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Guide to Carbon–

post Copenhagen

How carbon trading can increase the investment in clean

energy projects and present carbon trading opportunities in

their own right- and whether it will- after Copenhagen

Authors: Gordon Robinson and Stephen Larkin

All rights reserved. The information contained in this document is confidential. It may also be proprietary and trade secret to Pinpoint Energy Ltd. Without the prior writtenapproval of Pinpoint Energy Ltd. no part of this document may be reproduced or transmitted in any form or by any means, including, but not limited to, electronic,mechanical, photocopying or recording or stored in any retrieval system of whatever nature. Use of any copyright notice does not imply unrestricted public access to any part of this document.

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www.pinpointenergy.co.uk



Pinpoint’s Guide to Carbon | Table of contents 3

Responsible parties involved in Carbon Offset Projects ...........................................................51

Joint Implementation (JI) ..........................................................................................................53

The EU-ETS Linking Directive ........................................................................................................ 54

Voluntary Carbon Markets ........................................................................................................... 54

Carbon Offset Market Prices ....................................................................................................56

Why CER’s trade at a discount to EUA’s ...................................................................................58

The future of mandatory carbon markets in the United States ...............................................60

Key areas of opposition to the Kerry-Boxer bill ........................................................................62

The Chinese change of heart towards global warming ................................................................ 64

China’s aim to change the terms of debate - carbon emissions vs. carbon intensity...............66

Copenhagen 2009 .................... ..................... ...................... ..................... ...................... ............... 68

Unilateral commitments ...........................................................................................................69

What are the positives that can be taken out of Copenhagen? ...............................................70

... And the negatives .................................................................................................................71

The Climate Change Sceptics’ arguments.................................................................................73

Conclusion and recommendations ............................................................................................... 74

Pinpoint’s views on climate change and the carbon markets ..................................................74

Carbon trading outlook post Copenhagen ................................................................................... 77

Short term outlook ...................................................................................................................77

Medium term outlook ..............................................................................................................78

Addendum A – Common Acronyms ............................................................................................. 79

Addendum B - Glossary ................................................................................................................ 83

Table of figures

Figure 1 - Effect of inconsistent temperature increases around the world - assuming a 2.8

degree Celsius rise in temperature by 2010 ...........................................................................8

Figure 3 - Impact of rising sea levels on human habitation and comments the likelihood of each

scenario ..................................................................................................................................9

Figure 4 - Effect on sea levels if the polar ice caps were to melt ...................................................9

Figure 5 - Hurricane Dolly swept over the Texas-Mexican border in July 2008. ..........................10

Figure 6 - Some of the worst storms on record - such as Katrina have changed US public opinion

towards climate change ........................................................................................................10




Figure 7- Worldwide droughts, like that in a village northeast of Nairobi, expose rural

communities to food shortages. ...........................................................................................11

Figure 8 - A field sample of mosquitoes that could carry West Nile virus pictured in California. 11

Figure 9 - The conflict in Darfur has been partly blamed on stresses caused by global warming.

..............................................................................................................................................12

Figure 10 - The red fox and has been affected by rising global temperatures. ............................13

Figure 11 - Coral bleaching is only one tangible aspect of global warming's effect on ecosystems.

..............................................................................................................................................13

Figure 12 - New Orleans and Louisiana have faced the economic consequences with floods and

hurricans causing billions of dollars in damage. ...................................................................14

Figure 13 - Link between global temperature increases and climate change risks ......................15

Figure 14 – The link between greenhouse gas concentration and global temperature increases

..............................................................................................................................................16

Figure 15 – Shows the future global emissions savings trajectory that will be needed to reduce

GHG’s to 550/450 ppm. .......................................................................................................16

Figure 16 - The Keeling Curve, which shows how GHG concentration has steadily increased over

the last fifty years to levels above safe limits estimated at 350 ppm by environmentalists.

The Kyoto protocol is based on 350 parts per million. .........................................................17

Figure 17 – Global anthropogenic greenhouse gas emissions in the year 2000 broken down

through 8 different sectors of activity. .... ...................... ..................... ..................... ............28

Figure 18 - Atmospheric concentration of carbon dioxide since 1750 ... ...................... ...............28

Figure 19 - Atmospheric concentration of methane since 1750 .................... ...................... .......29

Figure 20 - The emissions of the average family of pigs is 9.2 tonnes per year of Methane .. .....30

Figure 21 - Atmospheric concentration of Nitrous Oxide since 1750 ..................... ..................... .31

Figure 22 - There are six groups of GHG’s controlled under the Kyoto Protocol, each with

increasingly significant impact on Global Warming..............................................................33

Figure 23 – Value of global carbon transactions ($Bn) .................................................................35

Figure 24 - The convenient truth - how one third of all carbon cutting measures actually save

money – often delivering triple digit returns on an annuity basis........................................36

Figure 25 - How to get a better return than the post office offers – an energy saving plug on a

laptop/mobile phone and especially a TV will deliver returns of in excess of 300% at

current UK electricity prices .................................................................................................38

Figure 26 - Distinguishing Features of Cap-and-Trade and Baseline-and-Credit Systems ............40

Figure 27 - Distinguishing Features of Cap-and-Trade and Baseline-and-Credit Systems ............41

Figure 28 - Most CDM projects are located in Asia and Latin America – August 2009.................43

Figure 29 – Distribution of CDM Project activities by scope (Note that a project activity can be

linked to more than one sectoral scope) – August 2009 .....................................................44

Figure 30 – Benefits accruing from CDM Projects ........................................................................46




Figure 31 – The CDM Project Cycle ...............................................................................................47 Figure 32 - Types of buyers for carbon-credit products ...............................................................53

Figure 33 – Carbon Offsets in the Compliance and in the Voluntary Market .................... ...........54

Figure 34 - Historic Values for the Voluntary Carbon Markets .................... ...................... ...........54

Figure 35 - Transaction Volumes and Values, Global Carbon Market, 2007 and 2008 ............ ....55

Figure 36 – Closing Prices BlueNext (exchange) Spot EUA 05-07 and EUA 08-12 .................... ....56

Figure 37 – How regulatory and market supply factors caused the EUA 05-07 markets to crash

..............................................................................................................................................56

Figure 37 – Correlation between carbon credits and other energy products ...................... .......57

Figure 38 - Pricing of Offsets for each Standard ...........................................................................58

Figure 39 Comparison in price between CER's and EUA's prices are in EUR per tonne CO2e ......58

Figure 40 - Comparison between the Waxman-Markey House and Kerry-Boxer Senate Bills .....61

Figure 41 - Proportion of people who believe that there is solid evidence of rising global

temperatures ........................................................................... Error! Bookmark not defined.

Figure 42 - Chinese coal is running out faster than any other major coal producer ....................64

Figure 43 - Chinese water sources that are vulnerable to melting of the Tibetan Glaciers .........65

Figure 44 - The link between electricity consumption per capita and GDP per capita ................66

Figure 45 - Chinese electricity consumption to GDP per capita (PPP) ..........................................67

Figure 46 - Carbon intensity of the world's top 12 emitters.........................................................67

Figure 47 - Unilateral National Commitments to Reduce GHG Emissions ..................... ...............69

Figure 48 - Impact of Copenhagen Accord on climate change policy expectations .....................71



Pinpoint’s Guide to Carbon | Introduction 6

Introduction

Climate change and carbon trading at a glance

The carbon market is different to any other - in that the product does not exist. Caron is sold

not – rather the act of not emitting carbon, one otherwise would have done, is sold. The

certificates establish the number of tonnes of carbon dioxide (or the equivalent in other

greenhouse gases) have not been emitted by the seller, entitling the buyer to emit the same.

The purpose of setting up the market was, first, to establish a price for carbon and, second, to

encourage efficient emissions reductions by allowing companies which would find it expensive

to cut emissions to buy credits more cheaply. It has had some success on both counts —somewould argue too much on the second.

A carbon price now exists, established by the European Emissions-Trading Scheme (ETS). In its

first phase it has been volatile – because information about Europe's industrial emissions was

poor, so the market got a shock in early 2006 when it emerged that the European Commission

had been too generous with the allowances it handed out to industry. Phase one allowances

(2005-08) collapsed to zero. But the commission has learnt its lesson and got meaner with

allowances, thus pushing up the price in phase two (2009-12) – but faces a recession, which has

reduced energy consumption of major emitters, so is also likely to reduce to zero in 2010.

The supply of carbon credits comes principally from two sources. The first is the allowancesgiven to companies in the five dirty industries covered by the ETS (electricity, oil, metals,

building materials and paper). The second source of carbon dioxide lies outside Europe. The

European Commission linked the ETS to the “clean-development mechanism” (CDM) set up

under the Kyoto Protocol. This provides for emissions reductions in developing countries —such

as those on the Latin American pig farms—to be certified by the UN. Such “certified emissions

reductions” (CER) can then be sold in theory on a one-to-one basis, but in practice at a discount

of about 40%, due to various risks that are discussed later in the document.

The demand for carbon credits comes mostly from within the ETS, from polluters who need

certificates allowing them to emit carbon. There is some demand from Japan, which has a

voluntary scheme, and from companies and individuals elsewhere in the world who want to

offset their emissions for moral reasons, or for branding purposes.

The trade is now sizeable. Some $120 billion of allowances were traded last year, according to

Point Carbon, a data-provider; representing 8 billion tonnes of CO ₂ saving about 3% in

emissions that otherwise would have happened. Europe's ETS made up about 70% of the total

value of carbon trading globally. Developing-country CERs accounted for about $15 billion of

last year's trade: 1.2 billion tonnes of CO₂. The money has gone mostly into projects in

People struggle with

the concept of carbon

trading, as the good

being sold is not a

physical good, but a

“non good” - the

avoidance of carbon

emission has

significant economic

value.

Carbon dioxide not

emitted by the seller

may therefore be

emitted by the buyer.



Pinpoint’s Guide to Carbon | Why emissions abatement is needed - how global

warming affects people’s everyday lives

8

Why emissions abatement is needed - how global warming

affects people’s everyday lives

The rationale behind carbon trading is that if the increase in humankind’s emission of green

house gases continues at the projected rate of growth, the world will warm up – by up to five

degrees above its current average. The impact of this on the earth could be – but has not yet

been definitively proven to be - catastrophic. Potential impacts of climate change are listed

below:

Rising temperatures

Globally, over the past century, the average temperature of the atmosphere near the earth’s

surface has risen by 0.74 degrees Celsius. Eleven of the 12 hottest years on record occurred

between 1995 and 2006. For instance in the author’s place of residence in the UK - the 1990s

was the warmest decade since records began in the 1660s. Summer heat waves are now

happening more frequently and in winter there are fewer frosts. The scientific consensus is that

global temperatures could rise between 1.1 and 6.4 degrees above 1980-1999 levels by the end

of the 21st century. The exact amount depends on the levels of future greenhouse gas

emissions.

Figure 1 - Effect of inconsistent temperature increases around the world - assuming a 2.8 degree Celsius

rise in temperature by 20102

The graph above shows that the temperature effects of global warming are felt inconsistently,

with the greatest risk in the Polar Regions. As the polar ice caps could melt, the impact on sea

levels represents a particularly significant and little understood risk of rising sea levels – see

Figure 3 - Effect on sea levels if the polar ice caps were to melt. It is sobering to think that once

the ice caps have melted, this process will be irreversible.

2National Centre for Atmospheric Research - http://www.ucar.edu/news/releases/2009/images/global-warming-

trends_lrg.jpg

The impact of a 5 :C

increase above the

current average on

the earth could be

catastrophic.

Eleven of the 12

hottest years on

record occurred

between 1995 and

2006.

It is sobering to think

that once the ice caps

have melted, this

process will be

irreversible.





9

Rising sea levels associated with the melting of polar ice caps

UK coastal waters have warmed by about 0.7 degrees Celsius over the past three decades. In

addition, the average sea level around the UK is now about 10 cm higher than it was in 1900.

Globally, the scientific community believes that sea levels could rise by anywhere between 18

and 200 cm by the end of the century. Rising sea levels would swamp some small, low-lying

island states and put millions of people in all low-lying areas at risk of flooding.

Figure 2 - Impact of rising sea levels on human habitation and comments the likelihood of each scenario

Figure 3 - Effect on sea levels if the polar ice caps were to melt3

3 CEGIS sea level r ising video http://www.youtube.com/watch?v=W2fg5PaHcUI&feature=related

Globally, the

scientific community

believes that sea

levels could rise by

anywhere between

18 and 200 cm by the

end of the century.





10

Extreme weather events - storms and floods

Experts use climate models to project the impact rising global temperatures will have on

precipitation. However, no modelling is needed to see that severe storms are happening more

frequently: In just 30 years the occurrence of the strongest hurricanes -- categories 4 and 5 --

has nearly doubled [source: An Inconvenient Truth].

Figure 4 - Hurricane Dolly swept over the Texas-Mexican border in July 2008.

Warm waters give hurricanes their strength, and scientists are correlating the increase in ocean

and atmospheric temperatures to the rate of violent storms. During the last few years, both the

United States and Britain have experienced extreme storms and flooding, costing lives and

billions of dollars in damages. Between 1905 and 2005 the frequency of hurricanes has been on

a steady ascent. From 1905 to 1930, there were an average of 3.5 hurricanes per year; 5.1

between 1931 and 1994; and 8.4 between 1995 and 2005. In 2005, a record number of tropical

storms developed, and in 2007, the worst flooding in 60 years hit Britain.4

Katrina is seen as the

tipping point towards US support for climate change abatement legislation.

Figure 5 - Some of the worst storms on record - such as Katrina have changed US public opinion towards

climate change

4 USA Today 30 July 2007 - Study links more hurricanes, climate change by Dan Vergano

In just 30 years the

occurrence of the

strongest hurricanes

- categories 4 and 5 -

has nearly doubled.

In 2005, a record

number of tropical

storms developed,

and in 2007, the

worst flooding in 60

years hit Britain.

Katrina is seen as the

tipping point towards

US support for

climate change

abatement

legislation.





11

Drought

While some parts of the world may find themselves deluged by increasing storms and rising

waters, other areas may find themselves suffering from drought. As the climate warms, experts

estimate drought conditions may increase by at least 66 percent. An increase in drought

conditions leads to a shrinking water supply and a decrease in quality agricultural conditions.

This puts food production supply in danger and leaves populations at risk for starvation.

Figure 6- Worldwide droughts, like that in a village northeast of Nairobi, expose rural communities to

food shortages.

Today, India, Pakistan and sub-Saharan Africa already experience droughts, and experts predict

precipitation could continue to dwindle in the coming decades. Estimates paint a dire picture.

The Intergovernmental Panel on Climate Change suggests that by 2020, 75 to 250 million

Africans may experience water shortages, and the agricultural output will decrease by 50%.

75-250 million people across Africa could face water shortages by 2020

Crop yields could increase by 20% in East and Southeast Asia, but decrease by up to30% in Central and South Asia

Agriculture fed by rainfall could drop by 50% in some African countries by 20205

Disease

Depending on where you live, you may use bug repellent to protect against West Nile virus or

Lyme disease. But have Westerners have woken up to the fact that they can contract tropical

diseases such as dengue fever?

Figure 7 - A f ield sample of mosquitoes that could carry West Nile virus pictured in California.

5BBC News 6 April 2007 Billions face climate change risk –

http://www.howstuffworks.com/framed.htm?parent=worst-effects-global-

warming.htm&url=http://news.bbc.co.uk/go/pr/fr/-/2/hi/science/nature/6532323.stm

As the climate

warms, experts

estimate drought

conditions may

increase by at least

66 percent.

The

Intergovernmental

Panel on Climate

Change suggests that

by 2020, 75 to 250

million Africans may

experience water

shortages, and the

continent'sagricultural output

will decrease by 50

percent.





12

Warmer temperatures along with associated floods and droughts are encouraging worldwide

health threats by creating an environment where mosquitoes, ticks, mice and other disease-

carrying creatures thrive. The World Health Organization (WHO) reports that outbreaks of new

or resurgent diseases are on the rise and in more disparate countries than ever before,

including tropical illnesses in once cold climates -- such as mosquitoes infecting Canadians with

West Nile virus.

While more than 150,000 people die from climate change-related sickness each year,

everything from heat-related heart and respiratory problems to malaria are on the rise [source:

The Washington Post]. Cases of allergies and asthma are also increasing. How is hay fever

related to global warming? Global warming fosters increased smog -- which is linked to

mounting instances of asthma attacks -- and also advances weed growth, a bane for allergy

sufferers.6

Competition over increasingly scarce food and water - conflicts

and War

Declining amounts of quality food, water and land may be leading to an increase in global

security threats, conflict and war.

National security experts analyzing the current conflict in Sudan's Darfur region suggest that

while global warming is not the sole cause of the crisis, its roots may be traced to the impact of

climate change, specifically the reduction of available natural resources .The violence in Darfur

broke out during a time of drought, after two decades of little-to-no rain along with rising

temperatures in the nearby Indian Ocean.

Figure 8 - The conflict in Darfur has been partly blamed on stresses caused by global warming.

Scientists and military analysts alike are theorizing climate change and its consequences such as

food and water instability pose threats for war and conflict, suggesting that violence and

ecological crises are entangled. Countries suffering from water shortages and crop loss become

vulnerable to security trouble, including regional instability, panic and aggression.7

6Washington Post Foreign Service Friday, May 5, 2006 Climate Change Drives Disease To New Territory - Viruses

Moving North to Areas Unprepared for Them, Experts Say - By Doug Struck7 SEATTLE POST-INTELLIGENCER EDITORIAL BOARD - Global Insecurity: Conflicts heat up - June 22, 2007

More than 150,000

people die from

climate change-

related sickness each

year.

Declining amounts of

quality food, water

and land may be

leading to an

increase in global security threats,

conflict and war.





13

Loss of Biodiversity

Species loss and endangerment is rising along with global temperatures. As many as 30 percent

of plant and animal species alive today risk extinction by 2050 if average temperatures rise

more than 2 to 11.5 degrees F (1.1 to 6.4 degrees C) [sources: EPA, Scientific American]. Such

extinctions will be due to loss of habitat through desertification, deforestation and ocean

warming, as well as the inability to adapt to climate warming. Wildlife researchers have noted

some of the more resilient species migrating to the poles, far north and far south to maintain

their needed habitat; the red fox, for example, normally an inhabitant of North America, is now

seen living in the Arctic.

