Beruflich Dokumente
Kultur Dokumente
Rasananda Panda
Submitted to,
Submitted By,
Group 11
Importance
Shahid Ahmed
(20081047)
Shashank
Suman
(20081048)
Shashank
1|Page
Tiwary
(200810490)
Shashwat
ON
PROJEC
Chaturvedi
(20081050)
T
Acknowledgement
We would like to thank Mr. Rasananda Panda for providing us the
opportunity to work on this report and guiding us throughout the
preparation. His contribution towards the topics to be covered and the
way to complete the report was very helpful for us. We would also like
to thank our seniors particularly Mr. Amit Mandal for helping us with
our project. We would also like to thank our librarian who provided us
with the relevent reports. Also our sincere thanks to the college
administration for including this as a part of our course, because of
which we were able to gain a lot of knowledge in the field of oil and
gas.
2|Page
Contents
S. Topics Page Number
No.
Executive Summary 4
Objective 4
1. Introduction of Carbon Market 5
1.1 Overview 6
1.2 Methods of trading 8
2. Market Structure 11
2.1 Kyoto Mechanisms 12
2.1.1 Clean Development Mechanisms
1. Introduction 12
2. Various Agencies, Boards 13
and Panels Involved and
their responsibilities
14
3. CDM Participation
Requirements 15
4. Scope of CDM Projects 17
5. CDM Project Cycle 22
6. Crediting Period
22
7. Registration fees & SOP
23
8. Types of CDM Projects
23
9. Markets for CDM
10.Overall Advantages and 24
Disadvantages 25
11.Some statistics Related
with CDM
2.12 Joint Implementation 31
2.1.3 International Emissions Trading 36
3|Page
2.2 Emission Trading Market 37
Executive Summary
4|Page
Continuing with our last project this time we have tried to understand
the carbon market, how does it work, who are the players, what are
they doing how are they doing the business. The carbon markets are
dived into two categories based on the regulation they are markets
under Kyoto Mechanisms and Voluntary Markets. Where are the credits
being traded and how they are traded. We have tried to concentrate on
the Clean Development Mechanism as it is the one which is being
practiced in India. There are 8 steps which are involved in a CDM
project which are pre project and post project implementation. Various
agencies like EB, DNA, and DOEs are involved in it. The CERs which are
issued are traded into two types of markets Primary (contract based)
and Secondary Markets (open markets). Then we have tried to see
India’s potential as to how it is trading who are the prominent players
etc.
Nothing is perfect in this world so neither is CDM too. We have tried to
summarize the various issues related with CDM, the risks related with
the projects which are still causing a problem for arranging finance for
these projects. The structural issues, procedural issues and risk like the
timeframe is too long for the projects to get registered and issue of
CERs. It is a high risk with the large amount of obligations to be
fulfilled. Then there are price related risks too. Various organizations
like IETA, World Bank and other major consultancies have tried to
address these matters and have come with certain recommendations
which we have tried to summarize in the report.
Objective
The objective of this project is to understand the concept of carbon credits.
What is it, how it is traded, what are its different mechanisms. What types of
markets are there who the players are? Who is buying, who is selling. How
has the world reacting to this market opportunity. As its CDM which is being
practiced in India we have given special attention to it. We have tried to
5|Page
understand how the projects are started, how the CERs are traded and what
are the issues and risks related with the projects. Looking at the present
scenario we have tried to find how India is capitalizing on it.
1.INTRODUCTION
6|Page
1.1 Overview
Carbon Credit- the concept of Carbon Credit emerged in 1997 at World
Health Summit held in Kyoto Japan. This idea could bring enormous
changes to the environment and society if practiced properly. The
outcome of this was Kyoto protocol, in which developed nations agreed
to limit their green house gas (GHG) emissions relative to the levels
emitted in 1990 or pay a price to those that do. At this point came
carbon trading.
The idea was to make developed countries pay for their wild ways with
emissions while at the same time monetarily rewarding countries with
good behaviour in this regard. Since developing countries could start
with the clean technologies so they would be rewarded and would get
paid by those who were still polluting the environment and did not
meet the norms. This system can become a machine which partially
transfers the money from wealthy developed countries to the
developing ones. Say a company in India can prove it has prevented
the emission of x-tonnes of carbon, it can sell this much amount of
points (or carbon credits) to a company in say, Europe which has been
emitting carbons.
As a result under the UNFCC (United Nations Framework Convention on
Climatic Change) industrialized nations entered into a legally binding
agreement to reduce the collective emissions of greenhouse gases
(GHG) by 5.2% compared to the 1990 level; calculated at an average
over the five year period of 2008-12. Separate national targets have
been given to US (7%), European Union (8%), Japan (6%) and Russia
(0%). The reduction is to be done on six greenhouse gases – carbon
dioxide, methane, nitrous oxide, sulphur hexafluoride, HFCs and PFCs.
Further the protocol reaffirms the principle that industrialized countries
7|Page
have to pay and supply technology to other countries for climate
related studies and projects. The Protocol came into force in February
2005 giving GHG emission limits for each developed (Annex I) country
included in the protocol. In order to facilitate reaching emission limits,
three additional mechanisms were agreed upon in the Marrakesh
Accords in 2001. These are the Clean Development Mechanism (CDM),
Joint Implementation (JI) and Emission Trading (ET).
8|Page
1.2 Methods of trading
9|Page
IET- international emission trading
CDM- clean development mechanism
JI- joint implementation
AAU- assigned amount units
CER- carbon reduction units
ERU- emission reduction units
10 | P a g e
By allowing 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 C-
credits from another operator. Trading of C-credits between buyers and
sellers establishes the market price per C-credit. If it is cheaper for an
emitter of greenhouse gases to buy a C-credit from another company
rather than controlling additional emissions, they will buy credits. A
seller will want to sell credits if they can reduce greenhouse gas
emissions or sequester additional C at a cost that is less than the price
of the C-credit.
11 | P a g e
Sources Usually high emitters As defined by each standard.
Covered such as the energy Not limited to just high
sector and energy emitting sectors.
intensive industries
Independe Minor role in verifying Fundamental role in verifying
nt third emissions inventories the
Party credibility of the
counterfactual baseline and
thus the authenticity
(additionality) of the claimed
emission reductions.
