Working of Carbon Market
Carbon trading as an instrument for combating climate change has grown rapidly, more in the cap-and-trade regulatory regime than in the voluntary compliance market. There are, however, many issues concerning its contribution to reducing the build-up of greenhouse gases and the role of developing countries,
including India, in such trading.
PATRICK NUSSBAUMER
C
Preoccupations about anthropogenic climate change emerged on the political agenda in the mid-1980s. Indeed, it was during that decade, that the scientific evidence of human interference with the climate system started to raise public concern. The consequences of a global average temperature rise of a few degrees are numerous, diverse and alarming. The projected changes in the climate patterns could alter ecosystems which are fundamental to humankind and, amongst other effects, disrupt agricultural production, water cycles and resources.
The mitigation of anthropogenic climate change, by drastically reducing greenhouse gases (GHG) emission and stabilising the carbon dioxide concentration in the atmosphere has become a prerequisite to avoid a strong alteration of the climate system. The carbon market is a product of such efforts.
India and Greenhouse Gases
The Indian economy experienced strong growth during the last few years. The country’s Gross Domestic Product (GDP) grew at the rate of between 4 and nearly 9 per cent in the last few years.1 Projection
Economic and Political Weekly July 28, 2007 based on scenario analysis indicates that the Indian economy will keep expanding at a fast pace in the near future.2 With its vibrant economy, still growing population and increasing welfare, India has become a major energy consumer on the global level. In 2004, it ranked fourth in terms of total primary energy supply with 573 million tonnes of oil equivalent (Mtoe), behind the United States (2326 Mtoe), China (1609 Mtoe), and Russia (641 Mtoe).3 Energy use and electricity consumption per capita are very low in comparison to the US and also lower than China.
Access to reliable, affordable electricity is a prerequisite for socio-economic development. Despite significant progress in terms of widespread access to electricity during the last couple of decades, only about half of the households benefit from electricity access [Planning Commission 2002]. There is a significant regional variation in the rate of electrification across the country, and an even more prominent rural-urban gap.
In terms of GHG, the trends are rising rapidly as well. In 1994, India’s GHG emission represented 1.2 billion tonnes of carbon dioxide (CO2) equivalent [Government of India 2004]. It increased by about 4 per cent per annum during 1990 to 2000 [Sharma, Bhattacharya et al 2007]. GHG emissions are expected to further increase at a similar rate as to that of GDP. Nonetheless, per capita emissions in India still represent a fraction of those of industrialised countries [The Energy and Resources Institute and The Centre for Clean Air Policy 2006].
Carbon Market
Carbon offsetting is at the forefront of climate change mitigation actions. Because GHG are spread out relatively evenly in the atmosphere around the globe, the geographical location of the emissions, or the emission cuts, does not significantly matter from an emission concentration point of view. Therefore, GHG emission reductions can be either performed domestically or abroad. The concept of emission trading is basically motivated by economic arguments. It is claimed to be an economically-efficient way of mitigating climate change and GHG reduction is undertaken wherever it is the least costly.
With transactions for 1.6 billion tonnes of CO2 equivalent4 (CO2e), carbon markets, worldwide, were worth $ 22.5 billion in 2006 [Point Carbon 2007]. This represents a doubling of the volume compared to the previous year. Furthermore, the carbon market is expected to grow significantly in 2007, possibly up to 50 per cent.
One can distinguish two types of carbon markets nowadays. The first type represents the compliance market, which is the product of the cap-and-trade climate policy framework. Emission levels are agreed upon, at regional, national, or international level. The difference, positive and negative, between the actual emissions and the cap agreed upon is then negotiated on a market. That is, a company, or country, which is emitting more than its allowance must compensate the difference by buying emission certificates on the market. And a company which would emit less than allowed in the cap-and-trade framework can put its surplus on the market.
