Can Carbon credit cure Climate Change?

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Different parts of our dear mother earth have witnessed series of major environmental disasters in the recent past. Very cold, frosty and snowy European winter caused shutting down of air traffic movements in Western Europe during Christmas. Many innocent persons failed to celebrate Christmas with their families getting stranded at London Heathrow and other European airports. Devastating flash flood of South East Queensland, Major earthquake at New Zealand, catastrophic earth quake at Japan followed by massive Tsunami have caused huge loss of life and property. The natural disaster caused terrible crisis at Fukushima Daichi Nuclear plant. Japan and the rest of the world will have to bear the brunt for several years.

Researchers, scientists  and system planners would definitely find out different reasons behind the increase of frequencies of these natural disasters .But one thing for sure ,we human being are basically responsible and major contributors to global warming through greenhouse gas emissions. Burning of fossil fuels, felling of tress and destructions of forests are changing the ecological balance. The normal pattern of season changes is usually not there. Many countries are suffering from severe draughts for years causing widespread desertification, many other countries which used to experience insignificant rains are regularly visited by flash floods. Winter is getting more severe, summers getting hotter. Environtalists were triggering alarm bells for a while. World leaders are meeting over climate changes, many provisions of famous Kyoto protocol still remains to be agreed and implemented by major nations. Copenhagen and Cuncoon virtually failed to create meeting of minds among major polluting nations. How long mother earth can bear burning of fossil fossils, drying and diversion of major rivers by upper riparian countries, massive destruction of forests, and indiscriminant drainage of subsurface water?

Australia is one of the major energy using countries and for that reason major polluter on the basis of per capita emission. It promised Changes in 2007 when Labor party led by Kevin Rudd in his pre election campaign Kevin 07 announced to address the climate change issues more positively. A commission lead by Prof Garnett prescribed several measures to confront severe GHG in Australian backyard. It was widely discussed that Kevin in his term as Prime Minister of Australia would  bring major changes in Australia’s energy generation and utilization patter,. But other than endorsing Kyoto Protocol Kevin’s Government could do very little. Rather he was removed from office unceremoniously by conspiracies (?) of major coal mining companies. In 2006 -2008 Western Corridor Recycled Water Pipeline Project Was implemented to treat used water in Reverse osmosis process and supply the recycled water for Giant Tarong ,Swanbank and other power plants , some councils for supplying irrigation water and pump the rest to Wivenhoe dam which is used to meet majority of water demand for South Eastern Queensland including Brisbane. This part of Queensland suffered from severe water crisis due to massive drought for several years. But in 2010 summer the region witnessed torrential monsoon rain causing massive flash flood. The wivenhoe dam released so much of water that southeast Queensland witnessed the worst flooding of the millennium.

Australia seriously thought about introducing Carbon tax as a measure of confronting GHG Emissions. Julia Gillard after severe flash flood in South East Queensland has realized that Carbon tax matter need to be revisited seriously. But it is getting serious opposition to such an extent that thin majority of Julia Government in Australian parliament is stressed to its limits.

Let us assess how or whether it can be an effective tool to handle pollutions and emissions.

What Is Carbon Credit?

A carbon credit is a generic term for any tradable certificate or permit representing the right to emit one tone of carbon or carbon dioxide equivalent (tCO2e). The Collins English Dictionary defines a carbon credit as “a certificate showing that a government or company has paid to have a certain amount of carbon dioxide removed from the environment”.

Warming of the climate system is unequivocal, as is now evident from the observations in global average air and ocean temperatures, widespread melting of snow and ice, and rising average sea level. With these words, the UN's Intergovernmental Panel on Climate Change (IPCC) made certain that the reduction of greenhouse gas (GHG) emissions, which are widely believed to have contributed to global climate change, will be a policy issue for decades. Carbon trading markets are the most popular solution for reducing GHG emissions, and in particular carbon dioxide emissions, which are the largest constituent of GHG emissions.