Emissions Neutral, as is ensured Neutral, providing projects are
impact by zero-sum nature of additional. Otherwise, net
of trade allowance trades. increase in emissions.
Possible decrease in emissions
in the Voluntary market.
12 | P a g e
2.MARKET
STRUCTURE
13 | P a g e
and also to help them develop new technologies and methods for clean
processes which would not only reduce emissions but also help in the
development of the developing economies.
CDM is defined in the article twelve of the Kyoto Protocol which
states:
The purpose of the clean development mechanism shall be to
assist Parties not included in Annex I(developing countries
defined in Kyoto Protocol) in achieving sustainable development
and in contributing to the ultimate objective of the Convention,
and to assist Parties included in Annex I in achieving
compliance with their quantified emission limitation and
reduction commitments under Article 3.
Under CDM
14 | P a g e
• The COP shall be responsible for ensuring transparency,
efficiency and accountability through independent auditing and
verification of project activities. It shall ensure that a share of the
proceeds from certified project activities is used to cover
administrative expenses as well as to assist developing country
Parties.
15 | P a g e
industry) in which they are allowed to operate. The DOE checks
that the project fulfils the requirements set forth by the UNFCCC,
additionality being the most important issue. In March 2008, 13
companies have received DOE status world wide of which 7 are
operating in India.
Thus a DOE has two key functions:
• It validates and subsequently requests registration of a proposed
CDM project activity which will be considered for its validation by
EB.
1: The List of DNA of various countries is provided in the Exibit at
the end.
• It verifies emission reduction of a registered CDM project activity,
2: The list of DOE around the world is provided in the Exibit.
certifies as appropriate and requests the Board to issue Certified
Emission Reductions accordingly.
16 | P a g e
Small-Scale Working Group: this group is concerned with
small-scale methodologies and projects.
17 | P a g e
f) It submits the supplementary information on the assigned
amount.
The various sectoral scopes in which a CDM project activity can occur
are:
1. Energy industries (renewable - / non-renewable sources)
2. Energy distribution
3. Energy demand
4. Manufacturing Industry
5. Chemical Industry
6. Construction
7. Transport
8. Mining and Mineral Production
9. Metal Production
10. Fugitive emissions from fuels (solid, oil, gas)
11. Fugitive emissions from production and consumption of
halocarbons and sulphur hexafluoride
12. Solvent used
18 | P a g e
13. Waste handling and disposal
14. Afforestation and Reforestation
15. Agriculture
19 | P a g e
1. Project Identification:
20 | P a g e
The official CDM-cycle laid out by the UNFCCC does not formally
require the formulation of any kind of document in the project
identification phase, but the DNA requires it later. It is also a
useful tool for the project proponents when in dialogue with
potential stakeholders such as CER buyers and project financiers.
Generally CDM consultants are hired by the parties to develop a
CDM project. In India particularly 90% of CDM-projects so far
have involved one.
2. Project Design:
Environmental impacts.
Stakeholder Comments.
21 | P a g e
3. Host Country Approval:
4. Validation:
22 | P a g e
validation phase ranges from 8 to 13 weeks. Out of other things
which a DOE looks for Addtionality (A project activity is expected
to result in a reduction in emissions of GHGs that are additional
to any that would occur in the absence of the proposed project
activity).
In case a new methodology has to be developed for the project,
it has to be approved by the CDM methodology panel. In this
case, the validation phase will take an additional 3–12 months. It
also checks whether the Provisions for monitoring, verification
and reporting are in accordance with relevant decisions of the
COP. A written approval constitutes the authorization by a
designated national authority (DNA) of specific entity(ies)’
participation as project proponents in the specific CDM project
activity. Multilateral funds do not necessarily require written
approval from each participant’s DNA. However those not
providing a written approval may be giving up some of their
rights and privileges in terms of being a Party involved in the
project.
Following a successful validation, the project proponents can
apply for project registration.
5. Registration:
23 | P a g e
by the CDM Executive Board. In case of rejection of a project,
the costs of a review (estimated at 4500 USD) shall be borne by
the DOE if it is to be found in the situation of malfeasance or
incompetence. The EB will bear the costs if the project is not
rejected.
6. Monitoring:
24 | P a g e
7. Verification and Certification:
8. Issuance:
25 | P a g e
2.1.1.6 Duration of the project activity / Crediting
period
Project participants have to select a crediting period for a
proposed project activity from one of the following alternative
approaches:
• A maximum of seven years which may be renewed at
most two times (maximum 21 years), provided that, for
each renewal, a DOE determines and informs the CDM EB
that the original project baseline is still valid or that it has
been updated taking account of new data where
applicable; or
The starting date and length of the first crediting period has to
be determined before registration.
26 | P a g e
get registered after a request for registration the moneys
paid in excess of US$ 30,000 would be reimbursed to the
project developer.
27 | P a g e
Secondary Market
The primary CER market is the one in which there is transaction between the project
developer and investor. It is the transaction that carries the CER into the international market.
The contract to transfer ownership of a CER from seller to buyer is known as an Emissions
Reduction Purchase Agreement (ERPA). As the initial CDM contract is much like project
finance, ERPAs vary from case to case. But it does depend on the risk involved with the
project.
The secondary markets are the ones where the CERs are traded like EU ETS or CCX where it
is bought by the firms who will submit it to meet their targets. The buyers for this more
expensive, low-risk secondary CER tend to be European companies that face their specific
target under the EU ETS.
Disadvantages:
28 | P a g e
Some critics who are not in favor of this mechanisms support their
views by:
They say that it is provision of cheapest way of purchasing
climate destroying right.
29 | P a g e
Number of
Region
projects
30 | P a g e
From the above figure we can see that the Asian countries are really
enchasing the CDM opportunities.
Each and every sector which is included under CDM in Kyoto Protocol is
participating in the market opportunities of CDM if we see the breakup
of the number of projects under every sector we will see that the
energy sector by employing better technologies are not only reducing
the emissions but even earning money, the most.
