a cost-effective way.

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TYPES OF KYOTO MECHANISM

Clean Development Mechanism

Joint Implementation

International Emission Trading

The Clean Development Mechanism is a mechanism, which allows developing countries to receive investments for the construction of new facilities in order to replace old ones.

Joint Implementation is a mechanism that permits the industrialized countries, which are unable to reach their reduction target solely by domestic means, to reduce their greenhouse gases emissions through investing in the economies of the countries in transition. The donors receive a share of the reduced emissions.

International Emission Trading is a mechanism that allows trading the parts of the reduced emissions, which exceed the commitments. Countries who fail to diminish their emissions can buy these 'credits' from countries, which have reduced their greenhouse gases below the committed level. Emission trading is a market based scheme for environmental improvement that allows parties to buy and sell permits for emissions or credits for reductions. Emission trading allows established emission goals to be met in a cost effective way, letting the market determine the lowest cost pollution control opportunities. Emissions trading can work within a region or country or on a global basis.

Chart 1: Types of Kyoto Mechanism

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4.1. INTRODUCTION: The CDM market is like any other commodity market. The CDM market is rising sharply and is getting matured with time. Currently, it is the second largest carbon market after the EUA market. The market is nearly doubling every year. Majority of the trading is done in the Primary market. The secondary market is not as expanded as the primary mainly because of the high volatility of the carbon prices. The CER market is an evolving market and has not yet become matures enough to be completely independent. The CER market is closely linked to EUA market. Thus the volatility of EUA market is inherently transferred to the CER market. Fluctuations in EUA market cause price fluctuations in CER market. The Buyers of CERs can be broadly classified into: 1. Compliance Buyers 2. Carbon Funds (e.g. Prototype Carbon Fund of World Bank) 3. Traders India is a big market for CDM projects. As per the rating system of Point Carbon, India ranks second in terms of attractiveness for CDM project participants. In other words, India has a good climate for investment into CDM projects. In the registered projects category, India has the largest share 31.00%. However, in the issued CER category, India ranks second after China. The total Number of projects registered till 17 March 2008 was 1023 and the total no of CERs issued were 196635114. However, the registration process is getting more and more stringent lately mainly to safeguard the mechanism‟s integrity and the quality of CERs.

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4.2. CLEAN DEVELOPMENT MECHANISM: The Clean Development Mechanism (CDM) is a mechanism whereby an Annex I party may purchase emission reductions which arise from projects located in non-Annex I countries. The carbon credits that are generated by a CDM project are termed Certified Emission Reductions (CERs) , expressed in tonnes of CO2 equivalent (tCO2-e). The key stages in the CDM project cycle are the initial feasibility assessment, development of a Project Design Document (PDD), host country approval, project validation, registration, emission reduction verification and credit issuance. The interdependencies of the activities that need to be undertaken as part of the process, and which stakeholders

are

responsible

for

carrying

out

each

activity.These

stakeholders include the CDM project developer and the CDM Executive Board (EB), as well as the Designated Operational Entity (DOE), responsible for validation and verification of the project. The CDM EB supervises the CDM under the authority and guidance of the Conference of the Parties. The EB‟s core tasks are the following: 

Accreditation of independent auditors for validation and verification



Review of validation reports and PDDs



Approval of new baseline and monitoring methodologies



Registration of projects



Issuance of CERs

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All CDM projects must satisfy certain requirements specified in either the Kyoto Protocol. These include requirements that the project: 

Complies with the eligibility criteria (e.g. sustainable development criteria) of the host country and other parties, and receives project approval by the host country



Provides real, measurable, and long-term benefits related to the mitigation of climate change using an approved baseline and monitoring methodology



Delivers reductions in emissions that are additional to any that would occur in the absence of the project activity



Does

not

result

in

significant

environmental

impacts

and

undertakes public consultation Each of these requirements is dealt with in greater detail below. HOST COUNTRY APPROVAL: Obtaining host country approval is a critical step in the CDM project cycle. Without it, a project is not eligible for the CDM. In order for a CDM project to receive formal host country approval, the host country must have ratified the Kyoto Protocol and have nominated a Designated National Authority (DNA) to the UNFCCC. The DNA is formally responsible for managing the CDM approval process in the host country. This approval should be provided in writing, in the form of a Letter of Approval (LoA). Such a letter must include: 

Confirmation that the host country has ratified the Kyoto Protocol



A statement that the host country's participation in the CDM is voluntary



A statement that the project contributes to the host country‟s sustainable development. 18 | P a g e

It is up to each DNA to specify rules and procedures for obtaining host country approval, including setting any criteria that will be applied in determining whether or not the project contributes to the host country‟s sustainable development. BASELINE AND MONITORING METHODOLOGY At the heart of CDM project development is a baseline study which quantifies the emissions reduced and therefore the carbon revenue potential of a project. The determination of a baseline is defined in a baseline

methodology.

Related

to

this,

the

procedures

for

the

measurement of the actual emissions reduced by a project over time are defined in a monitoring methodology. A CDM project can only be submitted for validation if it has been developed in accordance with an approved baseline and monitoring methodology. A baseline methodology describes each of the steps that must be taken to characterize baseline emissions, and ultimately to calculate the project emission reductions. To facilitate project development, the EB has set out a process through which methodologies developed for one project can be used for similar activities. The EB has approved a number of methodologies that can be applied to a variety of project activities.

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4.3. CDM PROCESS CYCLE:

CDM Process Cycle Procedure

Project Cycle

Key role

Project Design Project development (CDM concept Application)

Project Proponent

(Analysis, PIN, PDD, Buyer’s Letter of Intent)

Govt. Approval

Validation

DOE

UNFCCC Registration Project Implementation

Monitoring

CDM EB Project Proponent

Verification and Certification

CERs

DOE

CDM EB

PIN: Project Idea Note PDD: Project Design Document DOE: Designated Operational Entity CERs: Certified Emission Reduction EB: Executive Board (UNFCCC) UNFCCC: United Nations Framework Convention on Climate Change CDM: Clean Development Mechanism

Chart 2: CDM process flow

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Simplified CDM Process Flow Identification of Project and development of Project concept note

Project Developer

Development of project design document

Host country approval

Host Govt. (National Authority)

Submission of the PDD and host country approval validator

Project Developer

Make PDD completely available for 30 days

Operational Entity

Validation of Project

Operational Entity

Submission of validation report and PDD

Registration with the CDM

CDM executive board

Project implementation and monitoring

Project Developer

Verification and Certification

Operational Entity

Possible review by CDM executive board

CDM executive board

Issuance of CERs to project developers

CDM executive board

Chart 3: Simplified CDM process flow

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4.4. CHALLENGES IN CDM: Procedural delays in the CDM: In spite of its success, or perhaps even because of it, 7 the carbon market came under close public scrutiny in 2007-08. The success of the CDM is threatened by a creaking infrastructure that, despite some efforts to streamline, is struggling to process the overwhelming response from project developers worldwide in a timely manner. Procedural inefficiencies and regulatory bottlenecks have strained the capacity of the CDM infrastructure to deliver CERs on schedule, as too many projects await registration and issuance: 

Out of 3,188 projects in the currently pipeline, 2,022 are at validation stage.



Market participants report that it is currently taking them up to six months to engage a Designated Operational Entity (DOE), causing large backlogs of projects even before they reach the CDM pipeline.



Projects face an average wait of 80 days to go from registration request to actual registration.



The Executive Board has requested a review of several projects received for registration, has rejected some of them, and has asked project developers to re-submit their projects using newly revised methodologies. There is a very short grace period allowed to grandfather the older methodology, and the additional work adds to delays and backlogs.



Projects are currently taking an average of 1-2 years to be issued from the time they enter the pipeline. Over 70% of issued CERs come from industrial gas projects, with the vast majority of energy efficiency

and

renewable

energy

projects

remaining

stuck

somewhere in the pipeline

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Complex rules and the capacity constraint: DOEs, who are accredited to validate and verify CDM projects, are unable to keep up with a large backlog of projects awaiting registration, and are finding it difficult to recruit, train and retain qualified, technical staff to apply the complex rules consistently. As a result, some projects have been registered incorrectly, resulting in a call for more reviews being requested by the CDM Executive Board, which, in turn, causes even more delays. Important concerns have been voiced about CDM on issues of its additionality, its procedural efficiency and ultimately, its sustainability. Some critics of the CDM maintain that its rules are too complex, that they change too often and that the process results in excessively high transaction cost; they ask for relief from the rules. Other critics question whether certain project activities are truly additional, or whether CDM can create perverse incentives; they ask for even more rules. Impact of delays on carbon payments: CDM project registration and CER issuances are generally lower and slower than expected and regulatory efforts to reform and streamline the process are urgently needed. Delays for any reason in a project‟s schedule can jeopardize elements of its financing package, and ultimately its construction and implementation. Those delays, in turn, affect expected CER delivery schedule as well as dampen enthusiasm for further innovation, which is urgently needed to mitigate climate change. Delays in payments also increase a systematic bias in favor of those projects that can be self-financed by large, wealthy project developers. Projects that really need the carbon payments to overcome barriers are more likely to fail as a result of these delays. Conversely, projects that are not as reliant on carbon payments for their construction and implementation are more likely to be able to take the financial hit from the delays.

