Climate science tells that the earth is warming due to human activities. But considerable uncertainty regarding the precise nature and extent of the risks remains. Climate change happens slowly and has a global impact on the physical environment, whereas financial markets react to news in fraction of a second and are almost liberated from specific physical locations. The low energy intensity of financial sector means that reductions in greenhouse gases (GHGs) emissions would have little impact on physical operations of financial markets and institutions unlike for instance their effect on electricity production and transport. Nevertheless, financial markets potentially play two important roles in the policy response to climate change. They foster mitigation strategies, that is, the steps taken to reduce GHGs emissions for a given level of economic activity by improving the efficiency of the schemes to price and reduce emissions and the allocation of capital to cleaner technologies and producers.
Furthermore, financial markets can cut the costs of adaptation by reallocating capital to newly productive sectors and regions and hedging weather related risks. In recent years, markets in carbon trading, weather derivatives and catastrophe (CAT) bonds have seen sharp increases in activity and innovations, which bodes well for the future. Hence recognizing how financial markets will react to climate change initiative and how they can best promote mitigation and adaptation will become crucial to shaping the future policy and minimizing its costs. Failure in reflection of basic understanding of finance can cause major setbacks to climate change policy.
Burning of fossil fuels is a major source of industrial GHGs emissions, especially for power, cement, steel, textile and fertilizer industries. The major greenhouse gases (GHGs) emitted by these industries are carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydro fluorocarbons (HFCs), Per fluorocarbons (PFCs) and Sulphur hexafluoride (SF6) which will 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 GHGs products, technologies and processes. Such policies could include economic instruments, government funding and regulation (IPCC 2000).
This tradable permit system is one of the policy instruments that have 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. Every Annex-I country had been assigned the amount of emission which is to be reduced by the concerned country. It also implies that a country is permitted to emit the remaining amount. This emission amount of allowance is actually one kind of carbon credit. The total amount is then subdivided into certain units expressed in terms of carbon equivalent. Each unit gives the owner the right to emit one metric tones of carbon dioxide or other equivalent GHGs. There is, however, another variant of carbon credit. This variant of carbon credit is to be earned by a country by investing some amount of money in such projects known as carbon projects which will emit lesser amount of GHGs. This exchange may take place within the economy or may take the form of international transactions. Accordingly there are two types of carbon trading, namely, emission trading or cap-and-trade and offset trading or base-line-and credit trading. Credit cards are generated by enterprises in the developing world that shift to cleaner technologies and thereby save on energy consumption, consequently reducing their GHGs emissions.
Carbon trading is the name given to the exchange of emission permits, alternatively known as carbon credit. It is an emission allowance which was originally allocated or auctioned by the national administrators of a cap-and-trade program or it can offset of emission. Such offsetting and mitigating activities can occur in any developing county 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 as Certified Emission Reductions (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 enables countries or operators in developed countries to acquire GHGs reduction credit
· Under Joint Implementation a developed country with relatively high costs of domestic GHGs reduction would set up a project in another developed country.
· Under the Clean Development Mechanism (CDM) a developed country can sponsor a GHGs reduction project in a developing country where the cost of GHGs 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 countries 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 short fall in allowances. Countries with surplus credit can sell them to countries with capped emission commitments under the Kyoto Protocol.
The Clean Development Mechanism (CDM), defined in Article 12 of the Protocol, allows a country with an emission-reduction or emission-limitation commitment under the Kyoto Protocol (Annex B Party) to implement an emission-reduction project in developing countries. Such projects can earn saleable certified emission reduction (CER) credits, each equivalent to one tonne of CO2, which can be counted towards meeting Kyoto targets. The mechanism is seen by many as a trailblazer. It is the first global, environmental investment and credit scheme of its kind, providing standardized emissions offset instrument, CERs. A CDM project activity might involve, for example, a rural electrification project using solar panels or the installation of more energy-efficient boilers. The mechanism stimulates sustainable development and emission reductions, while giving industrialized countries some flexibility in how they meet their emission reduction or limitation targets. A CDM project must provide emission reductions that are additional to what would otherwise have occurred. The projects must qualify through a rigorous and public registration and issuance process. Approval is given by the Designated National Authorities. Public funding for CDM project activities must not result in the diversion of official development assistance. The mechanism is overseen by the CDM Executive Board, answerable ultimately to the countries that have ratified the Kyoto Protocol. Operational since the beginning of 2006, the mechanism has already registered more than 1,000 projects and is anticipated to produce CERs amounting to more than 2.7 billion tonne of CO2 equivalent in the first commitment period of the Kyoto Protocol, 2008–2012.
