What is meant by carbon credit? Who gets it? What is its significance?

Question

In financial circles carbon credit is often mentioned. I do not understand its significance.

Answer 1

Carbon credits are a key component of national and international emissions trading schemes. They provide a way to reduce greenhouse effect emissions on an industrial scale by capping total annual emissions and letting the market assign a monetary value to any shortfall through trading. Credits can be exchanged between businesses or bought and sold in international markets at the prevailing market price. Credits can be used to finance carbon reduction schemes between trading partners and around the world.

There are also many companies that sell carbon credits to commercial and individual customers who are interested in lowering their carbon footprint on a voluntary basis. These carbon offsetters purchase the credits from an investment fund or a carbon development company that has aggregated the credits from individual projects. The quality of the credits is based in part on the validation process and sophistication of the fund or development company that acted as the sponsor to the carbon project. This is reflected in their price; voluntary units typically have less value than the units sold through the rigorously-validated Clean Development Mechanism

Background

Burning of fossil fuels is a major source of industrial greenhouse gas emissions, especially for power, cement, steel, textile, and fertilizer industries. The major greenhouse gases emitted by these industries are carbon dioxide, methane, nitrous oxide, hydrofluorocarbons (HFCs), etc, which all increase the atmosphere's ability to trap infrared energy and thus affect the climate.

The concept of carbon credits came into existence as a result of increasing awareness of the need for controlling emissions. The IPCC has observed that:

Policies that provide a real or implicit price of carbon could create incentives for producers and consumers to significantly invest in low-GHG products, technologies and processes. Such policies could include economic instruments, government funding and regulation,

while noting that a tradable permit system is one of the policy instruments that has been shown to be environmentally effective in the industrial sector, as long as there are reasonable levels of predictability over the initial allocation mechanism and long-term price.

The mechanism was formalized in the Kyoto Protocol, an international agreement between more than 170 countries, and the market mechanisms were agreed through the subsequent Marrakesh Accords. The mechanism adopted was similar to the successful US Acid Rain Program to reduce some industrial pollutants.

Emission allowances

The Protocol agreed 'caps' or quotas on the maximum amount of Greenhouse gases for developed and developing countries, listed in its Annex I . In turn these countries set quotas on the emissions of installations run by local business and other organisations, generically termed 'operators'. Countries manage this through their own 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 tonne 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 allowing 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[6]. From 2008, EU participants must link with the other developed countries who ratified Annex I of the protocol, and trade the six most significant anthropogenic greenhouse gases. In the United States, which has not ratified Kyoto, and Australia, whose recent ratification comes into force in March 2008, similar schemes are being considered.

Kyoto's 'Flexible mechanisms'

A credit can be an emissions allowance which was originally allocated or auctioned by the national administrators of a cap-and-trade program, or it can be an offset of emissions. Such offsetting and mitigating activities can occur in any developing country which has ratified the Kyoto Protocol, and has a national agreement in place to validate its carbon project through one of the UNFCCC's approved mechanisms. Once approved, these units are termed Certified Emission Reductions, or CERs. The Protocol allows these projects to be constructed and credited in advance of the Kyoto trading period.

The Kyoto Protocol provides for three mechanisms that enable countries or operators in developed countries to acquire greenhouse gas reduction credits

* Under Joint Implementation (JI) a developed country with relatively high costs of domestic greenhouse reduction would set up a project in another developed country.
* Under the Clean Development Mechanism (CDM) a developed country can 'sponsor' a greenhouse gas reduction project in a developing country where the cost of greenhouse gas reduction project activities is usually much lower, but the atmospheric effect is globally equivalent. The developed country would be given credits for meeting its emission reduction targets, while the 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 allowances. Countries with surplus credits can sell them to countries with capped emission commitments under the 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 tonne 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 tonne 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.

Currently there are at least four exchanges trading in carbon allowances: the Chicago Climate Exchange, European Climate Exchange, Nord Pool, and PowerNext. Recently, NordPool listed a contract to trade offsets generated by a CDM carbon project called Certified Emission Reductions (CERs). Many companies now engage in emissions abatement, offsetting, and sequestration programs to generate credits that can be sold on.

Managing emissions is one of the fastest-growing segments in financial services in the City of London with a market now worth about €30 billion, but which could grow to €1 trillion within a decade. Louis Redshaw, head of environmental markets at Barclays Capital predicts that "Carbon will be the world's biggest commodity market, and it could become the world's biggest market overall."

Setting a 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 a Kyoto Allocation Allowance 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 homegeneity between projects which causes difficulty in pricing, as well as questions due to the principle of supplementarity 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.

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.

By way of example, consider a business that owns a factory putting out 100,000 tonnes of greenhouse gas emissions in a year. Its government then enacts a law that limits the emissions that the business can produce. So the factory is given a quota of say 80,000 tonnes per year. The factory either reduces its emissions to 80,000 tonnes 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. Instead may choose to buy carbon credits on the open market from organizations that have been approved as being able to sell legitimate carbon credits.

