Role of Carbon Credits in Environmental Up Gradation

8/9/2019 Role of Carbon Credits in Environmental Up Gradation

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Executive summary:

The need for future action to reduce the risks of climate change has figured

prominently on the international agenda, a variety of approaches are being

implemented to reduce carbon emissions. These range from efforts by

individuals and firms to reduce their climate footprints to initiatives at city,

state, regional and global levels. Among these are the commitments of

governments to reduce emissions through the 1992 UN Framework

Convention on Climate Change and its 1997 Kyoto Protocol, and Europes

carbon constraint for electricity generators and industry under the European

Union Emissions Trading Scheme (EU ETS). The carbon markets are a

prominent part of the response to climate change and have an opportunity to

demonstrate that they can be a credible and central tool for future climate

mitigation.

The carbon market grew in value to an estimated US$30 billion in 2006 (23

billion), three times greater than the previous year. The market was

dominated by the sale and re-sale of European Union Allowances (EUAs) at a

value of nearly $25 billion under the EU ETS (19 billion). Project-based

activities primarily through the Clean Development Mechanism (CDM) and

Joint Implementation (JI) grew sharply to a value of about US$5 billion in 2006

(3.8 billion). The voluntary market for reductions by corporations and

individuals also grew strongly to an estimated US$100 million in 2006 (80

million). Both, the Chicago Climate Exchange (CCX) and the New

South Wales Market (NSW) saw record volumes and values traded in 2006.

EU ETS Phase I demonstrated that a carbon price signal in Europe

succeeded in stimulating emissions abatement both within Europe and

especially in developing countries. Following the release of verified 2005

emissions data, it became clear, however, that the 2005-07 emissions cap

had not been set at an appropriate level relative to what actual emissions

were in that period. As a result, market expectations and the Phase I price

signal were based on incorrect assumptions of the carbon constraint, leading

to high volatility in the EUA market. The EU Commission stated that Phase I

was a learning phase and assured the market that it would assess secondperiod plans in a manner that ensures a correct and consistent application of


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the criteria in the Directive and sufficient scarcity of 1allowances in the EU

ETS.

Market interest in the second half of 2006 shifted out of Phase I, and began to

focus on Phase II based on expectations that those caps would be much

more stringent. In contrast to a highly volatile 2006 EUA market, project-

based assets showed greater price stability, while transacted volumes also

grew steadily. Developing countries supplied nearly 450 MtCO2e of primary

CDM credits in 2006 for a total market value of US$5 billion (3.8 billion).

Average prices for Certified Emission Reductions (CERs) from developing

countries were up marginally in 2006 at US$10.90 or 8.40 (with the vast

majority of transactions in the range of US$8-14 or 6-11). China continued

to have a dominant market-share of the CDM with 61% and set a relatively

stable price floor for global supply of CERs.

In 2006, Joint Implementation (JI) projects from economies in transition saw

increasing interest from buyers, with 16.3 MtCO2e transacted (up 45% over

2005 levels) with Russia, Ukraine and Bulgaria providing more than 60% of

transacted volumes so far at an average price of US$8.70 (6.70).

Preliminary data for the first quarter of 2007 indicate at least the same

volumes had already transacted in the first three months alone.

Buyers found it easier to close transactions than six months earlier, while

sellers managed carbon price risk by favoring fixed price forward contracts.

CER assets traded considerably higher in secondary markets (in a range of

US$14.30-19.50 or 11-15) than in primary transactions, although accurate

volume data were difficult to confirm for secondary transactions.

Since 2002, a cumulative 920 MtCOe (equivalent to 20% of EU-15 emissions

in 2004) have been transacted through primary CDM transactions for a value

of about US$8 billion (6 billion). Hydro fluorocarbon (HFC-23) reduction and

nitrous oxide (N2O) destruction projects accounted for approximately half of

the market volumes, while renewable energy and energy efficiency

transactions together accounted for nearly 21% of the CDM market over the

same period.


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European buyers dominated the primary CDM & JI market with 86% market

share (versus 50% in 2005) with Japanese purchases sharply down at only

7% of the primary market in 2006. The U.K., where the City of London is

home to a number of global financial institutions, led the market for a second

consecutive year with nearly 50% of project-based volumes, followed by Italy

with 10%. Private sector buyers, especially banks and carbon funds,

continued to buy large volumes of CDM assets, while public sector buyers

continued to dominate JI purchases. A large number of international financial

institutions and funds engaged in secondary transactions of carbon portfolios

with other banks (primarily in Europe) or companies facing compliance

obligations (in both Europe and Japan).

European buyers reported that they increasingly asked for and obtained zero-

premium call options to purchase emission reductions beyond 2012. For the

most part, the strike price in these contracts was the same as the contract for

pre-2012 assets. Others reported a right of first refusal for post-2012 vintages

at a future time for an unspecified market price.

Outlook:

Most market players stated that considerable price risk and likely volatility

remained in the market for both CERs and EUAs. There is a consensus

emerging among market analysts that the expected shortfall in the EU ETS

Phase II is likely to be in the range of 0.9 billion to 1.5 billion tCO2e.Estimates

for not-yet-contracted volumes from JI/CDM and projected EU shortfalls are

very similar to each other in these projections (unless additional demand

before 2012 and the promise of higher prices stimulates additional JI/CDM

supply).

The current projected demand-supply balance excluding Canada (and

residual demand from Japan) implies that the price of CERs/ERUs is likely to

help set the market equilibrium price for EUAs in Phase II. EU ETS

companies would be the prime beneficiary of this balance provided that: nosignificant Japanese or Canadian competition appears for these assets; and


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provided that there are no surprises from higher than expected under-delivery

of CERs/ERUs; as well as no consistent anomalies over the five years from

weather or from fuel prices; or any major technological inflection points in that

time period. The prospect of EU ETS Phase III and the ability to bank

allowances across the second and third periods gives a longer time

planning horizon to market players considering new investments for

abatement from both the CDM/JI and marginal abatement within the EU.

The April 26, 2007 climate change announcement by the Government of

Canada calls for improvements in carbon intensity leading to an emission

target of 20% below 2006 levels by 2020 (assumed to be 150 MtCO2e by

Canada). The approach incorporates emissions trading and also includes the

idea of early action and banking and allows CERs for up to 10% of the

projected shortfall. If these assumptions are true, then some demand from

Canada could enter the CER market relatively soon.

