Business

Saturday September 26, 2009

Asia the growing hub for carbon emission reduction programmes

By DANNY YAP


EVERY year, companies around the world pollute the environment they are located in, with the businesses they are engaged in. This could be in the form of air pollution, water pollution or other forms of contamination. At one time, we only think of factories as the bad guys. Today, we know that contamination happens everywhere, in all sectors of the economy.

Does that mean we stop producing? That does not seem logical, not in today’s economy. But there is something being advocated by the developed world today – reducing contamination by companies by setting targets.

Companies that pollute more, that is, produce more carbon emissions, must buy credits from companies that pollute less. This transfer of allowances – or buying carbon credits – is known as carbon trading.

In effect, the buyer is being charged for polluting, while the seller is being rewarded for producing less contaminants.

The benchmark for companies is to become carbon neutral over time, which means they don’t contribute to any carbon emmission in the course of doing business.

Under the Kyoto Protocol, developed nations that have ratified the treaty are committed to reduce their greenhouse gas emissions by 2012 to about 5% below their 1990 levels. —Reuters

Malaysia Airlines and AirAsia Bhd officials say their support for the environment is by being fuel efficient.

Officials from both airlines say they do this by acquiring state-of-the-art fuel efficient aircraft. The airlines get carbon credits for doing so.

United Nations Framework Convention on Climate Change officials say globally, carbon trading has the potential to grow to a whopping US$1 trillion in the next ten years.

Much of this carbon trading opportunities can benefit developing countries, including Malaysia, if they play their cards well.

A local analyst says the big boys in the plantation sector, for example, Sime Darby Bhd, may be the ones to gain most from the carbon trading legislation imposed in the West. Plantation companies can sell their carbon credits to the companies in the developed world that need to offset their carbon footprint.

The power, manufacturing, waste management, forestry, oil and gas, and transportation sectors have been identified as potential beneficiaries.

The Malaysia Energy Centre reported that about 100 million tonnes of carbon emitted (between 2006 and 2010) could have been potentially traded under the international mechanisms recognised under the Kyoto Protocol.

This implies that the 100 million tonnes of carbon emitted from Malaysia could have generated carbon credits worth RM4.8bil.

So why isn’t every individual or corporation jumping on the bandwagon to “convert” their carbon emissions to carbon credits and finally to cash?

Building fuel efficient consultant Gregers Reimann says the concept of carbon trading appears fairly simple and logical in theory.

“But carbon trading is much more complex. The carbon emissions by corporations will be subjected to stringent tests and evaluation under the Clean Development Mechanism (CDM) before it can be exchanged,” he says.

Reimann says often, only large corporations with huge carbon emissions will embrace such practices. Smaller companies with significantly less carbon emission will find it time consuming and not cost effective to invest in such schemes because of the stringent guidelines and criteria set under the Kyoto Protocol. Put simply, the Kyoto Protocol is an agreement carved out by participating nations in the 1990s to try to reduce, or find ways, to cut pollutants.

Nevertheless, Asian countries are generally making headway in carbon trading; maybe not as fast as we would like, but certainly the momentum is building up, based on the number of CDM projects currently occurring in Asia (see chart).

China leads the pack with 47% of all CDM projects registered, followed by India (35%), while developing countries are in single digit mode, including Malaysia at 4%.

Kyoto Protocol

Under the Kyoto Protocol, developed nations that have ratified the treaty are committed to reduce their greenhouse gas (GHG) emissions by 2012 to about 5% below their 1990 levels.

Essentially, this means that the developed countries under the treaty have agreed to set carbon emission targets. If they are unable to meet the targets, they must offset their carbon footprint each year by buying carbon credits via a recognised exchange for carbon credits.

Gregers Reimann ... ‘Carbon trading is much more complex.’

A local analyst says these carbon credits are tracked and traded like any other commodity. The European Union emissions trading scheme is the largest market in operation.

“As a general rule each certified emission reductions (CERs) or carbon credit is equivalent to one tonne of carbon dioxide being prevented from being released into the atmosphere and the carbon credit are basically points given for reducing pollution,” he says.

The analyst says companies in the developed world tend to buy carbon credits mainly from developing countries (that generally have a lower carbon footprint), to offset their carbon footprint.

The commitment to reducing carbon footprint has been agreed by most of the developed world, including Australia, except for the United States.

Interestingly, since the year of 2006, China has led the world in terms of total CO2 emission, closely followed by the United States. Each of them accounts for about a fifth of the world’s carbon emissions.

For the time being, developing nations, including Malaysia, have not been imposed any targets in carbon reduction.

The analyst says it should also be noted that through the exchange, the carbon credit gains will depend on the source of energy extraction, for example carbon credits from fossil fuel, solar, hydro or wind will each have different weighting criteria.

Carbon trading potential in Malaysia

Despite carbon trading being relatively new in Malaysia, we are the first in the world to be awarded CERs by the United Nation Executive Board of CDM via a biomass project in Sabah in 2007.

An analyst with Aseambankers says Malaysia’s corporate sectors – palm oil, agriculture, transportation, manufacturing, oil and gas, and the wastewater – have been proactive to capitalise on CDM participation. As at March 1, there were a total of 4,660 future CDM projects registered, based on data released by the United Nations Environment Programme resource centre.

Of this, Malaysia has 156 CDM projects in the pipeline or 3.3% of the list.

The analyst says the Government has been very supportive and instrumental in the CDM participation and has established the machinery and mechanisms for smooth implementation to tackle the greenhouse gas emissions, and the promotion of carbon trading in the country.

In Budget 2008, an additional 10-year pioneer status were granted to companies involved in energy conservation, as well as three years tax exemption for income derived from the trading of carbon credits.

In the upcoming Budget 2010, he says analysts generally expect more goodies and tax incentives to be dished out by the Government to encourage more individuals and corporations to be involved in carbon trading.

Moreover, the number of CDM projects in Malaysia is expected to surge in the next few years as a result of growing demand by European Union countries to meet their target reduction.

How does carbon trading work?

The reduction of GHG emissions can be achieved by restructuring individual and company operations and processes to physically reduce GHG emissions; and by “buying” carbon credits to meet carbon emission reduction deficits.

Carbon reduction can be accomplished through financial exchanges, by supporting the CDM, which function to reduce emissions in developing countries that are engaged in joint implementation projects, or by buying carbon credits from companies or developed countries that have excess allowances.

The most obvious beneficiary of CER trading in Malaysia is the plantation sector.

An analyst in the power sector says CERs are a form of carbon credits, issued by the CDM executive board for emission reductions achieved by CDM projects.

He says CERs can be traded and used by developed countries to comply with emission reduction targets, thus creating win-win relationships between developing and developed countries.

“As an emission-trading scheme under the Kyoto Protocol officially commences in 2008, we expect to see an acceleration in carbon trading,” he says.

The World Bank estimates the global carbon credit market to be worth US$30bil in 2006, up three-fold from 2005.

The carbon trading system, which started in the EU in 2005, accounted for US$24bil (about 80% of total trade) in 2006.

There have been similar exchanges in the United States in recent years but it is the developing world, like Malaysia, that stands to benefit significantly from the exchange mechanism and demand from the developed world to offset its carbon emmission.

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