* One seller might be a company that will offset emissions by planting a number of trees for every carbon credit you buy from them under an approved CDM project. So although the factory continues to emit gases, it would pay another group to go out and plant trees which will draw back 20,000 tonnes of carbon dioxide from the atmosphere each 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 tonnes 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

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 may be applied inefficiently or not used to benefit the environment.

By treating emissions as a market commodity it becomes easier for business to understand and manage their activities, while economists and traders can attempt to predict future pricing using well understood market theories. Thus the main advantages of a tradable carbon credit over a carbon tax are:

* the price is more likely to be perceived as fair by those paying it, as the cost of carbon is set by the market, and not by politicians. Investors in credits have more control over their own costs.
* the flexible mechanisms of the Kyoto Protocol ensure that all investment goes into genuine sustainable carbon reduction schemes, through its internationally-agreed validation process.

Creating Real Carbon Credits

The principle of Supplementarity 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 GHG 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 lead to the reduction of real, measurable, permanent emissions is understanding 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

Additionality and Its Importance

It is also important for any carbon credit (offset) to prove a concept called additionality. Additionality is a term used by Kyoto's Clean Development Mechanism to describe the fact that a carbon dioxide reduction project (carbon project) would not have occurred had it not been for concern for the mitigation of climate change. More succinctly, a project that has proven additionality is a beyond-business-as-usual project.

It is generally agreed that voluntary carbon offset projects must also prove additionality 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 tonne 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. Additionality is thus critical to the success and integrity of GHG programs that recognize project-based GHG reductions."

Criticisms

Environmental restrictions and activities have traditionally been imposed on businesses through regulation. Many people were, and still are, uneasy at the use of a novel market-based approach to managing emissions, although the concept of Cap and Trade eventually won the day in international negotiations.

The Kyoto mechanism is the only internationally-agreed mechanism for regulating carbon credit activities, and, crucially, includes checks for additionality and overall effectiveness. Its supporting organisation, the UNFCCC, is the only organisation 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 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, China and India) 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.

Establishing a meaningful offset project is complex: voluntary offsetting activities outside the CDM mechanism are effectively unregulated and there have been criticisms of offsetting in these unregulated activities. This particularly applies to some voluntary corporate schemes in uncapped countries and for some personal carbon offsetting schemes.

There have also been concerns raised over the validation of CDM credits. One concern has related to the accurate assessment of additionality. Others relate to the effort and time taken to get a project approved. Questions may also be raised about the validation of the effectiveness of some projects; it appears that many projects do not achieve the expected benefit after they have been audited, and the CDM board can only approve a lower amount of CER credits. For example, it may take longer to roll out a project than originally planned, or an afforestation project may be reduced by disease or fire. For these reasons some countries place additional restrictions on their local implementations and will not allow credits for some types of forestry or land use projects.

Hope this info is useful to u...
Good luck...!!!!!!!!!

Answer 2

Carbon Credits Definition

Answer 3

Probably you would never emit carbon in any amount that would make a difference. Evan if you plowed the land witch is what would release carbon stored there. Witch is why they want you to put it under reserve status. I cant say for sure as i am not familiar with the organization you named. The whole idea behind the carbon credit,s is to give polluter,s a reason to cut their emission,s by making polluting costly and nudge them into changing their way of doing business. If you say to them hey you pollute to much so stop they would say hey it,s the cost of progress. How ever if you say we will start fining you for it . They will say well we cant afford the change and stay in business. You now offer them away to make the change less costly then the polluting.Buy giving them credit,s and when they use up the credit,s then they will realize that they will save by cutting pollution.then they can buy credits,s from some one who dose not pollute and use their credits,s. Now they see how to cut pollution and still make money. Of course it is more complicated then that but i hope you get the general idea. It is the same system that was used to bring acid rain under control. It work,s even though some people will not agree or understand. It is the best tool we have at the time to help stop some of this polluting. Is it perfect ? No! But what else do we do sit on our hand,s and hope for the best? So no it is not a sham and i dont think Mr. Gore or any one else is making money of it. It is just a way for the co,s. to off set the cost of fines while they make the change,s.

Answer 4

In some countries production of waste carbon dioxide is regulated. Different industries face different costs per ton to reduce pollution simply because it's easier to clean up some processes than others. In this situation, a company with low costs can reduce their pollution below the level required by law and get a "credit" which they can then sell to a company who will use it to offset the pollution they are creating above the legal limit. The result of this is that you get pollution reduced to the same level as if everyone were operating at the legal limit, but at lower total cost.

Answer 5

This Site Might Help You.

RE:
What is meant by carbon credit? Who gets it? What is its significance?
In financial circles carbon credit is often mentioned. I do not understand its significance.