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5.1. INTRODUCTION: Under an emissions trading system, the quantity of emissions is fixed (often called a "cap") and the right to emit becomes a tradable commodity. The cap (say 10,000 tonnes of carbon) is divided into transferable units (10,000 permits of 1 tonne of carbon each). Permits are often referred to as "GHG units," "quotas" or "allowances." To be in compliance, actors participating in the system must hold a number of permits greater or equal to their actual emissions level. Once permits are allocated (by auction, sale or free allocation) to the actors participating in the system, they are then tradable. This enables emissions reductions to take place where least costly. 5.2. SHOULD THERE BE TRADING OF EMISSIONS? When a given volume of GHG‟s has been defined by an international agreement as permissible over a certain period of time, emission allowances become scarce goods. As demand will be higher than supply, allowances will command exchange value. This value will basically be determined by the size of supply on the one hand and by the perceived utility of fossil-based combustion (in the case of CO2) on the other. Where the threshold regulating the permissible amount of global emissions is set depends on what kind of risk is politically accepted over what period of time and for whom. The more inclusive the ethical storyline adhered to; the lower will most likely be the level of risk accepted. And the desire for combustion will, inter alia, depend on the extent to which a society has embarked upon a sustainable development path; the more national income is decoupled from carbon emissions and the more well-being from national income, the less will be the pressure to emit. Trade regimes have been criticized for turning parts of the global commons into saleable pieces of property, i.e. commodities. Indeed, such a conception would clearly contradict ethical narratives that see the 24 | P a g e

atmosphere as common heritage of mankind, as integral to the Earth‟s bio-community, or as God‟s creation. Possibly for these reasons, the Indian government has demanded to ensure “that the Protocol has not created any asset, commodity or goods for exchange”. However, these objections would not hold if one considered the price of emission permits not as a rent yielded by a property, but as a fee to be paid for the temporary right to use the atmospheric commons beyond its sink capacity. In fact, the temporary nature of permits along with the fact that a price tag will be attached not to the use but to the overuse of the commons, suggests interpreting the price for a permit not as a price for acquired property but the price for obtaining a user right. Money gives the right to access, but not to ownership. Following this consideration, a trade in permits takes on a different meaning. It would not be instituted in the first place for identifying the most efficient allocation of abatement investments, but for forming the price of user rights. After all, the market, under conditions of relative symmetry

among

players,

is

the

most

ingenious

technology

for

determining prices. Carbon Taxes: Carbon taxes are simply direct payments to government, based on the carbon content of the fuel being consumed. Given that the primary objective of the abatement policy is to lower carbon dioxide emissions, carbon taxes make sense economically and environmentally because they tax the externality directly. Coal generates the greatest amount of carbon emissions and is therefore taxed in greater proportion than oil and natural gas, which have lower carbon concentrations (Coal contains .03 tonnes of carbon per million Btu of energy, while oil and natural gas contain only 0.024 & 0.016 tonnes respectively).

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5.3. WHICH ONE’S BETTER, EMISSION TRADING/CARBON TAXES? There is no simple yes or no answer, and the policies are not necessarily mutually exclusive. Several important advantages and drawbacks of the respective policies are outlined below. The Case for Emissions Trading: 

A well functioning emissions trading system allows emissions reductions to take place wherever abatement costs are lowest, regardless of international borders. E.g.: If emissions reductions are cheaper to make in India than in France, emissions should be reduced first in the former where costs are lower.



Emission

trading

has

the

advantage

of

fixing

a

certain

environmental outcome - the aggregate emissions levels are fixed, and companies/countries pay the market rate for the rights to pollute. This also makes emissions trading more conducive to international

environmental

agreements,

such

as

the

Kyoto

Protocol, because specific emissions reduction levels can be agreed upon more easily than tax rates or policy instruments, which may vary in appropriateness and applicability between states. 

Emission

trading

is

more

appealing

to

private

industry.

By

decreasing emissions, firms can actually profit by selling their excess greenhouse gas allowances. Creating such a market for pollution could potentially drive emissions reductions below targets. In general, transferring resources between private entities is more appealing than transfers to government. 

Emission trading is better equipped than taxes to deal with all six GHGs included in the Kyoto Protocol and sinks (e.g. trees which absorb and store carbon) in one comprehensive strategy. Each gas has a "greenhouse gas potential". Thus firms emitting more than one GHG have more flexibility in making reductions.

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The Case for Carbon Taxes: 

A carbon tax would offer a broader scope for emissions reductions. Trading systems can only be implemented among private firms or countries - not individual consumers (transaction costs would be prohibitively high if commuters needed permits to fill up their car with

gas).

Carbon

taxes

extend

to

all

carbon-based

fuel

consumption, including gasoline, home heating oil and aviation fuels. Trading systems may not be able to reach parts of the transportation and service sectors which could account for 3050% of emissions. 

A system of tradable permits entails significant transaction costs, which include search costs, such as fees paid to brokers or exchange institutions to find trading partners; negotiating costs; approval costs, such as delays or fees incurred during the approval process; and insurance costs. Conversely, taxes involve little transaction cost, over all stages of their lifetime.



Carbon taxes have dynamic efficiency advantages that trading lacks because

taxes offer

a

permanent incentive

to

reduce

emissions. Trading systems may not be able self-adjust in response to rapid change, and thus provide the permanent incentive of a tax system to reduce emissions. In short, emissions trading must have some method of removing permits from the system or other method of ratcheting-up permit prices. 

Emissions trading proposals are highly complicated and technical, unlike taxes which are an extremely familiar instrument to policymakers. Many technical issues would need to be resolved before trading could begin, including treatment of sinks, different GHGs, monitoring, enforcement, etc. Ongoing costs are also low for tax systems because of the lack of monitoring and enforcement requirements.

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

Carbon taxes earn revenue, which can be "recycled" back into the economy by reducing taxes on income, labor and/or capital investment. This is often referred to as a "revenue neutral" tax and may be part of a broader program of "environmental tax reform" (ETR) which attempts to shift the tax burden from "goods" like labor, to "bads" like pollution. Evidence indicates that there can be profound employment, distributional and political benefits to such an approach. Permit systems have the potential to earn revenue, but only if permits are auctioned.

5.4. THE POLITICS: WHO LIKES WHICH POLICY, AND WHY? United States is the strongest proponent of emissions trading and fought hard to

include

trading

in the

Kyoto

Protocol. The

reasons are

straightforward. Relative to other industrialized countries, the US is energy inefficient and has high per capita carbon dioxide emissions levels. Thus carbon taxes would penalize the US relative to other, less fossil fuel dependent nations. US industry is also strongly against any taxation measures to achieve GHG reductions. Trading would allow US firms to purchase emissions allowances from other countries, and avoid domestic reductions. The

European

Union

has

traditionally

been

in

favor

of

strong

coordinated policies, such as energy/carbon taxes, among countries. Because the EU is already relatively energy efficient, carbon taxes would be less of a burden than in the US. In Kyoto, the EU was against emissions trading, but was unable to overcome US support for trading. Therefore, EU efforts have been channeled into developing effective rules and guidelines for a trading system. The Russian Federation and the Ukraine are major supporters of emissions trading, and would stand to gain financially. Their emissions reduction targets are 0%; reductions by 2008-2012 based on 1990 levels 28 | P a g e

(i.e. to remain at 1990 levels through 2012). However, because of the economic collapse of the former Soviet bloc, and the closure of inefficient power plants, these countries are already 30%; below 1990 levels. If they were allocated trading permits, they would be able to immediately flood the market and receive major cash inflows. Developing countries are extremely cautious of emissions trading, and view it primarily as a "loophole" that the US and Japan can use to avoid their domestic responsibility. They are in favor of rules and guidelines that ensure equitable allocation of allowances and monitoring provisions. Currently, trading is being discussed only as a means for Annex 1, since developing countries do not have binding emissions reduction targets. However, if the system were to be extended globally in the future, developing countries would demand that permit allocations be based on population, rather than historic national emissions levels. This position is indicative of the strong equity concerns held by developing countries. Developing countries favor the principle of carbon taxes - as long as they are

levied

on

rich

countries

and

not

poor

ones.

