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 Europe’s
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 second
period plans “in a manner that ensures a correct and consistent application of
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.
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: no
significant Japanese or Canadian competition appears for these assets; and
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) which
currently represents 58% of the capitalization. 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.

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. For
regulated markets, emissions trading can help achieve a given level of
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.
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 their carbon 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 or

companies that fail to meet designated emission reduction targets to
 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.

Energy Savings

Waste to
Energy Credits
Project
Carbon Credit
Carbon Credits
Buyers

US$

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:
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 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.

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 a
connection between the voluntary and regulated carbon markets.
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 aside
100 acres of California forest to capture carbon dioxide, while instead
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
you’re going to pay for a credit, that money must be vital for making the
carbon project happen—it doesn’t 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.
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 company’s 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 company’s emissions and then act
as brokers by offering opportunities to invest in carbon-reducing projects
around the world. Unlike carbon trading, offsetting isn’t yet government
regulated in most countries; it’s up to buyers to verify a project’s
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?

 Mandatory legal
obligation to reduce
greenhouse gas
emissions
Compliance
markets

Targeted Voluntary or
offsets retail schemes

Offset real or contingent

risks that regulatory Voluntary compliance
barriers may arise due to targets for public relations
significant greenhouse Market for Carbon purposes or to promote
emissions of a project Credits products as “climate-
Projected €5 billion neutral”
by end 2005

Types of carbon credits:

Contractually-based credits
Buyer motivation Associated rules Species of credit Example

Early corporate to
corporate carbon
No govt-approved “Emissions trades
or other standard Reduction”

Greenhouse
Voluntary “Approved Friendly
corporate and Govt-approved Abatement Unit”
retail schemes Verification or or “Verified 500 PPM
other standard Emission
Reductions” Kyoto
pre-compliance
 Regulatory-based credits
Buyer motivation Associated rules Species of credit Example

Voluntary rules- “Exchange

based trading Allowance” Chicago Climate
exchange Created or “Exchange Exchange
under
Offset”
mandatory
Mandatory (sometimes
cap & EU Allowances
voluntary)“Allowance” or
trade scheme under
“Unit” the EU ETS
rules or
regulatory
“Abatement
Mandatory framework
cap & Certified Emission
certificate”,
trade scheme Reductions under
“Project-based
CleanDevelopment
credit”
Mechanism
or “Offset”

Structure of the carbon market:

Project-based transactions Allowance-based transactions

EU Emission
JI and CDM
Trading Scheme

Voluntary UK ETS

Other
Compliance
NSW Greenhouse Chicago Climate
Retail
Gas Abatement Exchange
Scheme

Different contracting approaches

 Emerging contracting approaches

Standard sale agreement “Emission Reduction Purchase

for contractually-based Agreements” for
credits Verified Emission Reductions

“Emission Reduction Purchase

Commodity and derivative
Agreements” for Kyoto Protocol
market-
credits or other
style agreements
statutory-based credits

Factors influencing the adoption of different approaches

Type of carbon credit Carbon credits from forestry

sequestration
Type of trade
Type of buyer

Dealing with CDM risk in emission reduction purchase agreements

Key legal issues:

Defining the commodity

CERs delivered into a registry account?

VERs delivered through provision of Verification Report?

Establishing and transferring legal title

On delivery or on payment?

Warranties and indemnities

CDM-specific or in relation to project generally?

Default, Termination and Compensation

Events of default and termination events

Compensation amount – market price, liquidated damages?

Managing and mitigating CDM risk

 Risk Mitigation Strategy

Failure to register or non- CERs or VERs

approval of methdology Conditions precedent /
Suspensive conditions

Inaccurate validation/ Delivery shortfall provisions

verification Back-to-back with DOE agreement

Back-to-back with third party contracts

Legal title disputes
Warranties and representations
regarding legal title

Managing and mitigating Kyoto risk

Risk Mitigation Strategy

CER market risk

Different pricing structures
Floors and ceilings

Direct issuance into buyer’s account

Delivery risks Undertakings regarding
communicating with CDM EB

Undertakings regarding adding

Registry delays and failures
project participants
Alternative delivery accounts

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
  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
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
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 country’s 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
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 of diesel 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
market may have the flexibility to reward these efforts regardless of future
developments on market continuity.

