Eco Ahead

What is global warming?

Global warming is perhaps the most important environmental problem in the world today. Levels of greenhouse gases are increasing in the atmosphere due to human activities, and are changing the composition of the atmosphere and global warming. Climate scientists agree that human activities such as the burning of fossil fuels contribute to the problem.

Scientists have predicted the phenomemon of global warming for decades. Unfortunately, some of the adverse effects of global warming, they have also predicted begin to occur throughout the world, including:

* growing incidence of droughts in some areas, floods in others;
* The rising temperatures of oceans and the sea level;
* increase extreme weather events such as tornadoes and hurricanes;
* The melting of mountain glaciers and the reduction of snow cover;
* Dying coral reefs, and
* Coastal erosion, and loss of coastal ecosystems.

While a handful of skeptics continue to discuss science, the World ’scientists agree: science is in. Global warming is happening.

The Intergovernmental Group of Experts on International Climate Change (IPCC), an organization of more than 2000 climate scientists , has produced three scientific assessments concerning climate change and, in each, has concluded that global warming occurs, and is related to human activity. Their latest report (January 2001) stated that: “There is new and stronger evidence that most of the warming observed over the last 50 years is attributable to human activities.”

The US National Academy of Sciences (NAS) concluded in June 2001 that: “Greenhouse gases are accumulating in Earth ‘atmosphere as a result of human activities, causing air temperatures on the surface and subsurface of the Ocean temperatures on the rise. Temperatures are, in fact increasing. “And he added: ” national policy decisions made now and in the longer-term future will influence the extent of any damage suffered by vulnerable populations and ecosystems later in this century. ”

The World Meteorological Organization (WMO) issued an unprecedented alert in July 2003 warning that ” Extreme weather events Might Increase “in the world. The alert tied a record number of extreme weather events such as tornadoes and heat waves in 2003 to global warming. The alert said: “Record extremes in weather and climate events continue to occur around the world. Recent scientific assessments indicate that, as the global temperatures continue to warm due to climate change, the number and intensity of extreme events might increase. “Here in the United States, some states are taking action. The private sector is also responding to this challenge.

The Bush administration, unfortunately, has turned its back on this problem. Shortly after taking office in 2001, President Bush went back on a campaign promise to regulate carbon emissions from the power plants (a major source of pollution to global warming). The Climate Change Plan announced by President Bush in February 2002, calls for a 18 percent reduction of greenhouse gases “intensity ” in 2012, which translates into a 14 per cent more greenhouse gases during this period. As pointed out by the US General Accounting Office (GAO) in October, 2003 report, however, the “plan ” represents virtually ‘business as usual. ‘The report states: “While the emissions of greenhouse gases in the United States rose Significantly, the Energy Information Administration of the United States reported that the emission intensity has been generally declining steadily since 50 years. “The Bush Climate Change Plan allows greenhouse gases continue to rise while the long decline in emissions intensity is also continued.

Fortunately, the United States Congress are beginning to demand action in the light of the continued blocking of the Bush administration. In the very first Senate vote on a mandate of the American policy cuts greenhouse gases, which took place in October 2003, 43 members of the Senate voted in favor of the measure, with 55 voting members of the objection. The authors of legislation, Senator from Arizona John McCain and Senator Joseph Lieberman of Connecticut have promised to push for another vote on the bill, the Climate Stewardship Act, in 2004, and believe that they may even have enough votes for the measure to pass the Senate.

What are Rainforests?
Rainforests are defined by a few factors. Most importantly is the amount and distribution of rainfall. To be a rainforest it must have 200cm of rain a year. Tropical rainforests usually receive a more steady rain around the year while temperate rainforests can vary throughout the year with a pronounced dry season.

Where are they found?
Tropical rainforests are found in a belt around the equator. Half of the world’s rainforests lie within the borders of Brazil, Indonesia, and Zaire. Temperate raiforests extend well above these zones are dependent mostly on the rainfall throughout the year.