Carbon trading refers to a system to control the emission of carbon dioxide whereby governments or international bodies set an overall limit on the amount of carbon that can be emitted. Allowances are then granted (or auctioned) to large emitters of carbon, such as electric utilities, paper mills, and chemical plants, which are then freely tradable. Companies who will be emitting more carbon than they have permits to emit must therefore buy additional credits on the open market, while those who will emit less can sell their credits.

This system is attractive to governments for several reasons. First, it easily enables sliding reductions in carbon emissions over a number of years. Every year, the number of credits granted can just be decreased by the government. Second, it creates a flexible and efficient market for carbon reduction, encouraging reduction of carbon emissions by those companies who can do so at the least cost. After all, a company for whom reducing carbon emissions is expensive will buy excess credits from a company that can reduce carbon emissions cheaply. On the hand, in the words of economist Jeffrey Sachs, carbon trading is "hard to implement, it's hard to monitor, it's non-transparent, it's highly political, highly manipulative, which is why the banks love it, the banks all want to trade, this is an investment banking dream.

Emission allowances

Under the Kyoto Protocol, the 'caps' or quotas for Greenhouse gases for the developed countries are known as Assigned Amounts .The quantity of the initial assigned amount is denominated in individual units, called Assigned amount units (AAUs), each of which represents an allowance to emit one metric tone of carbon dioxide equivalent, and these are entered into the country's national registry.

In turn, these countries set quotas on the emissions of installations run by local business and other organizations, generically termed 'operators'. Countries manage this through their national registries, which are required to be validated and monitored for compliance by the UNFCCC. Each operator has an allowance of credits, where each unit gives the owner the right to emit one metric tone of carbon dioxide or other equivalent greenhouse gas. Operators that have not used up their quotas can sell their unused allowances as carbon credits, while businesses that are about to exceed their quotas can buy the extra allowances as credits, privately or on the open market. As demand for energy grows over time, the total emissions must still stay within the cap, but it allows industry some flexibility and predictability in its planning to accommodate this.

By permitting allowances to be bought and sold, an operator can seek out the most cost-effective way of reducing its emissions, either by investing in 'cleaner' machinery and practices or by purchasing emissions from another operator who already has excess 'capacity'.

Since 2005, the Kyoto mechanism has been adopted for CO2 trading by all the countries within the European Union under its European Trading Scheme (EU ETS) with the European Commission as its validating authority. From 2008, EU participants must link with the other developed countries who ratified the protocol, and trade the six most significant anthropogenic greenhouse gases. In the United States, which has not ratified Kyoto, and Australia, whose ratification came into force in March 2008, similar schemes are being considered.

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 Assigned amount units. Countries with surplus units can sell them to countries that are exceeding their emission targets under 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.

Emission markets

For trading purposes, one allowance or CER is considered equivalent to one metric ton of CO2 emissions. These allowances can be sold privately or in the international market at the prevailing market price. These trade and settle internationally and hence allow allowances to be transferred between countries. Each international transfer is validated by the UNFCCC. Each transfer of ownership within the European Union is additionally validated by the European Commission.

Climate exchanges have been established to provide a spot market in allowances, as well as futures and options market to help discover a market price and maintain liquidity. Carbon prices are normally quoted in Euros per tone of carbon dioxide or its equivalent (CO2e). Other greenhouse gasses can also be traded, but are quoted as standard multiples of carbon dioxide with respect to their global warming potential. These features reduce the quota's financial impact on business, while ensuring that the quotas are met at a national and international level.

Setting Market Price for Carbon:

Unchecked, energy use and hence emission levels are predicted to keep rising over time. Thus the number of companies needing to buy credits will increase, and the rules of supply and demand will push up the market price, encouraging more groups to undertake environmentally friendly activities that create carbon credits to sell.

