How the Carbon Credit Market Does Its Magic
A recent Fortune article articulates how the new tradable commodity, Certified Emissions Reductions or CERs, and the carbon credit market created by the 2005 Kyoto Protocol, actually work. According to the article, thirty-six industrial countries (but not the U.S.) have committed to reducing greenhouse gas emissions over time, in part, by financing "clean development" projects in the developing world.
This example of pig manure on a farm in the Philippines really brought home how the mechanics work for me:
Daniel Co and his family raise about 10,000 pigs on a farm called Uni-Rich Agro Industrial in the province of Tarlac in the Philippines. Until recently pig manure was shoveled into concrete ponds, where it decomposed, emitting methane, a potent greenhouse gas, and a putrid smell. Daniel Co knew that he could install biogas technology to seal the ponds, trap the gas, and produce electricity, but he didn't want to spend the $200,000 or so it would cost until he heard that pig farms could collect money from Europe for capturing methane: He would be paid not to pollute.
...Daniel Co got involved when he was approached by EcoSecurities, an Irish company that has developed more carbon-mitigation projects than any other firm. Its experts calculated that trapping his farm's methane would generate 2,929 CERs a year. A CER is created when the equivalent of one ton of carbon dioxide is prevented from entering the atmosphere. (Because methane creates more global warming than carbon dioxide, trapping one ton of methane generates 21 CERs.) CERs are sometimes called carbon credits.
EcoSecurities offered to pay Uni-Rich $4 per credit, or $12,000 a year, every year, until Kyoto expires in 2012, and to handle all the paperwork at the UN, which registered the project late in 2006. Uni-Rich then installed the methane digesters.
Now, thanks to the magic of carbon finance, Daniel Co and his family treasure their pig waste. They use it to produce electricity, which has reduced their utility bills by about $48,000 a year. They collect their $12,000 a year in carbon revenues. EcoSecurities, in turn, will sell the credits for about $18 each, or $54,000 a year, to a big French bank called Caisse des Depots. Caisse des Depots can hold onto the CERs as an investment, betting that their value will rise, or sell them to a client, most probably a European power generator or industrial firm that needs credits to meet its regulatory obligations.
The article suggests that the market for CER trading in the U.S. could reach $1 trillion per year if the U.S. were to adopt the appropriate regulatory framework. As a result, recent calls by large foundations for funding for global warming policy change are aligned with the interests of major investment banks that are "rushing into the business of carbon finance." The odds for change look a lot better when that type of alignment occurs.
Posted at 2:45 AM, May 19, 2008 in Permalink | Comment