Figure 9 - The red fox and has been affected by rising global temperatures.

Humans also aren't immune to the threat. Desertification and rising sea levels threaten human

habitats. And when plants and animals are lost to climate change, human food, fuel and income

are lost as well.8

Destruction of Ecosystems

Changing climatic conditions and dramatic increases in carbon dioxide will put our ecosystems

to the test, threatening supplies of fresh water, clean air, fuel and energy resources, food,

medicine and other matters we depend upon not just for our lifestyles but for our survival.

Figure 10 - Coral bleaching is only one tangible aspect of global warming's effect on ecosystems.

8 Scientific American - November 26, 2007 - State of the Science: Beyond the Worst Case Climate Change Scenario The

IPCC has declared man-made climate change "unequivocal." The hard part: trying to stop it by David Biello

As many as 30

percent of plant and

animal species alive

today risk extinction

by 2050 if averagetemperatures rise

more than 2 to 11.5

degrees F

Changing climatic

conditions and

dramatic increases incarbon dioxide will

put our ecosystems to

the test, threatening

supplies of fresh

water, clean air, fuel

and energy resources,

food, medicine and

other matters we

depend upon not just

for our lifestyles but

for our survival.





14

Evidence shows effects of climate change on physical and biological systems, which means no

part of the world is spared from the impact of changes to land, water and life. Scientists are

already observing the bleaching and death of coral reefs due to warming ocean waters, as well

as the migration of vulnerable plants and animals to alternate geographic ranges due to rising

air and water temperatures and melting ice sheets. Models based on varied temperature

increases predict scenarios of devastating floods, drought, wildfires, ocean acidification and

eventual collapse of functioning ecosystems worldwide, terrestrial and aquatic alike.

Economic Consequences

The costs associated with climate change rise along with the temperatures. Severe storms and

floods combined with agricultural losses cause billions of dollars in damages, and money isneeded to treat and control the spread of disease. Extreme weather can create extreme

financial setbacks. For example, during the record-breaking hurricane year of 2005, Louisiana

saw a 15 percent drop in income during the months following the storms, while property

damage was estimated at $135 billion [source: Global Development and Environment Institute,

Tufts University].

Figure 11 - New Orleans and Louisiana have faced the economic consequences with floods and hurricans

causing billions of dollars in damage.

In addition to the loss of life caused by Hurricane Katrina, New Orleans and Louisiana have

faced the economic consequences of billions of dollars in damage.

Economic considerations reach into nearly every facet of our lives. Consumers face rising food

and energy costs along with increased insurance premiums for health and home. Governments

suffer the consequences of diminished tourism and industrial losses, soaring energy, food and

water demands, disaster cleanup and border tensions.

Extreme weather can

create extreme

financial setbacks.

Governments suffer

the consequences of

diminished tourism

and industrial losses,

soaring energy, food

and water demands,

disaster cleanup and

border tensions.

According to the

Stern Report on

Climate Change the

cost of combating





15

And ignoring the problem won't make it go away. A recent study conducted by the Global

Development and Environment Institute at Tufts University suggests that inaction in the face of

global warming crises could result in a $20 trillion price tag by 2100.9

According to the Stern Report on Climate Change, arguably the most respected costing exercise

of climate change, the cost of combating climate change was 1% of global GDP, but the costs of

doing nothing was 5% - 20% of GDP.10

Link between global temperature increases and climate change

risks

This section draws on the research by Sir Nicholas Stern into the economics of climate change.

The Stern Report is regarded as the most authoritative report on this subject and has informed

the debate around paying for climate change. The graph below shows links the adverse

consequences of climate change with global temperature change.

Figure 12 - Link between global temperature increases and climate change risks

The previous section on the effects of global warming illustrates the effects of the heating up of

the planet. What is less obvious is the link between emitting carbon dioxide (and other

Greenhouse Gasses) emissions and increasing temperature. According to Climate Change

believers, manmade carbon emissions have been increasing from 280 parts per million from

pre-industrial times to about 385 ppm by volume currently. It is estimated that if the world

continues in its business as usual trend, that the amount of CO 2 in the air will reach anywhere

from 750 to 1,000 parts per million by 2100. The impact that this increase in GHG will have on

global mean temperatures is listed below.

9 Climate Change – the Costs of Inaction by Frank Ackerman and Elizabeth Stanton, Global Development and

Environment Institute, Tufts University10

BBC News – 31 October 2006 - Climate Change can’t wait - http://news.bbc.co.uk/1/hi/6096084.stm

It is estimated that if

the world continues

in its business as

usual trend, that the

amount of CO2 in the

air will reach

anywhere from 750

to 1,000 parts per

million by 2100.





16



shows graphically just why there is so much uncertainty about climate change. Due to the

difficulty in forecasting long term weather patterns, the confidence intervals showing the

correlation between greenhouse gas concentration and rise in global temperatures are so wide,

that climate sceptics argue that they are meaningless. These wide confidence intervals also

explain the rage that environmentalists feel towards the politicians for agreeing to reduce

global warming to a maximum of 2 degrees at Copenhagen. Until this is translated into

emissions reductions – see graph below, the commitment is so vague as to be meaningless.

Figure 14 – Shows the future global emissions savings trajectory that will be needed to reduce GHG’s to

550/450 ppm.11

The graph below shows the link between man-made emissions and concentration of carbon

dioxide and the emissions reductions that will be needed to reduce the world’s greenhouse gas

concentration to 450 ppm CO2e. It shows a major reduction in emissions is needed. It is

sobering to consider the fact that the process is coming close to becoming irreversible. It is also

11 The Stern Report as reported by the BBC - http://news.bbc.co.uk/1/shared/bsp/hi/pdfs/30_10_06_slides.pdf

It is also sobering to

note that 350 ppm is

the point of safety for

climate change.

Unless action is

taking this level may

never be attainable.





17

sobering to note that 350 ppm is the point of safety for climate change. Unless action is taking

this level may never be attainable. The graph below shows that the still high risk 450 ppm is an

exceptionally difficult target, with the world having to reduce emissions to 40% below 1990

levels.

Figure 15 - The Keeling Curve, which shows how GHG concentration has steadily increased over the last

fifty years to levels above safe limits estimated at 350 ppm by environmentalists. The Kyoto protocol is

based on 350 parts per million.



Pinpoint’s Guide to Carbon | How the world has responded to the Climate change

crisis

18

How the world has responded to the Climate change crisis

Chronology of the discovery of Global Warming and the Formation of Carbon

Markets12

1800-1870

Level of carbon dioxide gas (CO2) in the atmosphere, as later measured in ancient ice, is about

290 ppm (parts per million).

Mean global temperature (1850-1870) is about 13.6°C.

First Industrial Revolution, Coal, railroads, and land clearing speed up greenhouse gas emission,

while better agriculture and sanitation speed up population growth.

1824

Joseph Fourier calculates that the Earth would be far colder if it lacked an atmosphere.

1859

Tyndall discovers that some gases block infrared radiation. He suggests that changes in the

concentration of the gases could bring climate change.

1896

Arrhenius publishes first calculation of global warming from human emissions of CO2.

1897

Chamberlin produces a model for global carbon exchange including feedbacks.

1870-1910

Second Industrial Revolution. Fertilizers and other chemicals, electricity, and public health

further accelerate growth.

1914-1918

World War I; governments learn to mobilize and control industrial societies.

1920-1925

Opening of Texas and Persian Gulf oil fields inaugurates era of cheap energy.

1930s

Global warming trend since late 19th century reported.

12 Spencer Weart, ‘The Discovery of Global Warming’ , July 2009 - < http://www.aip.org/history/climate/timeline.htm>

[accessed 10 August 2009].

As early as 1859 it

was suggested that

changes in the

concentration of the

atmospheric gases

could bring climate

change.

Calendar argues in

1938 that CO₂

greenhouse global

warming is

underway, reviving

interest in the

question.



Pinpoint’s Guide to Carbon | Chronology of the discovery of Global Warming and the

Formation of Carbon Markets

19

Milankovitch proposes orbital changes as the cause of ice ages.

1938

Calendar argues that CO₂ greenhouse global warming is underway, reviving interest in the

question.

1939-1945

World War II. Grand strategy is largely driven by a struggle to control oil fields.

1945

US Office of Naval Research begins generous funding of many fields of science, some of which

happen to be useful for understanding climate change.

1950s:

Research on military applications of radar and infrared radiation promotes advances in

irradiative transfer theory and measurements. Studies conducted largely for military

applications give accurate values of infrared absorption by gases. Nuclear physicists and

chemists develop Carbon-14 analysis, useful for dating ancient climate changes, for detecting

carbon from fossil fuels in the atmosphere, and for measuring the rate of ocean turnover.

Development of digital computers affects many fields including the calculation of radiation

transfer in the atmosphere and makes it possible to model weather processes. Geological

studies of polar wandering help provoke Ewing-Donn model of ice ages. Improvements in

infrared instrumentation (mainly for industrial processes) allow very precise measurements of atmospheric CO₂.

1956

Ewing and Donn offer a feedback model for quick ice age onset.

Phillips produces a somewhat realistic computer model of the global atmosphere.

Plass calculates that adding CO₂ to the atmosphere will have a significant effect on the radiation

balance.

1957

Launch of Soviet Sputnik satellite. Cold War concerns support 1957-58 InternationalGeophysical Year, bringing new funding and coordination to climate studies.

Revelle finds that CO2 produced by humans will not be readily absorbed by the oceans.

1958

Telescope studies show a greenhouse effect raises temperature of the atmosphere of Venus far

above the boiling point of water.

Improvements in

infrared

instrumentation

(mainly for industrial

processes) allow very precise

measurements of

atmospheric CO₂.

In 1960 a young

scientist Charles

David Keeling, begins

tracking CO2 in the

Earth's atmosphere

and what becomes

known as the Keeling

curve is one of the

most important

scientific graphs ever

produced.





20

1960s:

Analysis of automobile and airplane exhaust pollution brings recognition of complex chemical

and light interactions in the atmosphere, especially involving ozone. Research on urban air

pollution, and related industrial and military applications, improves knowledge of aerosols and

atmospheric turbidity. Studies of fallout from nuclear weapons tests give improved picture of

circulation of aerosols in the stratosphere. Studies of fallout and pesticides foster worries that

human technology can bring world-wide disaster. Research on small-scale phenomena in

various fields of geophysics (cloud formation, soil moisture, etc.) provides information useful

for setting crucial parameters in global computer models. Studies of rice paddies and other

biological and agricultural entities show emission of large quantities of methane.

1960

Mitchell reports downturn of global temperatures since the early 1940s.

Young scientist Charles David Keeling, begins tracking CO2 in the Earth's atmosphere at two of

the world's last wildernesses - the South Pole and the summit of the Mauna Loa volcano in

Hawaii. What becomes known as the Keeling curve is one of the most important scientific

graphs ever produced, as it forms the first empirical basis on which the global warming

movement bases its claims. Keeling accurately measures CO₂ in the Earth's atmosphere and

detects an annual rise - the level is 315 ppm. Mean global temperature (five-year average) is

13.9°C.

1962

Cuban Missile Crisis, peak of the Cold War.

1963

Calculations suggest that feedback with water vapour could make the climate acutely sensitive

to changes in CO₂ level.

1965

Boulder, Colorado meeting on causes of climate change: Lorenz and others point out the

chaotic nature of climate system and the possibility of sudden shifts.

1966

Emiliani's analysis of deep-sea cores shows the timing of ice ages was set by small orbital shifts,

suggesting that the climate system is sensitive to small changes.

1967

International Global Atmospheric Research Program established, mainly to gather data for

better short-range weather prediction, but including climate.

Boulder, Colorado

meeting on causes of

climate change:

Lorenz and others

point out the chaotic

nature of climate

system and the

possibility of sudden

shifts.





21

Manabe and Wetherald make a convincing calculation that doubling CO₂ would raise world

temperatures a couple of degrees.

1968

Studies suggest a possibility of collapse of Antarctic ice sheets, which would raise sea levels

catastrophically.

1969

Astronauts walk on the Moon, and people perceive the Earth as a fragile whole.

Budyko and Sellers present models of catastrophic ice-albedo feedbacks.

1970s:

Neutrino experiments and new astrophysical theories suggest that the Sun could be a variable

star. Models of glacier flow, developed by generations of glaciologists, reveal a possibly

catastrophic instability in the Antarctic ice sheet. Fallout from nuclear weapons tests, slowly

penetrating the oceans, reveals deep circulation patterns. Studies of ancient reversals of the

Earth's magnetic field, measured in continental rocks and the ocean floor, provide a time-

marker for climate changes. Ocean geologists find huge deposits of methane-bearing ices in the

world’s sea beds. Continued rapid improvement of digital computers and software makes

possible fairly realistic models of complex systems like climate. Nimbus-III and other satellites,

designed chiefly for weather prediction, provide global data essential for climate modelling.

1970

First Earth Day Environmental movement attains strong influence, spreads concern about

global degradation.

Creation of US National Oceanic and Atmospheric Administration, the world's leading funder of

climate research.

Aerosols from human activity are shown to be increasing swiftly. Bryson claims they counteract

global warming and may bring serious cooling.

1971

SMIC conference of leading scientists reports a danger of rapid and serious global changecaused by humans, calls for an organized research effort.

Mariner 9 spacecraft finds a great dust storm warming the atmosphere of Mars, plus

indications of a radically different climate in the past.

Studies in 1968

suggest a possibility

of collapse of

Antarctic ice sheets,

which would raise

sea levels

catastrophically.





22

1972

Ice cores and other evidence show big climate shifts in the past between relatively stable

modes in the space of a thousand years or so, especially around 11,000 years ago.

1973

Oil embargo and price rise bring first "energy crisis".

1974

Serious droughts since 1972 increase concern about climate, with cooling from aerosols

suspected to be as likely as warming; scientists are doubtful as journalists talk of a new ice age.

1975

Warnings about environmental effects of airplanes leads to investigations of trace gases in the

stratosphere and discovery of danger to ozone layer.

Manabe and collaborators produce complex but plausible computer models which show a

temperature rise of several degrees for doubled CO2.

1976

Studies show that CFCs (1975) and also methane and ozone (1976) can make a serious

contribution to the greenhouse effect.

Deep-sea cores show a dominating influence from 100,000-year Milankovitch orbital changes,

emphasizing the role of feedbacks.

Deforestation and other ecosystem changes are recognized as major factors in the future of the

climate.

Eddy shows that there were prolonged periods without sunspots in past centuries,

corresponding to cold periods.

1977

Scientific opinion tends to converge on global warming, not cooling, as the chief climate risk in

next century.

1978

Attempts to coordinate climate research in US end with an inadequate National Climate

Program Act, accompanied by rapid but temporary growth in funding.

1979

Second oil "energy crisis." Strengthened environmental movement encourages renewable

energy sources, inhibits nuclear energy growth.

In 1976 deforestation

and other ecosystem

changes are

recognized as major

factors in the future

of the climate.

In 1977 scientific

opinion tends to

converge on global

warming, not

cooling, as the chief

climate risk in next

century.





23

US National Academy of Sciences report finds it h ighly credible that doubling CO₂ will bring 1.5-

4.5°C global warming.

World Climate Research Programme launched to coordinate international research.

1980s:

1981

Election of Reagan brings backlash against environmental movement to power. Political

conservatism is linked to scepticism about global warming.

IBM Personal Computer introduced. Advanced economies are increasingly delinked from

energy.

Hansen and others show that sulphate aerosols can significantly cool the climate, raising

confidence in models showing future greenhouse warming.

Some scientists predict greenhouse warming "signal" should be visible by about the year 2000.

1982

Greenland ice cores reveal drastic temperature oscillations in the space of a century in the

distant past.

Strong global warming since mid-1970s is reported, with 1981 the warmest year on record.

1983

Reports from US National Academy of Sciences and Environmental Protection Agency spark

conflict, as greenhouse warming becomes prominent in mainstream politics.

1985

Ramanathan and collaborators announce that global warming may come twice as fast as

expected, from rise of methane and other trace greenhouse gases.

Villach Conference declares consensus among experts that some global warming seems

inevitable, calls on governments to consider international agreements to restrict emissions.

Antarctic ice cores show that CO₂ and temperature went up and down together through past

ice ages, pointing to powerful biological and geochemical feedbacks.

Broecker speculates that a reorganization of North Atlantic Ocean circulation can bring swift

and radical climate change.

In 1981 some

scientists predict

greenhouse warming

"signal" should be

visible by about the

year 2000.

Strong global

warming since mid-

1970s is reported,

with 1981 the

warmest year on

record.

Villach Conference in

1985 declares

consensus among

experts that some

global warming

seems inevitable,

calls on governments

to consider

international

agreements to

restrict emissions.





24

1987

Montreal Protocol of the Vienna Convention imposes international restrictions on emission of

ozone-destroying gases.

1988

News media coverage of global warming leaps upward following record heat and droughts.

Toronto conference calls for strict, specific limits on greenhouse gas emissions; UK Prime

Minister Thatcher is first major leader to call for action.

Ice-core and biology studies confirm living ecosystems give climate feedback by way of

methane, which could accelerate global warming.

Intergovernmental Panel on Climate Change (IPCC) is established.

1989

Fossil-fuel and other U.S. industries form Global Climate Coalition to tell politicians and the

public that climate science is too uncertain to justify action.

1990

First IPCC report says world has been warming and future warming seems likely.

1991

Mt. Pinatubo explodes; Hansen predicts cooling pattern, verifying (by 1995) computer models

of aerosol effects.

Global warming sceptics claim that 20th-century temperature changes followed from solar

influences. (The solar-climate correlation would fail in the following decade.)

Studies from 55 million years ago show possibility of eruption of methane from the seabed with

enormous self-sustained warming.

1992

Conference in Rio de Janeiro produces UN Framework Convention on Climate Change, but US

blocks calls for serious action.

Study of ancient climates reveals climate sensitivity in same range as predicted independently

by computer models.