An individual allowance, such as an Assigned amount unit (AAU) or its near-equivalent European Union Allowance (EUA), may have a different market value to an offset such as a CER. This is due to the lack of a developed secondary market for CERs, a lack of homogeneity between projects which causes difficulty in pricing, as well as questions due to the principle of supplementary and its lifetime. Additionally, offsets generated by a carbon project under the Clean Development Mechanism are potentially limited in value because operators in the EU ETS are restricted as to what percentage of their allowance can be met through these flexible mechanisms.

Yale University economics professor William Nordhaus argues that the price of carbon needs to be high enough to motivate the changes in behavior and changes in economic production systems necessary to effectively limit emissions of greenhouse gases.

Raising the price of carbon will achieve four goals. First, it will provide signals to consumers about what goods and services are high-carbon ones and should therefore be used more sparingly. Second, it will provide signals to producers about which inputs use more carbon (such as coal and oil) and which use less or none (such as natural gas or nuclear power), thereby inducing firms to substitute low-carbon inputs. Third, it will give market incentives for inventors and innovators to develop and introduce low-carbon products and processes that can replace the current generation of technologies. Fourth, and most important, a high carbon price will economize on the information that is required to do all three of these tasks. Through the market mechanism, a high carbon price will raise the price of products according to their carbon content. Ethical consumers today, hoping to minimize their “carbon footprint,” have little chance of making an accurate calculation of the relative carbon use in, say, driving 250 miles as compared with flying 250 miles. A harmonized carbon tax would raise the price of a good proportionately to exactly the amount of CO2 that is emitted in all the stages of production that are involved in producing that good. If 0.01 of a ton of carbon emissions results from the wheat growing and the milling and the trucking and the baking of a loaf of bread, then a tax of $30 per ton carbon will raise the price of bread by $0.30. The “carbon footprint” is automatically calculated by the price system. Consumers would still not know how much of the price is due to carbon emissions, but they could make their decisions confident that they are paying for the social cost of their carbon footprint.

Nordhaus has suggested, based on the social cost of carbon emissions, which an optimal price of carbon is around $30(US) per ton and will need to increase with inflation.

The social cost of carbon is the additional damage caused by an additional ton of carbon emissions. ... The optimal carbon price, or optimal carbon tax, is the market price (or carbon tax) on carbon emissions that balance the incremental costs of reducing carbon emissions with the incremental benefits of reducing climate damages. ... [I]f a country wished to impose a carbon tax of $30 per ton of carbon; this would involve a tax on gasoline of about 9 cents per gallon. Similarly, the tax on coal-generated electricity would be about 1 cent per kWh, or 10 percent of the current retail price. At current levels of carbon emissions in the United States, a tax of $30 per ton of carbon would generate $50 billion of revenue per year.

How buying carbon credits can reduce emissions?

Carbon credits create a market for reducing greenhouse emissions by giving a monetary value to the cost of polluting the air. Emissions become an internal cost of doing business and are visible on the balance sheet alongside raw materials and other liabilities or assets.

For example, consider a business that owns a factory putting out 100,000 tones of greenhouse gas emissions in a year. Its government is an Annex I country that enacts a law to limit the emissions that the business can produce. So the factory is given a quota of say 80,000 tones per year. The factory either reduces its emissions to 80,000 tones or is required to purchase carbon credits to offset the excess. After costing up alternatives the business may decide that it is uneconomical or infeasible to invest in new machinery for that year. Instead it may choose to buy carbon credits on the open market from organizations that have been approved as being able to sell legitimate carbon credits.

We should consider the impact of manufacturing alternative energy sources. For example, the energy consumed and the Carbon emitted in the manufacture and transportation of a large wind turbine would prohibit a credit being issued for a predetermined period of time.

One seller might be a company that will offer to offset emissions through a project in the developing world, such as recovering methane from a swine farm to feed a power station that previously would use fossil fuel. So although the factory continues to emit gases, it would pay another group to reduce the equivalent of 20,000 tones of carbon dioxide emissions from the atmosphere for that year.
Another seller may have already invested in new low-emission machinery and have a surplus of allowances as a result. The factory could make up for its emissions by buying 20,000 tones of allowances from them. The cost of the seller's new machinery would be subsidized by the sale of allowances. Both the buyer and the seller would submit accounts for their emissions to prove that their allowances were met correctly.



