Carbon trading is an ethical investment

Dr N Yogaratnam, Tree Crops Agro Consultants

It has become important to explore ways in which business can most effectively engage in the global effort to address climate change. The investment volumes required to avoid the catastrophic impact of climate change are substantial and success will largely depend on the successful mobilization of both the public and private sectors.

There are viable business opportunities in the energy and carbon sector that could potentially generate high investment returns. Investors and policy-makers are facing a historic choice.

At the very time when commentators are branding green investing as a luxury the world cannot afford, enormous investment in the world’s energy infrastructure is required in order to address the twin threats of energy insecurity and climate change.

Waiting for economic recovery, rather than taking decisive action now, will make the future challenge far greater.

As the cost of clean energy technologies decreases and policy support is put in place, the shape of the eventual energy system is emerging with the investment demand substantial.

The vast majority of us are aware that our environment is reaching a crisis point.

A crisis point that society is desperately trying to pull back from as humanity continues to belch out toxic carbon emissions (CO2 gasses) in its continued efforts to provide the type of existence we feel is necessary.

Scientists have recently discovered that the Earth’s temperature is rising at an alarming rate.

In fact, if we see a further three degree rise in temperature, we will be at the point of no return. This temperature rise is commonly known as global warming and we are all aware that something needs to be done.

Because of rapid warming trends over the last 30 years, the earth is now reaching and passing through the warmest levels seen in the last several centuries.

Carbon credits

High returns are available whilst making an environmentally and financially responsible investment.

With the introduction of Carbon Credit trading, there is now a way for the pollution cycle to be turned. Rainforests are finally being protected and replanted.

Individuals and organisations produce CO2 gases through their everyday activities such as air and car travel, burning of fossil fuels for energy, the production of cement, steel, textiles and fertilizers.

The concept of carbon credits came into existence as a result of increasing awareness of the need for controlling emissions coupled with the understanding that to move forward, a monetary value needs to be placed alongside the environmental value.

Forests

The great forests and rain forests are the lungs of the world, drawing in harmful CO2 gasses as they grow while producing the air that we breathe. Unfortunately, for many years, while there has been no way to show a monetary value on the world’s rainforests, they have continued to be harvested at an alarming rate. Investors can most effectively engage in the global effort to address climate change.

However, with the introduction of carbon credit trading a monetary value has been found and there is now a way for the cycle to be turned. Rainforests can finally be protected and also replanted allowing for an increase in the removal of CO2 gases from the atmosphere whilst also rewarding enlightened businesses and investors in these projects. The good news is that the process of reducing pollution from CO2 emissions is well under way.

Until recently for example, the US government refused to believe that CO2 was responsible for all global warming, with California its only state taking the opposite stance by aggressively promoting emission reduction policies and the use of renewable resources, now it is fast becoming a national concern.

Russia however, agrees that CO2 is a major contributor to global warming (it signed the Kyoto Protocol in 2004) and is already in process of upgrading its antiquated infrastructure to meet its emission targets.

Emission reduction targets and ensuing discussions have to date been based around countries that have been identified as major polluters (from global CO2 emission statistics 1990).

China and India

At the Kyoto meeting in 1997, China and India were perceived as not being significant polluters.

Other nations deemed responsible for significant CO2 emissions were given reduction targets. Until recently, the US had used the non-inclusion of China and India as a reason to stay out of the Kyoto Protocol.

One fundamental feature to emerge from the Kyoto meeting is the requirement that each country that produces CO2 above set targets must reduce the level of its emissions by offsetting by tree-planting or other processes that can absorb CO2, such as sequestration and/or changing farming methods.

If any country continues to produce more CO2 than it can absorb, it must purchase an ‘absorption ability’ from another nation.

This ‘absorption ability’ is the Carbon Credit, with one Carbon Credit equal to one tonne of CO2. It is referred to as a CO2 equivalent (CO2e). A nation might, for example, have a shortfall in absorbing 500,000 tonnes of CO2 and according to the Kyoto agreement it must seek to purchase an ‘offset’ from another nation that has been planting trees for such a consideration. Costs currently are between US $10 to $15 per credit at the moment.

In Copenhagen last December, the World’s hopes were somewhat desperately high that international negotiators would be able to negotiate a strong enough agreement so that once and for all mankind could take climate change by the horns and start to reign.

