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Melting glaciers, freak storms and stranded polar bears - the mascots of
climate change - show how quickly and drastically greenhouse gas
emissions (GHG) are changing our planet. Such graphic examples,
combined with the rising price of energy, drive people to want to reduce
consumption and lower their personal shares of global emissions. But
behind the emotional front of climate change lays a developing framework
of economic solutions to the problem. Two major market-based options
exist, and politicians around the world have largely settled on carbon
trading to regulate GHG emissions.
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dollar market in global emissions trading. The recent surge in carbon
credits trading activities in Europe is an indication of how the emissions
trading industry is going to pan out in the years to come. Carbon credits
seek to reduce these emissions by giving them a monetary value. One
credit gives the owner the right to emit one ton of carbon dioxide. Such a
credit can be sold in the international market at the prevailing market
price. This means that carbon becomes a cost of business and is seen like
other inputs such as raw materials or labor.
Country % of total
Annual CO2 emissions
emissions
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Following diagram shows emission of carbon dioxide by different countries
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Worldwide carbon dioxide emissions in 2005 are estimated to be
slightly more than 24 billion tonnes. Every litre of gasoline or petrol
used in motor vehicles produces 2.4 kilograms of carbon dioxide
emissions. For diesel fuel, every litre produces 2.7 kilograms carbon
dioxide.
The average US citizen emits as much carbon dioxide in one day as
someone in China does in more than a week, or someone in
Tanzania, one of the world's poorest countries, emits in seven
months, according to International Energy Agency (IEA) statistics.
The World Health Organization has estimated that climate change
leads to more than 150,000 deaths every year and at least 5 million
cases of illness. Global sea levels will increase by 11 to 13 inches by
2100, according to 2006 estimates by Australia's science research
agency CSIRO.
According to International Energy Agency statistics, world energy-
related CO2emissions in 2004 were 16.4 per cent above their 1990
level. In 2002 alone, they increased by 2%.
Ten countries account for two-thirds of global forest area, according
to the UN Food and Agriculture Organization: Australia, Brazil,
Canada, China, The Democratic Republic of Congo, India,
Indonesia, Peru, Russia and United States.
China says its reforestation and afforestation programmes over the
last two decades have it on track to lift forest cover to 20 per cent
of its land mass by 2010, compared to just 8.6 per cent in 1949.
The United States is the world's leading greenhouse-gas emitter,
accounting for 22 % of total emissions. US annual greenhouse
emissions per capita are about 20 tonnes.
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2.1 CARBON CREDITS:
The carbon market is the most visible result of early regulatory efforts to
mitigate climate change. Regulation constraining carbon emissions has
spawned an emerging carbon market that was valued at €47 billion in
2007. Its biggest success so far has been to send market signals for the
price of mitigating carbon emissions. This, in turn, has stimulated
innovation and carbon abatement worldwide, as motivated individuals,
communities, companies and governments have cooperated to reduce
emissions.
Allowance Markets:
Market has been successful in its mission of reducing emissions, and
stimulating emission reductions abroad. The European Commission,
learning from the experience of Phase I, has strengthened several
important design elements for EU ETS Phase II. Along with recent EU
proposals for Phase III, these improvements include tighter emission
targets, stronger flexibility provisions for compliance more attention to
internal EU harmonization and, most importantly, longer-term visibility for
action to reduce emissions until 2020. These proposed reforms create
confidence in emissions trading as a credible and cost-effective tool of
carbon mitigation.
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Prices and price differentiation:
The growth in transacted values reflected higher prices for primary
forward contracts, which had an average price of €10 in 2007. Prices for
primary market forward transactions were in the range of €8-13 in 2007
and early 2008. The generally higher prices reflected the intense
competition and activity in the global market to encourage projects that
reduce global emissions. Prices in the higher end of that range typically
rewarded projects that were further along in the CDM process (such as
registered projects), projects that were being developed by experienced
and established sponsors (low credit risk and performance risk), and/or
for projects with high expected issuance yields. Spot contracts of issued
Certified Emission Reductions were transacted at €16-17, a nice premium
to the primary CER, but still at a discount to the EUA, reflecting a
combination of the impact of the European Commission‟s 2020 proposal,
the time value of money, and some remaining procedures related to the
delay in connectivity of the International Transaction Log (ITL) to the EU.
Climate-friendly investment:
Analysts estimated that US$9.5 billion were invested in 2007-08 in 58
public and private funds that either purchase carbon directly or invest in
projects and companies that can generate carbon assets. The total
capitalization of carbon vehicles could reach US$13.8 billion in 2008-09,
with 67 such carbon funds and facilities. This capital inflow was
characterized by a substantial increase in the number of funds seeking to
provide cash returns to investors and by more funds getting involved
earlier in the project development process, taking larger risks through
equity investment in expectation of larger returns. The authors estimated
that in 2007-08 alone, CDM leveraged US$33 billion in additional
investment for clean energy, which exceeded what had been leveraged
cumulatively for the previous five years since 2002.
