DARE - Because Entrepreneurs Do

Projects aimed at reducing pollution and mitigating climate change are no longer mere investments for a good cause. They have become revenue generators, thanks to the Kyoto Protocol, an agreement by world governments to limit dangerous emissions

SRF, a refrigerant producer, took up a project in 2005 to reduce the emission of HFC-23, a greenhouse gas (GHG) generated as a byproduct at its factory in Bhiwadi, Rajasthan.

This effort reduced the emission of 3.8 million tons of GHG every year. Good show, right? But what happened next is more of interest to us. The company traded this reduction at Euro 10 a ton of emission saved or per CER (Carbon Emission Reduction) units, earning $53.2 million a year! At the other end of the spectrum, Karnataka-based NGO SKG Sangha has set up biogas and vermi-compost plants for 10,000 rural families in the state. This reduces carbon dioxide (CO2) emissions substantially. The NGO sells these emission savings as Voluntary Emission Reduction (VER) units directly to international buyers and not through regulatory mechanisms, thus raising money for its programs.Welcome to the world of carbon trading, where otherwise non-remunerative projects aimed at reducing pollution, specifically carbon dioxide and other greenhouse gases, become money-spinners. Both SRF and SKG Sangha are among the hundreds of beneficiaries of the carbon trading business that Frost and Sullivan estimates to be worth $52 billion this year, and to touch $100 billion by 2010. Developing countries such as India are tapping the benefits of this market both through the highly regulated Clean Development Mechanism (CDM) or a more informal voluntary market.

The era of debate whether climate change is for real or not has drawn to an end and the fight to save environment has achieved a critical mass. This year’s Nobel Peace Prize, jointly shared by climate change activist and former US Vice President Al Gore and the Intergovernmental Panel on Climate Change (IPCC), has only underscored the need to contain global warming, which if left unchecked, could cause the biggest catastrophe mankind has ever witnessed.

Carbon Trading in a Nutshell

This is a unique trading system agreed upon by more than 170 countries in a bid to save our environment from further degradation. It is based on the premise that those who continue to pollute the environment should pay for their sins to those who make efforts to save it. If you undertake a project to reduce pollution levels, you become eligible for selling the amount of greenhouse gas emissions saved as carbon credits. One credit equals to one ton of CO2 emission saved. Carbon credits are traded in the international market. Credits earned through the Clean Development Mechanism are called Carbon Emission Reduction (CER) units. The process requires approval of the host country and registration with the UN Executive Board. The CDM is time consuming and expensive compared to another process which generates Voluntary Emission Reduction (VER) units. VERs are tradable at climate exchanges like the Chicago Climate Exchange or sold directly to end buyers. VERs have a much lower market value than CERs. Payments in the carbon market are made in the form of cash, equity, debt, convertible debt or warrants. Some parties pay in-kind, providing technologies to curb emissions.

Opportunity: Reducing Emissions
“The Clean Development Mechanism is a voluntary activity to reduce green house gas emissions and everyone is eligible whether it is a big corporate, an NGO or an individual. You become eligible if the project meets the CDM eligibility criteria,” says CDM expert Dhirendra Kumar, Group Coordinator, Winrock International. Bharti Gupta Ramola, Executive Director at PricewaterhouseCoopers feels that “early success in the CDM market has brought such projects within the investment decision-making process in a large number of medium and large corporations.”

While for Indian companies, carbon trade has opened up a new revenue stream, for NGOs, this has become a means for making grass-root level projects self-sustaining in the long run. “We want money to implement programs for poor rural women, and carbon trade has helped bring in funds," says D Vidya Sagar, President, SKG Sangha.

DARE/carbon market
		2005			2006
	Volume (MtCO2e)*		Value ($million)	Volume (MtCO2e)		Value ($million)
Allowances Market
EU-ETS	321		7,908	1,101		24,357
New South Wales	6		59	20		225
Chicago Climate Exchange	1		3	10		38
UK-ETS	0		1	NA		NA
Sub Total	328		7,971	1,131		24,620
Project-based Transactions
Primary CDM	341		2,417	450		4,813
Secondary CDM	10		221	25		444
Joint Implementation	11		68	16		141
Other Compliance	20		187	17		79
Sub Total	382		2,893	508		5,477
TOTAL	710		10,864	1,639		30,097
Source: World Bank's State and Trends of Carbon Market 2007 * Metric ton of CO2 equivalent

The Kyoto Protocol
At the heart of the carbon trading market lies the Kyoto Protocol. On December 1, 1997 more than 160 nations met in Kyoto, Japan, to negotiate limitations on emission of greenhouse gases for developed nations, as part of the multi-nation treaty – the United Nations Framework Convention on Climate Change (UNFCCC). The outcome of the discussions was the Kyoto Protocol, which came into force on February 16, 2005. The Protocol, ratified by more than 170 countries, is a legally-binding agreement under which industrialized countries have agreed to reduce their collective GHG emissions to a level that is 5.2% below their 1990 emission levels in the commitment period 2008-12. However, the US is yet to ratify the Protocol.

The Different Markets
The carbon market is based on three mechanisms under the Kyoto Protocol: Emissions Trading, Joint Implementation and Clean Development Mechanism. These mechanisms are aimed at rewarding those who reduce emissions or remove carbon from the atmosphere at the cost of those who add GHG. While Emissions Trading and Joint Implementation are of concern to developed countries, Clean Development Mechanism is of particular interest to developing countries such as India.

Emissions trading or the allowance market is a trading system wherein developed countries or transition economies purchase carbon credits from other developed countries or transition economies to meet their GHG reduction targets. This has led to the development of the European Union Emission Trading Scheme (EU ETS), which is the largest sub-set of the carbon market. According to the World Bank’s State and Trends of the Carbon Market 2007 report, under the EU ETS, 1,101 tons of carbon dioxide equivalent was traded in 2006 with the allowance market valued at $24,357 million.

Joint Implementation (JI) involves project-based transactions wherein an emitter in a developed country buys carbon credits by implementing a GHG reduction project in another developed country. In 2006, this market was valued at $141 million.

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