The
Carbon Market and Carbon Financing
----Dr.Debesh Bhowmik
What
is Emissions Trading?
‘Carbon
trading’, or ‘emissions trading’, takes place when there is sale
and purchase of:[i] ‘permits’ or ‘allowances’ to emit greenhouse
gases; or[ii] ‘certificates’ that prove a certain reduction in emissions
from a particular activity beyond what would otherwise have been the case (i.e.
‘business as usual’ emissions); or[iii] certificates that
indicate a certain amount of actual emissions have
been ‘offset’ somewhere else, through for example, carbon sequestration.
Usually, each permit,
allowance or certificate is a document, often electronic, representing one tonne (1,000 kg) of
carbon dioxide equivalent (‘CO2e’) that was emitted, or not emitted
below business-as-usual
projections for emissions. The term CO2e means that greenhouse gases other than carbon dioxide
are converted to tones of CO2e, based on their relative contribution to global warming. This
provides for a single, uniform means of measuring emissions reductionsfor multiple
greenhouse gases.
What
is the Carbon Market?
Transactions for the
sale of emissions permits, reductions or offsets together comprise the ‘carbon
market’, which has grown exponentially since the entry into force of the
Kyoto Protocol in 2002. In fact the
term ‘carbon market’ is not entirely accurate: because carbon dioxide is
only one of several
greenhouse gases that can be ‘traded’; and because there is not a
single, unified international market
for emissions reduction purchases. Rather, there are various markets in
operation around the world, which can be classified as either regulated or
unregulated markets and which interact with one another in different ways.
‘Regulated
markets’ are emissions trading schemes set up under domestic or international
law to provide a means for specified actors (often large industrial or power
companies) to meet emissions reduction targets. Key examples include the
European Union Emissions Trading Scheme and the New
South Wales and Australian Capital Territory Greenhouse Gas Abatement Schemes. Such schemes
usually provide that the actors can trade emissions reduction allowances among themselves
(i.e. one company that has exceeded its emissions reduction target could buy
surplus allowances from another company that has emitted less greenhouse gases
than its specified target). Or it may provide for a company with an emissions
reduction target to buy offsets or credits for emissions reductions achieved in
some other activity, then apply these
toward meeting its
own target.
‘Unregulated
markets’ arise where there are private agreements to trade or offset
emissions or emissions
reductions among actors who may not be legally bound to meet an emissions reduction target, but
who have decided to take action anyway. Sometimes these are one-off, single agreements and
sometimes they are part of wider voluntary schemes, each with its own procedures. WWF
recently published a guide that explains the voluntary carbon market and compares some of the
big voluntary schemes in existence.
What
is the Size of the Market?
In light of the
fragmented nature of the market, it is difficult to describe precisely its
current and
projected size.
Research indicates that the entire global market was worth more than US$30 billion
in 2006, three times its value in the previous year , to then over US$60
billion in 2007. The biggest part of the market is the European Union Emissions
Trading Scheme. There are no clear figures on Indigenous involvement in the global
market.
Generating Tradable Credits
Types
of Activities that Generate Tradable Credits
Key greenhouse gas
mitigation activities that can generate credits or offsets for sale include energy efficiency,
renewable energy and land use and forestry activities. Other kinds of
activities that may also
generate credits but which are not addressed here include the management of methane
released from landfill or waste sites or by livestock, and the substitution of
oil, coal or diesel with gas,
biofuels or other renewable energy for use in transportation or industrial processes. The first
three are described in more detail below.
Energy Efficiency Projects
‘Energy
efficiency’ involves reducing the amount of energy used to operate a product
or to carry out a process, without
reducing the quality or level of service. You might choose, for example,
a car that needs less
fuel to travel the same distance at the same speed as another that uses more
fuel. Related to that, energy conservation may involve reducing the demand or need
for energy. Energy efficiency activities can be undertaken in industry,
agriculture, electricity generation, transportation or households among others –
really in any activity where an opportunity exists to use energy in a more
efficient way. One example of an energy efficiency project that could attract
carbon financing would be the replacement of old, inefficient light bulbs
throughout a community with new light bulbs that use less electricity to give
the same amount of light.
Renewable Energy Projects
‘Renewable’
energy can be used to provide electricity, heating or fuel for
transportation similar
to the way we use
fossil fuels for these purposes. Such sources are called ‘renewable’ because,
unlike oil, gas and coal, there is not a finite amount of them in the earth.
Key renewable sources include wood, waste
decomposition, geothermal activity, wind and solar energy. The use of renewable sources for
generating energy usually involves lower emissions of greenhouse gasesthan the use of
fossil fuels does. An example of a renewable energy project would be to switch from using a diesel
generator for providing electricity, to using solar panels to provide
electricity.
Land Use and Forestry Projects
As plants and trees
act as carbon sinks, various ‘land use and forestry’ activities can lead to a reduction in
atmospheric greenhouse gas emissions. In particular, reducing the rate of, or avoiding entirely,
land clearing or deforestation is one such way because these activities release carbon dioxide into
the atmosphere. Another is by planting new trees to absorb more carbon dioxide. Other land
management practices may also be undertaken - such as carrying out controlled burning in
the early part of the dry season to prevent more frequent and intense bush fires later in
the dry season. Controlled burning may not only help to reduce emissions, but may also help to
control pests and weeds, maintain traditional Indigenous land management
practices and provide
for employment and training opportunities.