Developments in California, the eastern United States and Australia hold

some promise of market continuity beyond 2012. There is continued debate,

especially in California, regarding whether emissions trading, including offsets

from overseas will be allowed. Precise rules to be developed will clarify to

what extent these emerging carbon markets will seek to maximize value from

high quality offsets no matter where they are sourced from. At least two

pending pieces of draft federal legislation before the U.S. Senate include

provisions that would welcome overseas credits.

The carbon market and associated emerging markets for clean technology

and commodities have attracted a significant response from the capital

markets and from experienced investors, including those in the United States.

Analysts estimated that US$11.8 billion (9 billion) had been invested in 58

carbon funds as of March 2007 compared to US$4.6 billion (3.7 billion) in 40

funds as of May 2006.50% of all capital driven to the carbon value chain is

managed from the UK. Most of the newly raised money, of private origin,

came to the sell-side (project development and carbon asset creation) whichcurrently represents 58% of the capitalization. A key indicator of interest in


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aligned and closely related fields is the record US$70.9 billion in clean

technology investments in 2006, with major investments (and

announcements) from well-known investment banks.

Most public companies in the carbon space are in a fast-growth mode and

are yet to show a profit. One public company delayed its public disclosure in

the wake of an unfavorable analyst report. Some companies cited the delay in

the operations of the International Transaction Log (ITL) as a risk that would

made it more difficult to earn and book revenues from CER spot sales this

year.

There was increased consolidation in the sector and evidence of growing

interest in the U.S. markets. A prominent investment bank bought a sizeable

stake in a leading project development and asset management company.

Another company acquired a boutique analyst firm in the United States, while

a third acquired a smaller company in Washington DC specializing in

developing Project Design Documents (PDDs). Several European entities

opened offices in the United States citing the need to develop a presence in

this potentially large market. Reports of early offset transactions in North

America filtered in with prices reported in a very wide price range starting at

around US$1.50, e.g. from pre-compliance buyers for emission reductions

from enhanced recovery from oil and gas fields.

The most promising impact of carbon markets has been its impact on

innovation as smart capital takes an early, long-term bet on the quickly

growing emerging market for environmentally-oriented investment. A key

indicator of interest in aligned and closely related fields is the record US$70.9

billion in clean technology investments in 2006, with major investments (and

announcements) from well-known investment banks.

In the emerging fragmented carbon marketplace, efforts to mitigate carbon

are multiplying in both the regulated and the unregulated sectors. Forregulated markets, emissions trading can help achieve a given level of


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emission caps efficiently by setting an appropriate price, but this requires that

policymakers set the caps consistent with the desired and scientifically

credible level of environmental performance. Regulated carbon markets can

only achieve environmental goals when policymakers set scientifically-

credible emission reduction targets while giving companies maximum

flexibility to achieve those goals. They also require clarity on the assumptions

for economic growth and baseline carbon intensity improvements, orderly and

transparent release of periodic market-relevant emissions data and the

imposition of strict penalties for fraud or non-compliance. The key elements

for well-functioning carbon markets include: competitive energy markets;

common, fungible units of measure; standardized reporting protocols of

emissions data; and transferability of assets across boundaries.

Markets can, to a certain extent, accommodate the appetite that individuals

and companies in Europe, Japan, North America, Australia and beyond have

for carbon emission reductions that go well beyond what their law makers

require of them. This high-potential voluntary segment, however, lacks a

generally acceptable standard, which remains a significant reputation risk not

only to its own prospects, but also to the rest of the market, including the

segments of regulated emissions trading and project offsets.

The enormity of the climate challenge, however, will require a profound

transformation, including in those sectors that cap-and-trade markets cannot

easily reach. These include making public and private investments in

research and development for new technology development and diffusion,

economic and fiscal policy changes, programmatic approaches to decouple

economic growth from emissions development as well as the removal of

distortion subsidies for high-carbon fuels and technologies.


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ROLE OF CARBON CREDITS IN ENVIRONMENTAL UPGRADATION

Introduction:

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 theircarbon footprint on a

voluntary basis. These carbons off setters 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.

In step with the dramatic rise in C02 emissions and other pollutants in recent

years, a variety of new financial markets have emerged, offering businesses

key incentives aside from taxes and other punitive measures to slow

down overall emissions growth and, ideally, global warming itself.

A key feature of these markets is emissions trading, or cap-and-trade

schemes, which allow companies to buy or sell credits that collectively bind

all participating companies to an overall emissions limit. While markets

operate for specific pollutants such as greenhouse gases and acid rain, by far

the biggest emissions market is for carbon. In 2007, the trade markets for C02

credits hit $60 billion worldwide almost double the amount from 2006.

The carbon credit scheme was set up to allow EU countries orcompanies that fail to meet designated emission reduction targets to
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avoid paying penalties by purchasing carbon credits. Carbon credits

are issued on projects around the world that result in reductions in the

emissions of greenhouse gases. They are also a traded by brokers to

facilitate exchange. For example the Multi Commodity Exchange of

India(MCX) has become first exchange in Asia to trade carbon credits.

India has apparently generated some 30 million carbon credits and has

roughly another 140 million to push into the world market.

Carbon credits are the certificates earned by projects that reduce

emissions of greenhouse gases.

Carbon credits are a new source of revenue that are in addition to revenue

from energy savings. Carbon credits are earned as part of the Clean

Development Mechanism (CDM).

Background:

Waste toEnergyProject

Energy Savings

Carbon Credits

Carbon Credit

Buyers

Credits

US$
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Burning of fossil fuels is a major source of industrial greenhouse gas

emissions, especially for power, cement, steel, textile, fertilizer and many

other industries which rely on fossil fuels (coal, electricity derived from coal,

natural gas and oil). The major greenhouse gases emitted by these industries

are carbon dioxide, methane, nitrous oxide, hydro fluorocarbons (HFCs), etc,

all of which have not yet been completely proven to 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 have 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 carbon trade is an idea that came about in response to the Kyoto

Protocol. Signed in Kyoto, Japan, by some 180 countries in December 1997,

the Kyoto Protocol calls for 38 industrialized countries to reduce their

greenhouse gas (GHG) emissions between the years 2008 to 2012 to levels

that are 5.2% lower than those of 1990.

