With this series on 'Carbon Credit', I am going to explore the interesting world of monetizing the carbon business. In 3 part series, I should be able to cover-
1. Basic of carbon credit- terms and terminologies
2. The Indian scene and MCX carbon trading
3. Future of carbon business and trends
Today, I would blog about part 1-
Basic of carbon credit- terms and terminologies
1. What is Carbon Credit?
In simple words, one carbon credit gives the owner the right to emit one tonne of carbon dioxide.
2. The background: Kyoto Protocol
The Kyoto Protocol set quotas on the amount of greenhouse gases countries can produce. Countries, in turn, set quotas on the emissions of businesses. Businesses that are over their quotas must buy carbon credits for their excess emissions, while businesses that are below their quotas can sell their remaining credits. Under the Kyoto Protocol, between 2008 and 2012, developed countries have to reduce emissions of greenhouse gases to an average of 5.2 per cent below the 1990 level.
1. Basic of carbon credit- terms and terminologies
2. The Indian scene and MCX carbon trading
3. Future of carbon business and trends
Today, I would blog about part 1-
Basic of carbon credit- terms and terminologies
1. What is Carbon Credit?
In simple words, one carbon credit gives the owner the right to emit one tonne of carbon dioxide.
2. The background: Kyoto Protocol
The Kyoto Protocol set quotas on the amount of greenhouse gases countries can produce. Countries, in turn, set quotas on the emissions of businesses. Businesses that are over their quotas must buy carbon credits for their excess emissions, while businesses that are below their quotas can sell their remaining credits. Under the Kyoto Protocol, between 2008 and 2012, developed countries have to reduce emissions of greenhouse gases to an average of 5.2 per cent below the 1990 level.
3. Mechanisms for reduction
The Kyoto Protocol provides for three mechanisms that enable developed countries with quantified emission limitation and reduction commitments to acquire greenhouse gas reduction credits. These mechanisms are Joint Implementation (JI), Clean Development Mechanism (CDM) and International Emission Trading (IET).
• Under JI, a developed country with relatively high costs of domestic greenhouse reduction would set up a project in another developed country that has a relatively low cost.
• Under Clean Development Mechanism (CDM), a developed country can take up a greenhouse gas reduction project activity in a developing country where the cost of greenhouse gas reduction project activities is usually much lower. The developed country would be given credits for meeting its emission reduction targets, while the developing country would receive the capital and clean technology to implement the project.
• Under IET, countries can trade in the international carbon credit market.
The Kyoto Protocol provides for three mechanisms that enable developed countries with quantified emission limitation and reduction commitments to acquire greenhouse gas reduction credits. These mechanisms are Joint Implementation (JI), Clean Development Mechanism (CDM) and International Emission Trading (IET).
• Under JI, a developed country with relatively high costs of domestic greenhouse reduction would set up a project in another developed country that has a relatively low cost.
• Under Clean Development Mechanism (CDM), a developed country can take up a greenhouse gas reduction project activity in a developing country where the cost of greenhouse gas reduction project activities is usually much lower. The developed country would be given credits for meeting its emission reduction targets, while the developing country would receive the capital and clean technology to implement the project.
• Under IET, countries can trade in the international carbon credit market.
4. Units of Exchange
• Certified Emission Reduction (CER)- are climate credits (or carbon credits) issued by the Clean Development Mechanism (CDM) Executive Board for emission reductions achieved by CDM projects and verified by a DOE under the rules of the Kyoto Protocol.
• Emission Reduction Unit (ERU)- refers to the reduction of greenhouse gases, particularly under Joint Implementation (JI), where it represents one tonne of CO2 equivalent reduced.
• Verified Emission Reduction (VER)- projects/activities are managed according to the quality standards set out for CDM/JI projects but the certificates provided are not registered by the governments of the host countries or the Executive Board of the UNO. As such, high quality VERs can be acquired at lower costs for the same project quality. However, at present VERs can not be used in the mandatory market.
• Certified Emission Reduction (CER)- are climate credits (or carbon credits) issued by the Clean Development Mechanism (CDM) Executive Board for emission reductions achieved by CDM projects and verified by a DOE under the rules of the Kyoto Protocol.
• Emission Reduction Unit (ERU)- refers to the reduction of greenhouse gases, particularly under Joint Implementation (JI), where it represents one tonne of CO2 equivalent reduced.
• Verified Emission Reduction (VER)- projects/activities are managed according to the quality standards set out for CDM/JI projects but the certificates provided are not registered by the governments of the host countries or the Executive Board of the UNO. As such, high quality VERs can be acquired at lower costs for the same project quality. However, at present VERs can not be used in the mandatory market.
5. Is it all about making developing countries air bad?
No, the polluters cannot buy 100 per cent of the carbon credits they are required to reduce. Say, out of 100 per cent they have to induce 75 per cent locally by various means in their own country. They can buy only 25 per cent of carbon credits from developing countries.
No, the polluters cannot buy 100 per cent of the carbon credits they are required to reduce. Say, out of 100 per cent they have to induce 75 per cent locally by various means in their own country. They can buy only 25 per cent of carbon credits from developing countries.
6. Exchanges
The company/entity can create CERs and sell them through exchanges, like Chicago Climate Exchange (CCX) and European Climate Exchange (ECX). As on October 23, 2007, the CERs were trading between USD 2.00-2.10 on the Chicago Climate Exchange. A few years back, the rates were hovering between USD 4.00-6.00 per CER.
The company/entity can create CERs and sell them through exchanges, like Chicago Climate Exchange (CCX) and European Climate Exchange (ECX). As on October 23, 2007, the CERs were trading between USD 2.00-2.10 on the Chicago Climate Exchange. A few years back, the rates were hovering between USD 4.00-6.00 per CER.
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