However, while the Accord that did emerge is a hard-fought political agreement and does include most of the key elements of a climate deal, it has been seen by some as falling short of most people`s hopes and our planet’s needs.

Even a weaker 11th hour voluntary ‘framework’ put forth by the U.S., China, India, Brazil and South Africa failed to win consensus support among the 119 attending heads of state.

However, the resulting Copenhagen Accord - which aims to keep global temperatures from reaching any more than 2°C (3.6°F) above pre-industrial times - does leave the door open for a stronger agreement later, with developing countries pledging a total of $30 billion in the short term and $100 billion a year by 2020, mostly to help less developed nations adopt policies and technologies to keep carbon footprints small moving forward.

Copenhagen

Greenhouse gas mitigation: The targets and actions countries listed in the accord entail, for the first time, commitments by both developed and developing countries.

However, more ambitious targets will be needed to limit the temperature rise to 2°C. OECD analysis shows that industrialised countries’ declared targets (as of early February 2010) would reduce their emissions collectively by at most 18 percent by 2020 compared with 1990 levels, below the 25-40 percent reduction that science says is needed to stay within a 2°C temperature increase.

Rainforests are now being protected and replanted

* The financing of climate change: Copenhagen delivered agreement for initial fast-start finance of 30 billion US$ for 2010- 2012, and a longer term perspective for advanced countries to mobilise 100 billion US$ per year by 2020.

The new Copenhagen Green Climate Fund will be critical for building trust and cooperation between developed and developing countries. The agreement also includes general principles for the measurement, reporting and verification of targets, actions and finance — an essential element to ensure transparency and accountability of the carbon markets.

* This accord cannot be everything that everyone hoped for, but it is an essential beginning, reported UN Secretary-General Ban Ki-moon. “The bad news is that the Accord is not legally binding and provides no plan of how to limit emissions, say climatologists. The original text leading up to the meeting called for a global cut in emissions of 50 percent by 2050, including an 80 percent cut by all developed countries.

The lack of detail in the resulting Accord regarding specific emissions reductions targets means cooperation is completely voluntary, which is not what environmentalists want to hear.

The Accord should be seen as simply a face-saving agreement. The politics are clear: Some developed and the richer developing countries resisted the call for legal limits to emissions.

The failure of COP15 to generate a binding agreement means that international policymaking will likely take a back seat in the effort to wean ourselves off of fossil fuels and profligate carbon emissions.

Climate change mitigation will now depend on the ability of individual nations to persuade domestic constituents that they will benefit economically as well as environmentally from an energy transition.

It is said that future UN climate talks should focus not on overarching agreements but on practical goals like providing funding for poor countries to mitigate and adapt to climate change, accelerating international cooperation on technology, and coordinating a global effort to protect the world’s remaining forests given their capacity to store large amounts of carbon.

Point six from the final Copenhagen agreement to emerge from COP15 stated that;

‘We recognize the crucial role of reducing emission from deforestation and forest degradation and the need to enhance removals of greenhouse gas emission by forests and agree on the need to provide positive incentives to such actions through the immediate establishment of a mechanism including REDD-plus, to enable the mobilization of financial resources from developed countries’.

New reforestation projects

* The project(s) must be additional i.e. adding to the existing capacity of the forest: Planting trees will reduce the carbon in the atmosphere. They cannot be then cut down and burnt, as it has now been proved that crops that are planted in their place (and then harvested) actually store little or no carbon within them

* The project(s) require a good management team along with an excellent business and risk mitigation plan;

* The project(s) need to conserve natural ecosystems and improve biodiversity.

While the arguments in favour of renewable energies are important, reforestation projects are essential to the immediate removal of dangerous CO2 gases that are already in the earth’s atmosphere.

The burning and cutting of an estimated 34 million acres of trees each year is responsible for 20 to 25 percent of global carbon emissions

The objective of the Kyoto climate change conference in the city of Kyoto, Japan was to establish a legally binding international agreement, whereby all the participating nations commit themselves to tackling the issue of global warming and greenhouse gas emissions.

The Kyoto Protocol

The target agreed upon was an average reduction of 5.2 percent from 1990 levels by the year 2012.