The idea behind carbon trading is quite similar to the trading of securities or

commodities in a marketplace. Carbon would be given an economic value,

allowing people, companies, or nations to trade it. If a nation bought carbon, it

would be buying the rights to burn it, and a nation selling carbon would be

giving up its rights to burn it. The value of the carbon would be based on the

ability of the country owning the carbon to store it or to prevent it from being

released into the atmosphere. (The better you are at storing it, the more you

can charge for it.)

The carbon credit scheme was set up to allow EU countries or companies that

fail to meet designated emission reduction targets to avoid paying penalties

by purchasing carbon credits. Carbon credits are issued on projects aroundthe world that result in reductions in the emissions of greenhouse gases. They
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are also a traded by brokers to facilitate exchange. For example the Multi

Commodity Exchange of India (MCX) has become first exchange in Asia to

trade carbon credits. India has apparently generated some 30 million carbon

credits and has roughly another 140 million to push into the world market.

Terminologies Used in Carbon Market:

Carbon offset: An emission reduction that occurs outside of an industrial

arena that is regulated or capped and then credited to the capped industry.

A carbon offset is the process for reduction in greenhouse gas emissions.

Although there are six primary categories of greenhouse gases, carbon

offsets are measured in metric tons of carbon dioxide-equivalent (CO2e). One

carbon offset represents the reduction of one metric ton of carbon dioxide, or

its equivalent in other greenhouse gases.

There are two primary markets for carbon offsets. In the larger compliance

market, companies, governments or other entities buy carbon offsets in order

to comply with caps on the total amount of carbon dioxide they are allowed to

emit. In 2006, about $5.5 billion of carbon offsets were purchased in the

compliance market, representing about 1.6 billion metric tons of CO2e

reductions.

In the much smaller voluntary market, individuals, companies, or governments

purchase carbon offsets to mitigate their own greenhouse gas emissions from

transportation, electricity use, and other sources. For example, an individual

might purchase carbon offsets to compensate for the greenhouse gas

emissions caused by personal air travel. In 2006, about $91 million of carbon

offsets were purchased in the voluntary market, representing about 24 million

metric tons of CO2e reductions.

Offsets are typically generated from emissions-reducing projects. The most

common project type is renewable energy, such as wind farms, biomass

energy, or hydroelectric dams. Other common project types include energy

efficiency projects, the destruction of industrial pollutants or agricultural

byproducts, destruction of landfill methane, and forestry projects. Purchase

and withdrawal of emissions trading credits also occurs, which creates aconnection between the voluntary and regulated carbon markets.
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Carbon offsetting as part of a "carbon neutral" lifestyle has gained some

appeal and momentum mainly among consumers in western countries who

have become aware and concerned about the potentially negative

environmental effects of energy-intensive lifestyles and economies. The Kyoto

Protocol has sanctioned offsets as a way for governments and private

companies to earn carbon credits which can be traded on a marketplace. The

protocol established the Clean Development Mechanism (CDM), which

validates and measures projects to ensure they produce authentic benefits

and are genuinely "additional" activities that would not otherwise have been

undertaken. Organizations that have difficulty meeting their emissions quota

are able to offset by buying CDM-approved Certified Emissions Reductions.

The CDM encourages projects that involve, for example, renewable energy

production, changes in land use, and forestry, although not all trading

countries allow their companies to buy all types of credit.

The commercial system has contributed to the increasing popularity of

voluntary offsets among private individuals, companies, and organizations as

well as investment in clean technologies, clean energy and reforestation

projects around the world. Offsets may be cheaper or more convenient

alternatives to reducing one's own fossil-fuel consumption. However, some

critics object to carbon offsets, and question the benefits of certain types of

offsets.

Carbon project: The pollution-reducing activity that creates a credit, such as

planting trees or switching to clean, renewable fuel sources.

Carbon sink: Any project designed to capture and store carbon dioxide from

the atmosphere. For example, planting a forest of new trees to take in excess

carbon dioxide would be a carbon sink project.

Leakage: A problem with poor carbon credits, where a carbon-reducing

project saves one project by condemning another. For example, setting aside100 acres of California forest to capture carbon dioxide, while instead
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bulldozing a different 100 acres in Maryland that would have been left

standing had the California forest been harvested. A good carbon credit

should not suffer from leakage.

Additionality: A requirement for a good carbon credit, additionality means

that the carbon project has gone above and beyond business as usual. If

youre going to pay for a credit, that money must be vital for making the

carbon project happenit doesnt count as a credit if the project would have

happened anyway without your contribution.

A permit that allows the holder to emit one ton of carbon dioxide. Credits are

awarded to countries or groups that have reduced their green house gases

below their emission quota. Carbon credits can be traded in the international

market at their current market price.

Clean Development Mechanism?

International agreement to reduce green house gases:

EU Emissions Trading System requires EU countries to reduce

emissions of greenhouse gases by 6% during 2005-2007

Kyoto Protocol requires developed countries (Europe,Japan,Canada)to

reduce emissions of greenhouse gases by 5.2% during 2008-2012.

Clean Development Mechanism:

To meet these targets, developed countries can buy Carbon Credits

from emissions reductions projects in the developing countries,

through the clean development mechanism (CDM).

Currently 1420 CDM projects, representing 467 million tons of

emission reductions, varied at approximately US $2.5 billion.

Cap-and-trade scheme: A market approach to reducing greenhouse gases

that works by setting emissions targets. Governments or businesses that

reduce their carbon outputs in excess of the target can sell the difference to

those who produce more than the limit. This is the favored solution of many

business groups.


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MACs: Marginal abatement costs refer to the cost of cutting C02 emission,

which varies from country to country and industry to industry.

Free-market environmentalism: This theory holds that the free market,

which offers economic incentives, is the best tool to address global warming.

This view goes against the traditional approach to environmentalism, which

looks to government regulation to prevent environmental destruction.

How It Works?

Emissions limits and trading rules vary country by country, so each emissions-

trading market operates differently. For nations that have signed the Kyoto

Protocol, which holds each country to its own C02 limit, greenhouse gas-

emissions trading is mandatory. In the United States, which did not sign the

environmental agreement, corporate participation is voluntary for emissions

schemes such as the Chicago Climate Exchange. Yet a few general principles

apply to each type of market.

