POSSIBILITIES OF ASSESMENT OF CARBON CREDITS FOR

SRILANKA AND BHUTAN

INTRODUCTION:

There is an opportunity behind every crisis. Global warming due to carbon

emission has seemed to be the biggest crisis faced by mankind. But there is an
opportunity of carbon trading, which leads to less amount of carbon emission or
less carbon credits.

WHAT IS CARBON CREDITS?

One carbon credit is equivalent to 1-ton CO2 or any other green house gas
equivalent to 1-ton CO2. Now there is a monetary value assigned for those
companies which emits less Green House Gas.

IMPORTANCE OF CARBON CREDITS:

Carbon credit is most important quantity of International Carbon Trading. This

goal of trading is to allow market mechanisms to drive industrial and commercial
processes in the direction of low emissions or less carbon intensive approaches
than those used when there is no cost to emitting carbon dioxide and other Green
House Gasses into the atmosphere.

MARKETS OF CARBON CREDITS:

There are two types of market for carbon credits based on countries.

1) Voluntary Market. (Non-Annexure countries)

2) Compliance Market. (Annexure 1 countries)
KYTO PROTOCOL:

Objective of KYTO Protocol is to reduce the emission of GHGs to prevent air

pollution and climate change.

Under these protocols there are several types of trading. As follows

CDM (Clean Development Mechanism):

CDM is a mechanism whereby an Annex I party may purchase emission reductions

which arise from projects located in non-Annex I countries. The carbon credits
that are generated by CDM projects are termed as Certified Emission
Reductions(CER), expressed as tones of CO2.

EMISSION TRADING:

Emissions trading (ET) is a mechanism that enables countries with legally binding
emissions targets to buy and sell emissions allowances among themselves.

JOINT IMPLEMENTATION:

One country of Annex 1 invests on the projects of reducing carbon emission of

another country of Annex 1, and receive credit through emission reduction
projects.

The carbon emission reduction accreditation by the UNFCCC has encouraged

many countries. We will discuss here about Sri Lanka and Bhutan.

ASSESMENT OF CARBON CREDITS FOR SRI LANKA

To take the advantages of carbon credits Sri Lanka is trying to use renewable
resources and hydel power. New projects has been carried out to use renewable
energy resources.

CARBON TRADING

Carbon Trading is a new international market introduced by the Kyoto Protocol as

a global strategy to combat global warming. The Kyoto Protocol to United Nations
Framework Convention on climate change (UNFCCC) adopted in 1997 has
provided rules and guidelines for this new international market of carbon trading.
Though this new market has been in operation since year 2000 with a demand of
5.5 billion tons of GHG emission reductions equivalent to Carbon Dioxide (C02),
Sri Lanka has so far traded only 5 projects which reduce around 109,619 tons of
C02 per year. Up to March 2008, in the world, 950 CDM projects have been
registered and are expected to reduce 1170M t/CO2e by 2012 at the rate of 193
M t/CO2 e per year. Recently the establishment state owned Sri Lanka Carbon
Fund Limited is expected to increase the Sri Lanka share of this international
business.

SRI LANKA CARBON MARKET

Sri Lanka still is in the initial stage of CDM project implementation compared to
neighbouring India and many other developing countries. Of over 950 CDM
projects registered so far, only 5 projects are from Sri Lanka. Of the expected
annual CERs of 193 M/tC02 marketed so far from the world (by March 2008), Sri
Lanka has sold only 109,619 tC02 per year. Many attempts by the private sector
to initiate CDM projects have failed due to various constraints. One of the reasons
for this low level of participation is lack of financial mechanism to promote CDM
market in Sri Lanka. Neither private sector nor the government was ready to
invest funds to promote CDM.

Some of the serious constraints which restrict the optimum use of CDM for the
benefits of country are explained below.

1) Financing constraints

2) Investment risk

3) Information constraints

4) Institutional constraints

5) Inadequate technical capacity

CARBON CONSULTING COMPANY:

A new venture is to commence operations in Sri Lanka to help businesses

minimize their environmental footprint and take advantage of carbon gains.
According to officials, Sri Lanka’s potential for carbon trading could generate US$
100 million a year.

With the consequences of global warming and climate change becoming

apparent, carbon and environmental management have moved up the corporate
agenda. This is driven by a combination of actual, and threatened, regulation,
consumer pressure and an underlying desire to cut costs.

