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Statusandpotentialofenergyandcarbontradinginindia 111121072701 Phpapp01 PDF
Statusandpotentialofenergyandcarbontradinginindia 111121072701 Phpapp01 PDF
2011
www.spm.pdpu.ac.in
11/21/2011
Page 1
Table of contents:
S No
Topic
Page Number
3 to 5
5 to 8
8 to 11
11 to 14
Fuel substitution
14 to 16
Renewable Energy
16 to 17
Technology Transfer
18 to 19
Project Sustainability
19 to 20
21 to 24
10
24 to 29
11
30 to 32
12
Post KYOTO?
32 to 33
13
Conclusion
34
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Executive Summary:
Carbon is the major constituent of all GHG which are the root cause of Global Warming. As
the GHGs are transparent to incoming solar radiation, but opaque to outgoing long-wave
radiation, an increase in the levels of GHGs could lead to greater warming, which, in turn,
could have an impact on the world's climate, leading to the phenomenon known as climate
change.
Important greenhouse gases are;
S No. GHG constituent
GWP
%
change*
between 1750
and 2000
31%
151%
17%
-
1
2
3
4
Atmospheric
Life (Years)
Impact
(%)
5-200
12
114
1.4-260
70-72%
20%
6-7%
-
10,000
50,000+
3200
to -
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Timeline:
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ERU
CDM
CER
Emission
Trading
AAU/ RMU
Project Based
Carbon Market
Allowance
Based
Voluntary Based
VER
Other greenhouse gasses can also be traded, but are quoted as standard multiples of carbon
dioxide with respect to their global warming potential
The cost of implementing a carbon cap in an Annex-1/ 2 (Developed) countries is
significantly higher than that in a Non-Annex (Developing) country. This is the primary driver
for implementation of Carbon Credit trading mechanism wherein the carbon cap can be
offset by reducing the carbon output of the countries where redundant technology can be
replaced by highly efficient greener technologies with less capital expenditure and negative
impact to the economy.
Carbon Trading Exchanges:
There are six emission trading exchanges which serve to connect the emitter with the Credit
generator
1. Chicago Climate Exchange: The now defunct Chicago Climate Exchange (CCX) was
North Americas only voluntary, legally binding greenhouse gas (GHG) reduction and
trading system for emission sources and offset projects in North America and Brazil.
Trading reached zero monthly volume in February 2010 and remained at zero for the
next 9 months when the decision to close the exchange was announced due to
inactivity in the U.S. carbon markets.
2. European Climate Exchange: ECX / ICE Futures is the most liquid, pan-European
platform for carbon emissions trading, with its futures contract based on the
underlying EU Allowances (EUAs) and Certified Emissions Allowances (CERs)
attracting over 80% of the exchange-traded volume in the European market. ECX
contracts (EUA and CER Futures, options and spot contracts) are standardised
exchange-traded products.
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RMUs
ERU+CER
Emission
Trading Units
+/-
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Party-X
10
1
11
12
1
200
200
150
350
Party-Y
8
-1
7
10
3
100
300
-150
150
Total
18
0
18
22
4
500
0
500
Party-X
10
NA
10
12
2
200
400
NA
400
Party-Y
8
NA
8
10
2
100
200
NA
200
Total
18
NA
18
22
4
600
NA
600
VER can vary largely with their quality (actual emission reduction achieved for each unit of
standard value 1 Metric Tonne of CO2 claimed) depending on the supplier and buyer.
Parties involved in such transactions should make proper due diligence before making
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It can be seen that the bottom 50% of rural people emitted in 1990 a mere 54 kg of carbon
per person per year. The richest 10% of urban people emitted 12 times as much at 656 kg of
Carbon per person per year, which is still way below the world average of 1.1 tonne and
much below the average emission in developed countries.
Government initiatives in reducing Carbon Emissions:
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Population
Carbon
intensity
Energy
intensity of
GDP
GDP per
Capita
CARBON EMISSIONS
The Carbon Emission basket can be reduced by controlling one of the four parameters;
1. Carbon intensity: The amount of carbon by weight emitted per unit of energy
consumed.
2. Energy intensity of GDP: Energy intensity is a measure of the energy efficiency of a
nation's economy (energy per unit of GDP).
3. GDP per capita: A measure of the total output of a country that takes the gross
domestic product (GDP) and divides it by the number of people in the country.
