“Climate change is the defining challenge of our age.” Ban Ki-moon, CMP 3, Bali, Indonesia
BACKGROUNDThe burning of fossil fuels is a major source of greenhouse gasemissions, especially for power, cement, steel, textile, fertilizerand 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 arecarbon dioxide, methane, nitrous oxide, hydrofluorocarbons(HFCs), etc., all of which increase the atmospheres ability totrap infrared energy and thus affect the climate.The concept of carbon credits came into existence as a result ofincreasing awareness of the need for controlling emissions.The mechanism was formalized in the Kyoto Protocol, aninternational agreement between more than 170 countries.
KYOTO PROTOCOLThe Kyoto Protocol to the United Nations Framework Conventionon Climate Change was adopted in Kyoto, Japan, in December1997 and entered into force on 16 February 2005.Objective: stabilize atmospheric concentrations of GHGs at a levelthat will prevent dangerous interference with the climate system.Under the Kyoto Protocol, the caps or quotas for Greenhousegases for the developed Annex 1 countries are known as AssignedAmountsAnnex I Parties have a binding commitment to limit or reduceGHG emissions. Eg USA has to reduce its emissions by 7% andCanada by 6% etc.
KYOTO MECHANISMS Emissions trading - 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. Joint implementation (JI) - a developed country with relatively high costs of domestic greenhouse reduction would set up a project in another developed country. 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, but the atmospheric effect is globally equivalent. The developed country would be given credits for meeting its emission reduction targets, while the developing country would receive the capital investment and clean technology or beneficial change in land use.Kyoto mechanisms enhance the flexibility of Annex I Parties to meet their emissionreduction or limitation commitments, by allowing these Parties to take advantage of lower-cost emission reductions outside their territories.
CARBON CEDITSA carbon credit is a generic term for any tradablecertificate or permit representing the right to emit onetonne of carbon dioxide or the mass of anothergreenhouse gas with a carbon dioxide equivalentequivalent to one tonne of carbon dioxide.Many companies sell carbon credits to commercial andindividual customers who are interested in loweringtheir carbon footprint on a voluntary basis.
EMISSION MARKETSFor trading purposes, one allowance or CER is consideredequivalent to one metric ton of CO2 emissions.These allowances can be sold privately or in the internationalmarket at the prevailing market price.These trade and settle internationally and hence allowallowances to be transferred between countries. Eachinternational transfer is validated by the UNFCCC.Carbon prices are normally quoted in Euros per tonne ofcarbon dioxide or its equivalent.Currently there are five exchanges trading in carbon allowances:the European Climate Exchange, NASDAQ OMXCommodities Europe, PowerNext, Commodity ExchangeBratislava and the European Energy Exchange.
How buying carbon credits can reduce emissionsCarbon credits create a market for reducing greenhouse emissionsby giving a monetary value to the cost of polluting the air.Emissions become an internal cost of doing business and are visibleon the balance sheet alongside raw materials and other liabilities orassets.For example, consider a business that owns a factory putting out100,000 tonnes of greenhouse gas emissions in a year. Itsgovernment is an Annex I country that enacts a law to limit theemissions that the business can produce. So the factory is given aquota of say 80,000 tonnes per year. The factory either reduces itsemissions to 80,000 tonnes or is required to purchase carboncredits to offset the excess. After costing up alternatives the businessmay decide that it is uneconomical or infeasible to invest in newmachinery for that year. Instead it may choose to buy carbon creditson the open market from organizations that have been approved asbeing able to sell legitimate carbon credits.
CRITICISMSDeveloped countries have more carbon emissions than developingcountries.US has one of the highest emissions and yet doesnt’t want to be a partof the Kyoto protocol.Developed nations purchase the credits from developing nations sothat they don’t have e to clean their own backyard.Even though the carbon credit trade that takes place is beneficial to thedeveloping nations who reduce their emissions and sell the credits todeveloped nations( in return for finance or technology etc), thedeveloping nations play no actual part in reducing their emissions.This goes against the very purpose of creating carbon credits as theemissions from developing nations are far lesser as compared todeveloped nations.Unless the developed nations take concrete steps to reduce theiremissions, the Carbon Credits System is nowhere close to beingsuccessful.