Carbon Trading: An Innovative Financial Service

Presented By:

Anu Sahi Lecturer APJIM Jalandhar

Environmental Changes

Environmental Changes

Contents
Introduction Origin of Carbon Trading
UNFCCC

& Kyoto Protocol Clean Development Mechanism

Meaning

Carbon Trading Carbon Market Carbon Transactions Carbon Trading Mechanism Approaches of Carbon Trading Carbon Trading: Pros & Cons Carbon Market potential Indian Initiatives Conclusion

Meaning of Climate change

Variation in the Earths global climate or in regional climates over time. It describes changes in the state of the atmosphere over time scales ranging from decades to millions of years.

Carbon Emission: Reason for Climate Change

Impacts of Climate Change

Forests Biodiversity
Impact of rise in temperature of 1.8oC to 4oC

Agriculture

Coastlines

Climate Change Impact in India

Rajasthan- Drought Mumbai-Salt water intrusion Kerala Productivity of Forest Ganges Sedimentation problem Sunder bans-Sea level raise Northwest India-reduction In rice yield

World Carbon Dioxide Emission 1990-2025

Per-capita Carbon dioxide Emission (Metric Tons

Country USA
Europe Japan China Russia

In metric tons 20.01

9.40 9.87 3.60 11.71

India
World average

1.02
4.25

Snapshot on CO2 Emission by Human Activities

Particulars Consumption units Amount of Co2 released in atmosphere

Use of electricity LPG Us of motorbike Traveling by car

1 KW/hr 2 ltrs 1000 Km 1000 Km

10kg 3kg 84 kg 200 kg

Climate Change
Avenues for controlling spread of carbon Carbon Capture and Sequestration (CCS), in which carbon dioxide is caught at the point of production and piped to a secure facility for long-term storage. Carbon Emissions Trading, in which producers are allocated allowances for their anticipated carbon production, and can sell any that they dont use (or buy what they need to compensate for any over-production of carbon).

Origin of Carbon Trading

UNFCCC & Kyoto Protocol
The UN Framework Convention on Climate Change (UNFCCC) is one of a series of international agreements and treaties on global environmental issues that were adopted at the 1992 Earth Summit at Rio.
It provides the overall policy framework for addressing the climate change issue and so forms the foundation of global efforts to combat global warming.

The ultimate goal of the UNFCCC is: Stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic human induced interference with the climate system. (UNFCCC, 1992).

Kyoto Protocol to the United Nations Framework Convention on Climate Change

Signed in 1997; Entry into Force on 16 February 2005 Ratified by >170 countries Major non-participants: USA and Australia Commits industrialised countries (Annex I) to reducing their greenhouse gas emissions by, on average, 5% below 1990 levels in 2008-12 Individual, quantified emission targets for each industrialized country Six greenhouse gases covered: CO2, CH4, N2O, HFC/PFC, SF6 Flexibility mechanisms for financing emission reductions abroad: Clean Development Mechanism (CDM) Joint Implementation (JI) International Emissions Trading

Flexibility Mechanism
Clean

Development Mechanism (CDM):The opportunity for countries or companies to acquire Certified Emission Reductions (CER) that can be used to meet their own commitments by investing in projects in developing countries. Joint Implementation (JI):The opportunity for industrialized countries or companies with projects in other countries which have signed the Kyoto Protocol to acquire Emission Reduction Units (ERUs) that can be offset against their own commitments.

Flexibility Mechanism.
International Emissions trading (IET): A market-

based approach for achieving the environmental protection goals defined by the Kyoto Protocol. This approach allows countries that reduce their greenhouse gas emissions further than required to trade their excess certificates to offset emissions from other sources within or outside the country.