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Secondary markets:
The biggest overall market development in 2007-08 and early 2008 was the
emergence of the secondary markets. A segment of the secondary markets that
the authors had discussed in the 2007 report had largely involved primary
project developers providing project-specific guarantees, often along with credit
enhancement. In 2007-08, as a wide range of procedural delays and risks of CER
registration and issuances grew, the carbon market innovated by providing
portfolio-based guarantees. In these transactions, a secondary seller, typically a
market aggregator sold guaranteed CER (gCER) contracts that were secured
through a slice of its carbon portfolios. These guarantees were also usually
credit-enhanced through the balance sheet of a highly-rated bank engaged by
the secondary seller for this purpose.
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participate in the futures market to manage the price risks associated
with trading in carbon credits and other related risks such as project risk,
policy risk, etc. Keeping in view the various risks associated with carbon
credits, trading in futures contracts in carbon allowances has now become
a reality in Europe with burgeoning volumes.
1. COMPLIANCE MARKET:
Compliance markets have set a “cap and trade” system whereby the
total annual emissions for an industry or country are capped by law or
agreement, and carbon credits can be traded between businesses or
sold in trading markets. Those producers who exceed their emission
reductions can trade their credits to others in the marketplace who
have not reached their emission goals. Voluntary markets exist for
businesses or individuals to lower their “carbon footprint” by
voluntarily purchasing carbon credits from an investment fund or
company that has aggregated credits from individual projects that
reduce emissions.
The compliance markets are mainly a result of the Kyoto Protocol, a
cap and trade system that resulted from the international Framework
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rd
Convention on Climate Change. The protocol was adopted at the 3
Conference of the Parties in Kyoto, Japan, on December 11, 1997.
2.2.1: INTRODUCTION:
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.
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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.”
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2.2.2. INDIA AND KYOTO PROTOCOL:
India signed and ratified the Protocol in August, 2002. Since India is
exempted from the framework of the treaty, it is expected to gain from
the protocol in terms of transfer of technology and related foreign
investments.
However, the U.S. and other Western nations assert that India, along with
China, will account for most of the emissions in the coming decades,
owing to their rapid industrialization and economic growth.
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3.1. INTRODUCTION:
Kyoto is a 'cap and trade' system that imposes national caps on the
emissions of Annex I countries. On average, this cap requires countries to
reduce their emissions 5.2% below their 1990 baseline over the 2008 to
2012 period. Although these caps are national-level commitments, in
practice most countries will devolve their emissions targets to individual
industrial entities, such as a power plant or paper factory.
Both Annex I and non-Annex I Parties must co-operate in the areas of:
a) The development, application and diffusion of climate friendly
technologies;
b) Research on and systematic observation of the climate system;
c) Education, training, and public awareness of climate change; and
d) The improvement of methodologies and data for GHG inventories.
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Under the Treaty, countries must meet their targets primarily through
national measures. However, the Kyoto Protocol offers them an additional
means of meeting their targets by way of three market
based mechanisms.
Although Kyoto created a framework and a set of rules for a global carbon
market, there are in practice several distinct schemes or markets in
operation today, with varying degrees of linkages among them.
The mechanisms help stimulate green investment and help Parties meet
their emission targets in a cost-effective way.
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TYPES OF KYOTO MECHANISM
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4.1. INTRODUCTION:
The CDM market is like any other commodity market. The CDM market is
rising sharply and is getting matured with time. Currently, it is the second
largest carbon market after the EUA market. The market is nearly
doubling every year. Majority of the trading is done in the Primary
market. The secondary market is not as expanded as the primary mainly
because of the high volatility of the carbon prices.
The CER market is an evolving market and has not yet become matures
enough to be completely independent. The CER market is closely linked to
EUA market. Thus the volatility of EUA market is inherently transferred to
the CER market. Fluctuations in EUA market cause price fluctuations in
CER market. The Buyers of CERs can be broadly classified into:
1. Compliance Buyers
2. Carbon Funds (e.g. Prototype Carbon Fund of World Bank)
3. Traders
India is a big market for CDM projects. As per the rating system of Point
Carbon, India ranks second in terms of attractiveness for CDM project
participants. In other words, India has a good climate for investment into
CDM projects. In the registered projects category, India has the largest
share 31.00%. However, in the issued CER category, India ranks second
after China.
The total Number of projects registered till 17 March 2008 was 1023 and
the total no of CERs issued were 196635114. However, the registration
process is getting more and more stringent lately mainly to safeguard the
mechanism‟s integrity and the quality of CERs.