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6.1. INTRODUCTION:

Joint implementation (JI) is a project-based mechanism by which one Annex I Party can invest in a project that reduces emissions or enhances sequestration in another Annex I Party, and receive credit for the emission reductions or removals achieved through that project. The unit associated with JI is called an emission reduction unit (ERU). ERUs are converted from existing AAUs and RMUs before being transferred. JI does not affect the total assigned amount of Annex I Parties collectively; rather it redistributes the assigned amount among them. There are two approaches for verification of emission reductions under JI, commonly called „JI Track 1‟ and „JI Track 2‟. Under Track 1, a host Party that meets all of the eligibility requirements may verify its own JI projects and issue ERUs for the resulting emission reductions or removals. Annex I Parties may also choose to use the JI Track 2 verification approach. The eligibility requirements for JI Track 2 are less strict than those for Track 1. Under JI Track 2, each JI project is subject to verification procedures established under the supervision of the Joint Implementation Supervisory Committee. JI Track 2 procedures require that each project be reviewed by an accredited independent entity to determine whether the project meets the requirements established under Article 6. The emission reductions or removals resulting from the project must also be verified by an accredited independent entity in order for the Party concerned to issue ERUs. All Annex I Parties participating in JI, irrespective of whether they use Track 1 or 2, are required to inform the secretariat of their national guidelines and procedures for approving, monitoring and verifying these projects. They are also required to make information about each project publicly available.

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6.2. JI IN 2006-07: JI project market saw 20.5 Mt CO2e transacted in 2006. Of that, 16.7 Mt CO2e represents confirmed transactions registered in Point Carbon‟s transaction database while the remaining 3.8 Mt CO2e are estimated using data from Point Carbon‟s project database and regular contact with market participants. The quarterly average was 5.1 Mt, with a somewhat smaller volume of contracts in the second quarter and higher volumes in Q4.

Reported ERU prices in 2006 were between €4.5 and €12.5. The price did not see any abrupt changes, partly because JI is still dominated by governmental buyers which have limits on their budgets and are not very flexible with the prices they offer. They also usually negotiate the price at early stages of the projects, and the resulting price at the date of contract signature does not necessarily reflect the latest market trends. 6.3. JI IN 2007-08: During 2007, 16 Emission Reduction Purchase Agreements (ERPAs) with a total volume of 12.7 Mt were confirmed by market players. The ERUs for these contracts are generated by projects represented by renewables, nitrous oxide, biomass, energy efficiency and fugitive emissions types. It is notable that the N2O projects account for one-third of total volume, followed by renewables and landfill projects (19 and 13 % respectively). Early-stage negotiations have been reported by market players in energy efficiency and landfill gas projects.

On average, ERU price ranges have increased compared to the previous year, with the price range across contracts becoming narrower. While cited ERU prices for standard off-take contracts varied from €6 to €10 depending on project risk, sellers‟ expectations for the ERU price were

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higher due to the significant increase of CER prices throughout the past year. In 2007, the numbers and volumes of projects submitted to the JI supervisory committee (JISC) for verification were boosted. Overall, 84 projects with a total volume of 117m ERUs were submitted to the JI Supervisory Committee (JISC) for public comment during 2007, taking the pipeline to a total of 107 projects that are capable of generating up to 34.5m ERUs annually during 2008 – 2012.

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7.1. INTRODUCTION: A carbon trading system allows the development of a market through which carbon (carbon dioxide) or carbon equivalents can be traded between participants, whether countries or companies. Each carbon credit is equal to one hundred metric tons of carbon dioxide, which can be traded or exchanged in market. TYPES CARBON TRADING: There are two kinds of carbon trading – Emission trading and trading in Project-based Credits. The two categories are put together as Hybrid trading System. Carbon trading is also called Pollution trading. 1. EMISSION TRADING: A company can reduce its emission by half the cost of allowance bought from other company. On the other hand, a company with higher expenditure for reduction of its emissions buys the required allowance from other company to save its emission cost. In either ways, the company saves half the expenditure they would have to spend for reduction of carbon emissions without carbon trading. Some emissions trading scheme allow companies to save any surplus allowances they have for their own use in future years, rather than selling them. Emission trading is also sometimes call „cap-and-trade‟. The development of emissions trading over the course of its history can be divided into four phases: I.

Gestation: Theoretical articulation of the instrument and, independent of the former, tinkering with "flexible regulation" at the US Environmental Protection Agency

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II.

Proof of Principle: First developments towards trading of emission certificates based on the "offset-mechanism" taken up in Clean Air Act in 1977.

III.

Prototype: Launching of a first "cap and trade" system as part of US Acid Rain Program, officially announced as a paradigm shift in environmental policy, as prepared by "Project 88", a network building effort to bring together environmental and industrial interests in the US

IV.

Regime formation: Branching out from US clean air policy to global climate policy and from there to the European Union, along with the expectation of an emerging global carbon market and the formation of the "carbon industry"

2. TRADING IN PROJECT-BASED CREDITS: Government and World Bank subsidized credit for such project-based trading to the companies, covering part of the cost of building the projects and calculating how much carbon dioxide equivalent they save. Project-based Credit trading includes „baseline-and-credit‟ trading and „offset‟ trading. 3. HYBRID TRADING SYSTEM: In Hybrid trading system, both emission trading and offset trading are used and try to make allowance exchangeable for project-based credits. Hybrid trading system is enormously complex as it is not only difficult to try to create credible „credit‟ and make them equivalent to „allowance‟. Mixing emission and project-based credit trading also changes the economics

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7.2. UNDERSTANDING CARBON TRADING: Carbon trading, or more generically emissions trading, is the term applied to the trading of certificates representing various ways in which carbonrelated emissions reduction targets might be met. Participants in carbon trading buy and sell contractual commitments or certificates that represent specified amounts of carbon-related emissions that either: 

are allowed to be emitted;



comprise

reductions

in

emissions

(new

technology,

energy

efficiency, renewable energy); or 

Comprise offsets against emissions, such as carbon sequestration (capture of carbon in biomass).

People buy and sell such products because it is the most cost-effective way to achieve an overall reduction in the level of emissions, assuming that transaction costs involved in market participation are kept at reasonable levels. It is cost-effective because the entities that have achieved their own emission reduction target easily will be able to create emission reduction certificates "surplus" to their own requirements. These entities can sell those surpluses to other entities that would incur very

high

costs

by

seeking

to

achieve

their

emission

reduction

requirement within their own business. Similarly, sellers of carbon sequestration provide entities with another alternative, namely offsetting their emissions against carbon sequestered in biomass. Emissions trading are one of the flexibility mechanisms allowed under the Kyoto Protocol to enable countries to meet their emissions reduction target. Countries/companies with high internal emission reduction costs would be expected to buy certificates from countries or companies with low internal emission reduction costs. 35 | P a g e

The latter entities would also be expected to maximize their production of low cost emission reduction so as to maximize their ability to sell certificates to high cost entities. The overall outcome is that the emission reduction target is met, but at a much lower cost than would be incurred by requiring each entity to achieve the emission reduction target on their own. 7.3. CARBON TRADING MARKET MECHANISM: The simplest type of carbon trade involves an entity preparing a contract that describes and specifies the kind of activity they are undertaking to either reduce or offset emissions. The contract may or may not be independently verified, although doing so will increase buyer confidence and probably attract a higher price. This contractual commitment is then sold to another entity that wishes to make use of the specified amount of the reduction or offset. Contractual commitments are usually traded "over the counter" (OTC), which means that the trade is usually a bilateral one between a willing buyer and a willing seller without the need for a market to exist. OTC trades are usually single trades where the terms are either partially or fully confidential. OTC markets are relatively simple and operate where there is limited "liquidity" (that is, not many trades are occurring) or where the product being traded is somewhat unique for each trade. In contrast, a carbon trading market is more akin to a share market. Products traded on a market are generally more homogeneous; for example, all types of carbon sequestration that meet the rules defining the creation of a "carbon sequestration certificate" may be deemed to be identical in the market. This both increases the liquidity of the product and helps market participants understand and have more confidence in the product being traded. The existence of a set of enforced rules

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associated with the creation of both emission reduction and emission offset certificates also increases market confidence in the product.

