Indian Talent, Global Content
|
Indian Talent, Global Content |
New and Improved: May 2012
Just Launched - New eStore selling travel guides, editing courses, ebooks and special offers |
Carbon Trading 101
Trading There are various markets that trade in different financial asset classes such as, shares, debentures, loans, foreign currencies and their derivates. These are assets that many of us are accustomed to. There is however a new kid on the block, not yet as commonly known as the assets mentioned. This new asset class has a variety of instruments that can be traded. For the sake of simplicity however, we will lump all these instruments together and call them “Carbon Credits.” But, this is not the true beginning of the story. The story has celestial origins; it begins with the Sun, the basic source of energy for the world. Greenhouse effect and global warming The Sun radiates light and heat on the earth and there is a natural balance over time between the heat absorbed and the heat lost. Greenhouse effect is the process by which the atmosphere warms its planet. The heat in a planet increases when more greenhouse gases are present in its atmosphere. The rapid industrialization of the world and the inherent pollution from this process, have contributed to the increase in the greenhouse gases in our planet and consequent warming of the globe. The following are the major greenhouse gases in earth’s atmosphere:
“NASA reported … that 2008 was the ninth warmest year since 1880 and all the nine warmest years have occurred in the past 11 years. It reported that Jan to Nov, the global temperature was 0.76 degrees F above the average for 20th century.” Unbridled increase in earth temperature has devastating consequence for life on this planet. It is important for the survival of the world therefore that pollution is reduced to a bare minimum before its effects wreck lasting damage. Concerted action from the world community was immediately needed and this, after the usual dithering that marks any internationally cooperative effort, came in the form of a treaty - the Kyoto Protocol. Kyoto Protocol: Through this international treaty of 1997 that came into force in 2005 and which was ratified by all developed nations except the United States, the signatory nations agreed to bring their emission down to 1990 levels within the year 2012. Under the scheme entities in developed countries could sponsor projects in other countries – projects that could absorb / reduce greenhouse gases and consequently obtain carbon credits, which they could then trade. Emission Trading/Carbon Trading The objective was to reduce pollution in the atmosphere but in the most cost effective way. Instead of governments trying to achieve this objective through fiscal measures such as taxation, it was realized that the market mechanism would achieve better results with lesser cost to the consumer. This idea led to the genesis of Emission Trading. The free play of the forces of supply and demand was expected to ensure that the price to achieve the objective was just right. In effect, the industries that emit greenhouse gases pay a price and those that initiate activities that contain emissions reap incentives. Trading in carbon credits at the market price would achieve both these ends at an efficient economic price. In the not too distant future, Emission Trading, which is in its comparative infancy at present, could reach phenomenal volumes and work its magic against global warming. While there are many types of greenhouse gases that are produced by industries, Carbon dioxide (Co2) emission is the highest in quantity. The bulk of the emission trade therefore takes place in CO2. Other gases are also measured in terms of tons of CO2 equivalents. Incidentally, irrespective of the geographical area that emits Co2, its ill effects are suffered by the whole world. The mechanism of Carbon Trading - Cap and Trade The mechanism, in theory, is not too complicated. Polluting industries, based on historic data and their capacities of production, are given a certain number of allowances, Certified Emission Reductions (CERs) each representing 1 metric ton of CO2. This is the cap beyond which the respective entity cannot release pollution into the environment during a specified period, such as a year. If the pollution exceeds the allowance given, the entity would be forced to either buy appropriate number of such allowance from the open market or to pay hefty fines. Offsetting activities such as planting forests that trap carbon or Carbon Capture and Sequestration (CCS) would be entitled to credits which could also be traded. CCS refers to separating carbon dioxide generated in a production process and piping it into underground geological formations that can permanently hold the gas without releasing it to the atmosphere. The buyers in the trade are primarily made up of entities that exceed their cap and the sellers primarily by those able to reduce their pollution below the cap and have spare allowances to sell as well as those entities that involve in activities that trap carbon. If a polluting industry find its operation unviable due to the high cost of purchasing additional credits, less polluting technology, although more expensive, might become viable for it to migrate to. Non-governmental organizations that wish to reduce pollution could also buy up the credits from the market, thus reducing the supply, to make it more expensive for the polluters. Thus the carbon trading mechanism is built to automatically reduce pollution over time. European Union Emission Trading Scheme (EUETS) This is the largest emission trading scheme in the world at present and was created in conjunction with the Kyoto Protocol. This commenced operation in January 2005 with the participation of most of the European Union member states. It covers emissions from the most polluting industries, such as power, steel, cement, and paper Companies that are given allowances representing their ‘cap’ for a compliance period must at the end of the period surrender sufficient allowances to reconcile against their total actual emissions during the period. If emission is below their cap they have allowances to sell; if not, they must purchase allowances from companies which have excess. Each allowance permits the holder to emit one ton of CO2. The penalty for excess ton is €40 for Phase I 2005-2007 (rising to €100 in the Phase II 2008-2012). How Trades are executed by Companies The trade is made through a broker:
Conclusion For the system of carbon trading to achieve its objective, highly accurate measurement and estimation methods are required - to measure emissions, to estimate the effectiveness of alternate technologies. To what extent the system would actually reduce the global warming is yet to be seen. However, we may not have the time to save ourselves from the brink of extinction if we were to wait for the perfect system. Carbon trading appears a reasonable enough beginning in the right direction. Carbon credit market is expected to expand to more than 40 billion Euros ($58 billion) by 2012 from 22 billion Euros in 2006. There is also a view that this market could eventually exceed even $1 Trillion.
More on Chillibreeze.comRelated links Global Warming and Humankind - an Indian Perspective
Other popular articles on Chillibreeze Book Review: A Thousand Splendid Suns
>> Read more articles written by Chillibreeze writers:1. Articles related to Content and Outsourcing
|
Premium Services
Products Must Reads...
Upgrade Your Writing |
Copyright 2004 - 2011 Chillibreeze Solutions Pvt. Ltd. |
