Carbon Market

Carbon Credits

 

What are Carbon Credits?

Carbon credits can be generated from carbon dioxide (or other Green House Gases) reducing projects implemented in India. Every tonne of carbon dioxide reduced generates one carbon credit.

Carbon credits are also called by different names depending on the carbon program applied under:

  • Certified Emission Reductions (CERs): Used by industrial polluters for compliance purposes within the EU emission trading system
  • Verified Emission Reductions (VERs): Used for non-compliance purposes, such as CSR, carbon foot-printing and other such initiatives anywhere in the world
  • Carbon Offset

 

Can you give an example of Carbon Credits? How do I earn them?

A 1 MWh capacity wind mill generates roughly 1800 carbon credits a year since it uses wind energy to generate power and supplies the same to the Indian grid.

In essence, the grid would have normally burnt either coal or natural gas (fossil fuel) to generate 1 MWh power, but this is now being supplied by the wind project. Hence the owner of the wind mill can apply for carbon benefits and is entitled to the carbon savings on account of the reduced fossil fuel consumption by the grid. This translates into carbon credits and is calculated on the number of power units supplied per year to the grid.

To calculate the number of carbon credits, the owner has to furnish details on power generated via meter readings, commissioning certificates, meter calibration reports and monthly invoices billed to the State Electricity Board (SEB).

Click here for a list of small-scale projects that are eligible for earning carbon credits.

 

Could you please elaborate on the difference between CERs and VERs?

CERs are generated only under the Clean Development Mechanism (CDM) United Nations Framework Convention on Climate Change (UNFCCC) program and can be used currently in the European compliance market i.e. EU industries have a compliance obligation to purchase CERs.

The non-compliance market is where the VERs or voluntary credits are generated. These can be used worldwide only for non-compliance purposes i.e. CSR, carbon footprint offsetting purposes, etc.

Since the process of earning CERs is more stringent and time consuming, CERs generate a better price than VERs. Because the UN sanctions CERs, they can also be used for voluntary purposes. However, VERs serve the voluntary market better since they priced lower than CERs.

 

What is Clean Development Mechanism (CDM)?

The Kyoto Clean Development Mechanism (CDM) is an arrangement allowing industrialized countries with a greenhouse gas reduction targets (USA, most of Europe and Japan) to invest in ventures that reduce emissions in developing countries as an alternative to more expensive domestic emission reductions. The program run by the UN enables earning of carbon credits that can be used by industrialized nations to offset carbon emissions at home and meet their Kyoto reduction targets. The projects include afforestation, reforestation and implementation of clean fuels technology.

This program is only applicable to new and about to be commissioned projects in India. Project owners need to inform the UN about their intention to earn carbon credits under the Kyoto CDM within 6 months from project commissioning, else they are disqualified automatically. Of course you can apply to the UN even before commissioning (as is the ideal case during financial closure of the project) as long as you meet the 6 month deadline ruling. The Kyoto CDM allows users to generate certified emission reductions or CERs, which fetch the highest prices in the market.

Click here for some basic statistics pertaining to the Global CDM Market.

 

Have companies in India benefited monetarily from the CDM mechanism?

As of August 11, 2010, India has 520 registered CDM projects, out of the total 2,313 submitted to the UNFCCC. These projects have the potential to generate 43 million CERs per annum which amount to approximately 12% of the total annual CERs generated by registered CDM projects globally. As on date 79 million CERs have been issued to Indian projects and assuming a conservative price of $10 per CER, the value of actual CER issued to Indian projects amounts to US$ 790 million. Some companies which have reaped the CDM rewards include SRF, GFCL and Navin Fluorine. Many SMEs with wind farms in TN, Karnataka and Maharashtra have also earned carbon revenues from the compliance and voluntary market.

 

I run a small enterprise. Are there any minimum eligibility requirements to benefit from the CDM mechanism? Do I qualify?

First and foremost, carbon credits are only generated from a specific carbon dioxide or GHG reducing project by an enterprise. Such a project can either exist on the factory site itself or in a different location. For example, a Mumbai-based SME can own a wind farm feeding power to the grid somewhere in Satara.

If you want to earn CDM carbon credits, then you must apply for the same at least 6 months prior to actual project commissioning, preferably during financial closure of the project. Ideally, you must generate 5000 carbon credits per year to enter the compliance carbon market due to the high application costs and time involved.

On its own, an SME unit may not be generating sufficient CER for trading the carbon credit in a cost effective manner but there are two ways through which SMEs can participate in CDM financing.