1993

Greenland ice cores suggest that great climate changes (at least on a regional scale) can occur

in the space of a single decade.

Toronto conference in

1988 calls for strict,

specific limits on

greenhouse gas

emissions; UK Prime

Minister Thatcher is

first major leader to

call for action.

In 1992 a conference

in Rio de Janeiro

produces UN

Framework

Convention on

Climate Change, but

US blocks calls for

serious action.

International

conference in 1997

produces Kyoto

Protocol, setting

targets to reduce

greenhouse gas

emissions if enough

nations sign onto a

treaty.





25

1994 UNFCCC enters into force and divides the world into Annex I (industrialised) and non-Annex I

(developing) countries.

1995

Second IPCC report detects "signature" of human-caused greenhouse effect warming declares

that serious warming is likely in the coming century.

Reports of the breaking up of Antarctic ice shelves and other signs of actual current warming in

Polar Regions begin affecting public opinion.

1997

Toyota introduces Prius in Japan, first mass-market electric hybrid car; swift progress in large

wind turbines and other energy alternatives.

International conference produces Kyoto Protocol, setting targets to reduce greenhouse gas

emissions if enough nations sign onto a treaty.

1998

"Super El Niño" causes weather disasters and warmest year on record (approximately matched

by 2005 and 2007). Borehole data confirm extraordinary warming trend.

Qualms about arbitrariness in computer models diminish as team’s model ice-age climate and

dispense with special adjustments to reproduce current climate.

1999

Criticism that satellite measurements show no warming are dismissed by National Academy

Panel.

Ramanathan detects massive "brown cloud" of aerosols from South Asia.

2000

Global Climate Coalition dissolves as many corporations grapple with threat of warming, but oil

lobby convinces US administration to deny problem.

Varieties of studies emphasize variability and importance of biological feedbacks in carbon

cycle, liable to accelerate warming.

2001

Third IPCC report states baldly that global warming, unprecedented since end of last ice age, is

"very likely," with possible severe surprises. End of debate among most scientists.

Bonn meeting, with participation of most countries but not the US, develops mechanisms for

working towards Kyoto targets.

1998 "Super El Niño"

causes weather

disasters and

warmest year on

record

(approximately matched by 2005 and

2007). Borehole data

confirm

extraordinary

warming trend.

In 2002 the United

Kingdom launches

the first regulated

Carbon Exchange.

British Airways uses

weight reduction fuel

efficiency measures

to sell their emissions

savings in the world’s

first carbon trade to a

Sussex pig farmer.





26

National Academy panel sees a "paradigm shift" in scientific recognition of the risk of abrupt

climate change (decade-scale).

Warming observed in ocean basins; match with computer models gives a clear signature of

greenhouse effect warming.

Marrakesh Accords lays out comprehensive rule book for meeting targets.

2002

The United Kingdom launches the first regulated Carbon Exchange. British Airways uses weight

reduction fuel efficiency measures to sell their emissions savings in the world’s first carbon

trade to a Sussex pig farmer.

2003

Numerous observations raise concern that collapse of ice sheets (West Antarctica, Greenland)

can raise sea levels faster than most had believed.

Deadly summer heat wave in Europe accelerates divergence between European and US public

opinion.

2004

In controversy over temperature data covering past millennium most conclude climate

variations were not comparable to the post-1980 warming.

First major books, movie and art work featuring global warming appear.

2005

Kyoto treaty goes into effect, signed by major industrial nations except US. Work to retard

emissions accelerates in Japan, Western Europe, US regional governments and corporations.

Hurricane Katrina and other major tropical storms spur debate over impact of global warming

on storm intensity.

2007

Fourth IPCC report warns that serious effects of warming have become evident; cost of

reducing emissions would be far less than the damage they will cause.

Greenland and Antarctic ice sheets and Arctic Ocean sea-ice cover found to be shrinking faster

than expected.

2008

First Kyoto commitment period begins.

In 2005 the Kyoto

treaty goes into

effect, signed by

major industrial

nations except US.

Work to retard

emissions accelerates

in Japan, Western

Europe, US regional

governments and

corporations.





27

2009

Many experts warn that global warming is arriving at a faster and more dangerous pace than

anticipated just a few years earlier.

Level of CO2 in the atmosphere reaches 385 ppm.

Mean global temperature (five-year average) is 14.5°C, the warmest in hundreds, perhaps

thousands of years.

The much-hyped Copenhagen conference fails to deliver anything more than a vague and

disputed agreement that the world would not increase average temperatures by more than 2

degrees. Critics complain that this is virtually impossible to measure – see Figure 13 – and that

it was not translated into specific emissions reductions targets.

The American congress struggles to turn the Waxman-Markey bill that sets mandatory federal

greenhouse-gas emissions controls into legislation – which sets targets of 17% reduction of

Green House gasses from their 2005 levels – by 2020, which is equivalent to 4% below their

1990 levels.

2012

First Kyoto commitment period ends.

Note that this summary was provided from the BBC website

In 2009 many experts

warn that global

warming is arriving

at a faster and more

dangerous pace than

anticipated just a few

years earlier.

Mean global

temperature (five-

year average) is

14.5°C, the warmest

in hundreds, perhaps

thousands of years.





28

Greenhouse Gases Controlled by the Kyoto Protocol and their

impact on Global Warming13

Six Greenhouse gases are regulated by the Kyoto Protocol, as they are emitted in significant

quantities by human activities and contribute to climate change. The six regulated gases are

carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydro fluorocarbons (HFCs),

perfluorocarbons (PFCs) and sulphur hexafluoride (SF6).

Figure 16 – Global anthropogenic greenhouse gas emissions in the year 2000 broken down through 8

different sectors of activity.14

Carbon Dioxide (CO2) - Carbon dioxide makes up a small but growing component of the

atmosphere. Its current concentration is 0.0385%, or 385 parts per million (ppm). Two hundred

years ago, its concentration was only about 280 ppm.

Figure 17 - Atmospheric concentration of carbon dioxide since 175015

13 Louise Grøndahl, ‘Greenhouse gases’ , <http://www.ens.dk/en-

US/ClimateAndCO2/ClimateChange/GreenhousEffect/GreenhouseGases/Sider/Forside.aspx - [accessed 10 August

2009] 14

Greenhouse gases, <http://www.solarnavigator.net/greenhouse_gases.htm> - [accessed 10 August 2009]

Six Greenhouse gases

are regulated by the

Kyoto Protocol, as

they are emitted in

significant quantities

by human activities

and contribute to

climate change.





29

At very small concentrations, carbon dioxide is a natural and essential part of the atmosphere,

and is required for the photosynthesis of all plants.

Carbon dioxide enters and leaves the atmosphere from a number of natural sources and sinks

at the earth’s surface. In the absence of human influences, the fluxes of carbon dioxide into and

out of the atmosphere were largely in balance. The burning of carbon-containing fuels (coal, oil

and gas) has considerably increased the concentration of the CO₂ in the atmosphere. Scientists

can directly measure the concentration of carbon dioxide in the atmosphere; they can also

determine atmospheric carbon dioxide concentrations in the past by, for example, measuring

the gas in tiny air bubbles trapped for many thousands of years in deep layers of polar ice.

Large amounts of carbon dioxide are transferred between the atmosphere, oceans and landvegetation in the natural global carbon cycle. Anthropogenic emissions are adding to the

amount of CO₂ in the atmosphere, and causing changes in the amount taken up by the oceans

and vegetation.

Methane (CH 4 ) - Methane occurs naturally in the atmosphere in very small concentrations.

Most of it presumably derives from the anaerobic breakdown of organic material in marshes.

Figure 18 - Atmospheric concentration of methane since 175016

Very large quantities of methane are bound in the frozen tundra in Canada and Siberia. There

are also large quantities of methane bound as methane hydrates (a type of ice containing

methane) in the ocean floor in the Arctic and more temperate regions.

15 Climate & Ozone, <http://www.ace.mmu.ac.uk/Resources/Teaching_Packs/Key_Stage_4/Climate_Change/02p.html>

- [accessed 10 August 2009] 16

The Garnaut Climate Change Review , <http://www.garnautreview.org.au/chp2.htm> - Figure 2.1 - [accessed 10

August 2009]

In the absence of

human influences,

the fluxes of carbon

dioxide into and out

of the atmosphere

were largely in

balance.

The burning of

carbon-containing

fuels (coal, oil and

gas) has considerably

increased the

concentration of the

CO₂ in the

atmosphere.





30

If the tundra begins to thaw or the temperature of the ocean floor rises due to global warming,

this methane may be released, making a further contribution to global warming.

Anthropogenic methane emissions are primarily due to agriculture. Methane is released from

the digestive systems of cows and other livestock, and from manure treatment operations

involving liquid, semi-liquid and solid manure. Some methane emissions also derive from wet

rice fields.

Landfills are another anthropogenic source where methane is formed when organic material is

broken down by anaerobic microorganisms.

Figure 19 - The emissions of the average family of pigs is 9.2 tonnes per year of Methane

Methane is also emitted in relation to energy consumption. For example, methane is the

primary component of natural gas, leading to emissions if motor and gas furnace combustion is

not complete or if natural gas pipelines leak. Methane is also released from coalmines and coal

stores.

Methane has a more powerful impact on the atmospheric greenhouse effect than carbon

dioxide. Yet methane breaks down relatively quickly (after approx. 12 years), with the result

that a reduction in methane emissions would have a rapid effect.

If the tundra begins

to thaw or the

temperature of the

ocean floor rises due

to global warming,

this methane may be

released, making a

further contribution

to global warming.

Methane has a more

powerful impact on

the atmospheric

greenhouse effect

than carbon dioxide.

Yet methane breaks

down relatively

quickly (after approx.

12 years), with the

result that a

reduction in methane

emissions would have

a rapid effect.





31

Nitrous Oxide (N 2O) - Like methane, agriculture is the primary source of anthropogenic

nitrous oxide emissions. These arise when soil-borne bacteria convert nitrogen from fertilizer

and manure into nitrous oxide. Combustion processes and the use of catalytic converters also

contribute to nitrous oxide emissions.

Figure 20 - Atmospheric concentration of Nitrous Oxide since 175017

The total increase in the atmospheric concentration of nitrous oxide due to anthropogenic

emissions is a relatively modest 17 per cent. However, it is still important to reduce emissions,

as nitrous oxide has a long lifetime in the atmosphere (120 years). As a result, the global

warming potential of nitrous oxide is around 310 times greater than that of CO2.

Halocarbons - Halocarbons are a group of compounds which are typically produced artificially

for industrial purposes. Even though the concentration of halocarbons in the atmosphere is

very small, they contribute to approximately 13 per cent of the anthropogenic increase in the

greenhouse effect.

The most lucrative and controversial greenhouse gasses

The group includes HFCs (hydro fluorocarbons), PFCs (perfluorocarbons), SF6 (sulphur

hexafluoride) – this group also includes CFCs and HCFCs. CFCs (previously used to produce

insulating foam for refrigerators, etc.) are best known for their part in breaking down the ozone

layer.

International agreements were established under the Montreal Protocol to phase out the use

17 The Garnaut Climate Change Review , <http://www.garnautreview.org.au/chp2.htm> - Figure 2.1 - [accessed 10

August 2009]

As nitrous oxide has a

long lifetime in the

atmosphere (120

years), the global

warming potential of

nitrous oxide is

around 310 times

greater than that of

CO2.

The greenhouse

effect of halocarbons

varies greatly, but

they are generally

very powerful

greenhouse gases

with an effect per

molecule several

thousand times more

powerful than that of

carbon dioxide.





32

of CFC gases in order to protect the ozone layer. Concentrations are therefore rising more

slowly, or even falling, because emissions are being reduced. However, concentrations of the

gases used to replace CFCs (HCFCs and HFCs) and other industrial gases (such as PFCs and SF6)

are increasing, and these are also powerful greenhouse gases.

The greenhouse effect of halocarbons varies greatly, but they are generally very powerful

greenhouse gases with an effect per molecule several thousand times more powerful than that

of carbon dioxide. Atmospheric lifetimes also vary greatly, from 50 to 50,000 years. Although

their concentrations in the atmosphere are very small, their effect is significant, especially for

halocarbons with long atmospheric lifetimes.

The most potent greenhouse gas is HFC-23, a by-product of HCFC-22, a chemical used in,

among other things, fridges. It is now mostly banned in the developed world. Its global-

warming effect is, tonne for tonne, 11,700 times greater than that of carbon dioxide, so it is

good to get rid of it, and cheap, too; capturing it and burning it off costs less than €1 for the

equivalent of one tonne of carbon dioxide. These days China produces most of the world's HFC-

23. That—along with the fact that the Chinese government is efficient to deal with —explains

why 53% of the total volume of CDM projects in 2006—worth around €3.5 billion in total—

went to China.

The very cheapness of cutting emissions of HFC-23 makes the trade controversial. Credits

costing less than €1 to produce have been sold on the market for up to €11. Factories have

found that their damaging by-product, HFC-23, can be more valuable than their main output.

The Chinese government, realising how much money there is in this business, has imposed a tax

of 65% on revenues from it, and in February this year it launched its own $2 billion CDM fund.

So European consumers, who are paying for greenhouse-gas abatement through their

electricity and other bills, are contributing billions of dollars to the Chinese government's

coffers via the CDM.

Easy options—HFC-23 and other fabulously dirty (i.e., profitable) industrial gases—will soon run

out. Guy Turner at New Carbon Finance reckons that the days of the CER that costs less than €1

to produce are over, and that the range is now more like €1-5. But there is plenty of scope at

that level. China's industrialisation is a fast and dirty business, and there will be no shortage of

greenhouse gases produced there for rich-country money to clean up.

That is part of the problem. Of the 65% of companies surveyed by Point Carbon in 2006 which

claimed that the ETS had led them to abate their emissions (up from 15% the previous year),

most were planning to buy credits rather than cut their own emissions. Yet the ETS was

intended to cut European emissions as well as Chinese ones.

The most potent

greenhouse gas is

HFC-23 of which

China is the biggest

contributor.



Pinpoint’s Guide to Carbon | Formation of Carbon Markets 33

This is happening on a small scale. At times the carbon price has made it worth power

companies' while to switch from dirty fuels to cleaner gas. “We massively reduced our lignite

production when the CO2 price was at its height,” says Alfred Hoffmann, head of portfolio

management in Scandinavia and Germany for Vattenfall, a Swedish power company. Lignite is

dirtier than black coal. But then gas prices rose, making switching less attractive.

Global Warming Potential of Green House Gasses covered byKyoto 18

Gases contribute to global warming by both their ability to trap heat and their mean

atmospheric lifetime. According to the IPCC report “Climate Change 2001: The Scientific Basis”

the Global Warming Potential (GWP) of a greenhouse gas is measured against that of carbon

dioxide which is given a GWP of 1.

Figure 21 - There are six groups of GHG’s controlled under the Kyoto Protocol, each with increasingly

significant impact on Global Warming18

Formation of Carbon Markets19

In 1992 the conference on global warming in Rio de Janeiro produced the UN Framework

Convention on Climate Change (UNFCCC). In 1997, the UNFCCC issued the Kyoto Protocol which

laid out target emission reductions of carbon dioxide for developed countries, and instituted

some mechanisms by which those targets could be achieved. Some industrializing developing

18 Jonathan Kornick, ‘South Pole Pocket Guide to Carbon’ , p.9

19 Janette Bulkan, ‘Sunday Stabroek’ – ‘When did carbon become tradable and what is actually traded’ - <

http://www.stabroeknews.com/2009/features/07/31/53115/> - [accessed 10 August 2009]

Gases contribute to

global warming by

both their ability to

trap heat and their

mean atmospheric

lifetime.




countries like China, India and Brazil resisted emission targets, arguing that developed countries

were historically responsible for the accumulation of greenhouse gases in the atmosphere.

Initially there was little progress made at the Kyoto meeting: firstly, the targets suggested for

developed countries to reduce their carbon emissions were voluntary, not mandatory.

Secondly, the United States, the largest emitter of GHGs, signed but did not later ratify the

Kyoto Protocol.

The Clean Development Mechanism (CDM) and the Joint Implementation Mechanism (JI) were

set up under the Kyoto Protocol to manage the buying and selling of carbon credits between

countries. The idea is that global carbon emissions can be regulated and reduced under a cap-

and-trade programme: countries submit an inventory of national GHGs, and work out ways of reducing their emissions as part of a concerted global effort to stabilize global warming.

Nationally a developed country would identify the principal emitters within its borders, and set

individual reduction targets for each factory or industrial sector, with penalties for non-

compliance. In turn, the emitter could reduce its greenhouse gas emissions by retrofitting

existing GHG-emitting plants. There would be investments in green technologies, etc. An

additional measure allowed developed countries to offset their GHG emissions by supporting

projects in developing countries that reduced carbon emissions, measurable in CDM-approved

credits. JI emissions reduction schemes are those that take place between two Annex 1

countries, that is, countries with binding GHG emissions reduction targets.

The aim of the carbon markets is to allow market mechanisms to drive

industrial and commercial processes in the direction of low emissions or less

"carbon intensive" approaches than are used when there is no cost to

emitting carbon dioxide and other GHGs into the atmosphere. Since GHG

mitigation projects generate credits, this approach can be used to finance

carbon reduction schemes between trading partners and around the world.

There are also many companies that sell carbon credits to commercial and individual customers

who are interested in lowering their carbon footprint on a voluntary basis. These carbon

offsetters purchase the credits from an investment fund or a carbon development companythat has aggregated the credits from individual projects. The quality of the credits is based in

part on the validation process and sophistication of the fund or development company that

acted as the sponsor to the carbon project. This is reflected in their price; voluntary units

typically have less value than the units sold through the rigorously-validated Clean

Development Mechanism.

The idea is that

global carbon

emissions can be

regulated and

reduced under a cap-

and-trade

programme.