CARBON NETWORK

Seller

Buyers Exchange

Banks Individuals

Annex 1 country

Trading exchange

Banks

Banks NGO & Govt. Consultants

Individuals Brokers & Traders

Consultants

Annex 2 & 3 countries

Intermediary service providers

Others

Others

Consultants

NGO & Government

Chart 4: CARBON NETWORK DIAGRAM

Carbon network or market is a complex structure as seller can sell carbon credits in primary and secondary market and also seller and buyer can have direct or indirect relation with or without help of consultant and intermediaries. But by entry of brokers and consultants in market trading becomes easier as compared to earlier trading platforms. Consultants and brokers have opened many platforms for seller and buyer to have smooth flow of carbon credits. Also consultants help to mitigate different types of risk associated with carbon trading.

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7.4. PARTIES INVOLVED IN CDM PROJECT DEVELOPMENT AND CARBON TRADING:

Experts

Rating agencies

Other Lenders

Rating Advisory contracts

Equity provider

Host government

Lender Guarantee

Shareholder’s Agreement

Loan Agreement

Supplier

Project entity

Permits and licenses

Supply contract

Construction contract

Constructor

Buyers Purchase contract

Insurance contract

Insurer

Operation & maintenance contract

Operator

Chart 5: ENTITIES INVOLVED IN CDM PROJECT DEVELOPMENT

Project entity: The project entity is often a Special Purpose Vehicle such as a joint venture company or a limited partnership set up specifically to undertake the project. Creating a Special Purpose Vehicle may be useful in order to keep a project at arm‟s length from the project sponsors, for legal, tax or financial reasons. Alternatively, the project entity may be an individual, an existing company, a government agency, a charity, and NGO or community organization. A project may also encompass several different entities. In such cases it is critical to have clear contractual arrangements in place specifying how the different entities are going to work together to implement the project. 38 | P a g e

Sponsor: Sponsors are those individuals, companies or other entities that promote or support a project because they have a direct or indirect interest in the project. Sponsors can include owners of the land on which the project will be situated, contractors, suppliers, buyers of the project‟s outputs, or other users of the project. Lender: If the project is financed through debt, one or more banks may be involved in providing this. A loan from a group of banks is known as a syndicated loan. Typically one of the banks will take the lead role in arranging the finance and syndication agreements, while another (called the engineering or technical bank) will monitor the technical aspects of the project. Others may be appointed to deal with other specific aspects such as insurance. Other types of lenders may include individuals, corporations, contractors, community groups and institutional investors such as the World Bank and other international agencies. Equity provider: Equity may be provided by project sponsors or third party investors. Equity providers will wish to ensure that the project produces a return on their investment as set out in the business plan or prospectus. Constructor: Construction is usually carried out by specialist contractors who have responsibility for the completion of the works, and often have to assume liability for finishing construction on time and to budget. Lenders will usually require contractors to demonstrate a good track record in completing the same or similar project activities.

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Operator: Operation of the project may be carried out by the project entity, one of the sponsors, or a third party appointed to be responsible for the operation and maintenance of the project facilities once completed. Supplier: Various companies will supply goods and services to the project. Lenders will generally prefer supplier agreements and contracts to be in place for the delivery of essentials such as fuel and equipment. Equipment suppliers will generally be required to have a track record of supplying the relevant equipment and to provide equipment performance guarantees. Buyer: A project may produce one or more outputs. Lenders will wish to have contracts in place with buyers of the outputs constituting the majority of the project‟s future cash flow. The nature of these contracts will be subject to particular scrutiny and the terms of a loan may well be dependent upon factors such as the minimum price level in a contract and how various risks are apportioned between the buyer and the project entity. In order for a lender to place any reliance on a purchase agreement as an indication of a project‟s ability to repay a loan, the lender will need to be satisfied as to the credit-worthiness of the buyer. Insurer: Insurers can assist in identifying and mitigating risks associated with the project. If a risk is to be mitigated by purchasing insurance, the lender will need to be satisfied as to the track record and credit-worthiness of the insurer. Rating agencies: The rating agencies (e.g. Moody‟s, Standard & Poor‟s, and Fitch Ratings) may be involved if the financing of the project involves the issue of securities. 40 | P a g e

Experts: Project sponsors and lenders will often call upon external experts to advise them on key technical, engineering, environmental and risk aspects of a project. Experts need to be able to demonstrate a track record of expertise in the relevant area. Host government: The objectives and role of the host government will vary but may involve economic, social and environmental guidelines and issuance of relevant consents, permits and licenses. In some countries, the host government may be involved through state owned or controlled companies that may take on any of the above roles in relation to the project. 7.5. THE ADVANTAGES OF CARBON TRADING: 1. Carbon credit trading can open up a new cash source to companies

who are able to maintain their emission levels well within the permissible limits. 2. The overall ecological balance is preserved 3. The

company

or

country

gets

rewarded

for

applying

clean

technology in its production process. 4. A much better corporate and social image which wins public

approval 5. Encourages activities like tree plantings which would help reduce

soil salinity, improve water quality and enhance biodiversity. 7.6. KEY RISKS AND UNCERTAINTIES: The key risks & uncertainties associated with carbon trading markets are: 1. The extent to which the Kyoto Protocol guidelines are implemented & followed 2. The attitude of US which is the biggest polluter and had refused to sign the treaty 3. The final rules and decisions relating to an emissions trading market

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The first Kyoto commitment period, which ends on 31 December 20121, is set to be dominated by the EU ETS and CDM on the market side. The interlinked EU ETS and CDM markets will see the greatest cumulative volume

and

value,

as

they

are

consolidating

and

getting

more

sophisticated. In addition, the next five years will see the JI market deliver its first credits and possibly an emerging market in national Kyoto allowances or AAUs. Beyond Kyoto, the ten-state RGGI has already produced the first US compliance trade, and more is expected.

1

Source:unfccc.org; Point carbon. 42 | P a g e

8.1. EXPECTATIONS FOR GLOBAL 2009 VOLUMES AND TRENDS: The total traded volume in global carbon markets in 2008 was 2.7 Gt, valued at just over €40 bn. We expect this to grow to 4.2 billion tonnes CO2e in 2009, up 56 percent from 2008. The EU ETS maintains its position as the largest market. Traded volume in the EU ETS is expected to be 2.6 Gt in 2009. At current prices, this would be equivalent to €63bn. The expected increasing traded volumes will continue as the global market becomes more mature and sophisticated. An increase in contract types, more players and markets and greater competition between market players (such as exchanges and brokers) will together generate momentum for higher volumes. As a consequence, liquidity providers will be attracted to this market. On the other hand, turbulence in global financial markets may contribute to less vigorous growth in transacted volumes. The expected 2009 carbon market will differ from 2008 in several ways. First, the EU ETS Phase 2 is considerably tighter than Phase 1. Moreover, the start of short-term prompt trading for Phase 2, where only forward trading was seen previously, is expected to contribute to increased traded volumes. Second, the EU climate and energy package, launched on 23 January this year, has sent a potentially bearish long-term signal to the project markets by placing uncertainty on the future of the Clean Development Mechanism. More immediately, the reduced average credit limits on CER/ERU and the tight Phase 3 are expected to dampen EUA-sCER swaps. Third, new policies in key countries such as the US and Australia imply that we will see trading in new markets. This will be accelerated by the ongoing negotiations under the Bali action plan.

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8.2. EUA MARKET: In the EU ETS which covers about 2.1bn tonnes CO2e annually of underlying assets, new financial instruments are developing and their use is spreading. What are the main developments in the EU ETS market from a trading perspective? What effects does the EU ETS have on company behavior when it comes to abatement, investment, production and other ways of managing emissions? And beyond current bid/offer spreads, what prices do compliance and financial players foresee for the period?

8.2.1 EU ETS IN 2009 The 2008 volume in the OTC market and on the exchanges corresponds to almost five times the annual Phase 2 shortage of about 300 Mt in the power and heat sector. This gap needs to be filled every year. The estimated gap in 2009 this volume will increase to about seven times the power and heat gap. There are several reasons why growth is expected: First, the tightness of the Phase 2 cap is expected to increase the traded volume compared to 2008, simply because more players are short of allowances. Industrials that were long in Phase 1 are in general balanced or slightly in Phase 2, while power and heat installations that were short in Phase 2 have now become even shorter. Only 15 percent of the respondents expect to be long in Phase 2, that is, to have an allocation that is sufficient for compliance and surplus EUAs to sell. About one-third – expected to be in the power sector – will need their full allocation, credit limit and extra EUAs. Shortness will mean more trading since fewer can ignore the EU ETS. As a consequence, Phase 2 volume will go up compared to Phase 1. Second, a tighter cap gives higher volatility because prices become more sensitive to changes in fundamentals. This will be attractive to financial players as well as compliance traders, consequently increasing the traded volume.

