Carbon Bank 02

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Carbon

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Carbon bank

1. Kyoto Protocol

2. Clean Development Mechanism

a. New commodity

b. Certified Emission Reduction

c. Sustainable Development

d. Methodology

e. CDM Market

f. CDM Evolving

3. Indias share in Carbon Credit Market

4. Carbon Trading

a. Emission Tradingb. Offset Trading

i. The theory behind Carbon Offsets

ii. Why do people Buy Carbon Offsets?

iii.Emerging Standards and how to buy

Offsets

5. CONCLUSION


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CARBON Bank

The dramatic imagery of global warming frightens people. Meltingglaciers, freak storms and stranded polar bears -- the mascots ofclimate change -- show how quickly and drastically greenhouse gasemissions (GHG) are changing our planet. Such graphic examples,combined with the rising price of energy, drive people to want toreduce consumption and lower their personal shares of globalemissions. But behind the emotional front of climate change lies adeveloping framework of economic solutions to the problem, the main

current international response to climate change and the centerpieceof the Kyoto Protocol.

The central feature of the Kyoto Protocol is its requirement thatcountries limit or reduce green house gas emissions. Emitting GHGover a set limit entails a potential cost. Conversely, emitters able tostay below their limit hold something of value. Thus, a new commoditywas created- emission reductions. Because carbon dioxide is theprinciple GHG, people speak simply of trading CARBON.

India signed and ratified the Protocol in August, 2002. Since India is

exempted from the framework of the treaty, it is expected to gain fromthe protocol in terms of transfer of technology and related foreigninvestments. At the G8 meeting in June 2005, Indian Prime MinisterManmohan Singh pointed out that the per-capita emission rates of thedeveloping countries are a tiny fraction of those in the developedworld. India maintains that the major responsibility of curbing emissionrests with the developed countries, which have accumulated emissionsover a long period of time. However, the U.S. and other Western
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nations assert that India, along with China, will account for most of theemissions in the coming decades, owing to their rapid industrializationand economic growth.

After hectic negotiations developed countries which have been the

biggest polluters accepted to on hard commitments to bring down thelevels of green house gases like CO2, by the year 2012 they committedto lower their emission level to what existed in the year 2000, whichmeant each developed country and within that country each industrywhich emitted GHG got fixed targets for emission reduction.

KYOTO PROTOCOL

The Kyoto Protocol is a protocol to the United Nations FrameworkConvention on Climate Change (UNFCCC or FCCC), an international

environmental treaty produced at the United Nations Conference onEnvironment and Development (UNCED), informally known as theEarth Summit, held in Rio de Janeiro, Brazil, from 314 June 1992. Thetreaty is intended to achieve "stabilization of greenhouse gasconcentrations in the atmosphere at a level that would preventdangerous anthropogenic interference with the climate system." TheKyoto Protocol establishes legally binding commitments for thereduction of four greenhouse gases (carbon dioxide, methane, nitrousoxide, sulphur hexafluoride)

Kyoto is intended to cut global emissions of greenhouse gases.

The objective is to achieve "stabilization of greenhouse gasconcentrations in the atmosphere at a level that would preventdangerous anthropogenic interference with the climate system."

Kyoto includes defined "flexible mechanisms" such as EmissionsTrading, the Clean Development Mechanism and Joint Implementationto allow developed economies to meet their greenhouse gas (GHG)emission limitations by purchasing GHG emission reductions creditsfrom elsewhere, through financial exchanges, projects that reduceemissions in under developed or developing economies, or fromDeveloped countries with excess allowances. In practice this meansthat developing or under developed economies have no GHG emissionrestrictions, but have financial incentives to develop GHG emissionreduction projects to receive "carbon credits" that can then be sold toDeveloped buyers, encouraging sustainable development. In addition,the flexible mechanisms allow Developed nations with efficient, lowGHG-emitting industries, and high prevailing environmental standards


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to purchase carbon credits on the world market instead of reducinggreenhouse gas emissions domestically. Developed entities typicallywill want to acquire carbon credits as cheaply as possible, whiledeveloping entities want to maximize the value of carbon creditsgenerated from their domestic Greenhouse Gas Projects.


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The chart below gives a representation of Annual CarbonEmission by several countries in 2000.

CLEAN DEVELOPMENT MECHANISM

Replacing the existing technology with a cleaner one on a large scaledemands a lot of capital investments. Therefore the WORLDCOMMUNITY came up with a market based plan called CLEANDEVELOPMENT MECHANISM. CDM assist countries in achievingsustainable development and emission reductions, while giving


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industrialized countries some flexibility in how they meet theiremission targets.

