Carbon Credit

Institute of Petroleum Management

Gandhinagar

Submitted by-
Shahid Ahmed
Shashank Suman
Shashank Tiwari
Shashwat Chaturvedi

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Executive Summary

The dangers of Global Warming and Climate Change that the world is
creating for it self, through emissions of GHGs, are one of the primary
issues of concern in the globe. IPCC and UNFCCC have made the
people realize this and hence not very late the world has reacted to it
in the form of Kyoto Protocol and Marrekesh Accords. But the industrial
world has even sought a way to materialize this concern and have
converted it into a huge business opportunity in the form of Carbon
Markets and Carbon Credits. Thus converting a negative externality
into a good business opportunity in which according to Coase Theorem
“everyone is better off”.

It is not only helping the world to reduce the emissions but also letting
developing countries like India to have a good business opportunity to
capitalize on it for its development.

Objective
The objective of this project is to understand the concept of carbon
credits. What is it, how it is traded, what are its different mechanisms.
We have also tried to find out the reasons which led to it. How this
market was created. How does it effect the environment or in other
words how is the environment being benefited due to it. Looking
towards the past we have tried to find out what was the Kyoto Protocol,
what led to it, what the decisions were taken. Looking at the present
scenario we have tried to find how India is capitalizing on it.

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List of Abbreviations Used

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 AAU Assigned Amount Unit (unit for
emissions trading)
AE Applicant Entity (an entity
applying to be a DOE)
AIJ Activities Implemented Jointly
The 39 developed countries in
Annex B Annex B of the Kyoto Protocol
that have GHG reduction
commitments.
The 36 developed countries in
Annex I of the UNFCCC that
Annex I had non-binding GHG reduction
commitments to 1990 levels
by 2000.
AP Accreditation Panel (a panel under
the EB)
Assessment Team (made by the
AT CDM Assessment Panel
under the EB to evaluate each AE)
CDCF Community Development Carbon
Fund (a WB activity)
CDM Clean Development Mechanism
CER Certified Emission Reduction (unit
for the CDM)
Certified Emission Reduction Unit
CERUPT Purchasing Procurement Tender

COP Conference of the Parties

Conference of the Parties and
Meetings serving as the
COP/MOP meeting of the Parties to the Kyoto
Protocol when the
Kyoto Protocol enters into force.
Designated Operational Entity: an
DOE accredited organisation
that validates and certifies CDM
projects.
Executive Board: the highest
EB authority for the CDM
under the COP/MOP.
DNA Designated National Authority
EIA Environmental Impact Assessment
Economies in Transition (former
EIT Soviet Union, central
and eastern European countries)
ERU Emission Reduction Unit (unit for
JI)
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GHG Greenhouse gas
 Chapter One
Background

1.1 Introduction

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Day by day the cycle of climate on earth is changing. Global warming
has led to season shifting, changing landscapes, rising sea levels,
increased risk of drought and floods, stronger storms, increase in heat
related illness and diseases all over the world. This has resulted due to
emissions of Green House Gases (GHG’s) from various anthropogenic
activities.
Burning of fossil fuels is a major source of industrial greenhouse
gas emissions, especially for power, cement, steel, textile, fertilizer
and many other industries which rely on fossil fuels (coal, electricity
derived from coal, natural gas and oil). The major greenhouse gases
emitted by these industries are carbon dioxide, methane, nitrous
oxide, hydrofluorocarbons (HFCs), etc, all of which have not yet been
completely proven to increase the atmosphere's ability to trap infrared
energy and thus affect the climate. The concept of carbon credits
came into existence as a result of increasing awareness of the need for
controlling emissions. The IPCC has observed that:
Policies that provide a real or implicit price of carbon could
create incentives for producers and consumers to significantly
invest in low-GHG products, technologies and processes. Such
policies could include economic instruments, government
funding and regulation,
While noting that a tradable permit system is one of the policy
instruments that has been shown to be environmentally effective in
the industrial sector, as long as there are reasonable levels of
predictability over the initial allocation mechanism and long-term
price. It soon became apparent that the voluntary approach under the
FCCC was producing next to nothing in actual policy measures.
Moreover, some countries, particularly the U.S., were experiencing
rapid growth in CO2 emissions. This led the advocates of strong policy
measures to pursue binding commitments, which led to the Kyoto
Protocol of December 1997. The key provision of the Kyoto Protocol is

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Article 3, which states: “The Parties included in Annex I shall,
individually or jointly, ensure that their aggregate anthropogenic
carbon dioxide equivalent emissions of the greenhouse gases ... do not
exceed their assigned amounts, ... with a view to reducing their overall
emissions of such gases by at least 5 per cent below 1990 levels in the
commitment period 2008 to 2012.”
In the light of this realization Kyoto Protocol and in turn Carbon Credit
came into picture. List of activities in chronological order which led to
these are:

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The debate on climate change has shifted dramatically over the past
few years. The strong evidence presented by the scientific community
through the Inter Governmental Panel on Climate Change (IPCC)
processes has largely settled the debate about whether the world
needs to respond. The question now is what shape such a response
Date Activities

1988 UNEP and World Meteorological

Organization (WMO) establish the Inter
Governmental Panel on Climate Change
(IPCC)

The UN Framework Conventions on

1992 Climate Change (UNFCCC) is agreed to
meet at Rio De Janeiro “EARTH
SUMMIT”.

1994 UNFCC enters into force.

IPCC Second Amendment report concludes

1995 that there is evidence suggesting a
discernible human influence on the global
climate system.

1997 Adoption of the Kyoto Protocol to the UN

Climate Convention.

IPCC finds stronger connection between

2001 human activities and global climate system.

2004 Russia ratifies the Kyoto Protocol.

2005 Kyoto Protocol enters into effect
.
2005 First meeting of the parties (MoP) of Kyoto
Protocol takes place in Montreal, Canada.
should take. There is an agreement approaching consensus that any
successful program of action on climate change must support two

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objectives- stabilizing atmospheric greenhouse gases (GHGs) and
maintaining economic growth.

The mechanism was formalized in the Kyoto Protocol, an international

agreement between more than 170 countries, and the market
mechanisms were agreed through the subsequent Marrakesh Accords.

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1.2 What is Kyoto Protocol?

The Kyoto Protocol is a protocol to the United Nations Framework

Convention on Climate Change (UNFCCC or FCCC), an
international environmental treaty produced at the United
Nations Conference on Environment and Development (UNCED),
informally known as the Earth Summit, held in Rio de Janeiro, Brazil,
from 3–14 June 1992. The treaty is intended to achieve "stabilization
of greenhouse gas concentrations in the atmosphere at a level that
would prevent dangerous anthropogenic interference with the climate
system. The Kyoto Protocol establishes legally binding commitments
for the reduction of six greenhouse gases (carbon dioxide, methane,
nitrous oxide, sulfur hexafluoride, hydrofluorocarbons,
and perfluorocarbons) produced by "Annex I" (industrialized) nations,
as well as general commitments for all member countries. As of
2008, 183 parties have ratified the protocol, which was initially
adopted for use on 11 December 1997 in Kyoto, Japan and which
entered into force on 16 February 2005.

The UNFCCC divides countries into two main groups: A total of 41

industrialized countries are currently listed in the Convention’s Annex-I
, including the relatively wealthy industrialized countries that were
members of the Organization for Economic Co-operation and
Development (OECD) in 1992, plus countries with economies in

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transition (EITs), including the Russian Federation, the Baltic States,
and several Central and Eastern European States. The OECD members
of Annex-I (not the EITs) are also listed in the Convention’s Annex-II .
There are currently 24 such Annex-II Parties. All other countries not
listed in the Convention’s Annexes, mostly the developing countries,
are known as non-Annex-I countries.

Recognizing that developed countries are principally responsible for

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

The major distinction between the Protocol and the Convention

is that while the Convention encouraged industrialized
countries to stabilize GHG emissions; the Protocol
commits them to do so.

The five principal concepts of the Kyoto Protocol are:

 Commitments. The heart of the Protocol lies in establishing

commitments for the reduction of greenhouse gases that are
legally binding for Annex I countries, as well as general
commitments for all member countries.

 Implementation. In order to meet the objectives of the Protocol,

Annex I countries are required to prepare policies and measures
for the reduction of greenhouse gases in their respective
countries. In addition, they are required to increase the
absorption of these gases and utilize all mechanisms available,

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 such as joint implementation, the clean development mechanism
and emissions trading, in order to be rewarded with credits that
would allow more greenhouse gas emissions at home.

 Minimizing Impacts on Developing Countries by establishing an

adaptation fund for climate change.

