Carbon Credits and Trading

By Manoj Kumar Meena CH04123 & Vivek Bharadwaj CH04156 Department of Chemical Engineering SVNIT Surat

THE SCIENCE OF GLOBAL WARMING & CLIMATE CRISIS CRISIS

What is Global Warming? Solar energy enters the earth in the form of UV rays and heats up the earth. Part of that energy is used to warm the Earth and balance is radiated back into space as infrared waves. Under normal conditions a portion of the outgoing infrared radiation is naturally trapped by the atmosphere. This is a good thing because it keeps the temperature on Earth at a comfortable level. The thick layer of green house gases on Venus makes its temperature unbearable The absence of GHGs on Mars makes the temps there freezing cold (This is why they perhaps say Men are from Mars and Women are from Venus !!)

So why so much of a fuss on Global Warming

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Human beings have created a problem for themselves by releasing huge amounts of CO2 and other GHGs which has thickened this atmospheric layer. As a consequence a lot of the infrared radiation that would otherwise escape the atmosphere is getting trapped by this thickened layer Consequently, the earths temperature keeps increasing and the earth is getting dangerously warmer.

CONSEQUENCES OF GLOBAL WARMING

The Past
- 20 of the hottest years during this century have occurred during the last 25 years (The hottest year recorded during this entire period was 2005).
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In 2003, Europe was hit by a massive heat wave that killed several thousand people. The intensity of the storms in the US and typhoons hitting Japan is getting stronger every

Contd.
Major storms spinning in both the Atlantic & the Pacific since the 1970s have increased in duration and intensity by about 50%. The insurance industry has experienced a several fold increase in claims due to floods, droughts, hurricanes etc. In 2005, Europe was experiencing a disastrous number of floods.

Contd.
The Future

Enough has been written on Disastrous consequences of unchecked Global warming.

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Here are a few most bizarre ones : Global warming will doom humanity, environment by 2050 : says a recent UN Study Himalayan glaciers could shrink from the present 500,000 sq.km. to 100,000 sq.km. by 2030 Asia is likely to be the most hit with over 100 mn people getting displaced from their homes. If Iceland melted due to increase in temps. sea levels everywhere would increase by several feet .

What exactly are Greenhouse Gases (GHGs)

- GHGs are gases that allow light from the Sun to come into the atmosphere, but trap a portion of the outward-bound infrared outwardradiation and warm up the air.
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CO2 is the most important GHG because it accounts for 80% of total GHG emissions. When we burn fossil fuels in our houses or cars or in our power plants and factories or when we cut down or burn down forests we release CO2 in the atmosphere. Like CO2, methane and nitrous oxides are other potent GHGs. 60% of the methane in the atmosphere is produced by us. More than 70% of the nitrous oxides in the atmosphere are produced by us. Sulphur Hexafluoride (SF6), PFCs & HFCs are all very potent GHGs produced exclusively by human activity.

Global Warming Potential (GWP) of various GHGs

The global warming potential is the impact a greenhouse gas (GHG) has to global warming. By definition, CO2 is used as reference case, hence it always has the GWP of 1.
Carbon dioxide (CO2) Methane (CH4) Nitrous oxide (N2O) Perfluorocarbons (PFCs) Sulphur hexafluoride (SF6) GWP: 1 GWP: 21 GWP: 310 GWP: 6500 9 200 GWP: 23 900

Hydrofluorocarbons (HFCs) GWP: 150 11 700

Who contributes How much to Global Warming

Who contributes How much to

Global Warming (Contd..)
6

Tons of Carbon per person

5 4 3 2
World average

1 0 Africa India China Japan EU Russia U.S.

Car.Emission

Source: WORLD RESOURCES INSTITUTE UNDERLYING DATA SOURCE : U.S. DEPARTMENT OF ENERGY, ENERGY INFORMATION ADMINISTRATION, INTERNATIONAL ENERGY ANNUAL 1999 NOTE : SHOWS CARBON EMISSIONS ASSOCIATED WITH FOSSIL FUEL COMBUSTION

THE SOLUTION TO GLOBAL WARMING & ITS OUTCOME

The Kyoto Protocol Kyoto Protocol is the UNs solution to global warming This is a legally binding treaty adopted by 120 countries, at the third COP of the UNFCCC in Kyoto on 11th December, 1997. Today the number of member nations is 150. Countries that ratify this protocol commit to reduce their emissions of CO2 and five other GHGs or engage in emissions trading if they maintain or increase emissions of these gases. The agreement requires 38 industrialised countries to reduce the emission of six major GHGs by 5.2% below the 1990 levels during the period 2008-12. 2008Countries that are not able to achieve their targets are liable for a punishment penalty.