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8.3. TOWARDS 2012 – AND BEYOND: In its rulings on Phase 2 national allocation plans, which took place from November 2006 to October 2007, the EC was unquestionably tough. As a consequence, the caps in 2008-2012 are much tighter than in Phase 1. The initial shortage in the 2008-2012 periods creates a demand for real emission reductions, either at home or in non-Annex 1 countries. The overall cap for Phase 2 for EU-28 (EU-27+Norway) is currently at 2 103.5 Mt/year. In total, the EC has cut the allocation by 245 Mt/year – or 10.4 percent – compared to the allocation suggested in the NAPs. The largest cuts in volume terms have been requested in Poland (76 Mt), Germany (29 Mt) and Bulgaria (25 Mt). The largest cuts in relative terms have been requested in countries located in Eastern Europe, with the three Baltic States (about half) and Bulgaria (37%) at the top of the list. The credit limits, defined as the maximum CDM/JI volumes that can be used for compliance purposes in Phase 2, were set quite generously, as every country was guaranteed a minimum 10 percent. It is generally accepted that the EC did a good job in setting the caps, but was more generous in setting the credit limit. Consequently, Phase 2 could in theory produce no emissions reductions in Europe, just credit imports from CDM and JI countries. The Commission corrected this through the EU ETS review – and the Phase 3 proposal – in January this year. The fundamental balance of the EU ETS in Phase 2 is now merged with that of Phase 3 (2013-2020). This is because EUAs can be banked without limits from one year to the next. Higher Phase 3 prices should thus also translate into higher Phase 2 prices. All the proposals in the EC energy and climate package are to some extent related to the overall EU climate and energy targets, i.e. a 20 percent reduction in GHG emissions, a 20 percent share of renewables in final energy consumption and a 20 percent increase in energy efficiency. 45 | P a g e

All targets would be achieved by 2020. The commission‟s climate and energy package comprises a number of elements: 

Amendments to the EU ETS;



A proposed burden-sharing among EU countries for emissions not covered by the EU ETS;



Promotion of renewable energy in the EU, including national targets;



Promotion of carbon capture and storage;



Improvement in energy efficiency; and



Changes to state aid rules to facilitate emission reductions

Under the EC proposal, the future allocation in the EU ETS would be reduced by 1.74% per year compared to the allocation in the “mid-point” of Phase 2 (2010). This gives a maximum amount of allowances to be issued in 2020 of 1720 Mt. On average, the annual allocation in Phase 3 will be 1846 Mt. Compared to the reported 2005 emissions, the average Phase 3 allocation implies a 14% reduction, while the annual allocation in 2020 is equivalent to a 21 percent cut from the 2005 level. The Commission has not yet concluded on distribution of allowances at the sector and installation levels. At this stage, the Commission states that no installation will receive a free allocation in 2013 that is higher than its average emissions in the 2005-2007 period. On auctioning, however, the rules are pretty clear. For the power sector, refineries and carbon capture and storage plants, all allowances would be auctioned from 2013. Installations in other sectors will receive 80% of the allowances for free in 2013 decreasing to zero in 2020. Under current EU legislation, the overall credit limit for the 2008-2012 period is set at around 1 400 Mt (about 280 Mt/year). However, unless a “satisfactory” global climate deal is reached and the EU commits to an overall reduction target beyond 20 percent, the Phase 2 credit limit would effectively be extended to also cover Phase 3.

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This implies that the 1 400 Mt limit now in place for Phase 2 would apply for the period 2008-2020, giving an average import potential of just above 100 Mt per year. This corresponds to a credit limit of nearly 6 percent for the 2008-2020 period for the installations included in the scheme in Phase 2. In the event of a “satisfactory” international agreement, the EU might increase the overall reduction target from 20 percent to up to 30 percent. The additional reductions required by a 30 percent target would be split between the EU ETS and the non-trading sectors. The EU ETS would take on an additional reduction corresponding to its relative reduction effort in the 20 percent scenario. If the EU should aim for a 30 percent reduction target, the cap in 2020 would be set just below 1 400 Mt, while the average allocation in Phase 3 would be set at about 1 630 Mt/year. Not surprisingly, a “satisfactory” international agreement would thus imply a significantly tighter allocation in the EU ETS. At the same time, a 30% reduction target will also lead to increased use of CERs/ERUs in Phase 3. Half of the additional effort could be covered by import of credits, under the proposal. Until now, Phase 2 and Phase 3 have been linked through the possibility of banking allowances into Phase 3. However, by extending the Phase 2 credit limit to 2020, the Commission has effectively merged Phases 2 and 3 of the scheme.

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9.1. INTRODUCTION: The sudden boom in the carbon market has greatly helped Indian industries to cash in on the carbon trading business. India certainly being the preferred location for carbon credit buyers or project investors because of its strategic position in the world today. India is considered as the largest beneficiary, claiming about 31 per cent of the total world carbon trade

through the Clean Development

Mechanism (CDM). It is expected to rake in at least Rs 22,500 crore to Rs 45,000 crore over a period of time and Indian companies are expected to corner at least 10 per cent of the global market in the initial year. Carbon Trading has potential of exploring Indian market worth 18000 Cr. Under the Kyoto Protocol, between 2008 and 2012, developed countries have to reduce emissions of greenhouse gases to an average of 5.2 per cent below the 1990 level. They can also buy CERs from developing countries, which do not have any reduction obligations, in case their industries are not in a position to lower the emission levels themselves. One tonne of carbon dioxide reduced through the Clean Development Mechanism (CDM) project, when certified by a designated entity, becomes a tradable CER. Developed countries have to spend nearly $300 to $500 for every tonne reduction in CO2, against $10 to $25 to be spent by developing countries. In developing countries like India, the emission levels are much below the target fixed by the Kyoto Protocol. So, they are excluded from reduction of GHG emission. On the contrary, they are entitled to sell surplus credits to developed countries. The European countries and Japan are the major buyers of carbon credits. The UNFCCC divides countries into two main groups: A total of 41 industrialized countries are currently listed in the Convention‟s Annex-I, including

the

members

of

relatively the

wealthy

Organization

industrialized for

countries

Economic

that

were

Co-operation

and

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Development (OECD) in 1992, plus countries with economies in transition (EITs), including the Russian Federation, the Baltic States, and several Central and Eastern European States. The OECD members of Annex-I (not the EITs) are also listed in the Convention‟s Annex-II. There are currently 24 such Annex-II Parties. All other countries not listed in the Convention‟s Annexes, mostly the developing countries, are known as non-Annex-I countries. They currently number 145. Annex I countries such as United States of America, United Kingdom, Japan, New Zealand, Canada, Australia, Austria, Spain, France, Germany etc. agree to reduce their emissions (particularly carbon dioxide) to target levels below their 1990 emissions levels. If they cannot do so, they must buy emission credits from developing countries or invest in conservation. Countries like United States of America, United Kingdom, Japan, Newzealand, Canada, Australia, Austria, Spain etc are also included in Annex-II. Developing

countries

(non-Annex

I)

such

as

India,

Srilanka,

Afghanistan, China, Brazil, Iran, Kenya, Kuwait, Malaysia, Pakistan, Phillippines, Saudi Arabia, Sigapore, South Africa, UAE etc have no immediate restrictions under the UNFCCC. This serves three purposes: a) Avoids restrictions on growth because pollution is strongly linked to industrial growth, and developing economies can potentially grow very fast. b) It means that they cannot sell emissions credits to industrialized nations to permit those nations to over-pollute. c) They get money and technologies from the developed countries in Annex II.