  1. CDM Project Bundler
  2. Programmatic CDM


Bundled project helps in reducing transaction cost of CDM projects. The transaction cost for bundled projects basically consist of :

  • Upfront cost related to the CDM project cycle and organizational aspects of the bundle
  • Annual running costs related to verification and certification of CER generated

Various agencies such as the Indian SME Technology Services Ltd. (ISTSL) facilitate the bundling and trading process among SME Clusters.

Click here to read about bundling of CDM projects and Programmatic CDM (pCDM) in particular.
Click here to download a presentation on Applicability of CDM for SMEs in India.

If you want to earn carbon credits from a project which is already commissioned for the past couple or more years, then you must try the voluntary carbon market.

 

I have heard that the CDM mechanism is not functioning smoothly? Is it true?

Yes. The first commitment period of the Kyoto Protocol is between 2008 and 2012, and another global agreement is required to extend the period. But the global climate talks at Copenhagen in 2009 failed to produce a new deal. Hence buyers of carbon credits under the CDM are adopting a wait and watch approach. Given the post-Kyoto uncertainty, buyers are hesitant to buy credits post 2012. Further, the US has not joined the carbon market under the Kyoto CDM and hence there is an inherent risk in getting onto the CDM bandwagon right now without any post 2012 future for Indian companies. If you are hesitant and uncertain with the delay in the Kyoto CDM market, it is best to look at alternative carbon programs – Voluntary Carbon Market and Carbon Offsets (ISO 14064)

 

Which other carbon programs are available? Are they more appropriate for Indian SMEs when compared to the CDM?

The other carbon programs include the Voluntary Carbon Standard (VCS) and Carbon Offsets (ISO 14064) Program. Carbon prices in the voluntary market are currently low ($3.00 and under). There is a growing demand for voluntary credits and the market is expected to pick up going forward. Although the carbon prices are not comparable to the Kyoto CDM process, this is a cost effective and quicker option for projects commissioned after 2004. Moreover, SMEs can monetize their carbon credits in the non-Kyoto sector (i.e. voluntary market) where the prices are in the $1.00-$3.00 range per carbon credit.

The alternatives to the CDM process also take lesser time. Typical timelines for the carbon market process are as under:

  • Clean Development Mechanism (CDM): 1.8 years
  • Voluntary Carbon Standard (VCS): 6-8 months
  • Carbon Offsets (ISO 14064): 2 months

 

What are the eligibility conditions for the VCS market?

The VCS is only one of the numerous voluntary programs. To be eligible in the VCS program, your project should have been commissioned within two years from the date of application. Hence if you decide to enter the market in August 2010, then your project should have been commissioned on or after August 2008 only. When we say commissioning, we essentially look at the commissioning certificates of boilers or wind mills from official certifying agencies.

Instead of reinventing the wheel, the voluntary market follows the guidelines of the CDM market and you can follow any of the methods to do a carbon project as listed under the UNFCCC CDM guidelines. For more on the VCS process please click here

Click here for statistics pertaining to the Global Voluntary Carbon Market.

 

Projects at my small enterprise do not qualify either for the CDM or VCS markets? Is there any way I can benefit from emission reductions?

If you fail to qualify under the VCS program, it does not mean that your project is not reducing carbon emissions. You might still be eligible under the ISO 14064 offset program. Companies worldwide use the ISO 14064 (part 1, 2) to estimate their carbon footprint. However, the ISO 14064:3 also indicates guidelines on generating carbon offsets. This market matches ISO 14064 (1,2) carbon clients to ISO 14064:3 projects and help corporates go carbon neutral across their operations worldwide. Ideally for the ISO 14064 program, your carbon project must have been commissioned on or after 2003. The methods to calculate the carbon credits are same as the CDM standard methods. Just like the VCS program, all ISO 14064 offset projects do not need UN or Indian government approval. You can claim carbon credits from 2004 onwards (YoY). The process involves report preparation (2 weeks), a quick validation cum verification, third party audit of the carbon project (2-3 weeks) and registration with an international carbon registry (1 week). This is a new market and sale prices vary from $1-$3 per credit.

For ISO 14064 carbon offsets please click here contact http://www.carbonyatra.com

Remember that any company worldwide doing a carbon audit at their plant follows ISO 14064 guidelines, and hence they would prefer to source ISO 14064 verified carbon credits to go carbon neutral.

 

How do I get my projects verified and validated for earning Carbon Credits?

