Introduction

In the last few decades, the world has witnessed frequent catastrophes, such as severe droughts, heavy rain cycles, cloudburst, longer and more extreme heat waves, threats to coastlines and property due to surge in storms and higher sea levels as a result of more ice melting and going into the sea. Though occurrence of floods, drought, storms and other extreme weather conditions have always been a reality, but their incident has been rare, interrupting long period of calm, in other words weather patterns have remained relatively constant. However, the frequency of extreme weather events has increased steadily over the 20^th century. The number of weather-related disasters during 1990s was four times that of 1950s and cost 14 times higher in terms of economic losses. This increased occurrence of extreme weather conditions across the globe points towards a dangerous threat – climate change. 

Global Warming and Climate Change

Climate change is an issue that threatens the entire globe. Broadly, climate change refers to variation in the earth’s climate or regional climate over time. It describes changes in the variability or average state of the atmosphere - or average weather - over time scales ranging from decades to millions of years. These changes may come from internal processes, be driven by external forces or, most recently, be caused by human activity. In recent usage, especially in the context of environmental policy the term "climate change" is often used to refer only to the ongoing changes in modern climate, including the average rise in surface temperature known as global warming. Overwhelmingly scientific evidences indicate that world is warming up and there is observed increase in the average temperature of the Earth’s atmosphere and oceans in recent decades. According to the findings of Intergovernmental Panel on Climate Change (IPCC)[1], the global average surface temperature has increased by 0.6 per cent over the course of 20^th century. Scientists have recorded 1990s as the hottest decade witnessed since the industrial revolution began. As a result of global warming, the extent of snow has decreased by about 10 per cent since 1960s, while mountain glaciers have retreated rapidly. The global average sea level has risen by 10 to 20 cm during the 20^th century and the amount of heat stored in the oceans has measurably increased since observations began in the 1950s. Rainfall patterns also appear to be changed. El Nino (which causes drought and flooding) phenomenon has become more frequent, intense and persistent since the mid-1970s than during the previous 100 years. Thus global warming is causing fundamental changes in the Earth’s climate system and there is enough scientific evidence to prove that it is human induced. IPCC’s Third Assessment Report also strengthens the conclusion that most of the warming observed during the last 50 years is attributable to human activities. The increased amounts of carbon dioxide and other greenhouse gases[2] are the primary cause of human-induced climate change. A rapid rise in the concentration of greenhouse gases in the atmosphere has been caused by rising industrial activity resulting in fossil fuel[3] combustion and deforestation. In fact, burning of fossil fuels is the largest source of emission of carbon dioxide, which is identified as the single most important factor contributing to global warming. Since climate change can have grave ecological consequences, this situation calls for serious and persistent efforts towards reducing the emission of greenhouse gases, particularly carbon dioxide.

Global Governance of Climate Change

Climate change negotiations started more than two decades ago and the first formal step in this direction was signing of a global Framework Convention on Climate Change (FCCC) under the auspice of United Nations. The United Nations Framework Convention on Climate Change (UNFCCC or FCCC) is an international environmental treaty on climate change produced at the United Nations Conference on Environment and Development (UNCED), informally known as Earth Summit, held in Rio de Janeiro in 1992. The treaty as originally framed did not set any mandatory limits on greenhouse gas emissions for individual nations and contained no enforcement provisions; it is therefore considered legally non-binding. However, it included provisions for updates (called "protocols") that would set mandatory emission limits. The principal update is Kyoto Protocol, which has become much better known than the UNFCCC itself.

The Kyoto Protocol

The Kyoto Protocol is an agreement made under the United Nations Framework Convention on Climate Change (UNFCCC) intended to cut global emission of greenhouse gases and countries that ratify this protocol commit to reduce their emissions of carbon dioxide and five other greenhouse gases or engage in emission trading if they increase or fail to reduce the emissions. The objective of UNFCCC is the “stabilisation of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic[4] interference with the climate system”. According to a press release from the United Nations Environment Programme “The Kyoto Protocol is an agreement under which industrialised countries will reduce their collective emissions of greenhouse gases by 5.2 per cent compared to the year 1990 (but note that, compared to the emissions levels that would be expected by 2010 without the Protocol, this target represents a 29 per cent cut). The goal is to lower overall emissions of six greenhouse gases – carbon dioxide, methane, nitrous oxide, sulfur hexafluoride, HFCs and PFCs – calculated as an average over the five-year period of 2008-12. National targets range from 8per cent reductions for the European Union and some others to 7per cent for the US, 6 per cent for Japan, 0 per cent for Russia, and permitted increases of 8 per cent for Australia and 10 per cent for Iceland.”. The Kyoto Protocol sets out (in Annex B) a range of legally binding greenhouse gas emission commitments (targets) for individual developed countries (also called Annex-I countries), designed to reduce overall greenhouse gas emissions and thus help meet the UNFCCC’s objective. 