India comes under the third category of signatories to UNFCCC. India signed and ratified the Protocol in August, 2002 and has emerged as a 49 | P a g e

world leader in reduction of greenhouse gases by adopting Clean Development Mechanisms (CDMs) in the past few years. According to Report on National Action Plan for operationalizing Clean Development Mechanism (CDM) by Planning Commission, Govt. of India, the total CO2-equivalent emissions in 1990 were 10,01,352 Gg (Giga grams), which was approximately 3% of global emissions. If India can capture a 10% share of the global CDM market, annual CER revenues to the country could range from US$ 10 million to 300 million (assuming that CDM is used to meet 10-50% of the global demand for GHG emission reduction of roughly 1 billion tonnes CO2, and prices range from US$ 3.55.5 per tonne of CO2). As the deadline for meeting the Kyoto Protocol targets

draws

nearer,

prices

can

be

expected

to

rise,

as

countries/companies save carbon credits to meet strict targets in the future. India is well ahead in establishing a full-fledged system in operationalising CDM, through the Designated National Authority (DNA). Other than Industries and transportation, the major sources of GHG‟s emission in India are as follows: 

Paddy fields



Enteric fermentation from cattle and buffaloes



Municipal Solid Waste

Of the above three sources the emissions from the paddy fields can be reduced through special irrigation strategy and appropriate choice of cultivars; whereas enteric fermentation emission can also be reduced through proper feed management. In recent days the third source of emission i.e. Municipal Solid Waste Dumping Grounds are emerging as a potential CDM activity despite being provided least attention till date.

50 | P a g e

9.2. PRESENT STATUS OF DUMPING GROUNDS IN INDIA: In India, due to increased population & commercial development, cities are facing problems of MSW (Municipal Solid Waste) disposal. The urban population in larger towns and cities in India is increasing at a decadal growth rate of above 40%. There are no Sanitary Landfill sites in India at present. Municipal Solid Waste is simply dumped without any treatment into land (depressions, ditches, soaked ponds) or on the outskirts of the city in an unscientific manner with no compliance of regulations. The existing dumping grounds in India are full and overflowing beyond capacity. It is difficult to get new dumping yards and if at all available, they are far away from the city and this adds to the exorbitant cost of transportation. A study made by CPCB, (2000) shows that the cumulative requirement of land for disposal of MSW in India would reach around 169.6 km2 by 2047 as against 20.2 km2 in 1997. Various processes/technologies available to reduce the

amount of

Municipal Solid Waste are as follows: 1. Physical (a. Pelletisation) 2. Biochemical (a. Aerobic Composting b. Anaerobic Digestion) 3. Thermal (a. Incineration b. Gasification) Among the above options/technologies following are considered as favorable to implement in India: 1. Pelletisation, 2. Anaerobic digestion using bio-methanation technology for production of power, 3. Production of organic manure using controlled aerobic composting. In India the segregation of municipal solid waste at source or at centralized/decentralized centre is not in practice on a large scale. Hence, 90% of Municipal Solid Waste is dumped in a mixed form in the open dumping yards without any pretreatment.

51 | P a g e

On the other hand, technology required in the above mentioned three options needs waste to be segregated first and then can be subjected to further processing. To carry out segregation of bulk amount of municipal waste at the dumping ground is practically impossible. It is not only massive but tedious. Bulk segregation requires not only substantial large scale labour but also considerable amount of investment. All these factors make the above three technologies unviable for existing dumping grounds. The waste in the dumping ground undergoes various anaerobic reactions producing offensive odorous gases such as CO2, CH4, H2S and Mercaptans, which foster harmful pathogens and lead to environmental, social and public health issues. The approximate methane emission all over India as per 2001 census was calculated using an IPCC default (1996) method by NSWAI. The total quantity of methane emitted out of Municipal Solid Waste generated in India as a whole was approximately 4612.69 MT/day. An economic feasibility study done by IGIDR (Indira Gandhi Institute of Development Research) for Mumbai city indicates that for a total population of 10 million producing 1.82 MT of MSW per year, the net methane that can be produced is equivalent to about 8.5 GJ (Giga Joules). According to TEDDY (2002-2003) the energy recovery potential from different waste is as shown in the following Fig. Energy recovery potential of MSW is 900 MWe out of total 1700 MWe amounting to about 53%. Thus, the utilization of MSW dumping grounds for energy production would mean a favorable and useful solution to the existing Municipal Solid Waste disposal problem. To efficiently recover the gases, MSW Dumping Ground Projects should primarily have a landfill gas collection technology by means of the following measures: 1. Implementation of vertical and/or horizontal pipes for collection of landfill gases. 2. Construction of vertical gas extraction domes.

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3. Construction of venting equipment in order to create underpressure in the landfill body to prevent uncontrolled emissions of landfill gas. 4. Gas Generator installed at LFG Through sale of CERs the project will aid in: 1. Gaining annual CER revenues for the country 2. Locally achieving: • Reduction in poverty by creating jobs for urban poor. • Safe and better working conditions for the informal sector. • Better environmental quality(Less odour, leachate, and disease vectors) • Enhanced public awareness on Solid Waste Management and recycling. • Improvement in the quality of life of the city. • Efficient resource utilization • Contribution to reduction of foreign expenditures (Macro-economic Indicators) • The increase in life of the dump sites. • Considerable amount of power to the city. • Reduction in cost on Solid Waste Management by municipalities. • Reduction of ground and surface water pollution and thus reducing health hazards. 3. Globally achieving: • Foreign Direct Investment (FDI) • Reduction in emissions of GHG‟s from dumping grounds which are responsible for Global Warming. • Project is complying with the Millennium Development Goals (MDG).

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9.3. LIST OF INDICATIVE PROJECTS AVAILABLE IN INDIA FOR CARBON TRADING:

GENERAL 

Renewable Energy Projects (Wind Power, Solar, Biomass, Hydel)



Fuel Switching (from fossil fuel to green fuel like biomass, rice husk, etc.)



Cogeneration

in

industries

having

both

steam

and

power

requirement 

Energy Efficiency Measures



Induction of new technologies in power sector



Waste Management



Transport

SPECIFIC: 

Energy & Power (Generation, Transmission & Distribution)



Renewable Energy like wind power project, biomass based project, solar power projects, small run of the river hydro electricity generation projects.



Refurbishment of existing power plants to achieve a heat rate which is amongst the top 20% of the heat rate of all power plants in the relevant regional grid



Fuel shift from cal to gas or liquid fuel to gas



Super

critical

or

ultra

super

critical

technologies

for

power

generation 

T&D loss reduction below CEA stipulated values through (HT line bifurcation, High Voltage Distribution System, etc.)



Power Generation through Methane recovery from municipal solid waste/ biomethanation



Replacement of SF6 containing equipment and destruction of SF6 etc.

54 | P a g e

Cement: 

General energy efficiency improvement initiatives



Waste heat recovery from kiln fuel gas



Raw mix modification to reduce process Co2 emissions



Use of pozzolanas (fly ash/blast furnace slag) over and above the industry specifications



Fuel shift from coal to gas or to biomass or high calorific value wastes



Initiatives to reduce kiln volume through higher conversion in precalciners, etc.

Steel: 

Coke dry quenching



Blast Furnace top gas heat and pressure recovery



Basic Oxygen Furnace gas waste heat recovery



Coal dust, oxygen and tar injection in Blast Furnace to reduce the coke rate



General energy efficiency improvement in rolling mill area



Oxy Fuel use in reheating furnaces

Corex Units: 

Waste heat recovery from DRI/Midrex process for sponge iron manufacture



Iron making technology



Hydrogen annealing etc.

Pulp & Paper: 

Energy efficiency improvements



Biomass based cogeneration



Continuous pulping, etc.

Fertilizer: 

Reduction of N2O in nitric acid/other fertilizer manufacture



Waste heat recovery



General energy efficiency improvement



Methane recovery and reuse 55 | P a g e

Coal Mining: 

Coal bed methane capture and use for power generation



Coal mine methane capture and use for power generation

Transport: 

Fuel shift from liquid fuel to CNG/LPG



Hybrid cars, electric cars and hydrogen fuel cells



O&M improvement of existing vehicles, etc.

Aluminium: 

PFC reduction through reduction in anode effect duration and frequency



Energy efficiency improvement in alumina refining, smelting and rolling



Heat

recovery

from

bauxite

digestion

and

bauxite

digestion

efficiency improvement 

Dry scrubbing of smelter fumes, waste heat recovery, etc.

