Carbon Credit Essay Example
Carbon Credit Essay Example

Carbon Credit Essay Example

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  • Pages: 8 (2096 words)
  • Published: January 14, 2018
  • Type: Research Paper
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The purpose of Carbon Credits

The concept of carbon credits pertains to the elimination of current C02 or C02e emissions from the atmosphere. This includes the sequestration of carbon from forests, tree planting endeavors, as well as the minimization of potential C02 or C02e emissions. Renewable energy sources and energy efficiency initiatives can replace the use of fossil fuel power generation or industrial processes in achieving this end.

Carbon credits and carbon markets are integral to global, as well as domestic, efforts aimed at reducing the proliferation of greenhouse gases (GHGs), with one unit of a carbon credit being valued at one metric tonne of carbon dioxide, or equivalent gases in certain markets. Carbon trading forms part of a system of emissions trading wherein greenhouse gas emissions are regulated, and allocation of emissions is determined through the use of markets.


Where do Carbon

...

Credits come from?

The concept of carbon credits is derived from various methods of reducing emissions that involve removing current emissions from the atmosphere and lessening future emissions. These methodologies aim to incentivize industrial and commercial activities towards low-carbon processes by employing market mechanisms. This approach is crucial to steer such processes in a direction that reduces carbon intensity, in contrast to traditional practices where emitting carbon dioxide and other greenhouse gases comes at no expense.

Carbon reduction initiatives worldwide, including between trading partners, can be financed through the generation of credits via GHG mitigation projects. Emission reduction activities such as afforestation and reforestation remove existing emissions from the atmosphere while constructing a wind farm instead of a coal-fired power station reduces future emissions and generates carbon credits. These activities can

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create carbon credits through voluntary and compliance market mechanisms, schemes, and standards.

Certain instruments have been created to assist nations in meeting their mandatory Kyoto objectives, while others offer opportunities for voluntary offsetting.

The Developing World is considered the "low hanging fruit" for environmental improvements due to their potential for significant progress. Any efforts towards Climate Change mitigation, such as Internal abatement, improved business efficiency, project-based reductions, or Emissions Trading Schemes, can provide environmental benefits. These improvement projects must be considered "additional", meaning that emission reductions could not have happened without the incentives offered by carbon credits and project supporters must demonstrate this factor.

Demonstrating a reduction in greenhouse gas emissions compared to a scenario where the project did not exist is essential for eligibility. The use of coal, natural gas, and oil by industries such as power, cement, steel, textile, and fertilizer significantly contributes to these emissions which consist of carbon dioxide, methane, nitrous oxide and hydrofluorocarbons (HFCs). These gases increase the atmosphere's capacity to trap infrared energy leading to an impact on climate.

Various policy instruments can be employed to address environmental issues, such as economic measures, government support, and regulation. One effective approach in the industrial sector has been the use of a tradable permit system with an assured initial allocation process and a stable long-term pricing structure. This strategy was formalized by the Kyoto Protocol, which involved over 170 nations, and later market mechanisms were established through the Marrakesh Accords.

The Kyoto Protocol was established as a means of addressing the increase in carbon emissions and harmful gases that contribute to global warming. The protocol's mechanism mirrored the successful approach taken

by the US Acid Rain Program, which aimed to decrease industrial pollutants. A few decades ago, the debate surrounding the reduction of greenhouse gases and their harmful effects began. In response, nations joined forces and signed the Kyoto Protocol.

The assigned amount is measured in Assigned Amount Units (AAUs), with one unit representing permission to emit one metric tonne of carbon dioxide equivalent. These AAUs are kept in a country's national registry. Emission quotas are then set for local operators, and countries ensure compliance through validated and monitored national registries overseen by the UNFCCC.

Every operator is given a certain amount of credits, that correspond to the emission rights of one metric tonne of carbon dioxide or equivalent in greenhouse gases. Any business that may exceed its quota can purchase additional allowances in the form of credits, either privately or on the open market.

To decrease greenhouse gases (GHG), there are two options. The first option is to enhance or adopt existing technology to meet new emission standards. The second option is to team up with developing countries and aid them in implementing sustainable technology, which will enable these countries or their businesses to receive credits. By permitting allowances to be traded, the operator can find the most cost-effective approach for decreasing emissions by investing in cleaner equipment and practices or buying emissions from another operator who has extra capacity.

The European Union countries have been using the Kyoto mechanism for CO2 trading through the European Trading Scheme (EU ETS) since 2005, which has been approved by the European Commission. Under the EIJ, developed nations that ratified Annex I from 2008 onwards are obligated to

trade six major man-made greenhouse gases. Countries like Australia, which ratified it in March 2008, and the United States, who did not ratify Kyoto, are evaluating comparable programs.

India, China and other Asian countries have a favorable position due to their status as developing nations.

Credits are bought by developed companies, mainly from Europe, as the United States is not a signatory to the Kyoto Protocol. In emissions markets, a single allowance or CER corresponds to one metric ton of C02 emissions and can be sold privately or internationally at the current market price.

The European Commission validates every transfer of ownership in the European Union. Climate exchanges have been created to facilitate a spot market in allowances and also a futures and options market. This helps in establishing a market price and maintaining liquidity. Generally, carbon prices are quoted in Euros per tonne of carbon dioxide or its equivalent (C02e).