"At a time when Sri Lanka is looking at accelerating her development, it is

imperative that we not only maximize the potential of our beautiful and bountiful
environment but also protect it for our future generations.

As Sri Lanka looks to develop into a hub of ethical manufacturing and eco-
tourism, we need to equip our local businesses to take advantage of our huge
carbon potential. Our companies and our products will need to be aware of their
carbon impact in order to compete in the new Green Economy", said "
Subramaniam Eassuwaran" one of the founder directors.

With a strong mix of both international expertise and Sri Lankan minds, the
Carbon Consulting Company (CCC) was formed by two young entrepreneurs,
Subramaniam Eassuwaran (Deputy Chairman of Eswaran Brothers Exports) and
Fazal Fausz (Managing Director of Rainco Pvt Ltd), under the guidance of Nobel
Laureate, Professor Mohan Munasinghe.

Professor Mohan Munasinghe, who needs no introduction and is a director of

CCC, will be actively involved in advising companies on how best to reduce carbon
emissions and implement world class environmental management strategies.

CCC has formed a strategic alliance with the Carbon Neutral Company of the UK.
They have been appointed as not only a reseller of carbon credits, but also as a
third-party verifier. The Carbon Neutral Company, a pioneer, is one of the world’s
leading providers of carbon reduction solutions. CCC is also accredited by the UK
Government’s Carbon Trust as a product "Footprint Expert".
The Managing Director of The Carbon Neutral Company, Jonathan Shopley will be
in Sri Lanka in the first week of October to address a select gathering of CEOs on
the theme; "The Carbon Phenomenon: Adding Business Value" at a forum
organized by the Ceylon Chamber of Commerce.

The Carbon Consulting Company has also concurrently established the

Conservation Carbon Company. Conservation Carbon was established with the
mandate to use environmental finance mechanisms to help protect some of Sri
Lanka’s most threatened ecosystems. Dr. Ranil Senanayaka, a founder, is a
brilliant ecologist. With the best scientific minds and concerned businessmen
joining hands, both companies intend making a difference to the environment
and making a positive impact on the country.

It is estimated that Sri Lanka could generate more than US$ 100 million through
carbon credit sales a year.

As at July 2008, about 40 projects, including the Upper Kotmale hydropower

plant, were at different stages of obtaining their emission reduction certificates.

These projects have the potential of reducing carbon emissions by about 2.4
million metric tons a year, generating approximately US $ 36 million in carbon
credit sales. Today, only eleven of these have been approved, officials said.

Sri Lanka has hundreds of statutes on conservation but they are far from being
implemented, as economic activities tend to take precedence over the
environment.

According to the IUCN, Sri Lanka, in a study published in 2009, with an annual loss
of 33,000 ha of forest cover, was one of the eight hottest hotspots in terms of
habitat loss in the world.

Sri Lanka is home to rich natural wealth in abundant fauna and flora.
Approximately 40 percent of the indigenous inland vertebrates are endemic to
the island and 30 percent of the indigenous flowering plant species are endemic
too. Change in climatic conditions directly affect the distribution, abundance and
life cycles of most species.
According to the 2007 Red List of Threatened Fauna and Flora of Sri Lanka, 72
flowering plant species were extinct. Sixty percent of them had been endemic
species.

Twenty-one amphibians found their way to the extinct list as well, and these
species were all endemic to Sri Lanka’s wet zones.

33 percent of vertebrate species are nationally threatened. Some areas in Sri

Lanka are mentioned below which are assigned to carbon credits.

Hydro Plant:

The small hydro power projects utilises a renewable indigenous source to

generate electricity which unless otherwise would be produced using the fossil
fuels imported, leading to foreign exchange outflow and the emission of
dangerous greenhouse gases. The United Nations Framework Convention on
Climate Change (UNFCCC) has issued carbon credits to the Lower Kotmale Mini
Hydro Power Project of Vidullanka PLC under the Clean Development Mechanism
(CDM) for the carbon emission reductions achieved by the project.