NEW COMMODITY

The sources of Kyoto credits are the Clean Development Mechanism(CDM). The central feature of the Kyoto Protocol is its requirementsthat countries limit or reduce green house gas emission. Emitting GHG

over a set limit entails a potential cost. Conversely, emitters belowtheir limit hold something of value. The new commodity was created-emission reductions. Because the Carbon dioxide is the principal GHG,people speak simply of trading CARBON.


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CERTIFIED EMISSION REDUCTION

The Clean Development Mechanism allow emission reduction projectsin developing countries to earn Certified Emission Reduction (CER)credits, each equivalent to one tonne of carbon dioxide. CERs can be

traded and sold, and used by industrialized countries to meet a part oftheir targets under the protocol.

SUSTAINABLE DEVELOPMENT

For a project to be considered for registration, project participantsmust first receive a letter of approval from the host country, statingthat the project assist the host country in achieving SustainableDevelopment goals.

METHODOLOGY

Any proposed CDM project has to use an approved baseline andmonitoring methodology to be validated, approved and registered.Baseline Methodology will set steps to determine the baseline withincertain applicability conditions whilst monitoring methodology will setspecific steps to determine monitoring parameters, quality assurance,and equipment to be used, in order to obtain data to calculate theemission reductions. Those approved methodologies are all coded."AM" stands for "Approved Methodology," "ACM" stands for "ApprovedConsolidated Methodology," "AMS" stands for "Approved Methodologyfor Small Scale Projects" and so on. All the approved methodology islisted in the UNFCCC home page. If a project developer can not find anapproved methodology that fits in his/her particular case, the projectdeveloper may submit a new methodology to the Meth Panel, and ifapproved the new methodology will be converted to an ApprovedMethodology.

CDM MARKET

Carbon trading under the Kyoto Protocol, however, is simply a quotasystem, whereby countries that emit below their quota must look tothe market. The CDM provides a means for developing countries,whose emission are not capped, to take part in this growing trade.Projects that achieve real emission reductions, according to the CDMsstringent rules, earn saleable units recognized internationally.


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CDM EVOLVING

Tackling carbon change will require huge shifts in investments flows tolow carbon technologies. Market-based mechanisms like CDM will bekey to achieving these shifts. Parties negotiating an international

response to climate change have said as much, stating clearly thatcarbon trading and market based mechanisms should continue.

INDIAS SHARE IN CARBON CREDIT

MARKETIndia is the second largest seller of carbon credits in the world with sixper cent share in 2007 while China tops the list with a whopping 73 percent share, a World Bank report said.

"India and Brazil, at 6 per cent market share each, transacted thehighest volumes after China in 2007," according to World Bank's `Stateand trends of the carbon market 2008' report.

China remained the world leader in CER supply for the third

consecutive year, with a 73 per cent market share in terms of volumeslast year against 54 per cent in 2006.

The report cited the attractiveness of China for buyers of carboncredits, due mainly to "the large size, economies of scale in origination,and its favourable investment climate."

China consolidated its position as the pre-eminent carbon creditsupplier, by quadrupling its number of projects in the pipeline fromJanuary 2007 to March 2008, even as the high price expectations forCERs in India and Brazil have hindered market growth in the two

countries, the report said.

China has 53 per cent of potential CER supply with 1,104 projects till2012, compared to India's 15 per cent of the total CDM pipeline, itnoted.

The report attributed Chin's lead to early regulatory efforts to mitigateclimate change.


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The total volume of carbon credits traded under a scheme in the KyotoProtocol remained almost unchanged in 2007 as compared with 2006,the report pointed out.

The volume of carbon credits totalled 551 million tonnes worth of

carbon in 2007, up slightly from 537 million tonnes in 2006 while it wasabout 350 million tonnes in 2005, nearly 100 million tonnes in 2004and 50 million tonnes in 2003.

The report attributes the slow growth to complicated procedures forregistering greenhouse gas reduction projects in developing countries.Also, developed countries like Japan, have been buying most of theircarbon emissions reduction obligations under the Kyoto pact fromprojects in developing countries.

CARBON TRADING

Carbon trading is the name given to the exchange of emission permits.This exchange may take place within the country or may take place inthe form of international transactions. We have two types of carbontrading a. Emission Trading

b. Offset Trading.

