What is a Carbon Credit?

The Carbon Credit What is a Carbon Credit? Its true definition is the ESO or Exchange Soil Offset or, more popularly the CO2e or Carbon Dioxide equivalent but what is it equivalent to? How many Euros are there for each Credit? Coincidentally, today is also the first day of a new currency that is very much like the real Carbon Credit. The Savetheplanet Carbon Credit is officially launched this day 1st September 2005 to a less than rapturous welcome from all who use her. Lets call them Credits because in Science Fiction films Credits are the currency of the future anyway. So far, I have printed off the first batch of notes you can see below, I guessed that the 20 Credit note would entitle the holder to drive for 20 weeks at current technology levels. Owners of hybrids might be entitled to drive for more weeks but until I can work out the true value of a Credit, its difficult to know how it compares to a loaf of bread, a litre of petrol or a pair of Levi jeans. Or a tree. But what is currency. The Euro was launched not long ago and its value floated around on money markets until the state of Europes economy, stability, legal framework, ethics and industry were used to give the Euro a value relative to other currencies. The Euro remains as flexible as other currencies since the price stabilized and its value now fluctuates according to political and economic factors. Currency is the way we value things against each other. The best currency is gold. It is subject to none of the political kerfufflings of any other currency and is never affected by the weather (which is about to change most economies). Its lowish when things are good and highish when things are bad. Everybody wants it because it looks nice and if the king of somewhere dies, the price of gold doesnt change. Carbon Credits have the potential to be the next great currency. Despite us not really wanting them at all, we will have to do something that stops us having more hurricanes like the one we had yesterday in the southern US. Hurricanes cost a lot of money and insurance companies are going to say that unless parties are seen to be taking all possible action to minimize the weathers destruction, we wont pay out. Insurers will find any reason not to pay out. It might be almost mandatory to have Carbon Credits one day and there seems to be no alternative world currency that escapes local political intervention that we can all trust. Carbon Credits are going to hold the same value where ever you are because CO2 has a global impact.

At the moment, the Carbon market is quoting one Credit as being worth US$10 30, which is a bit vague really. Whether you want them or not depends on how much you are prepared to pay

and maybe thats the reason for the large price band. Still, what precisely is a Carbon Credit? It should be based on something more tangible than the ability to decrease CO2 production to near 1990 levels (Kyoto uses 1990 as a baseline date). Maybe we might end up issuing too many Credits as we seek to mop up CO2 judiciously and go too far. As CO2 reduction accelerates and we start to gain control over atmospheric CO2, a Credit (the ability to reduce CO2 levels) could become worthless. It seems likely that in the initial stages of the use of the Credit, every nation is going to want them to offset their CO2 production (the Kyoto agreement states that all parties should be able to account for their CO2 output by investing in carbon sinks and buying an equal number of Carbon Credits) and the money used to buy Credits is essentially going to go towards the increased use of alternative energy sources. This is exactly what is happening right now, because the terms of the Kyoto Protocol dictate that monies are to be used in nations that do not have the resources to invest in alternatives. As weather patterns become more obviously disruptive, the need to counter CO2 emissions will increase and the demand for Carbon Credits will become greater. Essentially the Carbon Credit market will be about buying credits to ensure against extreme weather events. Since the Carbon Credit is so inextricably connected to CO2 and we need something to actually value, CO2 should be considered to be the currency, it has to be. But how much is CO2 worth and ultimately what do we have to buy to actually reduce our CO2 levels? Lets look at trees. Most people see trees as the solution to the CO2 problem. The tree is the only known thing we can control that absorbs CO2. I want to see how many trees a Credit is worth so that I can grasp the size and scale of a Credit. The oceans absorb a lot of CO2 (there are lots of shells) but we have no control over this constant. Our farming methods and the way we handle our waste affect levels of CO2 but if you try to imagine what one Credit looks like, a tree or number of trees is a great way to give it context. So what is the market value of a tree and how much CO2 does it absorb? Well that ultimately varies from tree to tree. An Oak in the UK is not the same as a Eucalyptus in Australia. Each tree has a different ability to absorb CO2. In practice, if the lumber price of a tree is less than its value for CO2 absorption, then foresters will naturally leave the tree to stand. So far, the unit for one Carbon Credit is given as 1 Tonne of CO2. So how many trees does it take to absorb 1 Tonne of CO2? And which particular trees do we choose? Since the terms of the Kyoto agreement are that trees should be left to stand for 25 years before being felled, I have used the example below to calculate how many 25 year old maple and pine trees are needed to absorb 1 Tonne of CO2.