Solar Plant:

Solar power generation plants have been praised by environmental groups as it

generates clean energy. While reducing the impact of the problem of air quality,
green resource can reduce the import of oil to our Country and most importantly,
keep average costs of electricity down. Hayleys Group PLC, together with
Windforce Pvt Ltd, have commissioned their 10-megawatt solar power plant
located in Welikande in the Pollonnaruwa District. The solar plant has been
installed with a solar tracking system. The group plans to obtain carbon credits for
this project in partnership with Sri Lanka Climate Fund. A scheme will be set up
whereby local businesses and corporates could obtain accreditation to offset their
carbon footprint.
Biomass

The potential and economic viability for sustainable biomass production and
conversion to energy in Sri Lanka are very good. Around 40% of the total land
area amounting to 2.4 million hectares is under-utilized.). Moreover, even
traditional crops such as coconut, tea, etc. also have intercropping potentials for
sustainable energy plantations. For electricity generation purposes, as an initial
estimate a total of 100 MW is expected by the year 2010 (Report of the Inter-
Ministerial Working Committee on Dendro Thermal Technology, June 2005). A
further 200 MW could be expected for the year 2012. Unlike hydro or wind
projects, biomass power projects are flexible with regards to location and size of
the power plants. The resource for biomass power plants, the biomass fuel supply
can be transported within reasonable distances to power plants. This enables the
developer to choose the location and capacity of the power plant based on a
number of alternative criteria. Unlike hydro power projects, there are no
predefined names or capacities for biomass power plants.

Industry

The annual consumption of electricity and petroleum in the year 2003 by the
industrial sector amounted to 204,000 and 360,000 tons of Petroleum Equivalent
respectively. These figures are increasing annually at a rate of 6% and 5%
respectively. In addition, the industrial sector also consumes approximately
1,236,000 tons of Petroleum Equivalent of bio fuels annually. As most of the bio
fuels are from renewable resources such as rubber plantations or dedicated
woodlots and any reduction in the consumption of bio fuels would not result in
CO2 emission reductions. Hence bio fuels consumption by the industrial sector is
not considered for CDM application.
 Carbon credit in Bhutan:
Talking about carbon credit, Bhutan is the only carbon negative country. Bhutan’s
massive tree cover, about 70% of the country is still forested, the country has
become a carbon sink. Being carbon sink means that Bhutan absorbs over 6
million tons of carbon annually while only producing 1.5 million tons of carbon.

To achieve this goal country followed some steps like_

 A ban was put on export logging.
 The constitution was amended to include that forested areas would not
drop below 60%
 Free hydroelectric power generated by Bhutan’s many rivers was utilized
over environmentally devastating fossil fuels.

Introduction to the CDM and voluntary carbon markets

1.Clean development Mechanism(CDM)

The CDM is a mechanism which allows emission-reduction projects in
developing countries to earn certified emission reduction credits,each eqivalents
to one tonne of co2. These CERs can be traded and sold, and used by
industrialized countries to a meet a part of their emission reduction target under
the Kyoto protocol.

The CDM mechanism tries to stimulate the sustainable development in

developing countries and achieve emission reductions at the same time ,while
giving industrialized countries some flexibility in how they meet their emission
reduction limitation targets.

CDM projects must qualify through a rigorous and pubic registration and
insurance process designed to ensure real, measurable and verifiable emission
reduction that are additional to what would have occurred without the project.
The cost of developing a CDM project depends on many factors, including size and
complexity of the project.
Various experts and source indicates that the transaction costs could mount to
around 200,000 US per project .In case of small relatively simple projects, the cost
could be less. Though for large, complex projects, which face challenges in the
CDM process, the cost could be higher. There is various business model in how
the projects and transaction costs could be covered e.g. Some project developer
may be willing to pay these transaction cost upfront with CER being used as bank
collateral.
Price aid for CERs depends on many factors and vary over time.

Table1: Current CER prices

Type of CER Price [EUR]3

High quality post-2012 vintages 7.5
Medium-risk forwards 7.5-9
Low-risk forwards 9-10
Registered projects 10-11.5
Bluenext spot price 12.62

2. The voluntary carbon markets4

The voluntary markets cater for the needs of those entities that voluntarily
decide to reduce their carbon footprint using offsets. There is no formal legal
framework or a supervisory body like the CDM EB. The market is much smaller
than the CDM market

“Voluntary carbon markets” usually refers to all purchases of carbon credits not
driven by an existing regulatory compliance obligation (such as the annex I
countries under the Kyoto protocol). This includes transaction including
Credits created specifically for the voluntary markets as well as transactions in
which suppliers sold regulatory market credits to buyers seeking to voluntary
offset their emission.

