Carbon Credit

Institute of Petroleum Management Gandhinagar

Submitted byShahid 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 AE AIJ Annex B

Annex I AP AT CDCF CDM CER CERUPT COP COP/MOP

Assigned Amount Unit (unit for emissions trading) Applicant Entity (an entity applying to be a DOE) Activities Implemented Jointly The 39 developed countries in Annex B of the Kyoto Protocol that have GHG reduction commitments. The 36 developed countries in Annex I of the UNFCCC that had non-binding GHG reduction commitments to 1990 levels by 2000. Accreditation Panel (a panel under the EB) Assessment Team (made by the CDM Assessment Panel under the EB to evaluate each AE) Community Development Carbon Fund (a WB activity) Clean Development Mechanism Certified Emission Reduction (unit for the CDM) Certified Emission Reduction Unit Purchasing Procurement Tender Conference of the Parties Conference of the Parties and Meetings serving as the meeting of the Parties to the Kyoto Protocol when the Kyoto Protocol enters into force. Designated Operational Entity: an accredited organisation that validates and certifies CDM projects. Executive Board: the highest authority for the CDM under the COP/MOP. Designated National Authority Environmental Impact Assessment Economies in Transition (former Soviet Union, central and eastern European countries) Emission Reduction Unit (unit for JI) Greenhouse gas

DOE

EB DNA EIA EIT ERU GHG

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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 7

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
1988

Activities
UNEP and World Meteorological Organization (WMO) establish the Inter Governmental Panel on Climate Change (IPCC) The UN Framework Conventions on Climate Change (UNFCCC) is agreed to meet at Rio De Janeiro “EARTH SUMMIT”. UNFCC enters into force. IPCC Second Amendment report concludes that there is evidence suggesting a discernible human influence on the global climate system. Adoption of the Kyoto Protocol to the UN Climate Convention. IPCC finds stronger connection between human activities and global climate system.

1992

1994

1995

1997

2001 2004 2005

Russia ratifies the Kyoto Protocol. 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 9

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, 12

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; 13

(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. 14

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 subgroup 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** - 2008/2012)

Country EU-15*, Bulgaria, Czech Republic, Estonia, Latvia,Liechtenstein, Lithuania, Monaco, Romania,Slovakia,Slovenia, Switzerland US*** Canada, Hungary, Japan, Poland

-8% -7% -6%

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Croatia New Zealand, Russian Federation, Ukraine Norway Australia Iceland

-5% 0 +1% +8% +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 20

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: 22

• 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. 23

• 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 Carbon Dioxide Methane Nitrous Oxide HFC1-23 HFC-125 HFC-134a HFC-143a Global Warming Potential 1 23 296 12,000 3,400 1,300 4,300 30

HFC-152a HFC-227ea HFC-236fa Perfluoromethane (CF4) Perfluoroethane (C2F6) Sulfur Hexafluoride (SF6) 1HFC = Hydroflourocarbons

120 3,500 9,400 5,700 11,900 22,200

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

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Emissions impact of trade

Neutral, as is ensured by zero-sum nature of allowance trades.

Neutral, providing projects are additional. Otherwise, net increase in emissions. Possible decrease in emissions

in emissions 2.3 Kyoto Mechanisms to reducethe 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) Clean Development Mechanism (CDM) International Emissions Trading (IET) Joint Implementation (JI)

II.
III.

I.

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

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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). 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. Thus, this infuses foreign capital in a developing country (non Annex I) and creates many such CDM opportunities for

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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

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

The CDM Project Cycle comprises seven steps

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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 AnnexI countries who have been assigned emissions targets in terms of

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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.

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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.

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

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Emission Reduction Units Assigned Allowance Units Verified Emission Reduction

ERU AAU VER

JI projects International Emission Trading Voluntary action to reduce 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.

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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

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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

Demand and Supply Factors

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Source: Developed from information within Williams, Peterson and Mooney

Chapter three CARBON CREDIT AND CLIMATE CHANGE

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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

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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,

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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.

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* 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 sub52

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.

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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.

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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

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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 supercritical 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),

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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

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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.

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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$ 3.55.5 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 64

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 cogeneration 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. 67

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 68

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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Bibliography

http://unfccc.int/essential_background/feeling_the_heat/items/ 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 http://in.rediff.com/money/2006/sep/22carbon.htm Massey J, Deputy Managing Director, MCX. (February 05, 2008) Carbon credit and how you can make money from it Retrieved on November 22, 2008, from http://www.rediff.com/money/2008/feb/05inter1.htm Choudhary S., TNN, (31 Jul 2007), India gets 43% Of Carbon Credits Retrieved on November 22,2008, from http://economictimes.indiatimes.com/India_gets_43_Of_Carbon_Credits/articlesho w/2245328.cms UNEP website 16 October 2008 KYOTO PROTOCOL, STATUS OF 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, UNFCCC secretariat (February 2007), pdf. CONFERENCE OF THE PARTIES, REPORT OF THE CONFERENCE OF THE PARTIES ON ITS SEVENTH SESSION, HELD AT MARRAKESH, FROM 29 OCTOBER TO 10 NOVEMBER 2001, Pdf. THE MARRAKESH ACCORDS & THE MARRAKESH DECLARATION, pdf.

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