Carbon trading report

SUSTAINABILITY OF CARBON TRADING IN A DEVELOPING ECONOMY- AN INDIAN PERSPECTIVE VAIBHAV GODSE, MBA OIL AND GAS, 2009-2011

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SUSTAINABILITY OF CARBON TRADING IN

A DEVELOPING ECONOMY- AN INDIAN

PERSPECTIVE


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SUSTAINABILITY OF CARBON TRADING IN A

DEVELOPING ECONOMY- AN INDIAN PERSPECTIVE

Dissertation submitted to College of Management & Economic Studies for the partial

fulfillment of the degree of

MBA (Oil and Gas Management)

Guided by:

Submitted by:

Vaibhav Godse

Enrollment No: R020209074

SAP ID: 500006887

College of Management and Economic Studies

University of Petroleum and Energy Studies,

Dehradun, Uttarakhand, India

April, 2011

Dr. Tarun Dhingra

Assistant Professor

College of Management & Economic Studies

University of Petroleum & Energy Studies

Dehradun – 248 006


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Certificate

This is to certify that dissertation report on “Sustainability of Carbon Trading in a

Developing Economy – An Indian perspective.” completed and submitted to UPES,

Dehradun by “Vaibhav Godse” in partial fulfillment of the requirements for the award of

degree of Masters of Business Administration (Oil and Gas Management), is a bonafide

work carried out by him under my supervision and guidance.

To the best of my knowledge and belief the work has been based on investigation made,

data collected and analyzed by him and this work has not been submitted anywhere else

for any other university or institution for award of any degree or diploma.

Dr. Tarun Dhingra

Assistant Professor

College of Management and Economics Studies

University of Petroleum and Energy Studies


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ACKNOWLEDGMENT

First of all, it is my profound privilege and pleasure to express the overwhelming sense of

gratitude and regards to project guide Dr. Tarun Dhingra for his expert guidance,

valuable suggestions and continuous encouragement throughout this project work.

Without his advice, guidance and blessings it would have been impossible to achieve the

objective.

Vaibhav Godse


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DECLARATION

I Vaibhav Godse hereby declares that the project work entitled “Sustainability of carbon

trading in a developing economy- An Indian perspective” is a bona fide work done by

me under the guidance and supervision of Dr. Tarun Dhingra. The work has not formed

part of any earlier studies or the award of degree/ diploma/ fellowship.

Place: Dehradun, Uttaranchal

Date: 25th April 2011 Signature of the Student.


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TABLE OF CONTENTS

SI.NO. TOPIC PAGE

NO.

LIST OF TABLES

LIST OF GRAPHS

1 EXECUTIVE SUMMARY 10-12

2

INTRODUCTION

� EMISSION OVERVIEW

� CARBON TRADING- INTRODUCTION

13-19

3 LITERATURE REVIEW 20-22

4

RESEARCH METHODOLOGY

� NEED FOR RESEARCH

� PROBLEM STATEMENT

� RESEARCH FLOW

� ANALYTICAL MODELS

� HYPOTHESIS

� STATISTICAL TECHNIQUES

23-31

5

DATA ANALYSIS AND INTERPRETATION

� PRICE COMPARISON

� SCENARIO ANALYSIS

� CO2 EMISSION PER CAPITA VS. GDP PER CAPITA

� CO2 EMISSION PER CAPITA VS. ELECTRIC POWER CONSUMPTION PER

CAPITA

� CO2 EMISSION PER CAPITA VS. FOSSIL FUEL CONSUMPTION

� CAPTURING THE FUTURE SCENARIO

� DEMAND SUPPLY CENTERS

32-56


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6 SECTORAL CDM PROJECTS IN INDIA AND OPPORTUNIES IN

OIL AND GAS SECTOR 57-67

7 MARKET RISKS 68-70

8 LIMITATIONS OF THE RESEARCH 71

9 CONCLUSION 72-75

10 REFERENCES 76-70


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LIST OF TABLES

SI NO. PARTICULARS PAGE NO.

1 CORRELATION FOR PRICE 34

2 SCENARIO SUMMARY 35

3 CORRELATION FOR CO2 EMISSION VS. GDP 40,41

4 CORRELATION FOR CO2 EMISSION VS. POWER CONSUMPTION

44,45

5 CORRELATION FOR CO2 EMISSION VS. FOSSIL FUEL CONSUMPTION

48,49

6 FORECAST FOR TRANSACTION OF CARBON CREDITS 52

7 REGISTERED CDM PROJECTS IN OIL AND GAS INDUSTRY 65-67


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LIST OF GRAPHS

SI NO.

PARTICULARS PAGE NO.

1 GHG EMISSION ESTIMATE FOR INDIA 15

2 SCATTER PLOT BETWEEN CER PRICE VS. CRUDE OIL AND NATURAL GAS

33

3 PRICE COMPARISON BETWEEN ENERGY COMMODITIES 36

4 SCATTER PLOT BETWEEN CO2 EMISSION VS. GDP 38,39

5 SCATTER PLOT BETWEEN CO2 EMISSION VS. ELECTRIC POWER CONSUMPTION

42

6 SCATTER PLOT BETWEEN CO2 EMISSION VS. FOSSIL FUEL ENERGY CONSUMPTION

46,47

7 FORECASTED VOLUME OF CER TRANSACTED VOLUME AND PRICE

51

8 PERCENTAGE SHARE OF BUYER COUNTRIES 53

9 PERCENTAGE SHARE OF SELLER COUNTRIES 55

10 PERCENTAGE SHARE OF CDM PROJECTS IN VARIOUS SECTORS

56


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EXECUTIVE SUMMARY


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EXECUTIVE SUMMARY

Carbon is a fundamental element of the earth, the fossil fuel discovery by man has

unleashed the energy of carbon which has proved bone and bane for the mankind. In the

recent years there has been a rise in one problem that is global warming and much is

talked about the same, but very little is done to curb it. Carbon trading is one of the steps

towards mitigating the effects of global warming and moving towards green economy by

developed and developing economies. Greenhouse gas (GHG) emissions are invisible

and odorless. Although the impacts of climate variability and the ability to adapt vary

widely, the global warming impact of these gases on the atmosphere is equal irrespective

of where they are emitted. This indifference from an environmental perspective to where

the greenhouse gas is emitted — or reduced — is the key insight that lends itself well to a

global management system.

The focus of this report is on the sustainability of carbon trading in a developing

economy and its growth. The research work is restricted to project based transactions

(CDM), that too taking the case of India only. This report consists of market scenario of

carbon trading in developing economies, future projections of project based transactions,

and various demand and supply centers. Further various economic indicators are used to

correlate with CO2 emission both for the World and India in order to determine the

influential factors in an economy which would indirectly or indirectly drive the carbon

markets. The economic indicators used for the same are Gross Domestic Product (GDP)

per capita, electric power consumption per capita, and fossil fuel consumption. The

relationships obtained between carbon dioxide emissions and above mentioned economic

indicators showed positive correlation and hence, increase in any one of the indicator

whether GDP, Power consumption or Fossil fuel consumption would result in increase in

carbon dioxide emissions. Since growth in economy and increase in energy consumption

has shown a related increase in CO2 emission. This means that, for any developing or

growing economy the hindrance in growth is the energy consumption, which would

further add to global warming. In order to strike a balance between the economic growth


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and green economy, Indian economy should move aggressively towards clean

development mechanism (CDM).

The most driving force for any commodity business is its market price and same is the

case with carbon trading. As the carbon markets have grown across the globe so as the

price per certified emission reduction (CER). The markets are growing complex with

addition of derivative trading and thus markets are becoming more and more price

sensitive and speculation driven. In this research study a price comparison between

carbon prices with other energy commodity such as crude oil and natural gas has been

done. The result showed the positive correlation between carbon credit price and crude

oil and natural gas. The variation in crude oil and natural gas would influence carbon

prices and thus carbon market would follow the same pattern as that of crude oil and

natural gas markets.

The sustainability of any business lies in its future growth or future scenario. A forecast

of project based transactions is calculated based on previous nine year data both in value

and volume traded. The forecast for next six years (2011 to 2016) showed a stable pattern

of the project based transactions. The market potential of the same in future would be

hovering between 5229.18 million US$ to 6478.61 million US$ and the volume of carbon

traded would be around 387.92 to 468.33 million tons for project based transactions.