Credits versus taxes

Carbon credits and carbon taxes each have their advantages and disadvantages. 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 would be applied based on what the particular nation's government deems most fitting. However, some would argue that carbon trading is based around creating a lucrative artificial market, and, handled by free market enterprises as it is, carbon trading is not necessarily a focused or easily regulated solution.

By treating emissions as a market commodity some proponents insist it becomes easier for businesses to understand and manage their activities, while economists and traders can attempt to predict future pricing using market theories. Thus the main advantages of a traceable carbon credit over a carbon tax are argued to be:

The price may be more likely to be perceived as fair by those paying it. Investors in credits may have more control over their own costs.
The flexible mechanisms of the Kyoto Protocol help to ensure that all investment goes into genuine sustainable carbon reduction schemes through an internationally agreed validation process.
Some proponents state that if correctly implemented a target level of emission reductions may somehow be achieved with more certainty, while under a tax the actual emissions might vary over time.
It may provide a framework for rewarding people or companies who plant trees or otherwise meet standards exclusively recognized as "green."

The advantages of a carbon tax are argued to be:

Possibly less complex, expensive, and time-consuming to implement. This advantage is especially great when applied to markets like gasoline or home heating oil.
Perhaps some reduced risk of certain types of cheating, though under both credits and taxes, emissions must be verified.
Reduced incentives for companies to delay efficiency improvements prior to the establishment of the baseline if credits are distributed in proportion to past emissions.
When credits are grandfathered, this puts new or growing companies at a disadvantage relative to more established companies.
allows for more centralized handling of acquired gains
Worth of carbon is stabilized by government regulation rather than market fluctuations. Poor market conditions and weak investor interest have a lessened impact on taxation as opposed to carbon trading.

Creating real carbon credits

The principle of Supplementary 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 greenhouse gas 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 led to the reduction of real, measurable, permanent emissions understands 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.

It is also important for any carbon credit (offset) to prove a concept called additionally. The concept of additionally addresses the question of whether the project would have happened anyway, even in the absence of revenue from carbon credits. Only carbon credits from projects that are "additional to" the business-as-usual scenario represent a net environmental benefit. Carbon projects that yield strong financial returns even in the absence of revenue from carbon credits; or that are compelled by regulations; or that represent common practice in an industry are usually not considered additional, although a full determination of additionally requires specialist review.

It is generally agreed that voluntary carbon offset projects must also prove additionally in order to ensure the legitimacy of the environmental stewardship claims resulting from the retirement of the carbon credit (offset). According the World Resources Institute/World Business Council for Sustainable Development (WRI/WBCSD) : "GHG emission trading programs operate by capping the emissions of a fixed number of individual facilities or sources. Under these programs, tradable 'offset credits' are issued for project-based GHG reductions that occur at sources not covered by the program. Each offset credit allows facilities whose emissions are capped to emit more, in direct proportion to the GHG reductions represented by the credit. The idea is to achieve a zero net increase in GHG emissions, because each tone of increased emissions is 'offset' by project-based GHG reductions. The difficulty is that many projects that reduce GHG emissions (relative to historical levels) would happen regardless of the existence of a GHG program and without any concern for climate change mitigation. If a project 'would have happened anyway,' then issuing offset credits for its GHG reductions will actually allow a positive net increase in GHG emissions, undermining the emissions target of the GHG program. Additionally is thus critical to the success and integrity of GHG programs that recognize project-based GHG reductions."