What
is Involved in Generating Tradable Credits?
Who may buy and sell
credits or offsets, and the particular procedures involved in generating
credits for sale,
vary considerably from one regulatory scheme to the next and from one
transaction to the next within the unregulated market. Often times, the
purchase of credits or offsets will take place by way of a legal agreement or contract
between two or more ‘parties’. The terms of the agreement may be decided
upon by the parties, however, a regulatory scheme under which a sale
takes place may also require that certain terms be included in the agreement. Here are some
requirements that are common in the purchase or financing of emissions
reductions.
1)
Additionality:
Generally speaking,
tradable emissions reductions must occur in addition to any reductions that would have
occurred in a business-as-usual situation - i.e. they must be emissions
reductions that would not have
occurred without the funded activity or project. This requirement is called ‘additionality’.
For example, if a community has already replaced diesel generators with solar panels for
providing hot water that uses less greenhouse gases, it may not be able to sell credits or offsets
from the solar panels because any reduction in the amount of emissions was likely to occur
anyway.
2)
Measurable Emissions Reductions:
In light of the
above, and in order to determine the precise nature and cost of a transaction,
the emissions reductions
or offsets must not only be additional, but they must be capable of being measured so that the
exact amount can be ascertained.
3)
Anthropogenic Emissions:
The emissions or
emissions reductions must generally be related in some way to human activity (called ‘anthropogenic’),
rather than simply being naturally occurring emissions or emissions reductions.
4)
Age of the Forest or Plantation:
In the case of carbon
sequestration activities (where greenhouse gas emissions are offset by an amount of carbon
dioxide stored in a designated forest or plantation), the forest must usually have been planted
after 1989 or some other year as designated in the agreement or rules of the trading scheme.
5)
Expiration of Forest Credits:
There is sometimes a
concern about the ‘nonpermanent’ nature of credits from forest-related activities - in
particular, a concern that carbon dioxide offset or stored through forestry
activities may not be permanent
if the trees in the forest die, are burnt down or are cleared. Because of this concern,
forestry-related credits may sometimes be time bound, which means that they
exist for only five, 20 or 30 years, after which time they expire. In this
case, the agreement may provide that the
expired credits must be renewed or replaced at the end of the time period.
6)
Sustainable Development:
The proposed activity
should contribute to the ‘sustainable development’ of the community with in which it
operates. This means that it should form a part of the wider economic, social and environmental
development of the community and avoid other detrimental consequences.
Planning for a Project
Before signing an
agreement, the project developer or seller of the credits will usually document a clear plan that
sets out: what the project will involve; how the emissions reductions or
offsets will be measured and
certified; the relevant actors and stakeholders; how all stakeholders have been consulted;
and what are likely to be the environmental and other impacts and risks of the project. Here
are some issues to think about when developing a project plan.
1)
Measuring Emissions Reductions:
For the purposes of
measuring the precise amount of emissions reductions that result from any funded project
(and so as to ensure that there is additionality), it is important to know the quantity of
greenhouse gases already being emitted from a targeted activity, and to be able to continue measuring
emissions from that activity after the project is implemented.
2)
Methodology for Measuring Emissions Reductions:
There are a range of
existing ‘methodologies’ for measuring the emissions that result from various daily and
commercial activities. There are also organisations, government and scientific, that may be able to
help communities to measure the emissions resulting from any single activity, so
communities may not have to face this issue alone. Often, assistance from a
partner organisation with
measuring emissions will itself be a part of the funded emissions reducing project. So while
this is a technical point, it does not have to be an insurmountable barrier to involvement in
emissions reduction projects.
3)
Wider Impact of Project:
In planning for an
emissions reducing activity, it is important to consider what wider impacts the project may have
on the community and its environment, both good and bad, and to try to ascertain if the
project will help the sustainable development of the community.
4)
Consultation:
It is important that
all relevant stakeholders and community representatives are consulted during the planning of a
project. Often times, the buyer and/or any third party financer of an emissions reducing project will
seek an assurance that the local community has been consulted and is supportive
of the project. Similarly, the local community and/or seller might wish to
ensure that the potential buyer
is acceptable to them.
5)
Right to Emissions Reductions:
When a proposed
activity, particularly forestry or land activities, are to take place on land
that is not owned by the
project developer, it may be necessary to clarify beforehand who would own the legal
property rights to any emissions reduction credits or offsets generated. The
same applies if the
project developer owns the trees on the land, but not the land itself.
6)
Verification/certification of Emissions Reductions:
An authorised third
party may need to ‘verify’ and ‘certify’ the emissions reductions
or offsets.Often times the
scheme or agreement under which the activity is taking place will designate who is entitled to
carry out these procedures. In the case of transactions under regulatory schemes, these and
many other issues will be decided upon by the rules of the scheme itself. For more information
on the precise legal and regulatory issues associated with projects under the Kyoto Protocol’s
Clean Development Mechanism.
