Sunday, October 14, 2007

Carbon Credits in Urban Local Bodies

It is by now universally acknowledged that there is an immediate need to internalize the external costs arising from negative externality producing activities like pollution. One of the ways of addressing this issue is by imposing a Pigouvian tax on the externality, thereby disincentivizing the polluting agent from indulging in more pollution. But this approach throws up many implementation problems. The more practical option is that of providing economic incentives for reducing the negative externality. One of the most popular form of this is the system of carbon trading for controlling greenhouse gas emissions.

Under the existing cap and trade, emissions trading arrangements, the Government sets a cap on the amount of pollutant that can be emitted by each agent. A credit gives the owner the right to emit one tonne of carbon dioxide (CO2). The agents are given credits that give them the right to emit a certain quantity of pollutants. Any emssion over and above this can be done only by buying unused credits from another agent, at a cost. The price of a carbon credit reflects the cost of polluting the environment. This incentivizes the polluters to reduce their emissions, so as to both meet their targets and also to generate enough credits to trade. It is an economically efficient solution, in so far as it enables those who can reduce their emissions at the lowest cost to do so and those facing higher reduction costs to buy credits to offset their excess emissions.

The Kyoto Protocol for limiting greehouse gas emssions, provides for a Clean Development Mechanism (CDM) under which developed countries with excess production of such gases can invest in projects in developing countries that can more cheaply reduce emissions. The Protocol also provides for converting any emission reductions into carbon credits, in the form of Certified Emission Reductions (CERs), which can be traded. The Executive Board (EB) of the CDM certifies and issues the CERs through an independent third party, Designated Operational Entity (DOE).

The largest international market on trading carbon credits is the European Union's Emission Trading Scheme ( EU ETS). It covers all the 27 EU nations, and the European Commission (EC) have put limits on the amount firms can pollute and have also issued an equivalent number of allowances. Those companies crossing the limit must either cut their emissions or buy spare allowances from others. Despite initial problems, the EU ETS carbon market is now well established, and has been found to have achieved its objective of reducing emissions. CERs have been found to be cheaper than EU ETS allowances. The global carbon trading market was about $30 bn in 2006 and has the potential to become the world's largest commodity market, with projected annual turn over crossing $1 trillion over the next few years.

The Kyoto Protocol and the carbon trading mechanism provide a huge window of opportunity for urban local bodies in developing countries, for both adopting newer technologies and profiting by trading carbon credits, and in the process improving urban environment. The civic infrastructure utilities in developing countries are ideally positioned to benefit from any emsissions trading schemes. Given the widespread obsolescence of existing techniques and the limited penetration of modern, environment friendly technologies and systems, there is enormous scope for reducing emissions at little cost. Hitherto, energy savings and environmental concerns were not major considerations in decision making in the Government. CERs and the emission trading markets provide an incentive for profitting from such emission reductions.

Solid Waste treatment and disposal facilities are a readymade source of CERs. Composting and waste to energy plants, and scientific landfills reduce methane emissions and are eligible for tradable CERs. Electro-mechanical devices and systems like water and sewerage motors and pumps, and streetlighting are easily amenable to substantial energy savings with appropriate technologies. Apart from claiming the CERs, energy saving technologies can generate atleast 30-50% savings on electricity expenditures. With appropriate technologies, the bio-gas produced in Sewerage Treatment Plants (STPs) can be converted to electricity. Modern public transport systems that promote public transport and thereby limits polluting private transport, are also eligible for CERs.

At the VMC, we have tried to adapt environment friendly technologies in some of the afore-mentioned systems. The VMC operates two waste to energy plants - an incineration plant and a bio-methanization plant. Apart from this, there are 25 vermi compost plants run on Public Private Partnership (PPP) with Resident's Welfare Associations (RWAs), which segregate and treat garbage in a decentralized manner at the community level. A scientific landfill is also under development. It is also proposed to instal gassifiers to generate electricity from biogas produced in STPs. A detailed energy audit has been undertaken for all the electrical installations. The entire 4.5 MW streetlighting systems have been outsourced to an Energy Saving Company (ESCO), generating an assured electricity savings of 42%. A project for retrofitting all sewerage and water pumps with energy saving devices is also on, and is expected to generate savings of atleast 30%.

On an average, 1 MW of power savings is equivalent to 4000-4500 mt of CO2 per annum. The price of CERs have fluctuated sharply between $1 - $60 per mt of CO2 in the EU ETS. (Though this is an area of concern, the volatility is likely to reduce as the market acquires more depth) The annual energy savings by the VMC due to these interventions is expected to be 25000-30000 mt of CO2 equivalent. At $10 per mt of CO2, the VMC could earn about Rs 1 - 1.2 Cr per annum. The earnings could be much higher for bigger cities, besides of course the attendant energy savings.

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