PrincetonUniversity
Shelby Cullom Davis Center for Historical Studies
http://dav.princeton.edu/
Cultures and Institutions in Motion
During the academic years 2008/09 and 2009/10 the Shelby Cullom Davis Center for Historical Studies will focus on the problem of cultures and institutions in motion. How have ideas, institutions, structures, and artifacts moved across social and geographical space? How have they intersected with their new environments? How have they been adapted, resituated, hybridized, and transformed in processes of motion? The field of inquiry includes transnational history but is not limited to it. Problemscouldincludethediffusionofreligiousandculturalpractices,themigrationoftechnologiesandobjects,thecirculation ofideas,traditions,andaestheticforms,thetransferofpoliciesandlegalpractices,thedynamicsoftravelingsocialmovements, histories of reception, appropriation, and encounter, and the creation of translocal networks and intermediaries. As in the past, we hope to address this problem from a wide variety of periods and places, from prehistory to the present and from all parts of the world. Scholars from all disciplines with an interest in the topic as an historical phenomenon are invited to apply.
The Center will offer a limited number of research fellowships for one or two semesters, running from September to January and from February to June, designed both for senior scholars and for highly recommended younger scholars who have finished their dissertations by the application deadlines. Fellows are expected to live in Princeton in order to take an active part in the intellectual interchange with other members of the Seminar. Funds are limited, and candidates are, therefore, strongly urged to apply to other grant-giving institutions as well as the Center, if they wish to come for a full year.
Written inquiries should be addressed to the Manager, Shelby Cullom Davis Center for Historical Studies, Department of History, 136 Dickinson Hall, Princeton University, Princeton, NJ 08544-1017, U.S.A. The deadline for applications and letters of recommendation for fellowships for 2008/2009 is December 1, 2007. Scholars who would like to offer a paper to one of the weekly Seminars are asked to send a brief description of their proposal and current curriculum vitae to the Director.
Applications can be made online at http://dav.princeton.edu/program/e14/fellowship_informati.html. Princeton University is an equal opportunity employer and complies with applicable EEO and affirmative action regulations. For general information about applying to Princeton and how to self-identify, see http://web.princeton.edu/sites/dof/ApplicantsInfo.htm.
Pleasenotethatwewillnotacceptfaxedapplications.
Daniel T. Rodgers Director2008-12
Economic and Political Weekly July 28, 2007
International negotiations under the United Nations Framework Convention on Climate Change gave birth to the Kyoto Protocol. This international agreement, which came into force on February 16, 2005, creates a legally binding set of obligations for 38 industrialised countries, and 11 countries of central and eastern Europe, in order to reduce their emissions of GHG to an average of 5.2 per cent below their 1990 levels over the commitment period 2008-12. The Kyoto Protocol is sometimes seen as the most ambitious attempt in history to tackle an environmental issue. It establishes three cooperative mechanisms to allow for annex 1 parties, countries with binding emission caps, to reduce their costs of meeting the targets by trading emission certificates or undertaking corrective actions abroad rather than domestically. These are: International Emissions Trading, Joint Implementation and Clean Development Mechanism (CDM). As previously stated, the effects of measures, wherever undertaken, are equally valuable from a GHG point of view.
The second type of carbon market, which is currently experiencing yet a stronger growth, is the voluntary market. Unlike the compliance market, there is no binding emission level to be respected in this framework. Rather, entities or individuals deliberately choose to offset their emissions. There are many reasons for doing so, ranging from reputation benefit and marketing, gaining carbon market experience and preparing for potential future regulatory requirements [Business for Social Responsibility and Marketplace 2006], or based on philanthropic motivations.
The first signs of climate change mitigation efforts based on voluntary offsets date back to the end of the 90s and those efforts mainly targeted forestation projects [Trexler and Kosloff 2006]. Since then, the portfolio of project types has expanded and presents a “bewildering array of projects” [Russell 2007].
