Assignment on

“Carbon Credits”
Submitted to Prof. Jayadeep Manjeshwar (Environment Management)

Submitted by: Division “A” Sneha Narkar 38 Division “B” Pranav Indulkar 16 Azaan Irani 17 Sneha Parab 37 Atul Rane 46

Anjuman-I-Islam’s Allana Institute Of Management Studies & Research Mumbai University Academic Year 2011-12

Carbon Credits

Page 1

.............................................................................................................................................. 12 Criticisms ........................................... 11 Creating Real Carbon Credits ...... 3 Types...................................... 4 Background.......................................................................................................................... 7 Setting A Market Price For Carbon ................................................................................................................................................................................................................................ 13 Carbon Credits Page 2 ............................................................................................................................................................. 10 Credits Versus Taxes .. 4 Verified Carbon Market .............Table of Contents Carbon Credit ............................................................................................................................................ 5 Kyoto's 'Flexible Mechanisms' ............ 3 Definitions .................................................................................. 4 Emission Allowances ................. 6 Emission Markets ................................................................................................................................................................................... 8 How Buying Carbon Credits Can Reduce Emissions ........ 12 Additionality And Its Importance .............................

.” The Investopedia Inc investment dictionary defines a carbon credit as a “permit that allows the holder to emit one ton of carbon dioxide”. The Environment Protection Authority of Victoria defines a carbon credit as a “generic term to assign a value to a reduction or offset of greenhouse gas emissions. such as the Carbon Trade Exchange. or in some markets. usually equivalent to one tonne of carbon dioxide equivalent (CO2-e).. Carbon credits and carbon markets are a component of national and international attempts to mitigate the growth in concentrations of greenhouse gases (GHGs). Carbon trading is an application of an emissions trading approach. voluntary units typically have less value than the units sold through the rigorously validated Clean Development Mechanism. Definitions The Collins English Dictionary defines a carbon credit as “a certificate showing that a government or company has paid to have a certain amount of carbon dioxide removed from the environment”. Greenhouse gas emissions are capped and then markets are used to allocate the emissions among the group of regulated sources. This is reflected in their price. which is like a stock exchange for carbon credits. One carbon credit is equal to one metric tonne of carbon dioxide. Carbon Credits Page 3 . Buyers and sellers can also use an exchange platform to trade. carbon dioxide equivalent gases. These carbon offsetters purchase the credits from an investment fund or a carbon development company that has aggregated the credits from individual projects.which “can be traded in the international market at their current market price”.Carbon credit A carbon credit is a generic term for any tradable certificate or permit representing the right to emit one tonne of carbon dioxide or the mass of another greenhouse gas with a carbon dioxide equivalent (tCO2e) equivalent to one tonne of carbon dioxide. this approach can be used to finance carbon reduction schemes between trading partners and around the world. Since GHG mitigation projects generate credits. The goal is to allow market mechanisms to drive industrial and commercial processes in the direction of low emissions or less carbon intensive approaches than those used when there is no cost to emitting carbon dioxide and other GHGs into the atmosphere. There are also many companies that sell carbon credits to commercial and individual customers who are interested in lowering their carbon footprint on a voluntary basis. The quality of the credits is based in part on the validation process and sophistication of the fund or development company that acted as the sponsor to the carbon project.

technologies and processes. all of which increase the atmosphere's ability to trap infrared energy and thus affect the climate. natural gas and oil). The concept of carbon credits came into existence as a result of increasing awareness of the need for controlling emissions. Such policies could include economic instruments. 131 million metric tonnes of CO2 were transacted.. fertilizer and many other industries which rely on fossil fuels (coal. Compliance Market credits Secondary / Verified Market credits (VERs) Verified Carbon Market The VER market accommodates all companies and industries not forced to comply with fixed reduction quotas as seen in the compliance market. government funding and regulation. Demand in the VER market is fast growing. an international agreement between more than 170 countries. as long as there are reasonable levels of predictability over the initial allocation mechanism and long-term price. according to Bloomberg. especially for power. The mechanism adopted was similar to the successful US Acid Rain Program to reduce some industrial pollutants. The IPCC (Intergovernmental Panel on Climate Change) 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. etc. The major greenhouse gases emitted by these industries are carbon dioxide. steel.Types There are two main markets for carbon credits. a 34% increase on 2009. Background The burning of fossil fuels is a major source of greenhouse gas emissions. In this market. The mechanism was formalized in the Kyoto Protocol. textile. VERs are traded „OverThe-Counter‟ (OTC). cement. and the market mechanisms were agreed through the subsequent Marrakesh Accords. electricity derived from coal. hydrofluorocarbons (HFCs). methane. Carbon Credits Page 4 . 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. For example in 2010. nitrous oxide.

