Carbon Credits: Advantage India

Here a little gyan on a vastly relevant and increasingly popular mantra's catching up with the indian business scenario..... I hope u all find it interesting...

Corrections, feedbacks and opinions are most welcome.....

WHAT ARE CARBON CREDITS?

In accordance with the Kyoto protocol, consumers of fossil fuels are assigned CO2 emission levels. In many cases, achieving these emission levels require massive up gradation or revamping of facilities; incurring costs too huge to justify the investment. Such parties are allowed to pay others to store carbon for them in exchange for the right to release carbon in excess of their limits into the atmosphere. This forms the basis of carbon credits.

The concept of carbon credits involves buying carbon units mainly in tons from a middle entity that aggregates contracts from suppliers (farmers) who meet the criteria of carbon sequestration through adoption of conservation practices. The carbon units are then sold to a buyer in the industrial sector needing to offset the CO2 emitted to the atmosphere through their manufacturing activities.

Carbon credits can form a massive source of revenue for the developing world. However this requires that carbon sequestration is adopted on a large scale in these regions. Carbon sequestration is the process by which carbon credits can be earned and subsequently traded in the world market.

CARBON SEQUESTRATION – MEANS TO THE END

Carbon sequestration is the capture and secure storage of carbon that would otherwise be emitted to or remain in the atmosphere. The idea is

1. To prevent carbon emissions produced by human activities from reaching the atmosphere by capturing and diverting them to secure storage, or,
2. To remove carbon from the atmosphere by various means and 'storing' it in the soil.
   

Carbon Sequestration can be achieved in three ways:

GENERATING CARBON SINKS: Carbon can be diverted to secure storage in plant material. The more permanent vegetation that is present, the more carbon is sequestrated. The Kyoto protocol recognizes afforestation and reforestation as the main sources of generating forests (called the Kyoto forests) to act as carbon sinks. However, these can be large scale or small scale, single or multiple species, pure forestry or on farm systems (illustrated below in Figure), such as:

• Establishment of woodlots on communal lands.
• Reforestation of marginal areas with native species e.g. riverine areas, steep slopes, around and between existing forest fragments (through planting and natural regeneration).
• New large scale industrial plantations.
• Establishment of biomass plantations for energy production and substitution of fossil fuels.
• Small scale plantations by land owners.
• Introduction of trees into existing agricultural systems (agroforestry).
• Rehabilitation of degraded areas through tree planting or assisted natural regeneration.
  

MINIMISING ORGANIC CARBON MINERALISATION: This involves managing crops and soil to restrict conditions that accelerate the oxidation of soil organic matter and leading to the release of CO2 as is the case with conventional tillage. This requires that plant material be allowed to decompose more slowly and naturally.

REDUCING SOIL EROSION: Implementing techniques for reducing soil erosion implies that lesser soil is exposed to the atmosphere and hence lesser carbon.

Goal of the latter two methods is to improve soil organic matter and soil function everywhere. This cannot be achieved through a single method. Multiple methods exist. For example, using higher residue cover crops like oats and crop rotations creates larger volumes of plant biomass and stores more carbon in the soil. Other methods like residue management (mulch-till, no-till, strip-till), compact prevention and rotational grazing will also yield very favorable results.

BENEFITS OF CARBON SEQUESTRATION

Carbon sequestration can provide a country with both monetary and non monetary benefits. Currently, carbon credits are valued at approximately € 30 per metric tone. Even if a country generates 100,000 metric tons of carbon credits a year it can generate an additional € 3 million which is a quite significant amount especially for a debt ridden country like India.

However, if we look at the non monetary benefits, carbon credits are a gold mine as they lead to positive changes in the soil property and environmental quality. Carbon sequestration, in general, leads to improved soil structure, with surface structure becoming more stable and less prone to erosion. Especially significant is the subsequent increase in soil organic matter. As soil organic matter increases, soil water and nutrient capacity increases significantly. And crops will fare better during drought because infiltration and water holding capacity have improved. Also, organic matter and the associated soil biological population will increase in vigor and numbers with more diverse crop rotations. Organic matter also may bind pesticides, suppress disease organisms, and improve crop health and vigor as soil biological activity and diversity increase. These changes could become a boon for agricultural economies.

With respect to environmental changes, improvements can be expected in air quality as dust, allergens, and pathogens in the air decline; in water quality as sediment and nutrient loads decline in surface water from better soil aggregation; and in agricultural productivity. Wildlife habitat also is improved with higher residue levels.

However, benefits always come at a cost and these should be analyzed before the benefits are praised.