The treaty (Kyoto Protocol) was negotiated in December 1997 but the agreement came into force only on February 16 2005[5]. As of April 2006, a total of 163 countries have ratified the agreement (representing over 61.6 per cent of emissions from Annex-1 countries). Almost all the developed countries with the exception of the US , the world’s top polluter, and Australia have not signed the treaty. India has also signed and ratified the protocol (August 2002) though it is exempt from the framework of the treaty. India, China along with other developing countries were exempt from the requirements of the Kyoto Protocol because they were not the main contributors to the greenhouse gas emissions during the industrialisation period that is believed to be causing today's climate change. The framework of the treaty recognised that it was industrialised nations which needed to take the first step in reducing emissions because not only were they more responsible for the problem, they also had greater capacity and resources to take corrective actions as they had already reached higher level of economic development.

To achieve the required above-mentioned reduction goal in a cost effective way[6] the Protocol provides three mechanisims to the developed nations.

Joint Implementation (JI) projects which reduce emissions within industrialised countries, : The Kyoto Protocol provides for developed countries to implement projects that reduce emissions, or remove carbon from the atmosphere in other developed countries and earn Emission Reduction Units (ERUs). These ERUs can be used to meet the emission reduction targets. A JI project might involve, for example, replacing a coal-fired power plant with a more efficient combined heat and power plant or for example, if a Japanese company invests in an emissions reduction project in Russia (for example, retrofitting coal-fired power plants to burn natural gas) then the credits for the emissions avoided could be allocated to the Japanese company (these credits are known as 'Emission Reduction Units', or ERUs and are equal to one metric tonne of carbon dioxide equivalent, or CO2 eq).

Clean Development Mechanism: is the only mechanism under the Kyoto Protocol involving countries that are not subject to binding greenhouse gas emission caps by the protocol – so-called non-Annex I countries. The CDM provides for developed countries to implement project activities that reduce emissions in developing countries in return for certified emission reductions (CERs). The CERs generated by such project activities can be used by developed countries to help meet their emission targets under the Protocol. In exchange, developing country parties will have access to resources and technology to assist in development of their economies in a sustainable manner. A CDM project activity might involve, for example, a rural electrification project using solar panels or the installation of more energy efficient boilers.

International Emissions Trading (IET): International Emissions Trading of assigned amount units (AAUs) allows Annex B parties (countries with binding commitments) to exchange emissions reductions or to trade AAUs via a cap-and-trade[7] system to meet their Kyoto targets. An allocation of emissions allowances to each of the Annex I parties has been proposed under the Kyoto Protocol. Each Annex I party is given an allowance known as an "assigned amount". 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). An Assigned Amount Unit (AAU) is a tradable unit of 1 tCO2e[8].

At the end of the commitment period, a country is declared in compliance with its emission commitment if its emissions are less than or equal to its assigned amount adjusted for emission trading, JI and CDM transactions.

India being a developing country is not included in the Annexure I of the protocol. Hence, India cannot qualify for JI and emission trading mechanisms. It qualifies to be a host country for the CDM projects. CDM mechanism allows industrialised nations to fund CDM projects in the developing world to offset their own GHG emissions.

Carbon Trading

Carbon trading, or more generically emissions trading, is the term applied to the trading of certificates representing various ways in which carbon-related emissions reduction targets might be met. Participants in carbon trading buy and sell contractual commitments or certificates that represent specified amounts of carbon-related emissions that either:

• are allowed to be emitted;

• comprise reductions in emissions (new technology, energy efficiency, renewable energy); or

• comprise offsets against emissions, such as carbon sequestration[9] (capture of carbon in biomass).

