Emission Trading


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Balancing Global Climate Change with a Sustainable Economic Model

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Emission Trading

  1. 1. Emission Trading Balancing Global Climate Change with a Sustainable Economic Model By Naveen Marasinghe Environmental Science Northwood University BBA - Management and International Business
  2. 2. Introduction In June 1992 at Rio de Janeiro the Conference on Environment and Development or popularly known as the Earth Summit brought a very serious concern to the attention of the world community. Global Warming, a phenomenon which ensued due to the rapid phase of human development and unsustainable pollution of the environment. The increase of greenhouse gases due to human activity has had a significant impact on the global climate and resulted in an accelerated greenhouse effect which has a negative impact on the overall sustainability of the planet. Reducing the amount of CO2 in the environment was taken as a main point in countering this development and a new way of thinking lead nations to find alternatives in countering this threat. The aims of this report  Provide an Introduction to Global Warming and Its effects  Discussion of alternatives and their feasibility  Introduction to Carbon trading and its impact
  3. 3. Global Warming – Its Happening! Regardless of what the skeptics say, one thing we can all agree is that the world climate has seen several negative developments during the past century. The melting of ice caps, and the increase of the global temperature at a significant rate are just normal observations one can make. But what exactly is global warming? Why do we have to bother so much?  The Green House Effect It is the process by which absorption and emission of infrared radiation by atmospheric gases warm a planet's lower atmosphere and surface. Existence of the greenhouse effect as such is not disputed. The question is instead how the strength of the greenhouse effect changes when human activity increases the atmospheric concentrations of particular greenhouse gases. The main greenhouse gases comprises of water vapor, carbon dioxide, methane, ozone. The increased human development and fast phased industrialization has increased the amount of CO2 (which is also a green house gas) in the planet’s atmosphere releasing huge amounts of greenhouse gases which are unsustainable to the environment. This has destabilized the natural greenhouse cycle and has caused the globe to increase its temperature as the planet is unable to sustain the excess Co2 emissions.  Other factors Another alternative thought for global warming is the variations in solar activity and its impact on the planet. It argues that variations in solar output possibly amplified by cloud seeding via galactic cosmic rays, may have contributed to recent warming. But on an overall note, it is considered by most that the increased global warming is mainly due to the excessive carbon emissions released by human activity. The Impact on the Planet It is predicted that if not precautionary steps are taken immediately future consequences of the current developments would be catastrophic to the overall sustainability to the survival of humans and other living beings on the planet.  Environmental Impact It is predicted that the increased global temperature would have severe impacts over boarder changes mainly the shrinking of the arctic and the glaciers that consists of that region. Even today the ice caps in the Arctic and Antarctic regions of the world are melting at a increased phase immediately threatening existing ecosystems in the region. It is predicted that many of the existing species in the region such as Polar Bears and Seals would be extinct during this century due to loss of habitat.
  4. 4. The melting of ice caps also poses a significant threat in raising the sea levels reducing land mass and threatening many smaller nations to be wiped off the map. It is also predicted that it would have a impact on the frequency and intensity of extreme weather conditions. Changes in agricultural yields, reduced summer streamflows, species extinctions and increase of disease vectors are all predicted impacts the global warming would have on the planet and its living beings.  Economic Impact Though there has not been a clear consensus over the actually economic impact of this development, it is predicted through a survey of 100 estimates that the economic cost of one ton of carbon dioxide would range from US$3 to US$95 giving a mean of US$ 12. This is a significant cost that the world economy would have to bear considering the amount of CO2 released every year. “Stern Review” a publication which explores the economic impacts of the global warming suggests that extreme weather might reduce global gross domestic product by up to one percent, and in a worst-case scenario global per capita consumption could fall 20 percent. Though the findings of the Stern Review have been critised by a number of leading economists but the publication is praised as a significant milestone in an attempt to foresee the impacts of the global warming. The Way Out – Adaptation and Mitigation The broad prediction among scientists over the increase of global temperatures is that it would continue to increase. Thus facing this problem comes in two alternatives. Adapting to the changes in the environment and reducing the greenhouse gas production also known as mitigation stand out as the two alternatives available. Out of the two alternatives the latter is considered to be more viable and effective in terms of reversing the greenhouse effect.
  5. 5. The Kyoto Protocol – Mitigating Global Warming United Nations Framework Convention on Climate Change held in Rio de Janeiro on June 1992 focused mainly on creating a global effort in successfully facing the threat posed by increased global warming. It was suggested that all member countries should work towards mitigating the levels of greenhouse gases released to the environment, thus the treaty aimed at stabilizing greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system. The treaty later established legally binding commitments from its member nations in limiting the amount of carbon emissions released by each respective country. The Kyoto Agreement was adopted for use on December 1997 in Kyoto Japan and 183 parties have ratified the protocol. Under the protocol industrialized countries agreed to reduce their collective greenhouse gas emissions by 5.2% compared to the year 1990, where as all other member states were also set limits on their emission productions. The agreement offered “flexible mechanisms” such as Emissions Trading, the Clean Development Mechanism and Joint Implementation to allow member states to meet their greenhouse gas emission limitations by purchasing green house gas emission reductions credits from elsewhere. This could be done through financial exchanges, projects that reduce emissions from states which had excess carbon emission allowances. Emissions Trading – Dawn of a New Industry? The emergence of Emission Trading was a direct result of world’s commitments to reduce the impacts of the global warming. Emission Trading is a novel way of strategically stabilizing the released amounts of CO2 to the environment. Under the Kyoto Protocol some of the developed member states had to cut down on their emission levels and reduce the amount of CO2 released. For countries who have already exceeded their set limit the protocol introduced a novel concept of emission trading. This allowed states which have already exceeded their allowed emission limits to buy excess carbon allowances from states that had excess amounts of unused allowances. It also allowed countries which have not been imposed a set limit on their carbon emissions to produce carbon credits. Carbon credits could be produced by reducing their emissions below a baseline level of emissions. Subsequently these credits were able to be traded at an open market creating a whole new concept of managing and sustaining emissions produced.