Ukraine, Russia and Bulgaria accounted for 20% each of the ERUs supply
traded through 2003-2006 (44 million tCO2e transacted, or about 10% of the
Primary CDM market in 2006). Other countries – and not only in Eastern and
Central Europe, but also New Zealand for instance – have also taken part to
the market, although to a lesser extent Transactions in the second half of
2006 and the first quarter of 2007 already exhibit a trend with fewer ERPAs
signed in Europe (as was historically the case) and more ERPAs in Russia
and Ukraine. This is no surprise as the biggest potential is expected to lie in
these two countries, with huge projects in the oil and gas sector as well as
power sector (refurbishment and energy efficiency improvements as well as
methane capture). The JI pipeline indicates Russia leading the market, with
48% of deliveries over 2008-12, followed by Ukraine with 16%. Other
countries, including those in Western Europe and other Annex B countries are
also considering JI opportunities (see, for instance, France’s announcement
on domestic projects with a potential estimated at 15 MtCO2e). However, the
EU decision on double counting means that the JI potential can only be
realized from projects outside the sectors covered by the EU ETS in the
newer members of the EU.

Relatively large numbers are often cited for the large potential in Russia, to
upgrade outdated technologies used in gas pipelines, as well as from
chemical and steel facilities, and in Ukraine, in the steel and cement sectors.
These numbers, if realized, are small compared to what China has already
supplied to the market. It remains to be seen what portion of the JI potential
may indeed materialize, given remaining uncertainties with regard to issuance
procedures and a limited five-year crediting period that may not be sufficient
to get many projects up and running. In the next year or so, this pipeline may
be exhausted as new opportunities may not be able to obtain financing on the
basis of only three years of credits to sell.
CARBON ASSET CLASSES AND TECHNOLOGIES
Industrial Gases Still Dominate

HFC23 destruction projects, although still the dominant asset class transacted
(34% CDM market share), peaked in 2005 (when HFC had a 67% CDM
market share). This could be interpreted as a sign that the stream of HFCs is
drying up, especially given questions regarding the treatment of new HCFC-
22 facilities under the CDM (a final decision postponed to the next COP/MOP
in Bali).
Projects for the destruction of N2O – another potent GHG with a global
warming potential of 310 – started to appear in the transaction database in
2006, on the basis of two approved methodologies. N2O projects captured a
13% market share of volumes transacted in 2006. There remain quite a few
N2O projects not yet transacted, although most appear to have been
committed exclusively for
contract to a buyer. In the next year or so they could be among the ones that
buyers find desirable – because of their large volumes and low delivery risk.
Together with HFC23 projects, they account for 50% of purchases since 2003
(at 480 million tCO2e) and represent 40% of expected deliveries by 2012 in
the CDM pipeline (and probably quite a bit higher, when adjusted for risk)

Methane in the Market

Coal Mine Methane (CMM) saw an absolute increase over 2005 volumes
transacted during 2006(with a market share constant at 7%). Among projects
targeted at abating methane emissions thiscould be one of the asset classes
gaining importance in the future with relatively important and morepredictable
volumes.

Landfill gas (LFG) projects saw their market share drop from 8% to 5% in
2006. This asset classshowed weak project performance and delivery yield in
the early set of Issued CERs. To date, some40 million CERs have been
issued across all asset classes (4% of the total volume of CDM transacted so
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 project’s 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 China’s
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:

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-à-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
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:

- 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:
Accurately recording the project-based transactions market is becoming more
difficult each year since the number of transactions together with the diversity
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 the
many secondary market project transactions that have not been captured by
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' or quotas on the maximum amount of Greenhouse
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 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.
Under Joint Implementation (JI) a developed country with relatively high costs
of domestic greenhouse reduction would set up a project in another
developed country.
 Kyoto Protocol
Japan
11th Dec
‘97
16th Feb
‘05
A
Adopted in Kyoto
Linked to
B UNFCCC
Intl. Agreement

C 37 Industrialized
Targets reducing Countries &
GHG European Community
D Till date
Ratified Nations
180
nations
E
Cap & Trade System

Assigned
AAUs & its
trading

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.
 Global carbon market (2007)US$ 64 bn

Allowance Based Market Project Based Market

Primary CERs market worth

EU ETS market (2007) worth US$ 7.4 Billion, 551
US$ 50.02 Billion, 2.06 million tCO2e
million tCO2e Secondary CERs market
New South Wales market worth US$ 5.54 Billion,
(2007) worth US$ 224 240 million tCO2e
million,25 million tCO2e ERUs market worth US$ 499
Chicago Climate Exchange million, 41 million tCO2e
(2007) worth us$ 72 Voluntary Market worth US$
million, 23 million tCO2e 265 million, 42 million
tCO2e