4. Population: The entire pool of people contributing to the GDP of a country.
Fuel substitution:
Coal was initially the mainstay of commercial energy and use of oil and gas was not allowed
for some sectors. More recently, many sectors have switched to the use of fuels other than
coal. For example, the power sector is permitted to use natural gas. Coal-based fertilizer
plants no longer function and coal use in railways is almost phased out. Consumers
preferences for clean and easily available fuel, oil is preferred in part because the
distribution infrastructure for petroleum is better. Natural gas emits 60% less carbon dioxide
than coal and 42% less than oil for a comparable unit of consumption, although it does emit
other non-carbon greenhouse gases. Gas is an efficient fuel and saves up to 30% of energy
in most applications. Unlike nuclear energy, natural gas do not pose waste disposal or safety
problems. And it is available in abundance. If any single factor can substantially lower
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For countries committed to Kyoto commitments to reduce carbon, nuclear energy will
provide an attractive alternative to gas. Among the technologies which could deliver a
contribution to emission reduction, nuclear power generation plays a crucial role. However
there are a lot of alternative energy sources, the costs of renewable sources are falling
rapidly: in the last 10 years the cost per kWh of electricity from wind turbines fell by 50%,
and that from photovoltaic cells fell by 30%. The costs of nuclear power are rising, despite
the fact that nuclear power has been hugely subsidized over the last half century and many
serious problems associated with nuclear power that have existed since its introduction and
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Renewable Energy:
Renewable energy source to meet growing energy needs can be capitalised to acquire
carbon credits. These carbon credits are sold on international markets generating income
for the owner of the credits. Carbon credits, which are issued to organizations based on
their efforts to limit climate change, and renewable energy projects are intricately linked in
India.
A carbon credit represents the removal of one ton of carbon dioxide or its green-house gas
(GHG) equivalent from the environment. Firms in the European Union and the OECD
member countries are buying carbon credits called CER (Certified Emission Reductions) from
firms in India. CER are registered and issued by the Executive Board of the Clean
Development Mechanism (CDM) of United Nations Framework Convention on Climate
Change. CER are used to meet a part of the obligations in the EU and OECD countries to
reduce GHG emissions; obligations that were agreed upon in the Kyoto Protocol and are
now mandated by national governments.
The World Bank estimates that in 2006 approximately US $5 billion worth of CER were sold.
The European Climate Exchange added CER Futures for trading in March 2008, followed by
CER Options in May 2008. The CER for December 2008 delivery was trading at about US $30
(EU 21) on September 1 on the European Climate Exchange.
Financing of renewable energy projects via carbon credits is a relatively new activity in India.
It requires simple and innovative models that are easy to implement, manage and finance.
Renewable energy firms like C-TRADE are working to help develop renewable energy
projects through carbon financing. C-TRADE develops renewable energy projects in
developing countries and finances them partly by having the rights to the carbon credits
that the project will generate. Its biogas renewable energy projects turn waste manure from
farms into electricity that the farmers use. The projects are completed on a Build-OperateTransfer (BOT) basis, transferring the asset to the farmer at the end of the agreement
period. C-Trade finances the entire operation. Because many of the renewable energy
projects in India tend to be on the smaller scale, innovative business models have made
aggregation of investments possible in these projects. Developers of these projects are
starting to use the growing market for carbon credits to finance a part of their project costs.
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Technology Transfer:
The role of technology is critical in achieving any carbon targets and there is a need for
complementary policies and cooperation to support technology development and diffusion.
In part, a sufficiently long horizon for the price of carbon should provide a stimulus, but the
Copenhagen discussions will also consider the extent to which multilateral co-operation can
be effective in transferring technology to developing countries and how this should link with
other areas such as foreign assistance programs and trade policy
India has announced that it will endeavor to reduce emissions intensity of GDP by 20 to 25
percent in comparison to the 2005 level by 2020. Government has launched National Action
Plan on Climate Change that includes National Solar Mission and National Mission on
Enhanced Energy Efficiency which aim at reducing emissions intensity of GDP.
The Indian Government follows the policy of sustainable development through a range of
programs aimed at;
Energy Conservation
The centrality of the technology question comes from the realisation that a reduction of
emissions consistent with the objective of the European Union, which is to keep global
warming under 2 C higher than pre-industrial levels, would entail developed countries
having to reduce their emissions in the range of 2540% by 2020 and 8095% by 2050,
whereas developing countries would need to limit the rise in their greenhouse gas emissions
(GHG) by 1530% below those of 1990 by 2020. To reach such an ambitious goal a
significant scale-up of public and private research and development (R&D) programs as well
as enhanced deployment and diffusion programs, together with private-sector investment
flows for mitigation technologies are necessary in both developed and developing countries.
As developing countries often lack the capacity to develop and finance critical climate
technologies, developed countries will have to increase the pace and extent of the current
technology transfer. This process involves not only the supply and shipment of hardware but
also requires developing processes covering the flows of know-how, experience and
equipment and the capacity of developing countries to understand, utilize and replicate the
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Project Sustainability:
A range of activities can generate greenhouse gas reductions while advancing sustainable
development. The carbon offsets market holds substantial promise as a source of catalytic
funding, but barriers often impede market access for small and medium sized enterprises,
local government bodies, and development organizations. Green Markets' carbon market
information program provides information and links to resources to increase knowledge
about the greenhouse gas reduction market so that it can become more broadly inclusive,
with the goal of helping to enable carbon market access for small-scale activities and for
initiatives conceived and implemented by stakeholders who might otherwise be left out.