There are two distinct

types of Carbon

Credits: Carbon

Offset Credits (COC's)

and Carbon

Reduction Credits

(CRC's).

http://en.wikipedia.org/wiki/Carbon_dioxide

http://en.wikipedia.org/wiki/Carbon_project

http://en.wikipedia.org/wiki/Carbon_footprint

http://en.wikipedia.org/wiki/Carbon_offset



http://en.wikipedia.org/wiki/Clean_Development_Mechanism







http://en.wikipedia.org/wiki/Carbon_footprint


http://en.wikipedia.org/wiki/Carbon_dioxide




There are two distinct types of Carbon Credits: Carbon Offset Credits (COC's) and Carbon

Reduction Credits (CRC's). Carbon Offset Credits consist of clean forms of energy production,

wind, solar, hydro and biofuels. Carbon Reduction Credits consists of the collection and storage

of Carbon from our atmosphere through reforestation, forestation, ocean and soil collection

and storage efforts. Both approaches are recognized as effective ways to reduce the Global

Carbon Emissions crises.

Figure 22 – Value of global carbon transactions ($Bn)20

The European Carbon Trading market is now bigger than the European Coal Market and about

1/3rd

of the size of the European natural gas market.


2004 2005 2006 2007 2008 2009

Others 0 0 0.8 1.2 4.7 6.9

CDM 0 2.7 7.8 13.4 24.9 28.9

Europe 7.8 8.4 24.3 50.2 70.5 85.6

0

20

40

60

80

100

120

140

G l o b a l c a r b o n t r a n s a c t i o n s i n U S

$ b i l l i o n s

The rapid growth of carbon trading

Carbon Offset Credits

consist of clean forms

of energy production,

wind, solar, hydro

and biofuels.

Carbon Reduction

Credits consists of the

collection and

storage of Carbon

from our atmosphere

through

reforestation,

forestation, ocean

and soil collection

and storage efforts.



Pinpoint’s Guide to Carbon | The most cost-effective ways of saving carbon/GHG 37

However, in up to a third of cases no carbon price is needed: Nowhere is this point better

illustrated than in the South African mining industry, which along with its associated

beneficiation industries, uses 52% of South Africa’s electricity to produce 6.4% of GDP.22

South

Africa faces grave electricity shortages by 2012, due to generation capacity issues and the

mining industry was immediately told to cut its consumption by 10% on pain of draconian fines

up to 10,000% higher than average electricity prices they were incurring. A study by the UCT

Energy Resource Unit, showed that this target could be achieved with a four month payback on

moving over to electric drills from hydraulic, which would alone achieve half the target – saving

$250 billion in electricity bills and over $1.5 billion in capital expenditure by the state owned

utility. The balance could be made up by better utilisation of equipment increasing the

production on fixed electricity consumption overhead, better ventilation and HVAC

management as well as energy efficient lighting.

Case study into profitable energy saving - How a boring gadget

saved $2 billion-worth of electricity23

“The dullest” bits of the many electronic devices people plug into mains sockets in their houses

and offices are the power adaptors. These are boxes that sit between the plug and the device,

or are sometimes integrated with the plug. Their job is to convert high-voltage alternating

current from the mains into low-voltage direct current for mobile phones, laptops, iPods and

other electronic gadgets. About 5 billion such devices are in use worldwide.

Until recently the conversion was made using copper wire. Typically, half the power they drew

from the wall, and sometimes as much as 80%, would be lost in conversion. As a result,

electricity bills and carbon emissions were both higher than necessary.

Making the conversion with integrated circuits is much more efficient, with as little as 20% of

the power being lost. The technology for this has been available for many years and costs only

around 30% more than the copper-wire method, but the market gave manufacturers little

incentive to switch. Power adaptors are cheap, usually costing $2 or less. Appliance-makers

tend to buy them from companies in Taiwan or China. Contracts are won and lost on a fraction

of a cent per unit. And since consumers do not think about power consumption when choosing

a phone or laptop, manufacturers tended to stick with copper wire.

Seven years ago the Natural Resources Defence Council and Ecos Consulting, an energy

consultancy, got manufacturers, power utilities and the state and federal governments

22 Stephen Larkin Perspectives on the South African Power Crisis – 16 April 2008

23 The Economist Print Addition - A special report on climate change and the carbon economy - Vampires on a diet -

Dec 3rd 2009

“The dullest” bits of

the many electronic

devices are the power

adaptors and these

are called vampires in

the industry –

because many types

– such as mobile

phone chargers and

laptop adapter

consume 50% - 80%

of electricity, when

the power source is

on, but the applianceis switched off.



Pinpoint’s Guide to Carbon | The most cost-effective ways of saving carbon/GHG 38

together to talk about shifting to integrated circuits. It took two years to get regulations in

place in America. Once adopted in the world’s biggest market, integrated-circuit adaptors

spread swiftly everywhere, because manufacturers cannot afford to make things that cannot be

sold in America. For consumers the switch has meant lower power bills and smaller, lighter

power adaptors. For the world as a whole it has meant a drop in global power consumption

worth around $2 billion a year—saving 13m tonnes of CO₂ annually worldwide, the equivalent

of closing down eight coal-fired power stations.

There are plenty more such savings available, says Chris Calwell of Ecos Consulting. The biggest

potential is in large-screen televisions, cable and satellite set-top boxes and battery chargers.

Millions of devices—known to energy-efficiency experts as “vampires”—continue to suck inelectricity even when the device that sits in them is fully charged.”

Figure 24 - How to get a better return than the post office offers – an energy saving plug on a

laptop/mobile phone and especially a TV will deliver returns of in excess of 300% at current UK

electricity prices

Changing to

integrated-circuit

adaptors has meant a

drop in US power

consumption worth

around $2 billion a

year —saving 13m

tonnes of CO₂

annually in the

United States alone,

the equivalent of

Jamaica’s annual

emissions.



Pinpoint’s Guide to Carbon | Carbon Offsetting - Market Overview 39

Carbon Offsetting - Market Overview24

In order to understand the carbon markets, it is important to recognize the differences

between two fundamentally different types of carbon commodities, allowances and offsets,

and the systems that create them. Allowances are created by cap-and-trade systems. Offsets or

carbon credits are created by baseline-and-credit systems (also called a project-based system).

Under a cap-and-trade system, an overall cap is set to achieve emissions reductions. Each of

the participants within a cap-and-trade system (usually countries, regions or industries) is

allocated a certain number of allowances based on an emissions reduction target. In a cap-and-

trade system the cap constitutes a finite supply of allowances, set by regulation. These

allowances are then neither created nor removed, but merely traded among participants. This

finite supply creates a scarcity and drives the demand and price for allowances.

A cap-and-trade system aims to internalise (some of) the costs of emissions, and thus drives

participants to seek cost-effective means to reduce their emissions. The challenge in a cap-and-

trade programme is to determine the appropriate level at which to set the cap, which should be

stringent enough to induce the desired level and rate of change, while minimizing overall

economic costs. A baseline-and-credit system in contrast, does not entail a finite supply of

allowances. It does not involve projects that are implemented under the umbrella of a cap-and-

trade system. Rather, more credits are generated with each new project implemented. These

credits can then be used by buyers to comply with a regulatory emission target, to “offset” an

emitting activity (such as an airline flight), or to be a “carbon neutral” organisation with zero

“net” emissions.

In a baseline-and-credit system a carbon offset buyer can only claim to offset his emissions if

the reductions come from a project that would not have happened anyway - this concept is

called additionality . Under a cap-and-trade system it is the cap and the allocations rules that

drives demand, and determines the level of emissions reduction. Activities that are undertaken

in response to the pressure of the cap therefore do not need to prove that they are additional.

Cap-and-trade systems often allow for a certain number of offsets to come from emissions

reductions that are generated by projects that are not covered under the cap (i.e. from baseline

and-credit systems). Under a cap-and-trade system the covered sources (for example power

producers) have an obligation to reduce their emissions. If these covered sources cannot buy

offsets, they will have to reduce their emissions in some other way (e.g. by buying allowances

or by increasing efficiency in their plants). If they can buy offsets and these come from projects

24 Anja Kollmuss, Helge Zink, Clifford Polycarp, Tyler Kemp-Benedict '" Making Sense of the Voluntary Carbon Market: A

Comparison of Carbon Offset Standards” – March 2008 - < http://www.caaltd.org/projects.aspx> - [accessed 11 A ugust

2009]

There are two

fundamentally

different types of

carbon commodities;

Allowances and

offsets.

Allowances are

created by cap-and-

trade systems

Offsets or carbon

credits are created by

baseline-and-credit

systems



Pinpoint’s Guide to Carbon | Carbon Offsetting - Market Overview 40

that are fully additional, then the offsets replace reductions that the cap-and-trade participant

would have had to otherwise achieve himself. In other words, under a cap-and-trade system,

offsets do not lead to emissions reductions beyond the target set by the cap but only cause a

geographical shift in where the emissions reduction occurs. Therefore, non-additional offsets

sold into a cap-and trade system will actually lead to an increase in emissions since the buyer

will not have reduced his emissions and the seller will not have offset this increase in emissions.

In a voluntary system, on the other hand, individuals and companies are not required to reduce

their emissions. We can therefore assume that they would only do so to a limited extent. The

availability of offsets enables them to go beyond what they would have done anyway to reduce

their own emissions. The availability of offsets in the voluntary market may therefore lead to

additional emission reductions that would not have happened without the availability of

offsets. Buyers in the voluntary market can only claim a unique, incremental “offset” reduction

if the reduction is additional. Yet even without additionality tests, the offset market might

induce reductions that would not have happened otherwise, because the market will bring

investment to some projects at the margin. But without clearly established additionality, there

is no one-to-one equivalence between each credit sold and an additional tonne of reductions.

Distinguishing Features of Cap-and-Trade and Baseline-and-Credit Systems

Features Cap-and-Trade Baseline-and-credit

Exchanged commodity Allowances Carbon Credits

Quantity available Determined by overall

cap

Generated by each new project

Market dynamic Buyers and sellers have

competing and mutually

balanced interests in

allowances trades.

Buyers and sellers both have an

interest in maximizing the offsets

generated by a project.

Sources Covered Usually high emitters

such as the energy sector

and energy intensive

industries

As defined by each standard. Not

limited to high emitting sectors.

Independent third party Minor role in verifying

emissions inventories.

Fundamental role in verifying the

credibility of the counterfactual

baseline and thus the

authenticity ("additionality") of the claimed emission reductions.

Emissions Impact of trade Neutral, as is ensured by

zero-sum nature of

allowance trades.

Neutral, providing projects are

additional. Otherwise, net

increase in emissions.

Possible decrease in emissions in

the voluntary market.

Figure 25 - Distinguishing Features of Cap-and-Trade and Baseline-and-Credit Systems

The availability of

offsets in the

voluntary market

may therefore lead to

additional emission

reductions that

would not have

happened without

the availability of

offsets.



Pinpoint’s Guide to Carbon | Compliance Market 41

Cap-and-trade systems exist almost exclusively in the compliance market. Baseline-and-credit

systems exist both in the compliance and in the voluntary market. All currently established cap-

and trade programs allow for a limited use of offsets and have an associated offset programme:

Distinguishing Features of Cap-and-Trade and Baseline-and-Credit Systems

Type of Programme Cap-and-Trade Associated Baseline-and-Credit

(Offset) Programme

Compliance Market Emissions Trading under

Kyoto Protocol

CDM & JI

EU-ETS CDM & JI

RGGI RGGI Offset Programme

Western Climate

Initiative

Under development

Voluntary Market Chicago ClimateExchange (CCX)

CCX Offset Programme

Figure 26 - Distinguishing Features of Cap-and-Trade and Baseline-and-Credit Systems

Except for the CCX Offset Programme, voluntary offset standards are independent of and

function outside of a cap-and-trade system.

Compliance Market

Carbon markets exist both under compliance schemes and as voluntary programs. Compliance

markets are created and regulated by mandatory national, regional or international carbon

reduction regimes.

Cap-and-Trade Systems

Emissions Trading Under the Kyoto Protocol

The UNFCCC established a cap-and-trade system that imposes national caps on the greenhouse

gas emissions of developed countries that have ratified the Protocol (called Annex B countries).

Each participating country is assigned an emissions target and the corresponding number of

allowances – called Assigned Amount Units, or AAUs. On average, this cap requires

participating countries to reduce their emissions 5.2% below their 1990 baseline between 2008

and 2012. Countries must meet their targets within a designated period of time by:

reducing their own emissions, and/or

trading emissions allowances with countries that have a surplus of allowances. This

ensures that the overall costs of reducing emissions are kept as low as possible; and/or

meeting their targets by purchasing carbon credits: to further increase cost-

effectiveness of emissions reductions, the Kyoto Protocol also established so-called

Cap-and-trade

systems exist almost

exclusively in the

compliance market.

Except for the CCX

Offset Programme,

voluntary offset

standards are

independent of and

function outside of a

cap-and-trade

system.

On average, this cap

requires participating

countries to reduce

their emissions 5.2%

below their 1990

baseline between

2008 and 2012.



Pinpoint’s Guide to Carbon | Compliance Market 42

Flexible Mechanisms: the Clean Development Mechanism (CDM) and Joint

Implementation (JI).

European Union Emissions Trading Scheme

The Kyoto Protocol enables a group of several Annex I countries to join together and form a so-

called ‘bubble’ that is given an overall emissions cap and is treated as a single entity for

compliance purposes. The 15 original member states of the EU formed such a ‘bubble’ and

created the EU Emissions Trading Scheme (EU-ETS). The EU-ETS is a company-based cap-and

trade system which came into force in 2005. Under this cap-and-trade scheme, emissions are

capped and allowances may be traded among countries.

There are currently several cap-and-trade compliance schemes that operate independently of the Kyoto Protocol. All of these also incorporate a baseline-and-credit component to their

programme.

Three examples are:

New South Wales GHG Abatement Scheme (NSW GHGAS)

The NSW GHGAS in Australia aims to reduce greenhouse gas emissions from the power sector.

It achieves this by using project-based activities to offset the production of greenhouse gas

emissions. The programme was established in 2003.

Regional Greenhouse Gas Initiative (RGGI)

RGGI is a multi-state regional cap-and-trade programme for the power sector in the Northeast

United States. The RGGI cap-and-trade programme is proposed to start in 2009 and lead to a

stabilisation of emissions at current levels (an average of 2002-2004 levels) by 2015, followed

by a 10% reduction in emissions between 2015 and 2020. Some of the programme reductions

will be achieved outside the electricity sector through emissions offset projects. Offsets serve

as the primary cost containment mechanism in RGGI; if allowance prices rise above trigger

prices, the ability for regulated sources to use offsets increases.

Western Climate Initiative (WCI)

The WCI is a collaboration of 5 Western US states and British Columbia launched in early 2007.

The initiative set a goal of reducing greenhouse gas emissions by 15% from 2005 levels by 2020

and requires partners to develop a market-based, multi-sector mechanism to help achieve that

goal, and participate in a cross-border greenhouse gas (GHG) registry.

This mechanism is the

first global,

environmental

investment and credit

scheme of its kind,

and provides a

standardized

emission offset

instrument, CERs.



Pinpoint’s Guide to Carbon | The Clean Development Mechanism 43

The Clean Development Mechanism25

The Clean Development Mechanism, as defined in Article 12 of the Kyoto Protocol, allows a

country currently making a transition to a market economy (Annex B party) with emission-

reduction or emission-limitation commitments to implement an emission-reduction project in

developing countries. These projects can earn CER (certified emission reduction) credits which

are saleable and can count towards meeting Kyoto targets. This mechanism is the first global,

environmental investment and credit scheme of its kind, and provides a standardized emission

offset instrument, CERs. It helps sustainable development and emissions reductions as well as

assists industrialized countries meet their emission or limitation targets.

A CDM project activity might involve, for example, a rural electrification project using solar

panels or the installation of more energy-efficient boilers.

A CDM project must provide emission reductions that are additional to what would otherwise

have occurred. The projects qualify through rigorous and public registration and issuance

processes. Approval is given by the Designated National Authorities. Public funding for CDM

project activities must not result in the diversion of official development assistance.

The mechanism is overseen by the CDM Executive Board, answerable ultimately to the

countries that have ratified the Kyoto Protocol.

Figure 27 - Most CDM projects are located in Asia and Latin America – August 200926

25United Nations Framework Convention on Climate Change,

<http://unfccc.int/kyoto_protocol/mechanisms/clean_development_mechanism/items/2718.php> - Clean

Development Mechanism - [accessed 10 August 2009] 26

UNFCCC, CDM Statistics – Registered Project activities by host party

<http://cdm.unfccc.int/Statistics/Registration/NumOfRegisteredProjByHostPartiesPieChart.html> - [a ccessed 11 August

2009]

Note that a project

activity can be linked

to more than one

sectoral scope.



Pinpoint’s Guide to Carbon | The kinds of projects qualify under the CDM? 44

Figure 28 – Distribution of CDM Project activities by scope (Note that a project activity can be linked to

more than one sectoral scope) – August 200927

The kinds of projects qualify under the CDM?28

CDM projects need to seek approval by the CDM Executive Board. A number of rules and

conditions will apply, some to all project types and others specifically to forestation and

reforestation projects. While several of the detailed procedures to be applied to CDM forestry

projects are still to be agreed, the overall framework is already established for approving

projects and accounting for the carbon credits generated:

1. Only areas that were not forest on 31st December 1989 are likely to meet the

CDM definitions of afforestation or reforestation.

2. Projects must result in real, measurable and long-term emission reductions, as

certified by a third party agency ('operational entities' in the language of the

convention). The carbon stocks generated by the project need to be secure over

the long term (a point referred to as 'permanence'), and any future emissions that

might arise from these stocks need to be accounted for.

3. Emission reductions or sequestration must be additional to any that would occur

without the project. They must result in a net storage of carbon and therefore a

net removal of carbon dioxide from the atmosphere. This is called 'additionality'

27UNFCCC, CDM Statistics – Registered Projects by scope <

http://cdm.unfccc.int/Statistics/Registration/RegisteredProjByScopePieChart.html> - [accessed 11 August 2009]28

CDMCapacity.org – ‘What are the CDM rules and conditions’ <

http://www.cdmcapacity.org/what_is_CDM/rules_conditions.html> - [accessed 11 August 2009]

Projects must result

in real, measurable

and long-term

emission reductions.

Only projects starting

from the year 2000

onwards are eligible.