For any trade to begin the two utmost entities required are seller and the buyer. The most

dominant demand and supply centers for the year 2001 to 2009 along with their

percentage share over the period is mentioned. India has been second largest seller of

carbon credits under project based transactions and holds an average of 16 percent share

over the period 2002 to 2009. Whereas, India’s the Asian counterpart China has the

largest share and Brazil being the third largest supplier of credits under the same

mechanism.


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INTRODUCTION


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BACKGROUND

EMISSION OVERVIEW

India is the world’s fourth largest economy and fifth largest greenhouse gas (GHG)

emitter, accounting for about 5% of global emissions. India’s emissions increased to 65%

between 1990 and 2005 and are projected to grow another 70% by 2020. By other

measures, India’s emissions are low compared to those of other major economies. India

accounts for only 2% of cumulative energy-related emissions since 1850. On a per capita

basis, India’s emissions are 70% below the world average and 93% below those of the

United States.

India remains home to the world’s largest number of poor people, with nearly 35% living

on less than a dollar a day. Its economy is growing rapidly, however, with GDP rising

about 8% a year over the past five years. As the economy has grown, emissions intensity

(GHGs per unit of GDP) has declined significantly. India’s GHG intensity is currently

20% lower than the world average (and 15% and 40% lower than the United States’ and

China’s, respectively). Factors contributing to the decline in energy intensity include

improved energy efficiency, increased use of renewable and nuclear power, expanded

public transport, and energy pricing reform. The government projects energy demand

growth of 5.2% a year for the next 25 years, driven by annual GDP growth rates of 8-

10%. The coal accounts for 39% of total primary energy demand, followed by biomass

and waste (29%), oil (25%) and natural gas (5%). The high proportion of biomass and

waste reflects the fact that some 500 million people have no access to electricity or other

modern energy services. Coal is projected to remain the primary energy source, with

demand growing nearly three-fold by 2030.

India is a party to both the UN Framework Convention on Climate Change and the Kyoto

Protocol. As a non-Annex I (developing) country, India has no binding emission limits


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under the Protocol. However, India is an active participant in the Clean Development

Mechanism (CDM) established by the Protocol. (The CDM grants marketable emission

credits for verified reductions in developing countries. Developed countries buying these

credits can apply them toward their Kyoto targets.) India has more than 500 registered

CDM projects, more than any other country, and about a third of all projects globally (In

terms of the overall volume of CDM reductions, China ranks first with 51% followed by

India at 14%). The largest project categories are biomass and wind power. Most projects

in India are undertaken on a unilateral basis— developed independently by local

stakeholders without the direct involvement of Annex I countries.

GHG Emission Estimates for India:

Source: IEA


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CARBON TRADING- AN INTRODUCTION

Carbon Credits Trading or Emission Trading refers to trading in Greenhouse gas

emission certificates within the legal framework. It is a market-based scheme for

environmental improvement that allows parties to buy and sell permits for emissions or

credits for reductions. Emissions trading allow established emission goals to be met in the

most cost-effective way by letting the market determine the lowest-cost pollution

abatement opportunities.

Under such schemes, the environmental regulator first determines the total acceptable

emissions and then divides this total into tradable units (often referred to as credits or

permits).

These units are then allocated to scheme participants with dual purpose while allowing

the flexibility to meet their emission targets according to their own strategy.

� Participants who emit pollutants must obtain sufficient tradable units to

compensate for their emissions.

� Participants who reduce emissions may have surplus units that they can sell to

others, who find emission reduction more expensive or difficult.

Carbon Transactions

These are defined as purchase and sale of contracts. These transactions can be grouped

into two main categories namely, Allowance based transactions and Project based

transactions. Greenhouse gas emissions are capped and then markets are used to allocate

the emissions among the group of regulated sources. The goal is to allow market

mechanisms to drive industrial and commercial processes in the direction of low

emissions or less carbon intensive approaches than those used when there is no cost to

emitting carbon dioxide and other GHGs into the atmosphere. Since GHG mitigation


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projects generate credits, this approach can be used to finance carbon reduction

schemes between trading partners and around the world.

There are also many companies that sell carbon credits to commercial and individual

customers who are interested in lowering their carbon footprint on a voluntary basis.

These carbon off setters purchase the credits from an investment fund or a carbon

development company that has aggregated the credits from individual projects

There are three basic types of emissions trading programmes these are as follows: ‘cap

and trade’, ‘baseline and credit’ and ‘offset’.

Source: Carbon Credits Trading-Young and Emerging Market by Tata Consultancy

Services


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Carbon Trading Market in India:

There is a new financial sector called carbon market waiting to take India by storm.

Carbon is now a financial commodity, according to Karan Capoor, senior financial

specialist, World Bank. Carbon is now priced and business managers take the carbon

price into consideration along with other factors while making business decisions. India

corners almost 16 per cent share of this market. India is a party to the United Nations

framework on Convention on Climate Change. It acceded to Kyoto Protocol in August

2002 and one of the objectives of acceding was to fulfiII pre-requisites for

implementation of Clean Development Mechanism (CDM) projects, in accordance with

the national sustainable priorities, where a developed country would take up greenhouse

gas reduction project activities in developing countries and where the cost of greenhouse

gas reduction projects are much lower. The Indian carbon market has the potential to

supply 30-50 per cent of the global market by 2012.

Future of India's Climate Change Policy:

After the Copenhagen summit on climate change in 2009, India has come up along with

China with many initiatives which both countries are working upon. Although both the

countries have not accepted any reduction targets but voluntarily set targets for carbon

emission reduction. India has proposed 25 percent decline in its carbon dioxide emission

by 2030 while China has proposed 40 percent reduction in its carbon intensity by 2020.

Presently, a variety of approaches are being implemented to reduce carbon emissions.

These range from efforts by individuals and firms to reduce their climate footprints to

initiatives at city, state, regional and global levels. Among these are the commitments of

governments to reduce emissions through the 1992 United Nations Framework

Convention on Climate Change (UNFCCC) and its 1997 Kyoto Protocol.

Under the Kyoto Protocol, emission caps were set for each Annex-I countries, amounting

in total to an average reduction of 5.2% below the aggregate emission level in 1990. Each


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country has a predetermined target of emission reduction as compared to 1990 level. No

emission cap is imposed on Non – Annex I countries. However, to encourage the

participation of Non-Annex I in emission reduction process a mechanism known as Clean

Development Mechanism (CDM) has been provided. The carbon markets are a prominent

part of the response to climate change and have an opportunity to demonstrate that they

can be a credible and central tool for future climate mitigation. The outcome was the

Kyoto Protocol, in which the developed nations agreed to limit their greenhouse gas

emissions, relative to the levels emitted in 1990 or pay a price to those that do. At this

point comes the carbon trading.


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LITERATURE REVIEW


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LITERATURE REVIEW

The world community faces a major test of its resolve in tackling the realities of climate

change. While the Kyoto Protocol has provided a valuable platform for policy and

international cooperation, it has failed in its aim to apply downward pressure on

emissions. In fact, with emissions increasing, the world requires a fundamental

technology revolution in energy production, distribution and usage. Till date many

research papers, journals, articles etc. have been published regarding the carbon trading

mechanism, some of these papers highlighted the benefits and some highlighted the loop

holes in the mechanism. The research works done earlier mainly focuses on financial

risk, political play, involved in carbon trading the flaws related in registering the CDM

projects, the issues and delays associated with the same. Some articles even highlighted

the policy issues and political intervention of developed nations. Studies were also based

on describing whether carbon trading could be replaced by any other mechanism or not.

Almost all the studies were more or the sort of qualitative rather than quantitative.

Carbon Trading- How it works and why it fails- Discusses on the issue how the polluting

companies are awarded and has caused social and environmental injustice.

Carbon market and financial risks- This paper highlights how the trading schemes with

different rules would instead encourage a “race to the bottom,” with capital migrating

towards those with the weakest environmental protections and the loosest caps. It will

only enrich "Wall Street" banks while posing new systemic financial risks.