31 | P a g e
By the size of the industry that is large or small scale projects we can
see that both have equal proportion that means all types of industries
are equally interested in investing into CDM projects.
Talking about DNAs the most number of DNAs are found in Non Annex I
African countries which clearly shows that the whole purpose of CDM in
turn the Kyoto Protocol is being fulfilled judiciously. The most number
of countries involved in CDM projects are from Africa which needs
development on a large scale.
32 | P a g e
The diagram below, gives an overall picture of participating parties and
DNAs.
33 | P a g e
Looking at the breakup we see that CERs are being traded primarily
through primary market and the HFC sector is producing the most
number of CERs uptil now.
34 | P a g e
From the above diagram we can see that the number CERs being
issued by china are the most, but India is not far behind. Hare one
thing is notable, that though most number of projects is in India but
the number of projects as compared to china is very low, one of the
reasons behind this is that India has not yet issued the CERs and
preserving it for selling it till 2012.
35 | P a g e
2.1.2 Joint Implementation (JI)
Introduction
Joint Implementation (JI) is effectively an alternative project-based
mechanism for trading emissions between countries with a cap.
36 | P a g e
Instead of directly purchasing emission rights, i.e. assigned amount
units (AAUs), a country gains emitting permits through funding a part
of a project activity which reduces greenhouse gas (GHG) emissions or
enhances removals by sinks. These emissions savings are measured in
tons of CO2 equivalent, which are credited with emission reduction
units (ERUs) after the actual emission reductions have been verified.
An equivalent amount of tons is deducted from the cap (the Assigned
Amount) of the host country, and added to the cap of the buyer
country through the transfer of ERUs. The countries hosting JI are
mainly economies in transition (EITs) – countries of the former Soviet
block – which can provide cheaper emission reductions than the
majority of the OECD countries as a result of the inefficiency of their
economies. There are also several cases of OECD counties hosting JI
projects, which are discussed in the study. While the value of ERUs
generated will generally not cover the investment costs of a project, it
does provide an added incentive to invest in certain project types and
this in a competitive market can be a decisive factor in investment
decisions.
Emission reductions are calculated by creating a baseline which is a
forecast of the future emissions in the absence of the project, and a
project scenario based on the measurement of the emissions after the
project has been implemented. Article 6 of the Kyoto Protocol enables
Annex 1 Parties i.e. developed countries to agree to jointly undertake
emissions, with credits arising from cross border investments
transferred between them.
37 | P a g e
INSTITUTIONAL BASIS AND GUIDELINES
• Track 1 is open to countries that can fully account for their GHG
emissions and movements of units in their registry. It allows the host
country government to decide which projects qualify and issue ERUs
without third party interference.
38 | P a g e
three basic eligibility requirements concern the ability of the country to
transfer units out of its registry, and form the basis of Track 2 eligibility:
• The host country is a Party to the Kyoto Protocol;
• It has calculated its Assigned Amount;
• It has in place a national greenhouse gas registry.
39 | P a g e
Source: Adapted from JI Track 1/Track 2 eligibility in Eastern Europe,
Point Carbon, 2007.
Additionality
40 | P a g e
another country’s account, the Kyoto cap of the seller country is
reduced because for every ERU transferred one AAU is cancelled
during conversion. But at the same time, an additional JI project
generates emission reductions which would be reflected in the reduced
national emissions. Thus, an equivalent amount of AAUs is freed up in
the national account, and the amount of AAUs under the cap remains
the same. If the project is not additional, no AAUs are freed on the
national account to replace those transferred, and thus the amount of
available permits under the cap is reduced. As most EITs have a surplus
rather than a shortage under the national cap, any such loss can be
offset by the available surplus, creating concerns that there is no
incentive to ensure additionality. Some projects which are regarded as
additional might have materialized in any case, but the sales of ERUs
could have provided the incentive to implement the project earlier than
business as usual. In practice, additionality is a vague concept and
difficult to apply in the case of a transition economy which is
undergoing a period of rapid growth and change. Some project
developers argue that a project design document (PDD) consists of the
‘science’ of baseline and the ‘art’ of additionality. Many projects are
superficially attractive according to the Western economic logic. For
instance the lack of capital availability can distort the seemingly
profitable modernization activities. Indeed, it could be argued that the
general Western market logic does not always apply. Additionality rules
and tests would work better in an established market economy than in
a transition economy where the rules of the game remain unclear and
where personal relations or practices from the previous economic
system can have a significant impact on decision making.
Full Track 1 compliance could solve most additionality problems as no
external verification of project is required under full compliance, and
consequently, buyer and host have more flexibility to decide between
them on what constitutes additionality. Some project developers are
41 | P a g e
also skeptical of the concept of additionality because of this. Should
Track 1 become the track of choice for buyers and sellers, some have
argued that JI might actually turn out to be more like international
emissions trading under the Kyoto Protocol which allows trading AAUs
without links to projects.
42 | P a g e
emission units to spare - emissions permitted them but not "used" - to
sell this excess capacity to countries that are over their targets. Thus,
a new commodity was created in the form of emission reductions or
removals. So according to this carbon is now tracked and traded like
any other commodity.
Other trading units in the carbon market:
More than actual emissions units can be traded and sold under the
Kyoto Protocol’s emissions trading scheme. The other units which may
be transferred under the scheme, each equal to one tonne of CO2, may
be in the form of:
• A removal unit (RMU) on the basis of land use, land-use change
and forestry (LULUCF) activities such as reforestation
• An emission reduction unit (ERU) generated by a joint
implementation project
• A certified emission reduction (CER) generated from a clean
development mechanism project activity
Transfers and acquisitions of these units are tracked and recorded
through the registry systems under the Kyoto Protocol. An international
transaction log ensures secure transfer of emission reduction units
between countries.
The commitment period reserve:
In order to address the concern that Parties could “oversell” units, and
subsequently be unable to meet their own emissions targets, each
Party is required to hold a minimum level of ERUs, CERs, AAUs and
RMUs in its national registry. This is known as the “commitment period
reserve.”