Answer 6

Trying to explain with simplicity:-

i) Carbon credit at the first place has to do with the reduction of emission of carbon-di-oxide which is the main cause for green house effect also called as global warming.

ii) Developed nations emit more CO2 than developing nations due to high industrialization. These days with booming economy several developing nations too have started to emit a lot of these so called green house gases. This pollution is very detrimental to our very existence.

iii) In order to safe guard the interests of one and all the concept of carbon credit was introduced, where in, for e.g. developed nations can assist developing nations with reducing the pollution levels by transfering state-of-the-art technology to reduce pollution. The amount of emission gases reduced in this countries can be taken as a credit by the donor (technology) country.

iv) With this credit the companies from the developed countries can either emit more than the permissible limit in their own country or purchase more rights for emission elsewhere.

v) The significance of carbon credit is a win-win situation for one and all in the business world and reducing pollution for preserving biodiversity on planet earth in general.

Answer 7

we (India) can get it if we stop bursting crackers and stop polluting the earth and that credit can be used to do some polluting for some good purpose

Answer 8

« World Bank scientist backs carbon capture | Main | Why carbon pricing won't work – and what to do instead »

Emission trading suffers as carbon prices plummet
A leading economist this week warned that the world's two leading carbon trading schemes are failing to deliver the expected benefits due to a collapse in the price of carbon credits - and the situation is likely to get far worse before it gets better.

Many politicians have identified carbon emissions trading schemes as the best means of tackling climate change, arguing that by putting a price on carbon emissions firms have a financial incentive to reduce their carbon footprint.

However, speaking to an audience of academics and business leaders at this week's Tyndall Centre conference on investments in low carbon technologies, Professor Catrinus Jepma of the University of Amsterdam warned that both the EU's Emissions Trading Scheme and the UN's Clean Development Mechanism were in danger of failing with prices for the carbon credits used under both schemes predicted to reach just a few cents.

"The Stern Report suggests we need a price for a tonne of carbon emissions of $20, rising to $30, $40 or even $50 to stabilise [the level of CO2 in the atmosphere] at manageable levels," he said. "But there is a good chance that the carbon credits that are meant to provide incentives for reducing emissions will be available for next to nothing."

The problems with the European Trading Scheme are well documented with the collapse in the price of a tonne of carbon dating back to May last year when it emerged that most countries in the scheme had set their carbon caps far too high, resulting in fewer firms than expected having to buy credits and causing the price of a tonne of carbon to plummet from over €30 to less than €10.

As one delegate observed "with some firms having carbon emissions capped at 110 percent of what they actually required it was always going to fail".

The EU is seeking to rectify the problem ahead of the second phase of the scheme, which starts next year, and recently rejected many member countries proposed emission allowances for the next phase as too high, ordering them to go away and come back with lower caps that will force more firms to cut emissions or buy credits.

However, Jepma argued that with no link existing between the first and second phase of the scheme the cost of carbon credits will drop to almost nothing by the end of the year. Currently the price is already below one euro meaning there is little incentive for firms to cut emissions as it is cheaper to just buy in credits to offset their pollution.

He also warned that something similar was in danger of happening with the Kyoto Protocol's Clean Development Mechanism (CDM), which is designed to allow signatories to the agreement to meet their carbon emission reduction targets by buying in Certified Emission Reductions (CERs) or carbon credits from CDM-approved carbon reduction projects in the developing world.

Jepma said the scheme was in danger of becoming a victim of its own success with over 500 projects already approved by CDM and a further 1,000 projects in the pipeline awaiting approval. He predicted that as a result over 2.4bn CERs will be available by 2012.

Meanwhile, Jepma warned that Russia and many of the Central European States are on track to be well below their Kyoto emission targets for 2012 meaning they will generate 2.8bn credits or Assigned Amount Units that they can sell to those countries unable to meet their Kyoto obligations.

This means that there will be a supply of 5.2bn tonnes worth of assorted carbon credits available under the various Kyoto carbon trading mechanisms by 2012, but the biggest polluters in the scheme – the EU, Canada and Japan – are expected to exceed their targets by just 3.6bn tonnes.

"Under the Kyoto targets the supply of credits will outstrip the demand," said Jepma. "We are going to see the same scenario as with the ETS whereby the price for a tonne of carbon starts high and then collapses to close to zero by the end of the scheme… which is precisely the wrong message."

He added that such a scenario would not only remove the financial incentive for countries to invest in clean technologies that help them stick to their emissions targets - as it would be cheaper to continue polluting and just buy credits - but it would also discourage investment in carbon reduction projects in developing countries as they would have to pay for CDM approval only to find they could not get a good price for the carbon credits they generate.

Jepma said the only hope for keeping the price of the various carbon credits high enough to act as an incentive for countries to hit their Kyoto targets lay with convincing the Russians to retire the bulk of their credits.

"We need to convince the Russians that if they put all the credits they have into the market they are going to undermine their own returns from the system," he said. "We need to implore them to be sensible and help push the price [of carbon] up to a workable level."

As one delegate observed what we need is a "CDM version of OPEC" to control the flow of credits onto the market. But until such an organisation emerges the success of the scheme up until 2012 rests entirely upon the goodwill of the Russian government.

Pls check this link for further information:

http://blog.businessgreen.com/2007/02/emission_tradin.html