The Kyoto Protocol was created by the United Nations Framework Convention on Climate Change (UNFCCC).  This committee created the Kyoto Protocol in an attempt to deal with Global Warming.  It was recognized that Global Warming has been a result of Greenhouse Gas emissions and the committee realized that this is an international issue.  The focus of emission reduction is on carbon dioxide, but methane, nitrous oxide, PFCs and HFCs are also taken into account.  The Kyoto Protocol was the first internationally organized climate change plan.  Since the adoption of this plan in December 1997, 166 different countries and entities have ratified the plan (Requirements, 2005).  The figure below displays each country’s stance on the Protocol.

The Protocol divides the nations of the world into two categories.  Annex 1 countries are developed nations that are able to reduce emissions, while Non Annex 1 countries are developing nations that are not yet forced to reduce emissions, though they are still encouraged to (Requirements, 2005).  The goal of Kyoto is to lower the world’s average GHG emissions, so the UNFCCC first had to decide on a reasonable world reduction rate.  The rate was then split up between all the Annex 1 countries.  Original calculations lead the committee to ask for an 8% reduction in the European Union, a 7% reduction in the U.S. and a 6% reduction in Japan (Viguier, 2003).  Since the European Union signed as one entity, they are free to allocate different reduction goals to individual members as long as their overall goal is met.
The three methods currently being used to reduce emissions are the international trading, joint implementation, and clean development mechanisms.  Emissions trading encourages countries to reduce their emissions even below their goals.  They are then allowed to sell excess emissions to other countries.  Joint implementation encourages countries to work together to develop new reduction technologies.  For example, if two countries create, develop, and share a renewable energy source, they will both receive reduction benefits.  Finally, clean development mechanisms focus on Non Annex 1 countries.  For this method, Annex 1 countries can receive credits for investing in emissions reductions within Non Annex 1 countries (Requirements, 2005).
In analyzing the effects of the Protocol economically, it should be noted that the GDPs of the European Union countries and Japan have increased despite the economic burdens of GHG reduction technologies.  Marginal Abatement Curves show that the predicted costs of carbon dioxide reductions are actually less in the United States than in the European Union or Japan (Dgoumas, 2006).

The costs in the U.S. for a 10% reduction can be estimated using this abatement curve.  If the U.S. emits approximately 5.91 billion metric tons of carbon annually, 5.91 million metric tons would need to be eliminated each year (International, 2006).  Using the predicted $65 per ton of carbon, it would cost the United States $38,415,000,000 (Dgoumas, 2006).  Though 38 billion dollars seems like a huge amount, the annual GDP of the U.S. is nearly $12 trillion; making the cost of a 10% reduction approximated 0.33% of the GDP (United States, 2006).
Based on Kyoto’s recommended 7% reduction, the U.S. would still be permitted to emit 4.14 x 10^8 metric tons of carbon per year.  This 7% reduction would lead to an eventual stabilization, or even a decrease in global warming.  As the graph shows, a strong correlation exists between temperature change and atmospheric concentrations of CO₂, so it can be expected that if CO₂ emissions are decreased, temperature change will also begin to decrease.

Carbon credits are a key component of national and international emissions trading schemes that have been implemented to mitigate global warming. 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.

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 ^[4]. In turn these countries set quotas on the emissions of installations run by local business and other organizations, generically termed ‘operators’. Countries manage this through their own national ‘registries’, which are required to be validated and monitored for compliance by the UNFCCC^[5]. 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 permitting 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. 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 ratification came 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^[7]

• 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 six exchanges trading in carbon allowances: the Chicago Climate Exchange, European Climate Exchange, Nord Pool, PowerNext, Multi Commodity Exchange and National Commodity and Derivatives Exchange. 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.^{[citation needed]} 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 Assigned Amount 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

See also: Economics of global warming

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 is an Annex I country that enacts a law to limit 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 for that year. Instead it 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 offer to offset emissions through a project in the developing world, such as recovering methane from a swine farm to feed a power station that previously would use fossil fuel. So although the factory continues to emit gases, it would pay another group to reduce the equivalent of 20,000 tonnes of carbon dioxide emissions from the atmosphere for that 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 greenhouse gas 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 led 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^[9]

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 Protocol 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 ^[10].

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^[11]. 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 carbon sink activity, such as forestry or land use projects.