UNDERSTANDING CARBON CREDITS By Olawale Akinwumi
A couple of years ago, the National Carbon Credit Train was flagged off in Nigeria by the then Minister of Environment, Mr. John Odey. The nationwide campaign on the economic benefits in Climate Change was expected to run through the nation’s 36 States and the Federal Capital Territory, Abuja.
According to the then Head, Special Climate Change Unit, Federal Ministry of Environment, Dr. Victor Fodeke, each state government was expected to host the event which would take the form of a road show in the states, as well as capacity building on Clean Development Mechanism (CDM) in NON-TECHNICAL FORMATS.
Speaking further on the National Carbon Credit Train in Abuja, Fodeke, who was also the Designated National Authority (DNA) in Nigeria said when the train started internationally, Nigeria had only one credit, but through the efforts of the former Minister, John Odey, the country recorded two additional units within one year.
According to him, one of the carbon credit units gained was in the oil and gas area, which was expected to bring in about 26 million Euros for the country in ten years. Fodeke concluded, “Carbon Credit is not known to everyone, and that is why, the Indians, Chinese and North American countries have cornered most parts of the billions of dollars available from the credits”.
Today, more than 7 Years after the National Carbon Credit Train was flagged off in Nigeria, nothing much has changed. Only Lagos State took advantage of the programme after the official flag off in Abuja. Nigerians are yet to begin to benefit from Carbon Credits as intended by the promoters and champions of the National Carbon Credit Programme in Nigeria. Just like Fodeke said in September 2010, Carbon credit is still not known to everyone and thus there are no appreciable credits coming to Nigeria.
WHAT ARE CARBON CREDITS?
Carbon credits are a key component of national and international attempts to mitigate the growth in concentrations of greenhouse gases (GHGs). One Carbon Credit is equal to one ton of Carbon. Carbon trading is an application of an emissions trading approach. Greenhouse gas emissions are capped and then markets are used to allocate the emissions among the group of regulated sources. The idea is to allow market mechanisms to drive industrial and commercial processes in the direction of low emissions or less “carbon intensive” approaches than are used when there is no cost to emitting carbon dioxide and other GHGs into the atmosphere. Since GHG mitigation projects generate credits, this approach can be used to finance carbon reduction schemes between trading partners and around the world.
There are also many companies that sell carbon credits to commercial and individual customers who are interested in lowering their carbon footprint on a voluntary basis. These carbon offsetters purchase the credits from an investment fund or a carbon development company that has aggregated the credits from individual projects. The quality of the credits is based in part on the validation process and sophistication of the fund or development company that acted as the sponsor to the carbon project. This is reflected in their price; voluntary units typically have less value than the units sold through the rigorously-validated Clean Development Mechanism.
There are two distinct types of Carbon Credits. Carbon Offset Credits COC’s and Carbon Reduction Credits CRC’s. Carbon Offset Credits consist of clean forms of energy production, wind, solar, hydro and biofuels. Carbon Reduction Credits consists of the collection and storage of Carbon from our atmosphere through reforestation, forestation, ocean and soil collection and storage efforts. Both approaches are recognized as effective ways to reduce the Global Carbon Emissions crises.
A credit can be an emissions allowance which was originally allocated or auctioned by the national administrators of a cap-and-trade program, or it can be an offset of emissions. Such offsetting and mitigating activities can occur in any developing country which has ratified the Kyoto Protocol, and has a national agreement in place to validate its carbon project through one of the UNFCCC‘s approved mechanisms. Once approved, these units are termed Certified Emission Reductions, or CERs. The Protocol allows these projects to be constructed and credited in advance of the Kyoto trading period.
HOW BUYING CARBON CREDITS ATTEMPTS TO REDUCE EMISSIONS
Carbon credits create a market for reducing greenhouse emissions by giving a monetary value to the cost of polluting the air. This means that carbon becomes a cost of business and is seen like other inputs such as raw materials or labor.
By way of example, assuming a factory produces 100,000 tonnes of greenhouse emissions in a year. The government then enacts a law that limits the maximum emissions a business can have. So the factory is given a quota of say 80,000 tonnes. The factory either reduces its emissions to 80,000 tonnes or is required to purchase carbon credits to offset the excess.
A business would buy the carbon credits on an open market from organizations that have been approved as being able to sell legitimate carbon credits. One seller might be a company that will plant so many trees for every carbon credit you buy from them. So, for this factory it might pollute a tonne, but is essentially now paying another group to go out and plant trees which will, say, draw a tonne of carbon dioxide from the atmosphere.
As emission levels are predicted to keep rising over time, it is envisioned that the number of companies wanting or needing to buy more credits will increase, which will push the market price up and encourage more groups to undertake environmentally friendly activities that create for them carbon credits to sell. Another model is that companies that use below their quota can sell their excess as ‘carbon credits.’ The possibilities are endless hence making it an open market.
HOW DOES THE CDM AFFECT DEVELOPING COUNTRIES?
At present, developing countries have no obligations to constrain their GHG emissions. But they are still able, on a voluntary basis, to contribute to global emission reductions by hosting projects under the Clean Development Mechanism.
The CDM has two key goals:
- To assist developing countries who host CDM projects to achieve sustainable development;
- To provide developed countries with flexibility for achieving their emission reduction targets, by allowing them to take credits from emission reducing projects undertaken in developing countries.
The greenhouse gas benefits of each CDM project will be measured according to internationally agreed methods and will be quantified in standard units, to be known as ‘Certified Emission Reductions’ (CERs). These are expressed in tons of CO2 emission avoided. When the Kyoto Protocol becomes 100% operational, it is anticipated that these ‘carbon credits’ will be bought and sold in a new environmental market; they are already becoming a commodity.
BENEFITING FROM CARBON CREDITS
Carbon Trading is the world’s next biggest market. If you haven’t been following the debate surrounding capping and trading emissions, you’re missing out.
Not only does it have implications for how our nation and the world produces energy; it
has the potential to offer a myriad of opportunities for well-informed investors.
According to a New York Times article, carbon trading is one of the “fastest-growing specialties in financial services.” And companies are scrambling to get a slice of a market now worth well over 100 billion and that could grow to $1 trillion within a decade.
The article, “In London’s Financial World, Carbon Trading Is the New Big Thing,” goes on: “Carbon will be the world’s biggest commodity market, and it could become the world’s biggest market over all.”
If you doubt that assertion, consider this: Every year, humans generate about 38 billion tons of carbon dioxide. And that number will continue to grow, as developing nations demand more energy that will likely be produced by coal and other carbon heavy sources of fuel.
As more international governments start to regulate their country’s emissions, and as more companies start to voluntarily limit their emissions the demand for available carbon credits will skyrocket. And so will their price!
One need only revert to the simple law of supply and demand to see that this industry is going to be huge. If increased demand dictates an increase in price, getting in now could be one of the wisest investment moves you make in the first half of this century.