Comment [T1]: Is this correct? Poss.

Forestation?




and is assessed by comparing the carbon stocks and flows of the project activities

with those that would have occurred without the project (its 'baseline'). For

example, the project may be proposing to afforest farmland with native tree

species, increasing its stocks of carbon. By comparing the carbon stored in the

'project' plantations (high carbon) with the carbon that would have been stored in

the 'baseline' abandoned farmland (low carbon) it is possible to calculate the net

carbon benefit. There are still a number of technical discussions regarding the

interpretation of the 'additionality' requirement for specific contexts.

4. Projects must be in line with sustainable development objectives, as defined by

the government that is hosting them.

5.

Projects must contribute to biodiversity conservation and sustainable use of

natural resources.

6. Only projects starting from the year 2000 onwards will be eligible.

7. Two percent of the carbon credits awarded to a CDM project will be allocated to a

fund to help cover the costs of adaptation in countries severely affected by

climate change (the 'adaptation levy'). This adaptation fund may provide support

for land use activities that are not presently eligible under the CDM, for example

conservation of existing forest resources.

8. Some of the proceeds from carbon credit sales from all CDM projects will be used

to cover administrative expenses of the CDM (a proportion still to be decided).

Projects need to select a crediting period for activities, either a maximum of seven years that

can be renewed at most two times, or a maximum of ten years with no renewal option.

The funding for CDM projects must not come from a diversion of official development

assistance (ODA) funds.

Each CDM project's management plan must address and account for potential leakage. Leakage

is the unplanned, indirect emission of CO2, resulting from the project activities. For example, if

the project involves the establishment of plantations on agricultural land, then leakage could

occur if people who were farming on this land migrated to clear forest elsewhere.

In the first tranches of project methodologies, there was a bias towards projects dealing with

landfill gases and renewable energy projects, essentially because these projects present

relatively straightforward methodologies. Although recent project methodology submissions

have been of a more diverse nature, renewable energy projects are expected to contribute to a

large share of CDM projects and resultant CERs.

Renewable energy

projects are expected

to contribute to a

large share of CDM

projects and resultant

CERs.

One of the core goals

of the CDM is to

contribute to

sustainable

development in

developing countries

by focusing on

projects with strong

development

benefits.




Main benefits of the Clean Development Mechanism 29

Reduction in GHG emissions - The CDM assists in reducing global greenhouse gas emissions.

Sustainable Development - One of the core goals of the CDM is to contribute to sustainable

development in developing countries by focusing on projects with strong development

benefits.

Foreign Investment - Results in an inflow of Euro-denominated foreign investment into

developing countries.

Technology transfer - Promotes technology transfer of emission reduction technologies from

industrialised to developing countries.

Figure 29 – Benefits accruing from CDM Projects


This mechanism is the

first global,

environmental

investment and credit scheme of its kind,

and provides a

standardized

emission offset

instrument, CERs.




Carbon Offsetting–

How projects are implemented30

The CDM Executive Board requires that all CDM projects follow a set of project development

steps that are referred to as the project cycle. CDM project activities can only deliver Certified

Emission Reductions (CERs) if the project itself and its successful operation have been approved

by the CDM EB. Each stage of the project cycle is outlined below.

Figure 30 – The CDM Project Cycle

Project DesignThe Project Design stage includes developing a project concept, choosing or developing a

baseline and monitoring methodology, and stakeholder consultations. All of these elements are

documented in the project design document (PDD).

30Anja Kollmuss, Helge Zink, Clifford Polycarp, Tyler Kemp-Benedict '" Making Sense of the Voluntary Carbon Market: A


2009]

CDM project

activities can only

deliver Certified

Emission Reductions

(CERs) if the project

itself and its

successful operation

have been approved

by the CDM EB. Each

stage of the project

cycle is outlined

below.




Project Concept A feasibility study of a potential CDM project is conducted to assess the technical feasibility,

investment requirements, development and operational costs, expected returns, administrative

and legal hurdles, and project risks and pitfalls. Based on the results of the feasibility study, the

project owner will decide whether or not to continue development of the potential CDM

project.

Methodology

A CDM methodology defines the rules that a project developer needs to follow to establish a

project baseline and to determine project additionality, to calculate emission reductions and to

monitor the parameters (e.g. electricity produced by the project) used to estimate actual

emission reductions. It is a generic recipe that can be applied to different projects within a

given project type (e.g. renewable power production) and applicability conditions (e.g. grid-

connected). If no approved methodology exists for a specific project type, a project developer

can submit a new methodology for approval to the CDM Methodology Panel.

Project Design Document (PDD )

The Project Design Document (PDD) describes the CDM project activity in detail and forms the

basis for all future planning and administrative procedures. It contains a description of the

chosen technology and explains the methodology used to define the baseline scenario, to

confirm additionality and to calculate emission reductions. It also contains information on the

monitoring of all relevant technical parameters (e.g. temperature, gas flow rates, electricity

productions, operation hours, etc.) including, how monitoring procedures will be established,

measurements will be made, quality will be controlled, and records wi ll be stored and accessed.

It contains an estimate of the volume of emission reductions achieved by the project. Finally, it

documents how the project contributes to sustainable development.

The PDD plays a central role in project development. It serves as the basis for evaluating all

carbon credit transactions and contract proposals for a CDM project. The PDD is used

throughout the implementation phase to ensure that the project performs according to the

parameters outlined in the document.

Stakeholder Consultation(s)

CDM projects are required to provide evidence that the project’s activities will not adversely

impact local populations and other relevant stakeholders. To ensure that all relevant

stakeholders have been provided an opportunity to comment on the proposed CDM project,

the project developer must inform them about the project through appropriate forms of media.

The project developer must respond to all stakeholder comments, and describe a course of

action to minimize negative impacts. The outcomes of the stakeholder consultations must be

documented in the Project Design Document (PDD).

The PDD serves as the

basis for evaluating

all carbon credit

transactions.




Project ValidationAfter the project developer has written the PDD, an independent UN-approved third-party

auditor conducts the project validation. Under CDM auditors are called Designated Operational

Entities or DOEs. The process of CDM project validation normally consists of five phases:

a desk review of the PDD,

on-site visits and follow-up interviews with project stakeholders,

a 30 day public comment period after the PDD has been made available through the

internet

resolution of outstanding issues, and

the issuance of the final validation report and written by the DOE

After completion, the validation report and the PDD are submitted to the CDM Executive Board

for review and registration.

Host Country Approval

Final acceptance of a CDM project by the CDM EB is not possible without the approval of the

project’s host country. The project documentation must be submitted to the relevant authority

which checks the project activity against national rules and regulations and confirms the

project’s compliance with the host country’s sustainability criteria. This screening process and

host country requirements vary from country to country.

Project RegistrationThe registration of a project by the CDM EB as a CDM project is a major step in the CDM project

cycle. The CDM EB’s decision to register a project is based on the review of the PDD and the

validation report and public feedback. Once the CDM EB approves a project it is officially

registered as a CDM project.

Project Implementation

The project can begin implementation anytime during the project cycle. However, if the project

is implemented before it is registered by the CDM Executive Board, then the project developer

has to supply documentary evidence proving that they considered CDM revenues at the time of

planning the project. The documentary evidence must be supplied at the time of seeking CDM

registration. If documentary evidence is not supplied, then the project is likely to be rejected on

the grounds that it is not additional.

Project Monitoring

Project developers are required to maintain records measuring the emission reduction

achieved during the operation phase. These records, maintained in a monitoring report, must

be in accordance with the parameters and procedures laid out in the original PDD that was

validated by the DOE and registered by the CDM EB. Emission reductions are issued based on

Final acceptance of a

CDM project by the

CDM EB is not

possible without the

approval of the

project’s host

country.




the monitoring report. Therefore, a project developer will make the trade-off between having

continuous CER income (many short monitoring periods) and lower administrative costs (long

monitoring periods). There are no requirements as to how long or short a monitoring period

must be as they range from a few weeks to several years.

Project Verification

The monitoring that the project developer has done is then evaluated and approved by a DOE.

To minimize conflict of interest, the validating DOE cannot also conduct project verification. A

different auditor must be chosen for this task. This is called Project Verification. The project

developer has to submit the monitoring report to the DOE along with relevant supporting

documents. The DOE undertakes a desk review of the report to ensure that the monitoring has

been carried out in accordance with the procedures laid out in the original PDD. The DOE may

also undertake a site visit, if necessary. Following the desk review and site visit, the DOE

prepares a draft verification report highlighting any issues in the process. Once the project

developer resolves these issues, the DOE prepares the final verification and certification report,

which also quantifies the actual emission reductions achieved by the project.

Verification is done at time intervals freely chosen by the project developer or project owner

and is usually a consideration between having low costs (long intervals) and frequent sales

revenues (short intervals).

Project Certification

The verification report is submitted to the CDM EB for certification and issuance of CERs. The

issued CERs are then transferred to the CDM registry account of the relevant project participant

after the mandatory fees are paid to the UNFCCC secretariat.

Commercialization

At the commercialization stage, a project developer sells the carbon credits from a project to a

prospective buyer. The credits can either be sold directly to a company that requires it to meet

its legally binding or voluntary emission reduction obligations or it can be sold to a trading

company that facilitates the transaction between the seller and the end user of the credits.

A contract to sell the carbon credits from a project can be signed at any stage during the project

development cycle. Depending on the project developer’s risk appetite, some will sign

contracts as early as the planning stage (i.e. forward contracts), lock in the price and other

terms, and insulate themselves from the risks of price volatility while others will wait until the

credits are generated, certified and issued before selling them (i.e. spot market sales). The

project developer usually receives payment for the credits only after they have been delivered.

However, in a few cases, a project developer may receive an advance payment. This is usually

A contract to sell the

carbon credits from a

project can be signed

at any stage during

the project

development cycle.

Designing,

implementing and

operating a carbon

offset project

requires the

involvement of a

large number of

parties, stakeholders

and authorities.




done if the project developer wants to bridge an investment gap or needs to meet cash flow

requirements during the project’s implementation.

Responsible parties involved in Carbon Offset Projects31

Designing, implementing and operating a carbon offset project requires the involvement of a

large number of parties, stakeholders and authorities. Even though the parties involved differ

from project to project some general categories and types of stakeholders can be defined as

follows:

Project Owner

The operator and owner of the physical installation where the emission reduction project takes

place can be any private person, company or other organisation.

Project Developers

A person or organisation with the intention to develop an emission reduction project could be

the project owner, a consultant or specialized services provider.

Project Funders

Banks, private equity firms, private investors, non-profit organizations and other organizations

may lend or invest equity to fund a project. Some of the standards have rules to what kind of

funding, aside from the offset revenue, are acceptable for an offset project.

StakeholdersStakeholders are individuals and organizations that are directly or indirectly affected by the

emission reduction project. Stakeholders include the parties interested in developing a specific

project (e.g. owner, developer, funder, local population, and host community), parties affected

by the project (e.g. local population, host community environmental and human rights

advocates) and national and international authorities.

Third Party Auditors, Valuators and Verifiers

The CDM and many of the voluntary offset standards require a third-party auditor to validate

and verify a project’s climate saving potential and achieved emission reductions. Under CDM

the auditors are called Designated Operational Entities (DOEs). To minimize conflict of interest,

the validating DOE cannot also conduct project verification.

Standards Organisation

In the absence of national and international legislation, standard organizations define a set of

rules and criteria for voluntary emission reduction credits.

31Anja Kollmuss, Helge Zink, Clifford Polycarp, Tyler Kemp-Benedict '" Making Sense of the Voluntary Carbon Market: A


2009]

Compliance with

emission targets is

the ultimate goal of

the users of carbon

credits.




Brokers and ExchangesIn the wholesale market, emission offset buyers and sellers can have a transaction facilitated by

brokers or exchanges. Exchanges are usually preferred for frequent trades or large volumes of

products with standardized contracts or products, while brokers typically arrange transactions

for non-standardized products, occasionally traded and often in small volumes.

Trader

Professional emission reduction traders purchase and sell emission reductions by taking

advantage of market price distortions and arbitrage possibilities.

Offset Providers

Offset providers act as aggregators and retailers between project developers and buyers. They

provide a convenient way for consumers and businesses to access a portfolio of project offsets.

Final buyers

Individuals and organizations purchase carbon offsets for counterbalancing GHG emissions.

Therefore, the final buyer has no interest in reselling the offset but will prompt the retirement

of the underlying carbon offset.

Who are the Buyers of Carbon Credits?

The users of carbon credits are companies and country governments that have emission

reduction targets. Companies and governments that cannot easily attain their targets in their

own operations turn to markets in order to buy carbon credits. The project developers of CDM

projects are one type of primary providers of carbon credits. Compliance with emission targets

is the ultimate goal of the users of carbon credits. While users can buy carbon credits directly

from the primary providers of carbon credits, intermediary organizations of different kinds have

evolved as well that provide compliance products to the users of carbon credits.

Carbon-credit buyers can be distinguished between those buyers that want to use the

compliance product themselves and those buyers that buy on behalf of others. There are

buyers that are also users, carbon funds, and traders. Brokers may act as intermediaries

between providers and all types of buyers.

A carbon fund is a public and transparent tender process, designed to build a project portfolio

that is expected to deliver a certain volume of carbon credits. Private carbon funds are solely

concerned with shareholder value.

Buyers that have compliance targets buy carbon credits for their own use. For private

companies and also governments with compliance targets, the barriers to engaging into

carbon-credit transactions directly with CDM project developers can be high. The project

developers are usually based in geographical regions that are far apart, come from different

The users of carbon

credits are companies

and country

governments that

have emission

reduction targets




cultural backgrounds, speak different languages and belong to a different business

environment. Intermediary buyers that want to resell carbon credits can bridge between the

user of carbon credits and the primary provider of CDM credits. Intermediary organizations are

able to build the technical expertise that is needed to engage into business with CDM projects.

Some funds and also private traders (but not usually the compliance buyers) engage with

projects at early stages of project developments. It is possible to sell carbon credits only based

on an initial project idea. For instance, based on a Project Idea Note, CDM credits could be sold.

Prices involved in early-stage transactions are much lower than prices for registered projects or

even for issued credits, because of the risk that credits may never be issued. Early-stage

purchase transactions can help the project developers to reach financial closure for projects;

however, carbon credits are usually only paid for on delivery of issued carbon credits. Some

buyers make limited upfront payments after financial, technical and CDM-related project due

diligence. If buyers engage at very early stages in a CDM project, they often support the process

towards registration of the CDM project. The facility model for carbon funds pre-finances the

development of a project’s CDM component. Correspondingly, some private buyers develop

CDM projects free of charge or cover the costs of the CDM project development if binding

emission-reduction purchase agreements are in place.

Figure 31 - Types of buyers for carbon-credit products32

Joint Implementation (JI)

Joint Implementation works similarly to CDM, with the exception that the host country is not a

developing nation but another Annex I country. The tradable units from JI projects are called

Emissions Reductions Units (ERUs). It is not strictly a baseline-and-credit system since it also has

aspects of a cap-and-trade system, and both participants have an overall reduction target.

32 Liana Morera, Zenia Salinas, Wen Hsu Chen '" Guidebook to markets and commercialization of forestry CDM projects

- ttp://www.proyectoforma.com/Documentos/GuidebooktoMarketsandCommercializationofCDMforestryProjects.pdf> –

2007 - < http://www.caaltd.org/projects.aspx> - [accessed 12 August 2009]

Some funds and also

private traders (but

not usually the

compliance buyers)

engage with projects

at early stages of

project

developments.



Pinpoint’s Guide to Carbon | The EU-ETS Linking Directive 54

The EU-ETS Linking Directive

The EU Linking Directive, which was passed in 2004, allows operators in phase 2 of the ETS to

use credits from Joint Implementation (JI) and the Clean Development Mechanism (CDM) to

meet their targets in place of emission cuts within the EU. Member States specify a limit up to

which individual installations will be able to use external credits to comply with the ETS.

Voluntary Carbon Markets

The voluntary carbon markets function outside of the compliance market. They enable

businesses, governments, NGOs, and individuals to offset their emissions by purchasing offsets

that were created either through CDM or in the voluntary market. The latter are called VERs

(Verified or Voluntary Emissions Reductions).

Figure 32 – Carbon Offsets in the Compliance and in the Voluntary Market

Figure 33 - Historic Values for the Voluntary Carbon Markets33

33 Katherine Hamilton, Milo Sjardin, Allison Shapiro and Thomas Marcello – “Ecosystem Marketplace, New Carbon

Finance” - 20 May, 2009

Pre-2002 2002 2003 2004 2005 2006 2007 2008

OTC 171 43 23 35 39 61 252 397

CCX - - - 3 3 38 72 307

Other exchanges - - - - - 1 1 1

-

50

100

150

200

250

300

350

400

450

V a l u e s i n U S $ ' m i l l i o n s

Values of Voluntary Carbon Markets

The voluntary carbon

markets function

outside of the

compliance market.



Pinpoint’s Guide to Carbon | Voluntary Carbon Markets 55

Figure 34 - Transaction Volumes and Values, Global Carbon Market, 2007 and 200834

Unlike under CDM, there are no established rules and regulations for the voluntary carbon

market. On the positive side, voluntary markets can serve as a testing field for new procedures,

methodologies and technologies that may later be included in regulatory schemes. Voluntary

markets allow for experimentation and innovation because projects can be implemented with

fewer transaction costs than CDM or other compliance market projects. Voluntary markets also

serve as a niche for micro projects that are too small to warrant the administrative burden of

CDM or for projects currently not covered under compliance schemes. On the negative side,

the lack of quality control has led to the production of some low quality VERs, such as those

generated from projects that appear likely to have happened anyway.

34 Katherine Hamilton, Milo Sjardin, Allison Shapiro and Thomas Marcello – “Ecosystem Marketplace, New Carbon

Finance” - 20 May, 2009. *Note that for the Alberta SGER the author assumes a Assume a CA$10 price for Alberta

offsets and Emission Performance Credits based on interviews with market participants).

Voluntary markets

allow for

experimentation and

innovation because

projects can be

implemented with

fewer transaction

costs than CDM or

other compliance

market projects.