The Kyoto Protocol establishes a legally binding commitment (from its signatories) for the reduction of four greenhouse gases (carbon dioxide, methane, nitrous oxide, sulphur hexafluoride), and two groups of gases (hydrofluorocarbons and perfluorocarbons) produced by industrialized nations.

As of January 2009, 183 parties had ratified the protocol, which entered into force on 16 February 2005.

Under Kyoto, industrialized countries agree to reduce their collective green house gas (GHG) emissions by 5.2 percent from the level in 1990. National limitations range from the reduction of 8 percent for the European Union and others, to 7 percent for the United States, 6 percent for Japan, and 0 percent for Russia. The treaty permitted emission increases of 8 percent for Australia and 10 percent for Iceland. The Kyoto Protocol provides for three mechanisms that enable countries or operators in developed countries to acquire greenhouse gas reduction credits.

* Under joint implementation, a developed country with relatively high costs of domestic greenhouse reduction would set up a project in another developed country.

* Under the Clean Development Mechanism (CDM) a developed country can ‘sponsor’ a greenhouse gas reduction project in a developing country where the cost of greenhouse gas reduction project activities is usually much lower, but the atmospheric effect is globally equivalent. The developed country would be given credits for meeting its emission reduction targets, while the developing country would receive the capital investment and clean technology or beneficial change in land use.

* Under International Emissions Trading (IET) countries can trade in the international carbon credit market to cover their shortfall in allowances. Countries with surplus credits can sell them to countries with capped emission commitments under the Kyoto Protocol.

These carbon projects can be created by a national government or by an operator within the country. In reality, most of the transactions are not performed by national governments directly, but by operators who have been set quotas by their country.

Socially responsible

As more and more governments start to regulate their countries emissions, Carbon trading could become the World’s biggest commodity market. Ethical or Socially Responsible Investments (SRIs), are one of the most rapidly growing areas of finance today.

In the efforts to reduce, control and (one day) eliminate harmful emissions, each member state of the EU currently receives an annual emission allocation that is then divided between its worst emissions-producing companies.

These companies are then legally obliged to comply with their set emissions targets. If company comes in under its set target, it can sell its excess as ‘carbon credits’ allowance to other companies that have overshot their targets.

If a company exceeds its permitted levels, it has to pay a penalty and buy credits to make up the difference. Right now, with an abundance of carbon credits available, their price is relatively low.

However, with the second phase of the program, 2008-2012, now in play and a reduced amount of credits available and ever more stringent emissions targets, prices are set to rise.

UNEP, ecologists and the scientific community have long argued that forests are worth billions, if not trillions of dollars, if their worth can be captured by economic and financial models.

Sri Lanka still is in the initial stage of Carbon trading compared to neighbouring India and many other developing countries. Of over 1000 CDM projects registered so far only 5 projects are from Sri Lanka. Of the expected annual CERs of 193 M/tCO2 marketed from the world by March 2008, Sri Lanka has sold only 109,619tCO2 per year. There had not been any contribution from Forestation/ Afforestation projects to this business.

Many attempts by the private sector to initiate CDM projects have failed due to various constraints. Some of the serious constraints include, Financing, Investment risk, Lack of information, Institutional constraints and Inadequate technical capacity.

Reforestation/ afforestation/ new rubber plantings

There is a potential for forest plantation in the marginal areas of the JEDB, SLPC, NLDB and RPCs.

The degraded or abandoned land estimated to be in the region of 2.0 million hectares can be reforested as CDM projects and earn carbon credits. Forest department can undertake forestry projects as CDM projects. Regional plantation companies involved in rubber planting should consider the vast potential in this business

Forestry CDM projects (including Rubber CDM projects) should address the issue of non-permanence. This means that these trees absorb carbon temporarily.

Once they are destroyed, the carbon will be released to the atmosphere. In order to address the non-permanence issue, system of temporary Certified Emission Reductions (tCERs) have been introduced.

In summary, the long-term outlook for carbon remains bullish as momentum towards a network of national and regional schemes remains strong.

In a short space of time, carbon credits are beginning to provide an economic rationale for the large-scale roll-out of renewable energy, commercial carbon capture and sequestration projects.

Perhaps the biggest problem the carbon market presents to investors - other than its sheer complexity - is its apparently uncertain future. The Kyoto Protocol in its current form lasts only until 2012 and Copenhagen outcome is equally disappointing.