Man is the only animal that uses external energy.

Colin Campbell — "Peak Oil” master mind.

9.1

Carbon is the Enemy

Some people argue that carbon is as big an enemy as World War I and World War II put together, and you could throw in a possible World War III as well.

Carbon credits are a key component of national and international emissions trading schemes (ETSs) that have been implemented to mitigate global warming. They provide a way to reduce greenhouse effect emissions on an industrial scale by capping total annual emissions and letting the market assign a monetary value to any shortfall through trading. Credits can be exchanged between businesses or bought and sold in international markets at the prevailing market price, and can be used to finance carbon reduction schemes between trading partners around the world. There are many companies that sell carbon credits to commercial and individual customers who are interested in lowering their carbon footprint on a voluntary basis. These carbon offsetters purchase the credits from an investment fund or a carbon development company that has aggregated the credits from individual projects. The quality of the credits is based in part on the validation process and sophistication of the fund or development company that acted as the sponsor to the carbon project. This is reflected in their price; voluntary stock typically has less value than the stock sold through the rigorously validated Clean Development Mechanism (CDM).

The Kyoto Protocol of 1997 called for 38 industrialized countries to reduce their greenhouse gas emissions between 2008 and 2012 to levels that 5.2% lower than those of 1990. Under the Kyoto Protocol, mechanisms for trading carbon emission reductions were created including the CDMs for developing countries. CDMs and voluntary credits (non-Kyoto credits) allow a developed country to receive credits towards emissions reduction targets by funding a greenhouse gas reduction project activity in a developing country. Carbon offsets are calculated by

Second Generation Biofuels and Biomass: Essential Guide for Investors, Scientists and Decision Makers, First Edition. Roland A. Jansen. r 2013 Wiley-VCH Verlag GmbH & Co. KGaA.

Published 2013 by Wiley-VCH Verlag GmbH & Co. KGaA.

the amount of carbon emissions that would have been emitted had petroleum fuel been burned instead of an alternative biofuel. The approval of such carbon offsets in relation to replacing petroleum jet fuel will require additional meth­odologies under the UN Framework Convention on Climate Change (FCCC; www. unfccc. int) rules.

The global carbon markets have grown to over $70 billion per year. Approxi­mately three-quarters of the market volume is accounted for by the EU ETS (ec. europa. eu/clima/policies/ets/index_en. htm) — the world’s largest cap-and-trade system for greenhouse gas emissions. The volume of the EU ETS is expected to grow substantially as the system is expanded to include civil aviation and other indus­tries that are currently excluded; moreover, the European Union has committed to reduce its emissions by 20-30% between 2012 and 2020, so demand for European Emission Allowances (EUAs) is expected to rise, with prices projected to increase sharply over coming years.

In light of the scientific and political consensus around the need to drastically reduce man-made emissions of greenhouse gases, cap-and-trade systems are expected to proliferate in developed countries and make emission reduction cer­tificates by far the most widely traded commodity by volume. Many of these ETSs will cover the aviation industry, meaning that airlines will either need to reduce their greenhouse gas emissions through the use of biofuels or hold emission allowances under the respective ETS.

Under the CDM, developers of projects that reduce greenhouse gas emissions in developing countries can apply to the UN FCCC for corresponding numbers of Certified Emission Reductions (CERs). These CERs can be bought by companies in Europe (and future ETSs) to meet their compliance needs. Finally, governments are also key actors in the carbon markets since they are ultimately responsible for a country’s greenhouse gas emissions. They delegate a large share of this respon­sibility to the private sector through ETSs, but retain responsibility for the residual emissions of economic sectors that are outside an ETS: households and govern­ment installations and services, including the military. To meet their international treaty obligations, governments can reduce emissions and purchase CERs or EUAs from other countries that have more than fulfilled their obligations (these emission allowances are referred to as Assigned Amount Units (AAUs)). The United Nations predicts that by 2012, China will account for 40% of all carbon credits issued under this scheme.

From 1 January 2012 onwards each flight to and from the European Union has been required to be offset through the corresponding amount of EUAs or CERs.

9.2