Carbon Trading FDP

7/31/2019 Carbon Trading FDP

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Presented By:

Anu Sahi

Lecturer

APJIM Jalandhar

CarbonTrading: An

Innovative Financial Service


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Environmental Changes


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ContentsIntroduction

Origin of Carbon TradingUNFCCC & Kyoto Protocol

Clean Development Mechanism

Meaning Carbon Trading

Carbon Market

Carbon Transactions

Carbon Trading Mechanism

Approaches of Carbon Trading

Carbon Trading: Pros & Cons

Carbon Market potential

Indian Initiatives

Conclusion


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Meaning of Climate change Variation in the Earths global climate or in regional climates over time. It

describes changes in the state of the atmosphere over time scales

ranging from decades to millions of years.


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Carbon Emission: Reason for Climate Change


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Impacts of Climate Change

Forests

Biodiversity

Agriculture

Coastlines

Impact of rise intemperature of 1.8oC to 4oC


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Climate Change Impact in

India Rajasthan- Drought

Mumbai-Salt water intrusion

Kerala Productivity of Forest

Ganges Sedimentation problem

Sunder bans-Sea level raise

Northwest India-reduction In rice yield


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World Carbon Dioxide Emission

1990-2025


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Per-capita Carbondioxide Emission (Metric Tons)Country In metric tons

USA 20.01

Europe 9.40

Japan 9.87

China 3.60

Russia 11.71

India 1.02

World average 4.25


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Snapshot on CO2 Emission by Human Activities

Particulars Consumption units Amount of Co2released in atmosphere

Use of electricity 1 KW/hr 10kg

LPG 2 ltrs 3kg

Us of motorbike 1000 Km 84 kg

Traveling by car 1000 Km 200 kg


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Climate ChangeAvenues for controlling spread of carbon Carbon Capture and Sequestration (CCS), in which

carbon dioxide is caught at the point of production and piped

to a secure facility for long-term storage.

Carbon Emissions Trading, in which producers areallocated allowances for their anticipated carbon production,

and can sell any that they dont use (or buy what they need

to compensate for any over-production of carbon).


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Origin of Carbon Trading

UNFCCC & Kyoto Protocol The UN Framework Convention on Climate Change (UNFCCC) is one

of a series of international agreements and treaties on globalenvironmental issues that were adopted at the 1992 Earth Summit at

Rio.

It provides the overall policy framework for addressing the climatechange issue and so forms the foundation of global efforts to combatglobal warming.

The ultimate goal of the UNFCCC is: Stabilization of greenhouse gasconcentrations in the atmosphere at a level that would preventdangerous anthropogenic human induced interference with the climatesystem. (UNFCCC, 1992).


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Kyoto Protocol to the United Nations

Framework Convention on Climate Change Signed in 1997; Entry into Force on 16 February 2005

Ratified by >170 countries

Major non-participants: USA and Australia

Commits industrialised countries (Annex I) to reducing their greenhousegas emissions by, on average, 5% below 1990 levels in 2008-12

Individual, quantified emission targets for each industrialized country

Six greenhouse gases covered: CO2, CH4, N2O, HFC/PFC, SF6

Flexibilitymechanisms for financing emission reductions abroad: Clean Development Mechanism (CDM)

Joint Implementation (JI)

International Emissions Trading


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Flexibility Mechanism Clean Development Mechanism (CDM):The

opportunity for countries or companies to acquireCertified Emission Reductions (CER) that can be

used to meet their own commitments by investing inprojects in developing countries.

Joint Implementation (JI):The opportunity forindustrialized countries or companies with projects

in other countries which have signed the KyotoProtocol to acquire Emission Reduction Units (ERUs)that can be offset against their own commitments.


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Flexibility Mechanism. International Emissions trading (IET): A market-

based approach for achieving the environmentalprotection goals defined by the Kyoto Protocol.

This approach allows countries that reduce theirgreenhouse gas emissions further than required totrade their excess certificates to offset emissions fromother sources within or outside the country.