Carbon credits were one of the outcomes of the Kyoto Protocol. They are a measure devised by the Kyoto Protocol to reduce world Greenhouse Gas emissions, and hence fight climate change. For each tonne of carbon dioxide that is saved or sequestered carbon credit producers may sell one carbon credit. Or in other words, each carbon credit represents one tonne of carbon dioxide either removed from the atmosphere or saved from being emitted

People buy and sell such products because it is the most cost-effective way to achieve an overall reduction in the level of emissions, assuming that transaction costs involved in market participation are kept at reasonable levels. Countries/companies with high internal emission reduction costs would be expected to buy certificates from countries/companies with low internal emission reduction costs. The latter entities would also be expected to maximise their production of low cost emission reduction so as to maximise their ability to sell certificates to high cost entities.

The idea behind Carbon Trading 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 can start with clean technologies, they will be rewarded by those stuck with ‘dirty’ ones.

Of late, multilateral development banks such as World Bank and the ADB have been taking keen interest in carbon market. Over the past five years the World Bank, the ADB, the African Development Bank, European Development Bank and the Inter-American Development Bank have invested over $17 billion in projects that directly or indirectly contribute to lowering carbon emission in developing countries. Both the World Bank and ADB now manage carbon funds worth close to $5 billion.

 

Need for Carbon equivalents

Carbon dioxide equivalents (CO2e) provide a universal standard of measurement against which the impacts of releasing (or avoiding the release of) different greenhouse gases can be evaluated. Every greenhouse gas has a Global Warming Potential (GWP), a measurement of the impact that particular gas has on 'radiative forcing'; that is, the additional heat/energy which is retained in the Earth's ecosystem through the addition of this gas to the atmosphere. The GWP of a given gas describes its effect on climate change relative to a similar amount of carbon dioxide and is divided into a three-part "time horizon" of twenty, one hundred, and five hundred years. As the base unit, carbon dioxide numeric is 1.0 across each time horizon. This allows the greenhouse gases regulated under the Kyoto Protocol to be converted to the common unit of CO2 eq.

Global Warming potentials for the greenhouse gases regulated under the Kyoto Protocol under a 100-year timeframe are as follows:

Domestic Emission Trading Schemes

With the signing of the Kyoto Protocol different Countries and/or Country States have developed Emission Trading Schemes.  These trading schemes are developed as part of the commitments of the Countries to reduce their GHG emission in which the most cost effective options are left to the market to develop.  Presently the following schemes exist:

 

European Union Emission Trading Scheme (EU ETS)

The ETS was established primarily to help EU member states achieve their Kyoto Protocol targets, as well as providing companies and governments with experience in developing, operating and participating in carbon markets. The first phase of the EU ETS will run from 2005 to 2007, with a second phase from 2008 to 2012 (when other greenhouse gases besides CO2 may be added). Further five-year periods are expected to be subsequently established.

Five sectors are explicitly covered by the scheme: electricity generation, pulp and paper, oil refineries, building materials (such as cement, glass, etc.) and ferrous metals. Overall, more than 12,000 individual installations will be regulated, accounting for about 45 per cent of all EU greenhouse gas emissions.

The scheme should allow the EU to achieve its Kyoto target at a cost of between € 2.9 and € 3.7 billion annually. This is less than 0.1 per cent of the EU's GDP. Without the scheme, it is predicted that compliance costs could reach up to € 6.8 billion a year.

The European Union Emissions Trading Scheme (EU ETS) became effective from January 1st 2005, creating the world's largest market in greenhouse gas emissions. The program establishes a mandatory carbon dioxide cap-and-trade system, in which sources are allocated a certain number of emission "allowances", based on historic performance and other parameters.

Specific emissions targets are being established by national governments in the form of National Allocation Plans (NAPs), which specify how many allowances will be awarded to emitters in each regulated industry. These NAPs were expected be finalised during 2005 before being approved and policed by the European Commission.

Participants reducing emissions below their cap can sell the resulting excess allowances. On the other hand, those companies which find reducing emissions internally to be prohibitively expensive, or those needing to increase production, can buy allowances in the open market.

If a participant is not able to surrender sufficient allowances to cover its annual emissions by the reconciliation date, it will be financially penalised (€ 40/tCO2 for the first phase and € 100/tCO2 for the second phase). All 25-member states of the European Union are involved in the EU ETS.