EMISSION TRADING

Emissions trading (or emission trading) is an administrative approach

used to control pollution by providing economicincentives forachieving reductions in the emissions ofpollutants. It is sometimescalled cap and trade.
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A coal power plant in Germany. Due to emissions trading, coalmight become less competitive as a fuel.

A central authority (usually a government or international body) sets alimit or cap on the amount of a pollutant that can be emitted.Companies or other groups are issued emission permits and arerequired to hold an equivalent number of allowances (or credits) whichrepresent the right to emit a specific amount. The total amount ofallowances and credits cannot exceed the cap, limiting total emissionsto that level. Companies that need to increase their emissionallowance must buy credits from those who pollute less. The transfer ofallowances is referred to as a trade. In effect, the buyer is paying acharge for polluting, while the seller is being rewarded for havingreduced emissions by more than was needed. Thus, in theory, thosethat can easily reduce emissions most cheaply will do so, achieving thepollution reduction at the lowest possible cost to society.

There are active trading programs in several pollutants. Forgreenhouse gases the largest is the European Union Emission TradingScheme. In the United States there is a national market to reduce acidrain and several regional markets in nitrous oxide. Markets for otherpollutants tend to be smaller and more localized.

Carbon trading is sometimes seen as a better approach than a directcarbon tax or direct regulation. By solely aiming at the cap it avoidsthe consequences and compromises that often accompany othermethods. It can be cheaper, and politically preferable for existingindustries because the initial allocation of allowances is often allocated
http://en.wikipedia.org/wiki/Coalhttp://en.wikipedia.org/wiki/Government_agencyhttp://en.wikipedia.org/wiki/Carbon_credithttp://en.wikipedia.org/wiki/Tradehttp://en.wikipedia.org/wiki/Greenhouse_gaseshttp://en.wikipedia.org/wiki/European_Union_Emission_Trading_Schemehttp://en.wikipedia.org/wiki/European_Union_Emission_Trading_Schemehttp://en.wikipedia.org/wiki/Acid_rainhttp://en.wikipedia.org/wiki/Acid_rainhttp://en.wikipedia.org/wiki/Carbon_taxhttp://en.wikipedia.org/wiki/File:Coal_power_plant_Datteln_2_Crop1.pnghttp://en.wikipedia.org/wiki/File:Coal_power_plant_Datteln_2_Crop1.pnghttp://en.wikipedia.org/wiki/Coalhttp://en.wikipedia.org/wiki/Government_agencyhttp://en.wikipedia.org/wiki/Carbon_credithttp://en.wikipedia.org/wiki/Tradehttp://en.wikipedia.org/wiki/Greenhouse_gaseshttp://en.wikipedia.org/wiki/European_Union_Emission_Trading_Schemehttp://en.wikipedia.org/wiki/European_Union_Emission_Trading_Schemehttp://en.wikipedia.org/wiki/Acid_rainhttp://en.wikipedia.org/wiki/Acid_rainhttp://en.wikipedia.org/wiki/Carbon_tax


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with a grandfathering provision where rights are issued in proportion tohistorical emissions. In addition, most of the money in the system isspent on environmental activities, and the investment directed atsustainable projects that earn credits in the developing world cancontribute to the Millennium Development Goals. Critics of emissions

trading point to problems of complexity, monitoring, enforcement, andsometimes dispute the initial allocation methods and cap.

The overall goal of an emissions trading plan is to reduce emissions.The cap is usually lowered over time - aiming towards a nationalemissions reduction target. In other systems a portion of all tradedcredits must be retired, causing a net reduction in emissions each timea trade occurs. In many cap and trade systems, organizations which donot pollute may also participate, thus environmental groups canpurchase and retire allowances or credits and hence drive up the priceof the remainder according to the law of demand. Corporations can

also prematurely retire allowances by donating them to a nonprofitentity and then be eligible for a tax deduction.

Because emissions trading use markets to determine how to deal withthe problem of pollution, it is often touted as an example of effectivefree market environmentalism. While the cap is usually set by apolitical process, individual companies are free to choose how or ifthey will reduce their emissions. In theory, firms will choose the least-costly way to comply with the pollution regulation, creating incentivesthat reduce the cost of achieving a pollution reduction goal.

Emission quotas were agreed by each participating country, with theintention of reducing their overall emissions by 5.2% of their 1990levels by the end of 2012. Under the treaty, for the 5-year complianceperiod from 2008 until 2012, nations that emit less than their quotawill be able to sell emissions credits to nations that exceed their quota.

