carbon credit

THE INTERNATIONAL INSTITUTE OF PLANNING AND MANAGEMENT AHMEDABAD

CARBON CREDIT

CARBON CREDITS

EMITTING GAINS

Report by:

Jayesh Dave Jigar Patel Jignesh Mehta Jay sheth Mahesh Panchal Archit Gupta Pratik Sureja

Reported to:

Prof. Jarana pathak

International Institute of Planning and ManagementGulbai Tekra

Project Survey Report on Carbon Credit


Ahemdabad

Contents

1. Executive Summary ……………… 3

2. Effect of Global Worming. ……………… 3

3. What is Carbon Credit? ……………... 4

4. How does Carbon Credit save planet? ………………9

5. What is Kyoto Protocol Product? ……………... 11

6. Carbon Credit calculator. …………….. 17 7.

What is Carbon Rating? ………………23



Executive Summary

We the student of IIPM to get loyal opportunity to take interest and to survey entire world economy is facing problem gaining Carbon Credit To study the impact of carbon trading on Indian companies.

With the increase in Greenhouse Gas (GHG) emissions in the atmosphere, the global temperature have been on a constant rise. In last 65 years the amount of anthropogenic (made or induced by humans) carbon dioxide has risen from 280 parts per million to 380. With the current energy mix favoring the use of fossil fuels, the level is expected to increase at a rapid pace. This has led to a global phenomenon called the Greenhouse Effect. By increasing day to day pollution from various industry in our locality region or as well as overseas Industry like US, Europe, Asia etc. Basically our projects related to the carbon emission reduction in developing countries. Carbon dioxide, the most important greenhouse gas produced by combustion of fuels, has become a cause of global panic as its concentration in the Earth's atmosphere has been rising alarmingly. Carbon credits are a part of international emission trading norms. They incentivise companies or countries that emit less carbon. The total annual emissions are capped and the market allocates a monetary value to any shortfall through trading. Businesses can exchange, buy or sell carbon credits in international markets at the prevailing market price.

What is Greenhouse effect?

The sun heats up the earth by sending solar rays towards us. Some of these rays don’t get through our atmosphere. Those that do, warm up the earth. When the earth warms up it radiates its own rays of heat – infrared rays. Greenhouse gases absorb those, which don’t escape past the atmosphere. These greenhouse gases warm the earth so it is at the temperature we experience now. Without this process the earth would be some 30o C cooler and life on our planet would be very different. However, we are producing too many greenhouse gases, which mean they are absorbing more heat and warming the earth too much – this is called global warming. One of the main greenhouse gases is carbon dioxide, which can be created from chopping down and burning of trees. The fuel used in cars and machinery also creates carbon dioxide, as do coal and natural gas. Therefore, if we reduce the use of fuel and reduce deforestation, the amount of greenhouse gas around earth should also be reduced. Scientists say it is already too late to prevent global



warming and therefore climate change, but by reducing greenhouse gases we could still limit the impact. Even a change in temperature of under 1 o C is enough to cause changes in rainfall and sea.Effect of Global Warming

Seawaters could rise almost a meter in this century, and will continue to move up. Some coastal regions already see seasonal flooding, and the situation is expected

to worsen as water levels rise. Coral reefs are under pressure from changes in water level and temperature. As

most carbon goes into sea, plankton could suffer, and that would affect species higher up the food chain.

What is carbon credit?

As nations have progressed we have been emitting carbon, or gases which result in warming of the globe. Some decades ago a debate started on how to reduce the emission of harmful gases that contributes to the greenhouse effect that causes global warming. So, countries came together and signed an agreement named the Kyoto Protocol.



India and China are likely to emerge as the biggest sellers and Europe is going to be the biggest buyers of carbon credits.

Last year global carbon credit trading was estimated at $5 billion, with India's contribution at around $1 billion. India is one of the countries that have 'credits' for emitting less carbon. India and China have surplus credit to offer to countries that have a deficit.

India has generated some 30 million carbon credits and has roughly another 140 million to push into the world market. Waste disposal units, plantation companies, chemical plants and municipal corporations can sell the carbon credits and make money.