The Growth of Project Based Market

Buyers:
n
 Spain, 4%
Italy Italy, 4%
Austria, 2%
9%
Spain
Austria
5%
2%
Europe- Europe-Baltic
Baltic Sea Sea, 12%
5%
Ne therlands
2% UK, 54% UK, 59%
Japan
6% Japan, 11%

Others
13% Others, 2%
Other Europe,
Other
6%
Europe
4%

Overall Volume 553 MtCO2e in 2006 Overall Volume 592 MtCO2e in 2007

Source – World Bank Report

Analysis of Top 5 Buyers:

C hoice of th e buyers
O thers
300 W ind
250
N2O
No of Projects

200
150 Landfill gas
100 Hy dro
50 F os s il fuel s w itc h
0 E E own generation
E c oS ec urities (UK ) Carbon A s s et E DF Trading (UKIB ) RD (W orld B ankCargill
) International
E E indus try
M anagem ent (S witz erland)
S weden B iom as s energy
B iogas
O rg a n iz a tion
A gric ulture

Source - UNFCCC

 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.
CER Sellers:

 China was again the destination for the buyers to buy CERs in
2007 with the share of 73% in total transacted volume.
 India stand second with total contribution of 6%.
 Brazil contribution was of 5%.

As a share of Volume supplied in 2007

R. of Latin
America, 5%
Brazil, 6%

ECA, 1%

Africa, 5%

R. of Asia, 5%

India, 6% China, 73%

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 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 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 homogeneity 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:
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 Supplementary 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.
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."
Case Studies:

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

• ICF is one of the world’s 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
 • 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 process is lengthy but well defined…

Project note
Methodology

Project
m
6

h
o

s
t
-

design Host Country DNA

document
~

DNA
approval

DOE Comment UNFCCC EB

m
4

h
o

s
t

(Validation) Period
~

Registration Comment
Period
n
u
a

y
l
l

CER
An

DOE (Verification) UNFCCC EB

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
 • 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
 – Composting produces – 20K CERs p.a.
– @ 6€/CER makes 120,000 €, i.e. INR 62lakh
– These credits accrue for 10 years

Baseline Scenario

CH4
Spent Wash Emissi
Distillery Open Lagoons ons

Alcohol

Project Activity
 High
Volume Incinerator
Spent Ste
Wash Bio-digesterMethane am
Distillery
High Boiler CO2
COD

SW
Po
High Low wer
Volume COD Generator
Alcohol CO2

High
Volume
Revers
e Clean Water
Evaporator
Osmosi Low
SW s COD

Low High
Volume COD

COD completely
Compost destructed

Steps of Calculations…

Distillery

Bio-digester

Reverse Osmosis/Evaporation

Composting

Parameters to be Monitored
 Vol. of Spent COD of the
Wash Spent Wash

Biodigester
Quantity of COD of the Vol. of the
Methane output output

Evaporator
Vol. of the COD of the
output output

Compost
Depth of the COD of the SW Lagoon-ing Average Monthly
lagoon composted Period Temperature

Bio-digestion:

Project Activity:
High CO2
Incinerator
Volume
Ste
Bio-digesterMethane am
Distillery Spent Wash
Boiler CO2
SW

Po
High High Low Generator wer
Alcohol COD Volume COD CO2

High
Revers Volume
e Clean Water
Evaporator
Osmosi
Low
s
COD
Low
SW

High
Volume COD COD
completely
Compost destructed

CDM @ Bio-digestion :
 High CO2
Incinerator
Volume Ste
Spent WashBio-digesterMethane am
Distillery
Boiler CO2

SW
High Po
COD High Low Generator wer
Alcohol
Volume COD CO2

High
Revers Volume
e Clean Water
Evaporator
Osmosi
Low
s
COD
Low SW
High
Volume COD

Compost

• 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

 Project Activity

High CO2
Volume Incinerator
Ste
Spent WashBio-digesterMethane am
Distillery
Boiler CO2
High