Carbon productivity challenge- Curbing climate change and sustaining economic growth-

Discusses concept of carbon productivity- amount of GDP produced per unit of carbon

equivalent emitted. Increasing carbon productivity can tackle the challenge of mitigating

climate change and maintaining economic growth


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Speculating on carbon, the next toxic asset- Developed countries claiming for the

creation of carbon derivatives, the market would enable big financial institutions to drive

carbon prices up and down, confusing and distorting the market, just as Wall Street

speculators did with food and energy prices in 2007 and 2008.

India’s climate change policy and carbon trading market- This report focuses on India’s

participation in carbon trading. India can gain in terms of transfer of technology and

enjoy foreign investments in its clean development mechanisms (CDM) projects.

Carbon credit trading- Young and emerging market- Describes about carbon trading

mechanism, how it is an administrative approach used mainly to control pollution by

providing economic incentives for achieving reduction in emissions. This market based

instrument encourages the transition to a more sustainable economy.

The clean development mechanism- user guide- Discuses CDM mechanisms and various

issues related to it such as the -common but differentiated responsibilities, whether CDM

shifts the economic burden of emission reductions from those who are responsible –

industrialized countries – to the developing countries.

Carbon 2010- Return of sovereign- The increased complexities is certainly making a

global climate deal more difficult, Carbon trading is a part of an international strategic

game between major countries and involve issues of trade, energy and outright power

politics. There is a general dissatisfaction among the nations about Copenhagen outcome.

The fool’s gold of carbon trading- Clearly describes that carbon trading does not solve

the emission problem, policies driven by politicians. The emerging carbon markets

capable of making a significant dent in the world’s surging carbon emissions.


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RESEARCH

METHODOLOGY


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NEED FOR RESEARCH

Carbon credits and carbon markets are a component of national and international attempts

to mitigate the growth in concentrations of greenhouse gases (GHGs). One carbon credit

is equal to one ton of carbon dioxide, or in some markets, carbon dioxide equivalent

gases.

There is a lot of skepticism associated with carbon emissions both in developed and

developing economies, which directly impacts its growth in future. Whether this new

trading mechanism will continue or crash. Carbon trading sustainability depends on

various economic, regulatory and marketing factors, whether the CDM mechanism

approach for India and developing economies will be continued or any other mechanism

such as carbon tax would be adopted. The main purpose of carbon trading is to reduce the

green house gas emission by adopting cleaner methods either through transfer of

technology or by using renewable sources of energy across various industries. This

method of GHG abatement should be effective in the sense of turning the high carbon

emission into low carbon emission economy. Since sustainability of this business lie in its

ultimate goal of reducing GHG emission, now to check whether any economy is heading

towards lowering its emission without affecting overall economic growth is an issue.

There is a lot of demand for carbon credits from Europe, Japan, and Canada which would

benefit the development of CDM projects in India. But at the same time the increase in

demand and supply are directly linked to carbon productivity (ratio of GDP to emissions),

carbon intensity, price per certified emission reduction, power consumption, fossil fuel

consumption, U.S participation (U.S withdrawal weakened the market for CDM, since

U.S constitute for about 40% of the total Kyoto market for emission reduction),

regulatory policies, developing of trading instruments and issuance of CERs (duration

and quantity). The entire study is focused on the sustainability of carbon trading in India

and developing economies, its market indicators, demand and supply centers, future

transactions, price variation based on other energy commodities and forecasting the

future project based transactions.


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PROBLEM STATEMENT

Sustainability of Carbon Trading in a developing economy- An Indian perspective.

To study the carbon trading mechanism in India and to investigate the sustainability of

carbon trading in a developing economy.

� Understanding the perspective of carbon trading in terms of Indian industry,

whether it is sustainable or not.

� Economic factors which are related to carbon trading mechanism.

� To study the market trends and forecasting the future project based transactions.

� Price comparison with energy commodities (crude oil and natural gas price).

� Market potential in India, scope in oil and gas industry, trading mechanisms and

risk involved.

SUSTAINABILITY OF CARBON TRADING IN A DEVELOPING ECONOMY

RESEARCH FLOW

At first exploratory research work was conducted through secondary data, which

involved collecting the data from articles, journals, white papers, news updates,

presentations, reports, government publications an

conclusive research design, which involved formulation and testing of hypothesis. Within

conclusive, causal research was carried out for finding the cause and effect of various

economic indicators, price of energy

following flow diagram provides the insight of area covered in order to justify the

objective and for collecting the secondary data.

Forecasting

Time series forecasting technique- moving avaerage

and exponential smoothening

Future project based transactions in value and

volume

Future Price of CER and its trend.

SUSTAINABILITY OF CARBON TRADING IN A DEVELOPING ECONOMY- AN INDIAN PERSPECTIVEVAIBHAV GODSE, MBA OIL AND GAS, 2009-2011

RESEARCH FLOW



presentations, reports, government publications and statistical sites. This was followed by



economic indicators, price of energy commodities, time (years) on carbon trading. The


objective and for collecting the secondary data.

Research work flow

Time series forecasting moving avaerage

and exponential smoothening

transactions in value and

Future Price of CER and its

Factors related to carbon trading-Quantitative Factors

CO 2emission traded Vs GDP gowth rate (World and India)

CO2 emission/capita vs gdp/capita

CO2 emission/capita vs electric energy consumption

/capita

CO2 emission/capita vs Fossil fuel energy

consumption( % of total)

Price comparison of carbon credit with crude oil and

natural gas

Market share in project based transactions of various participating

countries

Demand and supply centers-Indicating the percentage share of buyers and sellers

over 8-9 years period

AN INDIAN PERSPECTIVE

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d statistical sites. This was followed by



commodities, time (years) on carbon trading. The


Sectoral CDM

Indicating various sectoral projects involved in CDM

CDM projects in Indian Oil and gas industry


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ANALYTICAL MODELS

Price of certified emission reduction vs. crude oil and natural gas price:

A comparison between carbon price and energy commodities like crude oil and natural

gas is being done in order determine whether any relation exists or not. Both correlation

and regression analysis is done in order to understand the trend of carbon prices.

A scenario analysis is done for determining the price of carbon credits depending upon

the price variation of crude oil and natural gas. The current values are the prices of crude

oil, natural gas and CER price during October 2010. A total of four scenarios were being

taken in order to know the price of carbon credits under various circumstances.

Carbon dioxide emission vs. Gross domestic product (GDP): Carbon productivity

Carbon productivity refers to level of gross domestic product (GDP) output per unit of

CO2 emitted. Improvements in emissions productivity and reductions in energy

consumption can serve as complementary indicators of progress to emissions reductions.

This is particularly true for firms that are experiencing rapid growth, when emissions

reductions are simply not compatible with the organization’s mission. Ultimate goal of

carbon trading is to move the industrial world towards low carbon economy by bringing

about technological changes. To measure whether an economy is moving towards green

economy or not could be measure by the level of GHG emission in relation with growth

of an economy.


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Carbon dioxide emission vs. Electric power consumption:

The primary factors that alter CO2 emissions from electricity generation from year to year

are the growth in demand for electricity, the type of fuels or energy sources used for

generation, and the thermal efficiencies of the power plants. The fuel or energy source

used to generate electricity is the most significant factor affecting the year-to-year

changes in CO2 emissions. CDM projects can play an important role in India for ruling

out the challenges of providing sufficient power up to the remote areas and reducing the

CO2 emissions can be taken up by replacing coal and fossil fuels by renewable energy

source.

Carbon dioxide emission vs. Fossil fuel consumption:

The percentage of fossil fuel consumption in total energy basket for world and India has

been related with CO2 emission level for the period 1997 to 2007. The fossil fuels

involved are coal, crude oil and natural gas. The correlation and regression analysis

provide the information that CO2 emission for the world and India is due to the fossil fuel

consumption and as the years advanced the fossil fuel consumption has increased. In

order to reduce the emission the country needs to increase the efficient use of energy and

by using effective technology in various refinery processes, chemical industries,

manufacturing industries etc. so that the release of flue gases and GHG emissions would

reduce significantly even if the fossil fuel consumption increases.

Ultimate goal of carbon trading is to move the industrial world towards low carbon

economy by bringing about technological changes. To measure whether an economy is

moving towards green economy or not could be measure by the level of GHG emission in

relation with growth of an economy, electric power consumption and fossil fuel

consumption. Since sustainability of carbon trading dependents on whether, this new

concept of trading is able to mitigate the effect GHG emission or not, to check the same a


29

relationship between CO2 emission with GDP, electric power consumption and fossil fuel

consumption is drawn.