and these are entered into the country's national registry. these countries set quotas on the emissions of installations run by local business and other organizations. Countries manage this through their national registries. the total emissions must still stay within the cap. which are required to be validated and monitored for compliance by the UNFCCC. Since 2005. similar schemes are being considered. privately or on the open market. either by investing in 'cleaner' machinery and practices or by purchasing emissions from another operator who already has excess 'capacity'. and Australia. but it allows industry some flexibility and predictability in its planning to accommodate this. By permitting allowances to be bought and sold. Carbon Credits Page 5 . and trade the six most significant anthropogenic greenhouse gases.Emission allowances Under the Kyoto Protocol. From 2008. The quantity of the initial assigned amount is denominated in individual units. each of which represents an allowance to emit one metric tonne of carbon dioxide equivalent. while businesses that are about to exceed their quotas can buy the extra allowances as credits. whose ratification came into force in March 2008. In the United States. called Assigned amount units (AAUs). the Kyoto mechanism has been adopted for CO2 trading by all the countries within the European Union under its European Trading Scheme (EU ETS) with the European Commission as its validating authority. an operator can seek out the most costeffective way of reducing its emissions. As demand for energy grows over time. which has not ratified Kyoto. Operators that have not used up their quotas can sell their unused allowances as carbon credits. where each unit gives the owner the right to emit one metric tonne of carbon dioxide or other equivalent greenhouse gas. In turn. generically termed 'operators'. EU participants must link with the other developed countries who ratified Annex I of the protocol. the 'caps' or quotas for Greenhouse gases for the developed Annex 1 countries are known as Assigned Amounts and are listed in Annex B. Each operator has an allowance of credits.

but by operators who have been set quotas by their country. but the atmospheric effect is globally equivalent. Once approved.Kyoto's 'Flexible mechanisms' A tradable credit can be an emissions allowance or an assigned amount unit which was originally allocated or auctioned by the national administrators of a Kyoto-compliant capand-trade scheme. or CERs. These carbon projects can be created by a national government or by an operator within the country. The Kyoto Protocol provides for three mechanisms that enable countries or operators in developed countries to acquire greenhouse gas reduction credits    Under Joint Implementation (JI) a developed country with relatively high costs of domestic greenhouse reduction would set up a project in another developed country. In reality. while the developing country would receive the capital investment and clean technology or beneficial change in land use. The Protocol allows these projects to be constructed and credited in advance of the Kyoto trading period. Carbon Credits Page 6 . or it can be an offset of emissions. these units are termed Certified Emission Reductions. Under the Clean Development Mechanism (CDM) a developed country can 'sponsor' a greenhouse gas reduction project in a developing country where the cost of greenhouse gas reduction project activities is usually much lower. The developed country would be given credits for meeting its emission reduction targets. Under International Emissions Trading (IET) countries can trade in the international carbon credit market to cover their shortfall in Assigned amount units. Countries with surplus units can sell them to countries that are exceeding their emission targets under Annex B of the Kyoto Protocol. and has a national agreement in place to validate its carbon project through one of the UNFCCC's approved mechanisms. Such offsetting and mitigating activities can occur in any developing country which has ratified the Kyoto Protocol. most of the transactions are not performed by national governments directly.

and sequestration programs to generate credits that can be sold on one of the exchanges. These features reduce the quota's financial impact on business. Each international transfer is validated by the UNFCCC. NASDAQ OMX Commodities Europe listed a contract to trade offsets generated by a CDM carbon project called Certified Emission Reductions (CERs). Climate exchanges have been established to provide a spot market in allowances. Currently there are five exchanges trading in carbon allowances: the European Climate Exchange." Carbon Credits Page 7 . Each transfer of ownership within the European Union is additionally validated by the European Commission.Carbon place. one allowance or CER is considered equivalent to one metric ton of CO2 emissions. NASDAQ OMX Commodities Europe. These allowances can be sold privately or in the international market at the prevailing market price. while ensuring that the quotas are met at a national and international level. Other greenhouse gasses can also be traded. Commodity Exchange Bratislava and the European Energy Exchange. PowerNext. but are quoted as standard multiples of carbon dioxide with respect to their global warming potential. offsetting. These trade and settle internationally and hence allow allowances to be transferred between countries. head of environmental markets at Barclays Capital predicts that "Carbon will be the world's biggest commodity market. as well as futures and options market to help discover a market price and maintain liquidity. Many companies now engage in emissions abatement. Managing emissions is one of the fastest-growing segments in financial services in the City of London with a market estimated to be worth about €30 billion in 2007.Emission markets For trading purposes. Carbon credits at Commodity Exchange Bratislava are traded at special platform . and it could become the world's biggest market overall. Louis Redshaw. Carbon prices are normally quoted in Euros per tonne of carbon dioxide or its equivalent (CO2e). At least one private electronic market has been established in 2008: CantorCO2e.

