The 1997 Kyoto agreement raised the profile of tradable carbon permits as a policy instrument for successfully dealing with CO2 emissions.
As we find our planet in a state of apprehension over climate change, governments around the world take action to curb Greenhouse Gasses (GHG) in attempts to minimize the effect of a volatile climate. 184 countries have ratified the Kyoto agreement, making a commitment to reduce emissions of GHG like carbon dioxide (CO2), methane and nitrous oxide. The developed world has many choices on how to reach their targets of reduced emissions. One way, is to fund technologies which produce energy but emit less CO2 than current technologies. Other Clean Development Mechanism (CDM) emission reduction projects include renewable energy, energy efficiency, and fuel switching. The overarching aim of CDM is to lower the global output of GHG which are (unequivocally) altering the climate.
What are Carbon Credits (CER)?
Often expressed on the news with two hard C’s, carbon credits are the generic term for any tradable permit representing the right to emit GHG into the atmosphere. One Certified Emission Reduction (CER) equals one tonne of CO2 or its equivalent (tCO2e).
Companies are given an allowance of carbon credits called a ‘cap’. Until its expiration in 2013, participating nations are attempting to abide by limits set in the Koyoto protocol; elsewhere, governments are taking the initiative themselves by imposing limits or taxes on carbon emission. Australia’s carbon tax of A$23 (26,000 won) per CO2 tonne, deeply unpopular with voters and industry alike, is a necessary and brave measure taken by a government thinking long-term.
How does CDM Carbon Trading Work?
Those industries who can’t stay within the CO2 emission limits can buy the excess from those who produce less. The idea behind ‘cap and trade’ is that it makes sense for you to make my reductions for me and I pay you for your excess carbon credits (or CERs). What an economic success! You make money from selling me CER, and I don’t need to change the way I do business. So the corporate sector rubs their hands together at the opportunity to buy their way out of their obligations.
But the incentives for change are there. CERs were created to assist in a switch to greener technologies. It’s expensive and in some cases implausible (think energy or transportation industry) to change a company’s emissions overnight. Tradable CERs give businesses the option to fund GHG saving projects taken by others or to seize the opportunity to switch to greener activities themselves with the financial motivation of selling their excess CO2 credits.
How will Urban CDM work under the Gwangju Urban Environmental Accords (UEA)?
The Urban CDM will be the first financial system giving carbon emission rights to cities. Awarded by the United Nations, calculations will be based on the quantity of reduced emissions when compared to the cities standard emission. These CERs can be, traded with other cities or sold on the global carbon market.
The UEA emphasis that a city is the ideal unit to cope with climate change in a practical way because projects can be adapted to the needs of the community; cities in developing countries will also benefit from the technical and economical support.
As you can imagine, calculating the CO2 value for every act is a complicated task, and is not without its challenges. Although the Kyoto Protocol outlines rough provisions for trading, details need to be decided on how calculations will be made and by who, how emissions will be monitored, and how a trading scheme itself will work. Last month the European Union Emissions Trading Scheme (trading 20 million units daily valued at 15 Euros each) was shut down as internet scammers stole personal CERs, undermining the creditability and security of the system.
One contentious issue is whether there ought to be a limit on how much trading can be purchased by an organization, a policy promoted by the EU and unpopular in the USA.
Some argue carbon trading delays positive change in industries firmly wedded to fossil fuel like the energy, oil and gas sectors. By buying CERs they can delay action, when in fact it’s their industry which requires the largest structural change. Putting off changing the way, say energy and transport is organized will only increase the cost and difficultly in the future. They also argue that carbon trading shifts the problem not fixes it.
The counter argument is that serious regulatory restrictions to force industry change, will cause a political battle resulting in nothing will be done for years; and that CER trading is seen as an important way to persuade businesses to lower their levels of pollution now. And isn’t that the point?