Carbon Offset Market Prices

It is nearly impossible to give a precise overview of current offset market prices, as the market

is considerably fragmented due to the variety of available standards, project types and

locations, offset qualities, delivery guarantees, contract terms and conditions, etc. The main

price drivers are an offset’s standard and origin (i.e. project type).

Figure 35 – Closing Prices BlueNext (exchange) Spot EUA 05-07 and EUA 08-1235

Figure 36 – How regulatory and market supply factors caused the EUA 05-07 markets to crash36

35 BlueNext – Statistics < http://www.bluenext.eu/> - [accessed 25 A ugust 2009]

The main price

drivers are an offset’s

standard and origin




Figure 37 – Correlation between carbon credits and other energy products37

In a competitive market, offset prices are a function of supply and demand. The attractiveness

of a project depends on the buyer’s objectives. These are different for a compliance buyer than

for a voluntary buyer:

Compliance buyers are interested in obtaining credits reliably and cheaply in order tofulfil their regulatory requirements.

Most institutions that voluntarily use offsets for their climate neutralization efforts

want to communicate that effort to the public and choose projects that are well-

received by the target group.

In Europe, voluntary buyers are especially interested in biomass, renewable energy

and end user energy efficiency projects from less developed countries. Other

emissions reduction projects such as industrial gas projects at chemical plants are less

attractive to these buyers because, despite their emission reducing capability, such

projects deliver very limited co benefits such as job creation and protection of local

ecosystems. In the US, voluntary buyers prefer offsets generated by domestic projects, and are less

focused on project type or sustainable development components.

Carbon markets are still in their infancy. As public opinion and understanding of the markets

increase, different project attributes may become more attractive to buyers.

36 Market Participant as per FSA analysis ( infra)

37 Bloomberg as per FSA document (Infra)

The carbon price is highly

correlated with other

energy products




Figure 38 - Pricing of Offsets for each Standard38

Why CER’s trade at a discount to EUA’s

Figure 39 Comparison in price between CER's and EUA's prices are in EUR per tonne CO2e

The European Parliament passed legislation known as the Linking Directive39

that allows

companies with emissions reduction obligations under the EU ETS to invest in CDM and JI

38 Anja Kollmuss, Helge Zink, Clifford Polycarp, Tyler Kemp-Benedict '" Making Sense of the Voluntary Carbon Market: A

Comparison of Carbon Offset Standards” – March 2008 - < http://assets.panda.org/downloads/vcm_report_final.pdf> -

[accessed 12 August 2009]

In a competitive

market, offset prices

are a function of

supply and demand.

In Europe, voluntary

buyers are especially

interested in

biomass, renewable

energy and end user

energy efficiency

projects from less

developed countries.

Carbon markets are

still in their infancy.

As public opinion and

understanding of the

markets increase,

different project

attributes may

become more

attractive to buyers




projects or purchase CERs/ERUs produced by these projects in the market and surrender the

CER/ERU in fulfilment of their obligations on a one –for-one basis.

It strikes some as odd that offsets that are designated as Certified Emissions Reductions(CER)

trade at a 30% - 50% discount to European Union Allowances (EUA’s)However, there are good

reasons for this discount- which is a result result of a perceived risk premium (referred to as

Registration Risk) associated with CERs and includes a number of factors:

The percentage of CERs can be used in the total allowance allocation is limited40

;

Many CERs carry delivery risk associated with the particular projects;

The project might not be approved by the CDM executive board (again for non-

guaranteed CERs); this problem is exacerbated by the fact that the UN’s CDM approval

process is a major bottleneck in the process;

Sovereign risk due to the increased chances of political or economic disturbance in the

CDM host nation;

EU ETS allowances are generally traded between companies with investment

grade credit and pre-agreed contracts whereas CERs tend to be bundled

together in special purpose vehicles that do not have guarantees and may

lack credit worthiness;

Many CDM projects are not guaranteed to produce the agreed number of

CERs, and the delivery schedule may change mid-project;

Until very recently leading energy markets exchanges have not offered CER

contracts with the credit mitigation afforded by a central counterparty,

whereas these have been available for some time for the EU ETS market; and

EU ETS Registries are operational whereas the link to the ITL, being set up to

allow CER delivery, is not yet ready.41

39 2004/101/EC

40 Limits are set country by country on the proportion of CERs/ERUs that can replace EUAs – the UK has set an 8% limit.

This is a key reason for CERs’ discount to EUAs. This is one of the most contentious points in the Kerry -Boxer Bill in the

US. The original house bill allowed offsets to form 50% of an installation’s total allowance allocation, but was reduced

to 25% in the Senate bill. See Figure 40 - Comparison between the Waxman-Markey House and Kerry-Boxer Senate Bills 41

The UK Financial Services Authority - The emissions trading market: risks and challenges – March 2008 - Jonathan

Hill, Thomas Jennings and Evie Va nezi http://www.fsa.gov.uk/pubs/other/emissions_trading.pdf

CER’s are about 40%

cheaper than EUA’s

due to the DNA,

validation,

registration,

monitoring and

verification risks.

These risks are much

greater in the

developing world –

where CER’s

originate.




The future of mandatory carbon markets in the United States

American attitudes towards carbon have traditionally been hostile. The car and the freedom of

movement it brings epitomises the 20th

century American dream.... and the bigger the car the

better. The Oil industry is immensely powerful and a vital source of jobs and economic

strength. The country has relatively cheap electricity due to its liberal endowment of coal.

Recent innovation is causing natural gas prices to go down. And Americans tend to be more

inwardly focused than Europeans, so carbon offsetting involving the developing world and

indeed anything with the word global – tends to be treated with suspicion.

But attitudes are changing: The Hurricane Katrina in August 2005 caused a seismic shift in

American attitudes towards Climate Change. Al Gore’s unexpected Oscar -winningdocumentary, The Inconvenient Truth reinforced this message. The Obama administration

reversed eight years of White House resistance to carbon curbs. So what would have been

unthinkable even five years ago, is just possible: America may be about to get mandatory

federal green-house-gas emissions controls. The House of Representatives has passed the

American Clean Energy and Security Act, otherwise known as the Waxham-Markey bill. The bill

going through the Senate is called the Kerry –Boxer Bill, after John Kerry, the former democratic

presidential candidate and Barbara Boxer, the democrat leader of the senate. The first bill

requires a 17% reduction in US GHG emissions from a 2005 base line by 2020, while the second

requires a 20% reduction. The key points & differences are listed in Figure 40 - Comparison

between the Waxman-Markey House and Kerry-Boxer Senate Bills over the page.

The bills attempt to seek a compromise between the demands of environmentalists and those

of business. In attempts to bring emissions down by 17% below 2005 by 2020 and 4% below

1990 levels, its aims are low when compared to other developed countries, but is under attack

as it could hurt an economy still suffering from a recession. In a cap-and-trade system designed

purely for efficiency all permits will be auctioned, a position that Present Obama supports.

But as a result of concessions made at a committee level, by the time the bill was passed, 85%

were to be given away – although some of the giveaways will be returned to power consumers

as rebates. Despite compromising to what some environmentalists feel is watered down to a

level of pointlessness, the bill is struggling to get the 60 votes it needs to be filibuster proof. It

got through the House by a mere seven votes and there is a major battle going on the Senate.

The Kerry-Boxer bill has fallen victim to many factors:

Timing and liberal vs. conservative polarisation in the Senate – in that it co-insides

with the mammoth healthcare bill, which has exhausted most bi-partisan goodwill that

existed between the parties at the beginning of the Obama presidency. Former

American attitudes

towards carbon have

traditionally been

hostile.

The Hurricane

Katrina in August

2005 caused a seismic

shift in American

attitudes towards

Climate Change.

America may be

about to get

mandatory federal

green-house-gas

emissions controls.




republican supporters of cap-and-trade – such as John McCain, Richard Lugar and Lisa

Murkowski – have since got cold feet.

Senate distribution – the Senate elects two representatives from each state –

regardless of population. Americans living on the coast tend to be keener to mitigate

climate change as they are less reliant on coal, fear hurricanes and rising sea-levels.

Yet they are vastly under-represented in the senate. Based on this anomaly, senators

representing a mere 11% of the population can muster together the 40 votes to stop

the bill becoming an act.

Figure 40 - Comparison between the Waxman-Markey House and Kerry-Boxer Senate Bills42

42 What’s Different? Waxman-Markey Vs. Kerry-Boxer Climate Bills by Bill Chameides | Oct 02, 2009 –

http://nicholas.duke.edu/thegreengrok/waxmanmarkey-vs-kerryboxer

In attempts to bring

emissions down by

17% below 2005 by

2020 and 4% below

1990 levels, its aims

are low when

compared to other

developed countries,

but is under attack as

it could hurt an

economy still

suffering from a

recession.




Public opinion has cooled towards climate change - globally. Firstly people care less

about the environment when their jobs are in danger, than when they are feeling

wealthy. The recession has reduced the public support of climate change the world

over. In the United States, the leaking of the “Climategate” emails, where scientists

argued about the extent of climate change, has raised doubt in the minds of whether

human activity does in fact cause climate change. The proportion blaming rising

temperatures on human activity also fell over the same period from 47% to 36%.

Key areas of opposition to the Kerry-Boxer bill

While the move to give away, rather than auction off permits has been heavily criticised, the

most contentious aspect of the bill has been the generous provision of the use of offsets, which

seems to have attracted bipartisan criticism.

Concerns about offsets causing hundreds of billions in outflows to pay for emissions

reductions outside the USA: Conservative Republication Senator Bob Coker is not

alone when telling an audience at a hearing of the Senate Committee on Energy and

Natural Resources about America’s proposed climate-change legislation when he says

that the code means “we as Americans are transferring wealth from our companies

and our citizens ... to raise carbon prices and send money abroad.”43

... And this

suspicion seems to be unusually non-partisan for the polarised US Senate – SenatorMaria Cantwell, a left-wing Democrat from Washington, agrees with Mr Coker when

she says that the Environmental Protection Agency had estimated that the $1.4 trillion

dollars a year would go abroad to cover the generous provision for the carbon offsets

in the bills. The Environmental Protection Agency retorts that without the contribution

of offsets, the price of carbon under a cap-and-trade system would be twice as high.

Questions as to the ethics and effectiveness of offsets – critics point out that offsets

are vulnerable to fraud and that the concept of “additionality” is spurious at best and

destructive at worst. Critics argue that it is often impossible for a CDM board to know

whether the presence of carbon credits caused a project to tip from being

economically unviable to viable. Widely criticised projects include the 20-odd Chinesegas-fired power stations indirectly financed by European consumer-funded carbon

credits after the Chinese government announced a policy that they would be

diversifying away from their dependence on coal.44

Mistrust of the market – After the Wall Street Crisis of 2008/9, there is less faith in the

market to solve climate change. The views of Senator Murkowski of Alaska reflect

43 The Economist 5 December 2009 Cap and Trade – America struggles with climate-change legislation

44 Michael Wara of Stanford University – quoted in the Economist in same article

Concerns about

offsets causing

hundreds of billions

in outflows to pay for

emissions reductions

outside the USA

Mistrust of the

market

Opposition from

vested interests such

as coal-fired utilities

is powerful but

behind the scenes




commonly held attitudes: Despite the fact that she was concerned enough the effect

of global warming on the Alaska coastline to co-sponsor a previous bill curbing carbon

emissions, she is reluctant to support the Kerry-Boxer bill: “There is concern that we

are creating a new $1 trillion market that will be susceptible to being manipulated by

Wall Street in the same way as mortgage-backed securities were.”45

Opposition from vested interests – coal-fired utilities and energy hungry industries –

Despite the fact that the bill was proposed by a group of power utilities such as Exelon

and PG&E, who have virtually no coal-fired power generation, most utilities do have

plenty of coal-fired exposure so tend to fear carbon caps - along with energy-intensive

manufacturers. Once the house bill went through these vest interests stirred into

action. Powerful trade associations such as the National Association of Manufacturers,the American Petroleum Institute and the US Chamber of Commerce started to lobby

heavily against the bill. In the first 10 months of 2009, the industry spent over $300

million to over 2,000 lobbyists in Washington, handing out twice the campaign

contributions to opponents of the bill than to its supporters.

45 Climate Ark news archive – 3 December 2009

http://www.climateark.org/shared/reader/welcome.aspx?linkid=144734&keybold=carbon%20AND%20%20nuclear%20

AND%20%20tax

Concerns about

offsets causing

hundreds of billions

in outflows to pay for

emissions reductions

outside the USA

Mistrust of the

market

Opposition from

vested interests such

as coal-fired utilities

is powerful but

behind the scenes



Pinpoint’s Guide to Carbon | The Chinese change of heart towards global warming 64

The Chinese change of heart towards global warming

Unlike their American counterparts, Chinese leaders are not bothered by recalcitrant

legislatures or midterm elections every two years. So its change from climate change sceptic to

shrewd-negotiating supporter was both politically possible and caught most Green observers by

surprise: Previously China had indicated that it regarded climate change as a risk to its growth

and energy security – now it has embraced it as an opportunity for the following reasons:

Energy security - China is heavily dependent on coal for its electricity, whose demand

has been growing by more than 8% per year for the last two decades. It burns about

2.5 billion tonnes per year and has reserves of 110 billion tonnes. 46 If this trend

continues, China will run out of coal by 2043. So diversifying its energy needs away

from its rapidly depleting fossil fuel reserves has become a national priority. The

country has reached a point of infliction with regard to coal supply relative to demand

– in 2007 it exported 80 million tonnes, by 2009 it was importing 20 million tonnes.

Figure 41 - Chinese coal is running out faster than any other major coal producer

46 BP Statistical Review of World Energy June 2008 – coal reserves and consumption

0 100 200 300 400 500 600

China

India

South Africa

Australia

US

Kazakhstan

Ukraine

Russian Federation

Botswana

Brazil

China IndiaSouth

AfricaAustralia US

Kazakhsta

nUkraine

Russian

FederationBotswana Bra zi l

Reserves to production ratio in years 45 118 178 194 233 332 444 500 500 500

Coal reserves in billions of tonnes 115 56 48 77 243 31 34 157 11 7

Countries with top 10 coal reservesReserves to production ratio

China is depleting its coal reserves faster

than any other country, when compared

with those with top ten reserves – with

just 45 years of current production.

Analysts see their worries around coal

shortages as a key reason for its recent

change in policy towards embracing

climate change.

Diversifying its

energy needs away

from its rapidly

depleting fossil fuel

reserves has become

a national priority for

China.




Using its current account surplus to provide vendor finance for capital-intensive

green exports –Currently exports make up 37% of the Chinese GDP, so they have a

heavy trade surplus – particularly with America. Until recently they have used much of

this surplus to invest in US treasuries, which has artificially strengthened the US Dollar

and funded US fiscal and current account deficit more readily than the market would

have - left to its own devices. It is now starting to use this surplus to finance

infrastructure and energy projects – particularly in the developing world, where these

projects are tied to commodity procurement. As capital is scarce in the developing

world and renewable energy is by definition more capital intensive than fossil fuels,

the combination of low cost manufacturing combined with vendor finance secures an

unbeatable competitive advantage for Chinese Solar and Wind manufacturers.

47

AsChina’s leaders believe that the economy needs to create 10 million jobs per year to

retain social stability as vast swathes of West rural unemployed migrate towards the

East Coast and general consensus is that solar and wind will provide 60 % of the world’s

energy by 2100, China jockeying to become the world’s leading manufacturer for

renewable equipment.

Figure 42 - Chinese water sources that are vulnerable to melting of the Tibetan Glaciers

Vulnerability to changing weather patterns – China realizes that it is more vulnerable

than most to the impacts of global warming: The monsoon seems to be weakening,

travelling less far inland and increasing rainfall on the coasts. As a result China is seeing

floods in the south-east and droughts in the already poverty-stricken North West.

Furthermore, the melting of glaciers on the Tibetan plateau is causing unseasonal

47 The writer’s personal experience in dealing with Chinese solar manufacturers where advantageous terms for vendor

financing were offered – on condition that Chinese equipment was used and Chinese labour was e xported to construct

a utility sized solar farm in Africa/

It is now starting to

use this surplus to

finance infrastructure

and energy projects –

particularly in the

developing world,

where these projects

are tied to

commodity

procurement.

China realizes that it

is more vulnerable

than most to the

impacts of global

warming.




flooding of the Yangzi and the Yellow Rivers. Vast numbers of its population live on the

coast, so are vulnerable to flooding and rising sea levels.

Benefiting from CDM, especially when the US comes on board – As can be seen from

Figure 27 - Most CDM projects are located in Asia and Latin America – August 2009,

China provides one third of the world’s CDM projects, which has resulted in a $2 billion

inflow to China, mainly to reduce emissions from industrial processes. By 2012, it is

estimated that this inflow will be as high as $8 billion per year. If the Kerry-Boxer

legislation is passed by the US Senate, even with the new 25% limit on developing

world offsets projects, the offsets market will increase by a staggering 50 fold. China,

with its energy inefficient, low tech manufacturing base and heavy dependence on

coal, will be the largest beneficiary.

China’s aim to change the terms of debate - carbon emissions vs.

carbon intensity

China could not to agree to the Kyoto protocol which set ceilings based on 1990 baselines.

Economic growth tends to be highly correlated with energy demand, with a developing world

average of 0.6% increase in electricity demand for each 1% increase in real GDP.48

Figure 43 - The link between electricity consumption per capita and GDP per capita

Current trajectory

Carbon intensity reduction strategy

48 Stephen Larkin, The link between electricity production and economic growth in the developing world – presentation

to the Kenyan government - September 2009 – note that the forecast of as is based on current GDP per capita of

$5,800, with compound growth of 7% to 2020, 5% between 2020 and 2035 and 5% between 2035 and 2050. Based on

this modest growth scenario, Chinese per capita GDP will increase to $30,000 which is higher than several newer

members of the EU currently.

y = 0.2179x + 19.717

R² = 0.7273

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

- 10,000 20,000 30,000 40,000 50,000 60,000

E l e c t r i c i t y c o n s u m p t i o n -

K W h p e r

c a p i t a p e r y e a r

GDP per capita (PPP) in US$

With an average

growth of 8%, China’s

emissions have

increased more

rapidly than any

other large country

and will continue to

do so.




