Carbon credits and it’s effects on the common man
Posted on January 21, 2010
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Burning of fossil fuels is a major source of industrial greenhouse gas emissions, especially for power, cement, steel, textile, fertilizer and many other industries which rely on fossil fuels (coal, electricity derived from coal, natural gas and oil). The major greenhouse gases emitted by these industries are carbon dioxide, methane, nitrous oxide, hydrofluorocarbons (HFCs), etc, all of which increase the atmosphere’s ability to trap infrared energy and thus affect the climate. The mechanism was formalized in the Kyoto Protocol, an international agreement between more than 170 countries, and the market mechanisms were agreed through the subsequent Marrakesh Accords. The mechanism adopted was similar to the successful US Acid Rain Program to reduce some industrial pollutants.
The Protocol agreed ‘caps’ or quotas on the maximum amount of Greenhouse gases for developed and developing countries, listed in its Annex I. In turn these countries set quotas on the emissions of installations run by local business and other organizations, generically termed ‘operators’. Countries manage this through their own national ‘registries’, which are required to be validated and monitored for compliance by the UNFCCC. Each operator has an allowance of credits, where each unit gives the owner the right to emit one metric tonne of carbon dioxide or other equivalent greenhouse gas. Operators that have not used up their quotas can sell their unused allowances as carbon credits, while businesses that are about to exceed their quotas can buy the extra allowances as credits, privately or on the open market. As demand for energy grows over time, the total emissions must still stay within the cap, but it allows industry some flexibility and predictability in its planning to accommodate this.
Industry watchers say carbon markets will continue to grow at a fast clip — especially in the United States, where Fortune 500 powerhouses such as DuPont, Ford, and IBM are voluntarily capping and trading their emissions. Even though a national cap on carbon emissions doesn’t yet exist in the United States, most consider it inevitable, and legislators are already pushing the issue in Congress. Reducing emissions and lowering energy consumption is usually good for the core business. For example, in 1997 British energy company BP committed to bring its emissions down to 10 percent below 1990 levels. After taking simple steps like tightening valves, changing light bulbs, and improving operations efficiency, BP implemented an internal cap-and-trade scheme and met its emissions goal by the end of 2001 — nine years ahead of schedule. Using the combined C02 reduction strategy, BP reported saving about $650 million. Raising the price of carbon will achieve four goals. First, it will provide signals to consumers about what goods and services are high-carbon ones and should therefore be used more sparingly. Second, it will provide signals to producers about which inputs use more carbon (such as coal and oil) and which use less or none (such as natural gas or nuclear power), thereby inducing firms to substitute low-carbon inputs. Third, it will give market incentives for inventors and innovators to develop and introduce low-carbon products and processes that can replace the current generation of technologies. Fourth, and most important, a high carbon price will economize on the information that is required to do all three of these tasks. Through the market mechanism, a high carbon price will raise the price of products according to their carbon content. Ethical consumers today, hoping to minimize their “carbon footprint,†have little chance of making an accurate calculation of the relative carbon use in, say, driving 250 miles as compared with flying 250 miles. A harmonized carbon tax would raise the price of a good proportionately to exactly the amount of CO2 that is emitted in all the stages of production that are involved in producing that good. If 0.01 of a ton of carbon emissions results from the wheat growing and the milling and the trucking and the baking of a loaf of bread, then a tax of $30 per ton carbon will raise the price of bread by $0.30. The “carbon footprint†is automatically calculated by the price system. Consumers would still not know how much of the price is due to carbon emissions, but they could make their decisions confident that they are paying for the social cost of their carbon footprint.
Carbon credits are measured in tonnes of carbon dioxide. 1 credit = 1 tonne of CO2. Imagine 1 tonne of CO2 would fill a swimming pool the size of 10 by 25 metres and 2 metres deep.
These credits need to be authentic, scientifically based and comply with a regulatory body for these to be traded with confidence. Verification is essential.
These tradeable carbon credits are then given a monetary value set by the market and can be bought and sold between groups on state, national and international markets.
The owner then has the right to emit 1 tonne of CO2 per credit or trade if not needed. ie they have made significant reductions to meet their targets.
Credits may also be retired, meaning taken off the market. They can donated to non-profit groups and are tax deductible in countries where trading is taking place. Large amounts of credits can be bought and retired, thus driving the price up and forcing organisation to decrease their carbon emissions which is fantastic for the environment.
As an individual or business you can purchase carbon credits to offset your UNAVOIDABLE carbon emissions (ie car and air travel) under a voluntary or mandatory scheme.
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