II.2 Emission Trading Market
Various Emission Trading Schemes exist inside and outside the scope of
the Kyoto Protocol. These trading schemes are part of the commitment
43 | P a g e
of States or companies to reduce their GHG emission. As article 17 of
Kyoto protocol makes it clear that emissions trading "shall be
supplemental to domestic actions" as a means of meeting the targets
established for the Annex I parties and thus domestic emission trading
market has been created. These trading schemes are based on
“Emission Allowance”, wherein there are fifty Annex-I countries who
have been assigned certain emission unit (allowances). The assigned
amount for any Annex I party can be calculated from its emissions
reduction target specified under Annex B of the Kyoto Protocol. For
example, the "assigned amount" for Japan is calculated by multiplying
the total emissions of the Japanese target under Annex B (6 per cent
below 1990 US net emissions) by 5 (for the five years of the
commitment period: 2008-2012). These member countries, under their
National Allocation Plans (NAPs) assign these units to different
industries. If the units (of carbon or other ghgs) emitted by an entity
are more than units assigned to it, that entity will have to buy the extra
units to meet the target committed. Similarly, if the units emitted are
less than the assigned quantum, the spare units could be sold
internationally.
Source: IETA
44 | P a g e
Presently the following schemes are effective or are being developed:
And there carbon instruments are Assigned Amount Units (AAUs) and
European Allowances Units (EAUs).
45 | P a g e
sell any over-achievement of their targets. This scheme has run till
December 2006 with final reconciliation in March 2007. The fifth year
(2006) results show that Direct Participants have achieved emissions
reductions of over 7.2 million tCO2e against their baselines since the
start of the scheme in 2002.
46 | P a g e
This phase links to CDM. The phase II starts from January 2008 to
December 2012 with tighter caps and including other sector e.g.
domestic and transport sectors. This phase links to JI. The phase III will
commence on January 2013 to December 2017. Unit of Trade is called
“EU Allowance”.
47 | P a g e
Also there is a fine of 40 euro for each excess tonne which rises to 100
euro in 2008.
48 | P a g e
year. According to the supply electricity amendment act 2002, a State
greenhouse gas benchmark, expressed in tonnes of carbon dioxide
equivalent (CO2-e) per capita, has been set. The initial level was set at
the commencement of GGAS in 2003 at 8.65 tonnes. The benchmark
progressively drops to 7.27 tonnes in 2007 which represents a
reduction of five per cent below the Kyoto Protocol baseline year of
1989- 90. The per capita amount continues at this level until 2021. And
the expected reduction of CO2e is around 108% of the 1990 level as
per the Kyoto protocol till 2012. NSW Government has also committed
to reduce greenhouse gas emissions from 158.2 million tonnes (2005
level) to 63.3 million tonnes by 2050.
Source: NSW
49 | P a g e
4. California Climate Change Register: The California Climate
Action Registry is a private non-profit organization originally formed by
the State of California. The California Registry serves as a voluntary
greenhouse gas (GHG) registry to protect and promote early actions to
reduce GHG emissions by organizations. The California Registry
provides leadership on climate change by developing and promoting
credible, accurate, and consistent GHG reporting standards and tools
for organizations to measure, monitor, third-party verify and reduce
their GHG emissions consistently across industry sectors and
geographical borders.
CCX is a cap and trade system whose Members make a legally binding
emission reduction commitment. Members are allocated annual
emission allowances in accordance with their emissions Baseline and
the CCX Emission Reduction Schedule. Members who reduce beyond
their targets have surplus allowances to sell or bank; those who do not
meet the targets must comply by purchasing CCX Carbon Financial
Instrument (CFI) contracts.
In Phase I (years 2003-2006), Members committed to reduce emissions
a minimum of 1% per year, for a total reduction of 4% below Baseline.
In Phase II, CCX Members commit to a reduction schedule that requires
year 2010 emission reductions of 6% below baseline at minimum.
50 | P a g e
Source: Climate Registry organization
51 | P a g e
52 | P a g e
3.MARKET
DYNAMICS
The World Carbon market has started from essentially nothing to have
become a major business. Carbon trading has raised $14 billion in
renewable energy investment in developing countries between 2002
and 2006. The global carbon trading market was worth an estimated
$30 billion in 2006, a 200 % increase from 2005.
The global carbon market in 2008 grew substantially both in terms of
volume and value, fading the current downturn which has depressed
most of the industries globally. Overall, 2008 saw 4.9 billion tonnes
(gigatonnes or Gt) of carbon dioxide equivalent (CO2e) being traded,
up 83% as compared to 2007, (according to a recent report - Carbon
Market Monitor - released by Point Carbon).
The whole market’s total value for 2008 was estimated at US$125bn,
which showed around 119% growth from 2007.
Talking about each market separately the EU ETS was the leader which
accounted for 2/3 of the total carbon market by volume and 75% by
53 | P a g e
volume. The major transactions were again through the different
exchanges.
In the CDM segment of the market transactions worth $32bn took
place, and around 1.6 Gt CO2e was traded. Of which around 70% of
them was traded through secondary markets. Overall the CER market
was up by 70% from 2007 figures.
With such a huge growth already and a huge potential ahead let us
have look at the demand side and supply side of the market and also
how the pricing of these commodities done does and what are the
factors affecting them.
Buyers:
55 | P a g e
The typical buyers in the carbon markets both compliance and
voluntary are:
European private buyers interested in EU ETS:
They dominated the CDM and JI market for compliance and at the
close of 2007, their market share reached almost 90% (up from
2006).
A number of intermediaries:
56 | P a g e
investors get higher returns on coupons with increase in carbon
prices). These bonds are targeted to retail and institutional
clients seeking climate friendly investments.
CER Purchasers
CER purchasers can be divided into two groups: public and private CER
purchasers. The private CER purchasers can be further divided into
traders and end-users, while the public purchasers can be divided into
governmental and multinational organizations. The public CER
purchasers are the various governmental purchasing organizations, the
most active ones being Japanese, Canadian and German organizations.
In the private sector, British broker companies have been active, and
they have organized tours with several potential purchasers visiting
different areas to find suitable projects. Cumulatively since 2002, EU
57 | P a g e
buyers have accounted for nearly three-fourth of the primary CDM and
JI market since 2002, while Japan has accounted for about a fifth.