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4.2. CLEAN DEVELOPMENT MECHANISM:
The key stages in the CDM project cycle are the initial feasibility
assessment, development of a Project Design Document (PDD), host
country approval, project validation, registration, emission reduction
verification and credit issuance. The interdependencies of the activities
that need to be undertaken as part of the process, and which
stakeholders are responsible for carrying out each activity.These
stakeholders include the CDM project developer and the CDM Executive
Board (EB), as well as the Designated Operational Entity (DOE),
responsible for validation and verification of the project.
The CDM EB supervises the CDM under the authority and guidance of the
Conference of the Parties. The EB‟s core tasks are the following:
Registration of projects
Issuance of CERs
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All CDM projects must satisfy certain requirements specified in either the
Kyoto Protocol. These include requirements that the project:
Obtaining host country approval is a critical step in the CDM project cycle.
Without it, a project is not eligible for the CDM. In order for a CDM project
to receive formal host country approval, the host country must have
ratified the Kyoto Protocol and have nominated a Designated National
Authority (DNA) to the UNFCCC.
The DNA is formally responsible for managing the CDM approval process
in the host country. This approval should be provided in writing, in the
form of a Letter of Approval (LoA). Such a letter must include:
Confirmation that the host country has ratified the Kyoto Protocol
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It is up to each DNA to specify rules and procedures for obtaining host
country approval, including setting any criteria that will be applied in
determining whether or not the project contributes to the host country‟s
sustainable development.
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4.3. CDM PROCESS CYCLE:
UNFCCC CDM
Registration EB
Verification and
DOE
Certification
CERs CDM EB
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Simplified CDM Process Flow
Submission of the PDD and host country approval validator Project Developer
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4.4. CHALLENGES IN CDM:
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Complex rules and the capacity constraint:
DOEs, who are accredited to validate and verify CDM projects, are unable
to keep up with a large backlog of projects awaiting registration, and are
finding it difficult to recruit, train and retain qualified, technical staff to
apply the complex rules consistently. As a result, some projects have
been registered incorrectly, resulting in a call for more reviews being
requested by the CDM Executive Board, which, in turn, causes even more
delays. Important concerns have been voiced about CDM on issues of its
additionality, its procedural efficiency and ultimately, its sustainability.
Some critics of the CDM maintain that its rules are too complex, that they
change too often and that the process results in excessively high
transaction cost; they ask for relief from the rules. Other critics question
whether certain project activities are truly additional, or whether CDM can
create perverse incentives; they ask for even more rules.
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5.1. INTRODUCTION:
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atmosphere as common heritage of mankind, as integral to the Earth‟s
bio-community, or as God‟s creation. Possibly for these reasons, the
Indian government has demanded to ensure “that the Protocol has not
created any asset, commodity or goods for exchange”. However, these
objections would not hold if one considered the price of emission permits
not as a rent yielded by a property, but as a fee to be paid for the
temporary right to use the atmospheric commons beyond its sink
capacity.
In fact, the temporary nature of permits along with the fact that a price
tag will be attached not to the use but to the overuse of the commons,
suggests interpreting the price for a permit not as a price for acquired
property but the price for obtaining a user right. Money gives the right to
access, but not to ownership.
Following this consideration, a trade in permits takes on a different
meaning. It would not be instituted in the first place for identifying the
most efficient allocation of abatement investments, but for forming the
price of user rights. After all, the market, under conditions of relative
symmetry among players, is the most ingenious technology for
determining prices.
Carbon Taxes:
Carbon taxes are simply direct payments to government, based on the
carbon content of the fuel being consumed. Given that the primary
objective of the abatement policy is to lower carbon dioxide emissions,
carbon taxes make sense economically and environmentally because they
tax the externality directly. Coal generates the greatest amount of carbon
emissions and is therefore taxed in greater proportion than oil and natural
gas, which have lower carbon concentrations (Coal contains .03 tonnes of
carbon per million Btu of energy, while oil and natural gas contain only
0.024 & 0.016 tonnes respectively).
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5.3. WHICH ONE’S BETTER, EMISSION TRADING/CARBON TAXES?
There is no simple yes or no answer, and the policies are not necessarily
mutually exclusive. Several important advantages and drawbacks of the
respective policies are outlined below.
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The Case for Carbon Taxes:
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Carbon taxes earn revenue, which can be "recycled" back into the
economy by reducing taxes on income, labor and/or capital
investment. This is often referred to as a "revenue neutral" tax and
may be part of a broader program of "environmental tax reform"
(ETR) which attempts to shift the tax burden from "goods" like
labor, to "bads" like pollution. Evidence indicates that there can be
profound employment, distributional and political benefits to such
an approach. Permit systems have the potential to earn revenue,
but only if permits are auctioned.
