SUBMITTED TO:

GUJARAT UNIVERSITY

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SUBMITTED BY:

KOTHARY VAISHAL

NAVANI VICKY

DATE:

6TH MAY 2009

CARBON CREDIT Carbon credits are an element used to aid in regulation of the

amount of gases that are being released into the air. This is part of a larger international plan which has been created in an effort to reduce global warming and its effects.

The plan works by capping the amount of total emissions that can be released by one company or business.

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CARBON CREDITIf there is a shortfall in the amount of gases that are used, there is

a monetary value assigned to this shortfall and it may be traded. These credits are often traded between businesses.

However, they also are bought and sold in international markets at whatever the determined market value for them is.

There are also times when these credits are used to fund carbon reduction plans between trading partners.

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CARBON CREDITThere are two types of market in carbon credit:

1. Compliance Market (Annexure I countries)

2. Voluntary Market (Non- Annexure countries)

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KYOTO PROTOCOLThe Kyoto Protocol is a legally binding agreement that arose

out of the UNFCCC to tackle climate change through a reduction of green house gas emissions.

Countries (those listed in Annex I) are legally bound to reduce man-made green house gases emissions by approximately 5.2%

Individual countries have their own reduction targets outlined in Annex B of the Kyoto Protocol

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KYOTO PROTOCOLIt was adopted in Kyoto, Japan, on 11th December 1997

Objective:

“stabilisation of greenhouse gas concentrations in the atmosphere at a level that would prevent air pollution interference with the climate system”

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INDIA AND KYOTO PROTOCOLIndia 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

India maintains that the major responsibility of curbing emission rests with the developed countries, which have accumulated emissions over a long period of time.

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KYOTO MECHANISMKyoto 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.

The types of Kyoto mechanisms are:

1. Clean Development Mechanism

2. Emissions trading

3. Joint implementation (JI)

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KYOTO MECHANISMBoth Annex I & non-Annex I Parties must co-operate in the

areas of:Development, application & diffusion of climate friendly

technologies;Research & systematic observation of the climate system;Education, training, & public awareness of climate change; &The improvement of methodologies & data for GHG inventories.

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CDM MARKETThe CDM market is like any other commodity market.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 Buyers of CERs can be broadly classified into:

1. Compliance Buyers

2. Carbon Funds (e.g.: Carbon Fund of World Bank)

3. Traders

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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

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IDENTIFICATION OF PROJECT AND DEVELOPMENT OF PROJECT CONCEPT NOTE

IDENTIFICATION OF PROJECT AND DEVELOPMENT OF PROJECT CONCEPT NOTE

DEVELOPMENT OF PROJECT DESIGN DOCUMENTDEVELOPMENT OF PROJECT DESIGN DOCUMENT

HOST COUNTRY APPROVALHOST COUNTRY APPROVAL

SUBMISSION OF THE PDD AND HOST COUNTRY APPROVAL VALIDATOR

SUBMISSION OF THE PDD AND HOST COUNTRY APPROVAL VALIDATOR

MAKE PDD COMPLETELY AVAILABLE FOR 30 DAYSMAKE PDD COMPLETELY AVAILABLE FOR 30 DAYS

VALIDATION OF PROJECTVALIDATION OF PROJECT

SUBMISSION OF VALIDATION REPORT AND PDDSUBMISSION OF VALIDATION REPORT AND PDD

REGISTRATION WITH THE CDMREGISTRATION WITH THE CDM

PROJECT IMPLEMENTATION AND MONITORINGPROJECT IMPLEMENTATION AND MONITORING

VERIFICATION AND CERTIFICATIONVERIFICATION AND CERTIFICATION

POSSIBLE REVIEW BY CDM EXECUTIVE BOARDPOSSIBLE REVIEW BY CDM EXECUTIVE BOARD

ISSUANCE OF CERS TO PROJECT DEVELOPERSISSUANCE OF CERS TO PROJECT DEVELOPERS

CDM PROCESS

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CHALLANGESProcedural delays in the CDM: 2,022 out of 3,188 projects are at validation stage An average wait of 80 days to go from registration request to actual

registrationComplex rules and the capacity constraint: DOEs are unable to keep up with a large backlog of projects awaiting

registration It is difficult to recruit, train and retain qualified, technical staff to apply the

complex rules consistentlyImpact of delays on carbon payments: Delays for any reason in a project’s schedule can jeopardize elements of its

financing package, and ultimately its construction and implementation

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EMISSION TRADINGEmissions trading (ET) is a mechanism that enables countries

with legally binding emissions targets to buy and sell emissions allowances among themselves

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)

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EMISSION TRADING V/S CARBON TAXES:THE POLITICS-WHO LIKES WHICH POLICY & WHY?

United States is the strongest proponent of emissions trading as US is energy inefficient and has high per capita carbon dioxide emissions levels.