The first two months of 2005 saw more than 14 million tCO2 traded in the brokered market, which is more than was traded during all of 2004. At prices ranging from about € 6.50 to € 9.50 per tCO2, the market activity in January and February accounted for a combined total of over $100 million. Point Carbon predicts that the EU ETS will transact around €16 billion in 2010, accounting for almost half of the entire global carbon market, with some 1,700 million tCO2e being traded in the scheme.

California Climate Change Register

The California Climate Action Registry (the Registry) was established by California statute as a non-profit voluntary registry for greenhouse gas (GHG) emissions. The purpose of the Registry is to help companies and organisations with operations in the state to establish GHG emissions baselines against which any future GHG emission reduction requirements may be applied.

The Registry encourages voluntary actions to increase energy efficiency and decrease GHG emissions. Using any year from 1990 forward as a base year, participants can record their GHG emissions inventory. The State of California , in turn, will offer its best efforts to ensure that participants receive appropriate consideration for early actions in the event of any future state, federal or international GHG regulatory scheme. Registry participants include businesses, non-profit organisations, municipalities, state agencies, and other entities.

The Registry has developed a General Protocol and additional industry-specific protocols which give guidance on how to inventory GHG emissions for participation in the Registry: what to measure, how to measure, the back-up data required, and certification requirements. When organizations become participants, they agree to register their GHG emissions for all operations in California , and are encouraged to report nationwide. Both gross emissions and efficiency metrics will be recorded. The Registry requires the inclusion of all direct GHG emissions, along with indirect GHG emissions from electricity use.

The Registry requires the reporting of only CO2 emissions for the first three years of participation, although participants are encouraged to report the remaining five GHGs covered in the Kyoto protocol (CH4, N2O, HFCs, PFCs, and SF6). The reporting of all six gases is required after three years of Registry participation.

Chigaco Climate Exchange (CCX)

Chicago Climate Exchange is a self-regulatory exchange that administers the world's first multi-national and multi-sector marketplace for reducing and trading greenhouse gas emissions. CCX represents the first voluntary, legally-binding commitment by a cross-section of North American corporations, municipalities and other institutions to establish a rules-based market for reducing greenhouse gases. The members of CCX have made a voluntary, legally-binding commitment to reduce their emissions of greenhouse gases (CO2, CH4, N2O, PFCs, HFCs, SF6) by four percent below the average of their 1998-2001 emissions baseline by 2006. Each Member can meet their commitment through internal reductions, by purchasing allowances from other Members, or by purchasing credits from emission reductions projects. Eligible offset project categories are: landfill and agricultural methane capture, carbon sequestration in soils, and carbon sequestration in forest biomass.

The CCX's Members, as of March 2005, are: Rolls-Royce, Ford Motor Company, Dow Corning, DuPont, Bayer Corporation, Interface, American Electric Power, Green Mountain Power, Manitoba Hydro, TECO Energy, Motorola, Waste Management, Premium Standard Farms, International Paper, Mead Westvaco, Stora Enso North America, Temple-Inland, IBM, City of Chicago, Baxter Healthcare Corporation, Tufts University, The University of Iowa, The University of Oklahoma, ST Microelectronics, Roanoke Electric Steel, and Amtrak.

Trading activity and prices per tonne have been growing steadily. 2,250,000 tCO2e, valued at about $2 million, was traded through the CCX during 2004. During that period, prices ranged from $0.71 to $2.06 per tCO2e, with most trades occurring around $1 per tonne. These prices are much lower than those found in the regulated carbon markets, such as the EU ETS, NSW, in part because the CCX is voluntary and also because of the large volume of inexpensive agricultural sequestration offsets being offered, which would not be permitted under the other schemes.

New South Wales Greenhouse Gas Abatement Scheme

The New South Wales (NSW) Greenhouse Gas Abatement Scheme, commenced on January 1st 2003 and remains in force until 2012, unless extended. In order to abate the emissions of greenhouse gases associated with electricity consumption in New South Wales , the Scheme imposes mandatory greenhouse gas benchmarks on all NSW electricity retailers and certain other parties.

The scheme seeks to reduce greenhouse gas emissions from the NSW electricity sector by 5 per cent per capita between 2003 and 2007, and then maintain the reduced level until at least 2012. This creates an estimated potential market of over 10 million tCO2e in offsets by 2005, rising to 20 million tones by 2012.