The voluntary market can be divided into two segments:

a. The Chicago Climate Exchange(CCX)
b. The voluntary “Over-the-Counter” (OTC) offset market.
Bhutan’s Policy for Green and Clean Country: -
Bhutan is aiming for zero net greenhouse gas emissions, zero-waste by
2030 and to grow 100 percent organic food by 2020. The Himalayan nation is
currently 72 percent forested and the constitution requires that no less than 60
percent of it remains forested. It has even banned export logging.

Bhutan is working on getting all 10 of its hydropower projects (three under

construction) recognized as CDM projects. At the moment, two hydropower
projects – 112 MW Dagachhu and Chendebji – have been certified to receive
carbon credits. This means they are CDM projects.

Bhutan’s Gross National Happiness index gives the natural world a central place in
the making of public policy, and environmental protection is a core guiding
principle in Bhutan’s constitution.

The country would also like to increase its share of renewables, while decreasing
its reliance on hydropower and electricity imports in the winter. So, it's currently
exploring wind, biogas and solar.
the Bhutanese government has formed a partnership with Nissan to provide
hundreds of electric cars to the country with the promise of thousands soon
after. Bhutan’s Prime Minister Tshering Tobgay wants to eventually convert all of
the country's vehicles to electric power.
According to the second national GHG inventory, Bhutan is a net sink for
greenhouse gases. The estimated sequestration capacity of our forest is 6.3
million tons of CO2 while the emissions for year 2000 is only 1.6 million tons of
CO2 equivalent. This is largely due to huge areas of forest cover, low levels of
industrial activity and almost 100% electricity generation through hydropower.
Bhutan is aiming for zero net greenhouse gas emissions, zero-waste by
2030 and to grow 100 percent organic food by 2020. The Himalayan nation is
currently 72 percent forested and the constitution requires that no less than 60
percent of it remains forested. It has even banned export logging.
Many have credited its Gross National Happiness index as part of the reason for
the country’s strong commitment to environmental stewardship. Rather than
focusing solely on economic indicators, the index measures prosperity by giving
equal importance to non-economic aspects of well being.
Although the highest emissions are from the agriculture sector they have more or
less remained constant, but emissions from sectors such as industrial processes
and transport are showing a rapidly increasing trend4 . During the period
2000‐2013, emissions from the energy sector increased by 191.6% from 0.270
million tons of CO2e in 2000 to 0.79million tons of CO2e in 2013. During the same
period, emissions from industrial processes increased by 154.3% from 0.24 million
tons of CO2e to 0.6 million tons of CO2e. Emission from waste management also
increased by 247.54% from 0.047 million tons of CO2e to 0.16 million tons CO2e.
Forests currently cover 70.46% of the land area of Bhutan and sequestration by
forests is estimated6 at 6.3 million tons of CO2 and emissions in 2013 are
estimated at 2.2 million tons of CO2 equivalent
As reported in the Second National Communication, Bhutan is highly vulnerable
to adverse impacts of climate change due to the fragile mountainous ecosystem
and economic structure. The most vulnerable sectors are water resources,
agriculture, forests & biodiversity and hydropower sectors. It is projected that
both the frequency and intensity of extreme climate events would increase with
changing climate.
Assessment of Carbon Credit for Bhutan:-
Bhutan intends to remain carbon neutral where emission of greenhouse gases will
not exceed carbon sequestration by our forests, which is estimated at 6.3 million
tons of CO2. Bhutan will maintain a minimum of 60 percent of total land under
forest cover for all time in accordance the Constitution of the Kingdom of Bhutan.
Efforts will also be made to maintain current levels of forest cover, which
currently stand at 70.46%, through sustainable forest management and
conservation of environmental services.

