Carbon trade: Alternative to combat climate change

01 Mar 2008


Carbon trade has recently emerged as a rapidly expanding, multibillion-dollar international market and is currently being considered as one of the most efficient alternatives for controlling and reducing greenhouse gases known as “carbon” and financing for sustainable development.

New Horizons - Carbon trade came about in response to the Kyoto Protocol that was signed in December 1997 and ratified by 189 countries and which called for industrialized countries to reduce their greenhouse gas emissions by 5% of the 1990 levels by 2012. The Protocol determined quotas on the maximum amount of greenhouse gases for developed and developing countries and introduced legally binding targets for developed countries to reduce their GHG emissions a cost-effective way.

In simple, carbon is given an economic/monetary value to the cost of polluting the air and people, companies and/or governments trade it. In other words, countries who buy carbon, buy the right to burn it and countries that sell it, give up the right to burn it. The carbon market is thus an environment, created to facilitate the buying and selling of carbon. In this sense, businesses and governments who are close to exceeding their greenhouse gas (GHG) emission quotas can purchase carbon credits. These credits can then be used in projects that aim to mitigate global warming. Under the Kyoto Protocol, member states are obliged to match their greenhouse gas emissions with equal volumes of emission allowances. The carbon market transactions taken place under Kyoto Protocol framework are regulated and overseen by the special bodies, Clean Development Mechanism (CDM) Executive Board and Joint Implementation (JI) Supervisory Committee, established under the UNFCCC.

New Horizons asked UNDP Regional Technical Specialist for Climate Change for Europe and Commonwealth of Independent States (CIS) Marina Olshanskaya, more on carbon trade. Here is what Olshanskaya says:

New Horizons: What is carbon market?

Marina Olshanskaya:  Carbon market is a new type of capital markets (like securities or any other commodities), but instead of usual type of goods the commodity which is being traded on carbon markets is “reduction of greenhouse gas emissions” measured in tons of CO2 (or its equivalent)

NH: What is the use of it for each party?

MO: Most often the emission reductions are bought by companies or states to comply with their targets for GHG emission reduction for instance those set up by the Kyoto Protocol and under EU Emission Trading Scheme. Under both scheme a company or a state has options either to reduce emission itself or buy “emission reductions” happened elsewhere (where it is cheaper to do) and use them to meet its obligations. Another motivation for private companies or even individuals to buy carbon credits is the desire to be “green” and offset their carbon footprint. For example, many international conferences and events organized these days are announced “carbon neutral”. This means that organizers would pay for the emission reductions happened elsewhere (for instance in Turkey) to compensate for the GHG emissions associated with the travel of conference participants and other emissions that occured because of the event (i.e. power consumption).

NH: How are carbon credits used in carbon projects?

MO: The sales of carbon credits generate additional income stream for the projects and thus impove their economic attractiveness for investors. For example, carbon credits from a wind power project will complement revenues from power sales and will therefore make the project more attractive for a potential investor.

NH: Whats the difference between a carbon market and a voluntary carbon market? What are the opportunities and disadvantages that each market pose?

MO: There is one market, but different regime: compliance and voluntary. Compliance markets, such as EU Emission Trading Scheme, are better capitalized and prices for emission reductions are higher there, but they are also more regulated and certain type of projects, such as forestry, are excluded. Voluntary markets offer greater flexibility in terms of the type of credits which can be traded, but prices are generally much lower. Voluntary markets are also less organized and it takes more time to find a buyer or seller.

NH: Can individuals also participate in the voluntary carbon market?

MO: Yes, it is possible. A growing number of people, particularly in EU and other developed countries, are willing to offset their carbon footprint and buy emission reductions. There is a slow number of specialized companies, brokers, who provide this type of services for individuals

NH: Is ratifying the Kyoto Protocol a must for Turkey in order to participate in the carbon market?

MO: Without ratification of the Kyoto Protocol, Turkish companies and individuals can participate in the voluntary carbon trade, which is open to anybody. Also Turkish companies can participate in the projects implemented in other countries (Kyoto Protocol members), obtain and sell carbon credits on compliance markets

NH: How are carbon projects developed? What requirements are there?

MO: Most commonly used standards for carbon project development are those established for the Clean Development Mechanism of the Kyoto Protocol. There are also a number of voluntary market starndards. In general a project proponent need to prepare documentation with justification and estimation of the expected GHG emission reduction for the project, after that it is being validated by a specialised auditing company and registered (in case of compliance market) by an international body, such as the CDM Executive Board.