Carbon, like any other commodity, has begun to be traded on India's Multi Commodity Exchange since last the fortnight. MCX has become first exchange in Asia to trade carbon credits.

Developed countries, mostly European, had said that they will bring down the level in the period from 2008 to 2012. In 2008, these developed countries have decided on different norms to bring down the level of emission fixed for their companies and factories.

A company has two ways to reduce emissions. One, it can reduce the GHG (greenhouse gases) by adopting new technology or improving upon the existing technology to attain the new norms for emission of gases. Or it can tie up with developing nations and help them set up new technology that is eco-friendly, thereby helping developing country or its companies 'earn' credits.

India, China and some other Asian countries have the advantage because they are developing countries. Any company, factories or farm owner in India can get linked to United Nations Framework Convention on Climate Change and know the 'standard' level of carbon emission allowed for its outfit or activity. The extent to which I am emitting less carbon (as per standard fixed by UNFCCC) I get credited in a developing country. This is called carbon credit.

Carbon dioxide, the most important greenhouse gas produced by combustion of fuels, has become a cause of global panic as its concentration in the Earth's atmosphere has been rising alarmingly.



This devil, however, is now turning into a product that helps people, countries, consultants, traders, corporations and even farmers earn billions of rupees. This was an unimaginable trading opportunity not more than a decade ago.

Carbon credits are a part of international emission trading norms. They incentivise companies or countries that emit less carbon. The total annual emissions are capped and the market allocates a monetary value to any shortfall through trading. Businesses can exchange, buy or sell carbon credits in international markets at the prevailing market price.

India and China are likely to emerge as the biggest sellers and Europe is going to be the biggest buyers of carbon credits.

Last year global carbon credit trading was estimated at $5 billion, with India's contribution at around $1 billion. India is one of the countries that have 'credits' for emitting less carbon. India and China have surplus credit to offer to countries that have a deficit.

India has generated some 30 million carbon credits and has roughly another 140 million to push into the world market. Waste disposal units, plantation companies, chemical plants and municipal corporations can sell the carbon credits and make money.

Carbon, like any other commodity, has begun to be traded on India's Multi Commodity Exchange since last the fortnight. MCX has become first exchange in Asia to trade carbon credits.

So how do you trade in carbon credits? Who can trade in them, and at what price?

How does it work in real life?

Assume that British Petroleum is running a plant in the United Kingdom. Say, that it is emitting more gases than the accepted norms of the UNFCCC. It can tie up with its own subsidiary in, say, India or China under the Clean Development Mechanism. It can buy the 'carbon credit' by making Indian or Chinese plant more eco-savvy with the help of technology transfer. It can tie up with any other company like Indian Oil [Get Quote], or anybody else, in the open market.

In December 2008, an audit will be done of their efforts to reduce gases and their actual level of emission. China and India are ensuring that new technologies for energy savings


http://money.rediff.com/money/jsp/quote_process.jsp?query=indian%20oil%20corporation%20ltd


are adopted so that they become entitled for more carbon credits. They are selling their credits to their counterparts in Europe. This is how a market for carbon credit is created.

Every year European companies are required to meet certain norms, beginning 2008. By 2012, they will achieve the required standard of carbon emission. So, in the coming five years there will be a lot of carbon credit deals.

Understanding the system and logic

Science has correlated climate over the ages with core samples from ice sheets and found that carbon dioxide levels fluctuate with climatic events. Only recently has science been able to understand how this CO2 actually works to trap the heat in the atmosphere and by calling it the greenhouse effect gives us the basic understanding of what goes on.

It’s pretty simple really in theory. All growing things absorp carbon which ultimately ends up in the soil. Planting trees reduces the carbon in the atmosphere but not if they are then cut down and burnt and crops that are planted and harvested will not actually store carbon within them. Long term plans are needed. Crops can be farmed in such a way that the soils are not ploughed to let the stored carbon escape. Weeds and borders to fields can be encouraged. Forests can be left to stand. Fuel usage can be cut and power generation can be more efficient and all this reduced consumption of carbon will mean that less carbon credits will have to be purchased.