The Scheme includes a penalty of AU$10.50 per tonne of excess CO2 emissions over the benchmarks. However, since the penalties are not tax deductible, but offset purchases are, the effective price could be as high as AU$15/tCO2e. The penalty rate will subsequently be adjusted by the Consumer Price Index.

About two dozen NSW energy providers are regulated under the scheme (including Energy Australia , Country Energy, AGL, Delta, Origin and TXU). In addition, there are about ten other companies, mostly from the steel, aluminum and paper industries, that have elected to participate in the Scheme.

As of February 2005, over 10 million greenhouse abatement certificates have been registered in just over two years of the Scheme's operation. During 2004, more than fifty separate deals traded 5 million certificates, with prices ranging from ~AU$10 to AU$14 per tCO2e, depending on their vintage.

United Kingdom Emission Trading Scheme ( UK ETS)

The UK Emissions Trading Scheme commenced in April 2002, and was the first cross-industry, national greenhouse gas emissions trading scheme in the world. Under the scheme, companies could chose to enter the scheme either through a timed auction as a direct participant with absolute targets, as 34 companies chose to do, or through Climate Change Levy Agreements (CCAs)

The Market for Carbon Trading

Data on carbon trading is available since 1998 and according to the statistics available the total volume of carbon credits traded have increased from close to 18mn tons of CO2 equivalent in 1998 to around 107mn tons of CO2 equivalent in 2004. In 2005 the volumes have already reached levels of 43mn tons of CO2 equivalent. Out of the total volumes traded in 2005, more than 92 per cent was on account of compliance with the Kyoto Protocol and only close to 7 per cent was on voluntary basis.

The buying side of the market is primarily dominated by European countries and Japan with 60 per cent and 21 per cent share in the market respectively. More than two-thirds of the purchases made from Europe were by private firms, against only one-third by the Governments of Netherlands, Denmark , Sweden and Austria .

The seller’s side is dominated by Asia whose share has increased from 43 per cent in 2003-04 to 45 per cent for Jan to April 2005. These aggregate figures, however, are strongly influenced by the dynamics of HFC23 (1 ton of HFC 23 = 11700 tons of CO2) destruction projects, which are few in number but very large in volume, and are primarily located in Asia .

Pricing

Pricing is highly dependant on the characteristics of individual markets. Key factors include:

• International and domestic policy risk (uncertainty);

·     The recognition of monitoring and verification protocols;

·     The recognition of early credit;

·     Expected versus actual allocation;

• Delivery risk (project financial and operational risk);

·     Country risk; and

·     Sustainability and wider social impact of the underlying project.

The price for a carbon credit ranges between €5 and € 20, depending on the stage of approval process. For projects at pre-registration stage, the price is lower. But those where credits have already been issued command a premium.

Transactions range from simple purchases and sales to structured options transactions. Basic structures include:

Immediate Settlement (Spot) trades are trades where the terms of a bid and offer are set on the trade date with delivery and payment occurring in a standard timeframe shortly thereafter.

Forward Settlement trades resemble immediate settlement trades, with the difference being that terms are again set on the trade date, but delivery of reductions and payment are deferred to a future date also specified at the time of trade.

Options are derivative products in which the parties buy or sell the option, or right decided, whether or not to enter into a specified cash transaction at (or before) a future date, referred to as the strike date. The most common types of options are call options and put options, though there are many other forms. Call options allow a buyer to lock in the right to purchase reductions at a specified date at a specified price. Put options allow a seller to lock in the right to sell reductions at a set price.

Examples of global companies that have taken initiatives to reduce emissions

·        American Electric Power is investing in renewable energy projects in Chile , exploring ways to burn coal more cleanly, and testing methods to sequester carbon.

• Florida Power and Light invested in 42 wind facilities and energy efficiency, eliminating the need to build 10 power plants.
• General Electric purchased Enron’s wind business and a solar energy company; doing research on earth-friendly hydrogen and lower emission jet engines and locomotives.
• General Motors is in the process of developing hydrogen-powered cars that don’t emit CO2.
• Toyota , the world leader in hybrid gas-electric cars that deliver superior fuel efficiency.

