Improved Ppt

8/14/2019 Improved Ppt

1/39

A PRESENTATION ON

CARBON CREDITS AND ITS

TRADING


2/39

PRESENTATION

OBJECTIVES

Introduction Kyoto protocol (KP)

KP Mechanisms

Global Trading System Indian Scenario

Benefits of Carbon Trading


3/39

INTRODUCTION

Climate Changecauses:

Rapid Industrial Growth Increased energy consumption

Increased CO2 and other GHG emissions

Global Warming due to increased concentration of GHG

Increasing sea level

Changes in wind and precipitation

Changes in Crop yields


4/39

United Nations Framework

Convention on Climate Change

165 nations signed the 1992 United Nations Framework

Convention on Climate Change (UNFCCC) at Rio de

Janeiro

The Convention divides countries into two main groups -

Annex I & Non-Annex I Countries

Annex I (developed countries) agreed to reduce their

GHGs by 5.2 % below 1990 levels in 1st commitment

period 2008 2012


5/39

KYOTO PROTOCOL-AN OVERVIEW

May 1992: UN FCCC* establishes framework for containing global warming

Dec 1997: Following intense negotiations in Kyoto (Japan), a protocol is

agreed upon by over 100 countries

Feb 2005: 141 countries, including EU, Japan, Canada, and Russia sign the

Kyoto Protocol and it gets ratified from16-Feb-05 The US remains a key

non-signatory

The Kyoto Protocol sets legally binding targets for reducing green house

gases (GHGs)

Developed countries have a target to reduce GHG emissions by 5.2% below

1990 levels, by year 2012

EU members committed to reduce their average emissions by 8 % India,

China, and Brazil are classified as emerging countries and hence exempted

from this protocol.


6/39

The protocol commits developed countries to specific targets for reducingtheir green house emissions.

Each country has a prescribed number of 'emission units' which make up

the target emission.

The Kyoto Protocol provides mechanisms for countries to meet theiremission targets.


7/39

KP MECHANISM


8/39

International Emission Trading

(IET) Emissions trading (ET) is a mechanism that enables countries with legally

binding emission targets to buy and sell emissions allowances among

themselves

Each country has a certain number of emission allowances (amount of

carbon dioxide it can emit) in line with its Kyoto reduction targets The IET allows industrialized countries to trade their surplus credits on the

international carbon credit market.

Emissions trading transfers "assigned amount units"orAAU units

Thebuyer will then use the credits to meet their emissions targets.

A global Carbon Market is estimated to be around $30billion

BuyersAnnexure I countries

Suppliers Non annexure I countries


9/39

Clean Development Mechanism

The purpose of CDM is to reduce emissions and also

contribute to sustainable development in developing countries

The CDM is administered by the CDM Executive Board

(CDM Board) which reports and is accountable to the

Conference of Parties (COP).

A Carbon emission reduction (CER) is given by the CDM

Executive Board

One CER is equivalent to one tonne of carbon dioxide

reduced


10/39


11/39

Institutional Framework in CDM

Developing country is the Project Developer

Annex 1 countries are the Buyers , Investors

The project is approved by Designated National Authority

An institution which Issues CER is Executive Board (EB)


12/39

Joint Implementation

Projects between industrialized nations to earn emission

offsets

It is done because of geographical or cost implications

Emission reduction units (ERUs) created through jointimplementation is treated in the same way as those from

emissions trading.


13/39

CARBON CREDITS

Carbon credits are certificates issued to countries that reduce their GHG emissions

One credit = 1 tone of CO2 (or CO2 equivalent) reduced

Surplus credits result when a country overshoots its reduction target

These can be traded, with countries facing a shortfall in target able to buy and meet

their targets

Carbon credit trading encourages emission reduction, provides financial incentives tothose who do

Carbon credits can be acquired through

Clean development mechanism (CDM): Project-based emission reduction activities

in developing countries

Joint implementation (JI): Two developed countries can invest in emission mitigation

projects, generating ERUs

International emission trading (IET): Credit deficient and credit surplus countries

(that have ratified the Kyoto Protocol) can trade carbon credits at specialized

exchanges (European Climate Exchange, Chicago Climate Exchange.


14/39

How Carbon Credit works?

Carbon credits are a part of international emission trading

norms. They incentivize companies or countries that emit lesscarbon. The total annual emissions are capped and the market

allocates a monetary value to any shortfall through trading.

Businesses can exchange, buy or sell carbon credits in

international markets at the prevailing market price.

A company has two ways to reduce emissions. One, it can

reduce the GHG (greenhouse gases) by adopting new

technology or improving upon the existing technology to

attain the new norms for emission of gases. Or it can tie up

with developing nations and help them set up new technologythat is eco-friendly, thereby helping developing country or its

companies 'earn' credits.