 Accounting, Reporting and Review in order to ensure the integrity

of the Protocol.

The decisions under the protocol were compiled under 28 Articles and
two annexes A & B, and I & II

To list some of the important decisions:

i. Article 2
1. Each Party included in Annex I, in achieving its quantified
emission limitation and reduction commitments under Article 3, in
order to promote sustainable development, shall:
(a) Implement and/or further elaborate policies and measures in
accordance with its national circumstances, such as:
(i) Enhancement of energy efficiency in relevant sectors of the
national economy;
(ii) Protection and enhancement of sinks and reservoirs of
greenhouse gases not controlled by the Montreal Protocol, taking
into account its commitments under relevant international
environmental agreements; promotion of sustainable forest
management practices, afforestation and reforestation;

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(iii) Promotion of sustainable forms of agriculture in light of climate
change considerations;
(iv) Research on, and promotion, development and increased use
of, new and renewable forms of energy, of carbon dioxide
sequestration technologies and of advanced and innovative
environmentally sound technologies;

ii. Article 3
The Parties included in Annex I shall, individually or jointly, ensure
that their aggregate anthropogenic carbon dioxide equivalent
emissions of the greenhouse gases listed in Annex A do not exceed
their assigned amounts, calculated pursuant to their quantified
emission limitation and reduction commitments inscribed in Annex
B and in accordance with the provisions of this Article, with a view
to reducing their overall emissions of such gases by at least 5 per
cent below 1990 levels in the commitment period 2008 to 2012.

Each Party included in Annex I shall, by 2005, have made

demonstrable progress in achieving its commitments under this
Protocol.
Any certified emission reductions which a Party acquires from
another Party in accordance with the provisions of Article 12 shall
be added to the assigned amount for the acquiring Party

Any emission reduction units, or any part of an assigned amount,

which a Party acquires from another Party in accordance with the
provisions of Article 6 or of Article 17 shall be added to the assigned
amount for the acquiring Party.

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Any certified emission reductions which a Party acquires from
another Party in accordance with the provisions of Article 12 shall
be added to the assigned amount for the acquiring Party.

iii. Article 6

For the purpose of meeting its commitments under Article 3, any

Party included in Annex I may transfer to, or acquire from, any other
such Party emission reduction units resulting from projects aimed at
reducing anthropogenic emissions by sources or enhancing
anthropogenic removals by sinks of greenhouse gases in any sector
of the economy, provided that:

(a) Any such project has the approval of the Parties involved;

(b) Any such project provides a reduction in emissions by sources,

or an enhancement of removals by sinks, that is additional to any
that would otherwise occur;

(c) It does not acquire any emission reduction units if it is not in

compliance with its obligations under Articles 5 and 7; and

(d) The acquisition of emission reduction units shall be

supplemental to domestic actions for the purposes of meeting
commitments under Article 3.

iv. Also Article 7 and Article 17 which talks about CDM and
Emissions Trading mechanisms of the carbon trading.

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 1.3 Signatories to the UNFCCC are split into three
groups:

 Annex I countries (industrialized countries)

 Annex II countries (developed countries which pay for costs of
developing countries)
 Developing countries (Non-Annex).*

Annex I countries agree to reduce their emissions

(particularly carbon dioxide) to target levels below their 1990
emissions levels. If they cannot do so, they must buy emission
credits or invest in conservation. Annex II countries that have to
provide financial resources for the developing countries, are a sub-
group of the annex I countries consisting of the OECD members,
without those that were with transition economy in 1992.
Developing countries may volunteer to become Annex I countries
when they are sufficiently developed.
Developing countries are not expected to implement their
commitments under the Convention unless developed countries
supply enough funding and technology, and this has lower priority
than economic and social development and dealing with poverty.
*{an exhaustive list of countries under the Kyoto protocol is attached in the appendix.}

List of items in Annex A are

Greenhouse gases

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 • Carbon dioxide (CO2)

• Methane (CH4)

• Nitrous oxide (N2O)

• Hydrofluorocarbons (HFCs)

• Perfluorocarbons (PFCs)

• Sulphur hexafluoride (SF6)

Sectors/source categories

• Energy
• Fuel combustion
• Energy industries
• Manufacturing industries and construction
• Transport
• Fugitive emissions from fuels
• Solid fuels
• Oil and natural gas
• Industrial processes
• Mineral products
• Chemical industry

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 • Metal production
• Other production
• Production of halocarbons and sulphur hexafluoride
• Consumption of halocarbons and sulphur hexafluoride
• Solvent and other product use
• Agriculture
• Enteric fermentation
• Manure management
• Rice cultivation
• Agricultural soils
• Prescribed burning of savannas
• Field burning of agricultural residues
• Waste
• Solid waste disposal on land
• Wastewater handling

Countries included in Annex B to the Kyoto Protocol

and their emissions targets

Target (1990**
Country
- 2008/2012)

EU-15*, Bulgaria, Czech Republic, Estonia,

Latvia,Liechtenstein, Lithuania, Monaco, -8%
Romania,Slovakia,Slovenia, Switzerland

US*** -7%
Canada, Hungary, Japan, Poland -6%

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 Croatia -5%
New Zealand, Russian Federation, Ukraine 0
Norway +1%
Australia +8%
Iceland +10%

* The 15 States who were EU members in 1990 will redistribute their

targets among themselves, taking advantage of a scheme under the
Protocol known as a “bubble”, whereby countries have different
individual targets, but which combined make an overall target for that
group of countries. The EU has already reached agreement on how its
targets will be redistributed.
** Some EITs have a baseline other than 1990.
*** The US has indicated its intention not to ratify the Kyoto Protocol.
Note: Although they are listed in the Convention’s Annex I,
Belarus and Turkey are not included in the Protocol’s Annex B as they
were not Parties to the Convention when the Protocol was adopted.

Non-Annex I Countries
All countries that are not listed as Annex I parties, labelled “Non-Annex
I Countries”, do not have binding emission reduction targets for the
first period (2008-2012) of the Kyoto Protocol.

Under the Kyoto Protocol, Non-Annex I countries are currently not

allowed to participate in the international emission trading market,
however, under Kyoto Mechanisms they can benefit from the
participation in CDM projects (either bilaterally, with a
participating Annex I country, or unilaterally with participation of only
Non-Annex I countries).

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1.4 Eligibility to participate in the Kyoto
mechanisms.

The Kyoto Protocol requires that a Party must meet six specific criteria
in
order to be eligible to participate in the Kyoto Protocol mechanisms.
These
criteria are based on the methodological and reporting requirements
under
Article 5, paragraphs 1 and 2, and Article 7, paragraphs 1 and 4. These
eligibility criteria help to ensure that a Party is accounting accurately
for its

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emissions and assigned amount.

There are six basic criteria for eligibility to participate in the Kyoto
Mechanisms.

(a) The Party is a Party to the Kyoto Protocol.

(b) The Party’s initial assigned amount has been recorded in the CAD.

(c) The Party’s GHG national system is in compliance with that it has
established a national system for the estimation of anthropogenic
emissions by sources and removals by sinks of all greenhouse gases
not controlled by the Montreal Protocol.

(d) The Party’s national registry is in compliance with the requirements

established by COP for the preparation of national communications by
Parties included in Annex I.

(e) The Party has submitted its inventory for the most recent year, and
this inventory meets the requirements established under Article 7,
paragraph 1.

(f) The Party has submitted its information on assigned amount under
Article 7, paragraph 1 (e.g. the SEF and related information), and has
accounted correctly for additions to and subtractions from its assigned
amount.

1.5 Marrakesh Accords

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 The most recent meeting of the Conference of the Parties to the
United Nations
Framework Convention on Climate Change was held in Marrakech in
November
(COP7). The purpose of the meeting was to try to seek final agreement
on the rules to implement the Kyoto Protocol.

Key Decisions in Marrakesh

Mechanisms and Accounting

The Protocol establishes three market-based mechanisms aimed at

achieving
emissions reductions as cost-effectively as possible. They are:

• Emissions trading - the buying and selling of emissions credits among

nations
with binding emission targets;

• Joint Implementation (JI) - allowing one country with a target to

receive
emissions credit for a specific project undertaken in another country
with a
target; and

• the Clean Development Mechanism (CDM) - allowing developed

countries to
receive emissions credit for financing projects that reduce emissions in
developing countries.

Key decisions include:

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• Fungibility which allows emissions units under all three mechanisms
to be
treated equally. This should create a more fluid market in emissions
units,
making the mechanisms more viable and enhancing opportunities for
costeffectiveness.