Time series forecasting technique:

The strength of any business lies in its future trend, how the business will grow whether

have an upward trend or downward or reach maturity or remain constant.


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HYPOTHESIS

Null hypothesis: Price variation of crude oil and natural gas does not have significant

effect on variation in carbon credit price.

Alternate hypothesis: Carbon credit price is not entirely dependent on crude oil and

natural gas prices.

Null hypothesis: GDP per capita of an economy does not have significant effect on CO2

emission of that particular economy.

Alternate hypothesis: CO2 emission per capita is not entirely dependent on GDP per

capita of an economy.

Null hypothesis: Electric power consumption per capita does not have significant effect

on CO2 emission per capita.

Alternate hypothesis: CO2 emission per capita is not entirely dependent on electric

power consumption per capita.

Null hypothesis: Fossil fuel consumption does not have significant effect on CO2

emission per capita.

Alternate hypothesis: CO2 emission per capita is not entirely dependent on fossil fuel

consumption.


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STATISTICAL TECHNIQUES

� Time series forecasting technique is to be used for analyzing the future scenario of carbon

trading markets.

� Correlation and regression tools are to be used for analyzing the statistical data.

� Bars and pie charts showing the carbon market trends.


32

DATA ANALYSIS

AND

INTERPRETATION


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PRICE COMPARISON

A comparison between carbon price and energy commodities like crude oil and natural

gas is being done in order determine whether any relation exists or not. Both correlation

and regression analysis is done in order to understand the trend of carbon prices.

The correlation between CER prices and crude oil price was 0.66 and whereas between

CER prices and natural gas price came out to be 0.78. The result relates that carbon credit

price has positive correlation between crude oil and natural gas price. Therefore when

crude price increases, 66% of times CER price also increases, similarly when natural gas

price increases, 78% of times CER price also increases.

Plot between crude oil and carbon Plot between natural gas and

carbon price carbon price

The regression analysis was done where CER price was dependent variable and

independent variables were crude oil and natural gas prices. The coefficient of

determinant thus obtained was 0.723, which means 72.3% variation in CER prices can be

explained by crude oil and natural gas prices.

0

20

40

60

80

100

120

0 10 20

WT

O c

rud

e s

po

t p

rice

($

/ba

rre

l)

CER spot price ($/CER)

0

1

2

3

4

5

6

7

8

9

0 10 20

Na

tura

l ga

s p

rice

($

/ 0

00

cub

ic

fee

t)

CER spot price ($/CER)


34

Correlation result:

CER Spot price in $

WTO world spot price($/barrel)

Natural Gas($/000 cubic feet)

CER Spot price in $ 1


0.660056034 1

Natural Gas($/000 cubic feet)

0.78660666 0.477316492 1

Regression result:

� The regression line is Y (CER price) = 2.914+ 0.0404 Crude price+ 0.958 LNG

price.

� R2 is 0.723 which shows that 72.3% variation in average CER price is explained

by crude oil and natural gas prices.

� Standard error of slope coefficients of crude oil price and natural gas price are

0.013 and 0.191 respectively.

� For 24 degrees of freedom, t-value at 5% significance level is 2.064. Thus for 95

out of 100 cases the value for coefficient of crude oil price will lie between

0.0127 to 0.068. Also, for 95 out of 100 times the value for coefficient of natural

gas price will lie between 0.56 to 1.35.

� The value of t-statistics at 5% significant level for intercept, two independent

variables, crude oil and natural gas are 3.15, 3.01 and 5.00 respectively.

� The F- statistics is 31.42, which is greater than the critical value, thus the overall

model is highly significant.

� Regression result:

(CER price) Y = 2.914+ 0.0404 Crude price+ 0.958 LNG price

Se = (0.92) (0.013) (0.191)

T = (3.15) (3.018) (5.0)

R2 = 0.723, adjusted R2 = 0.70, F = 31.42, d.f = 24


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SCENARIO ANALYSIS: For Carbon credit price

A scenario analysis is done for determining the price of carbon credits depending upon

the price variation of crude oil and natural gas. The current values are the prices of crude

oil, natural gas and CER price during October 2010. A total of four scenarios were being

taken in order to know the price of carbon credits under various circumstances.

Scenario Summary

Current Values(oct- 2010):

Scenario A Scenario B Scenario C Scenario D

Changing Cells:

Crude_price 79.35 39 114 39 114

LNG_price 3.5 2.5 8.21 8.21 2.5

Result Cells:

CER_price 9.48049 6.89185 15.394885 12.364885 9.92185

Notes: Current Values column represents values of changing cells at

time scenario Summary Report was created.

� The Scenario A relates to determining the CER price at lowest level of crude oil

and natural gas price during the period August 2008 to October 2010.

� The Scenario B relates to determining the CER price at highest level of crude oil

and natural gas price during the period August 2008 to October 2010.

� The Scenario C relates to determining the CER price at lowest level of crude oil

and highest level of natural gas price during the period August 2008 to October

2010.

� The Scenario D relates to determining the CER price at highest level of crude oil

and lowest level of natural gas price during the period August 2008 to October

2010.

� Overall price of CER according to these four scenarios varied between 6.89

US$/tCO2 to 15.39 US$/tCO2.


Price comparison between energy commodities

The above graph shows the comparison between price of carbon with crude oil and

natural gas.

It is seen that carbon prices almost follow the similar pattern as

natural gas. The world markets were hit by recession in late 2007, there by affecting the

crude oil prices which raised to about 100 $/barrel in 2008, similarly carbon prices

moved up to 15 $/tCO2e. However in early 2009 the prices fe

consumption of energy commodities were lowered due to declining industrial demand,

the carbon prices were also decreased because of decrease in demand of certified

emission reduction (CER) by developed economies. Thus prices of carbo

volatile in nature and depend upon their demand and supply. CERs as all other

commodity are subject to economic shocks that will ultimately affect their price. There

are instruments available in market which provides desirable level of protec

0

20

40

60

80

100

120

Au

g-0

8

sep

oct

no

v

de

c

Jan

-09

feb


Price comparison between energy commodities


It is seen that carbon prices almost follow the similar pattern as that of crude oil and



moved up to 15 $/tCO2e. However in early 2009 the prices fell dramatically as the



emission reduction (CER) by developed economies. Thus prices of carbo



are instruments available in market which provides desirable level of protec

feb

ma

rch

ap

ril

ma

y

jun

e

july

au

g

sep

oct

no

v

de

c

Jan

-10

feb

ma

rch

ap

ril

ma

y

jun

e

july


CER Spot price in $

Liquified Natural Gas($/000 cubic feet)


36


that of crude oil and



ll dramatically as the



emission reduction (CER) by developed economies. Thus prices of carbon credits are



are instruments available in market which provides desirable level of protection against

0

2

4

6

8

10

12

14

16

july

au

g

sep

oct

no

v

de

c

Liquified Natural Gas($/000 cubic feet)


37

market risks, but at the same time these instruments make this business sensitive and

speculation driven. The average price of CERs ranged between US$ 9 to US$ 11 during

2008-2010. Further in future if the carbon prices are high to moderate and gas prices are

moderate to low this would help Indian power generation units to shift from coal based to

gas based, thereby reducing the GHG emission in air and moving towards low carbon

economy. Moreover in Indian energy basket coal and oil has 52% and 32% share

respectively, hence there is an ample opportunities for CO2 reduction through so-called fuel

switching.


38

CO2 EMISSION/ CAPITA AND GROSS DOMESTIC PRODUCT/

CAPITA: CARBON PRODUCTIVITY

For World:

Scatter plot between CO2 emission and GDP for World.

A relationship between CO2 emission and GDP is determined; the scatter plot shows a

significant relation between the two quantities. The correlation between the quantities for

the world and India is 0.966 and 0.979 respectively. The correlation between CO2

emission and GDP per capita is highly positive that is both the parameters are positively

correlated. The above result indicates that, 1% increase in GDP per capita will lead to

0.96% increase in CO2 emission for world and 0.97% increase in CO2 emission for India.

