Society’s preoccupation with climate change and environmental damage caused by the acts of man extends beyond the specialists in that area. It has affected another sector – financial markets. Citing the need to act quickly to avoid the dangerous degradation of our planet, financial specialists have created a market in so-called “carbon gases.”
The origins of this market are in the so-called Kyoto Protocol, which was signed on December 11, 1997, in that Japanese city, notes José Miguez, general coordinator of global climate changes, meteorology, climatology and hydrology, in Brazil’s Ministry of Science and Technology. According to the Kyoto treaty, between 2008 and 2012 industrialized countries must reduce their emissions of those gases that create the so-called Greenhouse Effect – carbon dioxide or carbonic gas as well as methane, among others – by at least 5.2% below the levels they produced in 1990. This reduction is equivalent to approximately 700 million tons of gases per year, and it means a restraint on industrial growth that could generate a contraction in the economies of developed countries.
According to Nuno Cunha e Silva, director of EcoSecurities, a Brazilian company that specializes in emerging environmental markets, the market in carbon gases is expected to raise $100 billion in credits beginning at the time the Kyoto Protocol goes into effect in 2008.
A Mechanism for Clean Development
A Clean Development Mechanism (CDM), which is the basis for the embryonic market in carbon gases, is laid out in the Kyoto Protocol. It establishes that developed countries – in those cases where they are not meeting their goals for reducing gas emissions, or when they do not want to comply with them – can purchase certificates from developing countries that are known as carbon gas credits, according to Miguez, one of the proponents of the CDM.
For example, he says, “a country or company creates a project that certifiably involves a reduction in the emission of gases with Greenhouse Effect. As the emission of gases drops off, it generates a so-called credit in carbon gas that takes into account a scientific calculation evaluating how many tons of the gases are no longer emitted into the atmosphere. Since there are no borders in the atmosphere, a reduction of gas emissions in Brazil is sufficient to compensate for emissions that are above the limit in Germany, for example. The tons of gases that are not let off into the atmosphere can be purchased by developing countries in order to reduce their annual goals.”
“The carbon gas credit is a bond, a certificate,” notes Amyra El Kalili, an economist who is president of CTA (Consultants, Traders and Advisors), an NGO (non-governmental organization), as well as coordinator of a project known as the BECE – the Brazilian Environmental Commodities Exchange. “It is a commitment to reduce the emission of gases, or the right to contaminate. It is a commitment that gives a polluter the right to contaminate up to a specific quota.”
For developing countries – and for a country such as Brazil, which does little to pollute and has no goals for reducing emissions in accordance with the Kyoto Protocol – the new Clean Development Mechanism is a great opportunity. First of all, beginning with its adoption, Brazil will be obliged to reduce its emissions of contaminants. Second, the process of negotiating credits in carbon gases with developed countries will generate [financial] resources that can stimulate local [Brazilian] development. Moreover, as José Miguez points out, “The Clean Development Mechanism is interesting for Brazil because it is a correct way to involve the country in the process of combating climate change, since Brazil is not historically responsible for the Greenhouse Effect.”
Russian Support Needed
Nevertheless, until the Kyoto Protocol officially takes effect, the CDM does not exist and there are no regulated carbon gas credits, states Miguez. Since the United States has already announced that it is not going to adhere to the Protocol, the support of Russia is required for the accord to go into effect as anticipated in the rules established in the document.
“Together, the United States and Russia represent 53% of all contaminating gas emissions. Since that is the case, if Russia does not ratify the document, there is no Kyoto Protocol,” he adds.
Russia still has not made any declaration in that regard. “The impression we have is that the Russian government’s process of evaluation is going to take a long time because Russian technicians have lots of doubts about the climatology and about the importance of ratifying the Kyoto Protocol,” says Miguez, who participated in the Third World Conference on Climate Change, which took place in Moscow in September. “I don’t expect that there will be a solution to these questions before the end of next year, for example.”
There are other limitations. “It is not sufficient that the Protocol just goes into effect. After going into effect worldwide, the Brazilian president has to issue a promulgation decree so that the Kyoto Protocol becomes part of that country’s legal framework,” Miguez notes.
“That [in itself] isn’t what interests us,” says Nuno Cunha e Silva. “Of course, it interests us, in the sense of having a regulatory process, but that [in itself] does not make it unfeasible to do business. These sales are independent of Kyoto. They are sales involving European countries, and Europe has its own structure for commercializing credits in carbon gases, with Kyoto or without Kyoto.” In other words, the market has a life of its own.
This is precisely what is happening: An independent market for carbon gas credits is being created and it is developing with the prospect of regulations [emerging] in the future.
EcoSecurities is the middleman in two local transactions in carbon gas credits. “In Brazil, there is a project with the steel manufacturer Mannesman, the largest sale of carbon gas credits ever realized in the country. It involves an operation with the International Financial Corporation, the private-sector arm of the World Bank, on behalf of the government of the Netherlands. It is a project that involves five million tons of carbon gas that were equivalent to an approximate value of three euros per ton. This took place last year. Afterwards, a small commercial transaction took place for Toyota Tsusho Corp., with about 400,000 tons of equivalent carbon, but its value was not revealed to the public,” explains Silva.
According to Silva, another project now being considered is known as Nueva Gerar, which would approve the emission of biogas (methane) from drains in Rio de Janeiro for the generation of electric energy. It would represent credits of carbon gas that are equivalent to five million tons.