Creation of a new Removal Unit (RMU) to represent sinks credits

generated in
Annex I countries (including through Joint Implementation). RMUs can
be
used only to meet a party’s emissions target in the commitment period
in
which they are generated. They cannot be banked for a future
commitment
period.
• Banking of any remaining emission allowances beyond those needed
to meet a
Party’s target is permitted. Banking of credits generated under CDM or
JI is
limited to 2.5%, respectively, of a Party’s initial assigned amount.
• Unilateral CDM is allowed, enabling a developing country to
undertake a
CDM project without an Annex I partner and market the resulting
emissions
credits.
• Annex I Parties that cannot meet the Protocol’s inventory
requirements can
still host JI projects through a project design and approval process
similar to
the CDM.

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• The CDM Executive Board is authorized to approve methodologies for
baselines, monitoring plans and project boundaries; accredit
operational
entities; and develop and maintain the CDM registry. The COP/MOP (the
Conference of the Parties meeting as the Parties to the Kyoto Protocol,
following entry into force) will oversee rules of procedure for the
Executive
Board; accreditation standards for, and designation of, operational
entities; and
a review of regional/sub-regional distribution of CDM project activities.
• The requirement in the Bonn Agreement that each Annex I party hold
back
from the market 90% of its allowable emissions (or five times its most
recently
reviewed emissions inventory, whichever is lower) is deemed
mandatory. The
provision addresses the risk of overselling emission credits that a party
might
need to meet its target. In essence, oversold units become the buyer’s
liability.
Sinks
Under the Protocol, countries may receive credit toward their
emissions targets for
carbon absorbed by forests, soils and other so-called “sinks.” The Bonn
Agreement
defined the kinds of sinks activities that are eligible and, for forest
management, set
country-specific caps for each Annex I country. The Marrakech Accords:
• Give Russia, which had registered an objection at the time of the
Bonn

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Agreement, an increase of its ceiling for forest management credits to
33
million tonnes of carbon annually. The Bonn Agreement had allocated
Russia
no more than 17.63 million tonnes.
• Require Annex I parties to report on their sinks activities in order to
be eligible
to participate in emissions trading and the other mechanisms. Parties
that report can participate in the mechanisms but their inventories will
be adjusted at the close of the commitment period if their reports are
deemed inadequate

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 CHAPTER TWO
Carbon Credit

2.1 Introduction

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Introduced under the aegis of Kyoto Protocol, Carbon Credits are
certificates issued against certain (per ton) reduction of carbon
emissions or other specific green house gases (GHGs) (equated
proportionally in terms of carbon). These credits are issued to
organizations or countries carrying out projects or activities
(manufacturing or production) which result in net reduction of carbon
(or GHG) emitted in the atmosphere compared to the emissions made
under normal condition of operations.
Thus Carbon credits create a market for reducing greenhouse
emissions by giving a monetary value to the cost of polluting the air.
Emissions become an internal cost of doing business and are visible on
the balance sheet alongside raw materials and
other liabilities or assets. If a country or organization has reduced its
greenhouse emissions to a level approved by a regulatory authority
such as Clean Development Mechanism (CDM), a credit is awarded to
it. One carbon credit allows the holder to emit one ton of carbon
dioxide. Credits so acquired can be traded in the international market
at the prevailing price.

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By way of example, consider a business that owns a factory putting out
100,000 tons of greenhouse gas emissions in a year. Its government is
an Annex I country that enacts a law to limit the emissions that the
business can produce. So the factory is given a quota of say 80,000
tons per year. The factory either reduces its emissions to 80,000 tons
or is required to purchase carbon credits to offset the excess. After
costing up alternatives the business may decide that it is
uneconomical or infeasible to invest in new machinery for that year.
Instead it may choose to buy carbon credits on the open market from
organizations that have been approved as being able to sell legitimate
carbon credits.
 One seller might be a company that will offer to offset
emissions through a project in the developing world, such as
recovering methane from a swine farm to feed a power station
that previously would use fossil fuel. So although the factory
continues to emit gases, it would pay another group to reduce

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 the equivalent of 20,000 tons of carbon dioxide emissions from
the atmosphere for that year.
 Another seller may have already invested in new low-emission
machinery and have a surplus of allowances as a result. The
factory could make up for its emissions by buying 20,000 tons of
allowances from them. The cost of the seller's new machinery
would be subsidized by the sale of allowances. Both the buyer
and the seller would submit accounts for their emissions to prove
that their allowances were met correctly.

2.2 Concept
Economic theory related with carbon credits:
The concept of Carbon credits can be explained through the theory of
externalities of economics. This can be explained by Coase Theorem
dealing with externalities.
The Coase Theorem says:
The private economic actors can solve the problem of externalities
among themselves. Whatever the initial distribution of rights, the
interested parties can always reach a bargain in which everyone is
better off and the outcome is efficient.
Though there are not only the private parties who are involved in the
transactions but the whole market works in that way. The carbon
emission is a negative externality which is not only affecting others but
the countries themselves also. By buying carbon credits from the
developing countries or from the countries which are producing low
emissions, the developed countries are producing less as there is a
money expenditure which they will have to make, thus they will tend to
produce less. The developing countries are gaining from the
investment that is made in their country, from selling the carbon

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credits. Similarly the firms are also trading and making huge money.
Thus not only a huge business is being done but also a negative
externality like CO2 is being reduced.

Global Warming Potential

There are many different “greenhouse gases”. The most common are
carbon dioxide (CO2), methane and nitrous oxide. Global warming
potentials (GWPs) are used to compare the abilities of different
greenhouse gases to trap heat in the atmosphere (table 1). Carbon
dioxide is given a base GWP of 1 and the GWPs of all other gases are
reported in comparison to this base. The global warming potentials are
used to convert other gases into units of CO2 equivalent (CO2e).
For example, using the information from table 1 below, 1 ton of
methane is equivalent to 23 tons of CO2 i.e. 23 tones CO2e. Most
carbon markets trade credits specified as tones of CO2e.

Table 1: Global Warming Potential of major Greenhouse Gases

Major Greenhouse Gas Global Warming

Potential
Carbon Dioxide 1
Methane 23
Nitrous Oxide 296
HFC1-23 12,000
HFC-125 3,400
HFC-134a 1,300
HFC-143a 4,300

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 HFC-152a 120
HFC-227ea 3,500
HFC-236fa 9,400
Perfluoromethane (CF4) 5,700
Perfluoroethane (C2F6) 11,900
Sulfur Hexafluoride (SF6) 22,200
1HFC = Hydroflourocarbons
Source: Intergovernmental Panel on Climate Change (2001).

Carbon transactions:
Carbon transactions are purchase contracts whereby one party pays
another party in exchange for a given quantity of GHG emission
reductions, either in the form of allowances or “credits” that the buyer
can use to meet its compliance objectives vis-à-vis greenhouse gas
mitigation. Payment for emission reductions can be made using one or
more of the following forms: cash, equity, debt, or in-kind contributions
such as providing technologies to abate GHG emissions.

Carbon transactions are based on two systems:

I. Cap and Trade System
II. Baseline-and-credit system

I. Cap and Trade System (Project Based Transaction)

The Kyoto protocol uses a cap and trade system to encourage the
reduction of greenhouse gas emissions. An absolute limit (a cap) is set
on total mass emissions for a group of sources for a fixed compliance
period. The cap is then subdivided into C-credit allowances, each
representing authorization to emit a specific quantity of CO2e
emissions. The allowances are allocated to the participants in the
program. During the compliance period, the sources must carefully

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measure and report total emissions. At the end of the compliance
period, each source is required to surrender allowances to cover each
ton of CO2e emitted, or face penalties and fines. Each emission source
can design its own compliance strategy – emission reductions and
allowance purchases or sales – to minimize its compliance cost. And it
can adjust its compliance strategy in response to changes in
technology or market conditions without requiring government review
and approval.
Carbon credit transactions will involve the purchase of emission rights
from those with the technical and economic ability to reduce
greenhouse gas emissions at low cost. By allowing allowances to be
bought and sold, an operator can seek out the most cost-effective way
of reducing its emissions, either by investing in 'cleaner' machinery
and practices or by purchasing C-credits from another operator. Trading
of C-credits between buyers and sellers establishes the market price
per C-credit. If it is cheaper for an emitter of greenhouse gases to buy
a C-credit from another company rather than controlling additional
emissions, they will buy credits. A seller will want to sell credits if they
can reduce greenhouse gas emissions or sequester additional C at a
cost that is less than the price of the C-credit.