Under a basic cap-and-trade scheme, if a companys carbon emissions fall

below a set allowance, that company can sell the difference in the form of

credits to other companies that exceed their limits. Another fast-growing

voluntary model is carbon offsets. In this global market, a set of middlemen

companies, called offset firms, estimate a companys emissions and then act

as brokers by offering opportunities to invest in carbon-reducing projects

around the world. Unlike carbon trading, offsetting isnt yet government

regulated in most countries; its up to buyers to verify a projects

environmental worth. In theory, for every ton of C02 emitted, a company can

buy certificates attesting that the same amount of greenhouse gas was

removed from the atmosphere through renewable energy projects such as

tree planting.

What motivates buyers?


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Types of carbon credits:

Contractually-based credits

Compliancemarkets

Targetedoffsets

Voluntary orretail schemes

Mandatory legalobligation to reducegreenhouse gasemissions

Offset real or contingentrisks that regulatorybarriers may arise due to

significant greenhouseemissions of a project

Voluntary compliancetargets for public relations

purposes or to promoteproducts as climate-neutral

Market for Carbon

Credits

Projected 5 billionby end 2005

Voluntarycorporate andretail schemes

Buyer motivation

No govt-approvedor other standard

Associated rules

Govt-approvedVerification orother standard

EmissionsReduction

Species of credit

ApprovedAbatement Unitor VerifiedEmissionReductions

Example

GreenhouseFriendly

500 PPM

Kyotopre-compliance

Early corporate tocorporate carbontrades


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Regulatory-based credits

Structure of the carbon market:

Different contracting approaches

Created undermandatory(sometimesvoluntary)rules orregulatoryframework

Buyer motivation

Voluntary rules-

based tradingexchange

Associated rules

Mandatory cap &trade scheme

ExchangeAllowance

or ExchangeOffset

Species of credit

Abatementcertificate,Project-basedcreditor Offset

Example

Chicago Climate

Exchange

Mandatory cap &trade scheme

Allowance orUnit

EU Allowancesunderthe EU ETS

Certified EmissionReductions underCleanDevelopmentMechanism

Allowance-based transactions

UK ETS

EU EmissionTrading Scheme

Chicago ClimateExchange

NSW GreenhouseGas AbatementScheme

Project-based transactions

JI and CDM

Voluntary

Retail

OtherCompliance


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Emerging contracting approaches

Factors influencing the adoption of different approaches

Dealing with CDM risk in emission reduction purchase agreements

Key legal issues:

Managing and mitigating CDM risk

tandard sale agreementr contractually-basededits

Emission Reduction PurchaseAgreements forVerified Emission Reductions

Emission Reduction Purchasegreements for Kyoto Protocoledits or otheratutory-based credits

Commodity and derivativemarket-style agreements

Type of carbon credit Carbon credits from forestrysequestration

Type of tradeType of buyer

Defining the commodity

CERs delivered into a registry account?VERs delivered through provision of Verification Report?

Establishing and transferring legal title

Warranties and indemnities

Default, Termination and Compensation

On delivery or on payment?

CDM-specific or in relation to project generally?

Events of default and termination eventsCompensation amount market price, liquidated damages?


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Managing and mitigating Kyoto risk

Comments:

Range of motivations for buyers leads to complex markets

No one standard contract can accommodate range of market variables(beyond price, quantity, delivery) not common to all transactions

Risk

Failure to register or non-approval of methdology

Inaccurate validation/verification

Legal title disputes

CERs or VERsConditions precedent /

Suspensive conditions

Delivery shortfall provisionsBack-to-back with DOE agreement

Mitigation Strategy

Back-to-back with third party contracts

Warranties and representationsregarding legal title

Risk

CER market risk

Delivery risks

Registry delays and failures

Different pricing structuresFloors and ceilings

Direct issuance into buyers accountUndertakings regardingcommunicating with CDM EB

Mitigation Strategy

Undertakings regarding addingproject participantsAlternative delivery accounts


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Pioneering of standards demonstrate potential reduction in complexity

and hence increase in market efficiencies

But different risks for different projects still need to tailor standards

WHO IS SELLING?

China dominated the CDM market on the supply side with a 61% market

share of volumes transacted, down slightly from 73% in 2005 (Figure 4). Next

was India at

12%, recovering from 3% in 2005. Asia as a whole led with an 80% market

share. Latin America an early pioneer of the market accounted for 10% of

CDM transactions overall with Brazil alone at 4%. The share of Africa

remained constant, at about 3%; however African volumes transacted

increased proportionally to the increase of overall volumes transacted. The

authors estimate that since 2003 some 30 MtCO2e originating from Africa

have been transacted on the Primary CDM market, nearly two-thirds of that

volume being from either North Africa or South Africa. The other countries of

sub-Saharan Africa account for just over 10 MtCO2e.

Location of CDM Projects

Historically, China has represented 60% of the cumulative CDM market since

2002 and 50% of the 45 UNEP/RISOE CDM pipeline as of the end of March

2007. China is still extremely attractive for buyers, despite some concerns

about geographical concentration of such high volumes of carbon. In our

interviews, buyers confirmed their efforts to diversify the geographical

distribution of their

portfolio but in the meantime acknowledge the huge potential still available

from China (bringing economies of scale in exploration, sourcing and

transactions costs) together with its favorable carbon investment climate

(strong support from institutions and experienced project developers).

In addition to building a significant pipeline, Chinese institutions have been

also able to diversify its content, by orienting its deployment towards priority


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sectors, such as renewable energy (wind, hydro long present and biomass

coming), energy efficiency improvement in the industrial sector, and methane

recovery and utilization. Some larger buyers, who built their project portfolios

in China,

have begun to look for diversification from industrial assets in China and are

reportedly seeking to re-sell parts of their existing portfolio to others, including

smaller buyers.

Meanwhile, carbon funds and other large buyers are busy closing transactions

for new different primary assets in China (renewable energy, biomass etc.) as

well as in other regions and countries.

Following the few large HFC destruction projects in late 2005 and early 2006,

there were 225 projects that entered the China project pipeline in the course

of 2006 (nine times the cumulative number of projects from the inception of

the pipeline up to December 2005). Although relatively smaller on average,

these new projects have the potential to deliver almost twice as many

expected emission reductions before 2012 as the ones prior to December

2005.

India has a relatively low market share at 12%. However, India is second (at

17%) only to China in the CDM pipeline by the number of expected CERs by

2012 and first by volumes of issued CERs to date at about 18 million (coming

mainly from two HFC projects). This is partially as a consequence of the

relatively small size of projects (70% of projects with deliveries below 50

MtCO2

e per annum).

