The Carbon Rush Is Here

Throughout history there have been gold rushes, silver rushes, oil rushes and even diamond rushes. Now, it seems, the carbon rush is coming. In the 21st century, carbon has become the new gold. As gold seekers once rushed to California, South Africa and Australia to seek their fortunes, emissions trading attracts almost all nations - the rich and the poor, the developed and the underdeveloped.

Carbon emissions and other greenhouse gases are considered a major element and leading cause of global warming. Now, people also see these emissions as one of the biggest potential areas of growth in the financial markets. Underdeveloped countries especially see the possible benefits of this greenhouse gas from both the environmental and economic points of view.

Under the Kyoto Protocol, three mechanisms are in place to meet the commitment to reduce greenhouse gas emissions.

Joint Implementation (JI) refers to investing in the joint reduction of emissions projects created by industrialized countries (the so-called Annex І countries). Any Annex I country can invest in emissions-reducing projects in any other Annex I country in which the cost of these programs is cheaper.

The countries that successfully reduce emissions are awarded credits called Emission Reduction Units (ERUs). One ERU is equal to one metric ton of CO₂ emissions reduction. Credits earned from this program are counted towards each country's commitment goal. Currently, Russia and Ukraine are scheduled to host a large number of JI projects, thanks to the relatively inexpensive cost of setting up facilities in their territories. 

The Clean Development Mechanism (CDM) is an arrangement that allows industrialized countries to meet their greenhouse gas reduction commitment (Annex B countries) by investing in emissions-reducing projects in cost effective developing countries instead of their own. If a project is implemented and emissions are reduced, credits called Certified Emission Reductions (CERs) are awarded. Each unit of CER is the same value as an ERU - one metric ton of CO₂.

However, the CDM is considered a controversial issue. The CDM program is opposed by environmental NGOs and by developing countries that feel the developed countries are taking advantage of this arrangement. Unlike the case of CDMs, JIs have caused less concern because these programs take place within countries that have emissions reduction commitments.

Emissions Trading (ET) basically trades allowances, which refer to the right to emit a certain amount of emissions. An authority, usually a government or international organization, sets a limit or a cap on the allowable amount of greenhouse gas emissions. Companies or other organizations are required to not exceed those limits. Companies that need to emit more than allowed by the cap must buy allowances from those who emit less than the limit. Thus, in theory, companies that emit less than the cap may sell their excesses and receive financial compensation from those who emit more pollution.

Currently, there are a number of active trading programs, the biggest being the European Union Emission Trading Scheme (EU ETS). The EU ETS traded more than 18.1 billion euro in 2006 and 18.5 billion euro in 2007. The World Bank estimates that the size of world emissions trading will reach US$150 billion by 2010.

Asian countries have also tapped into the greenhouse gas and/or carbon emissions exchanges. Japan and China are very eager to launch an exchange, whereas India has already begun futures trading in carbon credits.

Korea, which is the world's 10^th largest energy consuming country and the world's ninth largest carbon emitting country, accounting for 1.7 percent of total CO₂ pollution worldwide, has also recently embarked on its own emissions trading/exchange projects.

Two exchanges, the Korea Exchange (KRX) and the Korea Power Exchange (KPX) are both planning to set up emissions trading exchanges by the end of 2011. Korea Investment and Securities created a carbon fund that invests in emissions-reduction projects, and Daewoo Securities has introduced emissions trading derivatives-linked securities.

The state-run Export-Import Bank of Korea (Eximbank) also recently announced its plan to launch a 100 billion Korean won (US$76 million) 'Carbon Fund' in late September of this year. The bank will provide 15 percent of the funds and the rest will come from the Ministry of Knowledge Economy. The bank plans to select a financial firm to manage the fund in July.

This carbon fund will purchase carbon credits generated by Korean companies in CDM projects in order to contribute to the development of the CDM market, as well as green finance in Korea.

Korean conglomerates such as Samsung and LG have also joined the CDM market. Samsung Everland recently requested project registration under the United Nations Framework Convention on Climate Change (UNFCC) while LG has already registered one CDM project.

However, these approaches are in their early stages. It is still uncertain which government body - the Ministry of Knowledge Economy, the Ministry of Environment or the Financial Supervisory Commission - will supervise the carbon exchanges.  Furthermore, the so called 'Low Carbon Green Growth Law' is still under debate. Additionally, Korea is not a signatory of the Kyoto Protocol and is still reluctant to set emissions caps on corporations because it could limit its economic growth.

Mr. Kim Hyun-bo, spokesperson for the KPX, explained that KPX, KRX and the Korea Energy Management Corporation (Kemco) recently signed a memorandum of understanding with the Chicago Climate Exchange (CCX) in order to establish these Korean carbon exchanges and create a climate of cooperation.

However, as he pointed out, "Since the Green Growth Bill has not been enacted, and we are not sure which government agency will monitor the exchange, we will just have to wait until the groundwork is completed."

