Carbon Trading

Carbon Emission Trading

Some news articles recently said about JP Morgan acquiring a firm called Climate Care. A few questions come to our minds as soon as we read this.

• What does Climate Care do?

• Why would an organization as big as JP Morgan buy out an unknown firm in a totally different business?

• Where does Climate Care fit in JP Morgan’s business?

The following few pages will try to answer these questions. First of all let’s try to understand the business Climate Care does. Climate Care is a pioneer in carbon emission reductions. Its one of the world's largest organizations in originating, development and retail of voluntary carbon emission reductions.

Climate Care funds projects all over the world, particularly in developing countries, which produce verified reductions in greenhouse gas emissions and have associated social or environmental benefits for the local communities. They gain this funding by selling the greenhouse gas emission reductions to businesses and individuals. Often, but not always, these emission reductions are purchased by individuals and organizations in order to compensate for their own emissions - a process known as carbon offsetting. Climate Care encourages offsetting as one part of a strategy for reducing emissions, to take responsibility for emissions that cannot yet be eliminated at source.

Now let’s understand what are Carbon offsets?

A carbon offset is a financial instrument representing a reduction in greenhouse gas emissions. Although there are six primary categories of greenhouse gases, carbon offsets are measured in metric tons of carbon dioxide-equivalent (CO2e). One carbon offset represents the reduction of one metric ton of carbon dioxide, or its equivalent in other greenhouse gases.

Offsets are typically generated from emissions-reducing projects. The most common project type is renewable energy, such as wind farms, biomass energy, or hydroelectric dams. Other common project types include energy efficiency projects, the destruction of industrial pollutants or agricultural byproducts, destruction of landfill methane, and forestry projects.

Now why would a company or an individual buy carbon offsets?

The answer is simple, to offset its carbon emissions either because of the regulations or as a measure of social responsibility. A central authority (usually a government or international body) sets a limit or cap on the amount of a pollutant that can be emitted by a certain company. Companies or other groups are issued emission permits and are required to hold an equivalent number of allowances (or credits) which represent the right to emit a specific amount. The total amount of allowances and credits cannot exceed the cap, limiting total emissions to that level. Companies that need to increase their emissions must buy credits from those who pollute less. The transfer of allowances is referred to as a trade. In effect, the buyer is paying a charge for polluting, while the seller is being rewarded for having reduced emissions by more than was needed. Thus, in theory, those that can easily reduce emissions most cheaply will do so, achieving the pollution reduction at the lowest possible cost to society.

Next we should try and understand how a carbon trading market works?

Carbon Trading Market - There are two primary markets for carbon offsets.

i. In the larger compliance market, companies, governments or other entities buy carbon offsets in order to comply with caps on the total amount of carbon dioxide they are allowed to emit. In 2006, about $5.5 billion of carbon offsets were purchased in the compliance market, representing about 1.6 billion metric tons of CO2e reductions.

ii. In the much smaller voluntary market, individuals, companies, or governments purchase carbon offsets to mitigate their own greenhouse gas emissions from transportation, electricity use, and other sources. For example, an individual might purchase carbon offsets to compensate for the greenhouse gas emissions caused by personal air travel. In 2006, about $91 million of carbon offsets were purchased in the voluntary market, representing about 24 million metric tons of CO2e reductions

Carbon emissions’ trading has been steadily increasing in recent years. According to the World Bank's Carbon Finance Unit, 374 million metric tonnes of carbon dioxide equivalent (tCO2e) were exchanged through projects in 2005, a 240% increase relative to 2004 (110 mtCO2e) which was itself a 41% increase relative to 2003 (78 mtCO2e).

In terms of dollars, the World Bank has estimated that the size of the carbon market was 11 billion USD in 2005, 30 billion USD in 2006, and 64 billion in 2007.

With the creation of a market for mandatory trading of carbon dioxide emissions within the Kyoto Protocol, the London financial marketplace has established itself as the center of the carbon finance market, and is expected to have grown into a market valued at $60 billion in 2007. The voluntary offset market, by comparison, is projected to grow to about $4bn by 2010.

Kyoto protocol: Most of the Emissions Trading in the larger compliance market is done under the guidelines of Kyoto Protocol.

The Kyoto Protocol is a protocol to the international Framework Convention on Climate Change with the objective of reducing Greenhouse gases that cause climate change. It was agreed on 11 December 1997 at the 3rd Conference of the Parties to the treaty when they met in Kyoto, and entered into force on 16 February 2005. As of May 2008, 182 parties have ratified the protocol. Of these, 36 developed countries (plus the EU as a party in its own right) are required to reduce greenhouse gas emissions to the levels specified for each of them in the treaty (representing over 61.6% of emissions from Annex I countries), with three more countries intending to participate. One hundred and thirty-seven (137) developing countries have ratified the protocol, including Brazil, China and India, but have no obligation beyond monitoring and reporting emissions. The United States has not ratified the treaty.

Under the Kyoto Protocol, the countries that ratify this protocol have to maintain a cap on the emission of CO2 and 5 other greenhouse gases, and if they fail to do