15/39

India, China and some other Asian countries have the advantage because

they are developing countries. Any company, factories or farm owner in

India can get linked to United Nations Framework Convention on Climate

Change and know the 'standard' level of carbon emission allowed for its

outfit or activity. The extent to which I am emitting less carbon (as perstandard fixed by UNFCCC) I get credited in a developing country. This is

called carbon credit.

EXAMPLE:

Assume that British Petroleum is running a plant in the United Kingdom.

Say, that it is emitting more gases than the accepted norms of theUNFCCC. It can tie up with its own subsidiary in, say, India or China

under the Clean Development Mechanism. It can buy the 'carbon credit' by

making Indian or Chinese plant more eco-savvy with the help of

technology transfer. It can tie up with any other company like Indian Oil,

or anybody else, in the open market.


16/39

Global Trading System


17/39

European Union Emission Trading

Scheme

Its an example of Cap and trade system

The European Union Emission Trading Scheme

(EU ETS) is the largest multinational, greenhouse

emissions scheme in the world. It commenced

trading in 2005

Under Kyoto EU committed to reduce 8% 1990

levels of emissions in 2008 to 2012.


18/39

EU ETS contd..

The Kyoto protocol sets targets to countries

The States list down the amount and method of

allocating allowances to facilities under NAP

The total allowances granted = Kyoto target

Determinants of demand

Volumes are tracked by National registries

Registries keep track of the allowance ownership

transfers.


19/39

European Climate Exchange

ECX is the most liquid marketplace for trading

CO2 EU allowances, under the EU ETS.

Offer trading contracts on European union

allowances.

EUA is right to emit one tone of Carbon

dioxide.


20/39

INDIAN SCENARIO


21/39

Active CER Purchasers in India


22/39

CDM Country Fact Sheet : India


23/39


24/39


25/39

Current Status of CDM in India

Since the establishment of the Indian DNA (Designated National

Authority) in 2003, it has approved a significant number ofprojects. 392 projects have been registered by the CDM executive

board, which account for about 30% of all the registered projects

in developing countries (as of 1 February 2009).

One of the features of CDM in India is its large share of

unilateral CDM projects, CDM project developed by Indian

stakeholders without the involvement (finance, technology) of

Annex I countries. Indian project developers implement the

project by bearing transaction costs of CDM and taking on the

risks of the projects. Therefore, the price of credits issued by

unilateral CDM projects tends to be higher than bilateral or

multilateral CDM projects.


26/39

Financing Requirements of a CDM Project


27/39

Types of Finance Available for a CDMProject

The main sources of finance for these CDM-specific project costs

during the planning phase are:

Government tenders and carbon funds: which will often pay a

proportion of these costs in return for a contract to purchase some or

all of the resulting CERs

Private sector CDM project developers: who may cover part or all

of the CDM-specific costs in return for a contract to purchase some

or all of the resulting CERs; and

Project hosts: either public or private sector entities which provide

their own internal funds to develop projects with which they have an

association as, for example, landowner, fuel supply provider, or off-

taker of the non-CER outputs of a project.


28/39

The situation is more complex with regard to the costs incurred during the

construction phase

Lenders: who may provide limited recourse debt to relatively large

projects with secure revenue streams and relatively low risks, or to otherprojects with recourse to a financially strong sponsor;

Private sector CDM project developers: who may be able to finance

(usually smaller) projects with their own equity;

Project hosts: who may be able to finance (usually smaller) projects from

their own internal funds;

Equipment suppliers: who may provide assets on lease or credit; and

CER buyers: who may provide up-front payments against future CER

deliveries.


29/39

Case Study: Project Financing of a Biomass

Electricity Generation CDM Project in Asia

The project involved the construction of a 20 MW (net electricity

output) plant burning biomass to produce electricity that is supplied

to the project host countrys (India) electricity grid. The project

generates CERs because it:

(a)displaces grid electricity generated from fossil fuels and

(a)Eliminates methane emissions from the biomass, which previously

was left to rot in the sun.


30/39

The key features of the project were as follows:

Capital requirement approximately US$40 million;

Electricity output approximately 150 GWh/year;

Relatively high emission reductions due to avoided methane emissions

(GWP=21) plus dis- placed grid electricity (emissions factor around

0.5tCO2-e/MWh);

Single buyer for electricity output (National electricity utility, AA-rated);

Additional revenue from sale of ash to cement plants; and

Reliant for fuel supply (500 tonnes/day) on large number of small primary

producers.


31/39

Project financing was considered for this project because :

the capital requirement was sufficiently large to interest a bank

and because the project had several revenue streams, including the

possibility of a long-term power purchase agreement with a reliable off-

taker.