Sustainable Energy Acceleration:
Under the sustainable energy acceleration program, Green Markets has worked to enhance
understanding about the climate protection attributes of renewable energy and energy
efficiency applications, and to build knowledge about innovative financial mechanisms for
small-scale sustainable energy technologies. Areas of focus have included:
Solar Water Heating
With support from the Renewable Energy and Energy Efficiency Partnership, Blue Moon
Fund, and Oak Foundation, Green Markets worked to boost the use of solar water heating
systems for climate protection and economic development through the Innovative
Financing to Accelerate Solar Water Heating initiative.
Solar water heaters are often cost effective, locally manufactured
in many countries, and can contribute substantially to climate
protection and economic development. Yet solar water heater
markets have remained small in many locations, even where
conditions for market growth appear quite promising. Barriers
related to the lack of available arrangements to address the high
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As stated below the Clean Development Mechanism was introduced to combine the
interests of the Annex I and non-Annex I countries. In addition to this there are clear
benefits for Project Developers in using the CDM as it can be a driver for getting
environmentally benign technologies more economically viable and overcome barriers that
would otherwise prevent the project from being realized. Thus the CDM can widen the
market opportunity for suppliers of equipment. For project developers in developing
countries, the CDM can be used to modify planned or projected investments into projects
with lower emissions of greenhouse gasses. Together this makes a win-win situation for all
parties. An important facet of the CDM is that a project activity starting as of the year 2000
shall be eligible for validation and registration as a CDM project, if registered before 31
December 2005. This means that CERs are bankable from the inception of the CDM and can
thus be generated prior to 2008, which is a significant difference from ERUs generated from
Joint Implementation projects. This might create a strong incentive for those in a position to
act now to engage in CDM projects as early as possible.
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4.
Any industrial process change resulting in the reduction of any category greenhouse
gas emissions
5. Cogeneration:
Use of waste heat from electric generation, such as exhaust from gas turbines, for
industrial purposes or heating (e.g. Distillery-Molasses/ bagasse)
6. Agricultural sector:
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Project Scenario
The project activity, which is a carbon neutral fuel based cogeneration plant, generates
electricity in addition to steam to meet SPULs captive electricity requirement. Te additional
electricity from the project activity will be exported to adjacent sister paper plant i.e.
SIDDHARTH papers limited. Therefore project activity displaces the use of fossil fuels like
coal which would have been used in absence of the project activity.
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Fixed price: This is an agreed price per CERs which will not change if the EUA
allowance market moves against the Seller. This structure is often preferred by those
requiring more certainty of the revenue stream for future budgeting plans, rather
than being exposed to market fluctuations. A fixed price may also be preferable to
lock-in current market conditions if perceived to be advantageous to both parties.
Usually a fixed price will be lower than the equivalent Floating price, because the
Buyer is taking all market risk.
Floating price: This is a percentage of the average EUA price over an agreed number
of days. A floating price allows Sellers exposure to potential gains in the EUA market,
but also to potential loses should the market fall. This structure generally only works
for European Buyers who have an exposure to the EUA market Japanese Buyers
who are not involved in the EU ETS tend not to link CER prices to the EUA market.
Combination of Fixed and Floating: Buyers and Sellers may choose to specify a price
based on fixed and floating components, in order to reduce exposure to either
structure. For example, 50% of the agreed CERs may be at a fixed price, while the
other 50% may be at a floating price. Or, a Fixed minimum price may be agreed, with
an additional Floating payment
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EUA market price: For many Buyers, the value of CERs is benchmarked to the EUA
price, the most established trading system for emissions.
Volatility in EUA prices is typically reflected in the CER market. It is therefore
important to have a strong understanding of the underlying market dynamics of
EUAs.
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MCX is the futures exchange. People here are getting price signals for the carbon for the
delivery in next five years. The exchange is only for Indians and Indian companies. Every
year, in the month of December, the contract expires and at that time people who have
bought or sold carbon will have to give or take delivery. They can fulfill the deal prior to
December too, but most people will wait until December because that is the time to meet
the norms in Europe. If the Indian buyer thinks that the current price is low for him he will
wait before selling his credits. The Indian government has not fixed any norms nor has it
made it compulsory to reduce carbon emissions to a certain level. So, people who are
coming to buy from Indians who are actually financial investors. They are thinking that if the
Europeans are unable to meet their target of reducing the emission levels by 2009, 2010 or
2012, then the demand for the carbon will increase and then they may make more money.