With an average growth of 8%, China’s emissions have increased more rapidly than any other

large country and will continue to do so, especially as the country is building so many fossil fuel

plants. The nature of its growth also presents challenges to carbon intensity: It is building

infrastructure across vast swathes of its country, which involves building materials and metals.

Its competitive advantage lies in manufacturing rather than services, which consumes more

electricity.

Figure 44 - Chinese electricity consumption to GDP per capita (PPP)

The graph above shows that China is above the curve of developing economies – for the

reasons stated above. Due to its s ize, and its economic growth, China’s trajectory shows that

their involvement is seminal in any meaningful deal. So there change in direction towards

energy intensity is reason for climate change groups to be optimistic.

As its population gets wealthier, they will demand more cars and electricity, as well as semi-

durable consumer goods, all of which increase carbon intensity compared to their current

subsistence. Currently, the average Chinese person receives less electricity than the average

African and just three Chinese families per one hundred own a car.

Figure 45 - Carbon intensity of the world's top 12 emitters

GHANA

NIGERIA

AFRICA AVERAGEINDIA

CHINA - 5 827, 2 444

SOUTH AFRICA

WORLD AVERAGE

0

1,000

2,000

3,000

4,000

5,000

6,000

0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 E l e c t r i c i t y c o s n u m p

t i o n i n K W h p e r

c a p i t a p e

r y e a r

GDP per capita (PPP) in US$

0

200

400

600

800

1,000

1,200

G r a m s C O 2 e m i s s i o n s p e r

$ o f G D P ( p p p ) - 2 0 0 0

$ U S

CO2 emission per $ of GDPWorld's twelve largest emitters

China’s competitive

advantage lies in

manufacturing rather

than services, which

consumes more

electricity.

Currently, the

average Chinese

person receives less

electricity than the

average African and

just three Chinese

families per one

hundred own a car.



Pinpoint’s Guide to Carbon | Copenhagen 2009 68

Copenhagen 2009

The Copenhagen Conference was hyped up in the months before the conference on being the

defining moment when the world confronted climate change. Unfortunately expectations were

too high, so despite the fact that Copenhagen marks a vital step forward in the world’s co-

ordinated response to climate change, the conference and the Copenhagen Accord has been

branded a failure.

Released on December 19, 2009, the Copenhagen Accord is a three page political declaration

that is intended to frame future UN climate change negotiations and codify national policies on

adaptation and mitigation. It’s most important positive is that it was vague enough to increased

the potential for US involvement in a global climate change regime, inclusion of developing

country reduction plans in global reporting, and larger pledges of financial support for

developing countries. But severe limitations of the Copenhagen Accord will perpetuate policy

uncertainties. Missing elements include a lack of a deadline to negotiate a successor Treaty to

the Kyoto Protocol, no legally-binding GHG emission reduction targets, no coverage of aviation

and maritime emissions and no reform of the Clean Development Mechanism market. Smart

sustainability leaders need to explain to the CEO that the Copenhagen Accord doesn’t mean

carbon management plans should be shelved in 2010.

Key points of agreement from Copenhagen

Key points in the political statement include agreements to:

Limit increases in global temperatures to 2 degrees centigrade. The Accord

recognises the scientific view of the Inter-Governmental Panel on Climate Change that

greenhouse gas (GHG) concentrations in the atmosphere need to be stabilised to

prevent interference with the climate system. The maximum temperature increase

target could be cut to 1.5 degrees centigrade, depending on scientific analysis.

Make deep cuts in GHG emissions. The Accord articulates the need for global and

national emissions to peak as soon as possible, recognising that the time-frame for

peaking will be longer in developing countries such as Indonesia and Turkey than in

developed countries like Canada, Germany and Japan. The Accord contains no country-

specific, legally-binding targets for future GHG emissions reductions.

Submit quantified economy-wide emission targets by January 31, 2010. Developed

countries (Annex I countries) or groups of developed countries such as the European

Union, are required to submit quantitative economy-wide emissions targets for 2020

by January 31, 2010. These non-binding targets need to include the baseline year and

the percentage reduction in GHG emissions to be achieved by 2020. Targets submitted

Despite the fact that

Copenhagen marks a

vital step forward in

the world’s co-

ordinated response

to climate change,

the conference and

the Copenhagen

Accord has been

branded a failure.

Copenhagen’ s most

important positive is

that it was vague

enough to increased

the potential for US

involvement in a

global climate

change regime.

Comment [T2]: Is this a word?




to the UN will be based on officially announced national targets (see Figure 46 -

Unilateral National Commitments to Reduce GHG Emissions).

Provide information on national mitigation actions by January 31, 2010. Developing

countries (referred to as non-Annex I countries) agreed to implement mitigation

actions and submit a list of actions to the UN by January 31, 2010. These countries,

including large emitters like Brazil, China and South Africa, will communicate national

GHG inventory reports every 2 years with provisions for international consultation and

analysis of the GHG inventory reports and national mitigation actions.

Create a mechanism to tackle forestry-related emissions. Negotiators at the fifteenth

ministerial meeting (COP 15) of the Framework Convention on Climate Change

(UNFCCC) agreed to establish immediately a mechanism to reduce emissions fromforest destruction and degradation (REDD). The REDD mechanism is intended to help

mobilise financial resources from developed countries.

Boost climate funds from $10 billion a year to $100 billion a year. Developed

countries committed to provide new and additional funding “approaching $30 billion”

for the 3 years from 2010 to 2012. The funds are intended to be balanced between

spending on adaptation and mitigation projects. There is a further commitment to

“mobilise” $100 billion a year by 2020, from national government, multilateral and

private sources, to support climate change projects in developing countries.

Establish the Copenhagen Green Climate Fund. This fund will be an operating entity of

the financial mechanism of the UNFCCC. The mission of the Climate Fund is to support

projects and policies in developing countries covering REDD, adaptation, capacity-

building, technology development and transfer.

Create a Technology Mechanism to enhance technology transfer. The technology

mechanism will be designed to accelerate the development of technologies to reduce

GHG emissions and to help developing countries with their climate change adaptation

efforts. Further details will be negotiated by the UN’s working groups.

Unilateral commitments

Figure 46 - Unilateral National Commitments to Reduce GHG Emissions

Boost climate funds

from $10 billion a

year to $100 billion a

year.

Establish the

Copenhagen Green

Climate Fund.

Create a Technology

Mechanism to

enhance technology

transfer.




What are the positives that can be taken out of Copenhagen?

The agreement at Copenhagen is a non-binding political declaration containing just 12 articles

covering three pages of text. What, if anything, has been achieved since the Bali Action Plan set

the deadline for Copenhagen 2 years ago? Analysts believe that most important achievement of

the UN Copenhagen Accord will be securing the passage of the US Clean Energy Jobs and

American Power Act in 2010. Positive implications are listed below:

China turning from sceptic to supporter of in the Climate Change Debate - The Accord

will be seen as the turning point in Chinese co-operation for combating climate

change. As the previous section argues, China was highly skilled in shepherding

developing countries towards reaching a wording that is vague enough to enable the

US to pass the Kerry-Boxer Bill, which has the potential to increase the offsets market

by over 50 fold. China will be the largest recipient of a US offsets program.

Increased potential for US involvement in a global climate change regime. A post-

Kyoto global climate deal without the inclusion of the US would be a pointless

exercise. Global negotiations tend to move at the speed of the slowest ship and

President Obama is slowly manoeuvring the US Senate to pass the “Clean Energy Jobs

and American Power Act” in 2010. A non-binding agreement that codifies national

commitments and includes voluntary emission reductions developing countries –

especially China - significantly increases the probability that the Kerry-Boxer legislation

will be passed. Inclusion of developing world reduction plans in global reporting. Under the Kyoto

Protocol, developing countries (non-Annex 1 countries) including significant emitters

like Brazil, Indonesia, Saudi Arabia and South Korea, were exempt from reporting their

GHG inventories and mitigation actions. The Copenhagen Accord for the first time

encapsulates a UN agreement that developing countries should report their mitigation

actions and national GHG inventory reports. Crucially for the US, this includes China’s

emissions which will be subject to a moderate level of international verification.

Larger pledges of financial support for developing countries. Island states such as the

Maldives, at risk of increased flooding due to climate change, and African countries

like Sudan that face drought conditions, pushed hard for funding from developed

countries. The $11 billion pledged by Japan, $10.6 billion offered by the European

Union and $3.6 billion tabled by the US over the period 2010 to 2012 will support

action on the ground for both adaptation projects and mitigation programmes. The

promise to “mobilise” $100 billion of climate change financing a year by 2020 lacks

such clear cash pledges.

China turning from

sceptic to supporter

of in the Climate

Change Debate.

Increased potential

for US involvement in

a global climate

change regime.

Inclusion of

developing world

reduction plans in

global reporting.

Larger pledges of

financial support for

developing countries




... And the negatives

Due to the limited scope of the Accord and the weak wording of its provisions there is a vast

and uncertain range of outcomes for a successor to the Kyoto Protocol over the next 3 years. It

has therefore been seen as a failure.

Figure 47 - Impact of Copenhagen Accord on climate change policy expectations

The most prominent elements missing from the Copenhagen missive and their implications on

securing a workable deal are:

Poor expectations management – Pinpoint believes that the conference does

represent an important step forward in that it shows that main stream leaders and all

major economies are committed to mitigating the effects of climate change. The very

fact that so many heads of state were represents was major victory for the climate

change movement. However, the expectations a few months before the conference

were unrealistic. Anything short of dramatic and legislated commitments to reduce

GHG emissions below the level of Kyoto targets would be seen as a failure to many

activists. The fact that there was no agreement about emissions only a much more

vague and easy to avoid commitment to avoid increase in global warming to above

two degrees above pre-industrial levels was quickly jumped on by sceptics as a failure.

Due to the limited

scope of the Accord

and the weak

wording of its

provisions there is a

vast and uncertain

range of outcomes

for a successor to the

Kyoto Protocol over

the next 3 years. It

has therefore been

seen as a failure.

Poor expectations

management




The press seems to have bought this line, partly because of the hype before the

conference.

No deadline for the negotiation of an international Treaty. The Bali Action Plan,

agreed in December 2007, set COP 15 in December 2009 as the deadline to negotiate a

successor Treaty to the Kyoto Protocol. Not only did the Copenhagen negotiations not

agree on a new Treaty, the declaration did not even set a future deadline to agree a

Treaty. This calls into question the grand-fathering of the Kyoto mechanisms beyond

2012 and may result in a lack of continuity in UN-level climate policy in 2013.

No internationally-agreed post-Kyoto GHG reduction targets. The Copenhagen

Accord provides an Appendix into which developed countries can write their unilateral

commitments to achieve emissions reductions by 2020 based on their own baselineyear. The EU will use 1990, the US 2005 and Canada 2006 (see Figure 46 - Unilateral

National Commitments to Reduce GHG Emissions). This agreement opens the door to

more unilateral and bilateral commitments and downplays the value of a UN-

negotiated global regime requiring the consensus of all 192 UN members. Legally-

binding GHG reduction commitments will be made at the national level.

No coverage of GHG regimes for international aviation and maritime. Several years of

work on sectoral approaches to emissions reduction, in industries like aviation and

maritime that require international governance, failed to get a mention in the Accord.

This will add to the confusion and challenges of implementing the EU’s cap on GHG

emissions from aviation in EU airspace from 2013. The UN’s International Maritime

Organization will need to pick up the pieces on climate rules for international shipping.

No reform of the Kyoto Clean Development Mechanism. Preparatory work since the

Bali COP 13 meeting on reform of the Kyoto carbon market mechanisms will have to

wait for the blessing of the UN. Emissions from land use, land use change and forestry

(LULUCF) and the terms of the potential inclusion of carbon capture and storage will

be on the back-burner for at least a year. The Copenhagen Accord will not solve the

many problematic procedural issues relating to the timely validation of CDM projects

and verification of emission reductions.

No internationally-

agreed post-Kyoto

GHG reduction

targets.

No coverage of GHG

regimes for

international aviation

and maritime.

No reform of the

Kyoto Clean

Development

Mechanism.




The Climate Change Sceptics’ arguments

Few major decision makers believe the climate change sceptics, but their views should not be

overlooked as they are able to give balance to a debate that is getting increasingly emotional.

Below are some arguments that the sceptics put forward about the absence of proof that

global warming is caused by man-made activit ies.

There is no statistical certainty around the link – mainstream scientific estimates range

from 1.1 degrees Celsius to 6.4 degrees, which is so wide as to be meaningless

The price of carbon has been calculated from respected sources to cost anything from

$4 per ton (first European trading scheme opening price) to $85 per tonne mooted in

the Stern report. This means that the valuation system is so arbitrary that it is

meaningless and more dependent on regulation than economic value added.

Carbon trading can actually do damage, such as encouraging CFC heavy fridge factories

in China, so that they can be shut down and the carbon credits claimed.

Currently offsets projects involve less developed countries where corruption is a major

problem. Offsets effectively become transfers in wealth from tax payers in rich

countries to elites in poor countries who repatriate the proceeds in rich country banks

- Since the Kyoto Protocol in February 2007 US$10 billion/month has been spent in a

vain attempt to avert a speculated 0.5°C temperature rise by 2050.

The economic system values jam today rather than tomorrow. The world will get much

richer in the next century, so should pay for climate change when it has more money.

William Norhaus of Yale argues that since future generations will probably be much

richer than we are, it makes no more sense for us to sacrifice our well-being for them

than it would to expect 18th-century peasants to go without gruel so we can buy more

computers.

The present (average global) temperature is 7°C below the average for most of the last

four recent interglacial’s and 3°C lower than during the MINOAN, ROMAN & Medieval

Warming periods.

No greenhouse catastrophe occurred in the Cambrian Period when the CO 2 was 20

times higher than today and the temperature was 7°C warmer than today.

Experts’ track record in making predictions about the end of planet earth and other

frightening catastrophes is patchy at best. Most predictions including those of climate

zealots, have religious overtones. Pessimistic predictions attract much interest and

there is always a crowd ready to listen and believe - The New Testament tells us

(Matthew 16:28) that the world will end before the death of the last Apostle – only it

didn’t!

Carbon trading can

actually do damage,

such as encouraging

CFC heavy fridge

factories in China, so

that they can be shut

down and the carbon

credits claimed.

No greenhouse

catastrophe occurred

in the Cambrian

Period when the CO2

was 20 times higher

than today and the

temperature was 7°C

warmer than today.



Pinpoint’s Guide to Carbon | Conclusion and recommendations 74

The biblical overtones are amusing – in the United States, climate sceptics are more likely to be

republican supporters and to come from the South and that there is a correlation between

supporting creation and scepticism about climate change.

These views are not necessarily the views of the authors, but they should not be ignored. They

were sent to Pinpoint by a senior electrical engineer in a mining company that is one of South

Africa’s largest consumers of electricity.49

Conclusion and recommendations

Pinpoint’s views on climate change and the carbon markets1. If there is a risk – even a low one - of the catastrophic consequences of climate

change becoming reality, it is best to insure against it and this cost should be borne

in the way that we pay for insurance – by paying a small annual premium. We agree

with Lord Stern, when he says that the world should pay 1% GDP per year to avoid

Climate Change costs of between 5% and 20% by 2100.

One of the challenges of the climate change debate is the sheer complexity of the subject and

the lack of understanding and consensus within the scientific community. This uncertainty has

been exploited by the most obvious losers of the carbon economy, - fossil fuel providers, car

manufacturers and logistics companies. This lack of understanding has caused the public to be

confused enough about whether to support climate change or not. Besides they are much more

concerned about the recession and the more immediate issue of whether they will keep their

job than saving the planet in future generations.

While no person on either side of the climate change debate is able to say with certainty to

what extent humankind’s greenhouse gas emissions have caused climate change, there is a

growing consensus that the world should change its habits to avoid the possible effects of

climate change – and pay an insurance premium to avoid these effects. The range of estimates

that current economic trends will cause temperatures to rise by anywhere between 1.1⁰ C and

6.4⁰ C by the end of this century, with an average of 2.8 ⁰ C.50

This paper takes the view that

most potential catastrophe’s, whose probability is cannot be calculated with much confidence

can be insured against by a modest payment. This deals with scientific uncertainty in an

economically efficient manner.

49 Alex Ham - Electricity Supply options and consequences - Lecture in Cape Town in October 2009

50 The Economist – A special report on the carbon economy 5 December 2009 page 6 quoting the Intergovernmental

Panel on Climate Change’s data ranges.

If there is a risk –

even a low one - of a

catastrophe caused

by climate change, it

is best to insure

against it and this

cost should be borne

in the way that we

pay for insurance –

by paying a small

annual premium.

The first step is to

target energy saving

interventions that

save money.




2. The first step in the fight againstclimate is to target energy saving interventions that

actual save money – and legislate them. This will achieve one third of the world’s

emissions target and make people wealthier - and in the process - drive a massive

new financially sound capital investment boom that could easily become a $1 trillion

business sector by 2020.

Up to a third of the world’s emissions can be avoided through energy saving interventions that

save money. In this case energy saving interventions should be legislated, reducing the massive

capex needed to build energy capacity and saving customers on their ever increasing energy

bills.

As the plan for emissions reduction shows in figure 24, about a third of the emissions savinginterventions needed to reverse global warming actually save money. The paper deals with a

consumer example where an electric wall plug that changes laptops and mobile phones

generally wastes between 50% and 80% of electricity it draws, as it continues to suck electricity

even when the battery is fully charged. This was reduced to 20% in America seven years, when

it was legislated that wall plugs have integrated circuits with some intelligence to tell the plug

to stop drawing when the battery is full. This legislation slightly increased the capital cost of the

plugs (by about 60 US cents per plug to $2.60) which was generally less than 2% of the cost of

the equipment being charged. The energy saving resulted in $2 billion savings in US energy bills

per year and a reduction of 13 million tonnes of CO2 emissions. This is more than Lithuania’s 3.5

million people emitted in 2006.