While carbon trading promises almost free money, there are certain uncertanities involved in the mechanism. Part of this uncertanity in the market stems from the fact that the US , the largest producer of Green House Gases, has not ratified the Protocol and does not intend to do so in near future. There is also some uncertanity as to what will happen after the first phase of commitment gets over in 2012.

India ’s Status

CDM, which is the only mechanism available to developing countries, has evoked a tremendous amount of interest in India . CDM, as defined in the Protocol, is to (i) assist developing countries in achieving sustainable development (ii) contribute to the ultimate objective of the Convention, and (iii) assist developed countries to comply with their quantified emission limitation and reduction commitments. According to Group Head (corporate finance), GFL (Gujarat Fluorochemicals Limited), CDM is a win-win for all concerned. The developed nations are able to out-source environment compliance cost-effectively at the same time developing nations get the advantage of technology, funding and sustainable development.

For the first time, as per the Kyoto Protocol, India will receive funding from developed countries to set up cleaner projects that slow down climate change. The carbon emissions saved as a result of these projects will be purchased by the donor countries as carbon credits. In fact, the first project to seek the mandatory registration with the UNFCCC under CDM in 2004 was an Indian project – GFL’s project for thermal oxidation of HFC23, a key waste produced in the manufacturing of refrigerant gas. Since then, several other companies have followed the suit (Table 1). So much so that out of the 153 projects registered with the UNFCCC as on April 2006, 28 are from India . In the words of officer-in-charge of UNFCCC “ there are more than 500 projects in pipeline over the next six-months and we expect a third of these projects to emanate from India ”. The most popular CDM project types include energy efficiency, renewable energy use, refinement in industrial processes, switchover to cleaner fuels and solid waste management.

 

 

India is beginning to experience the first flow of money from the carbon market .CDM projects set up by Indian industry are expected to generate over 155 million CERs until 2012, based on projects that were approved by Indian authorities until November 2005. Of these, CERs generated by “industrial process” methodologies are in the forefront and account for about half the expected output.  Several Indian companies that are implementing CDM projects are thought to have agreements to deliver CERs at various stages during the 2008-12 period, for around euro 15/CER (US $ 17.5 at current rates). Karnataka, Andhra Pradesh, Rajasthan and Tamil Nadu have emerged as the most active host states in the country.

To facilitate this trading, The World Bank has set up the Prototype Carbon Fund for unhindered flow of capital between developed and developing countries, where the Bank will act as a mediator in the buying and selling of carbon credits. The World Bank has signed an agreement with the IDFC (Infrastructure Development Finance Company) on 21 October 2002 to handle carbon finance facilities worth US$ 10 million. The money received by the Bank will be further invested through local banks or institutions like IDFC for renewable technologies in India .

The institutional setting concerning CDM approval in India is Indian National CDM Authority established with Ministry of Environment & Forests (MoEF), Government of India in December 2003. It is clearing projects on monthly basis and is in charge of formulating the appropriate guidelines.

The CDM goes through different stages of project identification: host country endorsement, development of baseline emission data, validation by an independent agency, registration with the Executive Board for CDM, independent monitoring of the actual emission reductions, and verification. The end of the process is the certification of emission reductions, which can then be traded. Following flow chart explains the methodology.

Case Against CDM

The CDM clearly has some immediate and apparent benefits – it brings cleaner technologies and provides financing to projects in developing countries. However, according to critics the system, as currently proposed is no more than a way for wealthy nations to buy their way out of their emission reduction obligations without significantly reducing domestic emissions. These markets do not create right condition for the structural change needed to tackle global warming. Some critics have voiced that the issue of climate change is being commercialised. According to Mr Gopal Krishna, Coordinator of Toxics Link, a Delhi-based NGO says, "It is a pity that we are twisting the basic issue of CDM in the Kyoto Protocol into a profit-making machine". He adds, "The very seriousness of an issue as pertinent as climate change is being diluted by such trading. Countries like China and the G-7 nations are willing to be party to such arrangements because they don't have any commitments to meet. He feels that the three innovative mechanisms of the Kyoto Protocol seem a farce as they allow parties to pursue opportunities to cut emissions more cheaply abroad than at home. He adds that CDM mechanism is based on the fact that the atmosphere is the same and, if we are aiming at the overall improvement in the climate, it does not really matter if the GHG emissions are reduced in the US or in India, as long as the climate improves. Such an arrangement, he feels, is a decoy as it allows parties the right to emit, as long as they have the trading capacity.