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 the operators who have been set quotas by their country. For trading purpose, one allowance of 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 rates. These trades were settled internationally and hence allow allowance to be transferred between countries. Each internationally transfer is validated by the UNFCCC. Each transfer within the European Union is additionally validated by the European Commission.
Climate exchanges have been established to provide spot market in allowances, as well as futures and options market to help discover a market price and maintain liquidity. Carbon prices are generally quoted in Euros per tonne of carbon dioxide or its equivalent (CO2e). Other GHGs can also be traded, but are quoted as standard multiples of CO2 with respect to their global warming potential. Currently there are six exchanges trading in carbon allowances, namely, European Climate Exchange; Nord Pool; Power Next; Multi Commodity Exchange and National Commodity and Derivative Exchange. NCDEX is the first exchange in any of the developing countries of the world to launch a futures contract for carbon credit issued under United Nations Framework Convention on Climate Change on its Exchange Platform. CER prices on NCDEX will be in tandem with the international markets. Physical delivery of CERs will also be facilitated where specific delivery requirements of the buyers and sellers will be matched for guaranteed deliverable CERs. Recently, Nord Pool listed a contract to trade offsets generated by a CDM carbon project. Many companies now engage in emissions abatement, offsetting and sequestration programs to generate credits that can be sold on. MCX has futures trading in Carbon Emission Allowances. The allowances for carbon emissions allocated to developed countries up to their target level under the Kyoto Protocol. These allowances are tradable under Kyoto’s international emission trading mechanism in place from 2008 to 2012. Each AAU equates to one tonne of CO2e.
India will account for 14.69 per cent of the expected annual number of CERs from the registered projects under Clean Development Mechanism (CDM) of the United Nations Framework Convention on Climate Change (UNFCCC). Of the 978 projects that are registered under CDM, 332 are from India. Another 543 projects are in pipeline at various stage of validation or registration. By 2012 all these projects from India are expected to yield around 400 million CERs. The uncertainty over prices of carbon credits is prompting more Indian companies to enter into forward contracts and hedging their risks as against selling them on the spot market. Some of these companies include Dalmia Group, Gujarat State Energy Generation and Jindal Steel. In the first four months of 2008, the prices of Indian Certified Emission Reductions (CERs) have slid to 15-16 per cent of the European Union (EU) prices (€15.55-16.07). However, last year in March, the prices of CERs were being traded at 77 per cent of the EU prices (€13). This climbed to as high as 84 per cent of the EU prices (€16.07) in October 2007.
Carbon trading is becoming popular day by day. The volume of carbon trade is increasing at a faster rate. A recently released World Bank report, State and Trends of the Carbon Market 2008, points out that the value of carbon credits had doubled from $32 billion in 2006 to $64 billion in 2007. Amidst this burgeoning trade, the record on carbon emission cuts is rather dismal. Emissions increased by 1.1 per cent annually in the 1990s, and 3 per cent annually between 2000 and 2004. This is despite the Kyoto Protocol mandating a 5 per cent cut in 1990 emission levels by 2008-2012. This is bound to grow even further as participation increases from other countries that have not so far ratified to the Kyoto Protocol. As per World Bank estimates, Carbon Finance unit, volume of carbon trade only through Emission trading route had shown a 240 per cent increase in 2005 over the previous year. Barclays Capital predicts that “Carbon will be the world’s biggest commodity market and it could become the world’s biggest market overall”. As the deadline for meeting the Kyoto Protocol draws nearer, prices can be expected to rise as countries/companies save credits to meet strict targets in the future.