The money that purchases carbon credits will ultimately be used to give grants to further carbon saving schemes. New Zealand has already funded some wind generation projects from the money gained from selling carbon credits. Ireland has recently purchased 95% of its carbon credits from overseas to offset the millions of tons of CO2 its industries will develop for the forthcoming year. The other 5% will come from internally as they have new practices of farming and been planting trees since 1990. Some treebound countries do not necessarily have loads of carbon credits to sell as they have not made any attempts to increase the number of trees since 1990. There are complications to be conquered though. In Australia, Virgin has tried to introduce it's airline but has been deterred by the need to offset it's CO2 pollution by the purchase of Carbon Credits which makes them uncompetitive



How does it work in real life?

Assume that British Petroleum is running a plant in the United Kingdom. Say, that it is emitting more gases than the accepted norms of the UNFCCC. It can tie up with its own subsidiary in, say, India or China under the Clean Development Mechanism. It can buy the 'carbon credit' by making Indian or Chinese plant more eco-savvy with the help of technology transfer. It can tie up with any other company like Indian Oil [Get Quote], or anybody else, in the open market.

In December 2008, an audit will be done of their efforts to reduce gases and their actual level of emission. China and India are ensuring that new technologies for energy savings are adopted so that they become entitled for more carbon credits. They are selling their credits to their counterparts in Europe. This is how a market for carbon credit is created.

Every year European companies are required to meet certain norms, beginning 2008. By 2012, they will achieve the required standard of carbon emission. So, in the coming five years there will be a lot of carbon credit deals.

How do carbon credits save the planet?


http://money.rediff.com/money/jsp/quote_process.jsp?query=indian%20oil%20corporation%20ltd


Where do Carbon Credits fit in the planet saving action plan?

For individuals:

1. Recognize that everything we do has associated greenhouse gas emissions 2. Reduce your emissions. 3. Offset with fully certified carbon credits today (because the planet can't wait)



Farmers Union’s Carbon Credit Program

Farmers Union’s Carbon Credit Program allows agri producers and landowners to earn income by storing carbon in their soil through no-till crop production, conversion of cropland to grass, sustainable management of native rangelands and tree plantings on previously non-forested or degraded land. In addition, the capture of methane from anaerobic manure digester systems can also earn carbon credits.

Farmers Union has earned approval from the Chicago Climate Exchange to aggregate carbon offsets (carbon credits) and sell them on behalf of producers. Farmers Union enrolls producer acreage into blocks of marketable offsets that are traded on the Exchange, much like other agricultural commodities are sold. Proceeds from the sales are then forwarded to producers as each pool of carbon credits is marketed. National Farmers Union’s Carbon Credit Program earned more than $8 million for producers in its first two year of operation.

No-till crop production offsets are eligible in most central and eastern states. Seeded grass acres can be enrolled in most states and managed native rangeland offsets are offered mostly in central and western states. Maps are available on this Web site that show eligible states and counties. They are automatically programmed into the enrollment system and payment estimator. Forestry and agricultural methane projects also are available in every state.

Farmers Union offers continuous online enrollments for all offset types, although pools of enrollments are closed periodically for verification and registration of offsets. Producers provide land descriptions or map designations for the land they enroll in the program. The entered information is then transferred directly into Farmers Union’s database. Producers then follow up by sending in FSA 578 forms that detail their cropland acres, pasture descriptions, grazing plans for range acres and current maps. Producers also remit a signed contract. It is necessary for producers to have a valid e-mail address, as well as a post office address, for communication and verification purposes.

Agricultural methane offsets are also available, but only sample contracts and applications are available online. These individual projects will require producers or landowners to send in all materials by mail. Pooling, verification and marketing of carbon offsets will follow.


http://www.nfu.org/www.chicagoclimateexchange.com


What is Kyoto Protocol?

“The Kyoto Protocol is a legally binding agreement under which industrialized nations will reduce their collective emissions of greenhouse gases by 5.2% compared to the year 1990 (but note that, compared to the emission levels that would be expected by 2010 without the Protocol, this target represents a 29% cut). The goal is to lower overall emissions from six greenhouse gases – carbon dioxide, methane, nitrous oxide, sulfur hexafluoride, HFCs and PFCs – calculated at an average over the five-year period of 2008-12. National targets range from 8% reductions for European Union and some others to 7% for the US, 6% for Japan, 0% for Russia, and permitted increases of 8% for Australia and 10% for Iceland.” The protocol also reaffirms the principle that developed countries have to pay and supply technology to other countries for climate related studies and projects.