As with traditional project finance arrangements, a special purpose vehicle

(SPV) was created in order to take the financial risk off the balance sheet

of the project sponsors and limit recourse to the parent companies. 64% of

the capital was provided in the form of senior debt by two banks, one

local and the other international; the remaining 36% was equity provided by a group of project sponsors. A number of agreements were signed

between the SPV and other project stakeholders to facilitate the project

financing, including:


32/39

A number of agreements were signed between the SPV and other project

stakeholders to facilitate the project financing, including:

A 25-year power purchase agreement (PPA) with the off-taker for theenergy;

An ERPA to 2012 with a European buyer;

A turn-key engineering, procurement and construction agreement with

an international contractor;

An operations and maintenance contract;

A fuel supply agreement with the local suppliers of biomass;

An implementation agreement with the government;


33/39

Facts Learnt

Project development was very long (8 years from conception to

commissioning). Setbacks included the 1997 Asian financial crisisand the withdrawal of a major equity investor at an advanced stage

(for reasons unrelated to the project activity itself).

The senior debt provision was based only on the electricity revenue

and not on any CER revenue or revenue from sales of ash to cementplants. Nevertheless, the intention for future projects based on this

model is that debt will be secured on CER and ash revenue streams

as well as electricity.

The possibility of CER revenue did, however, contribute to the

interest of the equity investors in the project and helped to justify the

long (and costly) project planning phase.


34/39

The project has experienced delays with the CDM approval process.

However, the fact that the debt was obtained on the basis of

conventional revenue and not CER revenue meant that this did notdelay the construction of the plant.

Due to the rural, decentralized nature of the biomass providers, more

fuel supply agreements were entered into than were strictly required.

The fact that a share of the project debt was in an international currency,

whereas the major revenue (electricity and ash sales) was in localcurrency, meant that the project was exposed to currency risk.


35/39

India's potential India has 474 projects registered with the United Nations, second only to Chinas

680. However, in terms of CERs, Indias share is just 11.63 per cent, while Chinas is

58.75 per cent. The Indian government has approved more than 1,455 CDM projects

which can potentially make Rs 28,000-30,000 CRORE in export earnings.

The National CDM Authority in India has accorded Host Country Approval to 1,455

projects. These projects have seen an investment of more than $33.7 billion(Rs 1.6

LAKH CRORE).

If all these projects get registered at the CDM executive board, it will earn developers

over 600 million CERs by 2012. At a conservative price of $10 per CER, the figure

works out to a little over $6 billion.


36/39

Asia is the leading supplier of CERs in the global carbon market, holding approximately 77

per cent of the share. Over 3,714 projects are developed under CDM all over Asia.

Most of these are the future-installed power projects, which will have a capacity of around

58 Gw in hydro, wind, biomass, geothermal, biogas, landfill gas, solar, tidal, energy

efficiency-based own generation, and coal bed/coal mine methane sectors.

India, on its part, has generated around 30 million carbon credits, and approximately 140

million are in pipeline. Around 225 Indian projects in the fields of biomass, cogeneration,

hydropower, and wind power with a potential of 225 million CERs have been registered.

Carbon offsets from solid waste projects, too, will see a rise.

At present, the Indian solid waste management market is witnessing tremendous growth.

Currently it is valued at around $155.56 million (Rs 728 crore) and is expected to grow at a

rate of around 20 to 25 per cent in the next three to five years.

B fit f C b dit


37/39

Benefits of Carbon credit

Carbon trading deals with buying and selling of carbon credits, which are

financial instruments that are traded in the world market. Purchasing a

single unit of carbon credit permits you to emit one ton of carbon dioxide or

an equivalent quantity of other greenhouse gases into the atmosphere.

Purchasing and selling carbon credits aids in effectively dealing with global

warming, and the system is advantageous in several ways.

A global market for carbon credits ensures that companies can adopt and abide bythis system without difficulty. There are no complex regulations or procedures to

adhere to, which enhances their popularity and makes the system highly successful.

More than the penalty awarded to errant firms, the incentives and recognition given

to eco-friendly companies is what makes this method so popular and exclusive.This means that even if a firm has emissions within its allotted quota, it will be

encouraged to work upon further lowering of its emissions so that it can earn a

profit by selling carbon credits in the international market. Thus, the system works

towards de-polluting the environment increasingly.


38/39

Disadvantages

The biggest drawback of carbon trading is absence of a comprehensive and

structured global system for its trade. As almost all of the trading happens inthe global markets, it is tough for some local companies to adhere to this

system.

There is some resistance from a few organizations to this method as the

expenses incurred during carbon trading cannot be included in the final selling

price of products. Further, several small enterprises are not able to bear the

costs of buying the machinery or implementing sophisticated techniques that

would lower their emissions. Hence, they are stuck in a situation where they

have to continue paying for carbon credits every year, which means that they

will lose out to bigger organizations eventually.


39/39

Improved Ppt

Documents