A concerted effort to increase the participation of banks and appropriate

intermediaries or bundling agents to increase the average project size could

help attracting private carbon buyers to India. Others have pointed out difficult

negotiations, with high price expectations from the seller-side that may have

driven buyers to other countries. There is evidence, however, of this issue

becoming less of a constraint in recent months. Increasingly, Indian financial


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institutions have entered the market by wrapping the credits for guaranteed

delivery sale at a premium to un-guaranteed delivery sales.

There are several unilateral CDM projects in India, where project entities

finance the registration of projects themselves in the hope of selling issued

CERs on a spot market in order to attain a better price than they could by

selling forward streams of CERs. There long has been speculation that the

owners of issued CERs might prefer to hold on to these assets in the belief

that prices would continue to rise above the current value of EUAs (which is

used as benchmark price in India). However, recent trends seem to

contradict this, with indications of issued CERs coming to the market as well

as projects with forward streams.

With the ITL up and running, this trend could even accelerate with greater

access to sellers through auctions or exchanges.

Systematic Bias in Favor of Large, Industrial Opportunities?

All of Africa (including South Africa and the countries of North Africa) remain

at 3% of the market, and all the other countries of Sub-Saharan Africa

account for just about one third of that number. These numbers clearly

demonstrate the difficulty of expanding carbon business in much of Africa,

where electricity access is a major challenge and therefore mitigation

opportunities are also limited, e.g. in Uganda or Zambia, just around 10% of

the countrys population has access to the grid for electricity. Yet, a clean,

grid-connected electricity project in such a country has to demonstrate under

CDM rules that it displaces carbon-intensive electricity on its grid; the fact

that it derives mainly power from clean hydro sources is seen as a reason for

it not to receive credits for proposed new clean energy sources.

This unintended consequence unnecessarily punishes the poorest people in

poor countries, who can least afford to use expensive diesel, kerosene or fuel-

wood for their basic needs. The poorest usually forego even the most basic

benefits of modern energy services that so many others take for granted. No

approved methodology exists as yet through which countries with such

obvious energy needs such as these can be rewarded for clean development.The broader eligibility of projects expanding opportunities for clean electricity


21/64

in countries with largely hydro grids would help make more development

opportunities available for people, with CDM playing a role in helping to meet

their aspirations.In these cases, a simple methodology could consider using a

proxy for the current use ofdiesel generators, kerosene lamps and fuel-wood

as part of the baseline, and multiplying that with a large correction factor to

compensate for the suppressed demand.

In the next decade, many African countries will embark on major new

infrastructure development, including regional transmission and regional

power markets, which could enable, for example, clean hydro to be generated

where the resources are (e.g. Mozambique) and transmitted to where the

demand is (e.g. South Africa, where cheap coal is plentiful). It is important

that investments be encouraged to be low emissions to the extent possible.

The CDM rules should also consider why opportunities in the agricultural and

forestry sectors demonstrating real reductions should not be encouraged in

the same way as some opportunities in mitigation from the energy and

industrial sectors are. Even within the limitations of the current CDM rules,

African countries have demonstrated the potential of such opportunities to

mitigate (and help poor communities and ecosystems adapt to climate change

risk). This creates a wealth of experience on innovative ways to sequester

carbon through afforestation and reforestation activities that also deliver

strong local community, environmental and economic benefits.

African countries may do well to look even further beyond the CDM at the

quick growing carbonmarket in the voluntary and retail segments. The

voluntary market expected to expand exponentially in the coming years with

growing popular interest in mitigating climate change could also be an

opportunity for countries that have had limited access to the current

compliance-driven global carbon market. It may be too late for some African

countries to raise awareness from both public and private stakeholders, to

develop institutional capacities and technical expertise and source projects in

the 2012 timeframe. Alternative sources of demand such as the voluntary


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far). Preliminary analysis of the overall project yield (defined as the ratio of

the actually issued

CERs to the expected emission reductions according to the project design

document over the same period) indicates an average yield of 80% across all

asset classes with considerable fluctuations across asset classes and within a

given asset class. In particular, carbon assets from LFG score the lowest,with

an expected yield close to 20%. Reasons cited include, among others,

overestimation of the potential generation of gas at the modeling stage,

inadequate design of gas capture systems, sub-optimal operation of the

landfills, or other external factors. A delay in a projects start date caused by

something unrelated to the carbon process (e.g., difficulties in obtaining the

required equipment, a late permit, or the failure to close its financing as

expected), can substantially reduce the likely volumes that can be delivered

by 2012.

Share of Clean Energy Jumps

Carbon credits derived from renewable energy saw their share increasing by

50% in 2006, at 16% compared to 10% in 2005, buoyed mainly by Chinas

decision to identify these alternative sources of energy as a priority. The

share of transactions from energy efficiency projects and fuel switching

projects increased dramatically from 1% last year to 9% in 2006. Those were

mostly energy efficiency projects at industrial facilities. Demand-side

management energy-efficiency projects were held back by methodological

challenges (additionality requirements for activities that are considered

economically rational or because of issues with monitoring). It is, of course

the case, that many economically rational activities are not always

implemented for a wide variety of reasons, e.g. barriers to information or

inertia in consumer behavior.

Market Structure & Methodology:


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Setting the stage: allowances & project-based transactions in the

carbon market:

Carbon Transactions are defined as purchase contracts whereby one party

pays another party in return for GHG emissions reductions or for the right to

release a given amount of GHG emissions that the buyer can use to meet its

compliance or corporate citizenship objectives vis--vis climate change

mitigation. Payment is made using one or more of the following forms: cash,

equity, debt, convertible debt or warrant, or in-kind contributions such as

providing technologies to abate GHG emissions.

Carbon transactions can be grouped into two main categories:

Allowance-based transactions, in which the buyer purchases emission

allowances created and allocated (or auctioned) by regulators under cap-and-

trade regimes, such as Assigned Amount Units (AAUs) under the Kyoto

Protocol, or EUAs under the EU ETS. Such schemes combine environmental

performance (defined by the actual level of caps set) and flexibility, through

trading, in order for mandated participants to meet compliance requirements

at the lowest possible cost;

Project-based transactions, in which the buyer purchases emission credits

from a project that can verifiably demonstrate GHG emission reductions

compared with what would have happened otherwise. The most notable

examples of such activities are under the CDM and the JI mechanisms of the

Kyoto Protocol, generating CERs and ERUs respectively.

Carbon cap-and-trade regimes currently in place allow, for the most part, for

the import of credits from project-based transactions for compliance purposes.

