CARBON FINANCING

Abstract

Climate change has put the world's development in jeopardy today. It is one of the world's greatest problems today, and the awareness that human activity is causing global warming has made it a central mission all over the world. Day to day activities like driving of vehicle, use of heating & air-conditioning &

lighting of household consumes energy. These produces emissions of GHG- Greenhouse gases, major being carbon dioxide (Co2), which are the major contributors

to the climate change. With rise in emissions of GHGs, the Earth’s experience a climate change with increase in average temperature & average weather changes. Agriculture & forest sector is also responsible for the climate change. This sector offers sources, sink & storage for the typical greenhouse gases namely CO2 (Carbon dioxide), CH4 (Methane) & N2O (Nitrogen oxide). Forestry & agricultural practices followed emits these GHGs into the atmosphere. - Agricultural residue burning leads to rise in CO2 level. - Usage of fertilizers, soil releases N2O. - CH4 is released from livestock & also when rice is grown under flood conditions. - Tree cutting & land conversion to cropland creates a source of CO2 emission. The emissions of GHGs from industrialization, agriculture, forest practices etc are increasingly threating life on earth. To slow down the impacts of climate change, they must be minimised as soon as possible. This brought the world together & on March 21, 1994, the United Nations Framework Convention on Climate Change (UNFCCC) was established with the sole purpose of preventing dangerous human interference with the climate system. The convention now has 197 countries as signatories. The UNFCCC's ultimate goal is to stabilise GHG concentrations at a certain amount. These goals must be met within a certain amount of time. The time period should be long enough for ecosystems to respond to climate change naturally, food security should not be jeopardised, and economic growth should be sustainable. The convention acknowledged that developing countries are primarily to blame for the increased levels of GHG pollution in the atmosphere. The convention placed a greater responsibility on these countries, and they were required to do the most on their own

- 5 - soil to reduce GHG emissions to 1990 levels by the year 2000. Some nations have succeeded after taking strong actions within their country. World’s developing & poorer countries need economic development. Even without the added complications of climate change, this is difficult. The Convention anticipated that the proportion of GHG emissions emitted by developing countries will rise in the future. Nonetheless, in the interests of sustainable prosperity, it aims to assist in the reduction of pollution in ways that do not impede these countries' economic growth. Developing world lack resources & herein the developed world needs to chip in. On December 11, 1997, the Kyoto Protocol to the Convention was conceived. Due to the lengthy approval & complex ratification process, it entered into force on February 16, 2005. The Kyoto Protocol has 192 countries/parties as of today. The Kyoto protocol operationalized the UNFCCC by getting commitments from industrialized countries & developing economies to limit & reduce GHGs emissions with agreed individual targets. Over a five-year term, the binding carbon reduction goals were revised upwards by 5% more as compared to 1990 levels (from 2008-2012, the first commitment period). On December 8, 2012, the Doha Amendment was enacted & approved under the Kyoto Protocol for the second commitment duration (2013–2020). In the second commitment cycle of eight years, the parties to the convention agreed to reduce GHG emissions by at least 18 percent below 1990 levels. The convention compelled the nations across the world to go green across all the responsible sectors. Is the set target achievable? How polluting industries will reduce their emissions. This issue was more predominant to the industrialized world. How their emission producing sector will respond as this need lot of investment. Either they should adapt to new technologies which reduces the impact of emissions but also impacts their bottom line or they should close which would have catastrophic impact on nation’s economy & employment. One of the most important core elements of the Kyoto Protocol was built on this principle – "flexible market mechanisms," which were focused on the trading of emission permits. According to the protocol, countries must first fulfil their primary commitments by national initiatives. However, the Protocol provided these countries

- 6 - with three market-based mechanisms as a secondary means of meeting their expected obligation targets: 1. Clean development mechanism (CDM) 2. International emissions trading 3. Joint implementation (JI) The above mechanisms promote greenhouse gas reduction, starting with the most cost- effective regions, such as the developing world. If the pollutants contributing to the

climate are eliminated from the atmosphere, it makes no difference where they are minimised. In addition, these mechanisms promote green investment in poorer countries and involving the private sector in these mechanisms to minimise and stabilise greenhouse gas emissions at a safe level has a parallel advantage. It also allows for the replacement of older, dirtier technologies with modern, cleaner systems and facilities, which is initially more expensive but has obvious long-term cost savings. Here innovative financing solutions, CARBON FINANCE, could play a remarkable role. Worldwide, the carbon markets are created which provides an additional avenue of income for clean energy projects. One of the most valuable sources of funding for climate change programmes is the CDM (Clean Development Mechanism). Countries that signed and ratified the Kyoto Protocol were subject to maximum carbon emission standards for particular time periods, and they traded carbon credits.

What is Carbon Finance – - A branch of environmental finance that deals with financial instruments such as carbon emission trading in order to reduce the effect of GHGs on the atmosphere by putting a price on carbon emissions. This market-based instrument can reduce the financial risk by transferring the environmental risk & helps in achievement of environmental objectives. - This umbrella term refers to investments in greenhouse gas emission reduction programmes as well as the development of a carbon-tradable financial instrument. - This broad term refers to funds allocated to a project in order to obtain properly certified GHG reductions (also known as “carbon”). These emission reductions may then be used by the buyer to fulfil his or her own obligations. The first carbon

- 7 - purchase was made in 1996, and the number of carbon purchases has steadily increased since then. Carbon funds are financial institutions that make carbon finance easier to operate. - This is a broad term that refers to the revenue streams produced by low-carbon projects and activities through the selling of GHG emission reductions by sources, greenhouse gas emission removals by sinks, or carbon credit trading. - Carbon credit: It serves as a medium of exchange for carbon emissions. One tonne of CO2 emissions equals one carbon credit. - Carbon market: A virtual financial platform where people buy, sell carbon credits.