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33
II. Baseline-and-credit system (Allowance Based
Transaction):
Baseline Emission Reduction trading systems are project-based, often
incorporating non-capped industries and entities. This type of system
allows an entity to voluntarily reduce emissions below an agreed
baseline under business as usual. The accreditation system is based
upon the delta between two emission forecasts: with and without the
proposed project. The Clean Development Mechanism (CDM) relies on
such a mechanism.

Table 2: Distinguishing Features of Cap-and-Trade and

Baseline-and-Credit Systems

Features Cap-and-trade Baseline-and-credit

Exchanged Allowances Carbon Credits
Commodity
Quantity Determined by overall Generated by each new project
available cap
Market Buyers and sellers have Buyers and sellers both have
dynamic competing and mutually an interest in maximizing the
balanced interests in offsets generated by a project.
allowances trades.
Sources Usually high emitters As defined by each standard.
Covered such as the energy Not limited to just high
sector and energy emitting sectors.
intensive industries
Independen Minor role in verifying Fundamental role in verifying
t third emissions inventories the
Party credibility of the counterfactual
baseline and thus the
authenticity (additionality) of
the claimed emission
reductions.

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Emissions Neutral, as is ensured Neutral, providing projects are
impact by zero-sum nature of additional. Otherwise, net
of trade allowance trades. increase in emissions.
Possible decrease in emissions
2.3 Kyoto Mechanisms to reduce emissions
in the Voluntary market.

The trade in carbon is a manifestation of ‘Comparative advantage’

theory. The organizations which buy carbon credits are largely the
ones with emissions reduction targets (either in a regulated or
voluntary system). And at times the carbon abatement cost is higher
in certain type of industries and buying the carbon credits is rather a
cheaper affair. In such circumstances, seller organization has a
comparative cost advantage over the buyer organization and its
economically favorable for the latter to continue with the existing
process, emit the same level of GHGs and nullify the emissions by
buying credits.

The design of Kyoto protocol permits the signatories of the treaty to

involve in market based mechanisms to meet their emission reduction
targets. The three market based mechanism under the Protocol are:
I. Joint Implementation (JI)
II. Clean Development Mechanism (CDM)
III. International Emissions Trading (IET)

I. Joint Implementation (JI)

Joint Implementation (JI) is a project based mechanism developed
under the Kyoto Protocol (KP), designed to assist Annex 1 countries in
meeting their emission reduction targets through joint projects with
other Annex 1 countries, meaning that JI projects can only be
implemented between capped industrialized countries. One or more
investors (Government, companies, funds etc) will agree with partner

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in a host coun try to participate in project activities which generate
Emission Reduction Units (ERUs), in order to use them for compliance
with targets under the Kyoto Protocol.
Emissions from the host country are limited under the KP; JI projects
reduce the emissions in the host country and free up the part of their
total amount (Assigned Amount) which can then be transferred to the
investor country in the form of ERUs, which are subtracted from the
host country’s allowed emissions and are added to the total allowable
emissions of the investor country.

The Two Procedures to implement JI projects:

Track 1
When an Annex 1 country is not in compliance with all the
requirements, ERUs to a project, which can then transfer them to the
investing entity
Track 2

36
When an Annex 1 country is not in compliance with all the
requirements, ERUs generated by a project must be verified by an
external body under a procedure similar to that of the CDM. The host
party must meet several requirements relating to the establishment of
its Assigned Amount
and national registry before it can issue and transfer ERUs.

II. The Clean Development Mechanism

The CDM is a mechanism established by Article 12 of the Kyoto
Protocol. This mechanism is also a project based mechanism similar to
Joint implementation, with only difference that an entity in developed
country has to set up an emissions reducing project or invest in such a
project in a developing nation and earn or buy certified emissions
reductions (CERs). Thus, this infuses foreign capital in a developing
country (non Annex I) and creates many such CDM opportunities for
them.
The CDM is designed to meet two main objectives: to address the
sustainable development needs of the host country, and to increase
the opportunities available to parties to meet their reduction
commitments.

37
CDM project cycle: Participants must prepare a “Project Design
Document” including a description of the baseline, i.e. the technology
to be used, and the monitoring methodology to be used, an analysis of
the environment benefits that the project is intended to generate.
The “Project Design Document” is first submitted to the National CDM
Authority for validation, after receiving which the same is registered in
the ‘Host Country’. Then the ‘Project Design Document’ is submitted to
UNFCCC, an international operational entity for review and validation.
It does so after providing an opportunity for public comments and
taking the same into account. After the project is duly validated, the
operational entity forwards it to the executive board for registration.
The project is then ready to be operationalised. Once the project is

38
running, it will be monitored by the ‘Host Country’ throughout the
project cycle

The CDM Project Cycle comprises seven steps

39
1. Submission of the project design document to the National CDM Authority;
2. Project registration in the host country;
3. Project validation and registration by the Executive Board of the UNFCCC;
4. Project monitoring by the host country;
5. Verification
6. Certification
7. Issuance of Certified Emission Reductions (CERs)

III. International Emission Trading

International emissions trading falls under allowance based
transactions of carbon. Under the Kyoto Protocol, there are fifty Annex-
I countries who have been assigned emissions targets in terms of

40
reduction of greenhouse gases and as a part of the mechanism have
been assigned certain emissions units (allowances). These member
countries, under their National Allocation Plans (NAPs) assign these
units to different industries. If the units (of carbon or other ghgs)
emitted by an entity are more than units assigned to it, that entity will
have to buy the extra units to meet the target committed. Similarly, if
the units emitted are less than the assigned quantum, the spare units
could be sold internationally. So, IET is a flexible mechanism which
allows the trade of Assigned Amount Units (AAUs) among Annex-I
countries. This will adjust each nations ‘Pool’ of AAUs.

International Emissions Trading flexibility mechanisms include

the use of
• Carbon sinks (Pools that take up released carbon from another
part of the carbon cycle)
• Emissions trading.

Carbon Sink: Under Article 3.3 to the protocol a planted forest which is established
after January 1, 1990 on previously cleared land will count as a carbon sink. The
carbon dioxide sequestered in such forest can be used to create carbon credits.

41
Emission Trading: Emission trading is a general term used for the
Kyoto Protocol flexibility mechanisms. It is a market-based system that
allows firms the flexibility to select cost-effective solutions to achieve
established environmental goals.

Emission trading will allow countries and individual companies to buy

and sell carbon credits created by activities that reduce the level of
GHG emissions.

42
Before going further let’s familiarize with the different types
of carbon credits used by different Emission Trading Schemes

Table: 3 Different types of Carbon Credits

Types of Carbon Units of Carbon Emission Trading

Credits Credits Schemes
European Union EUA EU Emission Trading
Allowance Scheme
Certified Emission CER CDM projects under the
Reduction Kyoto Protocol

43
Emission Reduction ERU JI projects
Units
Assigned Allowance AAU International Emission
Units Trading
Verified Emission VER Voluntary action to reduce
Reduction emission

II.4 An Analysis of Carbon Demand and Supply

Dynamics and the Factors affecting the same

The demand and supply scenario of the carbon instruments are as

follows:
For CERs, supply is governed by project specific issues like methods
used, DNA approvals, project specific barriers, etc. Demand from ETS
depends on NAPs, the prevalent EUA prices, weather conditions as well
as relative prices of gas and coal.
For ERUs, supply mostly depends on DNA approvals and project
specific constraints. Demand of ERUs from Annex I countries mostly
depends on Kyoto caps – pre and post 2012 along with alternative
options for mitigating GHG emissions.

A detailed insight into the factors affecting the demand and

supply of carbon credits:

Policies like Greenhouse Gas reduction policy, energy policy,

etc.: An enforceable policy like regulated trading scheme of EU, gives
a clearer signal of the future demand of quantum of carbon credits.
Also the voluntary schemes like CCX’s and NSW’s give a rough
estimate of carbon credits required in future during a specific time.

44
But markets where such policy measures for reducing green house
gases don’t exist, and which indulge in voluntary trade, the estimated
demand quantity based on several assumptions doesn’t hold well in
reality.
Similarly implementation of such an energy policy which promotes the
use of alternative sources of energy which bring down the emissions
level would also largely influence the demand for carbon credits.
Incentives or disincentives for use of a specific energy type would
directly influence of the demand for that source of energy and
indirectly influence the demand for carbon credits.

Prices of gas, coal and other alternative sources of Energy: The

movement in prices of alternative sources of energy has a direct
impact on the demand and prices of carbon credits. Also the taxes on
use of certain fuels or energy sources would impact the demand and
subsequently the prices of carbon accordingly.