The basic buyers’ structure of CDM market can be shown through the
following table.
Active CER Purchasers in India Examples
Organization Type
Japan Carbon Fund, UK DEFRA's
Governmental purchase CCPO, Italy, Spain, Netherlands,
organizations Canada, Austria, Portugal,
Germany, France, Belgium,
Sweden
Ecosecurities, CO2.com,
Brokers/Traders Natsource, Akzo Nobel, Barclays,
HSBC, Pointcarbon, Rabobank,
Morgan & Stanley.
58 | P a g e
Due to the extreme growth shown in the last few years and the
potential to grow World Bank in its report on Carbon Market has tried to
project the demand of credits till 2012. The below table has been
derived from that report itself. It clearly shows the high demand
potential that is awaiting to be trapped from all over the globe.
Potential Demand from
Developed Countries (2008-
12)
KMs
demand(MtCO
Country or entity 2e)
EU 1940
gov't (EU-15) 540
private sector(EU ETS) 1400
P&Ms (200)
Japan 450
GoJ 100
private sector 350
additional demand (200)
Australia 0
Total 2435
Government 660
Private Sector 1775
additional demand (420)
59 | P a g e
3.2 Supply Side:
The supply side of the market primarily consists of the developing
countries. China till now has clearly dominated the supply side of the
market. It had a market share of 73% in 2007 as compared to 54% in
2006. The primary market is still playing a dominating role in the
selling of CERs. In 2007 62% of primary CER supply so far under
contract. It is being estimated that the global carbon market will be
worth 2 trillion pounds till 2020. And Asia’s role in global carbon
trading will be prominently that of a seller. These estimates largely rely
on estimates of the observed “yield” of issued CER from the emission
reductions initially projected in Project Design Documents (PDD) for
projects in the pipeline.
Looking at the market reports of 2007 we can see that China still
remains the favorite destination for buyers of credit, who site its large
size, economies of scale, and its favorable investment conditions.
China in order to continue its leading position increased the number of
CDM projects by nearly four times from January 2007 to March 2008
also pulled ahead of India in the number of projects.
India and Brazil :
Were the two second largest sellers with 6% market share, which was
drop in the levels from that of 2006. With CER issuances gradually
ramping up and the market infrastructure for spot CER transactions
being operational; one could reasonably expect higher volumes of spot
primary transactions reaching the market in the coming years. This
may also indicate an inclination away from the conventional,
standalone ERPAs from the past, with implications for their value as
project finance instruments. Indian prospects look very bright with the
emerging market. India is considered to claim about 31% of the total
world carbon trade, which can give $25bn by 2010.
Africa had a share of 5%. A number of countries entered into the
selling business for the first time, particularly in Sub Saharan Africa
60 | P a g e
and Central Asia and transacted volumes grew several-fold in a
number of other countries, most notably in Malaysia and Indonesia.
Although they account for a much smaller share of the primary CDM
market, some countries in Africa (Kenya, Uganda, Nigeria), Asia
(Malaysia, Philippines, Thailand) as well as in Eastern Europe and
Central Asia (Uzbekistan), reported sharp increases in transaction
volumes. Projects in Africa have contracted to supply about 50 MtCO2e
to the market so far, with more than 20 MtCO2e transacted in 2007
alone.
The following diagram gives a picture of CERs traded by volume in
2007.
In JI trading it was Russia and Ukraine who topes the charts. Their
transactions tripled in volumes through 2007. This growth was
primarily due to the EU policies which restricted the growth of JI in that
region. Hence the growth in the JI pipeline occurred almost entirely in
Russia and Ukraine which now account for 69% and 21% respectively
of the project pipeline of expected 2012 supply.
61 | P a g e
The potential of the carbon market is clearly visible from the growth
which it has shown in the last two to three years. The world bank in its
report on the market has tried to project the potential supplies of the
CERs and EUAs and other trading instruments till 2012 which can be
seen from the table below which has been derived from the from that
report. It shows the potential various countries are having and going to
have in the future.
Potential Suppliers (2008-2012)
Potential
Surplus of AAUs
(MtCO2e)
Total 7350
TOTAL 1830
62 | P a g e
3.3 The Carbon Price
There is not one single price in the global carbon markets, but many.
The reason for this is that the tradable instruments each have different
risks and usability which has led to a fragmented price. There are 5
main types of emission reduction certificate available:
• Certified Emission Reductions (CERs)
• Emission Reduction Units (ERUs)
• Voluntary Emission Reductions (VERs)
• EU-Allowances (EUAs)
• Assigned Amount Units (AAUs)
In order to assure the highest quality certificate quality, various
additional standards can be applied. Currently one of the most well-
known and strict standards for implementation of JI, CDM and VER
projects is the "Gold Standard", which was launched by the World Wide
Fund for Nature (WWF) in 2003. The table below presents price ranges
for various certificates, along with the Gold Standard (June 2007):
63 | P a g e
Price ranges and availability of various certificate types
ERU 6-14 First predictable Kyoto Protocol and Marrakesh Accords as well
from 2008 as country specific requirements
64 | P a g e
carbon prices would have ceased to exist, i.e., the marginal abatement
costs would have been equal to the prevailing market price of carbon.
regarding the prices of carbon is the prices differ significantly in
different markets. This variation in prices in different markets can be
attributed to difference in standards, regulations and many other
critical issues, but difference is so significant that it puts a question on
the efficiency of the carbon market. In addition to this, transparency of
the market has been low in the CDM and JI market.
65 | P a g e
(except possibly in Japan) are made from the Annex-1
countries (including new ones)
Bilateral government-to-government •
trades expected Banking from Russia and Ukraine
and US participation will have
Supply from Russia and Ukraine will be major impacts on supply and
important demand
POLICY DECISIONS
66 | P a g e
The power generation sector accounts for 60% of the emissions
covered in the scheme. As a result it is the most important sector in
the scheme and the relationship between the price of EUAs and the
prices for oil, natural gas, coal, freight for coal and electricity itself has
been established.
After the introduction of EU ETS, power generators are able to calculate
each day whether they would be more profitable generating from coal
plants (including the cost of emissions resulting from the generation),
or natural gas. This decision determines the intra-day demand for EUAs
and is the major price driver in the EU carbon market on a daily basis.