CDM Objectives and Organization

Twin objectives of CDM: Help Annex 1 countries meet their GHG emission reduction objectives in a costeffective way Contribute to sustainable development of the host country Involvement of Annex 1 Parties (buyers / investors) can take various forms: Most common: Purchase CERs from project proponent once they have been generated (typically, long-term forward purchase agreements) Less common: Investment in CDM project receive (part of) CERs as return on investment Rules, modalities and procedures of CDM are defined in: Kyoto Protocol (1997) Decisions of CDM Executive Board CDM Executive Board: Responsible for further development of implementation Composed of 10 Members Reports to the Conference of the Parties (COP)

CDM

rules,

and

supervising

CDM Project Cycle

Preparation of Project Design Document Host Country Approval to the candidate project Submission for registration UNFCCC- CDM Board Project validation by UNFCCC and DOE

One time activity

Project performance monitoring by project proponent

Certification and Issuance of CERs

Recurring Activity

Meaning of Carbon Trading

It is basically trading of certificates representing various ways in which carbon-related emissions reduction targets might be met.

Carbon Market
Carbon Market can be defined as market place that

involves an entity preparing a contractual agreement describing and specifying the kind of activity undertaken to reduce carbon emission.

Carbon Market
The types of transaction in carbon market can be:
Spot transaction: Delivery and payment occur

during a standard timeframe shortly after the agreement is executed Forward settlement: Delivery of reductions and payments are deferred to a future date also specified at the time of trade. Options: It gives the option buyer or seller the right but not the obligation to enter into a specific transaction on or before a certain date.

Carbon Transactions

purchases emission allowances created and allocated (or auctioned) by regulators under cap-and-trade regimes, such as Assigned Amount Units (AAUs) under the Kyoto Protocol, or EUAs under the European Union Emissions Trading Scheme (EU ETS).

Allowance-based transactions, in which the buyer

Carbon Transactions.
Project-based transactions In this the buyer purchases emission credits from a project that can verifiably demonstrate GHG emission reductions compared with what would have happened otherwise. The most notable examples of such activities are under the CDM and the JI mechanisms of the Kyoto Protocol, generating CERs and ERUs respectively.

CERs and VERs

Certified Emissions Reductions (CERs) are a

"certificate" just like a stock. A CER is given by the CDM Executive Board to projects in developing countries to certify they have reduced green house gas emissions by one tonne of carbon dioxide per year. For example, if a project generates energy using wind power instead of burning coal, it can reduce 50 tonnes of carbon dioxide per year. There it can claim 50 CERs (as one CER is equivalent to one tonne of carbon dioxide reduced).

VER
Voluntary Emission Reduction(VER) is also a

tradable commodity and refers to reduction of one ton of greenhouse gas. VERs are independently verified by a third party according to criteria that confirm that the emission reductions are real, measurable and credible. These independent auditors provide written assurance of the integrity of the emission reductions.

Carbon Credit
Carbon credit as defined by Kyoto protocol, is one metric

tonne of carbon emitted by burning of fossil fuels.

The GWP (Global Warming Potential) factors are used to

convert each of the five gases (like methane) that are not CO2 into tonnes of CO2 equivalent (CO2E), which is the standard of trading.

On this basis, participants engaged in carbon trading buy

and sell contractual commitments or certificates that represent specified amounts of carbon-related emissions.

Carbon Credit

Carbon Trading Mechanism

Carbon Trading mechanism includes: Central Authority - which fixes the limit of amount of pollutant that can be emitted by any sector. This limit of allowed pollutants becomes the permit of pollutants to be allowed in the environment. This permit is devised into several smaller units and distributed to several companies in the form of credit or allowance or permit.

Carbon Trading Mechanism.

Carbon trading Mechanism Contd ABC Company

XYZ Company
XYZ has been allotted 10 maximum unit of Green house gases(GHGs) that it can emit. XYZ actually emits only 8 units of GHGs. XYZ will have Two units as credit outstanding in its pollution account

ABC has also been allotted 10 maximum unit of GHGs that it can emit.
ABC actually emits 12 units instead of 10 units allotted to it. ABC will have now Two units of debit balance in its pollution account. ABC will be buying two units from XYZ and thus both the companies pollution account will be matched and the environment also is able to digest a certain scientifically fixed amount of pollutants.