The protocol provides three mechanisms to the developed nations to meetthe emission targets.

1) Joint Implementation (JI): The Kyoto Protocol provides for developed countriesto implement projects that reduce emissions, or remove carbon from the atmosphere in other developed countries in lieu of Emission Reduction Units (ERUs). These ERUscan be used to meet the emission reduction targets. A JI project might involve, forexample, replacing a coal-fired power plant with a more efficient combined heat andpower plant. JI projects must have approval of all the parties involved, and must leadto emissions reductions or removal that are additional to any that would have occurredwithout the project. Projects from the year 2000 that meet the JI requirements may belisted as JI projects. However, ERUs may only be issued in relation to periods from 2008 onwards.

2) Clean Development Mechanism (CDM) Projects: The CDM provides for



developed countries to implement project activities that reduce emissions in developingcountries in return for certified emission reductions (CERs). The CERs generated bysuch project activities can be used by developed countries to help meet their emissiontargets under the Protocol. The protocol also stresses that such project activities areto assist the developing country host parties in achieving sustainable development. ACDM project activity might involve, for example, a rural electrification project usingsolar panels or the installation of more energy efficient boilers. The protocol refrainsdeveloped countries from using CERs generated out of nuclear facilities to meet thetargets.

3) Emissions Trading: The Kyoto Protocol provides that developed countries canacquire units from other developing parties and use them towards meeting their emissionstarget. This enables developed countries to make use of low cost opportunities toreduce emissions. Only developed countries in specified in Annexure I to the KyotoProtocol with emission limitation and reduction commitments inscribed in Annex B tothe Protocol may participate in such trading. Such countries must therefore be preparedto transfer units when they do not require them for compliance with their own emissiontargets.

Where does India qualify?India being a developing country is not included in the Annexure I of the protocol.Hence, India cannot qualify for JI and emission trading mechanisms. It qualifies to bea host country for the CDM projects.CD

CER TradingA transaction in CER trading involves buying of GHG emissions credits by entities(companies, Governments, etc.) from companies or Governments involved in projectsrelated to carbon emission reduction in developing countries. The idea is to makedeveloped countries pay for their wild ways with emissions while at the same timerewarding countries with good behavior in this regard. For example, a company inIndia can prove it that it has prevented emission of x-tons of carbon, it can sell thismuch amount of points or carbon credits to a company in say, the US which has been



emitting carbon. This allows industries in developed countries to offset their emissionsof carbon dioxide by investing in reforestation and clean energy projects in developingcountries such as large-scale tree plantations as a lucrative alternative to reducingemissions. Planting 100,000 hectares of new forest can remove 1mn ton of carbon peryear from the atmosphere.

Monday, November 03, 2008

IIPM-INTERNATIONAL, AHEMDABAD Carbon Credits : Emitting Gains

15

CER Trading

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Benefits likely to be derived from CDM Projects Developed countries will be able to meet their targets of reducing emissions at

much lower cost.

Country US $/ ton CarbonJapan 400USA 200India 25



Developing countries will be able to access the latest technology. Further, the parties involved in carbon credit sale would be able to put in additional investments into their routine business through the carbon credit earnings.

Overall it will lead to reduction of GHG emissions.Company A



CDM ApplicabilityThe industries, which can qualify for the CDM projects, are as follows:

1. Renewable energy Wind power Solar energy Biomass power Hydel power Geothermal Tydel Power

2. Fuel switching from fossil fuel to green fuel like biomass, rice husk, etc.Energy efficiency measures related to

Boiler Pumps Turbines Installation of various speed drives Efficient cooling systems Back pressure turbines, etc

3 Cogeneration in industries having both steam and powerrequirement

In waste management Capturing of landfill methane emission to generate power Utilization of waste and waste water emissions for generation of energy for captive use of power generation

4 In transport Fuel switch from gasoline and diesel to natural gas Modal shift from air to train, road to train at macro level Replacement of shipment of certain raw materials through road to pipelines

To study the impact of carbon trading on Indian companies, we have selected aspectrum of stocks which comprises of SRF Ltd (SRF), Gujarat Fluorochemicals Ltd(GFL), Balrampur Chini Mills Ltd (BCML), Usha Martin Ltd (UML), Nahar SpinningMills Ltd (NSML), Kalpataru Power Transmissions Ltd (KPTL) and Tamil NaduNewsprints and Paper Ltd (TNPL).