Figure below shows price development of the headline contract in the
EU emissions trading scheme
67 | P a g e
Figure below shows the monthly EUA 08 price range from Jan 07 to Sep
07
68 | P a g e
generating a CER and delivering it to the buyer, as well as contractual
issues.
Figure below illustrates the recent price histories of the EUA and the
secondary CER, and the spread between the two.
69 | P a g e
Source: Point Carbon
70 | P a g e
4.CDM In India
71 | P a g e
CDM in India
India comes under the third category of signatories to UNFCCC. India
signed and ratified the Protocol in August, 2002 and has emerged as a
world leader in reduction of greenhouse gases by adopting Clean
Development Mechanisms (CDMs) in the past few years.
According to Report on National Action Plan for Clean Development
Mechanism(CDM) by Planning Commission, Govt. of India, the total
CO2-equivalent emissions in 1990 were 1001352 Gg, which was
approximately 3% of global emissions. If India can capture a 10%
share of the global CDM market, annual CER revenues to the country
could range from US$ 10 million to 300 million (assuming that CDM is
used to meet 10-50% of the global demand for GHG emission reduction
of roughly 1 billion tonnes CO2, and prices range from US$ 3.5-5.5 per
tonne of CO2).
India has generated some 30 million carbon credits and has roughly
another 140 million to push into the world market. Waste disposal
units, plantation companies, chemical plants and municipal
corporations can sell the carbon credits and make money. The number
of CERs issued by India is 24.55% of the world which is second best to
that of China with 43%.
72 | P a g e
More than 200 Project Idea notes and large numbers of PDD’s are
floating in India. The wide range of possible project types and sizes in
India allows international buyers to find the project of their choice
which acts as a competitive advantage for India.
• There is a large potential for renewable energy generation from
agriculture wastes, hydro and wind.
• Thermal electricity generation and industry offer countless
opportunities to improve energy efficiency, for example, regarding
coal-fired power plants and of the transmission and distribution
system.
• The chemical industry and aluminum production allow reductions of
industrial greenhouse gases with high warming potentials.
• Moreover, the availability of skilled consultants and a fierce
competition of validators allow getting high-quality services for each
step of the CDM project cycle at very competitive prices.
73 | P a g e
project is carried out by an assessment of the probability of eventual
successful implementation of CDM projects and of extent to which
projects meet the sustainable development objectives, as it would seek
to prioritize projects in accordance with national priorities. It can also
give further guidelines for additional requirements to ensure that the
project proposals meet the national sustainable development priorities
and comply with the legal framework. Apart from carrying out the
financial review of the project proposals to ensure that correct
measures are being adopted it also carries out activities like creating
databases on organizations designated for carrying out activities like
validation of CDM project proposals and monitoring and verification of
project activities, and to collect, compile and publish technical and
statistical data relating to CDM initiatives in India.
Its powers include:
• To invite officials and experts from Government, financial
institutions, consultancy organizations, non-governmental
organizations, civil society, legal profession, industry and
commerce, as it may deem necessary for technical and
professional inputs and may co-opt other members depending
upon need.
74 | P a g e
Up till now NCDMA has approved an about 1115 projects in various
states in India and in a variety of scopes.
The above figure shows the number of projects which have been
approved in various states and the below one shows the percentage of
projects in various states out of the total of 1115.
The below two diagrams shows the scope wise breakup of the projects
approved by NCDMA.
75 | P a g e
Data Source: CDM India Website
Market Players:
All types of players are found in the Indian Markets which operate in
either primary, secondary or both. Out of the total of 184 buyers in the
world 5 Indian firms are into the buying business. But when you look at
the sellers around 23 percent of Indian firms are selling the credits (57
76 | P a g e
out of 250) in both primary and secondary market. Various types of
sellers are found in the market, major players like TATA Steel, Reliance
Energy etc, even Government undertakings like Hindustan Zinc Limited
etc. But a great revelation can be seen in the terms of the number of
service providers found in India. Not only out of world’s thirteen, seven
DOEs are from India but around22% of service providers are Indian
firms which include industries, banks like IDBI bank, ICICI Bank ltd,
government players like Ministry of Power and even institutions like
UPES. (Data Source: CDM Bazaar)
The graph below shows the Market structure of Carbon Market in India
and its comparison with the world scenario.
77 | P a g e
78 | P a g e
5.Issues and Risks
Related with the
CDM Markets.
5.1 Issues
Though the CDM is projected as a great opportunity to earn as well as
cleaning the environment it has some issues related to it. That is why
though the projects are emerging at a fast pace but then also the
financers are not that much interested in them.
First of all registering a project under the CDM is a long and complex
process with a number of additional steps compared to conventional
projects. In addition costs for the additional procedures are around
$50,000 to $250,000 also it takes about one to three years before the
registration of the project which is a long time. Even the future of CDM
is not clear after 2012. The CDM process, which is long and often
perceived to be inefficient, gives further barriers to project
79 | P a g e
implementation and financing. Secondly, the heavy and steadily
increasing workload of the CDM Executive Board with number of
application for registration increasing and such a complex process is
creating much of a back log. The problems are also being created due
to the lack of institutional capacity both in host and buyer countries.
5.2 Risks
That is why the CDM in turn the sale of CERs offers an additional
income stream for the financers but then also they are not that many
risks this is basically due to some risks involved in the projects. The
risks can be categorized according to the nature like
Performance risk
Registration risk
Host country political risks
Contractual risks.
Performance Risk:
The performance risk relates to how the project performs in relation to
the expectation. It has a risk of whether the finance can be raised by
the developer or not. It also looks whether the plant will operate as
foreseen in the project plans and the expected number of CERs is
issued to it, even the creditworthiness of the counter parties also is a
risk factor.