The voluntary market is currently fragmented and critically lacks consistent standards. This leads to a certain lack of credibility and transparency. Nevertheless, more positive critics view the voluntary market as a means of succeeding where the CDM currently fails. That is including projects left aside by the bureaucratic Kyoto process due to their high transaction costs. Those types of projects are usually smaller-scale undertakings, with a great local community involvement in some cases, and are often accompanied by broader sustainable development benefits at local level, at least such is the claim.
Not just leading companies (such as HSBC Google, Ford Motor Company, and BP) are engaging in the voluntary offset market, governments and international institutions also are doing so. Furthermore, several recent events (e g, FIFA world cup 2006, 2006 Formula 1 Australian Grand Prix, etc) have claimed carbon neutrality by offsetting their emissions. Furthermore, individuals are now offered the opportunity to offset their emissions by brokers when travelling by aircraft or driving a car for instance.
The carbon market, voluntary and regulatory, is experiencing strong growth, although some experts qualify it as not yet quite mature and relatively volatile. Also, there is a great deal of uncertainty. The lack of clear perspectives in regard to post2012 commitments represents a burden on investments, especially in energy systems where medium-term evolutions need to be considered. The price of carbon credits exchanged on the EU Emission Trading Scheme (EU-ETS) for the first commitment period (2005-2007) evolved at around 20 EUR per tonne of CO2 eq in 2005 with a peak at nearly 30 EUR, before an abrupt fall in 2006 followed by a gradual descent to nearly zero nowadays. The price on the voluntary market varies greatly, ranging from $ 5 to 35/tCO2 eq [Taiyab 2005; Trexler and Kosloff 2006].
India in the Carbon Market
India is a key player in the carbon market nowadays and represents a very attractive country for hosting CDM activities. Most CDM projects currently in the pipeline, at validation stage or further, are located in countries with transition economies and medium income. Out of over 2000 CDM projects currently in the pipeline, 650 are located in India, followed by China (524), Brazil (233), and Mexico (165).5
Nevertheless, in terms of Certified Emission Reduction (CER) potential, the picture looks slightly different. This consideration is important in the sense that, in the market-based framework in which the CDM evolves, what is put on the market are the CERs yielded by the projects, and not the projects themselves. In that regard, India ranks second with a current potential of 323 000 Certified Emission Reductions (each one equivalent to a tonne of CO2) by 2012, far behind China (1 015 000 CER). This is due to the fact that China is hosting a few high-yielding projects in terms of CER.
There is little available information about the state of the voluntary market.
Nonetheless, it is fair to assume that it will follow a similar trend as for the regulatory market. Therefore, India will also play a key role in terms of voluntary offsets.
Controversy about Carbon Markets
Carbon markets find themselves at the centre of a growing controversy. However, their significance as prime instruments for the mitigation of climate change is also increasing. This section depicts a non-exhaustive series of arguments that are fuelling the controversy.
Firstly, it is necessary to put the carbon markets into perspective. The market volume represented transactions for 1.6 billion CO2eq in 2006 [Point Carbon 2007]. Although significant, this figure has to be compared to the current estimated 30 billion tCO2 eq6 annual emissions globally. Also, in terms of investments, the expected financial flow triggered by the CDM is minute compared to other investments, public or private. Indeed official development assistance and FDI represent flows far greater than CDM [Ellis et al 2004]. Therefore, the carbon offset markets seem largely marginal, both compared to other financial flows and in terms of GHG emissions.
The rationale behind carbon trading is an economic one. The market allows for the most cost-effective way of reaching GHG emission reduction targets. At least so is the claim, one that is motivated by short-term perspectives. Indeed, offset represents permanent costs to a company, while domestic measures, such as energy efficiency measures, could yield permanent savings [Russell 2007]. Furthermore, even if carbon trading is a cost-effective way of complying with emission commitments, it is not necessarily a cost-effective way to mitigate climate change. As demonstrated by Wara (2007), the price paid for carbon credit can be several times the price that it would actually cost to reduce emissions in some cases.