Executive summary the national strategy and action plan for low carbon
development shall enable Bhutan to fulfil its commitment of remaining carbon
neutral meaning that national emissions of greenhouse gasses (GHG) will not
exceed the national sequestration. The strategy comprises various scenarios
analysing development paths until the year 2040. As a supplement to the
scenarios the action plan presents a number of short- and medium-term
interventions to achieve carbon neutrality while still pursuing sustainable
economic development. The analysis starts by defining a baseline, i.e.
development path under a business-as-usual regime. The data for the baseline is
delivered by the National Environment Commission (NEC) and the National
Statistics Bureau supplemented by information from a large number of ministries
and other stakeholders involved. A core element is also the energy data directory
2005. Bhutan’s sequestration capacity is in the analyses assumed constant over
the period until 2040 while emissions are analysed in more detail. All projections
of the present study are made from 2005 until 2040. In line with the methodology
applied for the national GHG inventory, prepared by NEC, projections are made
on a sector level and emissions categorised as energy related (residential,
commercial, and industrial energy consumption as well as transport) and non-
energy related (industrial processes, agriculture, land use and forestry, and
municipal waste). Today Bhutan has low carbon intensity on 0.15 kg CO2e/USD of
GDP power purchase-parity compared to an average among developing countries
of 0.46 kg CO2e/USD. However, the low intensity reflects the high rate of carbon
neutral hydro power in Bhutan. Another hydropower based country like Nepal
has an intensity of 0.12 but also a lower GDP/capita. Bangladesh, which has no
hydropower and a low GDP/capita, has an intensity of 0.22. For projection of the
energy related carbon emissions it is assumed that an increase in economic
growth (GDP or GDP/capita) leads to an increased demand for energy services
(light, heat, transport, etc.) and consumption of final energy (fuel wood,
kerosene, diesel, etc.) resulting in increasing carbon emissions. Energy related
emissions can be reduced by improving the energy efficiency of appliances
producing energy services and/or by changing the source of final energy from
fossil fuels to renewable energy sources. Three different scenarios of energy
related emissions have been analysed to show the possible impact of energy
efficiency and renewable energy on the emission levels. For projections of the
non-energy related carbon emissions it is assumed that an increase in GDP leads
to an increase in demand for final products resulting in increasing carbon
emissions. Non-energy related emissions can be reduced by improving carbon
intensity in the production process and/or reducing the production of for example
municipal waste. Baseline development NEC has estimated the 2009 carbon
emission level to around 2.1 million t CO2e which is about one third of the
estimated sequestrated 6.3 million t CO2e. Emission from agriculture is a major
source with half of the emissions while emissions from energy and industry count
for a quarter each. The high share of emissions from the agricultural sector
compared to other countries reflects the high rate of carbon neutral hydro power
in Bhutan compared to the high dependence on fossil fuel for power generation
in many other countries. The baseline projection shows that in 2040 the emissions
will be 4.7 million t CO2e or more than double the level in 2010 (see Figure 1), but
still below the expected sequestration of 6.3 million t CO2e. The projections are
made using the official population and GDP forecasts. The energy related
emissions will increase with almost 90% during the period 2010-2040 while the
non-energy related emissions will increase with almost 110%. The main increase
is expected in the industrial processes with emissions in 2040 that are almost four
times the emissions in 2010. 10 | A national strategy and action plan for low
carbon development, Final report - 31-01-2012 Figure 1: Baseline projection of
carbon emissions from energy related and non-energy related emissions (kt
CO2e). Note: International aviation is not included in the numbers. Alternative
energy scenarios An overview of the results of the three modelled scenarios for
energy related carbon emissions is presented in Figure 2 below. No scenarios
were designed for the non-energy related emissions. Figure 2: Development in
final energy consumption (kt) and energy related carbon emissions (kt CO2) of the
four modelled energy scenarios 2005-2040. EE = energy efficiency; RE =
renewable energy. Note: Non-energy related emissions are not included.
Alternative energy scenarios:
An overview of the results of the three modelled scenarios for energy related
carbon emissions is presented in Figure 2 below. No scenarios were designed for
the non-energy related emissions.

In the baseline projection energy related carbon emission increases by a factor

2.5 from 2005 to 2040. A focused effort to improve energy efficiency in all sectors
could bring about a 10% reduction in 2040 compared to the baseline. A focused
effort to increase the share of renewable energy has a much more significant
impact and could result in a 42% reduction in 2040 compared to the baseline
development. A combined pursuit of energy efficiency and renewable energy will
a slightly larger impact, namely 49% reduction in 2040 relative to the baseline
level. Bhutan has a large hydro power potential and exploitation of this resource
is gradually increasing with the construction of new large scale hydro power
plants. In 2009, the total hydro power production was 6,925 GWh (installed large
hydro capacity 1,480 MW) of which 78% was exported to India. The carbon
emission level of the marginal production in the Indian electricity system is 1.0
tCO2e/MWh. In other words, the electricity exported to India in 2009 represents
about 5.4 million t CO2e avoided carbon emission. Bhutanese hydro power
production thus not only benefits Bhutan but also the regional carbon balance.
The 2009 amount of avoided carbon emissions in India due to import of electricity
from Bhutan exceeds the total expected 2040 amount of carbon emissions in
Bhutan.