Examples of Key Regulatory Markets
The Kyoto Protocol
allows for several ‘market based mechanisms’ to assist developed
countries
(Annex I parties) to
meet their emissions reduction targets. ‘Joint Implementation’ allows a
developed country to fund and/or run a project to reduce emissions in another
developed country. The funding country
can then apply the emissions reductions generated to help it to meet its own Kyoto target. Through
the ‘Clean Development Mechanism’ (or ‘CDM’), developed countries
may finance emissions reducing projects in developing countries that are party
to the Kyoto Protocol then use the resulting ‘certified emissions reductions’ (‘CERs’)
to offset their own emissions. This mechanism is design to support the
sustainable development objectives of developing countries and to provide for
the transfer of technology to, and capacity building in, developing countries.
It is a very big part of the carbon market, being worth 12 billion Euros in
2007 - an increase in 200% from 2006 and comprising 29% (in financial terms) of
the overall market. In reality, views are mixed about whether the CDM has
really helped to further sustainable development and technology transfer in
developing countries in a substantive way. Many Indigenous communities in
particular are concerned about the potentially negative impacts of CDM related activities
on their lands and livelihoods.This applies largely to Indigenous communities in
developing countries not developed countries - as all CDM projects are hosted
in developing countries. Types of CDM projects include: renewable energy, fuel
switching (from oil, gas or diesel to gas or biofuels), projects to capture
greenhouse gases released from landfill sites; energy efficiency projects;
activities to reduce methane from agricultural processes and forestry-related projects,
among others. The Kyoto Protocol is also flexible in that developed countries
may decide how to reduce their emissions at a domestic level. In this context,
a range of emissions trading schemes and other market-based mechanisms have
emerged. Examples include the European Union Emissions Trading Scheme, the
Swiss Emissions Trading Scheme, the New Zealand Emissions Trading Scheme and
another scheme running in several North Eastern states of the United States.
The US federal government, the state of California, Japan, Canada and Australia
among others, are also now in the process of (separately) considering the
establishment of such schemes.
The features of each
of these schemes are different. In most (but not all) cases, the government places a ‘cap’ on
the amount of greenhouse gases that certain factories or companies can emit over a period of
several years. These companies are usually from sectors of the economy that emit a lot of
greenhouse gases - like heavy industry and power generation. If a company is going to emit more
emissions than its cap, it can buy extra credits from another company that has managed to
beat its cap (by reducing its emissions below its cap). Another way that companies can comply
is to pay to offset their excess emissions through emissions reductions activities undertaken
by others. This is where Indigenous communities may most likely play
a role - through
providing offsets, particularly through land management or forestry-related activities. The
government entity administering the scheme will decide which activities can qualify as potential
offsetting activities. Indigenous communities may often also be able to undertake similar
activities through the voluntary market.
Carbon Financing
Opportunities
Another key aspect of
the overall development of efforts to reduce greenhouse gas emissions has been the
emergence of a range of opportunities for indirect or third-party financing of emissions reduction
activities. This is sometimes referred to as ‘carbon financing’. In
fact, it may also include other
fiscal incentives, such as tax rebates or exemptions for the installation of emissions reducing
equipment, such as solar water panels. International organisations like the
World Bank, the Asian Development Bank and the United Nations Development
Programme, among others have established a range of funds and programmes to
facilitate the creation of emissions reducing activities. These programmes generally
focus on emissions reducing activities in developing countries, such that
little of this international finance is currently available to Indigenous peoples
in developed countries. However, financing opportunities may well exist for
Indigenous communities in developed countries, through domestic grant
programmes. The reduction of emissions might be just one aspect of a project
designed to ensure sustainable land management, ecosystem protection, improved
community health, the creation of employment or training opportunities,
sustainable livestock management, or the development of a more stable community
power supply, for example. When carrying out wider projects like these, it
might often be worth considering whether they might have an emissions reducing component
and whether that might assist with the attraction of finance.
Impacts of Carbon Mitigation Activities on
Indigenous People
Reports are mixed as
to whether climate change mitigation activities are having a positive impact
on the lives and
lands of Indigenous peoples. Research suggests that problems can arise when
Indigenous people are
not properly consulted, nor their interests taken into account, in the
development of carbon mitigation activities. There have been claims of some
Indigenous people being evicted from lands to allow for the planting of trees
or biofuel crops, or for the development of hydropower schemes, for example.
Other commentators note that the growing demand for biofuel crops (for
transporation fuel) may reduce the production of food crops and raise food prices.
If instituted appropriately, climate change mitigation activities can
facilitate the availability and reliability of energy, sound water resource management,
a reduction in air pollution and the conservation of ecosystems, plants,
animals and land of importance to Indigenous people.
Climate change
mitigation activities may encourage a return to country, provide local employment
or even encourage the maintenance of traditional practices, such as customary
land management
activities. Additionally, it is important to bear in mind that Indigenous
people themselves can contribute a great deal to mitigating and adapting to climate
change, given their experiences of responding to natural climatic change over
millennia and given their ownership of considerable tracts of forested and wild
land.
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