This helps to achieve the environmental target cost effectively through access

to mitigation potentials from additional sectors and additional countries.

Once project-based credits are issued and are finally delivered where and

when desired


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for compliance, then they are at that time fundamentally the same as

allowances.

Unlike allowances however, project-based credits are compliance assets that

need to be created through a process that has certain risks inherent with it

(regulation, project development and performance, for instance) and can

involve significantly higher transaction costs. Such risks are addressed

through contractual provisions that define how they are allocated between

parties, and, along with other factors, are reflected in the value of the

transaction. Through the second half of 2006, a secondary market for CERs

has grown in activity, bringing to buyers (almost) standardized compliance-

grade assets coming with guaranteed deliveries for firm volume deliveries.

Segments of the carbon market :

There are several fragmented carbon markets, encompassing both

allowances and project-based assets that co-exist with different degrees of

interconnection. These carbon markets are each complex and fast-moving

and they continue to be influenced by both the development of policy and

regulation that led to their creation and by market fundamentals. These

markets are developed to different degrees in different parts of the world as

national and regional policies themselves evolve. In 2006 and the first quarter

of 2007, there were important regulatory developments in North America and

Australia with initiatives to manage GHG emissions at least at regional levels.

The carbon markets can be segmented in a number of different ways: chief

among these being, compliance or non-compliance, and mandatory or

voluntary markets. Buyers largely engage in carbon transactions because of

carbon constraints (current or anticipated) at international, national or sub-

national levels. Markets can also be segmented by size and value: the Kyoto

Protocol is the largest potential market and the EU ETS, a tributary scheme,

has spawned a thriving market in the trade of allowances and for the import of

project-based reductions.

The main compliance buyers are:


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- European private buyers interested in the EU ETS,

- Government buyers interested in Kyoto compliance,

- Japanese companies with voluntary commitments under the Keidanren

Voluntary

-Action Plan,

- U.S. multinationals operating in Japan and Europe or preparing in advance

for the Regional Greenhouse Gas Initiative (RGGI) in the Northeastern U.S.

States or the California Assembly Bill 32 establishing a state-wide cap on

emissions,

- Power retailers and large consumers regulated by the New South Wales

(NSW) market in Australia,

-and North American companies with voluntary but legally binding compliance

objectives in the Chicago Climate Exchange (CCX).

There is also a growing retail carbon segment that sells emission reductions

to individuals and companies seeking to offset their own carbon emission

footprints. Reports of increased interest of banks, credit card issuers, private

equity funds and others in this segment suggest that it could grow

exponentially if only there were a credible, voluntary standard for such assets.

Methodology:


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Accurately recording the project-based transactions market is becoming moredifficult each year since the number of transactions together with the diversity


29/64

of players involved is increasing dramatically. Prices and contract structures,

in particular, are confidential in an increasingly competitive market. The

authors have collected information from direct interviews and as well as a

review of the major relevant carbon-industry publications.

Natsource was also engaged to lead a series of parallel interviews of private

companies (in Europe and in Japan), fund managers and traders to gain a

broader

view on the state and tends of the market. Our focus is on regulatory

compliance; therefore our coverage of the voluntary segment of the market is

not exhaustive. Retail price data are reported to show how they differ from

the biggest segments of the market. For the most part, the information

provided here on the voluntary market is from preliminary results of a

forthcoming report that the authors agreed to share with us.

The information gathered has been aggregated in a database of more than

930 project-based transactions between 1996 and end of March 2007. Only

signed emission reductions purchase agreements (ERPAs) are included.

Although the study received a very high level of cooperation from most market

players, the authors were not able to obtain complete data for all reported

transactions. The completeness of data exceeds 80% in most cases except

for information related to contractual terms, especially prices, where reliable

data were obtained for only slightly more than 60% of the volume. Prices are

expressed in nominal US$ per TCO2e. In between the periodic reports in this

series, the authors have occasionally become aware of unrecorded

transactions from previous years

that have now been included in the database. This (upward) revision explains

why data for the previous years may be slightly different from previous

publications in this series.

The authors are relatively confident that the projects database for this series

captures most transaction activity entered into by governments and a high

proportion of all primary transactions. This confidence does not extend to themany secondary market project transactions that have not been captured by


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the database. Rather than estimate these, only those have been reported for

which reliable data exists. For this reason, the authors consider that the

analysis in this series provides a rather conservative estimate of the carbon

market, one that provides a good representative view of the carbon market.

The reader is invited to do his or her own comprehensive due diligence of the

market prior to taking any financial position, and in this regard nothing in this

report should be seen as constituting advice to take a position on the market

as a whole, or any component there-of.

In contrast to the projects-based market, daily price and volume information

on allowances markets is available online. The report draws on data collected

from the various trading platforms as well as aggregated information on the

volume known to have been exchanged over-the-counter for the EU ETS.

The authors have also obtained detailed information on transactions

conducted under the CCX,

as well as aggregate information on transactions under the NSW Trading

Scheme.

Emission allowances:

The Protocol agreed 'caps' orquotas on the maximum amount ofGreenhouse

gases for developed and developing countries, listed in its Annex I . 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. Each operator has

an allowance of credits, where each unit gives the owner the right to emit one

metric tone ofcarbon 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 themost cost-effective way of reducing its emissions, either by investing in
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'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.

UnderJoint Implementation (JI) a developed country with relatively high costs

of domestic greenhouse reduction would set up a project in another

developed country.
http://en.wikipedia.org/wiki/European_Unionhttp://en.wikipedia.org/wiki/European_Union_Emission_Trading_Schemehttp://en.wikipedia.org/wiki/European_Commissionhttp://en.wikipedia.org/wiki/List_of_Kyoto_Protocol_signatorieshttp://en.wikipedia.org/wiki/Ratificationhttp://en.wikipedia.org/wiki/United_Nations_Framework_Convention_on_Climate_Change#Annex_I_and_Annex_II_Countries.2C_and_Developing_Countrieshttp://en.wikipedia.org/wiki/Anthropogenichttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Australiahttp://en.wikipedia.org/wiki/Carbon_offsethttp://en.wikipedia.org/wiki/Carbon_projecthttp://en.wikipedia.org/wiki/UNFCCChttp://en.wikipedia.org/wiki/Certified_Emission_Reductionhttp://en.wikipedia.org/wiki/Joint_Implementationhttp://en.wikipedia.org/wiki/European_Unionhttp://en.wikipedia.org/wiki/European_Union_Emission_Trading_Schemehttp://en.wikipedia.org/wiki/European_Commissionhttp://en.wikipedia.org/wiki/List_of_Kyoto_Protocol_signatorieshttp://en.wikipedia.org/wiki/Ratificationhttp://en.wikipedia.org/wiki/United_Nations_Framework_Convention_on_Climate_Change#Annex_I_and_Annex_II_Countries.2C_and_Developing_Countrieshttp://en.wikipedia.org/wiki/Anthropogenichttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Australiahttp://en.wikipedia.org/wiki/Carbon_offsethttp://en.wikipedia.org/wiki/Carbon_projecthttp://en.wikipedia.org/wiki/UNFCCChttp://en.wikipedia.org/wiki/Certified_Emission_Reductionhttp://en.wikipedia.org/wiki/Joint_Implementation


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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.