COST OF CARBON SEQUESTRATION

Carbon sequestration is not an investment free avenue. Though generating carbon credits incur very low production costs, the subsequent costs can be high. The major challenge is in measuring the quantity of carbon in trees. A range of simple to complex techniques is available for the purpose. In general, the techniques are more reliable for plantations of species such as radiata pine and certain eucalypts, but less so for plantations of other species or of mixed ages and mixed species. Other things remaining the same, measurement of carbon with higher statistical accuracy results in higher cost for the grower.

Growers also incur costs in the steps leading to the sale of the carbon credits. The steps form a lengthy and costly process. Some of the key points in the process include aggregation of individual growers’ carbon into a sizeable pool; verification of the pool; issuance of carbon credit certificates by an independent agent; registration of certificates and their lodgment with an authorized market clearing house for sale; and exchange of the certificates and the monies. Also as the cost of services and transactions associated with selling carbon are subject to economies of scale; small scale growers end up paying higher cost per unit of carbon.

Recently concerns have risen over the long term effects of carbon sequestration. Kyoto forests consist of big trees which use a lot of water. Water use by plantations, cause a reduction of approximately 38 per cent in the stream flow. This may prove fatal in the long run, especially in populated areas. Shortage of water will start a cycle which will ultimately lead to the rotting of the forests themselves thereby defeating the purpose of the effort.
In spite of the multiple problems and issues, the carbon credits market is growing at a very fast rate.

WORLD CARBON CREDITS MARKET

The world carbon credits market is the one fastest growing market in the world. According to estimates, the market is expected to grow to between € 4.6 to € 100 billion by 2010, with the former estimate based on purchases of carbon credits limited to compliance only, and the latter estimate subject to international political developments. However, the Kyoto deadline of 2012 for compliance is being pegged as the accelerator for market growth and estimates say that as end of the compliance period approaches, trading will go up exponentially with the market capable of reaching as high as € 150 billion.

The largest current market is the European carbon credits market (EU ETS) which opened on 1st of January 2005 and began trading at € 6.7 per ton of CO2. Both, prices and volumes have gone up since then and currently carbon credits are being traded at approximately € 30 per ton of CO2.

The volumes are expected to rise up with massive demand coming from US, Germany, China and Japan in the near future. US which has not yet ratified the protocol is one of the largest generators of emissions, generating up to 25 per cent of the world CO2 emissions every year.

INDIA’S PROSPECTS

India has a huge advantage when it comes to the carbon credits market. In the new regime, the country could emerge as one of the largest beneficiaries accounting for 25 per cent of the total world carbon trade, says a recent World Bank report. The country’s dominance in carbon trading is expected to be driven, not so much by the domestic industry, but more by its huge tracts of plantation land, estimated to be over 15 million hectares, much larger than Australia which aims to be a major player in emission trading by adding 2 million hectare plantation by 2020.

Seeing the importance of the prospects in the Indian market, World Bank entered into an agreement with Infrastructure Development Finance Company (IDFC) in 2002 wherein IDFC was given the task of handling carbon finance operations in the country for various carbon finance facilities. World Bank also earmarked an initial investment of $ 10 million aid carbon finance to IDFC-financed projects that meet all the required eligibility and due diligence standards.

Identifying the opportunities the Indian industry has already taken proactive measures. A large number of domestic companies have initiated projects in diverse areas such as energy efficiency, co-generation, natural gas alternative fuels and hydel power. But the potential is still untapped. Currently, there are only about 225 projects in India which are moving towards taking advantage of this concept as compared to the current global requirement of 350-500 million tones of additional carbon credits.

Much depends on how well India can capitalize on the current scenario. If the Indian industry and government cooperate Indian stands the chance of creating a $ 5 billion carbon credits market in the next seven years.

IN CONCLUSION

The carbon credits market is a liquid market as of now. And there is nothing to support the fact it will remain the same in the time to come. But India needs additional sources of revenue to finance its infrastructural requirements and feed its ‘100 billion’ population. Even if the market stops growing in the future or ceases to exist, the non monetary effects for an agricultural economy like ours are huge enough to make the risk worth while.

REFERRENCES

• UN Bhati ‘The carbon credits market’Austalian National University Journal March 2000
• B Sally ‘Building carbon credits by recycling biosolids’ September 2004 University of Washington
• Jackpot awaits India in carbon credits ‘ Business Standard February 2006
• www.sify/business.com ‘Carbon credits : India to emerge as a big player ‘ March 2006
• M Kaisi and M Hanna ‘ carbon Sequestration ‘ Iowa State University April 2003
• Good news India : supplement ‘Carbon Trading Arrives in India ‘ October 2002