So investors are willing to buy now to sell later. There is a huge requirement of carbon
credits in Europe before 2012. Only those Indian companies that meet the UNFCCC norms
and take up new technologies will be entitled to sell carbon credits. There are parameters
set and detailed audit is done before you get the entitlement to sell the credit.
MCX keen to play a major role on the emission front by extending its platform to add carbon
credits to its existing basket of commodities with regard to commodities futures trading, the
existing and potential suppliers of carbon credits in India have geared up to generate more
carbon credits from their existing and ongoing projects to be sold in the international
markets. With India supposed to be a major supplier of carbon credits, the tie-up between
the two exchanges is expected to ensure better price discovery of carbon credits, besides
covering risks associated with buying and selling.
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1.
2.
3.
1.
2.
1.
2.
3.
Hedgers:
Producers: Reliance Energy, Tata Steel, Dwarikesh Sugar, DLF ltd
Intermediaries in spot markets
Green land carbon trading, Verve consulting, X-change carbon,
Ultimate buyers:
Investors:
Arbitragers
Portfolio managers
Diverse participants with wide participation objectives:
Commodity financers
Funding agencies
Corporate having risk exposure in energy products
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Post KYOTO:
The existing accord to reduce carbon emissions is up for review in 2012, beyond which it is
uncertain. The last global conference on the subject, at Copenhagen, was not able to
provide any clarity on the post-2012 period. Finding buyers for post-2012/Post-Kyoto
carbon credits has been a challenge. POINTCARBON reported that carbon brokers said that
such deal would likely reflect a price of 6-9 EUROS per ton CO2e. The current price for
CERs under the Clean Development Mechanism would be about 14 EUROS. The discount for
post-Kyoto credits would thus be 5-8 EUROS, a significant reduction reflecting the
uncertainty of the negotiations at Copenhagen and at UNFCC meetings thereafter. If a
treaty is not finalized until next December, these low prices may continue until then.
Under Kyoto, developed countries are allowed to establish domestic and internationally
linked emissions trading schemes and purchase emissions reductions in developing
countries and count them as their own. But on December 31 next year (eight months before
the next federal election) Kyoto will expire without a successor agreement. Since the 2007
Bali summit countries have been in a negotiating deadlock over different paths for a postKyoto agreement. Developing countries want a second Kyoto emissions reduction period
because it puts the entire onus on developed countries.
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Conclusion:
Carbon trading is a nascent concept which is a strong tool for mitigating the emission risks
the globe is facing. Though some major pollutants are signatories to the KYOTO Protocol, it
would take efforts of other nations in building up a mechanism that ensures the
temperature rise due to the GHG emissions being restricted to the envisaged 2 deg level.
Though the KYOTO Protocol was mandated for a window of 2008 to 2012, the Durban talks
as scheduled in December 2011 is expected to come up with concrete plans to make
sustainable developments in the field of Emission Trading. The flow of investments/
technology from developed countries to developing ones is aided by the unprecedented
economic growth as witnessed in Asia. Such rapid growth at the cost of the environment
would put the future generations in jeopardy. Hence developing nations like India and China
are better off accepting Voluntary Emission cuts which would ensure their readiness to face
compulsory cuts as and when they are imposed on them.
Carbon emissions trading has been steadily increasing in recent years. According to the
World Bank's Carbon Finance Unit, 374 million metric tonnes of carbon dioxide equivalent
(tCO2e) were exchanged through projects in 2005, a 240% increase relative to 2004 (110
mtCO2e)[26] which was itself a 41% increase relative to 2003 (78 mtCO2e).
One criticism of carbon trading is that it is a form of colonialism, where rich countries
maintain their levels of consumption while getting credit for carbon savings in inefficient
industrial projects. Nations that have fewer financial resources may find that they cannot
afford the permits necessary for developing an industrial infrastructure, thus inhibiting
these countries economic development. Most developing nations feel that instead of
adjusting their lifestyle and energy efficiency, developed nations are passing the buck of
Global Warming on developing nations who have very low per capita energy consumption.
Thus Emission Trading can be seen as a powerful tool in the hands of powerful nations to
maintain economic superiority and make poor countries accountable for their inefficiencies
which leads to a disparity in the concept of Emission Trading.
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http://www.business-standard.com/india/news/
http://www.general-carbon.com/joomla/images/stories/the_future.pdf
http://www.green-markets.org/programs.htm
www.europeanclimateexchange.com
www.cdmindia.com
www.pointcarbon.com
Literature Sources:
1. Understanding Carbon Credits (ISBN:81-85353-61-1), Aditya Books Pvt Ltd, 2009:
GURMIT SINGH
2. Energy in Emission Markets (ISBN:04-70821-58-2), Wiley Publication, TOM J and
PETER FUSARO
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