CARBON CREDIT

International CMO Carbon Credit is a BR PT based company that facilitates Clean Development Mechanism (CDM) projects between EU. We assist our clients, in line with Article 12 of the Kyoto protocol to develop carbon credits as a commodity that can be traded on the global market. 

As of December 2006, 166 states have signed and ratified the Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCC), aimed at combating global warming. Governments are separated into two general categories: developed countries, referred to as Annex 1 countries (who have accepted GHG emission reduction obligations); and  developing countries, referred to as Non-Annex 1 countries (who have no GHG emission reduction obligations and must submit an annual greenhouse gas inventory).

Any Annex 1 country that fails to meet its Kyoto target will be penalized by having its reduction targets decreased by 30% in the next period.  By 2008-2012, Annex 1 countries have to reduce their GHG emissions by an average of 5% below their 1990 levels (for many countries, such as the EU member states, this corresponds to some 15% below their expected GHG emissions in 2008. Reduction targets expire in 2013

The increase can also be attributable to the rapid industrialization across the world. As we go on burning more and more fossil fuels like coal and petroleum the problem only rises.

Various climatic changes like monsoon imbalance, droughts, floods and recent hurricanes have been credited to Global Warming. According to various scientific studies, this rise in temperature can cause polar ice caps to melt in near future raising the sea level causing various low lying regions to disappear in the ocean. Longer and hotter summers will have much more adverse impact on the flora-fauna, animals and humans also. The impact cannot be measured into monetary terms as the impact is much more far reaching and continuous.

Too many things have been written and same story has been told too many a times. Composition of carbon dioxide and green house gases has been constantly rising in the Earth’s atmosphere, and we have emitted more gases in the atmosphere than anytime before. Molecules of these gases acts as heat trap thus resulting in increase in earth’s temperature. Most of the Climatic changes observed in the recent years have been attributed to Global Warming and high emission of GHG in Earth’s atmosphere.  Answer to the problem can be summed in one line; ‘Reduce carbon and green house gas emission in the atmosphere before it’s too late’. Stop dependency on fossil fuels and look out for renewable energy which can be substituted for the energy needs.

First, rapid industrialization, growth and current life style has brought us to a point where our demand for high energy needs is growing every day. The primary source of this demand is fulfilled by coal and petroleum.  Second, we have failed to find any alternate source of energy other than the fossil fuels. Even after decades of research and innovations we still haven’t been able to find any other source of energy which can remove dirty fuels from their dominance. Wind, Solar, Bio, Nuclear all exist but they haven’t been able to come out and make a mark. They show more problems than they solve and economic viability of these energy sources has always been a topic of debate.

Now we cannot give up our automobiles, thermal power stations cannot be shut down, cement and steel plants cannot be locked, we end up in a circle a paradox which we need to break and find a solution to the answer.  We have to understand and accept the fact that emission of carbon and GHGs cannot be stopped completely and as we move ahead it’s only going to increase. We have to find a solution that not only solves the bigger problem but also goes hand in hand with the economic growth.

Carbon emissions into the earth’s atmosphere have resulted in drastic climatic changes. Though, we have both, firm believers who blame Industries outright for polluting the atmosphere resulting in some of natures shocking disasters and some who believe its difficult to blame carbon emissions being responsible for these climatic changes as its hard to find a pattern over the past billion years or so how climate has changed.Though, both have strong points to back their beliefs, whenever I see smoke coming out of chimney, i belive its not good for the environment.  For long have been screaming for everybody’s attention towards this huge problem, but no one seems to care enough, not until there is a financial incentive attached to it. That’s what the governments of various countries have been trying to come up with, a trading mechanism where companies gain a monetary benefit out of polluting the air less.

The Kyoto Protocol is a protocol to the international Framework Convention on Climate Change with the objective of reducing Greenhouse gases that cause climate change. It was agreed on 11 December 1997 at the 3rd Conference of the Parties to the treaty when they met in Kyoto, and entered into force on 16 February 2005.

As of November 2007, 174 parties have ratified the protocol. Of these, 36 developed countries (plus the EU as a party in its own right) are required to reduce greenhouse gas emissions to the levels specified for each of them in the treaty (representing over 61.6% of emissions from Annex I countries), with three more countries intending to participate[3]. One hundred and thirty-seven (137) developing countries have ratified the protocol, including Brazil, China and India, but have no obligation beyond monitoring and reporting emissions.

