Cashing In on Cutting Carbon Dioxide Emissions

Date: 06-08-2006

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HONOLULU (June 8) - Cutting carbon dioxide and other greenhouse gas emissions in an attempt to mitigate global climate change and rising sea levels may not seem like a way to make money. But, according to East-West Center (EWC) senior fellow ZhongXiang Zhang, it is.

"The European Union (EU) emissions trading scheme and the clean development mechanism (CDM) under the Kyoto Protocol link the two seemingly unrelated matters and have created a completely new industry worth multi-billions of euros."

The EWC researcher told a plenary session of the International Association for Energy Economics Conference today in Potsdam, Germany "Carbon is now increasingly being used as a hard currency."

The conference in the former East German city runs through June 10 and is scheduled to have 6 plenary sessions and 53 concurrent sessions. According to its organizers, "The plenary sessions are the platform for making the expert knowledge of the keynote speakers known to a broader audience."

Zhang's message to that broader audience is that cutting carbon emissions can be a lucrative business opportunity while at the same time being good for the environment.

"Few anticipated this development a few years ago," Zhang noted. "But it has become a reality as the EU emissions trading scheme went into operation on January 1, 2005 and the Kyoto Protocol entered into force February 16 the same year."

Ironically, emissions trading was a concept pioneered in the United States as a means of tackling the acid rain problem. Zhang says the U.S. lobbied intensively for it to be part of the Kyoto Protocol while the EU was in favor of environmental taxes and other measures and policies to curb the outflow of greenhouse gases. "But it was the EU that put into operation the world's largest multi-country, multi-sector carbon dioxide emissions trading scheme last year, three years before the Kyoto Protocol mandates to cut emissions are to come into effect."

As the EWC senior fellow points out, "Under the scheme, about 11,500 power installations and energy-intensive industrial plants are allocated a certain number of carbon dioxide allowances by their governments subject to approval from the European Commission." Zhang goes on to explain, "One allowance represents the right to emit one ton of carbon dioxide. If they emit more than their allocated allowances, they need to buy extra allowances to make up the shortfall. If they do not use their allowances they are allowed to sell what remains."

By placing a cost on carbon emissions and a value on reductions, the emissions trading scheme is creating market incentives that, according to Zhang, "drive companies to keep coming up with better and cheaper ways to cut their emissions."

There is little doubt emissions trading can be profitable.

"During its first year of operation," Zhang notes, "the EU emissions trading scheme has witnessed an extraordinary amount of 'business'." He points out, "There were some 362 million EU allowances transacted last year, with a total value of 7.2 billion euros (approximately U.S.$8.6 billion)."

And, according to the EU's own figures the scheme is working to cut emissions. It is reported that by the first compliance deadline of April 30 of this year, the twenty-one countries under EU supervision emitted 2.5 percent less than allowed under their 2005 quota. A few countries, such as the United Kingdom and Spain, missed their targets but the overall results indicate that the trading scheme works effectively.

Zhang notes, however, that the EU carbon market is "not yet mature." He says the market is "a politically created one that is very sensitive to policy developments on the supply side." As proof, he points to the April announcements on verified emissions. "When Belgian, Czech, Dutch, and French figures were released it was shown that their emissions were much lower than allowed. This surplus of allowances led to allowance prices dropping by 55 percent in only three days. The price dropped from a record high of 31 euros per unit in mid-April to only 13.5 euros per unit by April 27."

“To minimize surprises or shocks like this at the end of each year,” Zhang suggests, “that member states need to release their future verified emissions data in a coordinated manner and to require the covered installations to periodically release emissions data, just like public firms are required to release quarterly earning reports.” Zhang further adds that “providing flexibility to carry forward allowances from phase I to phase II” is helpful to reduce price volatility.”

Along with the EU allowances market, the clean development mechanism (CDM) credit market is enjoying remarkable growth. The CDM allows industrialized countries to generate emission credits through investment in emission reduction projects in developing countries.

In December 2004 there was only one registered CDM project with another 60 in the pipeline. A year later those numbers were 40 and 500 respectively. "Now," Zhang told his colleagues in Potsdam, "there are 203 CDM registered projects and approximately another 560 in the CDM evaluation process." Successful completion of the evaluation process is needed for registration.

Zhang says, "The reduction potential of these currently known CDM projects is estimated to be over 978 million tons of carbon dioxide equivalents by 2012, the end of the first commitment period under the Kyoto Protocol."

Put into perspective, the EWC senior fellow says, "This reduction potential is as much as the current greenhouse gas emissions of Germany, and corresponds to one-fourth of the total emissions in the 15 countries within the EU at the time of the adoption of the Kyoto Protocol in 1997." Zhang believes that contrary to arguments put forth by opponents to the Protocol, "These numbers speak for themselves. Developing countries are indeed already participating in global efforts to cut greenhouse gas emissions in a meaningful way."

Zhang also sees significant changes in the geographical distribution of CDM projects, too. "Until late-2003, both China and India lagged behind Latin America," he notes. "But, India has caught up very quickly. As of late-2005, India had emerged as the leading supplier of carbon credits in the world."

China may have been lagging behind, but no more.

"There were very few CDM projects in China during the first few years of this century," Zhang says. "But, the giant has awakened and implemented huge transactions on credits from a few large HFC23 projects. By providing thirty-three percent of the world's total estimated carbon credits by 2012, China now is the largest seller, although India still leads the market in terms of number of projects at the same stage of development."

Zhang explains that HFC23 "is a by-product in the production of the refrigerant HCFC22." He adds, "Its global warming potential is 11,700-times that of carbon dioxide. This means the releasing of one ton of HFC23 into the atmosphere is equivalent to 11,700 tons of carbon dioxide emissions."

“HFC23 types of CDM projects only have climate benefits but don’t have other social and environmental benefits,” Zhang says. “Theses types of projects are not the prioritized types of CDM projects in China. Ironically, to date, carbon credits from the so-called prioritized types of CDM projects only account for few percentages of the total carbon credits from China.”

"The substantial increase in CDM projects is partly attributed to the increasing number of carbon trading funds," according to Zhang. "Currently, over $4 billion have been dedicated to these carbon funds and governmental carbon credits purchase programs."

The World Bank kicked off the world's first carbon fund in 1999. Not too imaginatively called the Prototype Carbon Fund. The World Bank now manages 8 carbon funds and one facility worth $1.8 billion. The Japan Greenhouse Gas Reduction Fund, established in December 2004, is the first Asian carbon fund, worth some $141.5 million.

Purchasing carbon credits has been the main objective of most carbon funds. However, as Zhang points out, "The recent wave of activity in the carbon market has been more diverse." Major conventional financial institutions have become involved in the carbon business.

Zhang notes, as one example, "The French bank Caisse des Depots and the Dutch-Belgian Fortis Bank have structured and operate the European Carbon Fund. That fund is capitalized at 142.5 million euros." More important is the fact that the fund is offering investors, as Zhang points out, "financial returns." In other words, there is cash to be made in the carbon market.


ZhongXiang Zhang is a senior fellow in energy and environmental economics at the East-West Center in Honolulu. Dr. Zhang can be reached at (808) 944-7265 or via email at

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