Although carbon dioxide is by far the principal gas causing our climate to change, most GHG offset projects target non-CO2 gases. Indeed, gases with very high global warning potential7 represent the dominant type of emission reduction projects in terms of volume [Lecocq and Capoor 2005; Wara 2007]. This trend is not expected to change in the near future seeing the yet unexploited potential of those high yielding activities [Cosbey, Parry et al 2005; Sterk and Wittneben 2005]. By flooding the market with cheap emission certificates from non-CO2 emission
Economic and Political Weekly July 28, 2007 abatements, there is very little incentive for investment in low-carbon energy.
The market, if efficient, will promote the most economic options, the sometimes socalled “low-hanging fruit” [Cosbey, Parry et al 2005], and this raises a series of concerns. First, at a later stage, developing countries will also have to comply with some form of defined emission caps, then they would only have more costly options available in order to do so, this representing a paradoxical and counter-productive effect. Secondly, projects offsetting enormous amounts of carbon, although not problematic per se as they efficiently contribute to the mitigation of climate change, compete in a market with smaller projects that very often have higher accompanied benefits, notably in terms of contribution to local sustainable development.
The price collapse in the EU-ETS during the first commitment period is a source of concern, but understandable. The volatility of the market was not only due to its relative immaturity. Many countries under that scheme have generously allocated emission allowances to their industries. This coupled with domestic emission reduction through energy efficiency measures exceeding expectations, drove the price down in the market. For the second commitment period (2008-12), countries will have tighter emission targets and thus will not allocate as many emission allowances. Nevertheless, the uncertainty in regard to the supply and demand of carbon credits leads to the belief that such a price downfall is not impossible [Jepma 2007]. Also, the indecision in regard to the post-2012 regime, and thus the absence of a clear price signal, leads to investors refraining from longterm investments. And finally, but perhaps most importantly, the price of carbon credits will be strongly influenced by the amount of emission allocation surplus (sometimes referred to as “hot air”) that some countries, notably Russia and the Ukraine, will put on the market [Lecocq and Capoor 2005].
The price in the carbon market is of utmost importance since it defines the costeffectiveness of emission reduction measures. Low prices give very little incentive for investment in clean energy production. Also, social behaviour changes are unlikely under the current framework. For example, offsetting emissions for a flight from Europe to India and back would add a marginal 5 per cent to the price of the airfare.8
The functioning of the Clean Development Mechanism, although wellintentioned, has been criticised in the last few years. The CDM has a twofold objective at its core, it must 1) offset GHG emissions and 2) contribute to sustainable development in the host country. There has been a lot of debate, often fuelled by watchdog non-governmental institutions, on the ability of a market-based mechanism to serve a dual objective. Experience shows that while some CDM projects do seem to provide local communities with accompanied benefits, a majority of projects underperform in terms of sustainable development [Pearson 2004; Cosbey, Parry et al 2005]. Since the CDM is at best climate-neutral, its contribution to the second objective, sustainable development, is fundamental [Sterk and Wittneben 2005]. In the non-regulated market, the examples of failing offset projects are numerous [Dag Hammarskjold Foundation 2006].
Another well-debated issue of carbon offset projects is that of additionality. A
CALL FOR PAPERS
Dalit Agendas: Emancipation, Citizenship, and Empowerment
The Center for the Advanced Study of India and the Department of South Asia Studies at the University of Pennsylvania will hold a major conference on critical issues relating to Dalit Studies December 4-6, 2008 in Philadelphia, Pennsylvania (USA). We plan to bring together academics and intellectuals from both within and outside of formal academic institutions, including the many organic intellectuals who have kept alive India’s Dalit movement by following Dr. Ambedkar’s injunction to “educate, organize, and agitate.” The purpose of the conference will be to evaluate strategies for ensuring that Dalit agendas are recognized by and incorporated into mainstream academic dialogue and to assess the various political and social agendas, both contemporary and historical, that have sought to improve the lives of Dalits. These include Dalit political formations; print media and literary movements; colonial and postcolonial governmental practices and policies; initiatives for social and economic empowerment; feminist struggles; critiques of nationalist and radical movements; and diasporic activism. The conference will result in the production of an edited volume that will bring various Dalit agendas into dialogue and examine the conditions and contradictions of Dalit social mobility in contemporary India. We encourage proposals from all disciplinary, methodological, and ideological perspectives. Applications are welcome from independent scholars, postgraduate students, and those working within and outside of formal academic institutions.