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(i.e. to remain at 1990 levels through 2012). However, because of the
economic collapse of the former Soviet bloc, and the closure of inefficient
power plants, these countries are already 30%; below 1990 levels. If they
were allocated trading permits, they would be able to immediately flood
the market and receive major cash inflows.
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6.1. INTRODUCTION:
There are two approaches for verification of emission reductions under JI,
commonly called „JI Track 1‟ and „JI Track 2‟. Under Track 1, a host
Party that meets all of the eligibility requirements may verify its own JI
projects and issue ERUs for the resulting emission reductions or removals.
Annex I Parties may also choose to use the JI Track 2 verification
approach. The eligibility requirements for JI Track 2 are less strict than
those for Track 1. Under JI Track 2, each JI project is subject to
verification procedures established under the supervision of the Joint
Implementation Supervisory Committee. JI Track 2 procedures require
that each project be reviewed by an accredited independent entity to
determine whether the project meets the requirements established under
Article 6.
The emission reductions or removals resulting from the project must also
be verified by an accredited independent entity in order for the Party
concerned to issue ERUs. All Annex I Parties participating in JI,
irrespective of whether they use Track 1 or 2, are required to inform the
secretariat of their national guidelines and procedures for approving,
monitoring and verifying these projects. They are also required to make
information about each project publicly available.
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6.2. JI IN 2006-07:
Reported ERU prices in 2006 were between €4.5 and €12.5. The price did
not see any abrupt changes, partly because JI is still dominated by
governmental buyers which have limits on their budgets and are not very
flexible with the prices they offer. They also usually negotiate the price at
early stages of the projects, and the resulting price at the date of contract
signature does not necessarily reflect the latest market trends.
6.3. JI IN 2007-08:
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higher due to the significant increase of CER prices throughout the past
year.
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7.1. INTRODUCTION:
1. EMISSION TRADING:
A company can reduce its emission by half the cost of allowance bought
from other company. On the other hand, a company with higher
expenditure for reduction of its emissions buys the required allowance
from other company to save its emission cost. In either ways, the
company saves half the expenditure they would have to spend for
reduction of carbon emissions without carbon trading. Some emissions
trading scheme allow companies to save any surplus allowances they
have for their own use in future years, rather than selling them. Emission
trading is also sometimes call „cap-and-trade‟. The development of
emissions trading over the course of its history can be divided into four
phases:
I. Gestation:
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II. Proof of Principle:
III. Prototype:
Branching out from US clean air policy to global climate policy and
from there to the European Union, along with the expectation of an
emerging global carbon market and the formation of the "carbon
industry"
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7.2. UNDERSTANDING CARBON TRADING:
People buy and sell such products because it is the most cost-effective
way to achieve an overall reduction in the level of emissions, assuming
that transaction costs involved in market participation are kept at
reasonable levels.
These entities can sell those surpluses to other entities that would incur
very high costs by seeking to achieve their emission reduction
requirement within their own business.
Similarly, sellers of carbon sequestration provide entities with another
alternative, namely offsetting their emissions against carbon sequestered
in biomass.
Emissions trading are one of the flexibility mechanisms allowed under the
Kyoto Protocol to enable countries to meet their emissions reduction
target. Countries/companies with high internal emission reduction costs
would be expected to buy certificates from countries or companies with
low internal emission reduction costs.
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The latter entities would also be expected to maximize their production of
low cost emission reduction so as to maximize their ability to sell
certificates to high cost entities.
The overall outcome is that the emission reduction target is met, but at a
much lower cost than would be incurred by requiring each entity to
achieve the emission reduction target on their own.
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associated with the creation of both emission reduction and emission
offset certificates also increases market confidence in the product.
CARBON NETWORK
Seller
Buyers
Exchange
Banks Annex 1
country
Trading
Individuals Banks
exchange
Banks
NGO & Individuals
Govt.
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7.4. PARTIES INVOLVED IN CDM PROJECT DEVELOPMENT AND
CARBON TRADING:
Rating
Advisory contracts
Operation &
Construction contract Insurance contract maintenance contract
Project entity:
The project entity is often a Special Purpose Vehicle such as a joint
venture company or a limited partnership set up specifically to undertake
the project. Creating a Special Purpose Vehicle may be useful in order to
keep a project at arm‟s length from the project sponsors, for legal, tax or
financial reasons. Alternatively, the project entity may be an individual,
an existing company, a government agency, a charity, and NGO or
community organization. A project may also encompass several different
entities. In such cases it is critical to have clear contractual arrangements
in place specifying how the different entities are going to work together to
implement the project.
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Sponsor:
Sponsors are those individuals, companies or other entities that promote
or support a project because they have a direct or indirect interest in the
project. Sponsors can include owners of the land on which the project will
be situated, contractors, suppliers, buyers of the project‟s outputs, or
other users of the project.