Why is the world talking about carbon credit?With the increase in Greenhouse Gas (GHG) emissions in the atmosphere, the globaltemperatures have been on a constant rise (See Chart 1). In last 65 years the amountof anthropogenic (made or induced by humans) carbon dioxide has risen from 280parts per million (ppm) to 380 ppm. With the current energy mix (See Chart 2) favoringthe use of fossil fuels, the level is expected to increase at a rapid pace. This has led toa global phenomenon called the Greenhouse Effect.

Where does India qualify?India being a developing country is not included in the Annexure I of the protocol.Hence, India cannot qualify for JI and emission trading mechanisms. It qualifies to bea host country for the CDM projects.

Examples of global companies that have taken initiatives to reduceemissions

American Electric Power is investing in renewable energy projects in Chile,exploring ways to burn coal more cleanly, and testing methods to sequester carbon.

Florida Power and Light invested in 42 wind facilities and energy efficiency,eliminating the need to build 10 power plants.

General Electric purchased Enron’s wind business and a solar energy company;doing research on earth-friendly hydrogen and lower emission jet engines andlocomotives.

General Motors is in the process of developing hydrogen-powered cars that don’t

emit CO2. Toyota, the world leader in hybrid gas-electric cars that deliver superior fuel

efficiency.

The Market for Carbon TradingData on carbon trading is available since 1998 and according to the statistics availablethe total volume of carbon credits traded have increased from close to 18mn tons ofCO2 equivalent in 1998 to around 107mn tons of CO2 equivalent in 2004. In thecurrent year the volumes have already reached levels of 43mn tons of CO2 equivalent.



STEPS TO PURCHASE CARBON CREDIT

Step1Calculate your carbon footprint. You can search online under “calculate my carbon footprint” and find dozens of websites that ask you a series of questions to determine just how much carbon dioxide your lifestyle is emitting into the atmosphere. It’s this number that determines how many carbon credits you need to buy to offset your carbon-producing activity. Every carbon calculator is different. Ideally, you can find one such as the Nature Conservancy’s Online Carbon Calculator, which accounts for home energy, driving, flying, food, diet, recycling and waste. Step2Check with your utility company to see if they have a carbon offsetting program. You can deduct any carbon credits you purchase through your electric company from the overall carbon footprint you offset with an online carbon credit provider. Step3Decide on the types of projects that want your carbon credit purchase to support. Choose from tree planting projects to recreate natural forests and prevent deforestation; renewable energy projects, such as solar, wind, hydroelectric and biofuel; energy conservation projects aimed at reducing the overall demand for energy and methane projects, using the methane from farms, landfills and other industrial waste to create energy. Step4Research carbon credit providers. Visit EcoBusinessLinks, a website that compares carbon credit providers based on your non-profit status, carbon credit prices, the project types that your investment will support, your ability to designate your investment to a specific project and independent product certification, meaning that a third party has determined that your investment will offset emissions. Step5Make yourself carbon neutral by purchasing your carbon credits from the carbon credit provider of your choice. Step6Reduce your carbon footprint so that you can buy fewer carbon credits next time. Replace all of your incandescent light bulbs with CFL’s. Join a carpool. Buy locally-grown organic food. Install solar panels. Start your own compost pile in the backyard. Reduce. Reuse. Recycle.



Your Current Household Emissions



Enter your data Pounds of carbon dioxide/year*

The Basics

How many people live in your home?

How do you heat your house? Natural Gas

Electric Heat Oil

Transportation

On average, how many miles do you put on your car(s)? Per Week Per

Year

231 miles/week is about average in the United States per vehicle.

What is the average gas mileage for your car (miles per gallon)?

If you don’t know your car’s fuel economy, you can look it up at fueleconomy.gov.