The European Union has been in favor of carbon taxes as the EU is already relatively energy efficient

The Russian Federation & the Ukraine are major supporters of emissions trading

Developing countries are extremely cautious of emissions trading, & view it primarily as a "loophole" that the US & Japan can use to avoid their domestic responsibility

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JOINT IMPLEMENTATION (JI)Joint implementation 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)

In simple terms Joint Implementation means transfer of emissions reduction at the project level.

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JOINT IMPLEMENTATION (JI)There are two approaches for verification of emission

reductions:

Under JI 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.

Under JI Track 2, each JI project is subject to verification procedures established under the supervision of the Joint Implementation Supervisory Committee.

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CARBON TRADINGA carbon trading system allows the development of a market

through which carbon dioxide or carbon equivalents can be traded between participants, whether countries or companies. Each carbon credit is equal to 100 metric tons of carbon dioxide, which can be traded or exchanged in market.

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

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TYPES OF CARBON TRADING1. EMISSION TRADING:A company can reduce its emission by half the cost of allowance

bought from other companyOn 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

2. PROJECT-BASED TRADING:Government & World Bank subsidized credit for project-based

trading to the companies calculating how much carbon dioxide equivalent they save/reduces

Project-based Credit trading includes ‘baseline-and-credit’ trading and ‘offset’ trading

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TYPES OF CARBON TRADING3. 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’

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CARBON NETWORKSellerSeller

BanksBanks

IndividualsIndividuals

ConsultantsConsultants

Annex 2 & 3 countries

Annex 2 & 3 countries

OthersOthers

BuyersBuyers

Annex 1 countryAnnex 1 country

BanksBanks

IndividualsIndividuals

ConsultantsConsultants

OthersOthers

NGO & Government

NGO & Government

ExchangeExchange

Trading exchangeTrading

exchange

BanksBanks

Brokers & Traders

Brokers & Traders

Intermediary service

providers

Intermediary service

providers

ConsultantsConsultants

NGO & Govt.

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PARTIES INVOLVED IN CARBON TRADINGPROJECT ENTITY:Joint venture company or a limited partnership that are set up

specifically to undertake the project

SPONSOR:Individuals, companies or other entities that support a project

who have a direct or indirect interest in the project.

LENDER:If the project is financed through debt, one or more banks may

be involved in providing this.

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PARTIES INVOLVED IN CARBON TRADINGEQUITY PROVIDER:Equity may be provided by project sponsors or third party

investors who ensure that the project produces a ROI as set out in the business plan or prospectus.

CONSTRUCTOR:Who have responsibility for the completion of the works, & often

have to assume liability for finishing construction on time and to budget.

OPERATOR:Person responsible for the operation and maintenance of the

project facilities once completed23

PARTIES INVOLVED IN CARBON TRADINGSUPPLIER

BUYER

INSURER: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 may be involved if the financing of the

project involves the issue of securities

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PARTIES INVOLVED IN CARBON TRADINGEXPERTS:Experts are individuals who give advise 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

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ADVANTAGES OF CARBON TRADING

New cash source to companies who are able to maintain their emission levels well within the permissible limits.

The overall ecological balance is preserved

The company or country gets rewarded for applying clean technology in its production process.

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ADVANTAGES OF CARBON TRADING

A much better corporate and social image which wins public approval

Encourages activities like tree plantings which would help reduce soil salinity, improve water quality and enhance biodiversity

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KEY RISKS AND UNCERTAINTIESThe extent to which the Kyoto Protocol guidelines are

implemented & followed

The attitude of US which is the biggest polluter and had refused to sign the treaty

The final rules and decisions relating to an emissions trading market

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POSITION OF INDIAIndia is considered as the largest beneficiary, claiming about

31 % of the total world carbon trade through 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

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

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PRESENT STATUS OF DUMPING GROUNDS IN INDIA

In India, due to increased population & commercial development, cities are facing problems of Municipal Solid Waste disposal. The urban population in larger towns & cities in India is increasing at a decadal growth rate of above 40%

Various processes/technologies available to reduce the amount of Municipal Solid Waste are as follows:

Physical (a. Pelletisation) Biochemical (a. Aerobic Composting b. Anaerobic Digestion) Thermal (a. Incineration b. Gasification)

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CARBON TRADING AT MCXThe Multi Commodity Exchange of India Ltd entered into an

alliance with the Chicago Climate Exchange in 2005 to introduce carbon credit trading in India

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

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 are actually financial investors

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CARBON TRADING AT MCXTRADING 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

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OUTLOOK FOR INDIAIndia 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

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INDIAN COMPANIES: TAKING ADVANTAGEGujarat 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 CER credits from this year itself

Tata Steel is believed to have signed a 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

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

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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

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INDIAN COMPANIES: TAKING ADVANTAGE

CONCLUSIONSThere is a great opportunity awaiting for 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 % of the total world carbon trade, says a recent World Bank report

Analysts claim if more companies absorb clean technologies, total CERs with India could touch 500 million.

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CONCLUSIONSOf the 391 projects sanctioned, the UNFCCC has registered

114 from India, the highest for any country.

There are projects range from cement, steel, biomass power, bio-gases 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

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THANK YOU

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