A fourth installment on carbon trading explores a plan for a new kind of carbon credit.
Read: Carbon trading: What it is and how it works
Read: Carbon trading: Notes from the European Union
Read: Carbon trading: U.S. offset projects and aggregators
REDD means this: Reducing Emission from Deforestation and Degradation. And this is what it is, as described by Maywa Montenegro in an article for Seed magazine:
REDD mechanisms will assign a carbon storage value to forests, and nations that forego razing their trees will receive credits, which can then be sold on the carbon market.
I happened across the article “The market force of nature” in the April 2008 issue of Seed while en route to Baltimore over the weekend, and considering my on-going look at carbon trading over the last few days, I thought it was a nice coincidence.
Montenegro reported on this particular aspect of the 2012 replacement for the Kyoto protocol, and noted that international leaders agree that “conservation of the world’s tropical forests should play a critical role” in that protocol.
The goal of the REDD solution is to give developing nations – many of them with vast tracts of forested lands – a market incentive for maintaining those forested lands as they are, rather than clear-cutting for lumber, mining, biofuels or agriculture.
Here is Montenegro on the bigger picture of REDD:
As the first global experiment in this premise, REDDs will attempt to … test whether markets can begin to drive the protection of Earth’s resources, rather than their exploitation.
The whole process is based on the existing carbon credit trading platform known as “cap and trade,” currently up and running in the EU. The idea is the same: Countries that accumulate REDD credits, which represent an oversupply (based on set allowances) of carbon reduction as measured in tons, can sell them to countries that have an oversupply of carbon emissions based on those same allowances.
Scientists and The World Bank are behind the project, and five countries are expected to begin the REDD project in 2008, growing to between 20 and 30 by 2012. The usual criticism (one that I didn’t yet touch on in previous installments on this subject) has been levied: Some believe that carbon credit trading is simply a way for the developed and / or polluting nations to continue polluting by buying their way out of the responsibility of curbing their own carbon output.
Despite this criticism, support for the project has received funding from a host of nations, and a monetary value of the forests themselves has been assigned. For example, citing data that Montenegro gathered from “State of the World’s Forests 2007,” published by the UN Food and Agriculture Organization, Nigeria has $258 million worth of carbon credits at $5 per metric ton of CO2 equivalents. Indonesia has $626 million and Brazil, $1.6 billion.
Keep in mind that the above represents annual earnings based on no deforestation. It’s also important to consider that the future value of those credits might increase significantly as the developing world continues to develop and carbon emissions on a global scale increase rather than decrease as growth outpaces reduction efforts. That could drive demand for REDDs (and other carbon credits) among nations moving to the developed stage.
There is another thing that could drive demand for carbon credits, and that is stiff(er) penalties for polluting over the allowance. If there’s no penalty for polluting, why buy a credit to offset emissions? Demand from this eventuality may be around the corner, as I learned from another article in the same issue of Seed, called “China’s green blacklist.”
In the article, contributor Jane Qiu reported on the sad state of compliance with pollution laws on the part of large multinational corporations. Qiu says that some corporations “despite repeated warnings, had consistently broken the country’s environmental laws.” But Jane Qiu did not discover this news herself – it was made public by SEPA, China’s State Environmental Protection Agency, in early 2008.
The announcement is a big change for China, which had been criticized for turning a blind eye to big polluters. Now the message is clear to the multinationals and to the global audience: If you continue to pollute against the law, you will be punished. Qiu gave an example of a monetary penalty for water pollution that amounted to only $125,000 a year; that’s pocket change to the companies cited for incurring the penalty.
Applying some quick math reveals that a penalty of $125,000 would be worth the purchase of 25,000 metric tons of CO2 at $5 per metric ton. This brings us to the question, How much carbon are the polluters actually pumping out? From there we can start to get an idea of the potential of trading in carbon credits.
But we can look at it another way. The country of Myanmar, to go back to Montenegro’s data from the UN report, holds $228 million worth of credits. How many water pollution “penalties” does that cover at $125,000 per penalty? 1,824. That’s more than half the number of countries (3,000) cited in the SEPA report for breaking environmental laws in China. Buying the forests of tiny Indonesia, however, would more than cover all the polluters in China – at least, that is, until the country raises the penalty for polluting.
No matter how you slice it, the stage appears to be set for an increase in active carbon credit trading.
In my next piece I’ll attempt to uncover who is actively trading in these markets and find out if there is a place for retail investors.
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