Chlor-Alkali: 

Use of hydrogen to replace fossil fuel

Agriculture: 

Land use change from rice cultivation to alternative crops/cropping pattern change



Forestry and A forestation



Biodiesel/Ethanol

Sugar: 

Bagasse cogeneration plants



Energy efficiency improvement



Ethanol (from molasses) as replacement for fossil fuels

Oil & Natural Gas: 

Methane/CNG leak reduction in T&D system



Capture and use of natural gas which would otherwise have been flared

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9.4. GOVERNMENT OF INDIA APPROVAL CRITERIA:

9.4.1. PURPOSE: The purpose of the clean development mechanism (CDM) is defined in Article 12 of the Kyoto Protocol to the United Nations Framework Convention on Climate Change. The CDM has a two-fold purpose: a. To assist developing country Parties in achieving sustainable development, thereby contributing to the ultimate objective of the Convention, and b. To assist developed country Parties in achieving compliance with part

of

their

quantified

emission

limitation

and

reduction

commitments under Article 3. Each CDM project activity should meet the above two-fold purpose. 9.4.2. ELIGIBILITY: The project proposal should establish the following in order to qualify for consideration as a CDM project activity: Additionalities:  Emission Additionality: The project should lead to real, measurable and long term GHG mitigation. The additional GHG reductions are to be calculated with reference to a baseline.  Financial Additionality: The funding for CDM project activity should not lead to diversion of official development assistance. The project participants may demonstrate how this is being achieved.  Technological Additionality: The CDM project activities should lead to transfer of environmentally safe and sound technologies and know-how.

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Sustainable development indicators:

It is the prerogative of the host Party to confirm whether a clean development mechanism project activity assists it in achieving sustainable development. The CDM should also be oriented towards improving the quality of life of the very poor from the environmental standpoint. The following aspects should be considered while designing CDM project activities:  Social well-being: The CDM project activity should lead to alleviation of poverty by generating additional employment, removal of social disparities and contributing to provision of basic amenities to people leading to improvement in their quality of life.  Economic well-being: The CDM project activity should bring in additional investment consistent with the needs of the people.  Environmental well-being: This should include a discussion of the impact of the project activity on resource sustainability and resource degradation, if any, due to the proposed activity; biodiversity-friendliness; impact on human health; reduction of levels of pollution in general;  Technological well-being: The CDM project activity should lead to transfer of environmentally safe and sound technologies with a priority to the renewables sector or energy efficiency projects that are comparable to best practices in order to assist in upgradation of the technological base. 58 | P a g e

Baselines: The project proposal must clearly and transparently describe the methodology of determination of the baseline. It should conform to following: 

Baselines should be precise, transparent, comparable and workable



Should avoid overestimation



The

methodology

for

determination

of

baseline

should

be

homogeneous and reliable 

Potential errors should be indicated



System boundaries of baselines should be established



Interval between updates of baselines should be clearly described;



Role of externalities should be brought out (social, economic and environmental)



Should include historic emission data-sets wherever available



Lifetime of project cycle should be clearly mentioned

The baseline should be on a project-by-project basis except for those categories that qualify for simplified procedures. The project proposal should indicate the formulae used for calculating GHG offsets in the project and baseline scenario. Leakage, if any, should be described. For the purpose of Project Idea Notes (PIN), default values may be used with justification. Determination of the base project which would have come up in the absence of the proposed project should be clearly described in the project proposal. Financial indicators: The project participants should bring out the following aspects: 

Flow of additional investment



Cost effectiveness of energy saving



Internal Rate of Return (IRR) without accounting for CERs



IRR with CERs 59 | P a g e



Liquidity, N.P.V., cost/benefit analysis, cash flow etc., establishing that

the

project

has

good

probability

of

eventually

being

implemented 

Agreements reached with the stakeholders, if any, including power purchase agreements, Memoranda of Understanding, etc.



Inclusion

of

indicative

costs

related

to

validation,

approval,

registration, monitoring and verification, certification, share of proceeds 

Funding available, financing agency and also description of how financial closure seeks to be achieved

Technological feasibility: The proposal should include following elements: 

The proposed technology/process



Product/technology/material supply chain



Technical complexities, if any



Preliminary designs, schematics for all major equipment needed, design requirement, manufacturers name and details, capital cost estimate



Technological reliability



Organizational and management plan for implementation, including timetable,

personnel

requirements,

staff

training,

project

engineering, CPM/PERT chart etc. Risk analysis: The project proposal should clearly state risks associated with it including apportionment of risks and liabilities; insurance and guarantees, if any. Credentials: The credentials of the project participants must be clearly described. 60 | P a g e

9.5. CARBON CREDIT TRADING AT MCX: The Multi Commodity Exchange of India Ltd entered into an alliance with the Chicago Climate Exchange in 2005 to introduce carbon credit trading in India. This association has integrated Indian markets with their global counterparts to cover risks associated with futures trading of carbon credits and ensuring best prices. CDM projects, mostly in key sectors such as manufacturing, energy, agriculture, mining and mineral production, would thus result in providing a boost to the Indian economy. MCX is the futures exchange. People here are getting price signals for the carbon for the delivery in next five years. The exchange is only for Indians and Indian companies. Every year, in the month of December, the contract expires and at that time people who have bought or sold carbon will have to give or take delivery. They can fulfill the deal prior to December too, but most people will wait until December because that is the time to meet the norms in Europe. The Indian government has not fixed any norms nor has it made it compulsory to reduce carbon emissions to a certain level. So, people who are coming to buy from Indians are actually financial investors. They are thinking that if the Europeans are unable to meet their target of reducing the emission levels by 2009 or 2010 or 2012, then the demand for the carbon will increase and then they may make more money. So investors are willing to buy now to sell later. There is a huge requirement of carbon credits in Europe before 2012. Only those Indian companies that meet the UNFCCC norms and take up new technologies will be entitled to sell carbon credits. There are parameters set and detailed audit is done before you get the entitlement to sell the credit. In India, already 300 to 400 companies have carbon credits after meeting UNFCCC norms. Till MCX came along, these companies were not getting best-suited price. Some were getting Euro 15 and some were getting Euro 18 through bilateral agreements. 61 | P a g e

When the contract expires in December, it is expected that prices will be firm up then. MCX has power, energy and metal companies who are trading. These companies are high-energy consuming companies. They need better technology to emit less carbon. The Multi Commodity Exchange (MCX) on January 22, 2008 launched future trading in carbon credits, becoming Asia‟s first ever commodity exchange, and among few like Chicago Climate Exchange and European Climate Exchange to buy and sell carbon credit through exchange. Trading benefits: 

Sellers and intermediaries can hedge against price risk



Advance selling could help project to generate liquidity and thereby reducing its cost of implementation



There is no counter party risk as exchange guarantee the trade



The price discovery on the exchange platform ensure the fair price for both the sellers and buyers



Bring players to a single platform

62 | P a g e

10.1. GLOBAL OUTLOOK: Carbon market momentum is strong for now: After some growing pains in its first phase, the EU ETS has created a robust structure to cost effectively reduce greenhouse gas emissions. Created by regulation, the carbon market‟s biggest risk is caused, perversely, by the absence of market continuity beyond 2012 and this can only be provided by policymakers and regulators. This will require increased efforts well beyond what is envisaged by the current policies of major world emitters. The CDM is at a crossroads: The European Commission‟s post-2012 proposal, which strengthened several design elements of the EU ETS, however, did not provide much comfort for the project-based market, which, after its strongest year yet, finds itself at a significant crossroad. By linking additional EU ETS demand for CDM and JI credits to the success of post-2012 global climate change negotiations, the European Commission proposal has the risk, surely unintended, of slowing the momentum for the project-based mechanisms. Under the proposal, the issued CERs and the Emission Reductions Units (ERUs) would be less flexible and less fungible, limiting their risk management and compliance utility vis-à-vis the EUA. The EUA spread over the secondary CER widened to nearly €10 at the time of this writing, and even higher for most primary CER contracts. The key challenge, in our view, is not how to reduce the success of the CDM, but rather how to raise the ambition of the world, including the EU, to set science-based emission reduction targets and meet them cost-effectively. Time to re-think the CDM: The CDM‟s biggest strength has been its ability to bring developing and developed countries and the public and private sectors together to reduce emissions cost-effectively. In the years ahead, all countries will want to