The only difference in the world and Indian data is the steepness of slope of the two

scatter plots for the period 1997 to 2007. For the world, the small increase in GDP for

shorter period would lead to higher increase in carbon emission. Further, comparing the

percentage growth in CO2 emission and GDP during the period 1997 – 2007 for world is

10.9% and 63.27% respectively and for India it is 30% and 157.27% respectively. This

3.9

4

4.1

4.2

4.3

4.4

4.5

4.6

4.7

4.8

0 5000 10000

CO

2 e

mis

sio

n (

me

tric

ton

ne

s/ca

pit

a)

GDP per capita


39

clearly shows that in order to have sustainable growth the entire world has to move

towards green technologies in order to strike a balance between growth and emission.

As for India, the correlation is 0.97, but the slope in less inclined since this is due to the

fact that during 2000 to 2007 India has moved significantly towards mitigating the carbon

emission by adopting and implementing clean development mechanism (CDM) across

various sectors. Further it can be inferred that Indian industrial growth could be high due

to increasing non manufacturing or service industries like information technology (IT),

which obviously does not involve any GHG emissions.

For India:

Scatter plot between CO2 emission and GDP for India

In terms of CO2/GDP, India has continuously improved the efficiency of its economy and

reduced the CO2 emissions per unit of GDP by 21% between 1990 and 2008. India aims

to further reduce emissions intensity of GDP by 20-25% by 2020 compared with the 2005

level.

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

0 500 1000 1500

CO

2e

mis

sio

n m

etr

ic

ton

ne

s/ca

pit

a

GDP/capita


40

For world:

Correlation result:

GDP per capita (in US$)

CO2 emission(metric tons/ capita)

GDP per capita (in US$) 1

CO2 emission(metric tons/ capita) 0.96685797 1

Regression result:

� The regression line is Y (CO2 emission) = 3.121+ 0.0001 GDP.

� R2 is 0.93 which shows that 93% variation in CO2 emission is explained by GDP.


out of 100 cases the value for coefficient of GDP will lie between 0.00015 to

0.0002.

� The values of t-statistics at 5% significant level for intercept, independent

variable, GDP are 30.33 and 11.36 respectively.

� The F- statistics is 129, which is greater than the critical value, thus the overall



(CO2 emission) Y = 3.121+ 0.0001 GDP

Se = (0.102) (0.0000166)

T-stat = (30.33) (11.36)

R2 = 0.934, adjusted R2 = 0.927, F = 129, d.f =9


41

For India:

Correlation result:

GDP/capita (US$) CO2 emission metric tons/ capita

GDP/capita (US$) 1

CO2 emission metric tons/ capita 0.979495695 1

Regression result:

� The regression line is Y (CO2 emission) = 0.945+ 0.00048 GDP.

� R2 is 0.959 which shows that 95.9% variation in CO2 emission is explained by

GDP.


out of 100 cases the value for coefficient of GDP will lie between 0.00041 to

0.00056.


variable, GDP are 44.4 and 14.58 respectively.




� (CO2 emission) Y = 0.945+ 0.00048 GDP

Se = (0.021) (0.000033)

T-stat = (44.4) (14.58)

R2 = 0.959, adjusted R2 = 0.957, F = 212, d.f =9


42

CO2 EMISSION PER CAPITA AND POWER CONSUMPTION

For World:

Scatter plot between CO2 emission and electric power consumption for World.

For India:

Scatter plot between CO2 emission and electric power consumption for India.

The correlation between CO2 emission and power consumption for world is 0.93 and for

India it is 0.97. The scatter plot clearly shows that there is a high positive correlation

between the two quantities. Both the plots for India and world clearly shows that as the

3.9

4

4.1

4.2

4.3

4.4

4.5

4.6

4.7

0 500 1000 1500 2000 2500 3000

CO

2e

mis

sio

n (

me

tric

ton

ne

s/ca

pit

a)

Electric power consumption ( kwh/capita)

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

0 100 200 300 400 500 600

CO

2e

mis

sio

n i

n m

etr

ic t

on

ne

s/

cap

ita

Electric power consumption in Kwh/ capita


43

consumption of electricity is increasing year on year the emission is also increasing, this

reflects that still most of the power generating units in the world are fossil fuel fed,

specially coal fed.

The primary factors that alter CO2 emissions from electricity generation from year to

year are the growth in demand for electricity, the type of fuels or energy sources used for

generation, and the thermal efficiencies of the power plants.


44

For world:

Correlation result:

Electric power consumption(Kwh/capita)


Electric power consumption(Kwh/capita)

1


0.931383645 1

Regression result:

� The regression line is Y (CO2 emission) = 1.57+ 0.00108 electric power

consumption.

� R2 is 0.86 which shows that 86% variation in CO2 emission is explained by

electric power consumption.


out of 100 cases the value for coefficient of power consumption will lie between

0.00076 to 0.00139.


variable, power consumption are 4.48 and 7.67 respectively.




(CO2 emission) Y = 1.57+ 0.00108 electric power consumption

Se = (0.352) (0.00014)

T-stat = (4.48) (7.67)

R2 = 0.86, adjusted R2 = 0.85, F = 58.9, d.f =9


45

For India:

Correlation result:

Electric power consumption(Kwh/Capita)

CO2 emission metric tons/ capita

Electric power consumption(Kwh/Capita)

1

CO2 emission (metric tons/ capita)

0.979673946 1

Regression result:

� The regression line is Y (CO2 emission) = 0.349+ 0.002 electric power

consumption.

� R2 is 0.959 which shows that 95.9% variation in CO2 emission is explained by

electric power consumption.


out of 100 cases the value for coefficient of power consumption will lie between

0.0017 to 0.0023.


variable, power consumption are 5.71 and 14.65 respectively.




(CO2 emission) Y = 0.349+ 0.002 electric power consumption

Se = (0.061) (0.00013)

T-stat = (5.71) (14.65)

R2 = 0.959, adjusted R2 = 0.955, F = 214, d.f =9


46

CO2 EMISSION PER CAPITA AND FOSSIL FUEL CONSUMPTION

For world:

Scatter plot between CO2 emission and fossil fuel energy consumption for World.

The correlation between CO2 emission and fossil fuel consumption is 0.95. The sign of

coefficient of correlation is positive which shows that both the variables will move in

same direction. The value indicated that when Fossil fuel consumption increases, 95% of

time the CO2 emission also increases.

3.9

4

4.1

4.2

4.3

4.4

4.5

4.6

4.7

79.5 80 80.5 81 81.5

CO

2 e

mis

sio

n (

me

tric

to

nn

es/

cap

ita

)

Fossil fuel energy consumption (% of total)


47

For India:

Scatter plot between CO2 emission and fossil fuel energy consumption for India.

The correlation between CO2 emission and fossil fuel consumption is 0.95. The sign of

coefficient of correlation is positive which shows that both the variables will move in

same direction. The value indicated that when Fossil fuel consumption increases, 95% of

time the CO2 emission also increases.

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

62 64 66 68 70 72

CO

2 e

mis

sio

n (

me

tric

to

nn

es/

ca

pit

a)

Fossil Fuel Energy Consumption in %


48

For world:

Correlation result:

fossil fuel energy consumption(% of total)


fossil fuel energy consumption(% of total)

1


0.952589756 1

Regression result:

� The regression line is Y (CO2 emission) = -30.34+ 0.43 fossil fuel consumption.

� R2 is 0.90 which shows that 90% variation in CO2 emission is explained by fossil

fuel consumption.


out of 100 cases the value for coefficient of fossil fuel consumption will lie

between 0.32 to 0.53.

� The values of t-statistics at 5% significant level for intercept and fossil fuel

consumption are -8.2 and 9.3 respectively.




(CO2 emission) Y = -30.34+ 0.43 fossil fuel consumption

Se = (3.68) (0.04)

T-stat = (-8.2) (9.3)

R2 = 0.90, adjusted R2 = 0.89, F = 88, d.f =9


49

For India:

Correlation result:

Fossil fuel energy consumption(% of total)


Fossil fuel energy consumption(% of total)

1


0.953175508 1

Regression result:

� The regression line is Y (CO2 emission) = -1.95+ 0.048 fossil fuel consumption.

� R2 is 0.90 which shows that 90% variation in CO2 emission is explained by fossil

fuel consumption.


out of 100 cases the value for coefficient of fossil fuel consumption will lie

between 0.036 to 0.059.