India is well ahead in establishing a full fledged system in operationalizing CDM through the Designated National Authority (DNA)-Ministry of Forest and Environment. However, there remains high scepticism whether the prices would rise or crash post-2012, when the Kyoto Protocol, the treaty regulating the carbon emission reduction, would have to be ratified again. Till now Carbon Credits have been selling in the spot market. Post-2012, more imports can be allowed if there is a general agreement in the Kyoto, resulting in prices going up with increased demand. It is high time India takes an active part in the second phase of Kyoto negotiations to build a case for a more equitable solution, which ensures that garbage creation globally is dramatically reduced. It does not matter who produces the “garbage” the effects are the same. The problem is further compounded by the fact that the “garbage” has been accumulating since the industrial revolution. It is a no-brainer that while there is a common responsibility for all the nations to do their bit, the developed countries both by virtue of their high per capita emissions and the fact that most of the historical emissions have come from them, have to take the lions share of the responsibility for GHG emission reductions. While this was seen as adequate in the 1990s, when the Kyoto Protocol was developed, we need a more sophisticated understanding of how the burden of climate mitigation must be shared across nations. China’s rapid growth over the last 2 decades makes it one of the biggest emitters (in absolute terms) today.
The rapid growth of India makes it clear that without the participation of the large developing countries in the new mechanism, the problem cannot be tackled. We need a global regime that is effective in tackling global warming, but is equitable too. Science tells us that the sustainable limit for emissions is 2.5 tonne/per capita/annum. The entire developed world is way above this average. Most of the middle-income countries, including China and Brazil, are above this limit. Ironically, thanks to a very large number of poor people India’s average per capita emission is still below the limit, while the growing rich in India are well above the world average. If we attempted to bring every nation’s per capita emissions to 2.5 tonne by 2050, this would imply a 90 per cent cut for the US and 80 per cent cut for the EU etc. While this would be equitable it would certainly not be the most economically efficient way of getting to the target. It would also not be conducive to growth of countries like India. What we need therefore is a mechanism that makes the “polluters pay” for the green development of the poorer nations of the world, that is, all emissions above the sustainable per capita limit of 2.5 tonne needs to be paid for. The current CDM is too small and woefully inadequate to bring about the level of transfer of resources (financial and technological) to do this job.
Japan, the world''s second-most populous country rejected in April an international proposal to replace national limits on carbon- dioxide pollution set by Kyoto with targets for individual industries, taking sides against Japan and the U.S. in how to curb global warming. India is opposed to suggestions by the world's two largest economies Japan and US to adopt a so-called ``bottom-up, sectoral approach'' devised by Japan in its bid to lead the crafting of a successor to Kyoto. The impact of green house gas emissions is cumulative since it remains permanently in the atmosphere. The CDM is a sort of economic tool that makes it easier for developed countries to achieve their GHG reduction targets by using the lower costs of mitigation in developing countries also being an incentive for developing countries to invest in the cleaner technologies. It does not in any way put a penalty on the Annex I countries for their past emissions.
But this is not a good sign. Kyoto Protocol was signed to reduce GHGs emission. But this flexibility mechanism allows, especially the main culprits, to skip their reduction by spending some money. Moreover funds are invested in carbon projects which are meaningless from the view of emission reduction. Such projects only create a false sense of emission reduction and thereby jeopardize the ultimate objectives of the entire exercise. The time is now to fight climate change. We have to level with the public that there has to be a price on carbon emissions. Apparently, there should be a tax on carbon emissions. The belief is that by starting a carbon emissions tax, it would help reduce emissions and encourage companies and others to use renewable energy sources. These people in the fossil fuel industry should be prosecuted. Ecological Internet supports a global carbon market that is well regulated, but not as a replacement for carbon taxes, which will address the issue of pricing carbon more quickly, effectively and simply. While short-term politics favour markets, taxes would be better in the long term because industry needs certainty for investments... A government committing to painful taxes signals the seriousness of its intentions.