First. Ethical consumers today. A harmonized carbon tax would raise the price of a good proportionately to exactly the amount of CO2 that is emitted in all the stages of production that are involved in producing that good. thereby inducing firms to substitute low-carbon inputs. it will provide signals to consumers about what goods and services are high-carbon ones and should therefore be used more sparingly. may have a different market value to an offset such as a CER. This is due to the lack of a developed secondary market for CERs.” have little chance of making an accurate calculation of the relative carbon use in. Third. Through the market mechanism. Additionally. Thus the number of companies needing to buy credits will increase. offsets generated by a carbon project under the Clean Development Mechanism are potentially limited in value because operators in the EU ETS are restricted as to what percentage of their allowance can be met through these flexible mechanisms. such as an Assigned amount unit (AAU) or its near-equivalent European Union Allowance (EUA). encouraging more groups to undertake environmentally friendly activities that create carbon credits to sell. as well as questions due to the principle of supplementarity and its lifetime. say. and the rules of supply and demand will push up the market price. driving 250 miles as compared with flying 250 miles. Carbon Credits Page 8 . Fourth. a high carbon price will raise the price of products according to their carbon content. a lack of homogeneity between projects which causes difficulty in pricing.Setting a market price for carbon Unchecked. energy use and hence emission levels are predicted to keep rising over time. Second. and most important. An individual allowance. Raising the price of carbon will achieve four goals. it will give market incentives for inventors and innovators to develop and introduce low-carbon products and processes that can replace the current generation of technologies. Yale University economics professor William Nordhaus argues that the price of carbon needs to be high enough to motivate the changes in behavior and changes in economic production systems necessary to effectively limit emissions of greenhouse gases. hoping to minimize their “carbon footprint. it will provide signals to producers about which inputs use more carbon (such as coal and oil) and which use less or none (such as natural gas or nuclear power). a high carbon price will economize on the information that is required to do all three of these tasks.

The optimal carbon price. If a country wished to impose a carbon tax of $30 per ton of carbon. but they could make their decisions confident that they are paying for the social cost of their carbon footprint. is the market price (or carbon tax) on carbon emissions that balances the incremental costs of reducing carbon emissions with the incremental benefits of reducing climate damages. .The social cost of carbon is the additional damage caused by an additional ton of carbon emissions.01 of a ton of carbon emissions results from the wheat growing and the milling and the trucking and the baking of a loaf of bread. that an optimal price of carbon is around $30(US) per ton and will need to increase with inflation. the tax on coal-generated electricity would be about 1 cent per kWh.. based on the social cost of carbon emissions. Nordhaus has suggested.. a tax of $30 per ton of carbon would generate $50 billion of revenue per year. Similarly. At current levels of carbon emissions in the United States. or 10 percent of the current retail price. . then a tax of $30 per ton carbon will raise the price of bread by $0. or optimal carbon tax.If 0. The “carbon footprint” is automatically calculated by the price system.30. Consumers would still not know how much of the price is due to carbon emissions. this would involve a tax on gasoline of about 9 cents per gallon. Carbon Credits Page 9 .

The factory either reduces its emissions to 80. such as recovering methane from a swine farm to feed a power station that previously would use fossil fuel. the energy consumed and the Carbon emitted in the manufacture and transportation of a large wind turbine would prohibit a credit being issued for a predetermined period of time. For example. The cost of the seller's new machinery would be subsidized by the sale of allowances.000 tonnes of carbon dioxide emissions from the atmosphere for that year. consider a business that owns a factory putting out 100. After costing up alternatives the business may decide that it is uneconomical or infeasible to invest in new machinery for that year. it would pay another group to reduce the equivalent of 20. We should consider the impact of manufacturing alternative energy sources.000 tonnes of allowances from them.000 tonnes per year.   One seller might be a company that will offer to offset emissions through a project in the developing world. Its government is an Annex I country that enacts a law to limit the emissions that the business can produce. Carbon Credits Page 10 . The factory could make up for its emissions by buying 20. So the factory is given a quota of say 80.000 tonnes or is required to purchase carbon credits to offset the excess. Another seller may have already invested in new low-emission machinery and have a surplus of allowances as a result.000 tonnes of greenhouse gas emissions in a year. So although the factory continues to emit gases. For example. Emissions become an internal cost of doing business and are visible on the balance sheet alongside raw materials and other liabilities or assets. Both the buyer and the seller would submit accounts for their emissions to prove that their allowances were met correctly. 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.How buying carbon credits can reduce emissions Carbon credits create a market for reducing greenhouse emissions by giving a monetary value to the cost of polluting the air.