12,100 pounds is about average per vehicle over a year.

Home Energy

What is your average monthly gas bill? $105 is about average in

the United States for a household of two people.

Our calculations assume that you pay

11,000 pounds is about average for a household of two people over a year.


https://www.fueleconomy.gov/feg/byclass.htm


$13.83/thousand cubic feet

What is your average monthly electric bill? $100 is about average in


Our calculations assume that you pay 10 cents/kWh. We estimate your emissions based on the national average mix of fuels used to generate electricity. Your actual emissions may be higher or lower depending on your electricity provider's power mix.


What is your average monthly fuel oil bill? $130 is about average in


Our calculations assume that you pay $2.37/gallon


Waste

Based on the number of people in your household, the box at right shows your estimated greenhouse gas emissions from waste. However, if you

Total Waste Emissions Before Recycling 2,020 pounds is about

average for a household of two people over a year.


http://www.epa.gov/climatechange/wycd/waste/index.html


currently recycle certain materials, your waste emissions may be lower.

Which of the following products do you currently recycle in your household?

Do you recycle newspaper? Yes No

Pounds of carbon dioxide/year

Do you recycle glass? Yes No Pounds of carbon dioxide/year

Do you recycle plastic? Yes No Pounds of carbon dioxide/year

Do you recycle aluminum and steel cans?

Yes No Pounds of carbon dioxide/year

Total Waste Emissions After Recycling Pounds of carbon

dioxide/year

Your Total Emissions

The calculator provides a rough estimate of your household's total emissions

41,500 pounds is about average in the United States for a household of two people over a year.



What You Can Do to Reduce Emissions

On the Road

Amount of CO2

you can avoid per year

Are you in the market for a new car? Buy a vehicle that gets more miles per gallon than your current one.

more miles per gallon

The Fuel Economy Web site can help you find efficient vehicles.

pounds percent of your total emissions

Give your car a break. Reduce the number of miles you drive by this amount.

miles Per Week

Per Year

When running errands, combine trips. Using mass transit, carpooling, telecommuting, biking and walking are also good options.


At Home

Amount of CO2

you can avoid per year

Turn down your heating thermostat by

degrees Fahrenheit on winter nights.

Dropping the heat at night can make a difference.



http://www.epa.gov/climatechange/wycd/home.html

http://www.fueleconomy.gov/

http://www.fueleconomy.gov/

http://www.epa.gov/climatechange/wycd/road.html


Replace 75-watt incandescent light bulbs with 25-watt ENERGY STAR lights. (Enter the number of bulbs you will replace.)

You'll get the same amount of light for less energy and lower monthly bills. By replacing the five most frequently used lights in your home with ENERGY STAR qualified lighting, you can save about $60 each year in energy costs.


Replace your old refrigerator with an ENERGY STAR model. Will you take this action?

Yes No

New refrigerators, especially ENERGY STAR models, cost much less to operate than old ones.


Replace old gas or oil furnace or boiler with an ENERGY STAR model. Will you take this action?

Yes No

New models are much more efficient and cheaper to run.


Turn up your air conditioner thermostat

by degrees Fahrenheit in summer.

You'll save money as well as reduce your emissions.


Replace single-glazed windows with ENERGY STAR windows. Will you take this action?

Yes No

This step can save you a bundle in cold or hot climates.



http://www.energystar.gov/





Waste

Based on your selection, you indicated that you do not recycle the following material(s):newspaper, glass, plastic, aluminium and steel cans. Are you willing to start recycling these material(s)?

Yes No Pounds of carbon dioxide/year

percent of your total emissions

Could you also recycle magazines? Yes No

Pounds of carbon dioxide/year

percent of your total emissions

Your Totals

If you took all the actions listed above, you would reduce your emissions by

pounds per year percent of your total emissions

Your new total annual CO2 emissions would be

pounds per year

What are ratings?Ratings have been successfully used in the financial services markets for over 50 years as designations which give relative indications of a company’s or a government agency’s credit history – their likelihood of


http://www.epa.gov/climatechange/wycd/waste/index.html


default.

Why does the carbon market need ratings?According to IDEA carbon, the carbon trading market could be as big as €1 trillion by 2020, with project-based carbon offsets contributing at least €200 billion, but the market needs substantial improvements in transparency and risk management in order to reach this level.