Kyoto Protocol

Adopted in Kyoto

Intl. Agreement

AA

Targets reducingGHG

Ratified Nations

Cap & Trade System

DD

BB

CC

EE

37 IndustrializedCountries &

European Community

Japan11th Dec9716th Feb05

Till date180nations

AssignedAAUs & itstrading

Linked toUNFCCC
http://en.wikipedia.org/wiki/Clean_Development_Mechanismhttp://en.wikipedia.org/wiki/Clean_technologyhttp://en.wikipedia.org/wiki/Clean_technologyhttp://en.wikipedia.org/wiki/Land_use,_land-use_change_and_forestryhttp://en.wikipedia.org/wiki/Clean_Development_Mechanismhttp://en.wikipedia.org/wiki/Clean_technologyhttp://en.wikipedia.org/wiki/Clean_technologyhttp://en.wikipedia.org/wiki/Land_use,_land-use_change_and_forestry


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The Growth of Project Based Market

Buyers:

EU ETS market (2007) worthUS$ 50.02 Billion, 2.06million tCO2e

New South Wales market(2007) worth US$ 224million,25 million tCO2e

Chicago Climate Exchange(2007) worth us$ 72

million, 23 million tCO2e

Primary CERs market worthUS$ 7.4 Billion, 551million tCO2e

Secondary CERs marketworth US$ 5.54 Billion,240 million tCO2e

ERUs market worth US$ 499million, 41 million tCO2e

Voluntary Market worth US$265 million, 42 milliontCO2e

Global carbon market (2007)US$ 64 bn

Project Based MarketAllowance Based Market

n


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Analysis of Top 5 Buyers:

Credits from Hydro are the 1st choice of the investors.

Lots of investment is pooled in Biogas projects.

Interest can also be seen in Biomass energy followed by EE

own generation.

A significant amount of investment is made in Wind projects by

each investor.

UK, 54%

Spain

5%Austria

2%Europe-

Baltic Sea

5%

Netherlands

2%Japan

6%

Others

13%Other

Europe

4%

Italy

9%

Overall Volume 553 MtCO2e in 2006

Japan, 11%

UK, 59%

Austria, 2%Italy, 4%

Spain, 4%

Europe-Baltic

Sea, 12%

Others, 2%Other Europe,

6%

Overall Volume 592 MtCO2e in 2007

Source World Bank Report

Choice of the buye

0

50

10 0

15 0

20 0

25 0

30 0

EcoSecurit ies (UK)Carbon Asset

Management

Sweden

EDF Trading (UK)IBRD (World Bank)Cargill International

(Switzerland)

Organizat io

No

ofProjects

Others

Wind

N2 O

Landfill gas

Hydro

Fossil fuel switch

EE own generat i

EE industry

Biomass energy

Biogas

Agriculture

Source - UNFCCC


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CER Sellers:

China was again the destination for the buyers to buy CERs in2007 with the share of 73% in total transacted volume.

India stand second with total contribution of 6%.

Brazil contribution was of 5%.

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.

As a share of Volume supplied in 2007

R. of Latin

America, 5%

India, 6%

R. of Asia, 5%

Africa, 5%

ECA, 1%

Brazil, 6%

China, 73%
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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 optionsmarket 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 one of the

exchanges.

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. 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." [8] Carbon Credits are easy means for earning money.

Setting a market price for carbon:

Unchecked, energy use and hence emission levels are predicted to keeprising over time. Thus the number of companies needing to buy credits will
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increase, and the rules ofsupply 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 homogeneity between

projects which causes difficulty in pricing, as well as questions due to the

principle ofsupplementarity 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:

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 otherliabilities orassets.

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.
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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 ofSupplementary 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 legitimatelyled to the reduction of real, measurable, permanent emissions is
http://en.wikipedia.org/wiki/Carbon_taxhttp://en.wikipedia.org/wiki/Hypothecationhttp://en.wikipedia.org/wiki/Commodityhttp://en.wikipedia.org/wiki/Supplementarityhttp://en.wikipedia.org/wiki/Clean_Development_Mechanismhttp://en.wikipedia.org/wiki/Clean_Development_Mechanismhttp://en.wikipedia.org/wiki/Carbon_projecthttp://en.wikipedia.org/wiki/Carbon_projecthttp://en.wikipedia.org/wiki/Carbon_taxhttp://en.wikipedia.org/wiki/Hypothecationhttp://en.wikipedia.org/wiki/Commodityhttp://en.wikipedia.org/wiki/Supplementarityhttp://en.wikipedia.org/wiki/Clean_Development_Mechanismhttp://en.wikipedia.org/wiki/Clean_Development_Mechanismhttp://en.wikipedia.org/wiki/Carbon_projecthttp://en.wikipedia.org/wiki/Carbon_project


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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.

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."
http://en.wikipedia.org/wiki/Carbon_projecthttp://en.wikipedia.org/wiki/Carbon_project


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Case Studies:

Carbon Credit Potential in ICF International(Sugar & Distillery Sectors):

ICF is one of the worlds largest specialist energy and environment

consulting firms

Publicly traded company (NASDAQ: ICFI)

40 years of experience and sustained profitability

Worked extensively with energy companies, governmental and non-

governmental agencies worldwide

2,200 employees

$500 million revenues

More than 150 CDM/JI projects

Headquartered in Fairfax, Virginia

15 offices around the United States

International offices in London, Moscow, New Delhi, Rio and

Toronto

What is in the mind of a Distiller?