What we need therefore is: A much bigger CDM which essentially incentivise green investments with reduced transaction costs by penalizing the polluters and a separate mechanism for financing technology development and technology transfer. This mechanism should be based on historic emissions of developed countries on cumulative basis. In the next two years, when the UNFCCC process would agree on the targets and processes that would constitute the second commitment period of the Kyoto Protocol, it is the right time for India to take a proactive role in the drafting of this agreement, simply because India will be affected most. China has already grown its emissions to a level that, in absolute terms, is comparable to those of the US. The new mechanism should be developed with the objective of allowing growth for the less developed countries, including India and others. This is the opportune time for India to act since the additional funds created by the penalties imposed over the developed countries would pay for the development of new technologies which, in the long run, would benefit all. If we attempted to bring every nation’s per capita emissions to 2.5 tonne by 2050, this would imply a 90 per cent cut for the US and 80 per cent cut for the EU etc. While this would be equitable it would certainly not be the most economically efficient way of getting to the target. It would also not be conducive to growth of countries like India. What we need therefore is a mechanism that makes the “polluters pay” for the green development of the poorer nations of the world, that is, all emissions above the sustainable per capita limit of 2.5 tonne needs to be paid for. The current CDM is too small and woefully inadequate to bring about the level of transfer of resources (financial and technological) to do this job.
The Kyoto Protocol brings into focus the callousness with which humans have polluted the earth’s atmosphere. The negative impact of this industrial growth is being felt more by the less developed countries such as India. The new CDM should focus on encouraging developing countries to develop their energy portfolios with a large proportion of renewable sources, the incremental costs of such development being paid for by the polluters.
India was the fourth-largest emitter of carbon-dioxide in 2004, according to the United Nations Development Program's Human Development Report 2007-2008, after the U.S., China and Russia. India comes under the third category of signatories to UNFCCC. India signed and ratified the Protocol in August 2002 and has emerged as a world leader in reduction of GHGs by adopting Clean Development Mechanisms (CDM’s) in the past few years. Even though India has no mitigation commitments under the Kyoto Protocol, India has largest numbers of projects under the CDM of the Kyoto Protocol mooted to encourage investments in developing countries by promoting the transfer of environment-friendly technologies. The major CDM projects are located in Rajasthan, Andhra Pradesh, Maharashtra, Karnataka, Himachal Pradesh and Punjab. One third of the total CDM projects registered with UNFCCC are from India. In 2007, a total of 160 new projects were registered with UNFCCC. As a consequence, Indian industry managed to generate over 27 million carbon credits. Indian projects receive further impetus by way of investments and finance from developed nations who are potential buyers of CERs. Till November 2007, 828 CDM projects have been registered in 48 countries. Three wastes to energy projects to be undertaken shortly at three Delhi’s sanitary landfills at Timarpur, Okhla and Ghazipur are fine examples under CDM.
Other than Industries and transportation, the major sources of GHGs emission are the paddy fields, enteric fermentation from cattle and buffaloes and municipal solid waste. The emission from paddy fields can be reduced through special irrigation strategy and appropriate choice of cultivars; whereas enteric fermentation emission can also be reduced through proper feed management. In recent days the third source of emission, that is, Municipal Solid Waste (MSW) dumping grounds are emerging as a potential CDM activity despite being provided least attention till date. At present there are no Sanitary Landfill sites in India. MSW is simply dumped without any treatment into land (depressions, ditches or soaked ponds) or on the outskirts of the city in an unscientific manner with no compliance of regulations. The waste in the dumping ground undergoes various anaerobic reactions producing offensive odorous gases such as CO2, CH4, H2S and Mercaptans, which foster harmful pathogens and lead to environmental, social and public health issues. Moreover, the existing dumping grounds are full and overflowing beyond capacity. It is difficult to get new dumping yards and if at all available they are far away from the city which adds to exorbitant transportation costs. As per estimate of CPCB the cumulative requirement of land for MSW disposal would reach around 169.6 km2 by 2047 as against 20.2 km2 in 1997. Moreover various technologies/processes available to reduce the amount of MSW are unviable for existing dumping grounds due to various reasons such as segregation of MSW etc.