Weather Conditions: A deviation from normal weather conditions

would increase the use of energy consumption of power sector, which
may further increase the use of cheaper fuels resulting in higher
carbon emissions. This would increase the demand for carbon credits
to meet the commitments under voluntary or regulated arrangements.

Advancement in Technology: Use of technologically advanced and

economically viable methods to sequester carbon would affect the
price of carbon and in return affect its demand as well as supply.
Similarly, use of advanced technology in industries like power, cement,
steel which emit heavy loads of GHGs would also bring down the
emissions level and thus reduce the demand for carbon.
Table 4: Factors affecting C-credits Demand and Supply

45
 Demand and Supply Factors Demand Supply Price
Effect Effect Effect
GHG and Energy Policy
GHG reduction rules targets I - I
Pre-credit subsidy for credit I - I
purchase
Clean Development Mechanism D - D
Increased energy use efficiency D I D
Subsidies for reduction or - I D
sequestration
Restriction on credit production - D I
Energy Prices
Use of non-carbon based energy D - D
Relative price increase of carbon D I D
intensive energy
Relative price decrease of carbon I D I
intensive energy
Technology and Input Cost
New energy and GHG efficient D - D
technology
Subsidies and tax credits for D - D
adoption
Lower cost reduction technology - I D
Higher cost reduction technology - D I
Lower input costs of reduction or - I D
sequestration
Higher input costs of reduction or - D I
sequestration
Demand and Profitability of Carbon Neutral Products
Increase in demand I - I
Decrease in demand D - D
Relative increase in profitability - D I
Relative decrease in profitability - I D
Climate Changes
Increased carbon based energy I - I
demand
Decreased carbon based energy D - D
demand
Productive Capacity of Agriculture
Declining capacity to sequester - D I
GHG
D= Decrease, I= Increase

46
Source: Developed from information within Williams, Peterson
and Mooney

Chapter three
CARBON CREDIT AND CLIMATE
CHANGE

47
 III.1 Current evidence of climate change

Extra-strength weather

*Numerous long-term changes in the climate have been observed,

including extreme weather such as droughts, heavy precipitation, heat
waves and the intensity of tropical cyclones.
* Trends towards more powerful storms and hotter, longer dry periods
have been observed and are assessed in the IPCC’s Fourth Assessment
Report. Warmer temperatures mean greater evaporation, and a
warmer atmosphere is able to hold more moisture -- hence there is
more water aloft that can fall as precipitation. Similarly, dry regions are
apt to lose still more moisture if the weather is hotter; this exacerbates
droughts and desertification.
* The frequency of heavy precipitation events has increased over most
land areas. Significantly increased precipitation has been observed in
eastern parts of North and South America, northern Europe and northern
and central Asia. There is also observational evidence for an increase of
intense tropical cyclone activity in the North Atlantic since about 1970.
*Drying has also been observed over large regions, i.e. the Sahel, the
Mediterranean, southern Africa and parts of southern Asia.
* In Africa's large catchment basins of Niger, Lake Chad, and Senegal,
total available water has decreased by 40 to 60 per cent, and
desertification has been worsened by lower average annual rainfall,
runoff, and soil moisture, especially in southern, northern, and western
Africa.
* The Rhine floods of 1996 and 1997, the Chinese floods of 1998, the
East European floods of 1998 and 2002, the Mozambique and European
floods of 2000, and the monsoon-based flooding of 2004 in Bangladesh
(which left 60 per cent of the country under water), are examples of
more powerful storms.

The decline of winter

48
 Average Arctic temperatures increased at almost twice the global rate
in the past 100 years. Temperatures at the top of the permafrost layer
have generally increased since the 1980s by up to 3°C. In the Russian
Arctic, buildings are collapsing because permafrost under their
foundations has melted.
* Snow cover has declined by some 10 per cent in the mid- and high
latitudes of the Northern Hemisphere since the late 1960s. Mountain
glaciers and snow cover have declined in both hemispheres and
widespread decreases in glaciers and ice caps have contributed to sea
level rise. New data evaluated by the IPCC shows that losses from the
ice sheets of Greenland and Antarctica have very likely contributed to
sea level rise from 1993 to 2003. The average global sea level rose at
an average rate of 1.8 mm per year between 1961 and 2003, but
between 1993 and 2003 it rose by 3.1 mm per year.
* Almost all mountain glaciers in non-polar regions retreated during the
20th century. The overall volume of glaciers in Switzerland decreased
by two-third.
Shifts in the natural world
Scientists have observed climate-induced changes in at least 420
physical processes and biological species or communities
* In the Alps, some plant species have been migrating upward by one
to four meters per decade, and some plants previously found only on
mountaintops have disappeared.
* Across Europe, the growing season in controlled, mixed-species
gardens lengthened by 10.8 days from 1959 to 1993. Butterflies,
dragonflies, moths, beetles, and other insects are now living at higher
latitudes and altitudes, where previously it was too cold to survive.

Feeling the Heat

The average temperature of the earth's surface has risen by 0.74
degrees C since the late 1800s. It is expected to increase by another
1.8° C to 4° C by the year 2100 - a rapid and profound change - should
the necessary action not be taken. Even if the minimum predicted
increase takes place, it will be larger than any century-long trend in the
last 10,000 years.
The principal reason for the mounting thermometer is a century and a
half of industrialization: the burning of ever-greater quantities of oil,

49
gasoline, and coal, the cutting of forests, and the practice of certain
farming methods.
These activities have increased the amount of "greenhouse gases" in the
atmosphere, especially carbon dioxide, methane, and nitrous oxide. Such
gases occur naturally - they are critical for life on earth, they keep some
of the sun's warmth from reflecting back into space, and without them
the world would be a cold and barren place. But in augmented and
increasing quantities, they are pushing the global temperature to
artificially high levels and altering the climate. Eleven of the last 12
years are the warmest on record, and 1998 was the warmest year.
Climate change can be difficult - you could ask the dinosaurs, if they
weren't extinct. The prevailing theory is that they didn't survive when a
giant asteroid struck the earth 65 million years ago, spewing so much
dust into the air that sunlight was greatly reduced, temperatures
plummeted, many plants didn't grow and the food chain collapsed.
What happened to the dinosaurs is a rare example of climate change
more rapid than humans are now inflicting on themselves . . . but not the
only one. Research on ice cores and lake sediments shows that the
climate system has suffered other abrupt fluctuations in the distant past.
The climate appears to have "tipping points" that can send it into sharp
lurches and rebounds. Although scientists are still analyzing what
happened during those earlier events, it's clear that an overstressed
world with 6.3 billion people is a risky place to be carrying out
uncontrolled experiments with the climate.
The current warming trend is expected to cause extinctions. Numerous
plant and animal species, already weakened by pollution and loss of
habitat, are not expected to survive the next 100 years. Human beings,
while not threatened in this way, are likely to face mounting difficulties.
Recent severe storms, floods and droughts, for example, appear to show
that computer models predicting more frequent "extreme weather
events" are on target.

50
The average sea level rose by 10 to 20 cm during the 20th century, and
an additional increase of 18 to 59 cm is expected by the year 2100.
(Higher temperatures cause ocean volume to expand, and melting
glaciers and ice caps add more water.) If the higher end of that scale is
reached, the sea could overflow the heavily populated coastlines of such
countries as Bangladesh, cause the disappearance of some nations
entirely (such as the island state of the Maldives), foul freshwater
supplies for billions of people, and spur mass migrations.
Agricultural yields are expected to drop in most tropical and sub-tropical
regions - and in temperate regions too - if the temperature increase is
more than a few degrees C. Drying of continental interiors, such as
central Asia, the African Sahel, and the Great Plains of the United States,
is also forecast. These changes could cause, at a minimum, disruptions
in land use and food supply. And the range of diseases such as malaria
may expand.

Global warming is a "modern" problem - complicated, involving the

entire world, tangled up with difficult issues such as poverty, economic
development and population growth. Dealing with it will not be easy.
Ignoring it will be worse.
Over a decade ago, most countries joined an international treaty -
the United Nations Framework Convention on Climate Change - to begin
to consider what can be done to reduce global warming and to cope with
whatever temperature increases are inevitable. More recently, a number
of nations approved an addition to the treaty, called the Kyoto Protocol,
which has more powerful (and legally binding) measures. The Protocol’s
first commitment period began in 2008 and ends in 2012. A strong
multilateral framework needs to be in place by 2009 to ensure that there
is no gap between the end of the Kyoto Protocol’s first commitment
period in 2012 and the entry into force of a future regime.