Further information can be found on the conference website: http://casi.ssc.upenn.edu. The author of each paper proposal accepted for participation in the conference will receive an honorarium of USD 500 that we hope will help to defray the costs of any additional research that will be conducted for the paper. Travel (international or domestic, as needed) to and from Philadelphia, meals, and accommodation will be covered for all conference participants, and each contributor whose paper is accepted for publication in the edited volume will receive an additional honorarium of USD 500 following the final submission of their paper.
Deadline for Paper Proposals: November 1, 2007
Applications should include:
Mailing address for applications:
Dr. Ramnarayan S. Rawat Department of South Asia Studies University of Pennsylvania 820 Williams Hall, 255 South 36th Street Philadelphia, PA 19104-2653 (USA) Email: rawat@sas.upenn.edu
Economic and Political Weekly July 28, 2007
project for which carbon credits are issued must represent local GHG reduction that is additional to what would have happened in the absence of the project in order to guarantee its environmental integrity. Although the concept might seem straightforward, the practical application can be biased. The hypothetical scenario of what would have happened in the absence of the CDM project is characterised by a relatively high degree of uncertainty. Because the CDM does not reduce GHG emissions as such in global terms but only offsets them, if the additionality of a project is questionable there is the risk of emission certificates being issued without actually being compensated.
The permanence of the carbon offset is also a source of great concern. Indeed, if carbon credits are issued based on an offset that in a later stage vanishes, the global carbon balance is not neutral anymore but positive. The experience shows that several projects have seen their carbon capture leaking.
The voluntary market, because it is unregulated, suffers from all the shortcomings mentioned above, but to a greater extent. Serious doubts have been expressed about the quality of projects in the voluntary market. Because there is currently no commonly agreed and applied standard, the range in the quality of the projects is wide. More generally and besides the technicalities, there is also a more fundamental discussion on carbon markets. Some critics see carbon offset as the wrong answer to the urgent need of reducing carbon dioxide emissions. Going carbon-neutral, which is currently sort of fashionable, is often seen as a green claim that is good for the conscience, but provides little incentive for behaviour change.
On the positive side, however, the carbon market and its flexible mechanisms might be viewed as a condition sine qua non for some countries to accept participation in the international climate change mitigation efforts. The climate change issue tends to further strengthen the north-south divide. According to historical responsibilities for anthropogenic climate change, the north is undoubtedly contributing to a great extent to the alteration, while the south will suffer most of the consequence. Based on the principle of common but differentiated responsibilities, the carbon market and the CDM in particular might be the notable exception that helps to relax the tensions [Prum 2007]. Indeed, this form of international cooperation allows for the combining of different interests, the need for industrialised countries to offset their emissions and the development aspiration of developing countries.
Conclusion
The carbon market is currently booming and India is in a position to play a key role. Numerous projects providing emission certificates for the carbon market, either regulatory or voluntary, are located in India.
The Clean Development Mechanism, in the regulatory framework, represents an opportunity for sustainable development in developing countries, facilitated by the need of industrialised countries to meet their GHG emission targets. However, the link between such undertakings and sustainable development is not straightforward. Indeed, different factors could undermine the valuable objective of the CDM to promote sustainable economic, social and environmental development in the host country. The CDM is largely considered a success. It has nevertheless being laden with a lot of unrealistic expectations (rural electrification, poverty alleviation) for which it is not designed.
