Most of you have watched the documentary “Inconvenient Truth” by Al Gore, which gives you an idea of how important climate change is. The need of “Clean Energy” is in demand and the importance of Carbon Trade has now hit PNG.
Here is a write-up by Ogis Sanida explaining the rationale of Carbon Trade
The carbon trade rationale
By Ogis Sanida
The carbon trade rationale
By Ogis Sanida
Carbon trade is a new market-based mechanism which intends to encourage the reduction and/or offset of greenhouse gas emissions while, at same time, allows income creation. Such trade involves the buying and selling of ‘environmental services’. These services constitute activities that remove greenhouse gases which cause global warming from the atmosphere.
The carbon trade idea developed from the Kyoto Protocol that was signed in Kyoto, Japan, by some 180 countries in December 1997. The Protocol called for 38 industrialised countries to reduce their greenhouse gas emissions between the years 2008 to 2012 to levels lower than 5.2% of those in 1990. However, the Protocol did not give specific instructions on how countries will achieve their reductions. Carbon trade is a mechanism that was developed to address this shortcoming.
How does carbon trade work?
Carbon trade is supposed to work in the following way: An eco-consultancy firm, which plays the role of a broker or middleman, conducts an eco-audit of a client (individuals, industries/firms, or countries) and comes up with a reasonably accurate estimate of how much carbon the client's activities release to the atmosphere.
At the other end of the operation, the eco-consultant searches the world for environmental services that could offset its client's polluting emissions. These services are mainly forests and tree-planting projects, which are known in the carbon trade business as carbon assets or carbon sinks, because trees remove carbon from the atmosphere and retain it in their wood. Employing a variety of methodologies, the eco-consultant arrives at an estimate of how much carbon a particular sink retains, and then assigns it a monetary value and sells it to a client. The client then subtracts from its carbon account the carbon retained by its newly purchased carbon sink. The client is said to be carbon-neutral or climate-neutral when its carbon assets equal its carbon emissions.
In terms of income flows/creation, the eco-consultant receives money from its client and pays the environmental service providers, after subtracting its consultancy fees.
Types of carbon trade
There are three market-based ‘flexible’ systems of carbon trade: clean development mechanism (CDM), emissions trading system, and joint implementation system.
- Clean development mechanism: This involves the trade of environmental services mainly between the industrialised and developing countries. The intention of CDM is to enable industrialised countries to meet their domestic emission reduction targets by investing in projects that reduce or offset greenhouse gas emissions in developing countries. Such projects typically focus on carbon-neutral projects such as renewable energy, energy efficiency, eco-forestry, wildlife conservation, and small-scale hydroelectric schemes. PNG is currently developing CDM projects through the Department of Environment and Conservation and other relevant stakeholders.
Emissions trading system: This mechanism mainly concerns trading of ‘pollution rights/permits’ among the industrialised countries. Under the system, countries or industries which exceed their pollution targets will have to buy extra quotas from companies or countries that undershoot their pollution targets.
Joint implementation system: This system is a specific form of the CDM where the Western and/or industrialised countries are to fund climate-friendly (or carbon-neutral) projects in the former Soviet Bloc.
The rationale of carbon trade can be understood when we consider the impracticality of the environmental ‘purist’ argument on the one hand, and economic growth maximisation on the other.
Extremist environmental organisations argue that the only way to address climate change is for countries to undertake a direct reduction of carbon emissions by reducing ‘pollution-creating industrial activities’. These organisations contend that any other options are just an indirect blockage to the real solution to global warming which is reducing and finally eliminating fossil fuel burning. The idea that people can burn fossil fuels and then plant trees to clean up the carbon dioxide is simply wrong, so goes the argument. This false ‘solution’ will merely keep people digging up oil and coal. The only ‘solution’ is for countries to reduce carbon emissions.
However, the environmental ‘purist’ approach would be an ‘economic and social suicide’ for many countries. Outright reduction in industrial activities would lead to a fall in economic growth, loss of jobs and income. This would have a flow-on effect in the social arena where spending in health, education and other related activities will have to be cut. Because of such concerns, many countries have been reluctant to take the ‘purist’ approach. Until new technologies are commercialised, people will continue to drive cars, take flights and use energy from fossil fuel sources.
At the other extreme, some countries, mainly the big industrialised nations, are taking a rather passive approach to the global warming issue. These countries seem to think that they should continue to maximise industrial development and hope that future scientific advancement will provide the ‘vaccine’ to solve the global warming problem. If the adverse effects of global warming are correct, then outright ignorance of environmental issues would be detrimental to our welfare in the long term. The rights of citizens of a country or the global community, in general, to live in a secure environment would be compromised.
Given these two opposing scenarios, it is now obvious that carbon trade is the way forward. By reducing or containing carbon emissions and generating revenue, simultaneously, carbon trade addresses both the environmental and economic concerns. Carbon trade is not the perfect solution; however, it is the ‘best’, given the current situation.
Moreover, by its nature, carbon trade could have a wider appeal to governments and private sector entrepreneurs. The challenge facing countries venturing into this new form of international trade is how to plan for and implement it, in order to get the best value out of it, both in economic and environmental terms. In the PNG context, the current work of the Department of Environment and Conservation and the stakeholders in trying to get the CDM activities off the ground should be given full support by the Government, private sector and the NGOs.
Ogis Sanida is a Research Fellow with the Economics Studies Division of the National Research Institute