The second example shows how a change of a mining process in South Africa, where moving

from jack hammers to electric drilling systems on underground mines would reduce electricity

consumption of the mining industry by 5% and the whole country’s demand by 1.25%. The

financial payback on the energy saving to the mines is less than four months. The savings to the

mining companies are about $300 million per year and the saving to the South African

government is a once off capital saving – by avoiding building new coal fired electricity

generation capacity is US$2 billion or 0.8% of GDP. There is no need for carbon credits in either

of these examples, as the return on investment to all stakeholders is far higher than competing

demands for capital.

3. Where the current market systems fail, greenhouse gas emissions pricing needs to

be internalised into investment decisions – particularly for new plant capacity.

Lord Stern estimates that the cost of carbon is about $85 per tonne, when all the negative

impacts of climate change are priced in. Currently – most of the world’s population and

companies in their countries do not incur the cost of their carbon footprint. The economic

system fails in that it excludes a material factor enabling heavy emitters – usually but not

The biggest challenge

climate change faces

is not technological -

there is affordable

technology to solve

the problem – but

one of public

acceptance and the

concomitant lack of

political will needed

to implement it.




always in the developed world to free ride the costs of drought, conflict and extreme weather

events incurred usually by developing countries.

As there is a shortage of electricity generation capacity, new plant investment decisions should

be prioritised for carbon taxes. The full cost of carbon emissions of fossil fuel generated plants

that are being commissioned in the future should reflect the full cost of carbon. In fact all new

industrial process investment decisions should.

4. The biggest challenge climate change faces is not technological as there is affordable

technology to solve the problem – but one of public acceptance and the concomitant

lack of political will needed to implement it. Public awareness can be increased by

linking climate change to people’s everyday lives through disclose of carbon impactof every economic decision they make

People find it a hassle to recycle their rubbish, 90% of British journeys are taken by private car

and less than 5% of British Airways travellers voluntarily offset their carbon footprint on flights.

If carbon is accounted for and companies have to disclose their carbon foot print according to a

similar regime to that of generally accepted accounting practice. Comparative carbon

advertising should be allowed.

Awareness of the carbon impact on people’s economic dec isions can be improved quickly and

inexpensively by:

Putting the carbon emissions embedded in each product, split by emissions from input

processes and emissions by processes to manufacture.

Making companies disclose “energy added” in the same way that they make

regulatory financial returns and to have a standardised system of disclosure similar to

International Accounting Standards for Financial Reporting.

Tax breaks for green energy fund investment returns – this will encourage companies

to place brand value and investor relationships value on their green credentials.

5. Carbon markets need to be reformed, and all major economies need to be included

in the carbon markets. Focus should be on setting reasonable limits and on industry

specific carbon intensity, rather than absolute country emissions. This takes into

account developing countries growth and the fact that energy hungry industries are

clustered nearer energy sources.

Key to the carbon trading concept is the ability to offset carbon emissions with lower

cost projects in the developing world. This process is currently badly hampered by

bottlenecks giving rise to a number of credit risks:

Carbon markets need

to be reformed, and

all major economies

need to be included

in the carbon

markets.



Pinpoint’s Guide to Carbon | Carbon trading outlook post Copenhagen 77

Sovereign risk – more a perceived than actual risk – but it does effect prices –

sovereign risk relates to political instability causing the project’s activities

being disrupted. The actual risk is lower as the performance of the operation

does not depend as much on finances or exchange rates, as other sovereign

risk adjusted assets such as bonds do;

DNA Risk - many developing countries do not have designated national

authorities (DNA’s) that are needed to approve projects – and other country’s

DNA’s are under-resourced and corrupt;

Validation risk – there is a high risk that the project’s delivery schedule will

change mid project, causing a delivery risk;

Registration risk – perhaps the key risk for CER’s is the fact that the UN CDMboard is so badly under-resourced that it can take up to two years to register

a project. By this time the opportunity to trade the carbon credits has often

passed – and they certainly will not be available to contribute towards the

capital costs on the project;

Monitoring risk – it may be impossible to track the emissions actually

achieved, due to a lack of monitoring ability in the project itself

Verification risk – each year the CDM requires external verification (rather

like a statutory audit of a company’s financial statements). There is a change

that this verification process will not happen – many countries lack

verification agencies – and the second is that the verification agency will findthat the carbon emissions achieved were lower than forecast.

All these factors contribute towards CER’s trading at a significant discount – currently

about 40% of EUA’s. Many of these factors – most particularly the CDM bottleneck and

issues around DNA’s, monitoring and verification can easily be dealt with.

6. It must be done by 2012, or else the carbon trading will never recover.

Carbon trading outlook post Copenhagen

Short term outlook

Carbon trading is perhaps the biggest loser in the aftermath of Copenhagen. It was under

serious pressure due to the economic downturn which has negative supply and demand

implications for price:

1. Negative pricing pressures from the recession - Heavy industry and mining shut down

for several months – for instance Debswana diamond mine in Botswana stopped

There are many

developing market

risks that have

hampered growth of

the CDM



Pinpoint’s Guide to Carbon | Carbon trading outlook post Copenhagen 78

production for four months, while Mittal has caused an outcry when it revealed that

the decrease in economic activity on its European plants resulted in carbon credits

worth $1 billion being claimed. This has caused a glut on the market, as traditional

buyers will turn to sellers. Projects have been put on hold to such an extent that teams

have been stopped in major brokerage houses. This has greatly thinned out liquidity.

2. Uncertainty around future framework

Kyoto second period ends in 2012 and the failure to get any kind of specific legal guidance on

emissions will virtually wipe out the market post 2012. There will be p lenty of anxious headlines

and attempts by individual countries to push national agendas, which will add to the perception

that no deal will struck.

3. Bottlenecks in approval process

The UN has been criticised for making the CDM process unworkable with too few people

working on approving deals, resulting in a backlog that stretches for years. This, along with the

high consultancy costs make smaller developing market offsets projects impossible.

All this adds up to lower prices in the next twelve months with the UA 2008 -2012 market

collapsing in the same way that 2005-2007 did – albeit for different reasons..

Medium term outlook

If the short term prognosis is gloomy, the medium term outlook is excellent: The possibility of

US legislation and a much larger carbon offsets market greatly increases the chances that the

market will be worth more than a trillion dollars by 2015. The fact that China is a large

beneficiary of US emissions reduction legislation as it currently stands increases the chances of

a post-2012 deal and puts pressure on the United States to comply. This means that it is a good

idea to accumulate and hoard post 2012 credits.

Our view is that pre-2012 prices will reduce in the short term, so existing credits should be sold

as quickly as possible, and the proceeds/goodwill created with the sales should be used to

obtain carbon credit options so that they can be traded on the market once it bounces back

after 2012 framework has being agreed – which will invariably be last minute, giving rise to a

once in a generation long term buying opportunity.

Will there be a workable successor to Kyoto? Yes in Pinpoint’s view, but it will be last minute

struggle, which will cause 2012 carbon prices to collapse to zero. As Winston Churchill said –

people always do the right thing – but only after exhausting all the alternatives.

Negative pricing

pressures from the

recession

The possibility of US

legislation and a

much larger carbon

offsets market is

excellent news for

creating a trillion

dollar market by

2015.



Pinpoint’s Guide to Carbon | Addendum A – Common Acronyms 79

Addendum A – Common Acronyms

AAUs – Assigned Amount Units are carbon credits which can be traded, sold, or bought at the

discretion of the holder. The AAU’s are redeemable for the emission of one metric ton of

carbon. AAU’s can be used or stored at any time. AAU’s are not to be bought, sold, or traded

from a non ratifying country.

Annex 1 - Annex I Countries are those which committed themselves as a group to reducing

their emissions of the six greenhouses gases by at least 5% below 1990 levels over the period

between 2008 and 2012. Specific targets vary from country to country. Non-Annex 1 countries

are developing countries, and they have no emission reduction targets.

Annex 2 - Annex 2 Countries are industrialised countries with greenhouse gas emissions

limitations or a reduction commitment. The annex identifies those countries currently making a

transition to a market economy. The only difference between the Annex I and Annex B

countries is that Turkey and Belarus are not Annex B countries.

CDM- The Clean Development Mechanism is an arrangement under the Kyoto Protocol

allowing industrialised countries with a greenhouse gas reduction commitment (called Annex B

countries) to invest in projects that reduce emissions in developing countries as an alternative

to more expensive emission reductions in their own countries.

CER- Certified Emission Reductions are climate credits (or carbon credits) issued by the CleanDevelopment Mechanism (CDM) Executive Board for emission reductions achieved by CDM

projects.

CO2e - Carbon Dioxide Equivalent CO2 is a measure used to compare the emissions from

various greenhouse gases based upon their global warming potential. Emissions of greenhouse

gases are commonly converted into carbon dioxide equivalent (CO2e) based on their 100 year

global warming potential. This allows a single figure for the total impact of all emissions sources

to be produced in one standard unit.

COP – The Conference of the Parties comprises all countries that have ratified the United

Nations Framework Convention on Climate Change. COP is responsible for implementing the

objectives of the Convention and has been meeting regularly since 1995.

DOE- A Designated Operational Entity is an independent body accredited by the CDM

Executive Board (CDM EB) that either validates a project proposal and recommends it for

registration by the CDM EB, or verifies the monitoring data and recommends to the CDM EB the

amount of carbon credits that should be issued.




DNA- The Designated National Authority is the official body representing the Government

which takes part in the arrangement of CDM/JI projects. For JI host countries, the DNA

approves the projects and issues the emission reduction units.

ERPA- The Emissions Reduction Purchase Agreement is a legally binding document signed

between the Seller and Buyer of carbon credits, at an arranged price for a specified volume

over a period of time. The ERPA may be based on standard formats such as that designed by

IETA, the International Emissions Trading Association.

ERU- An Emission Reduction Unit is the basic unit of Joint Implementation projects. One ERU

represents the successful emissions reduction equivalent to one tonne of carbon dioxide

equivalent (tCO2e).

EUA- European Union Allowances (see EU ETS).

EU ETS- The European Union Emissions Trading Scheme is a cap-and-trade system which

allows participants from eligible countries to trade European Union Allowances (EUA) The EU

ETS runs for eight years, from 2005 to 2007, and 2008 to 2012 to match the first Kyoto

Commitment Period.

GHG - Six Greenhouse gases are regulated by the Kyoto Protocol, as they are emitted in

significant quantities by human activities and contribute to climate change. The six regulated

gases are carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydro fluorocarbons (HFCs),

per fluorocarbons (PFCs) and sulphur hexafluoride (SF6).

GWh - A Gigawatt hour is a unit of energy equivalent to one million kilowatt hours (KWh).

GWP - Global warming potential is a measure of how much a given mass of greenhouse gas is

estimated to contribute to global warming.

IPCC - The Intergovernmental Panel on Climate Change is a scientific intergovernmental body

tasked to evaluate the risk of climate change caused by human activity. The World

Meteorological Organization (WMO) and the United Nations Environment Programme (UNEP)

established the IPCC in 1988.

JI- Joint implementation is an arrangement under the Kyoto Protocol allowing countries with

binding greenhouse gas emissions targets (Annex I countries) to meet their obligations. Any

Annex I country can invest in emission reduction projects (Joint Implementation Projects) in any

other Annex I country as an alternative to reducing emissions domestically.

KWh - A kilowatt hour is a unit of energy. Energy in kilowatt hours is the product of power in

kilowatts and time in hours; it is not "kilowatts per hour". Power is the rate at which energy is

http://en.wikipedia.org/wiki/Greenhouse_gas

http://en.wikipedia.org/wiki/Global_warming


http://en.wikipedia.org/wiki/United_Nations_Framework_Convention_on_Climate_Change#Annex_I_countries

http://en.wikipedia.org/wiki/United_Nations_Framework_Convention_on_Climate_Change#Annex_I_countries


http://en.wikipedia.org/wiki/Global_warming





generated and consumed. For example, if a 0.1 kilowatt light bulb is turned on for one hour, the

energy used is 0.1 kilowatt hours. A power station would be rated in watts, but its annual

energy sales would be in kilowatt hours (or megawatt-hours). A kilowatt hour is the amount of

energy equivalent to a steady power of 1 kilowatt running for 1 hour, or 3.6 megajoules.

LULUCF - Land use, land-use change and forestry is defined by the UN Climate Change

Secretariat as, "A greenhouse gas inventory sector that covers emissions and removals of

greenhouse gases resulting from direct human-induced land use, land-use change and forestry

activities.”

MWh - A Megawatt hour is a unit of energy equivalent to one thousand kilowatt hours (KWh).

RoCs - Renewable Obligation Certificates are a representation of the amount of energy

generated from renewable sources.

REDD - The program, Reducing Emissions from Deforestation and Degradation, aims to pay

mostly developing tropical countries enough money to keep their trees in the ground — and

thus continue to absorb carbon — rather than allowing them to be chopped down for a profit.

RTFO - Renewable Transport Fuel Obligation will require transport fuel suppliers to ensure

that, by 2010, 5% of all road vehicle fuel is supplied from renewable sources.

UNDP - The United Nations Development Programme is the United Nations' global

development network. UNDP provides expert advice, training, and grant support to developing

countries, with increasing emphasis on assistance to the least developed countries. To

accomplish the MDGs and encourage global development, UNDP focuses on poverty reduction,

HIV/AIDS, democratic governance, energy and environment, and crisis prevention and

recovery. UNDP also encourages the protection of human rights and the empowerment of

women in all of its programs.

UNEP - The United Nations Environment Programme coordinates United Nations

environmental activities, assisting developing countries in implementing environmentally sound

policies and encourages sustainable development through sound environmental practices. Its

activities cover a wide range of issues regarding the atmosphere, marine and terrestrial

ecosystems. UNEP has aided in the development of guidelines and treaties on issues such as

the international trade in potentially harmful chemicals, transboundary air pollution, and

contamination of international waterways.

UNFCCC - The United Nations Framework Convention on Climate Change was signed at the

1992 Earth Summit in Rio de Janeiro. It is an international treaty tasked with considering ways

of addressing global warming, and in 1997, was amended to include the Kyoto Protocol. More




information be found here:

http://unfccc.int/essential_background/convention/items/2627.php

WMO - The World Meteorological Organisation is a specialized agency of the United Nations.

It is the UN system's authoritative voice on the state and behaviour of the Earth's atmosphere,

its interaction with the oceans, the climate it produces and the resulting distribution of water

resources: http://www.wmo.int/pages/index_en.html .



http://www.wmo.int/pages/index_en.html







Pinpoint’s Guide to Carbon | Addendum B - Glossary 83

Addendum B - Glossary

Albedo - Albedo is the fraction of solar energy (shortwave radiation) reflected from the Earth

back into space. It is a measure of the reflectivity of the earth's surface. Ice, especially with

snow on top of it, has a high albedo: most sunlight hitting the surface bounces back towards

space. Water is much more absorbent and less reflective. So, if there is a lot of water, more

solar radiation is absorbed by the ocean than when ice dominates

Anthropogenic - Anthropogenic effects, processes or materials are those that are derived from

human activities, as opposed to those occurring in natural environments without human

influence.

Biological pump - The biological pump is a process by which carbon dioxide and other gases

and nutrients are brought to the bottom of the ocean by sinking organic matter, including dead

phytoplankton.

Carbon footprint - Carbon footprint is the measure of the amount of carbon dioxide or CO 2

emitted through the combustion of fossil fuels in carrying out a process or makes a product.

Carbon offset - Carbon offset is the act of reducing or avoiding GHG emissions in one place in

order to "offset" GHG emissions occurring elsewhere. Because GHG’s mix well in the

atmosphere, it doesn’t matter where that mitigation occurs. Carbon Sequestration - Carbon sequestration refers to the provision of long-term storage of

carbon in the terrestrial biosphere (soil and organisms) - or the oceans, so that the build up of

carbon dioxide concentration in the atmosphere will reduce or slow.

Carbon Sink - A carbon sink is a carbon dioxide reservoir that keeps increasing in size. Main

natural sinks are the oceans’ biological pump, as well as plants and other organisms that use

photosynthesis to remove carbon from the atmosphere by incorporating it into their biomass

to release oxygen into the atmosphere. The process by which carbon sinks remove CO2 from

the atmosphere is known as carbon sequestration, and it tries to alleviate the accumulation of

greenhouse gases.

CDM Methodology Panel - The Methodologies Panel (Meth Panel) was established to develop

recommendations to the Executive Board on guidelines for methodologies for baselines and

monitoring plans, and to prepare recommendations on submitted proposals for new baseline

and monitoring methodologies.

Emissions - Emissions are releases of gases to the atmosphere, caused by human behaviour. In

the context of global climate change, they consist of relatively important greenhouse gases,

e.g., the release of carbon dioxide during fuel combustion.



Emissions Trading - Emissions trading is an administrative approach used to control pollution

by providing economic incentives for achieving reductions in the emissions of pollutants. It is

sometimes called cap and trade.

Global warming - Global warming is the observed increase in the average temperature of the

Earth's atmosphere and oceans in recent decades, and its projected continuation.

Greenhouse Effect - The greenhouse effect is the heating of the surface of a planet or moon

due to the presence of an atmosphere containing gases that absorb and emit infrared radiation.

Greenhouse gases trap heat within the surface-troposphere system.

Kyoto Protocol - The Kyoto Protocol is an international agreement linked to the United

Nations Framework Convention on Climate Change. The major feature of the Kyoto Protocol is

that it sets binding targets for 37 industrialized countries and the European community for

reducing greenhouse gas emissions .These amount to an average of five per cent against 1990

levels over the five-year period 2008-2012.

Photosynthesis - Photosynthesis is the biochemical process in which green plants use energy

from light to synthesise carbohydrates from carbon dioxide and water.

Radioactive Forcing - Radioactive Forcing is the difference between the incoming radiation

energy and the outgoing radiation energy in a given climate system.

Zero Carbon - Zero Carbon is any activity that results in no carbon dioxide being emitted or

carbon emissions being equally offset through the purchase of exchange traded or voluntary

carbon credits.

http://en.wikipedia.org/wiki/Atmosphere

http://en.wikipedia.org/wiki/Infrared

http://en.wikipedia.org/wiki/Infrared

http://en.wikipedia.org/wiki/Atmosphere

pinpoint energy guide to carbon ver 2.02

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