Carbon Trading

Kyoto Protocol- 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 stated in the treaty itself, The objective of the Kyoto Protocol is to achieve "stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system."
As of November 2007, 174 parties have ratified the protocol. Of these, 36 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. A notable exception is the United States. One hundred and thirty-seven (137) countries have ratified the protocol, but have no obligation beyond monitoring and reporting emissions.
Among various experts, scientists and critics there is some debate about the usefulness of the protocol, and there have been cost-benefit studies performed on its usefulness.

India & Kyoto Protocol – India signed and ratified the Protocol in August, 2002. Since India is exempted from the framework of the treaty, it is expected to gain from the protocol in terms of transfer of technology and related foreign investments. At the G-8 meeting in June 2005, Indian Prime Minister Manmohan Singh pointed out that the per-capita emission rates of the developing countries are a tiny fraction of those in the developed world. Following the principle of common but differentiated responsibility, India maintains that the major responsibility of curbing emission rests with the developed countries, which have accumulated emissions over a long period of time. However, the U.S. and other Western nations assert that India, along with China, will account for most of the emissions in the coming decades, owing to their rapid industrialization and economic growth.

What is Carbon Trading? Let’s rewind to the Kyoto Protocol of 1997.
According to it all countries are required to reduce their greenhouse gas emissions by 5% --from 1990 levels-- in the next ten years, i.e. 2012—or pay a price to those that do. The idea was to make developed countries pay for their wild ways with emissions while at the same time monetarily rewarding countries with good behavior in this regard. Since developing countries can start with clean technologies, they will be rewarded by those stuck with ‘dirty’ ones. Say a company in India can prove it has prevented the emission of x-tonnes of carbon, it can sell this good carbon-karma to a company in say, the US which has a bad karma. An environment-fundamentalist may say it’s all a bit like an indulgent epicure paying someone else to diet for him, but then that’s another story. Right now, there is a market opportunity for India—but only till 2012. Closer to that clean-up date prices of carbon credits will rise and in the years leading up to it there will be a scramble to buy credits cheap. The World Bank has built itself a role in this market as a referee, broker and macro-manager of international fund flows. The scheme has been entitled Clean Development Mechanism [CDM] in 2000. Or more commonly, Carbon Trading.

India – Carbon Trading
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 isn’t obliged to cut emissions, as its energy consumption is low. While this may change 10 years from now, companies are jumping on the CER bandwagon. Enterprises are adopting cleaner, sustainable technologies. Insome cases the revenues from waste exceed those from the main business.
The result: India Inc pocketed Rs 1,500 crore in 2005 just by selling carbon credits to developed-country clients. This is a fraction of the RS 18,000 crore experts estimate will be India’s share in global carbon trading by 2012.
In the pipeline are projects that would create upto 306 million tradable CERs. Analysts claim if more companies absorb clean technologies, total CERs with India could touch 500 million.
Though small compared to the Chinese total, the lead has been heartening for industry, government and experts alike.

The ethics of carbon trading ( ET - 11,Dec,2007) - There is a belief that carbon trading offers a golden opportunity for developing countries like India to get foreign funds. However, is it ethical for richer countries to continue to contribute more than their share of global carbon emissions by buying ‘cheaper’ emission reduction opportunities in poorer countries?

The problem of climate change caused by the increasing concentration of greenhouse gases in the atmosphere needs concerted action by all countries of the world. The impact of one tonne of carbon dioxide emissions is the same irrespective of whether the emission occurs in New York, Beijing, Mumbai or Latur. This implies that in order to reduce the total annual global carbon dioxide emissions to a fixed target, it is necessary to decide a basis for national or regional emissions.

The global community led by the Intergovernmental Panel on Climate Change agreed upon the Kyoto Protocol in 1997 (ratified in 2005) where Annex I countries (38 industrialised/developed countries) agreed to reduce their GHG emissions by 2008-2012 to an average of about 5% below their 1990 levels.

The Kyoto targets range from +10% (Iceland) to -8% (EU). The developing countries were exempt from targets at Kyoto. This indicates differentiated responsibility. However, the basis for targets seems to be emissions in a predefined base year. This implies that countries that have higher emissions due to higher per capita energy use would be entitled to higher targets.