SW
COD Po
High Low Generator wer
Alcohol
Volume COD CO2

High
Revers Volume
e Clean Water
Evaporator
Osmosi
Low
s
COD
SW

Low High
Volume COD

Compost

Reverse Osmosis/Evaporation

High CO2
Incinerator
Volume
Spent Ste
Wash Bio-digesterMethane am
Distillery
High Boiler CO2
SW

COD Po
High Low Generator wer
Alcohol
Volume COD CO2

High
Revers Volume
e Clean Water
Evaporator
Osmosi
Low
s
COD
SW

Low High
Volume COD COD completely
destructed
Compost

• No direct carbon credit benefit

– Does not lead to emission reduction
• Both the processes require energy and lead to emissions
 – 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:
 CO2
Incinerator
Spent Ste
Wash Bio-digesterMethane am
Distillery
High Boiler CO2

SW
COD Po
High Low Generator wer
Alcohol
Volume COD CO2

High
Revers Volume
e Clean Water
Evaporator
Osmosi
Low
s
COD
SW
Low High
Volum COD
e
Compost

CDM @ Composting:

High CO2
Incinerator
Volume Ste
Spent WashBio-digesterMethane am
Distillery
High Boiler CO2
SW

COD Po
High Low Generator wer
Alcohol
Volume COD CO2

High
Revers Volume
e Clean Water
Evaporator
Osmosi
Low
s
COD
Low
SW

High
Volume COD

Compost

CDM Implementation Model:

 Month 1/2 Month 3-10/12 Annually

Decides to Owns the Owns the

Pursue the Project Project
Project

You Builds the

Conducts Project Operates
Project due- Bio- the
diligence methanatio Project
n
Evaporation
Trio-Chem Composting
Supports
Conducts Completes
CDM
CDM due- the CDM
transactio
diligence documentatio
n
n and
ICF registration

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 organization, the
UNFCCC, is the only organization 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,
and China) 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 .
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. 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.

The CDM Pipeline

 Total CDM Projects In the Pipeline
M alay sia, 1 1 5 P h ilip p in es, 7 1

In dia, 9 1 4 In do n esia, 6 5
So ut h K o rea, 4 4

T h ailan d, 4 5

Viet n am , 2 0

Sri L an k a, 1 4

Ch in a, 1 1 7 3 O t h ers, 3 3
L at in A m erica,
689

 The pipeline has swollen to 3183 projects.

 China stand 1st with total of 1173 projects.
 India stands 2nd with total of 914 Projects.
 Latin America stand 3rd with total of 689 projects.

OBSERVATIONS ON THE INDIAN CARBON MARKET:

 Indian Carbon Market
2nd in number of
CERs generation
UK is the biggest
buyer from India
India accounts
for 914
projects
India Geothermal, Nitrous
Oxide, Transmission
Total 161 Loss
projects got
registered in year
2007 Biomass energy
dominates with 260
projects