 The government once mentioned that their blueprint to decide the governing body and the exchange operating body would be released by the end of this year. A person familiar with the matter said, "KRX and KPX are competing with each other for the right to manage the carbon exchange, though now the only thing they can do is wait until the government completes the groundwork."

 It seems that many hurdles remain. "The early stages of creating an emissions trading system are far more difficult than the trading itself. Once everything, such as rules and modalities are set, the trading will be simple," said Kim Pil-kyu, research fellow at the Korea Capital Market Institute.

He stressed that rules and modalities are the first consideration. "According to the government's five-year plan, the regular market will be opened in 2011. However, there are a great number of prerequisites, such as rules including compliance standards and reporting measures."

While Korea is struggling with the groundwork, other Asian countries are already well underway with emissions trading and carbon exchanges.

China set up the China Beijing Environment Exchange (CBEEX) as the first emissions trading exchange in Asia. CBEEX, an environmental equity transaction institution authorized by the Beijing Municipal Government, was created by the China Beijing Equity Exchange (CBEX) for the purpose of publicly trading environmental equities. CBEEX plans to become a primary trading platform for domestic and international environmental equity.

According to a recent Financial Times report, CBEEX is planning a joint venture with Europe's largest carbon credit exchange, Bluenext, in order to expand its business in China.

India launched futures trading in carbon credits in January 2008 and it was the first Asian carbon derivatives exchange. The country's biggest commodity exchange, the Multi Commodity Exchange (MCX), launched carbon emissions derivatives in order to initiate carbon trading throughout India.

The MCX formed a strategic alliance with CCX in September 2005 and signed a memorandum of understanding with IDEAcarbon, a rating, research and strategic advisor to carbon market participants.

India, as the fifth-largest emitter of fossil fuel derived carbon dioxide, is now under international pressure to reduce greenhouse gas emissions. That was one reason India took a step forward in terms of emissions trading among developing countries.

India also signed the Kyoto Protocol and has pledged to reduce its carbon emissions by 10 percent by 2012 from the benchmark level of 1990.

India is one of the major players in the global market on the supply side of certified emission reductions (CERs). According to an MCX press release, India has already generated close to 30 million carbon credits, with roughly another 140 million in the pipeline for sale as of January 2008.

When the carbon credit future was launched, five contracts of carbon credits were available on the MCX platform expiring on Dec. 15 in the years 2008, 2009, 2010, 2011 and 2012.

The current global price for one metric ton of carbon dioxide, as listed at the CCX, hovers at around US$6. The total volume of carbon traded electronically in June 2009 was approximately 2.1 million metric tons.

The Indian government expects to earn up to US$100 billion through the trading of CERs, according to a recent report in The Economic Times of India.

S.N. Dash, Secretary of the Ministry of Heavy Industry and Public Enterprise, said that India has already sold carbon credits worth US$300 million, and there are around 930 carbon credit projects currently in the Indian carbon trade basket, while around 180 more similar projects are likely to be added every year, according to the report.

Those companies involved in the emissions trading and CERs also have to account for carbon credits sold or issued to them under the UNFCCC as of April 1 of this year.

Corporations in India also have to account for all the carbon credits that were issued as well as carbon credits that they may have sold throughout the current financial year.

According to Indian accounting guidelines, carbon credits are considered intangible assets and need to be treated as inventory on the balance sheet until they are sold.

At present, there are 2,058 CDM project activities registered or requesting permission from the UNFCC throughout the world.

India is involved with 138 projects as of July 9, 2009 while Korea is participating in only 12 projects.

Since October 2005, 313 million CERs been have issued, the most recent of which were for an India-Spain project, which issued a staggering 42,647 CERs according to UNFCC statistics.

The expected average annual number of CERs from registered projects in India is currently estimated at 35 million, whereas Korea is estimated to average an annual reduction of 14 million CERs - a total annual reduction of 11.62 percent and 4.81 percent, respectively.

However, there are no co-projects between India and South Korea as of now. India has been working with many European and Asian countries, such as Germany, the United Kingdom, Northern Island and Japan, while Korea has been involved in multilateral talks with Japan, Switzerland and France.

There are still many areas in which Korea and India can benefit from cooperating in these huge carbon credit markets.

Mr. Kim In-soo, Director of the derivatives market at KRX, stressed the possibility of cooperation. "We are interested in a very strong partnership with a foreign carbon exchange so that we, in turn, can set up a competitive carbon exchange in Korea," he said.

And the cooperation between the two countries has already started.

Mr. R. K. Sethi, member secretary at The National CDM Authority in India said, "There are a lot of opportunities for mutual cooperation between our two countries and, as a matter of fact, we recently had visitors from LG Electronics who were interested in Indian CDM projects and wished to further discuss the matter."

He also said that the future of the Indian CDM market is very bright. "The market looks so positive. Nearly 65 projects are newly added every month. This month alone, we reviewed between 65 and 67 projects," Sethi said.