Lender:
If the project is financed through debt, one or more banks may be
involved in providing this. A loan from a group of banks is known as a
syndicated loan. Typically one of the banks will take the lead role in
arranging the finance and syndication agreements, while another (called
the engineering or technical bank) will monitor the technical aspects of
the project. Others may be appointed to deal with other specific aspects
such as insurance. Other types of lenders may include individuals,
corporations, contractors, community groups and institutional investors
such as the World Bank and other international agencies.
Equity provider:
Equity may be provided by project sponsors or third party investors.
Equity providers will wish to ensure that the project produces a return on
their investment as set out in the business plan or prospectus.
Constructor:
Construction is usually carried out by specialist contractors who have
responsibility for the completion of the works, and often have to assume
liability for finishing construction on time and to budget. Lenders will
usually require contractors to demonstrate a good track record in
completing the same or similar project activities.
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Operator:
Operation of the project may be carried out by the project entity, one of
the sponsors, or a third party appointed to be responsible for the
operation and maintenance of the project facilities once completed.
Supplier:
Various companies will supply goods and services to the project. Lenders
will generally prefer supplier agreements and contracts to be in place for
the delivery of essentials such as fuel and equipment. Equipment
suppliers will generally be required to have a track record of supplying the
relevant equipment and to provide equipment performance guarantees.
Buyer:
A project may produce one or more outputs. Lenders will wish to have
contracts in place with buyers of the outputs constituting the majority of
the project‟s future cash flow. The nature of these contracts will be
subject to particular scrutiny and the terms of a loan may well be
dependent upon factors such as the minimum price level in a contract and
how various risks are apportioned between the buyer and the project
entity. In order for a lender to place any reliance on a purchase
agreement as an indication of a project‟s ability to repay a loan, the
lender will need to be satisfied as to the credit-worthiness of the buyer.
Insurer:
Insurers can assist in identifying and mitigating risks associated with the
project. If a risk is to be mitigated by purchasing insurance, the lender
will need to be satisfied as to the track record and credit-worthiness of
the insurer.
Rating agencies:
The rating agencies (e.g. Moody‟s, Standard & Poor‟s, and Fitch Ratings)
may be involved if the financing of the project involves the issue of
securities.
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Experts:
Project sponsors and lenders will often call upon external experts to
advise them on key technical, engineering, environmental and risk
aspects of a project. Experts need to be able to demonstrate a track
record of expertise in the relevant area.
Host government:
The objectives and role of the host government will vary but may involve
economic, social and environmental guidelines and issuance of relevant
consents, permits and licenses. In some countries, the host government
may be involved through state owned or controlled companies that may
take on any of the above roles in relation to the project.
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The first Kyoto commitment period, which ends on 31 December 20121, is
set to be dominated by the EU ETS and CDM on the market side. The
interlinked EU ETS and CDM markets will see the greatest cumulative
volume and value, as they are consolidating and getting more
sophisticated. In addition, the next five years will see the JI market
deliver its first credits and possibly an emerging market in national Kyoto
allowances or AAUs. Beyond Kyoto, the ten-state RGGI has already
produced the first US compliance trade, and more is expected.
1
Source:unfccc.org; Point carbon.
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8.1. EXPECTATIONS FOR GLOBAL 2009 VOLUMES AND TRENDS:
The total traded volume in global carbon markets in 2008 was 2.7 Gt,
valued at just over €40 bn. We expect this to grow to 4.2 billion tonnes
CO2e in 2009, up 56 percent from 2008. The EU ETS maintains its
position as the largest market. Traded volume in the EU ETS is expected
to be 2.6 Gt in 2009. At current prices, this would be equivalent to €63bn.
The expected 2009 carbon market will differ from 2008 in several ways.
Third, new policies in key countries such as the US and Australia imply
that we will see trading in new markets. This will be accelerated by the
ongoing negotiations under the Bali action plan.
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8.2. EUA MARKET:
The 2008 volume in the OTC market and on the exchanges corresponds
to almost five times the annual Phase 2 shortage of about 300 Mt in the
power and heat sector. This gap needs to be filled every year. The
estimated gap in 2009 this volume will increase to about seven times the
power and heat gap. There are several reasons why growth is expected:
First, the tightness of the Phase 2 cap is expected to increase the traded
volume compared to 2008, simply because more players are short of
allowances. Industrials that were long in Phase 1 are in general balanced
or slightly in Phase 2, while power and heat installations that were short
in Phase 2 have now become even shorter.
Second, a tighter cap gives higher volatility because prices become more
sensitive to changes in fundamentals. This will be attractive to financial
players as well as compliance traders, consequently increasing the traded
volume.
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8.3. TOWARDS 2012 – AND BEYOND:
In its rulings on Phase 2 national allocation plans, which took place from
November 2006 to October 2007, the EC was unquestionably tough. As a
consequence, the caps in 2008-2012 are much tighter than in Phase 1.