India comes under the third category of signatories to UNFCCC. India signed
and ratifiedthe Protocol in August, 2002 and has emerged asa world leader in
reduction of greenhouse gasesby adopting Clean Development Mechanisms
(CDMs) in the past few years.According to Report on National Action Plan for
operationalising Clean DevelopmentMechanism(CDM) by Planning
Commission, Govt.of India, the total CO -equivalent emissions in 1990 were
10, 01, 352 Gg (Gigagrams), which wasapproximately 3% of global
emissions. If India cancapture a 10% share of the global CDM market,annual
CER revenues to the country could rangefrom US$ 10 million to 300 million
(assuming that
CDM is used to meet 10-50% of the global demandfor GHG emission
reduction of roughly 1 billiontonnes CO2 , and prices range from US$ 3.5-5.5
per tonne of CO2 ). As the deadline for meeting the
Kyoto Protocol targets draws nearer, prices can be expected to rise, as
countries/companies savecarbon credits to meet strict targets in the
future.India is well ahead in establishing a full-fledged system in
operationalising CDM, through the Designated National Authority (DNA)
Other than Industries and transportation, the major sources of GHG’s
emission in India areas follow:
• Paddy fields
• Enteric fermentation from cattle and buffaloes
• Municipal Solid Waste
Of the above three sources the emissions from the paddy fields can be
reduced through special irrigation strategy and appropriate choice of cultivars;
whereas enteric fermentation emission can also be reduced through proper
feed management.
In recent days the third source of emission i.e. Municipal Solid Waste
Dumping Grounds are emerging as a potential CDM activity despite being
provided least attention till date. Present status of dumping grounds in India:
In India, due to increased population & commercial development, cities are
facing problems of MSW (Municipal Solid Waste) disposal. The urban
population in larger towns and cities in India is increasing at a decadal growth
rate of above 40%. There are no Sanitary Landfill sites in India at present.
Municipal Solid Waste is simply dumped without any treatment into land
(depressions, ditches, soaked ponds) or on the outskirts of the city in an
unscientific manner with no compliance of regulations. The existing dumping
grounds in India are full and overflowing beyond capacity. It is difficult to get
new dumping yards and if at all available, they are far away from the city and
this adds to the exorbitant cost of transportation. A study made by CPCB,
(2000) shows that the cumulative
requirement of land for disposal of MSW in India would reach around 169.6
km by 2047 as against 20.2 km in 1997.
Various processes/technologies available to reduce the amount of Municipal
Solid Waste are as follows.
1. Physical (a. Pelletisation)
2. Biochemical (a. Aerobic Composting b. Anaerobic Digestion)
3. Thermal (a. Incineration b. Gasification)
Among the above options/technologie following are considered as favorable
to implement in India.
1. Pelletisation,
2. Anaerobic digestion using bio-methanation technology for production of
power,
3. Production of organic manure using controlled aerobic composting.
In India the segregation of municipal solid waste at source or at
centralized/decentralized centre is not in practice on a large scale. Hence,
90% of Municipal Solid Waste is dumped in a mixedform in the open dumping
yards without any pre-treatment. On the other hand, technology required in
the above mentioned three options needs waste to be segregated first and
then can be subjected to further processing. To carry out segregation of bulk
amount of municipal waste at the dumping ground is practically impossible. It
is not only massive but tedious. Bulk segregation requires not only substantial
large scale labour but also considerable amount of investment. All these
factors make the above three technologies unviable for existing dumping
grounds.
The waste in the dumping ground undergoes various anaerobic reactions
producing offensive odorous gases such as CO2 , CH4, H2S and
Mercaptans, which foster harmful pathogens and lead to environmental, social
and public health issues.
The approximate methane emission allover India as per 2001 census was
calculated using an IPCC default (1996) method by NSWAI. The total quantity
of methane emitted out of Municipal Solid Waste generated in India as a
whole was approximately 4612.69 MT/day. An economic feasibility study
done by IGIDR (Indira Gandhi Institute of Development Research) for Mumbai
city indicates that for a total population of 10 million producing 1.82 MT of
MSW per year, the net methane that can be produced is equivalent to about
8.5 GJ (Giga Joules).
Energy recovery potential of MSW is 900 MWe out of total 1700 MWe
amounting to about 53%. Thus, the utilization of MSW dumping grounds for
energy production would mean a favorable and useful solution to the existing
Municipal Solid Waste disposal problem.To efficiently recover the gases,
MSW Dumping Ground Projects should primarily have a landfill gas collection
technology by means of the following measures:
1. Implementation of vertical and/or horizontal pipes for collection of landfill
gases.
2. Construction of vertical gas extraction domes.
3. Construction of venting equipment in order to create under-pressure in the
landfill body to prevent uncontrolled emissions of landfill gas.
4. Gas Generator installed at LFG

Indian CDM projects:

Reforestation 5
Landfill gas 16

HFCs 5
Fugitive 10
Hydro 79 Transport 2
EE service 5 Wind 168
Energy distribution 1
EE supply side 16

EE ow n generation
Fossil fuel sw itch 37
83 Solar 5

Biogas 27 Afforestation 1
EE industry 117 Agriculture 1

Biomass energy 260

EE Households 4

Cement 21

 India has a maximum number of Biomass energy projects.

 There are total of 168 projects of Wind.
 Energy efficiency has a good share with total of 117 projects.
 India has a total 0f 528 projects for validation.

China’s Influence on Pricing

China, as dominant market leader in the project CDM, influenced the overall
market price through itsinformal policy of requiring a minimum acceptable
price before providing DNA approval to projects.China’s floor price (around
US$10.4-11.7 or€8-9 in 2006 and reportedly moving upward in 2007) had a
strong impact on CER price development, especially during a period of high
EUA volatility in thesecond half of 2006.