51
* Even the minimum predicted shifts in climate for the 21st century are
likely to be significant and disruptive. Scientific understanding and
computer models have improved recently and many projections can
now be made with greater certainty.
* The matter is serious. Predictions of future climate impacts show
that the consequences could vary from disruptive to catastrophic.
*The minimum warming forecast for the next 100 years is more than
twice the 0.6° C increase that has occurred since 1900. . . and that
earlier increase is already having marked consequences.
*Extreme weather events are striking more often and sea levels have
already risen by 10 to 20 cm over pre-industrial average’s. Sea level
rise will continue for centuries due to the time scales associated with
climate processes and feedbacks. In its Fourth Assessment Report, the
IPCC states that the contraction of the Greenland ice sheet is projected
to continue to contribute to sea level rise after 2100. If this contraction
is sustained for centuries, that would lead to the virtually complete
elimination of the Greenland ice sheet and a resulting contribution to
sea level rise of about 7m.
*Projections also point to continued snow cover contraction, as well as
widespread increases in thaw depth over most permafrost regions.
*A future of more severe storms and floods along the world's
increasingly crowded coastlines is likely, and will be a bad combination
even under the minimum scenarios forecast. Furthermore, extra-tropical
storm tracks are projected to move pole ward, with consequent changes
in wind, precipitation, and temperature patterns, continuing the pattern
observed over the last half century.
* The IPCC also points to very likely increases in the amounts of
precipitation in high latitudes, as well as likely precipitation decreases in
most sub-tropical land regions.
* Although regional and local effects may differ widely, a general
reduction is expected in potential crop yields in most tropical and sub-

52
tropical regions. Mid-continental areas -- such as the United States'
"grain belt" and vast areas of Asia -- are likely to dry. Where dry land
agriculture relies solely on rain, as in sub-Saharan Africa, yields would
decrease dramatically even with minimal increases in temperature. Such
changes could cause disruptions in food supply in a world is already
afflicted with food shortages and famines.
* Salt-water intrusion from rising sea levels will reduce the quality and
quantity of freshwater supplies. This is a major concern, since billions of
people already lack access to freshwater. Higher ocean levels already
are contaminating underground water sources in Israel and Thailand, in
various small island states in the Pacific and Indian Oceans and the
Caribbean Sea, and in some of the world's most productive deltas, such
as China's Yangtze Delta and Vietnam's Mekong Delta.
* Most of the world's endangered species -- some 25 per cent of
mammals and 12 per cent of birds -- may become extinct over the next
few decades as warmer conditions alter the forests, wetlands, and
rangelands they depend on, and human development blocks them from
migrating elsewhere.
* Higher temperatures are expected to expand the range of some
dangerous "vector-borne" diseases, such as malaria, which already kills 1
million people annually, most of them children.

A world under stress

* Environmental damage -- such as overgrazed rangeland, deforested
mountainsides, and denuded agricultural soils -- means that nature will
be more vulnerable than previously to changes in climate. In any case,
when climate shifts occurred thousands and tens of thousands of years
ago, they generally took place more gradually. Natural systems had both
more space and more time to adapt.
* Similarly, the world's vast human population, much of it poor, is
vulnerable to climate stress. Millions live in dangerous places -- on

53
floodplains or in shantytowns on exposed hillsides around the enormous
cities of the developing world. Often there is nowhere else for them to
go. In the distant past, man and his ancestors migrated in response to
changes in habitat. There will be much less room for migration this time
around.
* Global warming almost certainly will be unfair. The industrialized
countries of North America and Western Europe, along with a few other
states, such as Japan, are responsible for the vast bulk of past and
current greenhouse-gas emissions. These emissions are a debt
unwittingly incurred for the high standards of living enjoyed by a
minority of the world's population. Yet those to suffer most from climate
change will be in the developing world. They have fewer resources for
coping with storms, with floods, with droughts, with disease outbreaks,
and with disruptions to food and water supplies. They are eager for
economic development themselves, but may find that this already
difficult process has become more difficult because of climate change.
The poorer nations of the world have done almost nothing to cause
global warming yet are most exposed to its effects
.

3.2 What Can Be Done

Measures -- heavily dependent on teamwork and political will -- can slow
the rate of global warming and help the world cope with the climate
shifts that occur.
Reducing emissions. Burning oil and coal more efficiently, switching to
renewable forms of energy, such as solar and wind power, and
developing new technologies for industry and transport can attack the
problem at the source.
Expanding forests. Trees remove carbon dioxide, the dominant
greenhouse gas, from the atmosphere. The more we have, the better.

54
But deforestation -- the current trend -- liberates additional carbon and
makes global warming worse.
Changing lifestyles and rules. The cultures and habits of millions of
people -- essentially, whether they waste energy or use it efficiently --
have a major impact on climate change. So do government policies and
regulations.
Coping. Steps have to be taken -- and the sooner the better -- to limit
damage from consequences of global warming that are now inevitable.
Accomplishments to date. . . and problems . A side effect of the painful
economic transition in Eastern Europe was a slight fall in greenhouse-gas
emissions among the world's major economies between 1990 and 2000.
But making more sustained progress will require overcoming a number
of obstacles.

3.3 What is the science behind the climate change?

The earth's atmosphere acts as a filter for solar rays; approximately

half of the visible light and ultraviolet radiation given off by the sun is
either absorbed by the various layers or reflected back into space.
Most of the 50% that does get through heats the earth's surface and is
eventually reflected back into space as infrared radiation. The
'greenhouse effect is the atmospheric trapping of that infrared
radiation; a natural phenomenon without which the Earth would be
uninhabitably cold for humans.
During the combustion of carbon-based fossil fuels, greenhouse gases
such as carbon dioxide, methane and nitrous oxide are emitted. These
gases add to that atmospheric layer that is permeable to ultraviolet,
but not infrared radiation. As more fossil fuels are burned, the layer of
greenhouse gases thickens; solar radiation continues to pass through
unimpeded, while heat reflected from the earth finds it harder and

55
harder to escape into space. In the medium to long term, this results in
the gradual increase in the Earth's temperature known classically as
'global warming.
Global climate dynamics, however, are unpredictable. Climatic models
show that the short to medium impacts of an increase in the
atmosphere's concentration of greenhouse gases will likely lead to
increased warming in some areas with deep cooling in others. For
example, consider the impact of the disruption of the gulf stream, the
oceanic system that keeps the British Isles a comfortable temperature
at the same latitude as Moscow. The unpredictability of the global
climate system's response to an increase in carbon dioxide has recast
the term "global warming" into its now accepted "global climate
change".
Certain gases, such as chlorofluorocarbons, contribute two-fold to
climate change by simultaneously trapping reflected heat and thinning
the protective ozone layer. This ozone depletion reduces the
atmosphere's ability to absorb and reflect solar radiation. As a result
more solar radiation is able to reach the earth's surface and potentially
accelerate the process of climate change.

Whether a unit of CO2 is never emitted, is emitted directly into

a bottle, or moves a short distance through the atmosphere

56
before being taken up by a tree, there is no impact on the
atmosphere.

3.4 MEASURES TO IMPLEMENT THE KYOTO PROTOCOL

Gas emission reductions are expected to happen in several economic
activities, mainly energy and transports. The countries must cooperate
among themselves by the following basic actions:
- Remodeling the energy and transport sectors;
- Promoting the use of renewable energy sources;
- Eliminating financial and market mechanisms inadequate to the
purposes of the Kyoto Convention;
- Reducing methane emissions in the management of waste and
energy systems;
- Protecting forests and other carbon peat lands
Although the treaty does not require developing countries to make a
commitment to reduce gas emissions, Brazil signed the agreement’s
ratification letter on July 23, 2002. The country is responsible for an
annual production of 250 million tons of carbon (10 times less than the
US).
The countries that do not meet the reduction targets will lose their
right to use flexibility mechanisms such as forests. In addition, in the
second reduction period, they will have a 30% increase on the amount
they failed to meet.

57
58
Below is a table of the changes in CO2 emission of some other
countries which are large contributors, but are not required to
meet numerical limitations

Comparing total greenhouse gas emissions in 2004 to 1990 levels, the

U.S. emissions were up by 15.8%, with irregular fluctuations from one
year to another but a general trend to increase. At the same time, the
EU group of 23 (EU-23) Nations had reduced their emissions by 5%.In
addition, the EU-15 group of nations (a large subset of EU-23) reduced
their emissions by 0.8% between 1990 and 2004, while emission rose
2.5% from 1999 to 2004. Part of the increases for some of the
European Union countries are still in line with the treaty, being part of
the cluster of countries implementation (see objectives in the list
above).
As of year-end 2006, the United Kingdom and Sweden were the only
EU countries on pace to meet their Kyoto emissions commitments by

59
2010. While UN statistics indicate that, as a group, the 36 Kyoto
signatory countries can meet the 5% reduction target by 2012, most of
the progress in greenhouse gas reduction has come from the stark
decline in Eastern European countries' emissions after the fall of
communism in the 1990s.