It is also possible for developed countries within the trading scheme tosponsor carbon projects that provide a reduction in greenhouse gasemissions in other countries, as a way of generating tradeable carboncredits. The Protocol allows this through Clean DevelopmentMechanism (CDM) and Joint Implementation (JI) projects, in order to

provide flexible mechanisms to aid regulated entities in meeting theircompliance with their caps. The UNFCCC validates all CDM projects toensure they create genuine additional savings and that there is noleakage.

The Intergovernmental Panel on Climate Change has projected that thefinancial effect of compliance through trading within the Kyotocommitment period will be 'limited' at between 0.1-1.1percent of GDP
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among trading countries. By comparison the Stern report placed thecosts of doing nothing at five to 20 times higher.

OFFSET TRADING

After reduction has reached its limit, or its comfortable threshold,carbon offsets can make up for the rest.

Carbon offsets help reduce the globalgreenhouse gas totalby funding projects like reforestation inEcuador.

Carbon offsets are a form of trade. When you buy an offset, you fundprojects that reduce greenhouse gas (GHG) emissions. The projectsmight restore forests, update power plants and factories or increasethe energy efficiency of buildings and transportation. Carbon offsets letyou pay to reduce the global GHG total instead of making radical orimpossible reductions of your own. GHG emissions mix quickly with theair and, unlike other pollutants, spread around the entire planet.Because of this, it doesn't really matter where GHG reductions take

place if fewer emissions enter the atmosphere.

Carbon offsets are voluntary. People and businesses buy them toreduce their carbon footprints or build up their green image. Carbonoffsets can counteract specific activities like air travel and driving orevents like weddings and conferences.
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Some environmentalists doubt the validity and effectiveness of carbonoffsets. Because the commercial carbon trade is an emerging market,it's difficult to judge the quality of offset providers and projects. Treesdon't always live a full life, sequestration projects (for the long-termcontainment of emissions) sometimes fail and offset companies

occasionally deceive their customers. And voluntary offsets can easilybecome an excuse to overindulge and not feel guilty about it.

Carbon offsets do, however, raise awareness about lowering the GHGworld total.

The Theory Behind Carbon Offsets

GHG emissions are a global problem. Carbon offsets operate on the

idea that any reduction in any area is worthwhile. Yet it's muchcheaper to reduce or absorb emissions in developing or transitionalregions of the world. Currencies might be weaker or supplies lessexpensive. Logistically, it is easier to make changes in an area thatdoes not already have a developed infrastructure.

Carbon offsets help support renewable energy sources

like wind power.

Offsets, however, are somewhat of a luxury. You are, after all, payingfor non-emissions -- something that doesn't even exist. Because of this,most people who purchase offsets live in developed nations wheredrastically lowering domestic emissions is difficult and expensive. Abusiness or household might find buying offsets more economical thanretrofitting a building or eliminating auto emissions. With the planet as
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a whole producing about 25 billion tons of CO2 per year, it doesn'treally matter if a reforestation project in Ecuador gets its funding froman Ecuadorian banker or an American factory.

Carbon offsets fund projects like forest planting, conversion to

renewable energy sources or GHG collection and sequestration. Offsetssupport both large-scale and community projects. A single companymight restore a forest in Uganda and support the construction ofefficient stoves in Honduran villages.

But can carbon neutrality really be bought?

Why do People Buy Carbon Offsets?

As people and businesses become more aware of their owncontributions to global warming, some turn to carbon offsets as a way

to go neutral. Offset companies first estimate a customer's personalcarbon output. Their Web sites includecarbon calculators that determine thetotal GHG produced by a year's worth ofelectricity or driving, an event or even around-trip flight. Offset companies thencharge an amount based on their ownGHG price per ton. The money fundsprograms that offset an equal amount ofemissions. Some offset companies allowcustomers to choose their projects;

others do not.

Aside from the physical benefits of offsetprojects, voluntary commercial offsetsmake customers look beyond the limitsof their own households or businesses.Before buying offsets, people presumablyfirst reduce their own emissions. Theymay limit travel, choose energy-efficientappliances or convert to renewableenergy. After they cannot reduce any

more, or if they find it uneconomical to do so, carbon offsets help makeup for the rest.

Some purchasers, however, make no attempt to reduce their emissionsbefore buying carbon offsets. Critics claim that offsets give people whoare unwilling to change their lifestyle an easy, monetary way out oftaking real responsibility. Offsets do not provide carbon atonement fora trip by private jet or the construction of a sprawling mansion. When

Some people buy offsetstomake up for air-travelemissions.
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the average American car produces more CO2 in a year than the totalannual production of an average global citizen, it's clear that monetaryinvestments cannot replace actual GHG reductions in developednations.

