Nepal Monitor: The National Online Journal

Nepal’s ministers are meeting today at the Kalapathar plateau, 5,262 metres up in the Himalayas, to send a message to the world: Enough is enough with the human-induced climate change.

The develop nations, which emit much of the world’s carbon, have a responsibility to mitigate and stabilize climate change in the Himalayas, where the glaciers, the life-source of more than a billion people in the region, appear to be receding at an alarming rate. According to scientists, the melting of glaciers are creating huge glacial lakes that threaten to burst, putting the communities downstream in risk.

The event on Mt. Everest may help bring media buzz to our environmental problem, but it must also prepare us well for our participation at Copenhagen next week. While there are several solutions sought in recent years to tackle climate change problem, I would like to focus in this article on a market-oriented approach, since I believe it is a more practical approach in today’s world.

What is Carbon Credit?
The global carbon credit (also called Emission Reduction Units or Certified Emission Reduction) mechanism is a market-oriented solution to environmental problems, particularly the reduction of greenhouse gases including carbon dioxide. This mechanism requires a number of countries and corporations to reduce their greenhouse gas emissions or to purchase emission reduction quantity from countries or corporations with a surplus.

Carbon Credits are a key component of national and international attempts to mitigate the growth in concentrations of Greenhouse Gases. The carbon credit system was ratified in conjunction with the Kyoto Protocol. According to Kyoto Protocol, one Carbon Credit equals one metric ton of carbon emitted by the burning of fossil fuels.

Carbon Credits can be considered as part of a tradable permit scheme which provides a way to reduce greenhouse gas emissions by giving them a monetary value. A credit gives the owner the right to emit one tone of carbon dioxide. Credits are awarded to countries or groups that have reduced their green house gases below their emission quota. Carbon credits can be traded in the international market at their current market price.

The main goal of Carbon Credit is to stop the increase of carbon dioxide emissions; that means a way to reduce greenhouse gas emissions by giving them a monetary value.

How does Carbon Credit work?
In contrast to using carbon credit mechanism protocols, a few countries have tried economic punishment policies to reduce greenhouse gases. Some countries imposed a “carbon tax” on domestic corporations, creating a disincentive for corporations that emit greenhouse gases.

Emissions limits and trading rules vary country by country, so each emissions-trading market operates differently. For nations that have signed the Kyoto Protocol, which holds each country to its own carbon limit, greenhouse gas-emissions trading is mandatory. In the United States, which have not signed the environmental agreement, corporate participation is voluntary for emissions schemes such as the Chicago Climate Exchange. Yet a few general principles apply to each type of market.

Under a basic cap-and-trade scheme, if a company’s carbon emissions fall beyond a set allowance, that company can sell the difference--in the form of credits--to other companies that exceed their limits. Another fast-growing voluntary model is carbon offsets. In this global market, a set of middlemen companies, called offset firms, estimate a company’s emissions and then act as brokers by offering opportunities to invest in carbon-reducing projects around the world. Unlike carbon trading, offsetting isn’t yet government regulated in most countries; it’s up to buyers to verify a project’s environmental worth. In theory, for every ton of carbon emitted, a company can buy certificates attesting that the same amount of greenhouse gas was removed from the atmosphere through renewable energy projects such as tree planting.

Carbon credits create a market for reducing greenhouse emissions by giving a monetary value to the cost of polluting the air. There are many companies and environmental groups that sell carbon credits to commercial outlets and individuals who are interested to buy for their emission quota. For example, if an environmental group plants enough trees to reduce emissions by one ton, the group will be awarded a credit. If a steel producer has an emissions quota of 10 tons, but is expecting to produce 11 tons, then that producer either reduces its emissions to 10 tons or it is required to purchase this carbon credit from the environmental group. The carbon credit system looks to reduce emissions by having countries honor their emission quotas and offer incentives for being below them.

Carbon credits transactions of an organized exchange can be grouped in two main categories:

Allowance-based transactions, in which the buyer purchases emissions allowances created and allocated by regulators under cap-and-trade regimes. These regimes include the Assigned Amount Units (AAUs) under the Kyoto Protocol and the EU Allowances (EUAs) under the EU ETS.

Project-based transactions, in which the buyer purchases emission credits from a project that reduces GHG emissions compared with the old environmentally insensitive methods. Some project-based transactions are conducted to meet voluntary targets, but most are ultimately intended for compliance with the Kyoto Protocol or other regulatory regimes. Most of the traded carbon credits are representing project-based transactions.

What is the volume and market price of Carbon?

Price of a carbon credit is determined by competitive bidding on one of the major climate exchanges. Carbon credit trading has real economic benefits for both sides. Unchecked, energy use and hence emission levels are predicted to keep rising over time. Thus the number of companies needing to buy credits will increase, and the rules of supply and demand will push up the market price, encouraging more groups to undertake environmentally friendly activities that create carbon credits to sell. The value of carbon market has grown from $727 million in 2004 to $ 118 billion in 2008 and forecasted to grow by 68% per year to $669 billion in2013.

