TOPICS:Carbon economics and profit maximisation
As evidence of global warming became apparent, world leaders met in Kyoto, Japan, in 1997 to work out measures to curb green house emissions. The green house gases — carbon dioxide, carbon monoxide, methane, nitrous oxide — are a major cause of rise in global temperature. The Kyoto protocol targeted reduction of green house gases by 5.2 per cent below 1990 level in developed countries. It also adopted Clean Development Mechanism (CDM) as an effective means to achieve the target. United Nations Framework Convention on Climate Change (UNFCC) claimed that CDM would help developed countries meet their quantified emission reduction obligations at lower costs while helping developing and least developed countries achieve sustainable development.
In CDM, carbon particles in earth’s atmosphere are traded. In general, developing and least developed countries, under global obligation to develop sustainably, adopt environmental-friendly technologies, especially renewable energy, to meet their energy demands. In return, the developed countries pay for their efforts in cash. Payments are made based on Certified Emission Reduction certificate (CER). A CER is equivalent to one ton of Carbon Dioxide (CO2). Many consider CDM a windfall. Nepal recently received approximately $ 0.5 million for its effort at producing biogas and is yet to receive millions of dollars for micro-hydro projects and forests. The World Bank facilitates the process in Nepal. However, CDM is basically a market-based mechanism and far from being perfectly competitive.
Carbon dioxide Fact Sheet 2007 had some interesting findings. It analysed the contribution of carbon dioxide on the GDP of six developed nations. The United States is the single largest emitter, followed by Japan, Germany, the United Kingdom, France and Canada. Industrial Gross Domestic Product per metric ton of carbon emission is calculated by dividing the industrial GDP by the total emission of CO2.
Monetary equivalent of a metric ton of carbon dioxide in industrial GDP is highest for France ($ 1255), followed by Germany ($ 1036), the UK ($ 945), Japan ($ 934), Canada ($ 571) and the US ($ 447). Applying the simple economic principle, the US is willing to pay up to $ 447 per metric ton of carbon. A metric ton of carbon can contribute $ 447 to the US industrial GDP. The US can purchase carbon at all possible rate below $ 447.
Surprisingly, the developing countries sell a metric ton of carbon for $5-$15 to the World Bank, which is far below the rates that developed nations pay for carbon. Developed nations are willing to pay $865/ metric ton of carbon. On the other hand, Nepal gets approximately only one percent of the potential market rate of carbon. Till date, carbon trading in Nepal has been characterised by monopoly as World Bank remains the sole buyer. Nepal must explore other buyers who are willing to pay higher rates. Maximisation of the profit is the basic rule of the trade and this should be the rule in carbon economics too.