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CDM Objectives and Organization

Twin objectives of CDM: Help Annex 1 countries meet their GHG emission reduction objectives in a cost-

effective way Contribute to sustainable development of the host country

Involvement of Annex 1 Parties (buyers / investors) can take various forms: Most common: Purchase CERs from project proponent once they have been

generated (typically, long-term forward purchase agreements) Less common: Investment in CDM project receive (part of) CERs as return on

investment

Rules, modalities and procedures of CDM are defined in: Kyoto Protocol (1997) Decisions of CDM Executive Board

CDM Executive Board: Responsible for further development of CDM rules, and supervising

implementation Composed of 10 Members Reports to the Conference of the Parties (COP)


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Preparation of Project Design

Document

Host Country Approval to the

candidate project

Submission for registration

UNFCCC- CDM Board

Project performance monitoring by

project proponent

Certification and Issuance of CERs

Project

validation byUNFCCC and

DOE

One time activity

Recurring Activity

CDM Project Cycle


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Meaning of Carbon Trading

It is basically trading of certificates representingvarious ways in which carbon-related emissions

reduction targets might be met.


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Carbon Market Carbon Market can be defined as market place that

involves an entity preparing a contractual agreementdescribing and specifying the kind of activity undertakento reduce carbon emission.


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Carbon Market The types of transaction in carbon market can be:

Spot transaction: Delivery and payment occurduring a standard timeframe shortly after theagreement is executed

Forward settlement: Delivery of reductions andpayments are deferred to a future date also specified

at the time of trade. Options: It gives the option buyer or seller the right

but not the obligation to enter into a specifictransaction on or before a certain date.


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Carbon Transactions Allowance-based transactions,in which the buyer

purchases emission allowances created and allocated(or auctioned) by regulators under cap-and-traderegimes, such as Assigned Amount Units (AAUs)under the Kyoto Protocol, or EUAs under theEuropean Union Emissions Trading Scheme (EU

ETS).


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Carbon Transactions. Project-based transactions

In this the buyer purchases emission credits from aproject that can verifiably demonstrate GHG emissionreductions compared with what would have happenedotherwise.

The most notable examples of such activities are underthe CDM and the JI mechanisms of the Kyoto Protocol,

generating CERs and ERUs respectively.


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CERs and VERs Certified Emissions Reductions (CERs) are a

"certificate" just like a stock. A CER is given by theCDM Executive Board to projects in developing

countries to certify they have reduced green housegas emissions by one tonne of carbon dioxide peryear.

For example, if a project generates energy usingwind power instead of burning coal, it can reduce 50tonnes of carbon dioxide per year. There it can claim50 CERs (as one CER is equivalent to one tonne ofcarbon dioxide reduced).


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VER Voluntary Emission Reduction(VER) is also a

tradable commodity and refers to reduction of oneton of greenhouse gas. VERs are independently

verified by a third party according to criteria thatconfirm that the emission reductions are real,measurable and credible.

These independent auditors provide writtenassurance of the integrity of the emission reductions.


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Carbon Credit Carbon credit as defined by Kyoto protocol, is one metric

tonne of carbon emitted by burning of fossil fuels.

The GWP (Global Warming Potential) factors are used toconvert each of the five gases (like methane) that are notCO2 into tonnes of CO2 equivalent (CO2E), which is thestandard of trading.

On this basis, participants engaged in carbon trading buyand sell contractual commitments or certificates thatrepresent specified amounts of carbon-related emissions.


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Carbon Credit


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Carbon Trading Mechanism Carbon Trading mechanism includes:

Central Authority - which fixes the limit of amount ofpollutant that can be emitted by any sector.

This limit of allowed pollutants becomes the permit ofpollutants to be allowed in the environment.

This permit is devised into several smaller units anddistributed to several companies in the form of credit

or allowance or permit.


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Carbon Trading

Mechanism.


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Carbon trading Mechanism

ContdXYZ Company ABC CompanyXYZ has been allotted 10maximum unit of Green housegases(GHGs) that it can emit.

XYZ actually emits only 8 units ofGHGs.

XYZ will have Two units as creditoutstanding in its pollution account

Now XYZ will be able to transfer itstwo credit balance to two debitbalance account of ABC

ABC has also been allotted 10maximum unit of GHGs that it canemit.

ABC actually emits 12 units insteadof 10 units allotted to it.

ABC will have now Two units ofdebit balance in its pollutionaccount.

ABC will be buying two units fromXYZ and thus both the companiespollution account will be matchedand the environment also is able to

digest a certain scientifically fixedamount of pollutants.


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Approaches to Carbon TradingTwo Approaches:

Baseline and Credit Regime

Cap and Trade Scheme


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Approaches to Carbon Trading Baseline and Credit Regimes

It is a basically a voluntary approach. It does not set a fixedabsolute cap on the emissions from the sectors covered bythe regime.