Contd..
The countries/governments are divided into two groups. Annex 1 countries Non Annex 1 countries the developed / industrialised countries emitting maximum GHGs the developing countries which have no GHG reduction obligation. They may participate in the CDM.

Carbon trading is an outcome of the Kyoto Protocol wherein the companies of countries which produce CERs (Certified Emission Reductions) through reduction in emissions of GHGs can trade the same with companies in the Annex-1 countries requiring to buy CERs to Annexcomply with their GHG reduction norms.

What is Carbon Trading Carbon Credits/CERs

Carbon credits are generated when a company in a developing country such a India, China, South Korea, Brazil, Mexico uses better technology or process, which reduces the emission of any of the six GHGs in the atmosphere. Carbon trading is a system in which carbon is given an economic value based on the ability of the country owning it to store it or prevent it from being released into the atmosphere. Those buying carbon have the right to burn it. The reduction in emission of a GHG is calculated as CO2 equivalent and the Carbon Credits or Certified emission reductions (CERs) can be sold in the international market.

CDM & Carbon trading

Developing countries or Non Annex-1 countries Annexare incentivised to reduce emissions through a trading mechanism known as CDM or Clean Development Mechanism.  Under CDM, verified emission reductions can be converted to CERs for sale into developed or AnnexAnnex-1 countries enabling carbon trading between countries


AnnexAnnex-1 countries to achieve their targets through low cost emission reductions abroad, reducing cost to their own economies

Potential CDM Pipeline by Country & Technology

By Country (million tons of CO2e)
India, 322 Others, 414

Brazil, 153

India Mexico, 48 China Mexico Brazil China, 777 Others

Source : New Carbon Finance

By Technology (million tons of CO2e)

Others, 102 Nitrous oxides, 16 Energy efficency, 203 HFC, 17
493 126

Figs in million tons

336 310

Renewable, 808

Methane, 377
HFC Renew able Methane Energy efficency Nitrous oxides Others

Source: New Carbon Finance

 Of the 17 HFC projects - 4 are in India, 10 in China, 1 in Mexico, 1 in S.Korea.

Potential Indian projects expected: expected:

No. of Projects Renewable Energy Methane Energy efficiency Nitrous oxides Others HFC 335 22 131 51 4 543 MT of Co2e or CERs 116 6 61 60 79 322

Some examples of Indian Projects

HFCHFC-23 based CDM projects 4 projects expected to deliver over 80 mn CERs Mitsuibishi UFJ Securities 5 MW biomass power project at a wood processing facility in Haryana likely to deliver 290,000 CERs (0.29 mn.) Japan Carbon Finance sponsored five wind power projects (3 in Karnataka and 2 in Rajasthan) in India likely to deliver 4.3 mn CERs. JP Steel Plantechs 110 MW power project using waste heat at a steel mill in Orissa likely to deliver 5.6 mn CERs. Ricoh & Co. sponsored five wind power projects in India lkely to deliver 1.8 mn CERs.

Carbon Trading A Few Definitions

Additionality Under the Kyoto Protocol, certificates from JI and the CDM will be awarded only to projectproject-based activities where emissions reductions are additional to those that otherwise would occur Baseline and Baseline Scenario The baseline represents forecasted emissions under a business-as-usual (BAU) business-asscenario, often referred to as the baseline scenario, i.e. expected emissions if the emission reduction activities were not implemented. Carbon Dioxide Equivalent (Co2e) This is a measurement unit used to indicate the global warming potential (GWP) of greenhouse gases. Carbon dioxide is the reference gas against which other greenhouse gases are measured. Clean Development Mechanism (CDM) The CDM is a mechanism for project-based emission reduction activities in projectdeveloping countries. Certificates will be generated through the CDM from projects that leads to certifiable emissions reductions that would otherwise not occur.

