Carbon dioxide is the most important greenhouse gas produced by combustion of fuels and it has become a cause of global warming due to its concentration in the Earth’s atmosphere has been rising alarmingly. This enemy, however, has turned into a product that helps people, countries, consultants, traders, corporations and even farmers earn some good monies. Carbon credits are a part of international emission trading standard. They incentivise organizations or countries that emit less carbon. The total annual emissions are restricted and the market allocates a monetary value to any shortfall through trading. Businesses can exchange, buy or sell carbon credits in international markets at the prevailing market price. Waste disposal units, plantation companies, chemical plants and municipal corporations can sell the carbon credits and make money. Carbon, like any other commodity, has begun to be traded on in Africa.
What is carbon credit?
As nations have progressed we have been emitting carbon, or gases which result in warming of the globe. Some decades ago a debate started on how to reduce the emission of harmful gases that contributes to the greenhouse effect that causes global warming. So, countries came together and signed an agreement named the Kyoto Protocol. The Kyoto Protocol has created a mechanism under which countries that have been emitting more carbon and other gases (greenhouse gases include ozone, carbon dioxide, methane, nitrous oxide and even water vapour) have voluntarily decided that they will bring down the level of carbon they are emitting to the levels of early 1990s.
Developed countries, mostly European, had said that they will bring down the level in the period from 2008 to 2012. In 2008, these developed countries have decided on different norms to bring down the level of emission fixed for their companies and factories. A company has two ways to reduce emissions. One, it can reduce the GHG (greenhouse gases) by adopting new technology or improving upon the existing technology to attain the new norms for emission of gases. Or it can tie up with developing nations and help them set up new technology that is eco-friendly, thereby helping developing country or its companies ‘earn’ credits.
Most African countries have the advantage because they are developing countries. Any company, factories or farm owner can get linked to United Nations Framework Convention on Climate Change and know the ‘standard’ level of carbon emission allowed for its outfit or activity. The extent to which I am emitting less carbon (as per standard fixed by UNFCCC) I get credited in a developing country. This is called carbon credit. These credits are bought over by the companies of developed countries — mostly Europeans — because the United States has not signed the Kyoto Protocol.
How does it work in real life?
Assume that British Petroleum is running a plant in the United Kingdom. Say, that it is emitting more gases than the accepted norms of the UNFCCC. It can tie up with its own subsidiary in, say, Kenya under the Clean Development Mechanism. It can buy the ‘carbon credit’ by making Kenyan plant more eco-friendly with the help of technology transfer. It can tie up with any other company like Kenya National Oil or anybody else, in the open market. An audit will is done to assess the efforts to reduce gases and the actual level of emission. Kenya can ensure that new technologies for energy savings are adopted so that they become entitled for carbon credits. They can sell their credits to the Europe. This is how a market for carbon credit is created. Every year European companies are required to meet certain norms, beginning 2008. In the coming five years there will be a lot of carbon credit deals.
What is Clean Development Mechanism?
Under the CDM a country or company can cut the deal for carbon credit. Under the UNFCCC, charter any company from the developed world can tie up with a company in the developing country that is a signatory to the Kyoto Protocol. These companies in developing countries must adopt newer technologies, emitting lesser gases, and save energy. Only a portion of the total earnings of carbon credits of the company can be transferred to the company of the developed countries under CDM. There is a fixed quota on buying of credit by companies in Europe.
Feasibility of carbon revenue schemes from community’s participation in Energy technology
Carbon trading markets are developed to bring buyers and sellers of carbon credits together with standardized rules of trade. One of the trading markets is the Clean Development mechanism (CDM), which was a concept first proposed by Brazil and later adopted by The UNFCCC as a mechanism for developing countries to promote environmentally sound foreign investment that can promote sustainable development while reducing global climate change. (Article 12 of the Kyoto Protocol sets out the goals for the CDM).
Entities that manage forest or agricultural land or involved in energy conservation projects might sell carbon credits based on a baselines evaluation proving additionality (-emissions that would have occurred in the absence of the proposed project activity: in these case switching of energy source from wood fuel to biogas reduced emission of Green House Gases). The carbon credits are determined by standard methodologies developed by UNFCCC. Business and project entities that introduce technologies that reduce their carbon emission may be able to sell their reductions (converted in to carbon credits) to other emitters in the annex1 countries.
Therefore it is important for the actors ie project implementers to considered carbon trading from the design and inception of projects. At implementation the project should go through most of the stages of a CDM starting with the idea, developing a project design document (PDD), stakeholder consultations, obtaining host country approval and validation by the Designated Operation Entity (DOE). The project also need a funding component (seed funding) or credit from a bank or potential buyers to undertake the process and deliver CERs. CDM project require a minimum period of 10 years or 21 years.