The regulator of this approach places the target throughdefining a baseline.

Baseline is expressed in terms of emission efficiency. Emission efficiency is calculated in this approach in terms

of weight per unit of input, output or activity.

If the pollution exceeds the allowance given, the entitywould not forced to buy appropriate number of suchallowance from the open market .

In short it is basically a carrot approach


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Approaches to Carbon Trading

Cap and Trade Scheme

It is basically a non volunteer approach.

It sets fixed absolute cap on the emissions from the sectors coveredby the regime.

The regulator in this approach focused more on quantitative

measurement. The unit of measurement of emissions is in terms of metric ton of

carbon dioxide.

The polluting industries, are given a certain number of allowances,Certified Emission Reductions (CERs), each representing 1 metricton of CO2 on the basis of historic data and their capacities of

production.

If the pollution exceeds the allowance given, the entity would beforced to either buy appropriate number of such allowance fromthe open market or to pay hefty fines

In short, it is basically a stick approach since it is not voluntary innature.


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Transfer of

funds

Company Broker

yesAnalysis ofMarket data

Execution of

Order

Settlement ofTransaction

Clearing House

IsMarketprice

=LimitPrice?

No

Cap and Trade Mechanism


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ADVANTAGES OF CARBON TRADING


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Advantages of Carbon Trading It is the best way of reducing global warming.

It is profitable for business houses as well as it also helps thecompanies in achieving economical means of overall carbonreductions.

Emitters are given flexibility and control

Firms choose to emit/abate, not bureaucrats

Rewards innovation and investment in new technology

An incentive to go beyond minimum requirements

Common price signal ensures that reductions take place where theyare least costly

Achieves environmental goals at least cost

The overall cap on emissions ensures environmental objective isachieved.


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Advantages Contd

It helps in creating renewable energy projects anddevelop sources of renewable energy from windturbines and solar panels.

It helps in boosting the local economy, and the

opportunity to improve the quality of life for localinhabitants by initiating renewable energy projects.


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Disadvantages of Carbon Trading

Still requires monitoring, reporting, verification andcompliance infrastructure - like traditional regulation.

May result in increased local concentrations of emissions.

Price is uncertain determined by market

Relies on a price signal some markets may be less

efficient

Allocation of target/allowances is highly contentious.


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Legal & Regulatory Framework for Environment

Protection in India Water (Prevention and Control of Pollution) Cess

Act, 1977

The Air (Prevention and Control of Pollution) Rulesformulated in 1982

The Environment (Protection) Rules, 1986

The National Environment Appellate Authority Act,

1997 Ratification of UN Framework Convention on Climate

Change (UNFCCC), 1992

Convention on Biological Diversity, 1992


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Indian Initiatives Launch of Indian Satellite for monitoring GHG Gases

Expert group on low carbon economy

Energy Efficiency Standards for Appliances

Energy efficiency ratings made mandatory for 4 key appliances refrigerators, air conditioners, tube lights and transformers from

January 7, 2010. Fuel Efficiency Norms Plan for fuel economy norms for vehicles

announced; to be made operational in two years

National Policy on Bio-fuels approved by Cabinet to promotecultivation, production and use of Bio-fuels for transport and in

other applications Capacity Building in Forestry Scheme New: Rs 369 crore (USD

80Mn) scheme for HRD for forest personnel

Ambitious Rs 11,700crore (USD2.5Bn) Programme for forestconservation launched.


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Carbon Market Potential: The

Future of Carbon trading "The carbon economy is the fastest growing industry

globally with US$84 billion of carbon tradingconducted in 2007, doubling to $116 billion in 2008,and expected to reach over $200 billion by 2012 andover $2 trillion by 2020.

(World Bank Carbon Finance Report for 2007)


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Carbon Market Potential

Contd.. Carbon trading is one of the fastest-growing specialties in financial services.

Carbon will be the world's biggest commodity market.

The governments all over the world have begin to cap carbon emissions and

initiate trading schemes, thus, necessitating a need for regulatory bodies that

can measure and confirm reduced emissions.

According to World Bank estimates, India is expected to collect $100 million

annually by trading in carbon credits and greenhouse gas emissions are

expected to come down by 2.5 billion tone by 2012.

Indian companies are also expected to corner at least 10 per cent of the

global market in the initial years.


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Carbon Trading FDP

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