Post Kyoto Protocol

Climate change is estimated to cause rise in global temperatures by as much as 1.4oC to 5.8oC by this Century. This may result in catastrophic climactic changes leading to mass population movements. The risks associated with climate change are high enough to merit serious spending on various mitigation measures. Limiting CO2 concentrations to sustainable concentration levels could lower global output anywhere between 1% and 5% by this Century, as compared to the situation if there were no attempts to control emissions. Sir Nicholas Stern’s calculations show that the damage to global output as a result of climate change may be anywhere between 5% and 20%.

There are essentially two ways to reduce carbon emissions: one, by imposing a carbon tax and the other, the “cap-and-trade” system as in vogue in the EU. Carbon tax lead to stable prices that producers can easily factor into their investment plans. The revenues from carbon taxes could be used to help develop cleaner technologies such as carbon sequestration. However, the system of “cap-and-trade” is more volatile, as prices of the tradable Certified Carbon Emission (CER) certificates are market determined, depending on demand and supply.

Carbon trading is a market based alternative to either direct taxation or “command and control” approach that directly improve emission limits. The global carbon trading market was worth $30 billion in the year 2006, of which over 80% was traded in the EU-ETS. The generous carbon allowances in the initial phase in the EU have led to oversupply and resultant crash in prices of the traded certificates. Global investment banks and project management companies act as middlemen in the trade and corner maximum benefits in the forward trading market. The carbon purchases have raised a total of just $14 billion in “associated investments” supporting clean energy in developing countries since 2002. Since most clean energy projects have a long payback period, the existing system has failed to encourage green investment in developing countries.

The global GHG emissions have come mainly from the developed world. During the period 1950-2003, the percentage of global GHG emissions was as follows: USA, 26.4%; EU-25, 21.5%; Germany, 5.7%; UK, 3.6% and Japan, 4.7%. The per capita CO2eq emission figures are relatively much higher: 792t in USA; 605t in Germany; 566t in Russian Federation; 527t in UK; 412t in EU(25); 322t in Japan, whereas the corresponding figures are a mere 65t in China and 21t in India. For example, the per capita GHG emission in USA was 38 times more than in India. In the year 2003, India with per capita GHG emission of 1.1t CO2eq was ranked 120th, while Qatar was the highest GHG emitting country with its per capita emission level being 40 times more.