Kyoto protocol’s goal is exactly that. The idea is to divide the whole world into two, one who can afford making changes to their existing infrastructure and the ones who cannot. As everybody is polluting, be it a developed country or a developing country, the financial aspect has to be kept in mind. All developed countries will have to cut down their emissions by some x percentage or else they pay heavy fines. Now, one way of measuring how much they are polluting the air less, is by clean each tonne reduction of CO2 a unit and a company must own those amounts of units at the end of every period.

Carbon credits are a key component of national and international emissions trading schemes that have been implemented to mitigate global warming. They provide a way to reduce greenhouse effect emissions on an industrial scale by capping total annual emissions and letting the market assign a monetary value to any shortfall through trading. Credits can be exchanged between businesses or bought and sold in international markets at the prevailing market price. Credits can be used to finance carbon reduction schemes between trading partners and around the world.

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. These carbon offsetters purchase the credits from an investment fund or a carbon development company that has aggregated the credits from individual projects. 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. This is reflected in their price; voluntary units typically have less value than the units sold through the rigorously-validated Clean Development Mechanism.

Burning of fossil fuels is a major source of industrial greenhouse gas emissions, especially for power, cement, steel, textile, and fertilizer industries. The major greenhouse gases emitted by these industries are carbon dioxide, methane, nitrous oxide, hydrofluorocarbons (HFCs), etc, which all 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.

 

A credit can be an emissions allowance which was originally allocated or auctioned by the national administrators of a cap-and-trade program, or it can be an offset of emissions. Such offsetting and mitigating activities can occur in any developing country which has ratified the Kyoto Protocol, and has a national agreement in place to validate its carbon project through one of the UNFCCC's approved mechanisms. Once approved, these units are termed Certified Emission Reductions, or CERs. The Protocol allows these projects to be constructed and credited in advance of the Kyoto trading period.

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.

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, 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.

Under International Emissions Trading (IET) countries can trade in the international carbon credit market to cover their shortfall in allowances. Countries with surplus credits can sell them to countries with capped emission commitments under the Kyoto Protocol.

These carbon projects can be created by a national government or by an operator within the country. In reality, most of the transactions are not performed by national governments directly, but by operators who have been set quotas by their country.

Credits were chosen by the signatories to the Kyoto Protocol as an alternative to Carbon taxes. A criticism of tax-raising schemes is that they are frequently not hypothecated, and so some or all of the taxation raised by a government may be applied inefficiently or not used to benefit the environment.

By treating emissions as a market commodity it becomes easier for business to understand and manage their activities, while economists and traders can attempt to predict future pricing using well understood market theories. Thus the main advantages of a tradable carbon credit over a carbon tax are:

The price is more likely to be perceived as fair by those paying it, as the cost of carbon is set by the market, and not by politicians. Investors in credits have more control over their own costs.

The flexible mechanisms of the Kyoto Protocol ensure that all investment goes into genuine sustainable carbon reduction schemes, through its internationally-agreed validation process. The principle of Supplementarity within the Kyoto Protocol means that internal abatement of emissions should take precedence before a country buys in carbon credits. However it also established the Clean Development Mechanism as a Flexible Mechanism by which capped entities could develop real, measurable, permanent emissions reductions voluntarily in sectors outside the cap. Many criticisms of carbon credits stem from the fact that establishing that an emission of CO2 equivalent GHG has truly been reduced involves a complex process. This process has evolved as the concept of a carbon project has been refined over the past 10 years.

The first step in determining whether or not a carbon project has legitimately lead to the reduction of real, measurable, permanent emissions is understanding the CDM methodology process. This is the process by which project sponsors submit, through a Designated Operational Entity (DOE), their concepts for emissions reduction creation. The CDM Executive Board, with the CDM Methodology Panel and their expert advisors, review each project and decide how and if they do indeed result in reductions that are additional.

CDM/JI Projects: CDM or Clean Development Mechanism is a project which is executed in a developing country who cannot, on its own, afford to bring that technology change in the existing infrastrutre which will result in less carbon emission. So a company in a developed world can give money to a company in a developing world to buy the necessary technology and in turn own the carbon units generated by bringing that technology change and thus meet the targets set by their governments. This will help developing countries to get the much needed financial help and in turn help the developed countries to sell their carbon units and earn some profits out of it. And it really doesnt matter, from where on earth carbon emissions are reduced, ’cause it will be beneficial for the environment any ways. JI or Join Implementation is a similar approach, only difference being the both the parties involved in executing such a project are from the developed world.