Ratings are a tool for assessing the risk factors associated with the delivery of a financial instrument. The recent news of delays in carbon project registration and credit delivery highlight the fact that the risks inherent in project based carbon offsets have often been underestimated. While there has been awareness of potential regulatory concerns, market-internal problems in development have been largely ignored. If we ignore the HFC and N20 projects which account for 75% of CERs issued to date, CDM projects have a credit issuance success of just over 70%.

If we are to attract the levels of finance necessary to make the carbon markets mainstream, we need to have tools acceptable to financiers who show that the risks of investing in carbon offset projects have been understood, articulated and minimized (or hedged against). By providing clarity and transparency in the market, ratings can help attract further investment into the sector.

Project ratings will help to standardized carbon as a commodity and create a new asset class. Rated projects will no longer be unique but comparable to other projects with the same rating.

Who will use the carbon ratings?Ratings are important for both the buy-side and the sell-side. Buy side clients are within the compliance or voluntary market and have an interest in both delivery and the social development benefits of the projects. Sell-side clients include project developers looking to get the best price for their credits and investors looking to invest in high quality projects.

What are the limitations of ratings?

While The Carbon Rating Agency identifies unsolicited (market initiated) ratings with adequate disclosure under the ‘rating type’ section on the rating rationale, it should be recognized that such ratings are carried out on a best-efforts basis and are dependent upon publicly available information. While The Carbon Rating Agency invites the rated entity to participate in the rating process and provide it with relevant information, the extent of such participation is completely at the discretion of the entity. In light of that, the level of information available for analytical inferences is largely limited to public sources.

In some instances The Carbon Rating Agency may issue a market initiated rating that includes a formal qualification to this rating.



How do carbon ratings work?Like standard credit ratings, the new service will award scores ranging from AAA for the highest quality, lowest risk projects, through to C and D for the highest risk projects which are least likely to meet their stated goals. Every project will be rated according to the likelihood of it delivering the stated number of offsets in the stated time period, as well as by its economic and social development benefits. By rating a broad range of project types across different sectors, we will be able to compare like with like.

Can market participants consider Ratings as recommendations?No. Ratings are opinions and are designed to be additional inputs to the system. They are an information enhancement rather than recommendations.

How can reliable ratings be developed in such a new and rapidly developing market?The Carbon Ratings Agency combines the science of benchmarking with the art of collective judgment. Other rating processes are based on a depth of past data from which correlations can be extrapolated in a fairly predictable manner. This is not the case for the rating of CDM projects. While our model is loaded with past performance data, we emphasize that the carbon market is still in a growth mode not only in terms of volume but more importantly in terms of the regulatory system. Past experience is therefore not necessarily a reliable predictor of the future. Our rating combines statistical benchmarking with the collective best judgment of our ratings committee.

Does the Carbon Ratings Agency rate projects or carbon credits?The Carbon Ratings Agency rates the offset asset, not the underlying project. While it is clear that a sound underlying project is critical to the production of a mitigation asset, not all sound underlying projects will produce mitigation assets. Our ratings focus on the likelihood of the project’s producing the intended volume of certified emission reductions, and do not in any way represent an investment rating of the underlying project.

Do ratings cover sustainable development?Sustainable development is an important objective of emission reduction projects. The Carbon Rating Agency assesses the sustainable development impact of projects in a separate analysis. However, to the extent that sustainable development issues may affect carbon delivery they are factored into the main rating. (For example, unaddressed environmental concerns may delay project implementation) The Carbon Ratings Agency’s sustainable development rating covers four areas: water (blue), ecosystems (green), pollution (brown) and social (red).