“It is one thing not to have a law; not to have any rules; not to have the Kyoto Protocol ratified. The market is something else. The market rules, and it makes things happen. The fact that the Kyoto Protocol has not taken effect does not mean that there can’t be a market – whether organized or disorganized; the market anticipates,” says Amyra El Kalili.
But Miguez makes the following evaluation concerning the reality of this market: “To simplify, you can consider setting up a small-scale market because it does not exist in the Kyoto Protocol. You can’t say that these projects are linked to the Clean Development Mechanism … This market is a pilot project, and people are preparing themselves for a probable CDM.”
In Europe, for example, there already exists an informal market for carbon gas credits driven mainly by large enterprises. The current value of a ton of carbon that is no longer emitted into the atmosphere is estimated at about $3.9, according to the newsletter “Carbon Market Europe.”
In the United Kingdom, there are already transactions in carbon gas credits between large companies that generate energy, explains Chris Armes, director of Combined Power, a British firm that provides solutions for energy generation.
“The carbon market is being implemented, and the government is at this moment sketching out mechanisms for it in the United Kingdom,” says Armes. “There is a carbon market, but it involves only large energy companies. If they change a generating plant driven by coal into one driven by natural gas, they obtain a large difference in carbon gas emissions, and they can receive a carbon gas credit [as a result]. The market for small operators, as in our case, is being implemented, although we don’t have any experience in this sector yet.”
A Country-to-Country Business
Another business opportunity that emerges in the wake of the Clean Development Mechanism involves governments, as in the case of Brazil and Germany. According an agreement that has yet to be clarified, Germany would bring in 100 million Brazilian reais in order to subsidize the sale of 100,000 cars that run on renewable alcohol fuel. Since this sort of fuel is less of a pollutant than gasoline, the difference between the volume of gases that would have been emitted and the volume that will really be emitted after the change in fuel – estimated at about 700,000 tons of carbon gas per year — would generate a carbon gas credit that would be transferred to Germany, says José Miguez.
The 100 million Brazilian reais offered by Germany would be utilized in Brazil in order to give a credit of one thousand reais per car to those companies and public-sector groups that renew their fleets with vehicles that run on alcohol fuels. From Brazil’s viewpoint, it would be necessary to make investments and provide incentives for the production of alcohol fuels. However, these investments would generate about 30,000 jobs, directly and indirectly, in the chains that make the cars and in the alcohol fuel sector, according to official calculations.
Other countries have already shown interest in negotiating carbon gas credits with Brazil. “We have talked a lot with France, Canada, Finland, and Sweden,” says Miguez. “Now it depends basically on the ratification of the Kyoto Protocol.”
Preparation for the KyotoProtocol
Despite the delay in defining the protocol, most countries taking part in the project are preparing themselves to adapt to its norms. The main initiative has been taken by the European Union, where a project currently being analyzed by the European Parliament establishes a limit for emissions of gases that produce the Greenhouse Effect, independent of the Kyoto Protocol. That text also anticipates the creation of the first official international market for trading in credits of carbon gas. According to Nuno Cunha e Silva, the law – which requires the support of the 15 member nations of the European bloc to be approved – is supposed to go into effect on January 1, 2005 – three years before the anticipated adoption of the Protocol.
Brazil has also been preparing legislation in this area, ever since last December. It involves the so-called Resolution Number One of the Interministerial Commission on Global Climate Change. Nevertheless, as José Miguez reminds us, “The Kyoto Protocol has to take effect for the Clean Development Mechanism to exist. It doesn’t make any sense to talk about the CDM without the Kyoto Protocol.”
Gilney Amorim Viana, secretary of sustainable development policy at Brazil’s Ministry of the Environment, recalls that the federal government also anticipates a series of official programs related to climate change, such as the Pro-Carbon and the Pro-Environment programs. “We had no governmental program for providing incentives for plans that collect carbon gas. In our new PPA (the long-term national plan), we are going to have two official programs that provide incentives for collecting carbon gas and, possibly, negotiating credits for it,” says Viana.
For its part, the Portuguese government is thinking about putting a tax on emissions of carbon dioxide and methane. Funds obtained by these taxes would permit Portugal to acquire credits in carbon gas from other countries, with the objective of complying with future goals for reducing gas emissions, both as established by European law and by the Kyoto Protocol.
In its original text, the Kyoto Protocol also contemplates that credits obtained before the accord takes effect can be used beginning in 2008. But this question, as well as other questions anticipated in the document, still awaits the creation of regulations, especially those for determining which entities will be responsible for certifying that transactions really do reflect reductions in gas emissions.
“With respect to business that takes place beginning in 2002, it will wind up being easier to obtain this approval (retroactive to the Protocol).” Says Miguez. “Nevertheless, there are entities that are certifying businesses without having the authorization of the Executive Board – the managerial organ that will be responsible for implementing the Protocol. Therefore, before the Protocol goes into effect, the entire market is still open for discussion by the Executive Board. There are no guarantees that these projects will be approved.”
According to analysts consulted by Universia-Knowledge at Wharton, the following initiatives could be considered appropriate for generating carbon gas credits: First, when a company makes a change in the energy matrix it utilizes for generating electricity in a factory, it switches to natural gas (which is less polluting) from other derivatives of petroleum. Second, when a company takes advantage of powerful pollutants like methane — which escapes from drains – it generates electricity or enables reforestation in an area. In that case, nearby vegetation absorbs the carbon gas in the atmosphere through means of the photosynthesis process. In principle, all these initiatives could generate carbon gas credits.