This advantage is especially great when applied to markets like gasoline or home heating oil. when credits are grandfathered. expensive. reduced incentives for companies to delay efficiency improvements prior to the establishment of the baseline if credits are distributed in proportion to past emissions. some proponents state that if correctly implemented a target level of emission reductions may somehow be achieved with more certainty. However. handled by free market enterprises as it is. while under a tax the actual emissions might vary over time. though under both credits and taxes. perhaps some reduced risk of certain types of cheating. Thus the main advantages of a tradeable carbon credit over a carbon tax are argued to be:     the price may be more likely to be perceived as fair by those paying it. this puts new or growing companies at a disadvantage relative to more established companies.Credits versus taxes Carbon credits and carbon taxes each have their advantages and disadvantages. Investors in credits may have more control over their own costs. A criticism of tax-raising schemes is that they are frequently not hypothecated. the flexible mechanisms of the Kyoto Protocol help to ensure that all investment goes into genuine sustainable carbon reduction schemes through an internationally agreed validation process. Carbon Credits Page 11 . allows for more centralized handling of acquired gains worth of carbon is stabilized by government regulation rather than market fluctuations. and so some or all of the taxation raised by a government would be applied based on what the particular nation's government deems most fitting. carbon trading is not necessarily a focused or easily regulated solution. By treating emissions as a market commodity some proponents insist it becomes easier for businesses to understand and manage their activities. it may provide a framework for rewarding people or companies who plant trees or otherwise meet standards exclusively recognized as "green. some would argue that carbon trading is based around creating a lucrative artificial market. Poor market conditions and weak investor interest have a lessened impact on taxation as opposed to carbon trading. and. while economists and traders can attempt to predict future pricing using market theories. and time-consuming to implement." The advantages of a carbon tax are argued to be:       possibly less complex. emissions must be verified. Credits were chosen by the signatories to the Kyoto Protocol as an alternative to Carbon taxes.

The concept of additionality addresses the question of whether the project would have happened anyway. or that represent common practice in an industry are usually not considered additional. permanent emissions reductions voluntarily in sectors outside the cap. or that are compelled by regulations. Each offset credit allows facilities whose emissions are capped to emit more. their concepts for emissions reduction creation. through a Designated Operational Entity (DOE). The idea is to achieve a zero net increase in GHG emissions.The first step in determining whether or not a carbon project has legitimately led to the reduction of real.Creating real carbon credits The principle of Supplementarity within the Kyoto Protocol means that internal abatement of emissions should take precedence before a country buys in carbon credits. According the World Resources Institute/World Business Council for Sustainable Development (WRI/WBCSD): "GHG emission trading programs operate by capping the emissions of a fixed number of individual facilities or sources. even in the absence of revenue from carbon credits. measurable. with the CDM Methodology Panel and their expert advisors. Many criticisms of carbon credits stem from the fact that establishing that an emission of CO2-equivalent greenhouse gas has truly been reduced involves a complex process. However it also established the Clean Development Mechanism as a Flexible Mechanism by which capped entities could develop real. Under these programs. Only carbon credits from projects that are "additional to" the business-as-usual scenario represent a net environmental benefit. because each tonne of increased emissions is 'offset' by project-based GHG Carbon Credits Page 12 . The CDM Executive Board. review each project and decide how and if they do indeed result in reductions that are additional Additionality and its importance It is also important for any carbon credit (offset) to prove a concept called additionality. permanent emissions is understanding the CDM methodology process. This process has evolved as the concept of a carbon project has been refined over the past 10 years. Carbon projects that yield strong financial returns even in the absence of revenue from carbon credits. tradable 'offset credits' are issued for project-based GHG reductions that occur at sources not covered by the program. in direct proportion to the GHG reductions represented by the credit. It is generally agreed that voluntary carbon offset projects must also prove additionality in order to ensure the legitimacy of the environmental stewardship claims resulting from the retirement of the carbon credit (offset). This is the process by which project sponsors submit. measurable. although a full determination of additionality requires specialist review.