According to Oslo-based research firm Point Carbon, the global carbon trade crossed $40 billion in 2007, a growth of 80% over the previous year. In terms of volume, 2.1 billion tons of carbon dioxide equivalent credits were traded, a hefty 64% increase over 2006. The global carbon market could be worth $2 trillion by 2020, if a greenhouse gas cap and trade scheme takes off in the US.

The price of carbon credits is also determined by market forces on one of the climate exchanges. It is difficult to empirically analyze the data because there is no standard contract size and the seller and buyer are not required to disclose the contract prices. Also, reporting practice is not uniform between public and private sector buyers. As a result, the price of carbon credits is not uniform across regions and industries.

What is the Role of Carbon Credit in Nepal?
Activities like stone as a gift, meeting on the base camp could not do any thing to stop the Global Warming; a proper mechanism of finance is a must. It is a realistic and practical way to join international efforts to tackle the global challenge of climate change. Nepal is facing the consequences of environmental damage disproportionately. The fast melting Himalayan glaciers is a latest an example, which will likely cause immense loss to Nepal’s fragile ecology with resultant floods, droughts and landslides.

After ratifying the Kyoto Protocol, Nepal now stands a chance of reaping benefits from the novel concept of "carbon-trading.” Nepal can sell its "carbon-credits" to highly polluting countries and earn money by pursuing Clean Development Mechanisms (CDM).

Nepal has a large potential to develop CDM projects--any sector that replaces unsustainable firewood or fossil fuels with clean energy will qualify. Nepal’s biogas projects, Electric Vehicles (EV), micro hydro; solar system; wind energy; are considered to be the most advanced of the country’s CDM projects. According to Clean Air Initiative, each biogas plant prevents around 5 tons of Carbon Credit from being released to the air in one year, which will give the nation a total of Rs. 36.5 million annually. The Community Developed Carbon Fund of the World Bank has shown interest in purchasing carbon credit from these projects which will reduce around 94,000 metric tons of CO2 equivalents per year.

Today, Nepal has the world's highest number of biogas systems per capita, outnumbering China and India, according to Bio-Gas Support Program (BSP). Over 173,000 Nepali households now have biogas systems and every biogas system in Nepal avoids nearly 7.5 tons of carbon emissions per year thanks to BSP.

Besides the Biogas Projects, Electric Vehicles (EV), micro hydro; solar system; wind energy have also contributed to the reduction of carbon dioxide. We should not forge or neglect this fact.

Last but not the least, Nepal’s forests have also contributed in the reduction of carbon dioxide in a big way. The saying “Hario ban Nepal ko Dhan” (Green Forests, Nepal’s Treasures) is a fitting slogan. W can create a conducive environment for garnering international support to launch more forestry projects in the country. Once such projects are popularized, Nepal can also benefit from clean development projects through World Bank-funded Global Environmental Facility. Through expanded forestry projects, Nepal will be in a position to sell higher amounts of carbon credits in the international market under the Carbon Trading Scheme of the Kyoto Protocol.

Currently, 30 per cent of Nepal's land area is covered with forest or shrub, and 20 per cent is set aside as national parks. In the past 20 years, the forests in Nepal' have expanded by 20 per cent because of the success of our community forestry efforts. According to a survey by the Livelihoods and Forestry Program, there are 14,300 community forestry user groups all over the country, protecting 1.2 million hectares of forests: more than one-fourth of the total forest area. The total amount of carbon offset that Nepal can realize from community forestry alone is between 1.8 to 3.6 million tons per year, and this means the country could earn anywhere up to $54 million a year.

Nepal started trading carbon emissions with the World Bank at the rate of just US$7 per tone from 2007, and recently the AEPC signed a deal with the Bank to sell carbon emissions at $10.25 per ton, according to WWF-Nepal. European carbon prices currently stand at around $33.12 per tons; according to China Daily and The Times of India, China’s rate for per ton of emissions stands around 7 euros and India’s around 12-12.5 euros. Nepal has already obtained $200,000 from the World Bank's Forest Carbon Partner Facility for a Readiness Plan Idea Note and $ 3.4 million has been pledged to fund a Nepali carbon credit.

The climate change issue calls for pragmatic solutions and approaches. The meeting on Mt. Everest should not end just as a media event to draw the world’s attention. Neither should our participation in Copenhagen (COP15) end as a conferencing ritual. Participates must address the issues of compensation for mitigation and its baseline in Nepal’s context.

Earlier article by the author in Nepal Monitor:
> FDI in Nepal’s Hydropower Sector: A Focus on the Product, February 8, 2009

Kundan Pokhrel Majagaiya is a doctoral candidate at Glorious Sun School of Management, Donghua University, China.

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