Registration Risk
It includes risks related to the administrative levels. That is whether
the project registered will be approved by EB or not. The emissions
reductions, which determine the number of CERs the project is issued,
depend on what ‘business as usual’ scenario the CDM authorities
decide is appropriate to judge the project (baseline risk). The project
80 | P a g e
must be executed according to a ‘methodology’ which in turn must be
approved by the CDM methodology panel
Country Risk
Once these challenges are overcome, there remains the investment
climate in the country hosting the project. The level of risk is higher in
developing countries due to the often less developed legal and political
infrastructure. It can include
Contractual Risks
It is also noteworthy that each ERPA contract may have different
provisions that affect the price. For example, where the buyer is willing
to commit to upfront payment they will command a lower price than
payment on delivery. Similarly, a higher price will be paid by one
company seeking to be the preferred claimant if a project with several
buyers under-performs. That company will pay more to be the first in
line to receive CERs if there are not enough for the seller to meet all of
its obligations.
Each CER in the primary market is therefore worth a different amount
reflecting the risk profile of each individual project, depending on
various factors, including:
1. the risk inherent in each project, how that risk is apportioned
between buyer and seller;
81 | P a g e
2. At what stage of development the project has reached when the
ERPA is agreed;
3. the risk profile that project type, host country etc offer;
4. Other contractual details of each individual ERPA, e.g whether it
covers the first 30% of the CERs to be generated or the last 30%.
The diagram below shows the resultant of different risks which can
cause delay in the CDM projects and thus trading of CERs.
5.3 Recommendations:
Looking at the issues and the risks involved in the CDM projects we feel
that there must be some potential steps taken to overcome the
difficulties. Institutions like IETA and World Bank and many other
82 | P a g e
consultancies have come up with various recommendations to improve
CDM so that it can become more popular as it was proposed to be. It
can be done by:
A thorough review of the CDM, simplifying, standardizing and
streamlining the process. It will not only decrease the time
duration but also the complexity of the process which creates
much of confusion
Redefining the Role of Various Boards like EB, Meth Panel etc.
making them permanent so that they can operate freely.
The management should based on a tiered management
structure within each ‘body’ of the CDM include clear, fixed
procedures and timelines for every aspect of the CDM process,
Communication, as the various and boards ant teams are not
permanent there is a big communication gap between both
between both the bords and parties so a clear cut
communication line must be established.
The staffs should be well trained include training programs for
staff, differentiated by the body and position within which they
work;
Even Developing PPs knowledge base is also an issue. Which can
be done by organizing regular seminars on various issues.
Include internal review systems for each body, with performance-
based indicators and automatic triggers for new staff hiring.
Providing prompt and clear guidance on the CDM regulations
beyond 2012. Not much has been brought into picture yet so the
people are sckeptive about the future i.e after 2012.
83 | P a g e
6. Conclusion
84 | P a g e
Future Prospects
The rising pressure on countries to address climate change has paved
the way for the rise of a multimillion dollar international market for
buying and selling emissions of greenhouse gases. Ever since its
establishment in 2001, the carbon market has captured the attention
of Indian entrepreneurs. Majority of projects selling carbon credits so
far include renewable energy (such as wind power, biomass
cogeneration and hydropower), energy efficiency measures in several
sectors (such as cement, petrochemicals and power generation) as
well as the reduction of industrial gases that contribute to climate
change.
About 34% of the total numbers of CDM projects that have been
approved are from India. Environmental finance as an asset-class is
pegged at USD 1 trillion globally by 2012. A carbon credit, or certified
emissions reductions (CER), licenses the owner to emit one tonne of
carbon dioxide in a year.
Certified emissions reductions issued through the clean development
mechanism programme will be in short supply by the end of 2012,
when the Kyoto Protocol will expire, carbon market intelligence firm
Point Carbon predicts in a report.
Continued strong demand for those emissions offsetting units in
Europe's carbon market would translate into robust prices for the rest
of the period, ensuring a healthy trading environment, the report
suggests.
Analysts were confident that while the economic slowdown would
affect the supply side and potentially push up the price of carbon that
the demand side had experienced little change, even in the face of
severe economic downturn.
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
85 | P a g e
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.
86 | P a g e
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
Carbon credits emanating from CDM projects can be considered as
enhancers of equity returns rather than as a reliable long term source
of cash flows for projects. As soon as the future trends for carbon
credits are frozen after year 2012, they would be viewed as source for
long term cash flows as well. Projects ought to be developed so that
they are CDM compatible. Due to OTC markets, the market is illiquid
and non transparent, firms need to negotiate deals with knowledge of
the market trends and potential problems arising after year 2012
deadline for current round of emissions reduction. The CERs are also
heterogeneous in nature depending on origin and quality of CERs and
quality of project. The CDM cycle is perceived to be long and the
complexity of rules and regulations is a barrier to usage of this
opportunity. With the expectation of the maturity of the carbon market,
carbon credits will become an important consideration in project
financing in developing countries especially India.
