Carbon Trading

Table of Contents

Background

Global Warming

Global warming is the increase in the average temperature of the Earth's near-surface air and the oceans since the mid-twentieth century and its projected continuation. Global surface temperature increased 0.74±0.18 °C during the 100 years ending in 2005. The Intergovernmental Panel on Climate Change (IPCC) concludes that anthropogenic (human-sourced) greenhouse gases (GHG) are responsible for most of the observed temperature increase since the middle of the twentieth century, and natural phenomena such as solar variation and volcanoes probably had a small warming effect from pre-industrial times to 1950 and a small cooling effect from 1950 onward.

Increasing fossil fuel use and other anthropogenic activities has led to increase in the level of GHG. The Green House Effect is the phenomenon of trapping of long wavelength infrared rays by GHG present in the atmosphere, causing heating up of atmosphere.

UN Framework Convention on Climate Change (UNFCCC)

UNFCCC is a “Rio Convention”, one of the three adapted at the United Nations Conference on Environment and Development (UNCED), held at Rio de Janeiro from 3 to 14 June' 1992 (popularly known as Rio Earth Summit). Its sister Rio Conventions are the UN Convention on Biological Diversity (UNCBD) and UN Convention to Combat Desertification (UNCCD). The three are intrinsically linked. It now also incorporates the Ramsar Convention on Wetlands.

The ultimate objective of UNFCCC and any related legal instrument that Conference of the Parties (COP) may adopt is to achieve stabilisation of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous manmade interference with the climate system. Such a level should be achieved within a time-frame sufficient to allow ecosystems to adapt naturally to climate change, to ensure that food production is not threatened and to enable economic development to proceed in a sustainable manner.

It entered into force on 21 March 1994 and as of 2011, UNFCCC has 195 parties.

Classification of parties

  • Annex I countries: developed countries belonging to OECD and countries with 'economies in transition'. They were expected by the year 2000 to reduce emissions to 1990 levels.
  • Annex II countries: developing countries belonging to OECD. They are to provide financial and technical support to economies in transition and developing countries.
  • Non-Annex I countries: low income developing countries.

UNFCCC itself set no binding limits on greenhouse gas emissions for individual countries and contains no enforcement mechanisms. In that sense, the treaty is considered legally non-binding. Instead, the treaty provides a framework for negotiating specific international treaties (called "protocols") that may set binding limits on greenhouse gases.

By 1995, countries realized that emission reductions provisions in the Convention were inadequate. They launched negotiations to strengthen the global response to climate change, and, two years later, adopted the Kyoto Protocol.

The Kyoto Protocol

The Kyoto Protocol to UNFCCC is an international treaty that sets binding obligations on 37 industrialised countries and EU to reduce emissions of greenhouse gases (GHG). There are 192 parties to the protocol, including 191 states (all UN members, except Andorra, Canada, South Sudan and the United States) and the European Union. The United States signed but did not ratify the Protocol and Canada withdrew from it in 2011. The Protocol was adopted by COP-3 to the UNFCCC in 1997, and entered into force in 2005.

Doha Amendment: In Doha, Qatar, on 8 December 2012, the "Doha Amendment to the Kyoto Protocol" was adopted. The composition of Parties in the second commitment period is different from the first.

The Kyoto Protocol is what “operationalizes” the UNFCCC. It commits industrialized countries to stabilize GHG emissions based on the principles of the UNFCCCC, while UNFCCC itself only encourages countries to do so. The emission is measured in carbon dioxide equivalent based on global warming potential (GWP) of each greenhouse gas. Greenhouse gases and their 20 years GWP are:

  • Carbon dioxide (CO2): 1
  • Methane (CH4): 56
  • Nitrous oxide (N2O): 280
  • Hydrofluorocarbons (HFCs): HFC23 - 9 100; HFC134a - 3 400
  • Perfluorocarbons (PFCs): 4 400 - 6 000
  • Sulphur hexafluoride (SF6): 16 300
  • Nitrogen trifluoride (NF3): Added in Doha ammendment.

Recognizing that developed countries are principally responsible for the current high levels of GHG emissions in the atmosphere as a result of more than 150 years of industrial activity, the Protocol places a heavier burden on developed nations under the principle of common but differentiated responsibilities.

The Annex I parties shall, individually or jointly, ensure that aggregate emission do not exceed their assigned amounts, with a view to reduce their overall emissions by at least 5 % below 1990 levels in the commitment period 2008-2012. After Doha amendment, for the second commitment period 2013-2020, tagert for reduction is 18 % below 1990 levels.

