(November 2008)
By Lerato Letsoalo, Logistics Unit Claims Consultant, Chery South Africa
Climate change has become one of the major challenges for mankind and the natural environment. Greenhouse gas emissions (GHG) released into the atmosphere in ever rapidly growing volumes are recognized to be responsible for this change; in response to this worsening crisis, countries have embarked on massive campaigns to address the issue. Carbon credit trading was developed as a result, as a way to deal with climate change and assist developing countries in developing in a manner which will not further erode the environment.
What is a carbon credit note?
The new carbon credit note is a newly introduced instrument, recently listed on the JSE, which allows South African investors the ability to invest in the carbon credit market. It is a tradable permit scheme which is an incentive for countries and businesses to reduce GHGs into the air. Experts see carbon trading as one of the most effective ways of combating global warming.
How it works?
Should an organization exceed the emissions limits as stated under the Kyoto Protocol on climate change; they can offset their carbon reduction commitments by funding initiatives in developing countries or they can buy credits to make up any shortfall. In other words, those that exceed their allowed quotas must buy carbon credits while those that operate below quotas can sell the remaining credits.
South African organizations can only create carbon credits by developing projects through Kyoto’s Clean Development Mechanisms (CDM). Credits from these organizations are called Certified Emissions Reductions (CERs). Organizations that leave a large carbon footprint (like Sasol) are expected to comply with these international levels of carbon emissions.
Carbon credits create a market for reducing GHGs by giving monetary value to the cost of polluting the air. Emissions become an internal cost of doing business and are visible on the balance sheet. It’s interesting to know that whatever the source or location, a carbon credit is always equal to one ton of carbon dioxide avoided or reduced by a project activity.
At the moment, there is a regulated demand of carbon credits but the market is short of supply. The carbon credit market is the fastest growing financial market in the world; and is also the only market not to have been affected by the global economic recession.
The Carbon Credit Note has been successful as a result of:
Rapid growth market – the market has outperformed expectations, which has boosted investor confidence
Positive legislation shifts
Stable investment currency
Resistance to market instability
How will carbon trading via the CDM help reduce global warming?GHGs mix uniformly in the earth's atmosphere. Unlike sulphur dioxide or low-level ozone, carbon dioxide and other GHGs have the same impact on climate everywhere in the world. It does not matter, therefore, where we begin to reduce net emissions. This fact provides the economic justification for international co-operation on climate change projects and project-based emissions trading. International co-operation makes economic sense because emissions reduction in developing countries generally costs less than in developed countries. The difference between the marginal reduction cost for the investor (developed country) and the host (developing country) is the 'surplus'. The host country and investor country can share the surplus so that both benefit.
A local example:
Sasol became the first company globally to register a nitrous oxide (N2O) abatement Clean Development Mechanism project using secondary catalyst technology to convert the greenhouse gas N2O into harmless nitrogen and oxygen gases. The project is expected to earn them significant income through sales of the resulting carbon credits. A share of these carbon credits will be invested to benefit local community-based sustainable development projects. Sasol Nitro commissioned its N2O emission abatement technology during the first quarter of 2007. It expects to reduce greenhouse gas emissions equivalent to about a million tons of carbon dioxide a year. One ton of N2O has the greenhouse gas impact equivalent to 310 tons of carbon dioxide. Sasol is achieving significant reductions in its air pollutant emissions and is reducing its overall environmental footprint by reducing emissions and promoting energy and water efficiencies.
How can we benefit from trading carbon credits?
Investors in credits have more control over their own costs.
The flexible mechanisms of the Kyoto Protocol ensure that all investment goes into genuine sustainable carbon reduction schemes, through its internationally agreed validation process.
All parties benefit - the host country is assisted in achieving sustainable development, the owner of the project receives financial and technological assistance, and the emitter in the developed country receives carbon credits.
Others are of a different opinion….
Lorrie Goldstein, a columnist puts it this way: First, buying and selling carbon credits doesn't remove one molecule of carbon dioxide from the atmosphere.
Second, carbon credits weren't designed to lower emissions. They were designed to shift emissions around. Practically speaking, they will delay the day when we start lowering them. Their present purpose is simply to permit developed countries and their industries to keep emitting carbon, so long as they pay a huge financial price for it by subsidizing the developing world.
An opinion I agree with..
Purchasing these credits doesn't actually prevent more carbon dioxide from being released into the air, but simply acts like a security blanket for big, carbon-spewing countries. Rather than focusing on solutions to physically reduce emissions, these countries are permitted to buy their way out of some bad habits without having to adjust any harmful behavior. Throw in the fact that emerging economies aren't held accountable for their own emissions in any capacity and one has to wonder exactly what the purchase of carbon credits is accomplishing.
In conclusion.
South African companies can gain tremendous benefits from carbon credits. They represent good business opportunities where large revenues can be generated.
Sources
Carbon credit note: Back on the JSE. Marc Ashton. September 9 2008. Available from: http://www.fin24.com/articles/default/display_article.aspx?ArticleId=1518-1786_2390515
Turning pollution into profits. Anonymous. December 10 2007. Available from: http://www.fin24.com/articles/default/display_article.aspx?ArticleId=1518-1783_2235770
Sterling Silver releases second carbon credit note onto JSE. Sterling Silver Media. September 7 2008. Available from: http://www.manufacturinghub.co.za/20080907_0001.htm
Carbon footprint. Anonymous. Available from: http://www.pe-international.com/consulting/carbon-footprint/?gclid=CIv27sKg25UCFQuJ1QodrlJwZA
Towards 2010: A green way to fund our city’s growth. Theuns Botha. May 1 2007. Available from: www.capeargus.co.za/index.php
Sasol to receive carbon credits. Anonymous. July 23 2007. Available from: www.greencarcongress.com
SA lagging behind in taking advantage of carbon credits system. Leandi Rostoll. May 16 2008. Available from: www.miningweekly.com
Carbon finance in South Africa. Anonymous. Available from: www.carbonfinanceafrica.org.za
Kyoto Protocol and the clean development mechanism. Anonymous. www.carbonwatch.com/KyotoProtocol.htm