� The values of t-statistics at 5% significant level for intercept and fossil fuel

consumption are -5.7 and 9.4 respectively.




(CO2 emission) Y = -1.95 + 0.048 fossil fuel consumption

Se = (0.33) (0.005)

T-stat = (-5.7) (9.4)

R2 = 0.90, adjusted R2 = 0.89, F = 89.4, d.f =9


50

CAPTURING THE FUTURE SCENARIO

The strength of any business lies in its future trend, how the business will grow whether

have an upward trend or downward or reach maturity or remain constant. The project

based market has shown a tremendous rise from mere 13 million tons of CO2e transacted

in 2001 to approx. 283 million tons of CO2e transacted in 2009. The future projections of

project based transactions from 2010 to 2016 shows a stable and constant trade in

volume. The volume of CO2e transacted would be hovering around 406 to 468 million

tones to CO2e and the value would be around US$ 5500 million to US$ 6470 million of

project based transaction during the year 2011 and 2016. The growth potential in the

future based on CDM projects depends on the demand for CER’s from Annex 1

countries.

The graphs shows a steeping growth during 2004 to 2007, during this period the demand

for CER in developed nations were very high in order to meet their emission

commitments, also markets were new and were developing rapidly across various

continents. The market for project-based emission reductions weakened considerably in

the second half of 2008 under the weight of the financial downturn and due to the

lingering questions about the rules of post-2012 eligibility.

During the year 2008 to 2009 the fall in CER transaction continued due to recession. The

CDM markets started regaining during 2009 and 2010, and thus in future there seems a

steady and constant growth.


Graph showing the past and forecasted volume of CO2e transacted in million tons

for years 2001 to 2016

Source: World Bank

Source: BlueNext Exchange

Graph showing the past and forecasted annual average price in US$ per tones CO2e

transacted for years 2001 to

0

100

200

300

400

500

600

700

2000 2002 2004

Vo

lum

e o

f C

O2

e T

ran

sact

ed

in

Mil

lio

n

ton

es

0

2

4

6

8

10

12

14

16

18

2000 2002 2004

An

na

ul a

vg

pri

ce in

US

$/t

CO

2e


howing the past and forecasted volume of CO2e transacted in million tons

Source: BlueNext Exchange


transacted for years 2001 to 2016.

2004 2006 2008 2010 2012 2014 2016Year

2004 2006 2008 2010 2012 2014 2016 2018Year


51

howing the past and forecasted volume of CO2e transacted in million tons


2018

Volume in

Million Tones

CO2e(Y) traded

Annaul average

price in

US$/tCO2e (Y)


52

As far as price of certified emission reduction is considered a similar pattern is seen as

that of volume transacted. The projected average price of CER would be around 13 to 14

US$/tCO2e in the upcoming years 2011 to 2016. The primary CER prices in 2008 were

an average of 16% higher at US$16, the value of transactions decreased by 12% from

2007 levels to US$6.5 billion. The 2008 average price reflects higher prices paid prior to

the financial meltdown, compared to much lower prices in the handful of transactions in

the remainder of 2008.

Table showing the volume and value of CO2e transacted in past and projected for

the future.

Source: State and trend of Carbon markets- World Bank

Note: The transactions include both CDM and JI

Year Volume in Million Tones CO2e(Y) traded

Annual average price in US$/tCO2e (Y)

Value Transacted in US$ million

2001 13 3.8 49.4

2002 29 4 116

2003 55 4.8 264

2004 65 3.2 208

2005 382 7 2674

2006 611 10 6110

2007 636 13 8268

2008 486 16 7776

2009 283 12.5 3537.5

2010 468.333333 13.83333333 6478.611105

2011 412.4444444 14.11111111 5820.049382

2012 387.9259259 13.48148148 5229.816186

2013 422.9012346 13.80864198 5839.691741

2014 407.7572016 13.80041152 5627.217182

2015 406.1947874 13.69684499 5563.587039

2016 412.2844079 13.76863283 5676.592634


53

DEMAND AND SUPPLY CENTERS

BUYERS

Buyers are governments, public-private partnerships like the Prototype Carbon Fund

(PCF), and increasingly private companies, especially from Japan. Private sector acting

alone now represents more than 40% of all the volume of emission reductions purchased

in developing countries. The demand will vary based on the rate of corporate growth,

actual output, efficiency measures undertaken as well as weather patterns and fuel prices.

Source: Carbon Finance

Graph showing the percentage share of major buyer countries of carbon credits

(includes CDM & JI)

The major buyers of carbon credits through CDM and JI for the years 2002 to 2009 were

United Kingdom (U.K), Spain, Europe Baltic, Netherlands, Japan, Italy, U.S.A, Canada,

Australia and New Zealand. Among these the consistent buyers were U.K, Spain, Japan,

Netherlands and other European countries.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2002 2003 2004 2005 2006 2007 2008 2009

PCF

Australia & New Zealand

Canada

USA

Other & UNSP

Italy

Other Europe

Japan

Netherlands

Europe-Baltic

Spain

U.K


54

The major buyer countries which had more than 10% market share over the period 2002

to 2009 were U.K, Japan, Europe Baltic and Netherlands. For the years 2009, 2008, 2007,

and 2006 the U.K showed aggressive buying of carbon credits with market share

averaging to 46%. Also for the years 2002 to 2009 Japan had an averaging buying share

of 23%.

In 2002 Carbon Market report showed Netherland, Japan, PCF and Canada had strong

buying pattern with more than 10% share each. Japan completely dominated the market

for project-based transactions in 2005 with buying share of 46%. Buyers from Japan

continued to be dominant by originating large trading houses. Almost all Japanese

contracts signed were with the private sector.

Within Europe, Italy (11%) and Spain (5%) sharply increased their purchasing in 2004,

while the share of the Netherlands ─ one of the earliest buyers in the market and the

biggest European buyer in 2004 ─ declined and the same trend was followed in 2005

with share of 8% in both the consecutive years. Within Europe, buyers from the Baltic

Sea Group (including Finland, Sweden, Norway, Germany, Denmark and Iceland) also

made significant purchases. The private sector clearly emerged in 2005 as the dominant

buyers in the project-based market with over 80% of the volume transacted. Towards the

end of 2005 and in early 2006, nearly all European project-based transactions had a

private buyer.

In 2007, buyers continued to show strong interest in the CDM and JI, and this was

supported by higher flows of capital into the carbon market. While transacted volumes

grew slightly to 636 MtCO2e for finalized primary project-based transactions. The

dynamics of the project-based market changed in early 2008 and the total transaction was

dropped to 485MtCO2e, as buyers became more cautious in response to a combination of

mounting delivery and issuance challenges, higher perceived credit risks amid the

generally bearish sentiment in the financial markets, as well as continuing uncertainty

about the role of and demand for CDM and JI in the post-2012 climate regime(s).


55

SELLERS

Source: Carbon Finance

Graph showing the percentage share of major seller countries of carbon credits

(includes CDM & JI)

In early years (mostly 1996 to 2000), the majority of project-based transactions took

place in industrialized countries, i.e., both buyers and sellers were located in

industrialized countries. A majority of reductions came from projects in Latin America

but, in 2003, Asia joined the list of major sellers specially India with share of around

50%. In particular, about 10 agreements for project activities were signed in India and

only one project in China, which has become a major player from 2005.

In 2006, China dominated the CDM market on the supply side with a 61% market share

of volumes transacted, down slightly from 71% in 2005. Next was India at 12%,

recovering from 3% in 2005. Asia as a whole led with an 80% market share. Latin

America – an early pioneer of the market – accounted for 10% of CDM transactions

overall with Brazil alone at 4%. The share of Africa remained constant, at about 3%.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2003 2004 2005 2006 2007 2008 2009

Australia & Newzealand

USA & Canada

OECD

Rest of Latin America

Brazil

Others

Africa

Rest of Asia

India

China


56

China had with an 84% market share in 2008, in the primary CDM market. Over the

period 2003-08, China accounted for 66% of all contracted CDM supply in the market.

With 4% and 3% market share each, India and Brazil rank second and third, respectively,

on the list of sellers in terms of volumes transacted. On a cumulative basis, Brazil

accounted for about 8% of primary CERs contracted cumulatively over 2002-2008. India,

on the other hand, accounts for 9% of CERs contracted cumulatively over 2002-2008.