The initial shortage in the 2008-2012 periods creates a demand for real
emission reductions, either at home or in non-Annex 1 countries. The
overall cap for Phase 2 for EU-28 (EU-27+Norway) is currently at 2 103.5
Mt/year. In total, the EC has cut the allocation by 245 Mt/year – or 10.4
percent – compared to the allocation suggested in the NAPs.
The largest cuts in volume terms have been requested in Poland (76 Mt),
Germany (29 Mt) and Bulgaria (25 Mt). The largest cuts in relative terms
have been requested in countries located in Eastern Europe, with the
three Baltic States (about half) and Bulgaria (37%) at the top of the list.
The credit limits, defined as the maximum CDM/JI volumes that can be
used for compliance purposes in Phase 2, were set quite generously, as
every country was guaranteed a minimum 10 percent.
It is generally accepted that the EC did a good job in setting the caps, but
was more generous in setting the credit limit. Consequently, Phase 2
could in theory produce no emissions reductions in Europe, just credit
imports from CDM and JI countries.
The Commission corrected this through the EU ETS review – and the
Phase 3 proposal – in January this year. The fundamental balance of the
EU ETS in Phase 2 is now merged with that of Phase 3 (2013-2020). This
is because EUAs can be banked without limits from one year to the next.
Higher Phase 3 prices should thus also translate into higher Phase 2
prices.
All the proposals in the EC energy and climate package are to some
extent related to the overall EU climate and energy targets, i.e. a 20
percent reduction in GHG emissions, a 20 percent share of renewables in
final energy consumption and a 20 percent increase in energy efficiency.
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All targets would be achieved by 2020. The commission‟s climate and
energy package comprises a number of elements:
Under current EU legislation, the overall credit limit for the 2008-2012
period is set at around 1 400 Mt (about 280 Mt/year). However, unless a
“satisfactory” global climate deal is reached and the EU commits to an
overall reduction target beyond 20 percent, the Phase 2 credit limit would
effectively be extended to also cover Phase 3.
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This implies that the 1 400 Mt limit now in place for Phase 2 would apply
for the period 2008-2020, giving an average import potential of just
above 100 Mt per year. This corresponds to a credit limit of nearly 6
percent for the 2008-2020 period for the installations included in the
scheme in Phase 2.
If the EU should aim for a 30 percent reduction target, the cap in 2020
would be set just below 1 400 Mt, while the average allocation in Phase 3
would be set at about 1 630 Mt/year. Not surprisingly, a “satisfactory”
international agreement would thus imply a significantly tighter allocation
in the EU ETS.
At the same time, a 30% reduction target will also lead to increased use
of CERs/ERUs in Phase 3. Half of the additional effort could be covered by
import of credits, under the proposal.
Until now, Phase 2 and Phase 3 have been linked through the possibility
of banking allowances into Phase 3. However, by extending the Phase 2
credit limit to 2020, the Commission has effectively merged Phases 2 and
3 of the scheme.
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9.1. INTRODUCTION:
The sudden boom in the carbon market has greatly helped Indian
industries to cash in on the carbon trading business. India certainly being
the preferred location for carbon credit buyers or project investors
because of its strategic position in the world today.
Under the Kyoto Protocol, between 2008 and 2012, developed countries
have to reduce emissions of greenhouse gases to an average of 5.2 per
cent below the 1990 level. They can also buy CERs from developing
countries, which do not have any reduction obligations, in case their
industries are not in a position to lower the emission levels themselves.
One tonne of carbon dioxide reduced through the Clean Development
Mechanism (CDM) project, when certified by a designated entity, becomes
a tradable CER.
Developed countries have to spend nearly $300 to $500 for every tonne
reduction in CO2, against $10 to $25 to be spent by developing countries.
In developing countries like India, the emission levels are much below the
target fixed by the Kyoto Protocol. So, they are excluded from reduction
of GHG emission. On the contrary, they are entitled to sell surplus credits
to developed countries. The European countries and Japan are the major
buyers of carbon credits.
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Development (OECD) in 1992, plus countries with economies in 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. They currently number 145.
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world leader in reduction of greenhouse gases by adopting Clean
Development Mechanisms (CDMs) in the past few years.
Paddy fields
Enteric fermentation from cattle and buffaloes
Municipal Solid Waste
Of the above three sources the emissions from the paddy fields can be
reduced through special irrigation strategy and appropriate choice of
cultivars; whereas enteric fermentation emission can also be reduced
through proper feed management. In recent days the third source of
emission i.e. Municipal Solid Waste Dumping Grounds are emerging as a
potential CDM activity despite being provided least attention till date.