Carbon offsets have also become the mode in corporate responsibility.Companies with green reputations attract a public increasinglyconcerned with the environment and global warming. Because carbonoffsets are voluntary, generous purchases can help strengthen acompany's environmental image. Some companies make real efforts tomodify their operations, create fewer GHG emissions and offset therest. But businesses can also conceal lax environmental standards withhighly promoted carbon offsets. Environmentalists call this type ofdeception greenwashing.

There are hundreds of offset projects available; how do you decide

what to buy?

Emerging Standards and How to Buy Offsets

Carbon offsets vary significantly in quality because they are intangible-- there is no product-- offset businesses that are not credible -- toscam consumers with bad or nonexistent projects. But with interest inoffsets growing, environmental and business organizations are tryingto establish reliable standards for rating offset companies and projects.Several standards have recently emerged: the Voluntary CarbonStandard (VCS), the Gold Standard and the Climate, Community and

Biodiversity Standard. While they focus on different types of offsets, allof the standards share the goal of bringing order to the boomingcarbon-offset business.
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Not all forestry offsets are completelyreliable.

The non-profit organization Clean Air-Cool Planet commissioned anevaluation of retail offset companies in December 2006. The report

proposes standards that consumers should consider before they buyoffsets. A quality offset funds only projects that would not haveoccurred without the extra support. This is called additionality,because all environmental benefits should be in addition to what wouldhave happened anyway. A good offset must also have an accuratebaseline, or estimate, of how much GHG a particular projectsequesters or avoids. A baseline set too high makes the project'sbenefits look more impressive than they really are. The GHGreductions should be accurately quantified, and the projects shouldhave permanence -- a low potential of releasing CO2 back into theatmosphere in the near future. Offsets also need clear, registered

ownership so the same offset cannot be resold again and again.

When a company warns consumers of the risks associated withprojects, it is acting with transparency. Offset companies that fundforestry projects should be especially up-front about the projects'permanence. It takes years for trees to reach their full growingpotential, and companies do not always disclose the likelihood ofdisease or fire. Despite questions of legitimacy, forestry offsets arepopular because they represent real, visible improvements. People feelmore comfortable buying 50 trees than sequestering a ton ofmethane.

The market for retail carbon offsets continues to grow, partly becauseof the absence or laxity of regulated carbon trading programs. There isno mandatory GHG market in the United States, but much of thedeveloped world supports the Kyoto Protocol, an addition to the UnitedNations Framework Convention on Climate Change. The United States,despite being a member of the Convention, chose not to ratify theProtocol in 2001.

Carbon offsets encourage individuals and businesses to takeresponsibility for their part in global climate change. Offsets don'texcuse excess, but if viewed as aid for people and the environment,they can be beneficial. Perhaps more importantly, the popularity ofvoluntary offsets could help promote a carbon market or a carbon taxbacked by public policy.
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EXAMPLE OF CARBON TRADINGThe concept of Carbon Trading and Emission Trading how it works canbe made clear with the help of the following example.

Country A

After trade ofemission right.

Buyer

Seller

RegulatoryCap

Levelsofem

ission

Country ABefore trade ofemissions right.

Country AAfter trade ofemission right.

Country BAfter trade ofemission right.


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In the year 2008 a country A emitted 1000 Carbon equivalent GHG.According to Kyoto Protocol it has been permitted to emit 948equivalent of GHG. This means it has to reduce its emission levels by

52 units. This it can do by exchanging the Carbon Credit of anothercountry which has positive Carbon Credit balance. This type ofexchange is known as Emission Trading.

If the country cannot buy Carbon Credits then there is an alternativeway. A country can invest in Carbon projects in another country to earnCarbon Credit and thereby help in meeting its reduction commitment.This is known as Offset Trading.

CONCLUSION

Carbon trading and other market-based schemes add a needed dose ofeconomic practicality to the emotionally charged issue of globalwarming. They help change the way we think about emissions, energyefficiency and the environment.

The Kyoto Protocol expires in 2012. Lawmakers around the world arerushing to analyze its achievements and shortcomings and negotiate asuccessor. The United States, Kyoto's most famous holdout, lacks anynational mandatory carbon legislation but, ironically, has a boomingvoluntary carbon market.
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Carbon Bank 02