World over, major companies are spotting "green spots" for investment and pouring in their resources to devise products that are at once revenue-generators of the future as well as accolade earners. With global warming becoming real threat, big corporate players of the world are developing environmentally conservative technologies which will see huge demand in future to cash in on million-dollar future demands. The carbon market, growing at a fast pace in India is estimated to be of US$5bn and has started to show its fruitful outcome for some industries. In the past few months, 62 Indian projects have received Rs290mn with MITCON's assistance, of which 32 projects were from Maharashtra.Tata Motors (about Rs1524 lakh) Vanaz Engineers, (about Rs18 lakh) Mahalaxmi Constructions (about Rs35 lakh), Alkyl Amines, (about Rs61 lakh) Saroj group (about Rs100 lakh), RDS Constructions (about Rs35 lakh), Mayura Steels, (about Rs31 lakh) were the major Indian companies that have received carbon credit. Apart from these, leading lenders like State Bank of India (SBI), ICICI Bank, IDBI Bank and HDFC Bank have signed MOUs with MITCON for providing carbon credit services to their borrowers.
Currently, India is one of the largest suppliers of carbon credit cards in the world with a whopping 29 million carbon credit cards and another 139 million in the pipelines. India is leading developing nations in carbon credits, expecting over 2.27 billion US dollars by selling certified emissions reduction units (CER) from approximately 300 Clean Development Mechanism (CDM) projects, according to the Designated National Authority (DNA) - India's Ministry of Environment and Forests. There is great opportunity awaiting India in carbon trading which is estimated to go up to $100 billion by 2010. In the new regime, the country would emerge as one of the largest beneficiaries accounting for one fourth of the world carbon trade. The counties like US, Germany, Japan and China are likely to be biggest buyers of carbon credits which are beneficial for India to a great extent. Hence MSW dumping grounds can be huge prospects for CDM projects in India. The utilization of MSW dumping grounds for energy production would means favourable and useful solution to the existing MSW disposal problem. Such projects can be executed using a Public-Private Partnership approach in which both the parties can invest and share the benefits. Investment and operating costs is recovered through the sale of CER. Such types of projects would not only be beneficial for the Government bodies and stakeholders but also for general public. The collaborative action by governments, the community and individuals could combat climate change.
Low CER rates, non-enforcement of rich nations' renewable energy investment commitments in poor nations, lack of transparency in the CDM quantification process and several other irregularities are cited in the CDM market.The CDM, one of three mechanisms of the Kyoto Protocol, allows Annex-I or industrialized nations to buy emissions reduction units, called CERs, from non- Annex developing countries. Annex I rich nations can then count these credits towards their GHGs emissions targets. The principle is to help rich nations reduce the costs of meeting their reduction targets by 2012 whilst mitigating climate change and helping developing nations. There are six greenhouse gases (GHGs), carbon dioxide, methane, nitrous oxide, hydro fluorocarbons, per fluorocarbons and sulphur hexafluoride. One tonne of carbon dioxide or its equivalent of the other five gases makes one CER. As per the CDM rules, the emissions reduction should benefit sustainable development, help alleviate poverty, create clean technology in a carbon-less economy and produce local benefits among others. But not a single one of India's 252 CDM projects, as per the United Nations Environment Programme, deals with afforestation, agriculture or even rural development. The majority of that number is energy-efficiency projects from industries. Since renewable energy technologies are given tax rebates as an incentive by the Indian government, industry is now quick to catch on to the double benefit of harnessing a CDM deal. With a history of renewable energy ventures falling by the wayside once this rebate has been used, the CDM's real contribution to development in India is a debatable one. Awareness on CDM in India also continues to remains poor. ‘'The Protocol says Annex-I countries are to invest capital in renewable energy technology to be able to gain their CO2 offsets. But this is neither happening, nor is there any mechanism to enforce this. Further, the CDM was to be between Annex-I and developing country parties. But Annex I governments with their clout have now entered the