Does carbon credits have any credibility?

I live in India, one of the fastest growing developing nation. Recently, I have been noticing and reading the air quality index of our country, which is going down gradually and it takes a nose dive in our National Capital Region and Metro cities. The reason can be traffic, construction, deforestation, global warming and other not so good things. The temperature difference that is created by Greenhouse gases emission like Carbon Dioxide are the culprit. But we are fast developing nation, does that mean that we can pollute and emit whatever toxic we want and how much we want without caring for the environment? There should be International treaty, impositions, taxes or system which should control this. After all we all have only one earth to live.

Well there is one system which I came across and the idea is beautiful but it is gaining some criticism over the course of time.

What is carbon credit?

 It’s much like the credit worth you have, when you do some transaction but instead of money it talks about carbon points. Just like money, the more you have the more you can spend. Simply speaking it is a kind of points or credit which give you right to emit CO2 or other greenhouse gas which is measured in tons. Suppose, a country has 1 carbon credit than it has right to either emit 1 ton of greenhouse gases or trade it in international market at current market price.

This immediately has few implications first by limited the credit points in market, the emission can be limited. It regulates and tracks the countries carbon emission as well.

Credits can be of two types Mandatory or Volunteer

Mandatory Credits caps or limits the carbon foot prints and is tradable unit. Voluntary credits are purchased against corporate social responsibility and is monitored by voluntary certification process.

Why the fuss?

After discovery of hydrocarbon fuels, industrial revolution and current pace at which technology is moving forward. Each resource we consume is manufactured directly or indirectly by the consumption of these carbon fuels then be it electronics, metals, transportation, agriculture.  The fossil fuels, coal, oil or natural gas produce the energy to convert raw materials to consumables. Burning these hydrocarbon fuels generate carbon footprints like carbon dioxide, methane, nitrous oxide, hydrofluorocarbons (HFCs), etc. These gases have property to trap the heat which falls on our earth through Sun or internal heat like volcanic eruption, man-made etc.

This caused the temperature to change over the course of decades and have global impacts like melting of global ice-caps, rise in ocean level.

How does it work?

Where there is credit, there is market and where there is market there are buy and sell relations. To buy carbon credit and to have right to generate greenhouse gases, someone should sell it. There are companies which do just that. They sell credits. Anyone who wants to lower the carbon foot print then whether it is commercial and individual customer, who is interested in lowering the carbon footprint on a voluntary basis can buy it.

The process is little bit more complicated than just buy and sell. The credits have quality which is directly associated with the price of credit points. The quality is determined by many factors like credibility of selling company, how validation is done etc...

In simple words, each country has businesses which emits greenhouse gases. A quota or limit is set for these companies termed as 'operators'. If they emit more than the quota they should purchase the carbon credits. If they consume less they can sell their carbon credits to others in market or individually. These transactions are validated by UNFCCCC organization. The total number of carbon credits in market should be in prescribed limit as set internationally.

A real-world example can be a tyre producing company, Tyrub has carbon emission of 50,000 tons. But the carbon credit it gets is 30,000 tons annually. As a result, it should purchase additional 20K credit points from market. Now the environment company, Entree generated carbon credit point by reforestation is selling carbon credits.  The Tyrub can purchase the carbon credits from Entree. This does two things. The Tyrub can continue to produce the tyres and it transfers the environmental obligation to Entree. This indirectly constraints the overall emission of greenhouse emission.

Let’s say if over years carbon emission of operators increases. As a result, the demand for the credit will increase which in turn will increase the credit price. Thus, the scarcity and inflated price will force the companies to reduce the carbon foot prints and will bring the down the emission.

The more details are defined in Kyoto Protocol which is the guiding principle established in 1997 but came in to effect in 2005 by European Union, now international agreement between more than 170countries around the globe, has also defined two mechanism the Clean Development Mechanism and the Joint Implementation.

This helps the businesses which are in strictly carbon emitting industry, can purchase carbon credits which makes finance available to renewable energy projects, forest protection and reforestation projects around the world.