You need to first prepare a concept note and project design documents (PDD) explaining the project and how it reduces carbon emissions. Then (possibly with the help of a consultant), decide your eligibility on either the compliance or voluntary carbon market. Depending on the outcome, you proceed to hire the relevant third party approved auditor who will validate and verify the project as per prevailing standards and guidelines. Auditors under the CDM will tell you upfront on the likelihood of CDM registration after assessing the project. The voluntary market is more open to early commissioned (pre-2008) projects and there are varied programs to test for eligibility. The third party auditors used to validate and verify voluntary projects are the same as for the CDM, save for a few exceptions.

 

Is there a central database that houses information of CERs and VERs issued?

Yes. CDM projects with CERs issued are listed and tracked by the UN at

http://cdm.unfccc.int/Issuance/cers_iss.html

Similarly, the voluntary market has carbon tracking registries so that a buyer view the project documentation and also retire the credits once purchased. This helps prevent the seller from selling the same carbon credits to multiple buyers.

Link: http://www.markitenvironmental.com/registryview.php?pg=prj

Click here for a brief list of voluntary carbon market participants.

 

I am a SME exporter, should I worry about the impending international carbon tax?

The European Commission has recently (June 2010) discussed plans to split the taxation base of energy products in Europe, between their energy content and their CO2 emissions, but it still hasn't presented a final proposal. Right now, only a rough draft of the plan has been in circulation. If EU countries decide to tax carbon locally, then to ensure competitiveness, they could implement a carbon tax mechanism on all EU exporters from India. This tax could be applicable at their respective borders on arrival of the goods. There is also talk about asking exporters to purchase carbon allowances and permits from the EU to offset their carbon footprints.

 

What is Carbon Footprint? How do I calculate this?

Carbon footprint is the overall amount of carbon dioxide (CO2) and other greenhouse gas (GHG) emissions associated with a good, service or event. The emissions could occur along its supply-chain, from its use and even from its disposal. Causes of these emissions are, for example, electricity production in power plants, heating with fossil fuels, transport operations and other industrial and agricultural processes.

In any industry, the bulk of the carbon emissions come from electricity usage (grid supply). Hence on the following link, input your estimated energy usage to get an idea of your in-house emissions from power usage alone: http://carbonyatra.com/carbon_calculator.php

Click here for a compilation of Carbon Footprint calculators.

All corporate/industrial carbon footprints need to be audited by a third party agency since they are usually made public to shareholders and investors.

Click here for downloading indicative industry-specific carbon footprint calculators


Download the excel file - spreadsheets that enable the calculation of GHG emissions from Indian Cement Industry.

 (This customized India specific cement sector tool has been developed by The Energy and Resources Institute (TERI), New Delhi through a multi stakeholder consultative process involving interaction with different experts in the field. The tool is based upon the existing corporate GHG Inventory Protocol and tools developed by the World Resources Institute (WRI), a Washington based NGO and World Business Council for Sustainable Development (WBCSD), a Geneva based coalition of international companies under their "The Greenhouse Gas Protocol" initiative. United States Environmental Protection Agency (USEPA) has supported this first version of the customized cement tool for India. This tool presents a simple approach for inventorising the CO2 emissions from a cement facility, which can then be extended to corporate level. The tool intends to facilitate the calculation CO2 and SO2 emissions from cement plants).

 

How can I avoid paying the Carbon Tax? Are there other advantages to offsetting my business’ Carbon Footprint?

Indian SMEs can assess their carbon footprint of their facility/product and offset any carbon emissions with local carbon credits or by implementing green measures (wind, solar, etc) at their plants. Consumer products are beginning to display details about their environmental impact, like the amount of greenhouse gases produced in making, transporting and selling them. By doing this, SMEs could prepare themselves for the carbon market and beat the carbon tax which could soon become a reality for Indian exporters. It pays to be proactive and understand the carbon market rules now rather than await mandatory international measures.

By offsetting your business's carbon footprint you are also making a positive, tangible statement to your employees, customers, suppliers and shareholders. Like you, they are all affected by climate change and will be more attracted, and loyal to, businesses which are committed to caring for the environment.

Green companies tend to be better managed, more efficient and more profitable than their rivals. Many of the most successful ones now recognize the clear business benefits of addressing environmental issues.

 

I see the benefits from measuring my carbon footprint and reducing emissions, but I don’t have the time to research and do the needful myself. Is there anyone who can help me?

Carbonyatra.com can help assess your ideal carbon program, prepare documentation and help sell your voluntary carbon credits. You need to assess which program is ideal for your project based on the size, buyer requirements, cost and amount of carbon credits to be generated and return on investment.

All corporate carbon footprints need to be audited by a third party agency. Contact carbonyatra.com for more. For a demonstration on carbon foot-printing please click here

http://www.carbonyatra.com/carbon_calculator.php.

 

Source: Content developed with contributions from CARBONyatra