How do Carbon Credits function?

The German company Mannesmann and Vallourec (V & M) plans to build a thermoelectric plant in Brazil that will use plant-derived coal as fuel. The plant will generate electricity for a steel plant that V & M owns in Barreiro, in the southeastern region of Minas Gerais. It is not that this multinational mining firm has given into environmentalism. Instead, this plant is not only a good way to ensure the flow of electricity to the company’s blast furnaces, but also serves to meet the requirements of the Kyoto Protocol. Indeed, it is estimated that this system, cleaner than coal or diesel fuel, will reduce 1.15 million tons of CO2 equivalent in 21 years, which will factored in to the calculation of carbon credits for this multinational German firm.

The Clean Development Mechanism (CDM) is the direct result of the Kyoto Protocol going into effect on February 16, 2005, and results in practices such as the one above. Indeed, from point forward, every country that has ratified the Kyoto agreement is assigned a quota of the emissions of greenhouse gases it must not exceed. The goal for 2008-2012 is to reduce emissions by 5.2 percent in comparison to 1990 levels. To achieve this, each country designs a National Allocation Plan for allocating emission rights. When a country or a company exceeds the limit set, other mechanisms such as CDM or emissions trading are put into place. None of these measures are the result of the original text of the Protocol but, rather, of the subsequent negotiations held in 2001 in Bonn and Marrakech that made possible the implementation of the agreement.

 

From these negotiations emerged two ways to escape the limits set by the Kyoto Protocol. The first, as seen in the case of V & M, is to help reduce emissions through investment in clean, renewable or less polluting energy that produces greenhouse gases in a country considered in the process of development. For practical purposes, V&M achieves reduction of emissions for its limits in Germany or Spain, while taking advantage of the cheaper costs of Brazil and Burundi.

 

On the other hand, every country that exceeds the permitted limits can purchase credits from countries that have not reached the quota set for them. Thus, the Protocol requirements are met without reducing pollution. Another way to avoid the limits is through the purchase of emission allowances for less polluting gases such as methane or HFC-23. This is the preferred practice of countries like the Netherlands or Japan.

In all cases, this is a profitable business. For example, three Spanish multinational energy firms (Iberdrola, Union Fenosa and Endesa) announced investments worth 650 million Euros for Clean Development Mechanism (CDM) in Latin America alone. And that, according to the Nonprofit CDM Watch, investing in clean or less polluting energy products are an insignificant 10 percent of total investment. Thus, during the first half of 2004, emerging markets sold emission rights and emission rates for methane and other gases in the equivalent of 64 million tons of CO2.

 

All business generated as a result of Kyoto increased once it was known that the protocol would enter into force. Thus, since January 1, 2005, there has been a market for the exchange of futures and options on greenhouse gas emissions, especially CO2. That is, since the agreement went into force, any citizen, company or institution can invest in pollution. Consultants, investors, brokers and banks have been quick to discover the gold mine, and "CO2 experts" or "climate change consultants" have become a common financial species.

 

According to the CCC international bank, an expert on climate change and energy security, the expectations generated by Russia's ratification and subsequent implementation of the protocol have generated funds, amounting to 30,000 million Euros, aimed at "carbon finance", technologies and clean energy markets in developing countries. It is estimated that by 2010, investments will have reached 200,000 million Euros. In Spain alone, which has complications with the implementation of the reduction target of 8 percent proposed by the European Union, emissions trading will generate transactions worth 200 million Euros in 2005.

 

Despite the dazzling figures and financial benefits generated by these markets, the problems, paradoxes and dark areas of these mechanisms overshadow the implementation of the Kyoto Protocol. For example, large CDM infrastructure in developing countries is of little use if the commitment is not extended beyond 2012. It is also true that, to reach an agreement of this size, a minimum realistic and achievable policy should be produced. But the fact remains that a carbon market has been created that reveals one of the paradoxes of Kyoto: it is not necessary to reduce global pollution; rather, you can pollute only to the extent of the price you can afford to pay for it.

 

Source: http://www.inti.gov.ar/sabercomo/sc28/inti8.php