As we draw ever closer
to phasing out the Millennium Development Goals and replace them with
Sustainable Development Goals in the Post 2015 Development period, there is
little doubt that climate change will not be one of the main cross cutting
themes. Here in Africa, climate change is a fairly new agenda and countries are
facing a severe inadequacy of technical expertise and know how to initiate and
scale up climate change governance interventions. Also, almost every other
organization is coming up with various ways of “re-branding” its activities to
fit into the “building resilience” realm – whose indicators are yet to be
determined – in anticipation of funding for climate change governance
strategies.
It is also generally
accepted that the level of funding needed to tackle the climate crisis is
astronomical. For instance the most recent cost estimate for cutting
deforestation in half ranges from USD 12 million to USD 35 billion per year (www.ucsusa.org/redd).
Still, this figure is much more than is currently spent on protecting forests
in the developing world and the question therefore is, where will the
additional funding come from? Well, two main sources have been proposed: public
funding and market finance. Public funding can come from several sources:
dedicated funding that is additional to traditional overseas development
assistance, the allocation of a portion of the revenue from cap-and-trade
systems and/or through taxes and levies. Public funding can also come from
international sources, or it can be raised internally within a country.
Carbon finance on the
other hand will come from carbon markets which are based on the premise that
certain companies will be able to reduce their greenhouse gas emissions at a
lower cost than others. If those companies are able to sell excess emissions
reductions to other companies, the overall cost of compliance with the system
will be lowered. Let’s see through an example of how a carbon market works. For
this example, we have two companies representing the industrial sector as a
whole, and we have a policy goal of reducing emissions by 2000 tons each.
Power Pro Ltd. uses
old, inefficient power sources. It can make some easy updates to reduce its
greenhouse gas emissions at a cost of USD 2 per ton. Power Pro is watching the
carbon market, which is currently trading carbon credits at USD 4 per ton. At
that price, Power Pro realizes it can reduce more emissions than required and
sell its extra reductions at a profit. Power Pro therefore reduces 1000 tons
more than required. At a cost of USD 2 per ton, reducing 1000 extra tons costs
the company USD 2000. Credits are currently trading at USD 4 per ton so Power
Pro should have no problem selling the extra 1000 tons at a profit in the
carbon markets.
For the second company,
Newfangled Power, it is more costly to reduce emissions. It costs them USD 6
per ton to reduce emissions. For Newfangled Power to meet its requirement and
reduce its emissions by 2000 tons, it would cost USD 12000. At that price,
Newfangled Power realizes that buying credits from the carbon market would be
cheaper than reducing their emissions because carbon credits are selling for
USD 4 per ton. Buying 2000 tons of credits would cost them USD 8000.
Power Pro therefore
reduced its emissions by 3000 tons, 1000 more than their goal. The cost to
reduce those extra tons was USD 2000. They put their extra tons on the market
at a price of USD 4000. Newfangled Power would like to buy credits to meet its
goal of 2000 tons of reductions. Due to government rules, they can omly buy 50%
of their necessary reductions on the market (and have to reduce the other 50%
on their own). Therefore, they reduce 1000 tons of emissions themselves at a
cost of USD 6000. They buy the other necessary 1000 tons at aprice of USD 4000.
This transaction resulted in a USD 2000 profit for Power Pro and a USD 2000
savings for Newfangled Power, and 4000 tons of emissions were reduced, meeting
everyone’s goals. Through the carbon markets, society achieves the needed
emissions reductions at a lower overall cost.
How governments
administer carbon markets
Carbon markets result
from policies that create “cap-and-trade” systems. A cap-and-trade system
example follows. The first part of the system is the cap. Governments place a
limit, or a cap, on the total amount of greenhouse gases that can be emitted
each year. The amount of greenhouse gas emissions allowed generally declines in
each subsequent year. Governments then print allowances allowances in the
amount of the cap each year. Each allowance allows a company to emit one ton
carbon dioxide equivalent (co2e) that year. They then generally give
some allowances to companies for free as a cost saving measure. Finally, the
rest of the allowances are auctioned off. The revenue generated from the
auction of allowances can be used to fund other efforts to mitigate or adapt to
climate change.
Then there is the
trading part of the system. This part operates just like the carbon market
described in the previous example. Companies choose the most cost-effective way
to meet their emission reduction requirements. Generally, they will reduce
their emissions upto the point where it becomes more cost-effective to buy
allowances from others rather than make further reductions. They then buy
allowances from another company that was able to reduce their emissions below
their requirement. The price of allowances is determined by the supply and
demand in the market.
It is important to note
that in many cases, some sectors such forestry are not usually included in the
emissions cap. This means that any reductions in emissions from such sectors
are treated like an offset. An offset is a certified emission reduction that
takes place outside of the regulated sector(s), for instance capture and
combustion of methane from landfills, and agricultural manure management. Activities
that measurably reduce emissions from any sector not covered by the cap could
be eligible to sell offset credits. Firm regulated by a cap-and-trade system
are sometimes allowed to submit offsets to cover their emissions in lieu of the
allowances that make up the cap.
*A major proportion of
this post is taken from the Nature Conservancy’s Reducing Emission from
Deforestation and Forest Degradation and Enhancing Forest Carbon Stocks Course*
Nicely done. Up!
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