87 | P a g e
88 | P a g e
Country EXHIBIT Country
Organization's Name 1 Organization's Name
90 | P a g e
British Standards 1, 2, 3
Institution
(BSI) — withdrawn (EB4
4)
Spanish Association for 1, 2, 3, 13 1, 2, 3
Standardisation and
Certification (AENOR)
TÜV NORD CERT GmbH 1, 2, 3, 4, 5, 6, 7, 10, 11, 12 1, 2, 3
(TÜV NORD) , 13
Lloyd’s Register Quality 1, 2, 3, 4, 5, 6, 7, 10, 11, 12
Assurance Ltd (LRQA) , 13
Colombian Institute for 1, 2, 3
Technical Standards
and Certification
(ICONTEC)
Korean Foundation for 1, 2, 3
Quality (KFQ)
PricewaterhouseCooper 1, 2, 3
s - South Africa
(PwC) — withdrawn (EB
44)
Sectoral Scopes:
1. Energy industries (renewable - / non-renewable sources)
2. Energy distribution
3. Energy demand
4. Manufacturing industries
5. Chemical industry
6. Construction
91 | P a g e
7. Transport
8. Mining/Mineral production
9. Metal production
10. Fugitive emissions from fuels (solid, oil and gas)
11. Fugitive emissions from production and consumption of
halocarbons and sulphur hexafluoride
12. Solvents use
13. Waste handling and disposal
14. Afforestation and reforestation
15. Agriculture
EXHIBIT 3
92 | P a g e
Sectoral Scope* Registered
Projects
(01) Energy industries (renewable - / non- 1040
renewable sources)
(02) Energy distribution 0
(03) Energy demand 18
(04) Manufacturing industries 86
(05) Chemical industries 42
(06) Construction 0
(07) Transport 2
(08) Mining/mineral production 15
(09) Metal production 3
(10) Fugitive emissions from fuels (solid, oil and 123
gas)
(11) Fugitive emissions from production and 18
consumption of halocarbons and sulphur
hexafluoride
(12) Solvent use 0
(13) Waste handling and disposal 321
(14) Afforestation and reforestation 2
(15) Agriculture 94
EXHIBIT 4
Number of CERs issued by Country:
93 | P a g e
Argentina 638,777 Jamaica 127,580
Bhutan 474 Malaysia 648,718
Bolivia 725,875 Mexico 5,498,686
Brazil 29,332,150 Morocco 26,213
Chile 2,949,920 Nicaragua 372,056
China 112,255,160 Pakistan 962,221
Colombia 295,200 Papua New 215,424
Guinea
94 | P a g e
NAI-Latin America and 33 26 19 19
the Caribbean (NAI-
LAC)
NAI-Other 9 9 7 3
Belgium 11
Brazil 1
Canada 38
Denmark 28
Finland 26
France 34
Germany 78
Italy 37
Japan 184
Luxembourg 12
Netherlands 183
Norway 21
Spain 56
Sweden 105
Switzerland 387
95 | P a g e
Brazil 150 Nicaragua 3
Cambodia 3 Nigeria 2
Chile 28 Pakistan 2
China 431 Panama 5
Colombia 14 Papua New 1
Guinea
Costa Rica 6 Kenya 1
Cuba 1 Lao People's 1
Democratic
Republic
Cyprus 2
Dominican 1 Peru 16
Republic
Ecuador 13 Philippines 20
Egypt 4 Qatar 1
El Salvador 5 Republic of 23
Korea
Fiji 1 Republic of 4
Moldova
Georgia 1 Singapore 1
Guatemala 8 South Africa 14
Guyana 1 Sri Lanka 4
Honduras 14 Thailand 13
India 395 Tunisia 2
Indonesia 23 Uganda 1
Israel 13 United 1
Republic of
Tanzania
Jamaica 1 Uruguay 3
Jordan 1 Viet Nam 3
List of Abbreviations
96 | P a g e
CDM - Clean Development Mechanism
CDM EB - CDM Executive Board
CER - Certified Emission Reduction
CFI - Carbon Financial Instrument
CITL - Community Independent Transaction Log
DOE - Designated Operational Entity
DP - Direct Participant
EC - European Commission
ERPA - Emission Reduction Purchase Agreement
ERU - Emission Reduction Units
ETS - Emission Trading Scheme
EU - European Union
EUA - European Union Allowance
EU ETS - European Union Emission Trading Scheme
GGAS - Greenhouse Gas Abatement Scheme
GHG - Greenhouse Gas
JI - Joint Implementation
LULUCF - Land Use, Land-Use Change and Forestry
MEP - Member of the European Parliament
NAP- National Allocation Plan
NSWGAS - New South Wales Gas Abatement Scheme
PoA - Programme of Activities
REDD - Reducing Emission from Deforestation in Developing Countries
RGGI - Regional Greenhouse Gas Initiative
RMU - Removal Unit
UK ETS -United Kingdom Emission Trading Scheme
UN - United Nations
UNEP - United Nations Environment Programme
UNFCCC - United Nations Framework Convention on Climate Change
WCI - Western Climate Initiative
WWF - World Wide Fund
97 | P a g e
VER - Voluntary Emission Reduction
References
98 | P a g e
carbon market analysis. (2008, october 20). Retrieved january 18, 2009, from
point carbon: http://www.pointcarbon.com
carbon trading exchange. (n.d.). Retrieved january 12, 2009, from carbon
trading: http://www.carbontrading.com
chhabara, r. (2008, july 28). climate change corporation (climate news for
business). Retrieved from asia switches on to the carbon market.
climate action reserve. (2008, october 20). Retrieved january 14, 2009, from
climate registry: http://www.climateregistry.org
energy security. (n.d.). Retrieved january 19, 2009, from international energy
agency: http://www.iea.org
IETA's guidance note through the CDM project approval process. (2006, may
02). Retrieved january 12, 2009, from international emission trading
association: http://www.ieta.org
Jackson, T. (n.d.). UK ETS & US ETS. Retrieved january 12, 2009, from Energy
& environment: http://www.defra.gov.org
kapoor, k., & ambrosi, p. (2008, may). state and trends of the carbon market
2008. Retrieved january 13, 2009, from The world bank: http://www.wbi.org
99 | P a g e
karan kapoor, p. a. (n.d.). state and trends of the carbon market 2008.
Retrieved from sustainable development operation, word bank, climate
change tean, world bank.
mero, R. (2008, january 22). market & CER pricing. Retrieved january 12,
2009, from EPMS: http://www.epms.com
mishra, s., & khuzema. (n.d.). carbon credits - in response to climate change.
Retrieved january 30, 2009, from paras & kuhad associates:
http://www.paraskuhad.com
Spangaro, C., Sniffin, M., & Drysdale, G. (2008). Compliance and Operation of
the NSW greenhouse gas reduction scheme . Retrieved january 9, 2009, from
Greenhouse Gas reduction scheme: http://www.greenhousegas.nsw.gov.au
swanepoel, e. (2008, october 10). state trends. Retrieved january 18, 2009,
from wbcarbonfinance.org: http://wbcarbonfinance.org/docs/state trends
final.pdf
the carbon market. (2007, september). Retrieved january 16, 2009, from ICF
international: http://www.icfi.com
the uk emission trading scheme. (n.d.). Retrieved january 15, 2009, from
department of trade and industry:
http://www.dti.gov.uk/energy/sources/renewables/policy/renewables-
obligation/whatis-
toscano, j. (2007, january). science tech entrepreneur. Retrieved january 1, 2009, from
carbon market: http://www.sciencetechentrepreneur.com
100 | P a g e