63 | P a g e

scale up their efforts to reduce emissions while growing their economies in a sustainable manner. As the world considers scaling up serious action to combat climate change, it would be desirable to re-think the CDM as a helpful tool for the challenges ahead. The forest for the trees: In its next phase, the CDM needs to move up the learning curve and evolve

toward

approaches

and

methodologies

that

conservatively

estimate emission reduction trends on the aggregate level and away from the current focus on trying to account for every last ton reduced or removed from the STATE AND TRENDS OF THE CARBON MARKET 2008 atmosphere. The next generation CDM should focus on catalyzing step changes in emission trends, and on creating incentives for large-scale, transformative investment programs. Built to last: Several jurisdictions, including various states, regions, and countries are considering whether and how to link up with international opportunities for reducing emissions. It would be helpful to find ways for them to learn together from and build on the CDM experience so far, with the goal of encouraging efficiency, reducing transaction costs, avoiding unnecessary duplication and creating, from the start, compatible infrastructure with strong linkages and inter-operability. Global cooperation on climate change: Given enough incentive and a long lead time, developing countries can deliver large volumes of cost effective emission reductions which can help meet science-based emission reduction targets. This puts a special responsibility on countries to cooperate under the Bali Action Plan to reach an ambitious international agreement to reduce emissions. It also makes it important for the EU, the U.S. and other major emitters to find ways, even before 2009, to encourage the continued engagement of developing countries in mitigation activities. International negotiators 64 | P a g e

should consider providing incentives for early action with sufficient lead time to develop emission reduction programs and projects. Solving the problem of climate change will need ingenuity to encourage a scaling up of action to reduce or avoid emissions as early and efficiently and in as many sectors & countries as possible. Long-term policy signals about intended carbon constraint policies and well-designed regulatory systems and infrastructure will send the appropriate signals to investors. The experience of the carbon market so far shows that the private sector is capable and willing to cooperate in solving the problem, provided that policies are predictable, consistent and transparent and regulations are efficient. 10.2. OUTLOOK FOR INDIA: 10.2.1. INTRODUCTION: The Kyoto protocol allows 35 developed nations to buy carbon credits from countries. Incidentally, India is one of the exempted from this protocol as they are stated as developing countries, but overseas companies can buy carbon credits from these countries. Now companies in India can use Carbon credits to get liberal loans, incentives by multinationals in their countries and benefits like better social and ecological visibility. 10.2.2. INDIAN COMPANIES: TAKING ADVANTAGE: Some of the companies in India shall be in a position to gain some extra money with the advent of Carbon Trading initiatives. Already some of them have taken steps in these lines. Some of these companies are: Gujarat Fluoro Chemicals is amongst first companies worldwide to get its carbon emission reduction project certified. It is set to reap rewards from the sale of carbon emission reduction (CER) credits from this year itself. The company has entered into a deal for sale of its carbon credits to the United Kingdom in 2005-06 and to the Netherlands the following year 65 | P a g e

(2006-07). The deals have been struck at $13.5 per tonne and € 14.6 per tonne, respectively. Tata Steel is believed to have signed a memorandum of understanding (MoU) with the Japanese government agency Nedo for sale of credits accruing to it from carbon reduction following the implementation of an over Rs 250 crore modernization and upgradation project. Also, Corporates like NTPC and several state electricity boards have also applied for carbon credit benefits. Most of them are replacing coal-based technologies with more environment-friendly processes. Amongst others, those Indian projects that can be verified as clean energy projects, which lead to lower carbon dioxide emissions than would otherwise occur, can generate CERs and sell them. These CERs, prices of which are market determined, are generated through an international due diligence process. In fact, many consultants and financial analysts are emerging in the area of evaluating projects for their emission reductions

66 | P a g e

There is a great opportunity awaiting India in carbon trading which is estimated to go up to $100 billion by 2010. 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 countries like US, Germany, Japan and China are likely to be the biggest buyers of carbon credits which are beneficial for India to a great extent. The Indian market is extremely receptive to Clean Development Mechanism (CDM). Having cornered more than half of the global total in tradable dominance

in

certified emission reduction (CERs), India‟s

carbon

trading

under

the

clean

development

mechanism (CDM) of the UN Convention on Climate Change (UNFCCC) is beginning to influence business dynamics in the country. India Inc pocketed Rs 1,500 crores in the year 2005 just by selling carbon credits to developed-country clients. Various projects would create up to 306 million tradable CERs. Analysts claim if more companies absorb clean technologies, total CERs with India could touch 500 million. Of the 391 projects sanctioned, the UNFCCC has registered 114 from India, the highest for any country. India‟s average annual CERs stand at 12.6% or 11.5 million. Hence, MSW dumping grounds can be a huge prospect for CDM projects in India. These types of projects would not only be beneficial for the Government bodies and stakeholders but also for general public. In the past few months MNCs, global and domestic consultancy houses have cut carbon trades with Indian entities, which have managed to put in place anti-emission technologies. Trades worth about Rs 2,000 crore have taken place, but industry circles feel that more of it is yet to come. Emission trading could earn India 67 | P a g e

anything between Rs 20,000 crore and Rs 50,000 crore a year. Planning

Commission

has

also

pointed

out

that

the

Indian

government and farmers would be benefited once the afforestation and the reforestation mechanisms are finalized by the UNFCCC board, in clearer terms. Hence India stands to benefit in a big way if she can make full use of the opportunity provided by the carbon credits. There are projects range from cement, steel, biomass power, biogases co-generation and municipal solid waste to energy, municipal water pumping and natural gas power. The ministry has given the host-country clearance, the CDM projects will have to be approved by the executive board of the UNFCCC. Of the 15 projects approved by the UNFCCC so far, four are Indian. These four are: 

Gujarat Flurochemicals,



Kalpataru Power Transmission Ltd,



The Clarion power project in Rajasthan and



The Dehar power project in Himachal Pradesh

The country accounted for 283 CDM projects out of the 819 registered by the CDM Executive Board, the environment ministry, the World Bank and the International Emissions Trading Association. The Indian National CDM Authority has accorded host country approval to 753 projects, facilitating investment of more than Rs 63,000 crore. These projects are in areas of energy efficiency, fuel switching, industrial processes, municipal solid waste and renewable energy and have the potential to generate 421 million CERs by 2012.

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ANNEXURE 1: The European Union               

Austria Belgium Denmark Finland France Germany Greece Ireland Italy Luxembourg Netherlands Portugal Spain Sweden United Kingdom

ANNEXURE 2: Countries undergoing the process of transition to a market economy            

Bulgaria Croatia Czech Republic Estonia Hungary Latvia Poland Romania Russian Federation Slovakia Slovenia Ukraine

ANNEXURE 3: Annex II non-EU countries that ratified the Kyoto Protocol         

Canada Australia Japan Monaco Iceland New Zealand Norway Switzerland Liechtenstein

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ANNEXURE 4: Annex I parties not ratified Among the Annex 1 countries that signed the Kyoto Protocol in 1997, only the USA has not ratified it. In 1990, the USA emitted 36.4 percent of the total GHGs in the world. ANNEXURE 5: Non-Annex I countries having ratified the Kyoto Protocol 

A-C Antigua Barbuda



Argentina



D-L &

M-P

P-Y



Djibouti



Madagascar



Philippines



Dominican Republic



Malawi



Republic of Korea

Armenia



Ecuador



Malaysia





Azerbaijan

Maldives



Bahamas

El Salvador Equatorial Guinea





 

Republic Moldova Rwanda



Mali



Saint Lucia



Bangladesh



Fiji



Malta



Saint Vincent and the Grenadines



Barbados



Gambia





Samoa

       

Belize Bhutan Benin Bolivia Botswana Brazil Burundi Cambodia

       

Georgia Ghana Grenada Guatemala Guinea Guyana Honduras India

       

Marshall Islands Mauritius Mexico Micronesia Mongolia Morocco Myanmar Namibia Nauru



Cameroon



Israel



Nicaragua

        

   

Chile China Colombia Cook Islands

   

Jamaica Jordan Kenya Kiribati



Costa Rica



Kyrgyzstan

    

Niger Niue Palau Panama Papua Guinea

Senegal Seychelles Solomon Islands South Africa Sri Lanka Sudan Thailand Togo Trinidad and Tobago Tunisia Turkmenistan Tuvalo Uganda United Republic of Tanzania



Lao Democratic People‟s Republic Lesotho Liberia



Paraguay



Uruguay



Peru

   

Uzbekistan Vanuatu Viet Nam Yemen



Cuba



Cyprus

 

New

    

70 | P a g e

of

WEBSITES REFFERED: 

www.carbontrading.com



www.unfccc.int



http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/0,,menuPK: 476823~pagePK:64165236~piPK:64165141~theSitePK:469372,00. html



http://www.primaryinfo.com/index.htm



www.carboncreditmart.com



www.carbon credit.org\carbon credits introduction



www.cdmmarket.org



www.kyotoprotocol.int



www.cseindia.org



www.mcxindia.com



www.climatechangeex.int



www.wikipedia.com



www.google.co.in



www.pdfcoke.com

MAGAZINES: 

The Analyst

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