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9.2. PRESENT STATUS OF DUMPING GROUNDS IN INDIA:
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On the other hand, technology required in the above mentioned three
options needs waste to be segregated first and then can be subjected to
further processing. To carry out segregation of bulk amount of municipal
waste at the dumping ground is practically impossible. It is not only
massive but tedious. Bulk segregation requires not only substantial large
scale labour but also considerable amount of investment. All these factors
make the above three technologies unviable for existing dumping
grounds. The waste in the dumping ground undergoes various anaerobic
reactions producing offensive odorous gases such as CO2, CH4, H2S and
Mercaptans, which foster harmful pathogens and lead to environmental,
social and public health issues.
The approximate methane emission all over India as per 2001 census was
calculated using an IPCC default (1996) method by NSWAI. The total
quantity of methane emitted out of Municipal Solid Waste generated in
India as a whole was approximately 4612.69 MT/day. An economic
feasibility study done by IGIDR (Indira Gandhi Institute of Development
Research) for Mumbai city indicates that for a total population of 10
million producing 1.82 MT of MSW per year, the net methane that can be
produced is equivalent to about 8.5 GJ (Giga Joules). According to TEDDY
(2002-2003) the energy recovery potential from different waste is as
shown in the following Fig. Energy recovery potential of MSW is 900 MWe
out of total 1700 MWe amounting to about 53%. Thus, the utilization of
MSW dumping grounds for energy production would mean a favorable and
useful solution to the existing Municipal Solid Waste disposal problem.
To efficiently recover the gases, MSW Dumping Ground Projects should
primarily have a landfill gas collection technology by means of the
following measures:
1. Implementation of vertical and/or horizontal pipes for collection of
landfill gases.
2. Construction of vertical gas extraction domes.
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3. Construction of venting equipment in order to create under-
pressure in the landfill body to prevent uncontrolled emissions of
landfill gas.
4. Gas Generator installed at LFG
2. Locally achieving:
• Reduction in poverty by creating jobs for urban poor.
• Safe and better working conditions for the informal sector.
• Better environmental quality(Less odour, leachate, and disease
vectors)
• Enhanced public awareness on Solid Waste Management and
recycling.
• Improvement in the quality of life of the city.
• Efficient resource utilization
• Contribution to reduction of foreign expenditures (Macro-economic
Indicators)
• The increase in life of the dump sites.
• Considerable amount of power to the city.
• Reduction in cost on Solid Waste Management by municipalities.
• Reduction of ground and surface water pollution and thus reducing
health hazards.
3. Globally achieving:
• Foreign Direct Investment (FDI)
• Reduction in emissions of GHG‟s from dumping grounds which are
responsible for Global Warming.
• Project is complying with the Millennium Development Goals (MDG).
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9.3. LIST OF INDICATIVE PROJECTS AVAILABLE IN INDIA FOR
CARBON TRADING:
GENERAL
Renewable Energy Projects (Wind Power, Solar, Biomass, Hydel)
Fuel Switching (from fossil fuel to green fuel like biomass, rice husk,
etc.)
Cogeneration in industries having both steam and power
requirement
Energy Efficiency Measures
Induction of new technologies in power sector
Waste Management
Transport
SPECIFIC:
Energy & Power (Generation, Transmission & Distribution)
Renewable Energy like wind power project, biomass based project,
solar power projects, small run of the river hydro electricity
generation projects.
Refurbishment of existing power plants to achieve a heat rate which
is amongst the top 20% of the heat rate of all power plants in the
relevant regional grid
Fuel shift from cal to gas or liquid fuel to gas
Super critical or ultra super critical technologies for power
generation
T&D loss reduction below CEA stipulated values through (HT line
bifurcation, High Voltage Distribution System, etc.)
Power Generation through Methane recovery from municipal solid
waste/ biomethanation
Replacement of SF6 containing equipment and destruction of SF6
etc.
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Cement:
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9.4. GOVERNMENT OF INDIA APPROVAL CRITERIA:
9.4.1. PURPOSE:
Each CDM project activity should meet the above two-fold purpose.
9.4.2. ELIGIBILITY:
The project proposal should establish the following in order to qualify for
consideration as a CDM project activity:
Additionalities:
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Sustainable development indicators:
Social well-being:
Economic well-being:
Environmental well-being:
Technological well-being:
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Baselines:
The project proposal must clearly and transparently describe the
methodology of determination of the baseline. It should conform to
following:
Financial indicators:
Technological feasibility:
Risk analysis:
The project proposal should clearly state risks associated with it including
apportionment of risks and liabilities; insurance and guarantees, if any.
Credentials:
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9.5. CARBON CREDIT TRADING AT MCX:
The Multi Commodity Exchange of India Ltd entered into an alliance with
the Chicago Climate Exchange in 2005 to introduce carbon credit trading
in India. This association has integrated Indian markets with their global
counterparts to cover risks associated with futures trading of carbon
credits and ensuring best prices. CDM projects, mostly in key sectors such
as manufacturing, energy, agriculture, mining and mineral production,
would thus result in providing a boost to the Indian economy.