  6. 6. Clean Development Mechanisms Developed countries that are unable to meet their set carbon cap on their own are able to fund clean development mechanisms and joint implementation projects in other countries as a way of generating tradable carbon credits. These assistance could come in a number of ways such as providing financial aid or technological know-how in implementing Clean Development Mechanisms or Joint Implementations. These include reforestation projects, development of cleaner energy projects such as hydro-power plants or investments in greener energy such as solar or wind power. Trade Your Carbon Credits! The emission trading mechanism is already under work and is fast becoming a highly lucrative market in terms of revenue generated. Since allowances and carbon credits are tradeable instruments with a transparent price, financial investors can buy them on the spot market for speculation purposes, or link them to futures contracts. A high volume of trading in this secondary market helps price discovery and liquidity, and in this way helps to keep down costs and set a clear price signal in CO2 which helps businesses to plan investments. Currently five established trading platforms offers interested buyers and sellers a way of trading their carbon credits. Chicago Climate Exchange, European Climate Exchange, Nord Pool, PowerNext and the European Energy Exchange facilitate the trading of CO2 as a commodity in the international market. Alongside this two private electronic markets have also been established to increase public interest and involvement in this industry. The market has seen active involvement of major businesses, bankers, investors and private traders and was estimated to be worth around US$ 60 billion by the end of 2007. It is predicted that if non-Kyoto Countries such as United States of America are also involved the market value would increase significantly. Though the trading of carbon credits is seen as a lucrative business approach, production and development of carbon credit projects would have undergo strict guidelines from the United Nations Framework Convention on Climate Change (UNFCCC) and are subjected to constant monitoring and scrutiny by regulatory bodies to ensure that standards are maintained.
  7. 7. Carbon Trading – A Sustainable Plan for Business Entities The practice of carbon would work as a sustainable approach for businesses in complying with the Kyoto Protocol. The same methodology practices under country level could be brought in to develop a feasible approach for business to develop their green initiatives. Companies who release different amounts of CO2 are set specific caps on their emissions released. These caps will be implemented after careful analysis of the overall limits the country would have to maintain under the protocol. Under the set limits the companies would have be provided with two alternatives, they could either buy carbon credits from other companies or they could invest that amount in finding new systems in reducing the emissions they are releasing to the environment. Subsequently this would direct many companies to adopt environment friendly and greener business processors.
  8. 8. Criticisms - Is Carbon Trading Really Worth The Money? Although Emission trading is welcomed by many as a viable method of fighting increasing global warming, it is seen by some as a bad investment. It draws a number of negative criticisms ranging from unfair treatments to member states in carbon limit allocations to enduring high costs for vaguely projected results. 1. Global Socialism Initiative/ Unfair treatment Some accuse the Kyoto protocol and its initiatives as a means of slowing down the growth of world’s industrial democracies by transferring wealth to the third world. It is also being accused of disregarding the commitments made by member countries far before the protocol was implemented and unfair treatment by selecting 1990 as the base year for the emission limits. 2. A bad investment with high costs One of the major factors that critics point out is the high investment costs involved. It suggests that the costs which has to be endured to mitigate carbon emissions have a vast disparity between the actually results yield. It also accuses of vague monitoring and control mechanisms and argues that the results doesn’t necessarily guarantee a fair investment as the actual impact of the results are not necessarily quantifiable. 3. Wrong Direction Another criticism is that the human intervention in changing the global weather conditions would not yield positive results and that the efforts which are being directed towards this cause can be directed at more pressing issues such as poverty or development. They argue that if the same commitments made towards Emission Trading schemes were made towards eradicating poverty it would have by now made considerable gains for the benefit of humankind. Conclusion All speculations aside, carbon trading today has evolved into a multibillion dollar market which has introduced a whole new way of managing the green house gas production. However there is a risk that Emission Trading could become the next sub-prime mortgage where loss of human confidence in the program could eventually bring the industry to a standstill.
  9. 9. Reference Materials International Organizations and Commercial Entities  United Nations Environment Programme (http://www.unep.org)  UNEP Finance Initiative (http://www.unepfi.org)  Sustainable Energy Finance Initiative – SEFI (http://sefi.unep.org)  Climate Action Registry (http://www.climateregistry.org/)  Sierra Club (http://www.sierraclub.org/)  Carbon Trading (http://www.carbon.sref.info/)  Zero Your Carbon (http://www.zeroyourcarbon.com.au/)  Carbon Farmers of America (http://carbonfarmersofamerica.com/)  CarbonTrading.com (http://www.carbontrading.com/) Published Articles and Online Reading Material  Will Carbon Trading Become the Biggest Traded Commodity? (http://blog.enviance.com/public/item/208545)  Intelligence Squared US- Major Reductions in Carbon Emissions are not worth the money (Media Transcripts)  Public Attitude Towards Kyoto Protocol –EKOS Publication (June 2002)  Carbon offsets: Are they worth your money? (http://today.msnbc.msn.com/id/29370474/)  How Does Carbon Trading Work? (http://blog.enviance.com/public/item/179590)  Setting a Price on Carbon vs. Deployment of Clean Technologies (http://blog.enviance.com/public/item/208546)  Public Finance Mechanisms to mobilize investment in climate change mitigation ( UNEP Publication – Financial Report)  Engaging Banks in Financing Sustainable Energy -SEFI (http://sefi.unep.org/english/home/bankers-training.html)  Carbon Farming (http://www.acfnewsource.org/carbon trading/carbon_farming.html)