The total value of the primary CDM market in 2009 fell to US$2.7 billion, 59% less than

the US$6.5 billion transacted in 2008. Africa and Central Asia doubled their market

shares in 2009 to 7% (15 million tons) and 5% (10 million tons), respectively. China

remained the most viable large-scale seller, maintaining its overall dominance with a

72% share of the market. However, China’s market share did decline from 2008.

India is still the second biggest carbon credits supplier after China in the market. Indian

average carbon market share over the period 2003 to 2009 has been around 16% to 17%.


57

SECTORIAL CDM PROJECTS IN INDIA

AND

OPPORTUNITIES IN OIL AND GAS

SECTOR


58

INDIAN SECTORIAL CDM PROJECTS

Till date 506 projects have been registered by the CDM executive board, which account

for about 20% of all the registered projects (as of 1 June 2010). In the initial stage of

CDM development in India, biomass utilization projects, waste gas/heat utilization

projects, and renewable energy (wind, hydro) projects were mainly being implemented.

Other than those projects, India has various types of registered CDM projects that include

energy efficiency (cement, steel and etc.), fuel switch, HFC reduction, N2O

decomposition, afforestation and reforestation, and transportation. The following pie

chart shows percentage share of the CDM projects in various sectors.

Source: IGES CDM Project database

Type of projects, which are being applied for CDM and which can be of valuable

potential, are:

Energy efficiency projects

� Increasing building efficiency (Concept of Green Building/LEED Rating), eg.

Technopolis Building Kolkata


59

� Increasing commercial/industrial energy efficiency (Renovation & Modernization

of old power plants)

� Fuel switching from more carbon intensive fuels to less carbon intensive fuels;

and also includes re-powering, upgrading instrumentation, controls, and/or

equipment

Transport

� Improvements in vehicle fuel efficiency by the introduction of new technologies

� Changes in vehicles and/or fuel type, for example, switch to electric cars or fuel

cell vehicles (CNG/Bio fuels)

� Switch of transport mode, e.g. changing to less carbon intensive means of

transport like trains (Metro in Delhi); and

� Reducing the frequency of the transport activity

Methane recovery

� Animal waste methane recovery & utilization

� Installing an anaerobic digester & utilizing methane to produce energy

� Coal mine methane recovery

� Collection & utilization of fugitive methane from coal mining;

� Capture of biogas

� Landfill methane recovery and utilization

� Capture & utilization of fugitive gas from gas pipelines;

� Methane collection and utilization from sewage/industrial waste treatment

facilities


60

Industrial process changes

� Any industrial process change resulting in the reduction of any category

greenhouse gas emissions

Cogeneration

� Use of waste heat from electric generation, such as exhaust from gas turbines, for

industrial purposes or heating (e.g. Distillery-Molasses/ bagasse)

Agricultural sector

� Energy efficiency improvements or switching to less carbon intensive energy

sources for water pumps (irrigation).

� Methane reductions in rice cultivation.

� Reducing animal waste or using produced animal waste for energy generation

(see also under methane recovery) and any other changes in an agricultural

practices resulting in reduction of any category of greenhouse gas emissions.


61

OIL AND GAS SECTOR

The O&G sector encompasses a wide variety of operations, ranging from the discovery

and production of O&G, to the delivery of products to consumers. In the scope of

upstream and downstream operations, O&G companies emit two primary types of GHG

emissions: carbon dioxide and methane. The general scope of applicable emission

sources for companies in the O&G sector that have the potential for CDM/JI projects are:

� Combustion in flares and incinerators

� Physical or chemical process emissions such as from gas processing, oil refining,

and petrochemical manufacture.

� Fugitive losses from equipment leaks (e.g. gas pipeline transmission, valves)

� Production of steam heat or electricity

� Production of work by engines and turbines (e.g. drive pumps/compressors)

The principal aqueous waste streams resulting from exploration and production operation

are:

� Produced water

� Drilling fluids, cuttings and well treatment chemicals

� Process wash and domestic wastes

� Cooling water

� Spills and leakage

Although considerable emission reduction opportunities exist in the sector, in general the

O&G sector has been relatively slow to implement projects under the CDM and JI

Mechanisms in their operations. Recently this mind-set has shifted as O&G companies

have come to realize the significant financial benefits of reducing GHG emissions. The

period of political uncertainty over the Kyoto Protocol and its instruments is over, and


62

early risk-takers in the carbon market have gained large financial rewards from investing

in emissions reduction projects. The CDM has become a well established international

financing mechanism creating billions of dollars in future carbon revenues, and

leveraging billions more in investments in renewable energy and other sectors. The

current status of the new carbon market presents excellent funding opportunities for

companies to develop projects in the O&G sector.

GHG abatement projects in upstream oil and gas sector:

Installation of Gas Recovery Facilities to prevent emission of methane/CO2 to the

atmosphere:

� Installation of compressors to recover low pressure (LP) gas and compress the

same for further distribution

� Installation of ejector systems which uses the motive force to suck LP gases

which were previously flared

� Installation of separators to separate gas at various pressures and recover very low

pressure gas that was previously flared

� Up-gradation of process gas compressors (PGC)

� Optimal utilization of gas for internal consumption in gas lift wells/ gas re-

injection

� Laying pipelines from gas rich areas to areas where there is scarcity of gas but

greater demand (by identifying potential consumers).

Common Grid of Power at Offshore:

� A common grid of power is setup by achieving interconnectivity across various

process and well platforms.


63

� This interconnectivity can be achieved by laying submarine cables and

transferring surplus power (NG based) to the shore for sale.

� The project replaces more carbon intensive power source (DG based) to relatively

cleaner (NG based) power.

Recovering Vapors from Storage Tanks:

� Recovery and utilization of vapors, previously being vented out from oil storage

tanks, using ejector system.

Carbon Capture & Storage (CCS):

� Capture of CO2 from large stationary sources, transportation of the gas to an

appropriate injection site where it is pumped and stored into underground

geological formations such as natural gas and oil fields.

� Storage may also be combined with Enhanced Oil Recovery (EOR) or Enhanced

Gas Recovery (EGR).

GHG abatement projects in downstream oil and gas sector:

Energy efficiency Improvement measures in the existing system- Steam generation and

distribution system up-gradation:

� Enhanced heat utilization through installation of centralized flash steam recovery

system to recover steam condensate

� Flash steam utilization in vapor absorption chiller to produce refrigeration effect

� Better steam trap management to reduce heat loss

� Improvement in the cogeneration/ self generation efficiency


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Steam optimization by installation of Dry-ejector system instead of steam-jet ejector in

VDU:

� In Dry-ejector system vacuum gas oil is used as motive liquid and circulated in

the system. This reduces generation of LP steam which is required as motive fluid

in conventional steam-jet ejector.

Other potential areas in refinery units where CDM may be applicable:

Flare recovery system:

� utilization to cater to heat demand of refinery

� utilization in boilers/ Gas Turbine

Fuel switch projects:

� Fuel switching in furnace, heater etc

� Fuel switch in the thermal energy generation system/ cogeneration/ self

generation equipments

Optimization in H2 recovery from off gases from CRU, VGO hydro-treater etc

Application of Advanced Processes:

� Use of new generation catalysts which reduces coke deposition on the catalyst

� Application of energy-efficient Solvent De-asphalting technology instead of

energy-intensive Cracking/Coking technology

� Novel bio-catalytic processes with very low energy consumption

� Application of membrane separation technology instead of conventional

separation techniques

� H2 generation in the refinery through natural gas reforming instead of naphtha

reforming


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� Gas-to-Liquid (GTL) technology for production of petroleum fuel/Lube oil/Wax

from Natural Gas

� Integrated Gas Combined Cycle (IGCC) based power generation from vacuum

residue/ petroleum coke – higher power generation efficiency with generation of

H2 as by product

� Steam-injection in Gas Turbine

Alternative Fuels/ Energy:

� Bio-diesel

� Efficient generation of H2 and utilization

� Renewable energy – wind power/ hydro power/ solar power etc.

Transportation project:

� Changes in the mode of transportation of petroleum products e.g. from road to

rail/ pipeline

� Energy efficiency improvement in the intermediate pumping stations of crude/

product pipelines

Registered CDM projects in Indian oil and gas sector:

Company Project implemented

Oil and Natural Gas

Corporation (ONGC) Limited

� Flare gas recovery project at Uran

plant, Oil and Natural Gas

Corporation (ONGC) Limited.