3.5 CARBON CREDITS: FROM ENVIRONMENT PRESERVATION TO

OVERCOMING POVERTY

CARE Brasil, in partnership with company CO2e., will launch CARE

Brasil Social Carbon Fund in the Conference of the Parties, held in
Nairobi, Kenya.
This is the first initiative combining Carbon Credits with benefits to the
communities, with a view not only to mitigating climate changes, but
also to contributing to overcoming poverty and strengthening social
development. The projects will be developed in four major and
strategic Brazilian biosystems: the Atlantic Forest, the Amazon Region,
the Cerrado and the Caatinga, where CARE Brasil already operates in
social programs to overcome poverty.

Unlike other funds, CARE Brasil Social Carbon Fund will focus on the
environment and social component promoting environment
preservation by issuing Carbon Credits and investing in the
development of impoverished communities in the areas where the
projects will be implemented. Another differential is the management
to be totally conducted by an NGO, in this case CARE Brasil, in addition
to being a fund that will invest in small scale projects focusing on the
local development of the communities involved. The fund’s technical
management will be developed by CO2e, one of the largest global

60
companies operating in the climate change area. Throughout the last
five years, CO2e established a globally recognized brand and
incomparable expertise, accounting for several pioneering innovations.
In addition, we have CARE’s history that gathers 60 years of actions
around the world in social development and poverty alleviation.
The greatest potential for carbon footprint reduction is in conventional
fossil fuelled electricity generation, using improved combustion
technologies, carbon capture and storage and co-firing with biomass.
We tried to examine most the technologies available to know the
potential to reduce their carbon footprint.
a. Fossil fuel generation – future carbon footprint - Technology
improvements could increase the energy efficiency of existing coal
fired plants from current levels of ~35% (where only 35% of the fuel
energy is converted into electricity) to over 50% (by using super-
critical thermal power plant). Improvements in energy efficiency can
halve life cycle carbon emissions in both coal and gas fired plants.
Carbon capture and storage (CCS) could potentially avoid 90% of CO2
emissions to the atmosphere in the future.
b. Co-firing fossil fuels and biomass - Co-firing biomass along side fossil
fuels in existing power plants can also significantly lower their carbon
emissions, because the fossil fuels are replaced by ‘carbon neutral’
biomass.
c. Future carbon footprint reductions in all technologies - Carbon
footprints could be further reduced in all electricity generation
technologies if the manufacturing phase and other phases of their life
cycles were fuelled by low carbon energy sources. For example, if steel
for wind turbines were made using electricity generated by wind, solar
or nuclear plants. Using fewer raw materials would also lower life cycle
CO2 emissions, especially in emerging technologies such as marine
and PV. New semi-conducting materials (organic cells and nano-rods),

61
are being researched for PV, as alternatives to energy and resource
intensive silicon.
d. Future nuclear footprint & global uranium resources - Some analysts
are concerned that the future carbon footprint of nuclear power could
increase if lower grade uranium ore is used, as it would require more
energy to extract and refine to a level usable in a nuclear reactor. Point
is to be noted: if lower grades of uranium are used in the future the
footprint of nuclear will increase, but only to a level comparable with
other ‘low carbon’ technologies and will not be as large as the
footprints of fossil fuelled systems.

Chapter Four

India and the World

62
4.1 How India is benefiting from carbon credits?
India is the world's sixth largest emitter of carbon dioxide with its
present share in global emissions estimated at 6 per cent.
India comes under Non- Annex countries of Kyoto Protocol, that is, a
developing economy. Developing countries (non-Annex I) such as India,
Sri Lanka, Afghanistan, China, Brazil, Iran, Kenya, Kuwait, Malaysia,
Pakistan, Philippines, Saudi Arabia, Singapore, South Africa, UAE etc
have no immediate restrictions under the UNFCCC.
This serves three purposes:
• Avoids restrictions on growth because pollution is strongly linked
to industrial growth, and developing economies can potentially
grow very fast.
• It means that they cannot sell emissions credits to industrialized
nations to permit those nations to over-pollute.
• They get money and technologies from the developed countries
in Annex II.

63
India comes under the third category of signatories to UNFCCC. India
signed and ratified the Protocol in August, 2002 and has emerged as a
world leader in reduction of greenhouse gases by adopting Clean
Development Mechanisms (CDMs) in the past few years. According to
Report on National Action Plan for operationalising Clean Development
Mechanism(CDM) by Planning Commission, Govt. of India, the total
CO2-equivalent emissions in 1990 were 10, 01, 352 Gg (Gigagrams),
which was approximately 3% of global emissions. If India can capture
a 10% share of the global CDM market, annual CER revenues to the
country could range from US$ 10 million to 300 million (assuming that
CDM is used to meet 10-50% of the global demand for GHG emission
reduction of roughly 1 billion tons CO2, and prices range from US$ 3.5-
5.5 per ton of CO2). As the deadline for meeting the Kyoto Protocol
targets draws nearer, prices can be expected to rise, as
countries/companies save carbon credits to meet strict targets in the
future. India is well ahead in establishing a full- fledged system in
operationalising CDM, through the Designated National Authority
(DNA).

There is a great opportunity awaiting India in carbon trading which is

estimated to go up to $100 billion by 2010. In the new regime, the
country could emerge as one of the largest beneficiaries accounting for
25 per cent of the total world carbon trade, says a recent World Bank
report. The countries like US, Germany, Japan and China are likely to
be the biggest buyers of carbon credits which are beneficial for India to
a great extent. The Indian market is extremely receptive to Clean
Development Mechanism (CDM). Having cornered more than half of
the global total in tradable certified emission reduction (CERs), India’s
dominance in carbon trading under the clean development mechanism
(CDM) of the UN Convention on Climate Change (UNFCCC) is beginning
to influence business dynamics in the country. India Inc pocketed Rs

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1,500 crores in the year 2005 just by selling carbon credits to
developed-country clients. Various projects would create up to 306
million tradable CERs. Analysts claim if more companies absorb clean
technologies, total CERs with India could touch 500 million. Of the 391
projects sanctioned, the UNFCCC has registered 114 from India, the
highest for any country. India’s average annual CERs stand at 12.6% or
11.5 million.

More than 112 Indian companies, including Hindustan Lever Ltd and
Tata Steel, are set to trade in carbon credits. These companies are
ready with clean technologies to bring down the emission levels of
greenhouse gases and sell certified emission reductions (CERs) to
developed countries. This is the largest portfolio for any country
signatory to the United Nations Framework of Climate Change
Convention (UNFCCC). The UN body certifies countries and companies
that can trade in carbon credits under the Kyoto Protocol.

It is cheaper for developing countries to reduce emissions than

developed countries. As a result, buyers are coming to India. Brazil and
China are emerging two of India's strong competitors. According to
industry estimates, some Indian companies have entered into forward
contracts with buyers from the European Union. These contracts are
estimated at $325 million.

The World Bank has also purchased CERs from 10 companies. Tata
Steel, HLL, Jindal Vijaynagar Steel, Essar Power and Gujarat
Flurochemicals Ltd have specially resigned projects to take advantage
of the opportunity. Bharat Heavy Electricals Ltd is the only public
sector firm which is planning to approach the ministry for approval.

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The projects range from cement, steel, biomass power, bagasse co-
generation and municipal solid waste to energy, municipal water
pumping and natural gas power.
While the ministry has given the host-country clearance, the CDM
projects will have to be approved by the executive board of the
UNFCCC. Of the 15 projects approved by the UNFCCC so far, four are
Indian.
These four are: Gujarat Flurochemicals, Kalpataru Power Transmission
Ltd, the Clarion power project in Rajasthan and the Dehar power
project in Himachal Pradesh.

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4.2 Carbon credit in various countries
Australia
In 2003 the New South Wales (NSW) state government unilaterally
established the NSW Greenhouse Gas Abatement Scheme to reduce
emissions by requiring electricity generators and large consumers to
purchase NSW Greenhouse Abatement Certificates (NGACs). This has
prompted the rollout of free energy-efficient compact fluorescent light
bulbs and other energy-efficiency measures, funded by the credits.
This scheme has been criticized by the Centre for Energy and
Environmental Markets of the UNSW (CEEM) because of its reliance
upon offsets.