The implementation of these characteristics has the effect of lessening the financial burden of quotas on businesses and ensuring their fulfillment both domestically and globally. Presently, there exist five exchanges that engage in the trading of carbon allowances: the European Climate Exchange, NASDAQ OMX Commodities Europe, PowerNext, Commodity Exchange Bratislava, and the European Energy Exchange. Among its listed contracts, NASDAQ OMX Commodities Europe includes Reductions (CERs).

In 2008, CantorC02e emerged as a private electronic market. The Commodity Exchange Bratislava has a unique platform called Carbon place for trading carbon credits. The City of London has witnessed rapid growth in financial services related to emission management and in 2007 the industry was estimated to be worth around ‚30 billion. Barclays Capital's head of environmental

markets, Louis Redshaw, anticipates that carbon will become the world's largest commodity market and could potentially surpass all other markets in size.

Carbon credits can lead to decreased emissions by establishing a market that recognizes the costs associated with polluting the air. These expenses are regarded as crucial elements of business operations and are listed on balance sheets together with other liabilities such as raw materials. For example, suppose a company's factory emits 100,000 tonnes of greenhouse gases each year and is classified as an Annex I country by the government, which imposes emission restrictions limiting output to 80,000 tonnes per annum.

It is possible that after assessing the cost of Jp alternatives, the company may come to the conclusion that investing in new machinery for that particular year is not feasible or economical. In such a scenario, the company may opt to purchase carbon credits from authorized entities trading in legitimate carbon credits on the open market. The manufacturing of alternative energy sources can have a significant impact on the environment, and thus the energy consumption and emission of carbon during the production and transportation of large wind turbines may render them ineligible for a predetermined duration. Companies that sell carbon credits may offer to offset emissions through projects in developing regions, such as recovering methane from a swine farm to power a station instead of using fossil fuels.

The sale of allowances would cover the cost of the seller's new machinery.

The price of carbon offset credits has dropped to record lows due to an excess supply and a potential prohibition of some credits in the European Union. The

cost of one credit, which was around Euro 24 (Rs 1,500) in 2008, has now reached only Euro 0.83 on Thursday.

Both Reliance Industries and ITC are holders in the private sector. An ITC spokesperson stated that a strong worldwide carbon market is crucial for promoting innovation, thus a more prosperous carbon market is preferred. ITC looks at carbon credits as not just a means of financing, having garnered them through various projects such as hotels and social forestry.

KPMG, a company specializing in sustainability and climate change consultancy services for businesses, experienced a decrease in their success fee for advisory charges linked to successful CER trading in April. Despite private investors avoiding green ventures, K Srinivas, CEO and founder of Vasudha Foundation- a charitable trust focused on clean energy- believes this won't hinder the growth momentum of such initiatives. This is because most clean projects are driven by government policies that vary from state to state; Gujarat and Tamil Nadu have implemented policies promoting solar missions and clean energy projects.

British Petroleum's management of a facility in the United Kingdom is an example of how this concept can be practically applied.

To meet the target level of carbon emissions by 2012, China and India are utilizing sophisticated energy-saving technologies to earn extra carbon credits. These credits are sold to European firms, creating a market for them. Furthermore, starting in 2008, European companies must adhere to annual regulations related to this issue.

Developing countries' companies must adopt modern technologies to decrease emissions and conserve energy. Nevertheless, the Clean Development Mechanism (CDM) restricts the amount of a company's carbon credit earnings that can be transferred

to developed countries. Furthermore, there is a set limit for credit acquisitions by European companies.

The electronic certificate is maintained in its digital form.

There are worries about the quantity of credit accessible in the market and whether European businesses can adhere to set standards. If targets are not achieved by December, governments may make minor adjustments to these standards, which could result in price corrections.

Furthermore, having precise information is essential.

To sell Carbon Credits to developed countries, businesses must invest in Windmill, Bio-gas, Bio-diesel, and Co-generation. Conversely, polluting industries such as steel, power generation, cement, fertilizers, waste disposal units, plantation companies, sugar companies chemical plants and municipal corporations can earn carbon credits by reducing emissions and profit from it.

According to Krishnan, starting from July 1st, the new guidelines will require that companies report both their issued and sold carbon credits for the current fiscal year in their September quarter results.

The group responsible for drafting the accounting guidelines has determined that carbon credits should be considered "intangible assets" and treated as "inventory" on the balance sheet until they are sold. This conclusion, which was previously reported by TOI on January 7, 2009, applies to projects that utilize the UNFCCC's clean development mechanism (CDM). Under this mechanism, developed countries can undertake greenhouse gas reduction projects in developing countries where the cost is typically lower. In exchange for meeting emission reduction targets, the developed country would receive carbon credits.

The certification of emission reductions (CDM) is associated with certified emission reductions (CER), or carbon credits, where one CER equals one metric tonne of carbon dioxide equivalent. Accounting guidance is required for

entities in India generating carbon credits due to the large number and newness of this field. The guidance note offers direction on applying accounting principles for recognizing, measuring, and disclosing CERs generated by an entity operating under the CDM.

Although CERS are classified as assets of the generating entity, they must undergo UNFCCC verification before issuance. This means that they can only be considered contingent assets once issued and can only be recognized in financial statements thereafter. It is important to note that the market for CERS is relatively new, so any future economic benefits are not guaranteed.

The note states that in order to ensure future economic benefits, it is important for an entity to assess the potential market for CERS and recognize their value.

With its dominant position in carbon trading through the UNFCCC's CDM, India has an advantageous edge as primary buyers like US, Germany, Japan and China are expected to purchase carbon credits. This has resulted in India securing over fifty percent of the world's tradable CERs which is starting to impact business strategies within the country.

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