A logical basis for deciding emission quotas (rights?) could be on a per capita basis. However, this basis is not agreed upon by the global community. Even the country averages hide significant intra-country variations.

A recent study by Greenpeace India computed the carbon dioxide emissions of different income classes in India and showed that the high income households (> Rs 360,000/ year income) have average emissions around the world average while low income households(< Rs 36,000/ year income) have emissions of about 20% of this value.

The Kyoto protocol permits meeting the national targets partially by trading emission allowances and carbon project credits through the emission trading system, joint implementation, and the clean development mechanism (CDM). This has resulted in the emergence of a carbon trading market.

The logic is that there are projects available in developing countries to mitigate carbon dioxide emissions — e.g., afforestation, energy efficiency and renewables — that can supply cheaper emission reduction credits. This implies that developed countries can continue to have higher emissions (than their emission quotas or rights) as long as they can buy these rights by funding equivalent emission reduction projects in developing countries.

Hence the problem can be ‘neatly’ (“efficiently”?) solved by the market without undue difficulty — no structural adjustments or lifestyle changes required in the developed countries. This would also benefit the developing countries as there would be significant fund transfers for the carbon credits.

What is the problem with this ‘win-win’ market solution? We are looking at the carbon reduction market as a great opportunity. Is this ensuring a fair price? Is it ethical? Are nations avoiding their responsibility to reduce carbon emissions to sustainable levels by using their ability to buy out emission rights?

At present, the volumes of certified emission reductions of carbon dioxide (CERs) recorded annually by the UNFCCC (UN agency regulating the emission reduction) are 174 million tonnes. The price for CERs is kept quite low (less than $20 per CER).

Suppose there were no global carbon market and each country had to balance its own carbon budget. Simulations done by European researchers indicate that if the countries had to meet their Kyoto targets, the economic cost incurred by the US would be $32 billion, by the EU would be $14 billion and for Japan it would be about $6 billion. This would indicate costs of reduction ranging from $41 to $55 per tonne of CO2. This is more than double the existing price of the CERs.

The targets set at Kyoto are a start but unlikely to help achieve the stabilisation scenario of carbon dioxide. Reductions of 40% or more would be required by the Annex 1 countries. Hence even the supply/demand equilibrium for carbon reductions in the global market is skewed since a much lower demand is initially mandated resulting in the developed countries benefiting from a carbon price that is lower than its fair value. The questions of ethics and equity are difficult issues to address.

The climate change negotiation is now about getting the two largest ‘future’ emitters India and China on board. India, a country hosting 17% of the world population has contributed only 2.4% to the total accumulated emissions since 1750.

The annual per capita energy consumption in the country is very low (0.53 tonnes of oil equivalent per person), whereas the average per capita electricity consumption in India is about 450 kWh per year — less than 1/5th of the world average and 1/30th of the US average. The economy is growing at the rate of 8%-10% in the past few years and the energy demand is on the rise.

To meet the developmental needs and to satisfy the aspirations of the people to achieve better living conditions, the energy consumption is expected to rise throughout the next decade or two. A significant part of the growth in the energy sector will be met through the coal reserves in the country. So, the carbon emission from India is likely to show a sharper rise than the historical trend, unless zero-emission coal plants become a reality in the near future.

At present, India is actively participating in CDM activity (~ 300 projects with 28 million CERs registered per year). Most of these projects allow the industrialised countries to pick up the low hanging fruits at the cheapest price. How can we ensure that substantial part of the Kyoto reduction targets are met through mitigation measures within Annex I countries themselves?

Unless that happens, stabilisation to any undisruptive GHG concentration level seems to be impossible. We should get fair compensation for the carbon credits to help in our development goals, especially when we are compromising our future emission rights by selling the carbon credits. It is high time industrialised countries looked beyond purchase of cheap emission credits through CDM.

Providing access to cleaner technologies (unconditional technology transfer) and ensuring a fair carbon price may help address the equity issues.