The Hindu Business Line : Will carbon credit be the next black bubble?

GLENEAGLES Plan of Action on `Climate Change, Clean Energy and Sustainable Development' has a section titled `Financing the transition to cleaner energy'.

Paragraph 22 (c) in that section speaks of promotion of dialogue on market-based instruments, fiscal or other incentives, and also "tradable certificates and trading of credits for reductions of emissions of greenhouse gases or pollutants," as one learns at www.number-10.gov.uk.

It seems, therefore, appropriate that the Finance Minister, during his recent trip to the US, was responding to the World Bank's call to join hands in climate change mitigation, though with a diplomatic line, "We would be happy to remain engaged in the dialogue for exchange of ideas," rather than easily shrugging off saying that India was not a party to the Plan adopted by the G8 in July.

But Indian companies are more than engaged in emission trading and booking carbon credit.

For instance, a press release from PricewaterhouseCoopers (PwC) India is about the firm currently advising more than 130 potential clean development mechanism (CDM) projects that can sell carbon credits. And the projects are at various stages of development.

A recent report informs that SRF Ltd and Shell Trading International have entered into a deal "for sale and purchase of 500,000 CERs (Certified Emission Reductions) to be delivered on or before April 1, 2007". The move made a strong impact on the charts.

Another report, commenting on Suzlon, the country's leading manufacturer of wind turbine generators, has an analyst writing that wind energy is eligible for carbon credit benefits under the Kyoto Protocol for a decade from 2002.

After Chicago Climate Exchange and the European Climate Exchange, MCX (Multi-Commodity Exchange of India) is likely to be the third exchange in the world with a licence to trade in carbon credits, informs yet another news report.

British Energy is the latest international energy producer to overhaul its in-house and external legal set-ups as rising carbon credit prices force the industry to review costs, notes a posting on www.thelawyer.com.

What is carbon credit? It is action that helps reduce the atmospheric concentration of CO2, such as fossil-fuel conservation and planting trees, defines Canadian Environmental Literacy Project (www.celp.ca).

Carbon credits as defined by Kyoto Protocol are one metric tonne of carbon emitted by the burning of fossil fuels, says Wikipedia.

However, the text of Kyoto Protocol to the United Nations Framework Convention on Climate Change on http://unfccc.int shows no `credit' in a simple search.

"Tradable credits issued according to the amount of absorption of carbon and then sold to emission sources to offset their emissions," is how www.watercorporation.com.au defines the phrase.

"What polluting companies might use to pay for the maintenance of forests," is the definition in the ecological glossary on projects.powerhousemuseum.com.

You can trace the origins of Kyoto Protocol to December 1997, when more than 160 nations met in Kyoto, Japan, "to negotiate binding limitations on greenhouse gases for the developed nations".

According to the protocol, the developed nations agreed to limit their greenhouse gas emissions, relative to the levels emitted in 1990.

The US agreed to reduce emissions from 1990 levels by 7 per cent during the period 2008 to 2012, says www.eia.doe.gov. But http://en.wikipedia.org would hasten to point out that the protocol is non-binding over the US until ratified.

Emissions trading is not elaborately dealt with in the protocol. Article 17 in it gives the job of defining "the relevant principles, modalities, rules and guidelines, in particular for verification, reporting and accountability for emissions trading" to the CoP or Conference of the Parties.

"The Parties included in Annex B may participate in emissions trading for the purposes of fulfilling their commitments under Article 3." Annex B shows a list of countries and `Quantified emission limitation or reduction commitment', as a percentage of base year or period.

Among the countries are those with limits that are above their current production; and the buffer or the `extra' is what can be sold to other countries on the open market, as tradable credit. "So, for instance, Russia currently easily meets its targets, and can sell off its credits for millions of dollars to countries that don't yet meet their targets, to Canada for instance.

This rewards countries that meet their targets, and provides financial incentives to others to do so as soon as possible," explains The Free Encyclopedia on http://en.wikipedia.org.

That apart, CO2 sinks such as forests earn credits. Please note that buying credits is no substitute to domestic action to reduce emissions. And also that we're talking about intangibles.

There are different types of carbon credit, you'd learn from an educative brochure titled `A Climate Change Projects Office Guide' on www.dti.gov.uk. "Various types of carbon credits exist, each with different characteristics and potential value," it begins, and classifies the credits under three heads.

First, `credits defined in the Kyoto protocol' include Assigned Amount Units (AAUs), Certified Emissions Reductions (CERs), Emission Reduction Units (ERUs) and Removal units (RMUs).

Second, `credits for specific emission trading markets to assist in achieving Kyoto targets' including UK Allowances, and European Emission Trading Allowances (EAU). And third, `non Kyoto compliant credits' under which are listed Emission Reductions (ERs) and Verified/ Voluntary Emission Reductions (VERs).

Of current bearing would be `Summary of the Seminar on Linking the Kyoto Project-based Mechanisms with the European Union Emissions Trading Scheme' on www.iisd.ca; it traces the history of the protocol and ETS.

The Saskatchewan Soil Conservation Association (http://ssca.usask.ca) has an interesting article by John Bennett to help "farmers understand the benefits and the risks of being short-changed" by carbon markets.

He offers a `30-second science lesson': "A plant takes solar energy and by the process of photosynthesis, transfers the CO2 gas into carbon (organic matter) and then returns the oxygen to the atmosphere. The removed carbon, which is stored in the soil and measured as organic matter is the RMU (emission removal)."

ERU would be a credit for reducing emissions by burning less fuel, fertiliser management with rates, timing and placement (less Nitrous Oxide emissions), and manure management (less Methane emissions), explains Bennett.

How is price determined for carbon credit? How big is the market? These are questions you may like to probe further. It may be a clue to know that a recent alert spoke of India standing to gain $5 billion from carbon credit in seven years.

Another estimate, from the UK angle, cited on www.dti.gov.uk pegs the size of the market "at between euro 4.6 to euro 200 billion by 2010, with the former estimate based on purchases of carbon credits limited to compliance only, and the latter estimate subject to international political developments."

A `truly liquid market', it notes. What is however sure is that nobody can assure you that carbon won't become the next big black bubble.

ZeroBase@TheHindu.co.in

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