About the Carbon Ratings Agency : The Carbon Ratings Agency is a wholly owned subsidiary of IDEA carbon. Its mission is to improve the functioning and efficiency of the carbon markets. The Carbon Ratings Agency’s



ratings and opinions are unencumbered and independent - it does not trade, buy, sell or originate carbon credits.The Carbon Ratings Agency will launch the world’s first independent carbon credit ratings service at the London Stock Exchange, 9.30am Wednesday June 25th. The Carbon Ratings Agency is the dedicated ratings subsidiary of IDEA carbon, which has spent two years investing in the development of the carbon ratings process. The service will provide detailed credit ratings for carbon offset assets in the CDM, JI and voluntary markets. Each asset studied will be given a rating based on a detailed analysis of the underlying project, leading to an assessment of the likelihood of it delivering its stated emissions reductions in the stated time period. The Carbon Ratings Agency also considers the economic and social development benefits that the project does, or does not bring. The Carbon Ratings Agency will provide ratings to market participants both on a mandated basis (where project owners or investors commission the agency to rate their carbon assets) and through the Agency’s Market Initiated Ratings Service, which will give subscribers access to a representative range of carbon asset ratings on an ongoing basis. Independent credit ratings are well established instruments for enhancing the transparency and efficiency of financial markets. Like standard credit ratings, the new service will award scores ranging from AAA for the highest quality, lowest risk offset assets, through to C and D for the highest risk assets which are least likely to meet their stated goals. As trading deepens and the carbon market grows, a growing number of companies will enter the project based market. They will look for quality projects, which do not expose them to undue performance risk. Like financial investors in other markets, they will expect a clear, transparent and unbiased declaration of those risks. The Carbon Ratings Agency aims to provide this service. It has already produced market-initiated ratings for a representative sample of 25 CDM projects across a range of technologies and geographies. Summaries of this initial set of ratings have been compiled in a report that will be made available at the launch. The report reveals that the carbon markets face a complicated set of risks, with very few of the projects achieving AA ratings and a significant proportion liable to under-perform compared to volumes projected at the project design stage. Each rating provides a detailed analysis of a wide range of risks to project performance. Projects that have already started to issue UN certified credits are delivering 96 per cent of the credits expected at project design stage. However, these figures are dominated by a small number of large projects dealing with industrial gases: to date 20 large projects together account for more than 100 million credits, 75% of all credits issued. The rest of the portfolio of projects currently issuing credits – more than 300 projects – has an average issuance success of just above 70%. Renewable energy and energy efficiency projects have been found to be the best performers, while coal mine methane projects have the highest standard deviation in delivery performance, although performance can vary widely within and between countries. The new ratings service is designed to enable market participants to manage their risk by differentiating between projects that are more or less likely to deliver the number of credits projected by the project developer.



The carbon market has faced several well documented regulatory risks such as constraints in the CDM registration process and long term uncertainty about the international policy framework after 2012. However, CDM projects are, at their core, development projects and face many of the same issues including weak counterparts, low administrative capacity, local funding shortfalls and a complex business environment. The Carbon Ratings Agency is the first company to provide an independent, in-depth and comparable assessment of both regulatory risk and these less well understood market-internal risks. The Agency’s management team and ratings committee includes ratings experts, financial market professionals, UN climate change negotiators and former senior managers from development agencies such as the World Bank, a combination which ensures that the broad range of risks facing carbon projects are taken into account by the ratings process. Improved transparency and better risk management – including ratings – are an integral part of the process that will turn carbon into a new asset class. At present, each emission reduction project is unique and has its own idiosyncratic risk profile that market players currently struggle to assess. Carbon ratings will help to standardize carbon as a commodity and create a new asset class. Rated assets will no longer be unique but comparable to other offset assets with the same rating. Welcoming the launch of the service, Lord Stern, Vice Chairman of IDEA global Group, said: “The carbon markets are showing their potential to reduce global emissions and should form a key plank for any future global climate agreement. If we are to attract the levels of finance necessary to make this a mainstream market and have a strong impact on emissions reduction, risks must be clearly understood, articulated and managed. A detailed ratings system is a vital tool to bring greater clarity, transparency and certainty to the market.” Ian Johnson, Chair of IDEA carbon and former Vice President for Sustainable Development at the World Bank, also speaking at the launch, said: “Our analysis shows that the concern of many investors is justified – carbon projects are risky and until recently these risks have been underestimated. But, the analysis also highlights the enormous potential in this market. Well designed projects are delivering genuine emissions reductions at an increasing scale. Project based mechanisms are likely to remain a key tool in combating climate change and have an important contribution to make.


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