Carbon credits can be generated

Money can be earned, atleast till 2012

But is it really possible?

Are consultants taking us for a ride?

So far no one has really seen CC dollars!

Confusion! Caution!! INACTION.

Does Distillery qualify for CDM?

It is not the Distillery or Dairy or any other industry, which automatically

qualifies for CDM

It is the Scientific action plan, which ensures reduction in GHG

emissions, especially Methane, qualifies for CDM/CC

CDM projects must satisfy three criteria:

Voluntary participation


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Project activity must result into emission reductions that are real,

measurable and offer long term sustainable development in the host

country

Emission reductions must be additional to what would occur in the

absence of the project activity.

CDM projects in Sugar Mills and Distilleries Bagasse-based co-generation at sugar mills

Electricity exported to grid displaces grid-electricity

Distillery effluent (spent-wash) treatment

The biogenic spent-wash leads to methane emissions

Composting leads destructs methane emissions and is potential

CDM project

Bio-methanation extracts methane from the spent-wash Methane could be used for heat or power generation

CDM process is lengthy but well definedProject note

Projectdesigndocument

DNAapproval

Methodology

Host Country DNA

DOE(Validation)

UNFCCC EB

CommentPeriod

Registration

DOE (Verification) UNFCCC EB CER

~

6 - 8 m o n t h s

~

4 m o n t h s

An

n u a l l y

CommentPeriod


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Is a potential CDM project

Baseline scenario and additionality arguments need to be in place for

CDM to happen

Carbon credits could offset investment:

Distillery

Capacity: 30klpd operating 270days/annum

Spent-wash produced: 320klpd/day

0.068tCOD/kl

Activity

RO/Evaporation to reduce spent wash volume by 60%

COD of the reject: ~0.17tCOD/kl

Composting of this reject with press-mud

Leads to ZED destructs potential CH4 emissions

CDM Impact

Composting produces 25K CERs p.a.

A version of methodology may lead to ~5K CERs p.a.

@ 6/CER makes 150,000 , i.e. INR 82.5lakh

These credits accrue for 10 years

Case Study Bio-methanation

Distillery

Capacity: 30klpd operating 270days/annum

Spent-wash produced: 320klpd/day

0.068tCOD/kl

Activity

Bio-methanation achieves 70% destruction in COD

CDM Impact


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Composting produces 20K CERs p.a.

@ 6/CER makes 120,000 , i.e. INR 62lakh

These credits accrue for 10 years

Baseline Scenario

Project Activity

DistillerySpent Wash

Alcohol

Open Lagoons

CH4

Emissions


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Steps of Calculations

Parameters to be Monitored

Bio-digester

Reverse Osmosis/Evaporation

Composting

Distillery

Distillery

SpentWash Bio-digester

Methane

S

W

Evaporator

Reverse

Osmosis

SW

Compost

Incinerator

Generator

Boiler

Alcohol

Clean Water

SteamCO

2

PowerCO

2

HighVolume

HighCOD

HighVolume

LowCOD

HighVolume

LowCOD

HighCOD

LowVolume

COD completelydestructed


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Bio-digestion:

Project Activity:

CDM @ Bio-digestion :

Evaporator

Biodigester

Compost

Vol. of SpentWash

COD of theSpent Wash

Quantity ofMethane

COD of theoutput

Vol. of theoutput

Vol. of theoutput

COD of theoutput

Depth of thelagoon Lagoon-ingPeriod Average MonthlyTemperatureCOD of the SWcomposted

Distillery Spent WashBio-digesterMethane

SW

Evaporator

Reverse

Osmosis

SW

Compost

Incinerator

Generator

Boiler

Alcohol

Clean Water

CO2

SteamCO

2

PowerCO

2

HighVolume

HighCOD

HighVolume

LowCOD

HighVolume

LowCOD

HighCOD

Low

Volume CODcompletelydestructed


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The bio digestion process extracts methane from SW

Methane is GHG with global warming potential of 21

One tonne of methane = 21 tonnes of CO2

The methane so extracted could be further:

Incinerated

Heat production

Electricity production

Methane is a clean fuel

Use of methane for energy begets additional CDM benefits (displacing

fossil fuel from baseline)

No reduction in the volume of the SW

COD of the spent wash is reduced considerably.

Reverse Osmosis & Evaporation

DistillerySpent WashBio-digesterMethane

S

W

Evaporator

Reverse

Osmosis

SW

Compost

Incinerator

Generator

Boiler

Alcohol

Clean Water

CO2

SteamCO

2

PowerCO

2

HighVolume

HighCOD HighVolume

LowCOD

HighVolume

LowCOD

High

COD

Low

Volume


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Project Activity

Reverse Osmosis/Evaporation

No direct carbon credit benefit

Does not lead to emission reduction Both the processes require energy and lead to emissions

Distillery

Spent WashBio-digesterMethane

SW

Evaporator

Reverse

Osmosis

SW

Compost

Incinerator

Generator

Boiler

Alcohol

Clean Water

CO2

Ste

amCO2

PowerCO

2

HighCOD

HighVolume

LowCOD

HighVolume

Low

CODHighCOD

LowVolume

DistillerySpentWash Bio-digester

Methane

SW

Evaporator

Reverse

Osmosis

SW

Compost

Incinerator

Generator

Boiler

Alcohol

Clean Water

CO2

SteamCO

2

PowerCO

2

HighVolume

HighCOD

HighVolume

LowCOD

HighVolume

LowCOD

HighCOD

LowVolume COD completely

destructed

HighVolume


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Reduces the overall emission reduction from the project activity

Reduces the volume of spent wash to be used for composting

Reduction of volume is important as press-mud is in limited

supply

Composting

CDM in Composting leads to 100% destruction of methane.

Composting destructs the high COD content of the spent wash

Destruction of COD leads to methane emission reduction

Methane emission destruction through composting qualifies as

CDM project

Methane emission happens due to anaerobic decomposition of spent

wash in the lagoon

Lagoon depth and lagoon temperature decides the methane

emission potential of the process

CDM requires quality composting and monitoring of composting

process to qualify for carbon credits year-on-year

Project Activity:


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CDM @ Composting:

\

CDM Implementation Model:

Distillery

SpentWash Bio-digester

Methane

S

W

Evaporator

Reverse

Osmosis

SW

Compost

Incinerator

Generator

Boiler

Alcohol

Clean Water

CO2

SteamCO

2

PowerCO

2

High