� Flare gas recovery project at Hazira

Gas Processing Complex (HGPC),

Hazira plant, Oil and Natural Gas

Corporation (ONGC) Limited.

� Up-gradation of Gas Turbine 1 (GT


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1) and Gas Turbine 2 (GT 2) at co-

generation plant of Hazira Gas

Processing Complex (HGPC) of Oil

and Natural Gas Corporation

Limited (ONGC).

� Waste heat recovery from Process

Gas Compressors (PGCs), Mumbai

high south (offshore platform) and

using the recovered heat to heat

process heating oil.

Oil India Limited

► Oil India Limited (OIL) –

Greenhouse Gas Emission

Reduction through Recovery and

Utilization of Flare Gas.

Essar Oil Limited

► GHG emission reduction through

the installation of energy efficient

vacuum creating system in the

vacuum distillation column of

petroleum refinery.

Numaligarh Refinery Limited

► NRL -Captive power generation by

recovery and utilization of the waste

energy (thermal and pressure) of HP

steam.

Bharat Petroleum Corporation Limited

► Bharat Petroleum Corporation

Limited (BPCL)’s Wind Power

Project, India.

Indian Oil Corporation Limited

► GHG emission reductions through

pre-heat train optimization in the

CDU and VDU of Digboi Refinery,,


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Indian Oil Corporation Limited

(Assam Oil Division).

► Flare Gas Recovery and Utilization

of Recovered Flare Gas for process

heating requirements at IOCL,

Haldia Refinery.

► Flare Gas Recovery system (FGRS)

at Barauni Refinery of Indian Oil

Corporation Limited.


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MARKET RISKS


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MARKET RISKS INVOLVED IN CARBON TRADING

Carbon trading is derivatives trading:

Most carbon trading, although it is rarely described as so, is actually derivatives trading.

Currently, most carbon, especially offsets, are sold as simple futures contracts (a type of

derivative). These contracts are promises to deliver carbon allowances or credits in a

certain quantity, at a certain price, at a specified date. Today’s carbon markets are small,

but if the United States adopts carbon trading (on the scale envisioned by the climate

legislation which passed the US House of representatives), carbon futures will become

the biggest of any derivatives product.

Derivatives are poorly regulated:

As the global financial crisis has shown, derivatives are not well regulated, and

regulations are practically non-existent at a global level. Currently, national and

international policy makers are debating on how to reform derivatives markets,

particularly the so-called "dark markets" in over-the-counter derivatives (unreported and

regulated financial deals made between two parties, rather than standardized contracts

traded on exchanges). However, these regulations are in flux, and traders are

aggressively lobbying to insert as many exceptions and loopholes as possible into

emerging rules.

General derivatives regulations are not enough to govern carbon:

Even if derivatives in general were excellently governed, they would not be enough to

govern carbon commodities. Unlike other commodities, carbon allowances have one

single producer with no marginal cost of production, and can be banked indefinitely with

no costs. This makes it difficult for regulators to determine whether the price of carbon is

tied to “market fundamentals.” Emissions trading schemes are also supposedly designed

so that the supply of allowances is supposed to contract, making market surveillance


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activities (e.g. monitoring whether prices are being artificially manipulated) more

difficult.

To make matters worse, policy makers around the world are designing carbon markets to

be particularly complex, which makes them prone to gaming and even more difficult to

regulate. For example, in the European Union (EU) free allowance give-away and over-

allocation have distorted carbon prices. In the US, policy makers are contemplating

creating a "trigger price" for carbon (i.e. flooding the market with additional carbon if

prices get too high), which provides additional opportunities for market manipulation and

gaming.

Ultimately, carbon markets are supposed to be established with an environmental

objective, and must be regulated as such. General derivatives regulations, which are

designed to prevent fraud and manipulation, are necessary but not sufficient.

A market dominated by speculators:

As carbon markets mature, the size of secondary markets (where individual or re-

packaged carbon is sold for the second, third, or twentieth time) will vastly overshadow

the primary markets (where carbon is bought and sold for the first time). That is because

Wall Street financiers are likely to end up dominating carbon markets, even though they

do not actually need the credits or allowances. Some of these financial players will be

traditional speculators, who want to make money by betting on whether the price of

carbon will go up or down. Others will be “passive investors” such as pension funds

which buy carbon and hoard it, hoping for -- and forcing -- the price to go up. If other

commodities markets, such as oil and corn, are any guide, passive investors will probably

end up owning about 40 percent of outstanding commodities contracts. This distorts

markets and creates excessive speculation, while providing little benefit to companies

seeking to comply with carbon caps.


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LIMITATIONS OF THE RESEARCH

� Since, research is limited to India hence it cannot be generalized for all other

CDM participating countries.

� Unable to get the industry views or experts involved in CDM projects, it would

have given more realistic scenario regarding CDM projects in India and its

sustainability.


72

CONCLUSION


73

CONCLUSION

The spirit and motivation behind the CDM need to be retained. Any effort to replace the

CDM with something totally new can possibly lead to the collapse of carbon market from

supply side and will be a big setback to fight against climate change. The mechanism

should be independent to be able to run on its own without too many interventions. At the

same time, it is important to focus on the fact that the CDM needs to reduce GHG

emissions, rather than focusing on the point that it leads to the generation of carbon

credits.

� The forecast for the project based transactions shows constant trend in

transactions of carbon credit volume for the duration 2011 to 2016. This shows

the CDM market will have moderate growth in future and demand won’t be too

high or low.

� The stability of carbon trading depends upon the price range of carbon credits

over the period. The price volatility of carbon credits is an issue which may create

an imbalance in demand and supply. As from the research it is concluded that

carbon prices almost follow the crude and natural gas prices, therefore a

significant variation in the price of these energy commodities would bring about

variation in carbon credit price. From the past trend (2008 – 2010), the price per

CER has been fluctuating at an all time low of US$ 6.7 and highest at US$ 15.2

an increase of 127 %, a variation of such type in future could cause risk to the

market.

� The GDP, electric power consumption and fossil fuel consumption have

significant impact on carbon trading, since these indicators are highly related to

increase or decrease of carbon emission. Carbon trading is a mechanism for

reducing environmental emissions keeping in mind the economic growth and

energy consumption of an economy. Therefore a relation between CO2 emission


74

along with economic growth and energy consumption gives a picture whether the

economy is moving in the direction of lowering GHG emission or not. Hence it is

important to focus on the fact that the CDM needs to reduce GHG emissions,

rather than focusing on the point that it leads to the generation of carbon credits.

Ultimately lowering of emission will lead to sustainability of this mechanism.

� The carbon intensity of energy supply is a measure of the amount of carbon

dioxide associated with each unit of energy used. It directly links changes in

carbon dioxide emissions levels with changes in energy usage. Carbon emissions

vary by energy source, with coal being the most carbon-intensive fuel, followed

by oil and natural gas. Nuclear power and some renewable energy sources (i.e.,

solar and wind) do not generate carbon dioxide emissions. As changes in the fuel

mix alter the share of total energy demand met by more carbon-intensive fuels

relative to less carbon-intensive or "carbon-free" energy sources, overall carbon

intensity changes. Over time, declining carbon intensity can offset increasing

energy consumption to some extent. If energy consumption increased and carbon

intensity declined at the same rate, carbon dioxide emissions would remain

constant.

� The energy intensity of economic activity is a measure of energy consumption per

unit of economic activity as measured by GDP. It relates changes in energy

consumption to changes in economic activity. As a country's energy intensity

changes, so does the influence of a given level of economic activity on carbon

dioxide emissions. Increased energy use and economic growth generally occur

together, although the degree to which they are linked varies across regions and

stages of economic development.

� Sector wise approach in clean development mechanism would help in focusing

for abatement of GHG emission through transfer of technology specific to the

sector. This approach would help in streamlining the methodology for the projects


75

specified under UNFCCC (United Nation Framework Convention on Climate

Change). But at the same time sectoral approach will face a lot many

implementation problems, and most of the developing countries are not at all

ready for the same. Availability of data to define sector baseline and boundaries

will be a big challenge.


76

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