and. although enforcement of decisions relies on national co-operation. crucially. undermining the emissions target of the GHG program. A question has been raised over the grandfathering of allowances. India. Countries within the EU ETS have granted their incumbent businesses most or all of their allowances for free. Its supporting organisation. Not only does this ensure that overall emissions are reduced but also that the costs of emissions trading are carried fairly across all parties to the trading system. is the only organisation with a global mandate on the overall effectiveness of emission control systems. However.reductions. As several countries responsible for a large proportion of global emissions (notably USA. and is expected to continue in a third phase afterwards. this also means that businesses in capped countries may perceive themselves to be working at a competitive disadvantage against those in uncapped countries as they are now paying for their carbon costs directly. This can sometimes be perceived as a protectionist obstacle to new entrants into their markets. The difficulty is that many projects that reduce GHG emissions (relative to historical levels) would happen regardless of the existence of a GHG program and without any concern for climate change mitigation. Carbon Credits Page 13 . As the EU ETS moves into its second phase and joins up with Kyoto. the UNFCCC. A key concept behind the cap and trade system is that national quotas should be chosen to represent genuine and meaningful reductions in national output of emissions. as evidenced by the 2006 and 2007 National Allocation Plans for several countries in the EU ETS. The first phase of the EU ETS system started before then.' then issuing offset credits for its GHG reductions will actually allow a positive net increase in GHG emissions. There have also been accusations of power generators getting a 'windfall' profit by passing on these emissions 'charges' to their customers. Additionality is thus critical to the success and integrity of GHG programs that recognize project-based GHG reductions. If a project 'would have happened anyway. China) have avoided mandatory caps. and may co-ordinate with whatever is internationally agreed at but there is general uncertainty as to what will be agreed in Post–Kyoto Protocol negotiations on greenhouse gas emissions. this adds risk and uncertainty to their plans. The Kyoto trading period only applies for five years between 2008 and 2012. it seems likely that these problems will be reduced as more allowances will be auctioned. which were submitted late and then were initially rejected by the European Commission for being too lax. includes checks for additionality and overall effectiveness." Criticisms The Kyoto mechanism is the only internationally agreed mechanism for regulating carbon credit activities. As business investment often operates over decades. governments of capped countries may seek to unilaterally weaken their commitments.

suppliers. 4. investors. 2. Using a dedicated carbon trading platform offers you the opportunity for substantial commercial gain – internally and externally. 3. Legislative future proofing >> You will need to prepare for the future in terms of energy costs and emission regulations. In an exceptionally difficult domestic business environment. making savings in any area is a compelling reason in itself. Keep stakeholders happy >> Public statement of efficiency targets to customers. 1.Ten reasons for your business to buy carbon credits Registering with Cosain to buy carbon credits has several business and organisational advantages. „Green‟ companies win more business >> Carbon Credits Page 14 . Being able to demonstrate a commitment to environmental and sustainable business methods keeps all your stakeholders informed and shines a positive light on your organisation. shareholders and stakeholders is also an important consideration. investing in carbon offsetting best practices means assurance in the future. With legislation and industry requirements changing regularly. New strategy will reduce costs >> Develop a strategy for saving on energy costs.

Adding value to bids when tendering for business under 'green procurement' procedures. Set targets >> State an annual target for achieving improved energy efficiency on the Cosain website. Showing your „green credentials‟ when tendering or bidding for public sector or government contracts – whatever the sector. A commitment to sustainable enterprise in Ireland will ultimately lead to more employment and an investment in our own energy reserves in a major growth area for domestic development. Setting targets gives you solid goals to aim for and ensures accountability and measures effectiveness. See the bigger picture >> Through the purchase of Irish offsets. you will invest in Irish communities. gives you an advantage over non compliant/participating competitors. 5. innovation. jobs. Internal audit >> Undertake an energy audit as part of ISO 14064 to identify where efficiencies and energy reduction can be achieved. Independent standards and assessment >> Carbon Credits Page 15 . Such an audit represents both a practical approach to energy savings and cost reductions and gives your business a greater understanding of your role in the environment as a whole. in Government tenders and for export markets is a crucial advantage. 6. 7. 8. energy security.

a positive attitude to innovation and commitment to our future. Identify your organisation with carbon trading initiatives and you will position your organisation as a central contributer in Ireland‟s shift to environmental awareness. Accountability >> It will give you the ability to self-report. practice and economic recovery. Irish development >> A changing business world requires a new focus. This level of detail offers an extra level of reporting and another degree of reporting and accountability. 10. Independent standards assure you of best practice methodologies and agenda-free assessments. 9. Carbon Credits Page 16 .Have a stated energy efficiency benchmark allowing for international industry sector peer comparison using ISO 14064. with efficiency described as CO2e per head of employee or unit of production.

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