Carbon Trading: the second option for companies in the developed world is that if they do fall short of the emission targets, they can buy those from the market, from someone who was successful in meeting those targets and has a surplus of carbon unit with him.

Lot of people argue that buying carbon units from the market does not give rights to pollute the environment. Meaning, you just cannot buy the rights to pollute the air. Well, first of all to believe that every human being on this earth will spend money just to keep the air clean is not true. Companies wont be involved until their is a financial benefit for doing so. I don’t blame them, ’cause this the way we all are. Secondly, its not important that someone is doing more to reduce carbon emissions and someone else is just buying the rights to pollute the air. What’s important is, overall, we have those many carbon units in market, or in other words we have reduced the amount of carbon emissions what we did set out to achieve.

CDM mechanism helps developed countries to achieve their Kyoto targets in a cost effective way by initiating these projects in developing countries. These renewable or clean energy projects can vary in size, sector, reduction targets and location.

These emission reductions can then be adjusted to meet their targets.

Process to start a CDM project have been simplified and streamlined.

1. The project initiating party have to get an approval from the local Designated National Authority (DNA)citing the project impact, planned reductions targets, cost, social impact etc.

2. Project once approved goes through other phases of development, implementation and monitoring.

3. Once the project is verified by the governing bodies for the impact the emission reduction certifications (CER) are issued.

The third mechanism of Kyoto Protocol introduces a concept of buying or selling of the Carbon Emission Reduction (CER) certificates, also known as Carbon Credits. These credits are quantified and verified by UNFCCC. Extra credits generated by CDM projects can be sold in the international carbon market.  These credits are quantified in terms of carbon emission being offset by the project. 1 carbon credit = 1 tone of carbon emission reduced. Price of a credit: €6 /tone*. The buyers of these credits are primarily from the Annex I or the developed countries. The cost of initiating CDM projects and generating these credits is lower in the developing countries.

The prices of these credits will depend on demand and supply equilibrium. The market will behave like any other commodity market with prices fluctuating based on the demand and supply. Prices/tone CO2 may go up, if the supply is lesser than the demand in the market. Currently international carbon market works on the day today basis with prices fluctuating just like a stock trade market. According to analysts and trade predictions the global market is expected to exceed US$100 billion by 2008, making it as one of the top commodity of trade.

The As an obligation under the Kyoto protocol, companies should plan ahead and invest in potential CDM projects with high carbon returns. Planning well ahead will help companies to gain from Carbon emissions Reductions in the end rather than loosing money. Its a decision which companies have to take, as to whether they should invest in projects with high carbon returns and sell off the excess carbon credits generated or to buy additional certificates to meet their emission reduction commitments. If you plan to take the former approach, Carbonfreezone.com is the platform for you to search for viable CDM projects planned and executed across the world, based on your country, sector and other preferences. Due to high costs involved to companies in trading of carbon credits, CDM enables developed economies to meet their targets by purchasing Carbon credits from the developing nations; where the cost of executing such projects is lower.

On the other hand, by using the CDM mechanism, developing nations can receive, from the UN, Certified Emission Reduction Credits (CERs) for their own GHG reduction projects. Since the value of these Carbon Credits to a developed economy buyer is greater than the cost of production in developing nations, a significant opportunity exists for developing nations to generate profits by reducing their own GHG emissions. Correctly managed, it is the world’s developing nations who can reap substantial benefits from GHG reduction projects under the Kyoto Protocol.

Ans: A typical CDM project life cycle can be broken down into following stages:

Stage I - Project Approval Stage
PIN/PCN Creation
Host Country Approval
PDD Creation
DOE Validation
DNA Approval
CDM EB Approval
Stage II - Project Execution and Monitoring
Stage III - Accreditation
Verification
Issue of credits or CER.

Following are the 6 GHGs idendified under the Kyoto Protocol: Carbon Dioxide, Methane, Nitrous Oxide, Perfluorocarbons, Hydroflurocarbons and Sulphur Hexafluoride.

One Carbon Credit is equivalent to One tonne reduction of Carbon Dioxide from the atmosphere.

All the GHGs have a Global Warming Potential associated with them eg. Carbon Dioxide has a GWP of 1 and therefore all GHGs have different values in terms of carbon credits hence, 1 tonne of Carbon Dioxide is equvalent to 1 carbon credit.