Now XYZ will be able to transfer its two credit balance to two debit balance account of ABC

Approaches to Carbon Trading

Two Approaches: Baseline and Credit Regime
Cap and Trade Scheme

Approaches to Carbon Trading

Baseline and Credit Regimes It is a basically a voluntary approach. It does not set a fixed absolute cap on the emissions from the sectors covered by the regime. The regulator of this approach places the target through defining a baseline. Baseline is expressed in terms of emission efficiency. Emission efficiency is calculated in this approach in terms of weight per unit of input, output or activity. If the pollution exceeds the allowance given, the entity would not forced to buy appropriate number of such allowance from the open market . In short it is basically a carrot approach

Approaches to Carbon Trading

Cap and Trade Scheme
It is basically a non volunteer approach. It sets fixed absolute cap on the emissions from the sectors covered

by the regime. measurement.

The regulator in this approach focused more on quantitative

The unit of measurement of emissions is in terms of metric ton of

carbon dioxide.

The polluting industries, are given a certain number of allowances,

Certified Emission Reductions (CERs), each representing 1 metric ton of CO2 on the basis of historic data and their capacities of production. forced to either buy appropriate number of such allowance from the open market or to pay hefty fines nature.

If the pollution exceeds the allowance given, the entity would be

In short, it is basically a stick approach since it is not voluntary in

Cap and Trade Mechanism

Transfer of funds Is Market price =Limit Price? No Analysis of Market data

Company

Broker

Settlement of Transaction

yes

Clearing House

Execution of Order

ADVANTAGES OF CARBON TRADING

Advantages of Carbon Trading

It is the best way of reducing global warming. It is profitable for business houses as well as it

also helps the companies in achieving economical means of overall carbon reductions. Emitters are given flexibility and control Firms choose to emit/abate, not bureaucrats Rewards innovation and investment in new technology An incentive to go beyond minimum requirements Common price signal ensures that reductions take place where they are least costly Achieves environmental goals at least cost The overall cap on emissions ensures environmental objective is achieved.

Advantages Contd
It helps in creating renewable energy projects and

develop sources of renewable energy from wind turbines and solar panels. It helps in boosting the local economy, and the opportunity to improve the quality of life for local inhabitants by initiating renewable energy projects.

Disadvantages of Carbon Trading

Still requires monitoring, reporting, verification and

compliance infrastructure - like traditional regulation.

May result in increased local concentrations of emissions. Price is uncertain determined by market Relies on a price signal some markets may be less

efficient

Allocation of target/allowances is highly contentious.

Legal & Regulatory Framework for Environment Protection in India

Water (Prevention and Control of Pollution) Cess

Act, 1977 The Air (Prevention and Control of Pollution) Rules formulated in 1982 The Environment (Protection) Rules, 1986 The National Environment Appellate Authority Act, 1997 Ratification of UN Framework Convention on Climate Change (UNFCCC), 1992 Convention on Biological Diversity, 1992

Indian Initiatives
Launch of Indian Satellite for monitoring GHG Gases Expert group on low carbon economy

Energy Efficiency Standards for Appliances

Energy efficiency ratings made mandatory for 4 key appliances

refrigerators, air conditioners, tube lights and transformers from January 7, 2010. Fuel Efficiency Norms Plan for fuel economy norms for vehicles announced; to be made operational in two years National Policy on Bio-fuels approved by Cabinet to promote cultivation, production and use of Bio-fuels for transport and in other applications Capacity Building in Forestry Scheme New: Rs 369 crore (USD 80Mn) scheme for HRD for forest personnel Ambitious Rs 11,700crore (USD2.5Bn) Programme for forest conservation launched.

Carbon Market Potential: The Future of Carbon trading

"The carbon economy is the fastest growing industry

globally with US$84 billion of carbon trading conducted in 2007, doubling to $116 billion in 2008, and expected to reach over $200 billion by 2012 and over $2 trillion by 2020.
(World Bank Carbon Finance Report for 2007)

Carbon Market Potential Contd..

Carbon trading is one of the fastest-growing specialties in financial services.
Carbon will be the world's biggest commodity market. The governments all over the world have begin to cap carbon emissions and

initiate trading schemes, thus, necessitating a need for regulatory bodies that
can measure and confirm reduced emissions.
According to World Bank estimates, India is expected to collect $100 million

annually by trading in carbon credits and greenhouse gas emissions are expected to come down by 2.5 billion tone by 2012.
Indian companies are also expected to corner at least 10 per cent of the

global market in the initial years.

Conclusion