Kyoto Mechanisms: Under the Protocol, countries must meet their targets primarily through national measures. However, the Protocol also offers them an additional means to meet their targets by way of three market-based mechanisms

  1. International Emissions Trading. The targets for emission reduction are expressed as levels of aloowed emissions or "assigned amounts" and are divided into "assigned amount units (AAU)". Emissions trading allows countries that have AAU to spare - emissions permitted them but not 'used' - to sell this excess capacity to countries that are above their targets. Thus a new commodity in the form of emission reduction or removals was created. Since carbon dioxide is the principal greenhouse gas, it has been spoken as carbon trading' and market as 'carbon market'. More than actual emission units can be traded under emissions trading scheme and other units which may be traded, each equal to 1 tonne of CO2, may be in the form of:

    • A removal unit (RMU) on the basis of land use, land-use change, and forestry (LULUCF) activities such as reforestation
    • An emission reduction unit (ERU) generated by a joint implementation project activity
    • A certified emission reduction (CER) generated from a clean development mechanism project activity
  2. Clean Development Mechanism (CDM): CDM allows a country with commitment for reduction (Annex B party) to implement an emission reduction project in developing country. Such projects can earn saleable certified emission reduction (CER) credits, each equivalent to 1 tonne of CO2, which can be counted towards meeting commitment. A CDM project might involve rural electrification with solar or installation of more energy efficient boiler.

    The CDM stimulates sustainable development and emission reductions and contributes to the ultimate objective of the Convention, while giving industrialized countries some flexibility in achieving emission reduction or limitation and reduction targets.

    CDM project must qualify through a rigorous and public registration and issuance process. Approval is given by the Designated National Authority

    Criteria to receive CERs:

    • Reductions in emissions that are additional to any that would occur in the absence of the certified project activity
    • Assist host-country to achieve sustainable development
    • Assist sponsor in achieving compliance with part of their emission reduction commitment
    • Voluntary participation approval by the parties
    • Real, measurable and long-term benefits related to the mitigation of climate change
    • Public funding for CDM project must not result in diversion of official development assistance.
  3. Joint Implementation (JI): The JI mechanism allows a country with an emission reduction or limiting commitment to earn emission reduction units (ERUs) from an emission-reduction or emission removal project in another country with commitment, each equivalent to one tonne of CO2, for the purpose of meeting its commitment.

CDM Projects

Driver for emission trading: Differential emissions reduction cost:

  • Developed Countries: Japan - $ 400/Ton of Carbon, US – $ 200/Ton of Carbon
  • Developing Countries: India – $ 25/Ton of Carbon or even less

Benefits under CDM to India. 

  • India is world‘s sixth largest GHG emitter, although per capita emission is small (0.2 tons) compared to USA (5.2 tons)
  • India need energy efficient technologies to reduce GHG emissions
  • CDM could help to overcome the financial constraints associated with the adoption of cleaner technologies
  • Analysis shows that renewable energy technologies are among the low cost options for carbon mitigation

GHG Emissions in India. 

  • Total GHG emission in India is estimated at 1235 million tonnes in 1995
  • Carbon dioxide contributes 63 % and Methane 36 % of GHG
  • Coal and Oil are major contributors (60 %) and agricultural sector contributes the rest

CDM Process:

  • Awareness creation to understand aspects of GHG reduction
  • Identification of projects and eligibility checks
  • Documentation of project as per guidelines
  • Design the project for clearance from National Authority
  • Validation of the project by an independent body
  • Registration of the CDM project by the registration body
  • Implementation of the project
  • Monitoring/Reporting to measure performance and report
  • Verification through an independent third party
  • Certification based on verification

Limitation:

  • Very high transaction costs (cost involved in project identification, consultancy, validation, registration etc).
  • Long and time consuming CDM process, especially if it involves methodology approval.
  • High penalties proposed by donor countries, if, committed CERs are not delivered.
  • Risk that the CDM project may not achieve adequate pay off in CER to make it worthwhile.
  • No time limits specified for project approvals by the DNA.
  • Low value of CERs, though this has improved from $ 3-4 to $ 8-10 now.
  • Taxation of CERs.
  • Level of understanding among industry and general public still low.

Project Validation and Clearance:

  • DNV is the first designated operational entity to be accredited for all major sectors under the CDM. DNV India has offices in Bangalore, Chennai, Kolkatta, Delhi and Mumbai.
  • The National Clean Development Mechanism (CDM) Authority, under the Ministry of Environment & Forests, is the official Designated National Authority (DNA). Address: 115, Paryavaran Bhawan, CGO Complex, Lodhi Road, New Delhi, India. Contact: Mr R K Sethi, Member Secretary, (011) 2436-2252, Fax: (011) 2436-2252.
  • The National CDM Authority is a single window clearance for CDM projects in the country. The project proponents are required to submit one soft copy of Project Concept Note (PCN) and Project Design Document (PDD) through online form and 20 hardcopies each of PCN and PDD along with two CDs containing all the information in each of them.

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