There is very little variance across countries or even regions for CDM,
suggesting that other countrieswere able to use China’s price floor as a basis
of negotiation of near-equivalent prices in theirtransactions as well. In the
case of countries more willing to risk the market through a floating price,there
was the possibility of commanding a price higher than China’s in the market.
A small discount(€0.50) was discernible in contracts from some countries
which were relatively new to the CDMmarket, with new institutions, a nascent
pipeline and few projects at the registration stage.
From both buyers and sellers, there seemed to be a desire for a benchmark
for CER pricing, with buyers and sellers asking whether the Chinese floor
price was the benchmark; or if a fraction of the EUA price was the appropriate
way to price it; or, if it was at a certain premium above the marginal cost of
reduction of the relevant GHG. Greater price information and transparency on
the secondary
market for CERs as exchanges soon start listing some index products will
provide additional insights on CER pricing and value. The increase in the
volume of Issued CERs and the operation of the ITL, will also hopefully help
foster the development of the market for issued CERs. Although EU ETS has
been and will be a major source of demand, there could emerge some
transparent third party index for CER prices in recognition that CER buyers
are not limited to EU ETS participants, and Japanese or other buyers may not
want to base CER prices on volatile EUA prices which have little to do with
their own willingness to pay.
 VS
India V/S China
600
550
500
450
No of Projects 400
350
300 China
250 India
200
150
100
50
0

2O

t
ve

r
o
t
as

d
y

EE ane

or
ry

de
en

la
FC

ga
dr
g

tio

io

in
it c

ti
st
og

So

sp
er

N
si

W
m

at
Hy
gi
ra

H
h

du

sw

fill
en

an
Bi

st
Fu
Ce

et

ly
ne

nd
in

re
pp
m

Tr
el
s

ge

fo
as

La
fu
su
e

Re
in
om

il
EE
m

ow

ss
Bi

d/

Fo
EE
be
al
Co

Project Types

Source - UNFCCC

The price in China was between €8 to €111, whereas in India the price
prevailed between €15-16.5.

The heavy buying from China has left almost 63% of total CERs unsold.

China has 1173 projects in the pipeline whereas India has 914 projects.

India dominates in terms of total project registered which is 346 whereas

China has 221 projects.

China is the biggest seller of CERs.

Positive Points:

• One of the most mature markets.

• Very strong government support for CDM.

• Good climate for Investments.

• Sophisticated and Innovative financial structuring

Project Developers are very well aware of the CDM market

• There is still a Huge opportunity in many sectors

• Indian already has more than 1/3 of the share in the registered projects with
UNFCCC.

Companies in different industries face dramatically different costs to lower

their emissions. A market-based approach allows companies to take carbon-
reducing measures that everyone can afford. “The private sector is better at
developing diversified approaches to manage the costs and risks [of reducing
emissions],” says Jesse Fahnestock, spokesman at Swedish power company
Vattenfall, which is a member of a global Combat Climate Change coalition.
Reducing emissions and lowering energy consumption is usually good for the
core business. For example, in 1997 British energy company BP committed to
bring its emissions down to 10 percent below 1990 levels. After taking simple
steps like tightening valves, changing light bulbs, and improving operations
efficiency, BP implemented an internal cap-and-trade scheme and met its
emissions goal by the end of 2001 — nine years ahead of schedule. Using the
combined C02 reduction strategy, BP reported saving about $650 million.
Then there’s the long-term investment angle: Buying into the carbon market
boom now suggests significant dividends later on. Carbon credits are
relatively cheap now, but their value will likely rise, giving companies another
reason to participate.
Negative Points:

• Consultancy dominated market, not transactions.

• The sellers of Carbon Credits, have unrealistic expectations of the price.

• Lack of awareness among the project developers regarding the prices and
the technicality of the CDM process.

• The Sellers are not cashing in on the CDM revenues, in the hope of
appreciation of CER prices.

• Sellers confuse EUA prices with CER prices.

• There is a lot of Mis-information in the market.

As with any financial market, emissions traders are vulnerable to significant

risk and volatility. The EU’s trading scheme (EU-ETS), for instance, issued so
many permits between 2005 and 2007 that it flooded the market. Supply
soared and carbon prices bottomed out, removing incentives for companies to
trade. Enforcement of trading rules can be just as unpredictable, though
Fahnestock says the EU is working to correct the problems.
Carbon offsets have their own drawbacks, which reflect a fast-growing and
unregulated market. Some offset firms in the United States and abroad have
been caught selling offsets for normal operations that do not actually take any
additional C02 out of the atmosphere, such as pumping C02 into oil wells to
force out the remaining crude. In 2008 the Climate Group, the International
Emissions Trading Association, and the World Economic Forum will work to
develop a Voluntary Carbon Standard to verify that offsetting projects are
beyond business-as-usual and have lasting environmental value.
The lack of offset regulations has also made marketing problematic. Recently,
companies have taken to declaring themselves “carbon neutral.” But until the
Federal Trade Commission determines the guidelines for such terms, it’s
unclear which companies actually merit the distinction. Already Vail Resorts,
the organizers of the Academy Awards, and other organizations have taken
heat for touting their investments in carbon offset projects that were not
entirely environmentally sound.