MCX is the futures exchange. People here are getting price signals for the
carbon for the delivery in next five years. The exchange is only for
Indians and Indian companies. Every year, in the month of December, the
contract expires and at that time people who have bought or sold carbon
will have to give or take delivery. They can fulfill the deal prior to
December too, but most people will wait until December because that is
the time to meet the norms in Europe.
The Indian government has not fixed any norms nor has it made it
compulsory to reduce carbon emissions to a certain level. So, people who
are coming to buy from Indians are actually financial investors. They are
thinking that if the Europeans are unable to meet their target of reducing
the emission levels by 2009 or 2010 or 2012, then the demand for the
carbon will increase and then they may make more money.
There are parameters set and detailed audit is done before you get the
entitlement to sell the credit. In India, already 300 to 400 companies
have carbon credits after meeting UNFCCC norms. Till MCX came along,
these companies were not getting best-suited price. Some were getting
Euro 15 and some were getting Euro 18 through bilateral agreements.
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When the contract expires in December, it is expected that prices will be
firm up then.
MCX has power, energy and metal companies who are trading. These
companies are high-energy consuming companies. They need better
technology to emit less carbon.
Trading benefits:
The price discovery on the exchange platform ensure the fair price
for both the sellers and buyers
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10.1. GLOBAL OUTLOOK:
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scale up their efforts to reduce emissions while growing their economies
in a sustainable manner. As the world considers scaling up serious action
to combat climate change, it would be desirable to re-think the CDM as a
helpful tool for the challenges ahead.
Built to last:
Several jurisdictions, including various states, regions, and countries are
considering whether and how to link up with international opportunities
for reducing emissions. It would be helpful to find ways for them to learn
together from and build on the CDM experience so far, with the goal of
encouraging efficiency, reducing transaction costs, avoiding unnecessary
duplication and creating, from the start, compatible infrastructure with
strong linkages and inter-operability.
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should consider providing incentives for early action with sufficient lead
time to develop emission reduction programs and projects.
10.2.1. INTRODUCTION:
The Kyoto protocol allows 35 developed nations to buy carbon credits
from countries. Incidentally, India is one of the exempted from this
protocol as they are stated as developing countries, but overseas
companies can buy carbon credits from these countries. Now companies
in India can use Carbon credits to get liberal loans, incentives by
multinationals in their countries and benefits like better social and
ecological visibility.
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(2006-07). The deals have been struck at $13.5 per tonne and € 14.6 per
tonne, respectively.
Also, Corporates like NTPC and several state electricity boards have also
applied for carbon credit benefits. Most of them are replacing coal-based
technologies with more environment-friendly processes.
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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.
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anything between Rs 20,000 crore and Rs 50,000 crore a year.
Planning Commission has also pointed out that the Indian
government and farmers would be benefited once the afforestation
and the reforestation mechanisms are finalized by the UNFCCC
board, in clearer terms. Hence India stands to benefit in a big way if
she can make full use of the opportunity provided by the carbon
credits.
There are projects range from cement, steel, biomass power, bio-
gases co-generation and municipal solid waste to energy, municipal
water pumping and natural gas power. The ministry has given the
host-country clearance, the CDM projects will have to be approved
by the executive board of the UNFCCC.
The country accounted for 283 CDM projects out of the 819
registered by the CDM Executive Board, the environment ministry,
the World Bank and the International Emissions Trading Association.
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ANNEXURE 1: The European Union
Austria
Belgium
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Luxembourg
Netherlands
Portugal
Spain
Sweden
United Kingdom
Bulgaria
Croatia
Czech Republic
Estonia
Hungary
Latvia
Poland
Romania
Russian Federation
Slovakia
Slovenia
Ukraine
Canada
Australia
Japan
Monaco
Iceland
New Zealand
Norway
Switzerland
Liechtenstein
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ANNEXURE 4: Annex I parties not ratified
Among the Annex 1 countries that signed the Kyoto Protocol in 1997, only
the USA has not ratified it. In 1990, the USA emitted 36.4 percent of the
total GHGs in the world.
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WEBSITES REFFERED:
www.carbontrading.com
www.unfccc.int
http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/0,,menuPK:
476823~pagePK:64165236~piPK:64165141~theSitePK:469372,00.
html
http://www.primaryinfo.com/index.htm
www.carboncreditmart.com
www.carbon credit.org\carbon credits introduction
www.cdmmarket.org
www.kyotoprotocol.int
www.cseindia.org
www.mcxindia.com
www.climatechangeex.int
www.wikipedia.com
www.google.co.in
www.scribd.com
MAGAZINES:
The Analyst
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