Similarly other GHGs have their GWPs: Carbon Dioxide = 1 GWP  Methane = 23 GWP  Nitrous Oxide = 296 GWP Perfluorocarbons = 11,000 GWP  Hydroflurocarbons = 11,000 GWP Sulphur Hexafluoride = 22,200 GWP

Therefore, 1 tonne of sulphur hexaflouride reduction is equivalent to 22,200 Carbon credits. CO2 and CH4 are emitted into the atmosphere from many different sources including: Landfill waste Power generation Transportation Natural gas flaring Coal mines Gas distribution networks Animal and human waste

Nitrous Oxide is produced in the production of Adipic Acid and Nitric Acid – used in the production of nylon and fertilizers.

Fluorocarbons are released in the production of: Landfill waste refrigents aerosols fire retardant foams aluminium semi-conductors

Sulphur Hexafluoride is emitted in the production of magnesium and electrical insulation materials.

Glossary  

Additionality. Under the Kyoto Protocol, certificates from JI and the CDM will be awarded only to project-based activities where emissions reductions are "additional to those that otherwise would occur". The issue has to be elaborated further by the Parties to the Kyoto Protocol, and on the basis of practical experiences.

Certification . The certification process is the phase of a CDM or JI project when permits are issued on the basis of calculated emissions reductions and verification, possibly by a third party.

Certified Emission Reductions. CERs are permits generated through the CDM.

Clean Development Mechanism. CDM is a mechanism for project-based emission reduction activities in developing countries. Certificates will be generated through the CDM from projects that lead to certifiable emissions reductions that would otherwise not occur. The CDM is mandated under Article 12 of the Kyoto Protocol and oversees emission reductions in projects carried out in developing nations. Under the CDM, investors from Annex I states receive Certified Emissions Reduction units (CERs) for the actual amount of greenhouse gas emissions reduction achieved. A key component of the CDM is the requirement of additionality. Certified Emission Reductions generated under the CDM will only be recognised when the reductions of greenhouse gas emissions are additional to any that would occur in the absence of the certified project activity.

Clean Development Mechanism (CDM) Executive Board (EB). The CDM EB registers and validates project activities as CDM projects, issues CERs to relevant projects participants, and manages a series of technical panels and working group meetings. It is accountable to the Conference of the Parties to the Kyoto Protocol.

CDM Registry. The UNFCCC Secretariat is the designated CDM registry administrator. The CDM registry is being used to issue CERs from registered CDM project activities.

Commitment Period.The five-year Kyoto Protocol Commitment Period is scheduled to run from calendar year 2008 to calendar year-end 2012.

Crediting Period. The crediting period is the duration when a project generates carbon credits. For CDM projects crediting period continues either a 7-year period, which can be renewed twice to make a total of 21 years, or a one-off 10-year period; for JI projects crediting period overlaps with the first commitment period under the Kyoto Protocol (2008-2012).  

Designated National Authority (DNA). To participate in CDM, a Party needs to appoint a Designated National Authority. The DNA issues the Letter of Approval (LoA) needed for registration of a project. A project will need both host and investor country approval.

Designated Operational Entit. DOE is a domestic legal entity or an international organization accredited and designated by the CDM EB. The DOE validates and requests registration of a proposed CDM project activity as well as verifies emission reductions of a registered CDM project activity.

Determination. The process of independent evaluation of a JI project by an accredited Independent Entity according to requirements to JI projects.

Early Crediting. Early credits can be given for CDM projects implemented between 2000 and 2008 to achieve compliance in the first commitment period.

Emission Reduction Purchase Agreement. Binding purchase agreement signed between buyer (of CERs or ERUs) and seller.

Focal Point. Contact person within the government of a country that has signed UNFCCC for communication according to UNFCCC.

Grandfathering. Method for allocation of emissions, where permits are allocated, usually free of charge, to emitters and firms on the basis of historical emissions.

Greenhouse Gases (GHGs). Are trace gases that control energy flows in the Earth's atmosphere by absorbing infra-red radiation. Some GHGs occur naturally in the atmosphere, while others result from human activities. There are six GHGs covered under the Kyoto Protocol - carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydro fluorocarbons (HFCs), per fluorocarbons (PFCs) and sulphur hexafluoride (SF6). CO2 is the most important GHG released by human activities.

Host Country. A host country is the country where a JI or CDM project is physically located. A project has to be approved by host country to receive CERs or ERUs.

International Transcation Log. A planned centralized database of all tradable credits under the Kyoto Protocol and the application that verifies all international transactions and their compliance with Kyoto rules and policies.

Issuance. Refers to the instruction by the CDM Executive Board to the CDM registry administrator to issue a specified quantity of CERs for a project activity into the pending account of the Executive Board in the CDM registry.