Typically, a tree reaches a size of around 14 dbh (diameter at breast height and depends on species) at the age of 25 and according to forest charts this tree has a marketable volume of 130 board feet. With prices varying from US$300 700 per thousand board feet, this one tree can be worth anything from about US$35 75. According to www.tufts.edu an average 25 year old maple tree absorbs 2.52lbs (1.1kg) of CO2 per year. Over 25 years thats 27.5 kgs. It means that 36 trees are needed to absorb one Tonne (1000kg) of CO2 and with each tree costing $50, each Carbon Credit should cost at least 50 x 36 trees = US $1800. Otherwise there is more value in felling the trees. Using these trees to give estimates to their carbon value gives very expensive Carbon Credit prices. Clearly these particular trees are not very good at absorbing high levels of CO2. According to the same website, an average 25 year old pine absorbs 15lbs (6.82kgs) of CO2 per year which means that the cost of a Carbon Credit when measured with this tree is approximately 6 times cheaper at US$300. In other words it takes $300 dollars (6 trees) worth of lumber of this type of tree to absorb 1 Tonne of CO2. If these trees are used as a benchmark for prices the Credit would cost $300. Its interesting to note from the website I refer to, how 50 year old trees consume much more CO2 than younger trees. Maybe I should base all the valuations for a Credit on 50 year old trees but this might not be practical to foresters as they will have to leave the trees to reach that age before felling them. The dilemma is which trees are we to use as the average tree for giving Carbon Credits their value. By having a look at the necessary charts for lumber prices, it seems to be hugely variable from region to region and species to species with prices depending on the time of the year and three measuring tables (International, Scribner and Doyle) all measuring trees differently. My guess at $1800 and $300 for the cost of each Credit using my simplistic theory is way off the estimates of $10-30. I had imagined that a Carbon Credit would be easy to weigh and to grasp, but just as the Signatories of Kyoto are finding out, its definition is hard to place in the context of our daily lives. It would be nice to say that a Credit is equivalent to two trees growing to 50 years of age, but it really is not that simple at all. Maybe my note which gives the driver 20 weeks driving for 20 Carbon Credits could be an indication of how much a Carbon Credit is after all. Using a simplistic ideal for working out the value of a Credit might mean it is more frequently used. Carbon Credits Explained Understanding the system and logic

Credits The inconvenience of the sky being darkened is nothing to the lasting effects of all the carbon being thrown into the atmosphere and radically changing our climate by trapping the heat from the sun (once the clouds of ash have disappeared). Science has correlated climate over the ages with core samples from ice sheets and found that carbon dioxide levels fluctuate with climatic events. Only recently has science been able to

understand how this CO2 actually works to trap the heat in the atmosphere and by calling it the greenhouse effect gives us the basic understanding of what goes on. Other gases are also responsible for containing the heat of our planet and some are far worse that CO2. See http://ghg.unfccc.int/index.html which shows that methanes Global Warming Potential (GWP) is much higher than CO2. However, since CO2 is the main contributor to the effects of Global Warming the GreenHouse Gases are known collectively as CO2 emissions. The good news is that the process of reducing pollution from CO2 emissions is well under way. It has got to be the most important thing for mankind to address as history has shown us the certain conclusion. The US government is not so sure that CO2 is responsible for all of the global warming although California is one of the states taking the opposite stance by aggressively promoting everything to do with the use of renewable resources. Russia agrees that CO2 is in its sights (it signed the Kyoto Protocol in 2004) but is unfortunate in having a massive and old infrastructure that will take time to upgrade. To reach this point in discussions between nations, the countries that form the worlds major polluters were identified from global CO2 emission statistics based on 1990 figures. At the meeting in Kyoto in 1997, China and India were therefore not significant polluters and the outcome was that those nations deemed responsible for significant CO2 emissions were given targets to reduce them. The US have used the non-inclusion of China and India as its reason to stay out of the Kyoto Protocol. What emerged from the Kyoto meeting is that as each country produces CO2, it must be able to contain that CO2 by tree-planting or other processes that can absorb it, such as sequestration and changing farming methods. Or it can reduce the CO2 it produces in the first place. If that country produces more CO2 than it can absorb, it must purchase an absorption ability from another nation. The Carbon Credit is this new currency and one Carbon Credit is equal to one Tonne of CO2 and is called a CO2e (CO2 equivalent). A nation might have a shortfall in absorbing 500,000T of CO2 and according to the Kyoto agreement it must seek to purchase those from another nation that has been planting trees for such a consideration. Costs are between US (ironically) $10 40 per credit. Its pretty simple really in theory. All growing things absorp carbon which ultimately ends up in the soil. Planting trees reduces the carbon in the atmosphere but not if they are then cut down and burnt and crops that are planted and harvested will not actually store carbon within them. Long term plans are needed. Crops can be farmed in such a way that the soils are not ploughed to let the stored carbon escape. Weeds and borders to fields can be encouraged. Forests can be left to stand. Fuel usage can be cut and power generation can be more efficient and all this reduced consumption of carbon will mean that less carbon credits will have to be purchased. The money that purchases carbon credits will ultimately be used to give grants to further carbon saving schemes. New Zealand has already funded some wind generation projects from the money gained from selling carbon credits. Ireland has recently purchased 95% of its carbon credits from overseas to offset the millions of tons of CO2 its industries will develop for the forthcoming year. The other 5% will come from internally as they have new practices of farming and been planting trees since 1990. Some treebound countries do not necessarily have loads of carbon credits to sell as they have not made any attempts to increase the number of trees since 1990. There are complications to be conquered though. In Australia, Virgin has tried to introduce it's airline but has been deterred by the need to offset it's CO2 pollution by the

purchase of Carbon Credits which makes them uncompetitive. A global market may become less global if the cost of a product is measured in terms of total CO2 emissions. The end result will be that we may all be seeking to trade locally. Along with our new found local power generation facilities we may see a shift away from massive corporations and move back towards co-operatives. Made in China might be something people in Europe see less of. Alternatively, goods could be moved around the globe super efficiently and only the large corporations will be able to afford this. The ramifications of the Kyoto Protocol are that it will affect the way we measure the cost of items. The development and fine-tuning of the terms of the Protocol are to be introduced in 2008 and it may seem to be a huge headache for businesses and governments alike. However, remember the certain conclusion.

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