Going, going, gone

To meet its Kyoto commitments the European Union has launched its own emissions trading scheme. CO2 intensive industries and individual companies within
Europe are allocated emission limits

Carbon trading is driving investment in low emission projects at the same time as helping major greenhouse gas polluters to meet reduction targets.

(Article taken from our customer magazine, Momentum)

In many ways the emerging carbon market is the antithesis of a conventional commodity market. It involves buying and selling shares of a gas that is omnipresent in the atmosphere; it is a market in which value is assigned to the absence of carbon, not its production; and it is a market in which carbon itself is often not the commodity being traded, but a more potent greenhouse gas instead.

“The market has only really become active since 2005 when the Kyoto Protocol was ratified by Russia,” explains Mott MacDonald head of renewables and low carbon Isabel Boira-Segarra. The Kyoto Protocol commits signatories to reducing their carbon emissions. Collectively, the 160 nations aim to bring their CO2 emissions to 5% below 1990 levels by 2012.

In practice, some nations must make far greater emissions cuts than others. Many less developed nations are in fact allowed to increase their emissions under the protocol.

“Kyoto has encouraged trading and the treatment of carbon as a commodity,” Boira-Segarra says. Countries have carbon ‘allowances’, and can be penalised for exceeding their allowance or rewarded, through trade, for emitting less than their allowance.

To meet its Kyoto commitments the EU has launched its own emissions trading scheme. CO2 intensive industries and individual companies within Europe are allocated emission limits. Industries that can swiftly reduce their emissions are able to sell their excess allowances to companies that are struggling to meet their targets.

"Kyoto has encouraged trading and the treatment of carbon as a commodity." Isabel

“Kyoto introduced a language of risk and opportunity that businesses understand,” says Boira-Segarra. In the last two years, investment funds specialising in carbon reducing projects have sprung into existence. “Many western industries have existing infrastructure that cannot be easily or rapidly modified or replaced to reduce their emissions,” Boira-Segarra says. Yet they are bound to make cuts.

“The Kyoto Protocol makes it possible for companies to earn carbon credits by investing in low carbon projects elsewhere – mainly in the developing world.

Low carbon projects have to be approved by the United Nations and promoters have to prove that the low carbon approach has been selected in favour of a more polluting alternative,” she adds.

Carbon ‘credits’ are awarded in proportion to the potential emissions reduction achieved. “You get a credit for each ton of CO2 or its equivalent avoided.” Many gases are far more potent than carbon dioxide. For example, a ton of methane has a global warming impact equivalent to 23 tons of CO2.

Carbon funds seek out low carbon projects and buy credits, which they then sell to Western firms exceeding their allowance.

“Carbon funds have been gaining experience. Initially there were some carbon reduction projects that looked good on paper but that were not technically robust or lacked project finance,” Boira-Segarra recalls.

“And projects have been overvalued. Developers and investors were too optimistic about projects’ performance and were assuming carbon related revenues that were not realistic. Mott MacDonald has carved out a niche in performing due diligence checks on projects, both on the drawing board and completed, to give investors reassurance when they buy carbon credits.

The company is also identifying projects that would not be financially viable without the investment of carbon funds. “Sometimes projects might be marginal. Certifying the project as a carbon scheme and offering carbon credits to the market can offset the increased capital cost of more efficient schemes,” Boira-Segarra notes.

Carbon credits

Schemes attracting the attention of carbon funds include:

Food processing

The processing of cassava into tapioca produces large volumes of water with a high organic material content, which is typically disposed of in open lagoons where large volumes of methane are produced. Biodigesters are being built at a number of tapioca factories to treat the wastewater and capture the methane. As well as keeping methane from the atmosphere, the gas can be used to fire small power plants producing green electricity.

Next generation coal-fired power stations

Super critical boilers producing ultra-hot steam married to highly refined turbines can improve the efficiency of coal-fired power stations by up to 5%. This reduces the amount of fuel needed per unit of electricity, with a corresponding reduction in CO2 emissions.

Heat recovery in cement kilns

Heat produced by cement kilns is being recovered to pre-heat raw materials, making the cement production process more efficient.

Dedicated bus lane and mass rapid transport schemes

An emerging sector, says Boira-Segarra, offering potential carbon savings based on passenger kilometres travelled by bus or train rather than car or plane.