What is Next?
A new facility to help developing countries preserve their tropical forests is
being designed with the support of several developing and industrial
countries. The proposed Forest Carbon Partnership Facility is aimed at setting
the stage for a future large-scale system of positive incentives for reducing the
rate of deforestation and degradation. It would build countries’ capabilities to
harness this future system and a few pilot performance-based payments for
reduced emissions from deforestation and degradation. The Forest Carbon
Partnership Facility is the second World Bank fund to address the forestry and
land use sector, following the BioCarbon Fund (launched in November 2003)
to support
mostly afforestation and reforestation project activities.

IS THERE A POST 2012 MARKET?

Preliminary findings from IETA’s recent Market Sentiment Survey indicate that
more than 90% of respondents believe that the GHG Market is an established
instrument that will continue post 2012. In addition, more than 65% of those
surveyed anticipated that a global market will be established in the next 10
years.
In this context, the recent EU announcement regarding its climate and energy
policy for 2012-2020 and beyond appears to been taken seriously by the
business community. Investment decisions are now more likely to take into
account the high likelihood of a carbon-constrained environment, at least in
the EU. Similarly, the recent announcement by the Government of Canada,
including a role for CERs, banking and credit for early action may also trigger
efforts by Canadian companies to start identifying and pursuing abatement
options at home and abroad. Developments in the EU, USA, Canada and
Australia have helped kick off a modest post-2012 market in abatement
domestically; however there is much ambiguity about the extent to which
CDM and JI will play a role in compliance.

Since there is still some uncertainty at play about details of each of these
post-2012 regimes, there is some risk that origination of new carbon projects
tapers off. This should not imply however a weakening of prices for CERs
and ERUs in the short run as there still is some strong residual demand
before 2012 to be met. Further, if the emerging North American regimes
encourage early action and banking of CERs, this could stimulate further
demand.

Some buyers have been purchasing post-2012 vintages, extending the

horizon of the stream of carbon revenues and improving the financial viability
of projects that require additional help to meet hurdle rates. The uncertainty
about demand post-2012 may justify a lower price – given the uncertain
compliance value of the credits that may be generated. The most common
way to address post-2012
Uncertainty in the market is through a zero premium call option provided to
the buyer in which the strike price is at the same level as the contract price for
pre-2013 vintages or at the prevailing market price should there be a system
in place in which the reductions can be used for compliance. Some buyers do
not put a value on this option at the moment, and sellers are essentially giving
away the option. But this may evolve quickly as more confidence appears on
the post-2012 front.

Conclusion:
There is a great opportunity awaiting India in carbon trading which is
estimated to go up to $100 billion by 2010. In the new regime, the country
could emerge as one of the largest beneficiaries accounting for 25 per cent of
the total world carbon trade, says a recent World Bank report. The countries
like US, Germany, Japan and China are likely to be the biggest buyers of
carbon credits which are beneficial for India to a great extent.
The Indian market is extremely receptive to Clean Development Mechanism
(CDM). Having cornered more than half of the global total in tradable certified
emission reduction (CERs), India’s dominance in carbon trading under the
clean development mechanism (CDM) of the UN Convention on Climate
Change (UNFCCC) is beginning to influence business dynamics in the
country. India Inc pocketed Rs 1,500 crores in the year 2005 just by selling
carbon credits to developed-country clients. Various projects would create up
to 306 million tradable CERs. Analysts claim if more companies absorb clean
technologies,total CERs with India could touch 500 million. Of the 391
projects sanctioned, the UNFCCC has registered 114 from India, the highest
for any country. India’s average annual CERs stand at 12.6% or 11.5 million.
Hence, MSW dumping
grounds can be a huge prospect for CDM projects in India. These types of
projects would not only be beneficial for the Government bodies and
stakeholders but also for general public.