The voluntary market, although wellintentioned, currently suffers from a lack of credibility for a number of reasons. Nonetheless, it seems to trigger projects that are left out by the high transaction costs of the bureaucratic regulatory framework. Often, projects providing offsets for the voluntary market have a stronger community involvement and broader accompanied sustainable development benefits although at other times, local complaints have arisen.
EPWEmail: patrick.nussbaumer@uab.es
Notes
1 Ministry of Statistics and Programme Implementation, Government of India, http:// www.mospi.gov.in/, accessed June 4, 2007.
2 International Institute for Applied SystemsAnalysis (2007), Greenhouse Gas Initiative (GGI) Scenario Database, http:// www.iiasa.ac.at/Research/GGI/index.html, accessed June 4, 2007.
3 International Energy Agency (IEA) 2006, Key world energy statistics, http://www.iea.org/dbtw-wpd/Textbase/nppdf/free/2006/ key2006.pdf, accessed June 4, 2007.
4 Different greenhouse gases are commonly converted into carbon dioxide equivalent (CO2e) using a factor known as Global Warming Potential (GWP) in order to be comparable andto facilitate accountability.
5 Status as of May 31, 2007, Data source: Fenhann, J (2007), ‘The CDM Pipeline’. 6 IIASA Greenhouse Gas Initiative Scenario
Database, http://www.iiasa.ac.at/Research/
GGI/index.html, accessed June 4, 2007.
7 Different gases have different impacts in terms of the greenhouse effect (so-called “global warming potential). For example, a kg ofHFC-23 (a by-product generated in the production of the Huoric refrigerant’, is the equivalent to about 10,000 kg of CO2 in terms of greenhouse effect.
8 Based on calculation from http:// www.myclimate.org/index.php?lang=en andstandard airfare rates.
References
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Cosbey, A, J-E Parry et al (2005): ‘Realising the Development Dividend: Making the CDM Work for Developing Countries’, IIfS Development.
Dag Hammarskjold Foundation (2006): ‘Carbon Trading, a Critical Conversation on Climate Change, Privatisation and Power’, Development Dialogue, n 48.
Ellis J, J Corfee-Morlot and H Winkler N (2004): ‘Taking Stock of the Progress under the Clean Development Mechanism (CDM)’, OECD, Paris.
Fenhann, J (2007): ‘The CDM Pipeline’, Capacity Development for CDM, UNEP, http:// www.cd4cdm.org, May 31.
Government of India (2004): India’s Initial National Communication to the United Nations Framework Convention on Climate Change,
International Institute for Applied Systems Analysis (2007): ‘Greenhouse Gas Initiative (GGI)’, Scenario Database.
IPCC (2007): ‘Climate Change 2007’, The Physical Science Basis.
Jepma, C J (2007): ‘Credit Prices Down the Drain?’ Joint Implementation Quarterly, 13(1): 1-2.
Lecocq, F and K Capoor (2005): ‘State and Trends of the Carbon Market 2005’.
Pearson, B (2004): ‘Market Failure, Why the Clean Development Mechanism Won’t Promote Clean Development’, CDM Watch.
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Prum, V (2007): ‘Climate Change and North-South Divide: Between and Within’, Forum of International Development Studies, 34: 223-44.
Russell, J (2007): ‘Offsetting Emissions – The Carbon Con?’, Ethical Corporation.
Sharma, S, S Bhattacharya et al (2007): ‘Greenhouse Gas Emissions from India: A Perspective’, Current Science, 90(3): 326-33.
Sterk, W and B Wittneben (2005): ‘Addressing Opportunities and Challenges of a Sectoral Approach to the Clean Development Mechanism’, JIKO Policy Paper 1/2005. Wuppertal Institut fur Klimat.
Taiyab, N (2005): ‘The Market for Voluntary Carbon Offsets: A New Tool for Sustainable Development?’.
The Energy and Resources Institute and The Centre for Clean Air Policy (2006): ‘Greenhouse Gas Mitigation in India’, Scenarios and Opportunities through 2031.
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Economic and Political Weekly July 28, 2007