Contd..
Commitment Period The five-year Kyoto Protocol Commitment Period is scheduled to run from fivecalendar year 2008 to calendar year-end 2012. yearConference of the Parties (COP) The COP is the supreme body of the United Nations Framework Convention on Climate Change (UNFCCC). Designated National Authority (DNA) To participate in CDM, a Party needs to appoint a Designated National Authority. The DNA issues the Letter of Approval (LoA) needed for registration of a project. A project will need both a host country approval as well as investor country approval. Designated Operational Entity (DOE) A domestic legal entity or an international organisation accredited and designated by the CDM EB. The DOE validates and requests registration of a proposed CDM projects activity as well as verifies emission reductions of a registered CDM project activity.

Contd..
Emission Reduction Purchase Agreement (ERPA) Binding purchase agreement signed between buyer (of CERs or ERUs) and seller. European Union Allowances (EUA) EU allowances, the tradable unit under the EU ETS. Equals 1 tonne of CO2.. Host Country A host country is the country where a JI or CDM project is physicaly located. A project has to be approved by host country t receive CERs or ERUs. National Allocation Plan (NAP) Allocation of emission allowances at the national level to individual sites under European Union Emissions Trading Scheme Project Design Document (PDD) Document completed by project developers in order to register their project under the CDM or JI.

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Validation The process of independent evaluation of a CDM project by an accredited Independent Entity according to requirements to CDM projects.

Source: Point Carbon

The CDM Project Cycle

Design
AE0

PP DOE

EB & COP/MOP DOE

Validation / Registration DNA EB Monitoring

Project development Licensing/permitting Contracts Fund-raising Project management Implementation Commissioning

PP

Verification/certification

DOE

Issuance

EB CER

Operational management Maintenance and replacement Servicing funders and buyers Ongoing verification

Key : AE = Applicant entity; DOE = Designated Operational Entity; EB = Executive Board; DNA = Designated National Authority; PP + Project proponent; CER = Certified Emission Reduction Source : UNFCCC

Project types (Examples)

Renewable

Waste

Transport

HFC & N2O

Energy efficiency

Coal, Oil and gas

CDM
THE PROCESS OF APPROVALS & EXECUTION
PHASE 1
Submit PDD to Indian DNA (MOEF) Week 5 Obtain Host Country Approval from DNA (MOEF)
Week 9 (Earliest)

Sign Contracts with approved Technology Supplier Week 1

Finalise PDD (Project Design Document) In approved format Week 4

Finalise Contract With Validation Agency (DOE) Week 4

Host PDD on DOE Site Week 10

Send final clarifications to DOE incorporating responses to any Public comments etc. Week 18

Obtain all Statutory Approvals (Pollution, Board, Factories Inspector, Local Municipal Authorities etc.) Week 18

Site Audit by DOE Week 15

One month for Public comments

Week 14

CDM
THE PROCESS OF APPROVALS & EXECUTION
Contd..
PHASE 2

Uploading of completed & validated PDD to CDM Executive Board Week 20

Get an assigned Locket No. From UNFCCC Week 20

Remittance of Registration fees & Submission of proof Week 20

OBTAIN REGISTRATION FROM UNFCCC Week 30

8 weeks mandatory Waiting period

Completeness check by CDM Office & Uploading Week 22

The Business Challenges

The first challenge of course is that the Kyoto Protocol is still young. CDM projects by definition of Additionality are tangential to PPs (Project proponents) core business. At times, the PPs staff may not be overly keen to take on additional responsibility or take the risk that implementing the project could have safety implications or cause interruptions to the core business. CDM projects are often one-off developments for the PP oneand there is often lack of cross-border funding, crossimplementation and project management expertise in this Space.

Contd
Converting potential CERs into real CERs typically entails a number of parallel project development activities each of which has its own challenges : Negotiations with ministries, other govt. authorities, local municipalities, NGOs, local public etc. in a public hearing process. Formalising of permits, licences, approvals, consents which inevitably leads to delays or unforeseen problems. Financiers due diligence (if external funding is sought). This can be tiresome in the detail with which they require assurances on technology performance, risk analysis, cost over-run & under performance scenarios and so on. over-

Contd
The last but perhaps the biggest business challenge is that while the Kyoto Protocol has matured to the implementation phase, there is an urgent need for the COPs

& the UNFCCC to conclude negotiations for post 2012 period.

Currently Kyoto exists only for 2008-12 & if project 2008developers are to embark on CDM projects now on, they need some comfort that CER trading will continue to exist post 2012.

References
www.unfccc.int  www.Wikipedia.org  Kyoto protocol to the united nations framework convention on climate change