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Carbon Credits Explained
The Kyoto mechanisms are:
Carbon credits
arising from Clean Development Mechanisms (CDM) projects, are known
as Certified Emissions Reductions (CERs).
A carbon credit is given for the
reduction
of every metric ton of carbon dioxide prevented from being emitted
into the atmosphere from climate change mitigation projects.
For example, hydropower projects replacing
coal-fuelled plants, or that sequester carbon through afforestation.
Industrialized countries pay the project. Credits are awarded to
developing countries that, through these projects, have reduced
their greenhouse gases below their emission quota. Developed
countries buy these credits to help meet their emission target.
For further example, if a company in a developing country has a registered projects such as wind farms which generate energy without resorting to burning of fossil fuel, and has thus reduced carbon emissions by one ton, the company will be awarded a credit. If a cement manufacturer has an emission quota of 10 tons, but is expecting to produce 11 tons, he could purchase 1 carbon credit from the planter, at current market price. As such, both parties benefit; the wind farm owner gets monetary returns. The cement manufacturer may continue cement production after having fulfilled his carbon quota. The mechanism is based on the reasoning that an emission reduction in one part of the world is as good for the atmosphere elsewhere. According to the World Bank and the International Emissions Trading Association's (ETS)State of the Carbon Market Report, the global carbon market grew to nearly US$22 billion in the first nine months of 2006, more than doubling in value over the almost US$11 billion recorded the previous year.
** Assumption: No renewal of crediting periods (UNFCCC) ( Jan 2010 )
Registered Projects by A1 and NA1 Investor Parties: UNFCCC
The objective of the Protocol is
noble, but the complex trading system has been open to abuses.
Problems emerge due to serious flaws in the checking system on
actual achievement in GHG reductions.
Under the Kyoto Protocol, a CDM project needs
to demonstrate that it will lead to a
quantifiable reduction
in greenhouse gases. Under the "additionality"
principle, it also has to
demonstrate that it would not have been economically viable
without the additional capital generated by carbon trading.
It was estimated that up to 20% of the carbon credits issued did not match genuine reductions. The system thus risks creating a false sense of security. Critics have argued that the CDM process has been manipulated, particularly by the owners of large-scale hydropower plants, which remain environmentally controversial. Besides questioning the effectiveness of carbon markets, critics also argue that carbon credits can be a way for an organization to throw money at a problem instead of taking action to reduce their own carbon footprint of their operations. Under the UNFCCC, countries are permitted
to use a trading system to help meet their emissions targets. Carbon credits can
be traded in the international market on
special exchanges, through brokers or among companies at
their current market price. Some countries are planning to
launch their own national trading system in the coming years,
although it is unclear so far as to how these might connect up with
the EU ETS.
References and Correlative Article:
UN to Make Emissions Trade More Predictable,
Dec 24, 2008
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