Criticisms and Oppositions to Carbon Credit:

The Kyoto mechanism is the only internationally agreed mechanism for regulating carbon credit activities, and, crucially, includes checks for additionally and overall effectiveness. The supporting organization, the UNFCCC, is the only organization with a global mandate on the overall effectiveness of emission control systems, although enforcement of decisions relies on national co-operation. The Kyoto trading period only applies for five years between 2008 and 2012. The first phase of the EU ETS system started before then, and is expected to continue in a third phase afterwards, and may co-ordinate with whatever is internationally agreed at but there is general uncertainty as to what will be agreed in Post–Kyoto Protocol negotiations on greenhouse gas emissions. As business investment often operates over decades, this adds risk and uncertainty to their plans. As several countries responsible for a large proportion of global emissions (notably USA, Australia, and China) have avoided mandatory caps, this also means that businesses in capped countries may perceive themselves to be working at a competitive disadvantage against those in uncapped countries as they are now paying for their carbon costs directly

A key concept behind the cap and trade system is that national quotas should be chosen to represent genuine and meaningful reductions in national output of emissions. Not only does this ensure that overall emissions are reduced but also that the costs of emissions trading are carried fairly across all parties to the trading system. However, governments of capped countries may seek to unilaterally weaken their commitments, as evidenced by the 2006 and 2007 National Allocation Plans for several countries in the EU ETS, which were submitted late and then were initially rejected by the European Commission for being too lax.

A question has been raised over the grandfathering of allowances. Countries within the EU ETS have granted their incumbent businesses most or all of their allowances for free. This can sometimes be perceived as a protectionist obstacle to new entrants into their markets. There have also been accusations of power generators getting a 'windfall' profit by passing on these emissions 'charges' to their customers. As the EU ETS moves into its second phase and joins up with Kyoto, it seems likely that these problems will be reduced as more allowances will be auctioned.

Conclusion and Recommendations:

Introducing carbon credit ox tax can be one of many options to control and gradually reduce carbon emissions. It will definitely cause some pains. Many industries in major industrialized countries will loose completive edges. There may be some job cuts. But for greater ultimate gains for world community these pains must be accepted. The way carbon trading should be introduced and practiced may be country specific. But for the pains of some people for a while the greater section of population exposed to natural revenges like draught, flash flood, Tsunami, earthquakes, blizzards , hurricanes, tornadoes , bushfires cannot be risked .

Time has come for world leaders to seriously think about all possible and probability actions to confront catastrophic climatic changes triggered by global warming induced by GHG emissions. Industrially developed G8 nations and EU countries must show the way.

BRICS [Brazil, Russia, India, China and South Africans] as well as ASEAN, Gulf Countries will not come to agreements for reducing emissions till industrially developed nations do not show the way. Several issues, several options are discussed when leaders meet in bilateral or multilateral seminars and conferences but very little are achieved.  World reserve of non renewable fossil fuel is fast depleting. Opportunity of accessing easy oil is getting diminished. Coal is still major fuel for power generation in many countries. Coal is the single largest polluter. There has been very little meaningful progress to Clean Coal Technology. The concept of Zero Emission appearing like a myth. After Fukushima Daichi disaster Countries using Nuclear power and planning to introduce it are in serious dilemma. Development of renewable power technology to use it as a major option is still very inadequate and expensive. Massive potential of Hydro power generation is not exploited in many countries in the excuse of temporary environmental and social impacts. In this situation world leaders must find some way without delay what has to be done.

Safe and secure Nuclear power generation under very stringent monitoring of IAEA from Conception till execution and regulatory control of operation and regular safety audit can be one option. Massive co-operation among nations for credible development of solar, wind, biomass energy, geothermal, energy from Ocean waves, Shale Gas, Hydrogen must be given serious push.

USA , NATO and EU forgetting about wasting money , efforts and energy in championing democracy in other countries can dedicate and divert these resources to sponsor environment friendly energy generation and use, saving and protecting rivers , reducing sub surface water depletion. Mother earth has taken enough. It has started taking revenge. We do not want to witness Earthquake, Tsunami disaster of Japan, flash flooding of Queensland anywhere. Let us all think seriously about Carbon Credit in a meaningful way.

Source- Energy Bangla