Opposition to Kyoto

The two major countries currently opposed to the treaty are the United States and Australia . Some public policy experts see Kyoto as a scheme to either retard the growth of the world's industrial democracies or to transfer wealth to the third world. Others argue the protocol does not go far enough to curb greenhouse emissions. Many see the costs of the Kyoto Protocol as outweighing the benefits, some believing the standards which Kyoto sets to be too optimistic, others seeing a highly inequitable and inefficient agreement which would do little to curb greenhouse gas emissions. It should be noted, however, that this opposition is not unanimous, and that the inclusion of emissions trading has led some environmental economists to embrace the treaty.

Further, there is a controversy to use 1990 as a base year, or not to use a per capita emission as a basis. Countries had different achievements in energy efficiency in 1990. For example, the former Soviet Union and eastern European countries did little to tackle the problem and their energy efficiency was at their worst level in 1990 as the year was just before their structual change, on the other hand Japan as a big importer of natural resources had to improve their efficiency after the 1973 oil crisis and their emission level in 1990 was better than most developed countries.

Also, economists have been trying to analyse the overall net benefit of Kyoto Protocol through cost-benefit analysis. But, there is disagreement due to large uncertainties in economic variables. Still, the estimates so far generally indicate either that observing the Kyoto Protocol is more expensive than the not observing the Kyoto Protocol or that the Kyoto Protocol has a marginal net benefit which exceeds the cost of simply adjusting to global warming.

Conclusion

Climate change is an issue which threatens the entire globe and climate stabilisation requires tremendous changes in the way energy is produced and consumed. The aim is to have a cleaner environment by limiting the emission of various greenhouse gases. Kyoto protocol is the first step in this direction. The Kyoto Protocol and its flexible emission trading mechanisms appear to be a promising tool to combat climate change. Emissions trading has been considered a possible tool for mitigating greenhouse gas emissions since the early 90s. While emissions trading does not in itself reduce pollution, it encourages manufacturers to decrease pollution so they can sell their credits to other larger polluters and profit. The intention is to create a monetary incentive for companies to reduce pollution. By making it more costly to pollute, it effectively causes companies to compete at being less pollutive while being cost effective. However, Kyoto still falls short of its purpose as world’s largest emitter of greenhouse gases, the US , continues to hold out. In fact, Emissions in America continue to rise and are now 11 per cent higher than they were in 1990 (base year). Most of the countries who have signed the Kyoto Protocol admit that meeting their targets will be difficult; nations are already falling behind. Spain and Portugal in the EU were 40.5 per cent above 1990 levels in 2002. canada , one of the first countries to sign up, has increased emissions by 20 per cent since 1990 and has no clear plans to reach its target. Japan is also uncertain about how it will reach its 6 per cent target by 2012.

Nevertheless, emissions trading offers a major opportunity to help achieve the ultimate objective of the UNFCC Convention. Emissions trading systems that are both environmentally effective and cost-effective also offer an important policy advantage by allowing for acceptable negotiated outcomes at a global level. However, they need some refinements to better deal with the deep and long-lasting uncertainties on abatement costs and technology developments over a century or more and the policy concerns these uncertainties raise.

Thus, International emission trading is full of promise. But difficult political and technical issues remain to be faced. If they are successfully resolved, the world will have gained a new and very effective way of combating climate change.

References

 Aditi Sen (2006), “Hotting up: the science and politics of climate change” Agenda issue no 5.

Butzengeir Sonja et al (2001), “ Making GHG emission trading work – critical issues in designing national and international emission trading systems” HWWA discussion paper no 154, Hamburg Institute of International Economics.

India Infoline (2005), “Carbon Credits – Emitting gains”, July.

Rahul Goswami (2006), “A trading system based on hot air” Agenda issue no 5.

Shalini.S.Dagar (2006), “Money from thin air” Business Today, May 7.

Various Media Sources

http://pointcarbon.com

http://ieta.org/ieta/www/pages/index.php

http://unfccc.int/2860.php

www.cdminida.nic.in

www.ecosystemmarketplace.com

www.cd4cdm.com

www.ecosecurities.com

www.co2.com

(* This note is prepared by Abhilasha Maheshwari)