Wana trade CO2 ?

Miscalculations and over-confidence seems to be the prime reasons behind the ongoing US financial crisis. Chance of committing an error, grave mistakes in the case of US housing crisis, gets compounded when one deals with complex financial instruments and evidently, the price which we all have to pay is too dear. Its definitely going to take few more quarters for US to come out of this slowdown, probably a recession. It's very bewildering to see intellectuals coming up with such complex instruments and regulations which are so difficult to comprehend for a layman like me. One of the recent entry to the list of global financial instruments is Carbon crediting i.e. trading carbon ( actually it is carbon di-oxide, CO2) . Carbon credit as a commodity is a newcomer and its current global market is estimated to be around USD $60 million. Moreover, if all the major economic powers ratifies the Kyoto Protocol, this market is estimated to cross a trillion US dollar mark by the year 2020.

The way carbon trading works is very intriguing - and it's a very laudable and noble way to mitigate global warming and might prove very helpful to humankind to avert a premature doomsday. Carbon trading is based under the premise of 'cap-and-trade' policy. With the ratification of Kyoto protocol, the amount of green house pollutants a firm, and hence a country, can emit is calculated and that sets the 'cap' for the organisation, subsequently for a country too, and it is obliged not to cross the upper limit. Now the question is, how firms or organisations are expected to grow, which is fundamental to any country's growth, without polluting earth's atmosphere further. To answer this questions comes the part of 'trade'; by purchasing carbon credits a firm can keep its net emission level under the predetermined capped level and hence continue emitting more pollutants. A carbon credit is nothing but the point which one earns by not emitting carbon di-oxide (CO2) in the atmosphere. Among all the green house gases CO2 is the most abundant one hence the standards are set based on it. So whenever one makes use of any technology and prevents emission of CO2 or helps reducing CO2 level, one earns points. Even if one uses a CFL instead of a conventional bulb, one earns carbon credits. It's another point that the total carbon credits which one will accumulate, with the help of one CFL, might not be significant enough to trade as commodity in actual market. It takes preventing one metric tonne of CO2 from escaping to atmosphere, to earn a Certified Emission Reduction (CER), the unit of one carbon point. It might look like a colossal quantity but it gets dwarfed when emissions of fuel guzzling firms, such as thermal power plant, are taken into consideration. Hence, if a firm wants to pollute more than the capped limit it must purchase carbon credits from other organisations and/or banks. Purchasing carbon credit means that the organisation has supposedly compensated the damage which it is going to inflict, by promoting some other environment preserving process. To me, it seems more like a 'heal-and-hit' policy as one helps in healing the environment before hitting it again - sounds very unethical but it's showing positive results and hopefully it continues to works out well in future.

There are many organisations which collect carbon credits from small firms and sell them to banks. Small firms might earn their points by using technologies as simple as non-conventional energy sources or even by preventing their livestock from belching or farting methane ( seriously! people are using pills on livestock to prevent emission of methane, which is more than 20 times effective green house gas compared to CO2. Also note that, HFC's, used as refrigerant are 3000 times effective and one metric tonne of HFC costs around USD $12000). Currently, in the lower rung, the cost of 1 CER is USD $4 and these CER's are sold at a rate many times higher to investment banks; and finally to firms by these banks at a much higher rate. This created a market in which CER's are traded and its potential is estimated to be huge, hence investment banking giants like JP Morgan Chase, UBS are heavily banking on carbon trading as one of the hedging instrument.

One feels that, carbon trading is not only playing an instrumental role in subduing global warming but also created a new commodity which can be traded in free market. Now there are more than one thing to watch; first, how effective will be to preserve earth's atmosphere and second, how this new commodity unfolds in the future of world economy. One hopes that it won't result to a crisis like the one which housing sector is currently facing.