scene, making small industries in developing countries unable to negotiate their own terms or prices with giant partners. This is just a ‘charitable' way of seeing the current situation. We are selling off our assets without pinning a real value on our CO2 tonne, and checking to see whether our sustainable development is real or not. Rich nations are holding the power and dictating terms to developing nations. Apparently, there is a clear nexuses between the WTO and the CDM process evolving. But, it is hoped that the market will allow CER rates to find its own level as per market driven forces. The small community and rural development projects being left out are unable to sell their small numbers of carbon offsets. The process of training various departments on ‘bundling' small projects together should be initiated for raising skills and awareness amongst those in this sector. Another phenomenon in the market is an increasing number of ‘Type 2' CDM deals between parties who do not fall under targets. The scenario in type 2 deals is fraught with irregularities and poor execution which, even the World Bank has expressed concern over. "The voluntary market lacks an internationally agreed, standardized protocol for engagement, leaving investors, buyers, project developers, verifiers and others to proceed on an ad hoc basis", according to the World Bank's Carbon Finance Unit.
India, the world's fourth-largest emitter of carbon dioxide, plans to form eight commissions to promote solar power, energy efficiency and water conservation as it seeks to mitigate damage from the changing climate
National Solar Mission
National Mission for Enhanced Energy Efficiency
National Mission for Sustainable Habitat
National Water Mission
National Mission for Sustaining the Himalayan Ecosystem
National Mission for a Green India
National Mission for Sustainable Agriculture
National Mission on Strategic Knowledge for Climate Change
Each of the eight panels will have an institutional structure consisting of government departments, industry experts, academics and citizen representatives, the government said. Each so-called mission will devise a state-funded plan and have authority to carry it out. The missions include developing efficient building technologies and better managing waste, conserving water, and sustaining the environment of the Himalayas.
India, China and other developing nations have asked industrialized countries to carry the burden of reducing CO2 and other greenhouse gases through adopting emissions targets by 2020. They also seek aid and technology to cut their own CO2 output. India has resisted adopting limits so its economy can grow enough to eliminate poverty. About 34 percent of the nation's 1.1 billion people live on less than $1 a day, the UN has estimated. This does demonstrate that we are prepared to be responsible global citizens and join others in a collaborative effort to deal with climate change. Sustainable development has to be supported by both financial resources and technological resources. Until that happens, how does one expect the developing countries to take up quantitative restrictions?
India relies heavily on coal for power generation as it is the abundantly available. The coal-based plants account for a large part of the country's carbon dioxide emissions. India's commitment to ensure that its per-capita emissions of green-house gases do not exceed those of developed nations. But the new action plan makes no commitment to cutting overall emissions. Despite mounting international pressure, India has refused to make any specific commitments so far on reducing green-house gas emissions, pointing out that its per-capita emissions are a fraction of those in rich nations. Convergence of per-capita emissions in developed and developing countries" can be the only basis for any global agreement on climate change. India feels developed countries have a larger responsibility to cut emissions. In terms of our development and r growth today, we are already emitting much less emissions than the developed world did at the time it was growing, which means that our energy intensity is lower than theirs at the time of growth. Developed countries say developing nations like India must reduce emissions because it is one of the world's top polluters. India, a country of one-billion-plus people, needs to use more energy to power its growing economy and lift its people out of poverty. The ingredients for innovation exist and governments should consider ways in which they can foster and take advantage of such innovations.
Dr Gursharan Singh Kainth is the Director GAD Institute of Development Studies, 14-Preet Avenue, Majitha Road, PO Naushera, Amritsar 143 008
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