When a ton of hydrocarbon fuel is purchased, carbon credits are created which gives the company to burn the specified amount of hydrocarbon fuel over a defined period.

According to report published by United States Environmental Protection Agency (EPA) released an updated report in 2015 estimates that one-ton emission of carbon dioxide is equivalent to USD $36 environmental degradation. And this price will increase over time.

Criticisms & Current Challenges

This noble intention is currently facing lot of criticism. The reason is demand and supply imbalance. The oversupply of credit points. The industry strong lobbying has caused the allocation of more than required carbon points to greenhouse emitting companies. This flood the market with carbon points and brought down the price of credits.  As current scenario has it the cost of credit is so low that it is negligible to Industry giants. This gives them freedom to increase their greenhouse emission, making whole situation worse. As the now have every right to increase their carbon footprints, morally, ethically and legally.

The price itself of Carbon Credits are quite variant for example Swiss retailer Coop sets their internal price on carbon at CHF 150 (roughly USD $150). The worth of credits is subjective depending on quality, type, quantity and geographical location. With 30$ per ton as global average.

The carbon offsetting excessively can create local environmental imbalance. 

Another factor is the effectiveness of validation, audits under prevailing environment of corruption and non-transparency under the hood of bureaucracy and capitalism. This has developed into a parallel market of nexus of unethical carbon brokers, operators, validators, policy makers &  NGOs.

The scenario is more complex there are examples of destabilization of local eco system by one company generating carbon credits through renewable resources but in turn consuming the raw material required by locals. Now the small fish should purchase substitute of natural resource which is artificially made of petroleum based chemicals. This increase the carbon foot print of local system and not to mention the offsetting that is done for the polluters, who are still producing the greenhouse gases.

Not all countries are carbon capped or don’t follow them mandatorily (USA, India, China). This cause disadvantage to capped countries. Allocation of surplus credits to the local union for free or cheap rate can be perceived as an unfair trade practice. Some countries have gain billions of dollars in carbon trading market and is currently dominating the market.

The factors of profit margin in traditional fossil fuels, adaptation to global warming makes businesses to invest in already deteriorating market.

Costing issues like it is estimated that if US put tax of 30$ per ton of carbon can generate 50 Billion dollars of revenue per year. This additional tax burden will get passed down to the end user who is mostly the consumer, which will contribute to the inflation. Developing countries already have shoddy processes, audits and unbearable inflation. Passing the carbon cost to end user will make things worse.

What I think?

I first thought this can be a perfect solution to maintain the carbon footprints but after going through the current situation. I see many loopholes, political unwillingness, bureaucracy, capitalism and lack of strict monitoring. Corruption and non-transparency has already rotten this system like many others. There is very little good that is coming out of it. The scenario is already biased in favor of some countries and rest are sharing the burden. It looks like no one is bothered about the environmental damage, which now may be permanent. We strictly need to create new system which should be more disciplined, transparent and effective if want to leave something good for the coming generations.

Footnotes

----------------------------------------------------------------------------

My Other Links

----------------------------------------------------------------------------

Articles List: https://azblogs4u.blogspot.in/p/articles-list.html

YouTube Channel: Learnitium - https://www.youtube.com/channel/UChlqyi2M5ywy85FSHI0i-tg

----------------------------------------------------------------------------

Credits -

References -

Carbon credit - Wikipedia: https://en.wikipedia.org/wiki/Carbon_credit

What are Carbon Credits and How Do They Work? - Conserve ...: https://www.conserve-energy-future.com/carbon-credits.php

Carbon Credit: https://www.investopedia.com/terms/c/carbon_credit.asp

Why are carbon markets failing? | Guardian Sustainable Business ...: https://www.theguardian.com/sustainable-business/blog/why-are-carbon-markets-failing

CARBON PRICING: What is a carbon credit worth? | The Gold ...: https://www.goldstandard.org/blog-item/carbon-pricing-what-carbon-credit-worth

Images -