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On 4 June 2007, former Prime Minister John Howard announced an
Australian Carbon Trading Scheme to be introduced by 2012, but
opposition parties called the plan "too little, too late. On 24 November
2007 Howard's coalition government lost a general election and was
succeeded by the Labor Party, with Kevin Rudd taking over as prime
minister. Prime Minister Rudd announced that a cap-and-trade
emissions trading scheme would be introduced in 2010.
Australia's Commonwealth, State and Territory Governments
commissioned the Garnaut Climate Change Review, a study by
Professor Ross Garnaut on the mechanism of a potential emissions
trading scheme. Its interim report was released on 21 February 2008.It
recommended emissions trading scheme that includes transportation
but not agriculture, and that emissions permits should be sold
competitively and not allocated free to carbon polluters. It recognized
that energy prices will increase and that low income families will need
to be compensated. It recommended more support for research into
low emissions technologies and a new body to oversee such research.
It also recognized the need for transition assistance for coal mining
areas.
In response to Garnaut's draft report, the Rudd Labor government
issued a Green Paper on 16 July that described the intended design of
the actual trading scheme. Draft legislation will be released in
December 2008, to become law in 2009.

European Union
The European Union Emission Trading Scheme (or EU ETS) is the
largest multi-national, greenhouse gas emissions trading scheme in
the world and was created in conjunction with the Kyoto Protocol.
After voluntary trials in the UK and Denmark, Phase I commenced
operation in January 2005 with all 15 (now 25 of the 27) member
states of the European Union participating. The program caps the

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amount of carbon dioxide that can be emitted from large installations,
such as power plants and carbon intensive factories and covers almost
half of the EU's Carbon Dioxide emissions. Phase I permits participants
to trade amongst themselves and in validated credits from the
developing world through Kyoto's Clean Development Mechanism.
Whilst the first phase (2005 - 2007) has received much criticism due to
oversupply of allowances and the distribution method of allowances
(via grandfathering rather than auctioning), Phase II links the ETS to
other countries participating in the Kyoto trading system. The
European Commission has been tough on Member States' Plans for
Phase II, dismissing many of them as being too loose again. In
addition, the first phase has established a strong carbon market.
Compliance was high in 2006, increasing confidence in the scheme,
although the value of allowances dropped when the national caps were
met.
All EU member states have ratified the Kyoto Protocol, and so the
second phase of the EU ETS has been designed to support the Kyoto
mechanisms and compliance period. Thus any organization trading
through the ETS should also meet the international trading obligations
under Kyoto.

New Zealand
The New Zealand Government introduced a bill for emissions trading
schemes before a select committee. Various reports by a range of
groups support the scheme but differ in opinion as to how it should be
implemented. An interesting feature of the New Zealand ETS is that it
includes forest carbon and creates deforestation liabilities for
landowners.
The emissions trading bill passed into law on 10 September 2008.

United States

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An early example of an emission trading system has been the SO2
trading system under the framework of the Acid Rain Program of the
1990 Clean Air Act in the U.S. Under the program, which is essentially
a cap-and-trade emissions trading system, SO2 emissions are
expected to be reduced by 50 percent from 1980 to 2010. Some
experts argue that the "cap and trade" system of SO2 emissions
reduction has reduced the cost of controlling acid rain by as much as
80 percent versus source-by-source reduction.
In 1997, the State of Illinois adopted a trading program for volatile
organic compounds in most of the Chicago area, called the Emissions
Reduction Market System. Beginning in 2000, over 100 major sources
of pollution in eight Illinois counties began trading pollution credits.
In 2003, New York State proposed and attained commitments from
nine Northeast states to form a cap and trade carbon dioxide
emissions program for power generators, called the Regional
Greenhouse Gas Initiative (RGGI). This program is due to launch on
January 1, 2009 with the aim to reduce the carbon "budget" of each
state's electricity generation sector to 10 percent below their 2009
allowances by 2018.
Also in 2003, U.S. corporations were able to trade CO2 emission
allowances on the Chicago Climate Exchange under a voluntary
scheme. In August 2007, the Exchange announced a mechanism to
create emission offsets for projects within the United States that
cleanly destroy ozone-depleting substances.
In 2007, the California Legislature passed the California Global
Warming Solutions Act, AB-32, which was signed into law by Governor
Arnold Schwarzenegger. Thus far, flexible mechanisms in the form of
project based offsets have been suggested for five main project types.
A carbon project would create offsets by showing that it has reduced
carbon dioxide and equivalent gases. The project types include:
manure management, forestry, building energy, SF6, and landfill gas

70
capture. California is also one of seven states and three Canadian
province that have joined together to create the Western Climate
Initiative, which has recommended the creation of a regional
greenhouse gas control and offset trading environment.

Learning

From the first chapter we came to know about various things which led
to carbon credits, how carbon credits came into picture.

• Why was it necessary to have a protocol like Kyoto Protocol.

Under the FCCC, Annex I countries (high-income nations plus the
former Soviet Union and Eastern European countries) committed
on a voluntary basis to limit their concentrations of GHGs to
1990 levels. This commitment left open almost all the important
questions, such as the environmental, economic, and political
components of such a commitment. It soon became apparent
that the voluntary approach under the UNFCCC was producing
next to nothing in actual policy measures. Moreover, some
countries, particularly the U.S., were experiencing rapid growth
in CO2 emissions. This led the advocates of strong policy
measures to pursue binding commitments, which led to the
Kyoto Protocol of December 1997.

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 • Then we learnt what the basic structure of the protocol was, that
is, it had 24 articles of which Article 3 was most important. The
various Annexes, that is, A & B and I & II. Annex A defined the
gases and the sectors under consideration and Annex B defined
the reductions in the emissions that the Annex I countries have
to do. Then we see that India was placed in Non-Annex countries
(developing countries), with no such obligations on it.

• We also saw why the Annex I countries (industrially developed)

were bounded by the protocol since they were polluting world
the most and Non-Annex countries were free of any obligation.
This would not only reduce emissions but also help the countries
development.

• What was Marrekesh Accords and what were its needs. It was in
the Marrekesh Accords, COP 7, which a proper framework was
made for implementing the decisions of Kyoto Protocol. The
major decisions were that of developing mechanisms like CDM
and JI on which the carbon market was going to work.

From second chapter

• Carbon Trading is based on the theory of externality and
comparative advantage theory.
• The ability of different greenhouse gases to trap heat in the
atmosphere is based on global warming potential.
• Out of different mechanism used for the carbon trading based on
different system, the most adoptable mechanism is the CDM
mechanism because of its flexibility and transparency.

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 • The demand and supply of carbon credit, hence its price is
governed by ecological factors, government policies and the
advancement of technology.

From third chapter

• What is the effect of greenhouse gas on environment?
• How to control greenhouse gas emission through carbon credit?
And make money through that
• Carbon credit is also economical good for rural area.

From fourth chapter

• Carbon dioxide (devil), however, is now turning into a product

that helps people, countries, consultants, traders, corporations
and even farmers earn billions of rupees.

• India and China are likely to emerge as the biggest sellers and
Europe is going to be the biggest buyers of carbon credits.

• Every year European companies are required to meet certain

norms, beginning 2008. By 2012, they will achieve the required
standard of carbon emission. So, in the coming five years there
will be a lot of carbon credit deals.

• It's a question of having correct information. How much will be

the demand for carbon credit some years from now? How much
will the supply be? It is a safe market because it is a matter of
having more information on the extent of demand and supply of
carbon credit market.

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http://unfccc.int/essential_background/kyoto_protocol/items/16
78.php

http://unfccc.int/meetings/seminar/items/3410.php

http://unfccc.int/parties_and_observers/items/2704.php

http://www.cd4cdm.org./

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http://www.ieta.org/ieta/www/pages/index.php?IdSiteTree=111
9

http://en.wikipedia.org/wiki/List_of_Kyoto_Protocol_signatories

http://en.wikipedia.org/wiki/Emissions_trading

Venkataraghavan Srinivasan (June 18, 2007) Are we ready for

Carbon trading? Retrieved November 22, 2008 from
http://www.rediff.com/money/2007/jun/18carbon.htm

Menon S. (September 22, 2006) Carbon credit brings in the

moolah Retrieved November 22, 2008 from
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2008) Carbon credit and how you can make money from it
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http://www.rediff.com/money/2008/feb/05inter1.htm

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RATIFICATION

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FRAMEWORK CONVENTION ON CLIMATE CHANGE - Secretariat
CONVENTION - CADRE SUR LES CHANGEMENTS CLIMATIQUES -
Secrétariat
Kyoto Protocol Reference Manual on Accounting of Emissions
and Assigned Amounts,
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Appendix

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