Carbon trading 101

That human induced climate change is occurring is no longer in much doubt. The world is under great threat if greenhouse emissions are not reduced … and soon. Carbon trading is being touted as a possible counter-measure to irreversible climate change. A noted expert in the field explains the new sector of carbon trading. to
Capital’s Andualem Sisay when theymet at recently in Nairobi, Kenya during ‘Reporting on Climate Change in Africa’, a media workers training program. Excerpts of the interview follow:

Dr Louis Verchot is
the International Centre for Research in Agro-forestry’s (ICRAF’s) lead scientist for Soil Fertility and Climate Change His research focuses on nitrogen and carbon cycling in agricultural ecosystems, the knowledge and understanding being used to improve the sustainability of farming systems, improve nutrient management, and facilitate agricultural development projects.
His work also involves coordinating ICRAF’s Climate Change research program, which consists of documenting the contributions that agro-forestry, can make to reduce vulnerability of small-scale farmers to climate change and the contributions of agro-forestry systems to carbon sequestration.
An important part of this program involves facilitating a dialogue between the policy and scientific communities to ensure that the results of research are rapidly available to policy makers and negotiators in developing countries.
He also coordinates ICRAF’s program in soil fertility research and development by facilitating and organizing multidisciplinary projects in this area.
He conducted postdoctoral research on the relationship between land use change and climate change with the Woods Hole Research Centre in Brazil and on the effects of nitrogen deposition on forest ecosystems with the Institute for Ecosystem Studies in New York. Dr. Verchot holds a Ph.D. from North Carolina State University.

Capital: The concept of Carbon trading seems too complicated for the average person. Could you describe it for us in a layman’s term?
Dr Louis Verchot : Carbon trading is indeed complicated and it needs to be understood as a business deal.  There are buyers, who are interested in purchasing carbon credits and seller who have carbon credits to sell.  At that level it is fairly simple, it works like most markets.  The next question is how does one produce carbon credits?  Like anything, it is a business and an entrepreneur needs to know what he or she is doing.  Carbon can be seen as a specialty item.  You do not produce motor vehicles without knowing something about mechanics.  The same can be said about carbon.  So there are specific rules, actually pages of rules, for producing carbon and bringing it to market.  The carbon market is not really for an individual with a few hectares of land.  However, there are a number of institutions that are working to make carbon markets work for individual land owners and who are exploring setting up projects. Projects will probably look like out-grower schemes or contract farming schemes, where farmers agree to undertake certain activities and where they are paid upon delivery.  These types of schemes hopefully have significant potential for African land owners.
Capital: What is the basis intention of carbon trading?
Verchot : The basic intention of carbon markets is to provide flexible mechanisms for developed countries to meet their greenhouse gas emission reduction targets.  The second intention is to provide investment resources to help developing countries follow a cleaner development pathway.  Many countries in the north have achieved sustainable development through use of technologies that have created the enhanced greenhouse effect that is causing global warming.  If developing countries follow the same pathway, then the efforts of the developed countries to clean up their negative impacts on the environment will be futile.  So the idea is that these countries that need to clean up their pollution could invest in developing countries to help them acquire technologies, undertake activities that are less polluting and reduce environmental degradation.   
Capital: Is carbon trading a global instrument or is it just a north-south exchange? 
Verchot : For now, carbon trading is a north-south exchange.  The only countries that are purchasing carbon are those that are required to reduce emissions.  These are all in the north.  If some of the larger polluting countries in the southern hemisphere – China, Brazil, India, Indonesia — take on emissions reductions targets, they will likely become buyers in the future.   
Capital: Is carbon trading sustainable in the long run or is there a threshold when it will not be effective? 
Verchot : That is a big question.  The Kyoto Protocol is the current international instrument for regulating greenhouse gases.  This agreement expires in 2012.  The sustainability of carbon trading depends on what the world decides it will do after 2012.  In all likelihood, the international decisions will protect carbon markets and will ensure that they are built into subsequent frameworks.  However, as a scientist I am more comfortable in making predictions about future climates than I am in making predictions about the future global political climate.   
Capital: How would countries benefit most from carbon trading?
Verchot : Carbon trading could provide significant resources for developing countries to adopt new technologies, rehabilitate degraded lands, promote sustainable land management and forestry.  But it is not a given.  There are numerous examples of carbon deals that have gone sour.   But lessons are being learned and the situation is improving.  In Africa, I believe that countries would benefit significantly from agro-forestry projects.  Agro-forestry can help African farmers improve their livelihoods and in some cases, it improves their resilience to climate variability.  Farmers suffer from mid-season droughts, flooding etc.  If the resources generated through carbon trading could be channeled toward agro-forestry projects, it could improve peoples’ lives and contribute to reducing global warming.   
Capital: Can you tell us about sample project in Africa that have benefited by implementing carbon trading? 
Verchot : Unfortunately, there are few carbon projects in Africa. Most projects have been in the energy sector.  There is a project coming through now with KenGen for clean power generation.  There have been a few projects in South Africa and Nigeria and several in North Africa.  There is a second group of markets, called the voluntary markets, where there have been more land based projects.  The voluntary markets are for businesses or individuals who out of social responsibility want to offset all or part of their carbon emissions.  There have been many more forestry types of projects in these markets.  There are a number of projects in Kenya, Tanzania, Mozambique, Uganda and elsewhere on the continent.    
Capital: Why do you think that Africa is reluctant so far in implementing carbon trading?
Verchot : Africa has been wary of these types of projects.  In the beginning there was a lot of hype and controversy around carbon projects.  There was a lot of mis-information. Some groups in Africa saw carbon trading as a form of neocolonialism. There were suggestions that large amounts of tropical lands would be locked up from development in perpetuity.  This is far from the reality, but there was a lot of uncertainty. More recently, African governments and development agencies are waking up to the opportunities that carbon trading offers for sustainable development, and we see large efforts to help Africa get into the game, and these efforts are beginning to bear fruit.  
Capital: Where is the funding to come from and which institution is in charge of monitoring its proper implementation and coordination at the global level?
Verchot : Funding for carbon trading comes from buyers.  There are funds which serve as intermediaries and purchase credits for investors and there are investors who purchase directly.  As I noted earlier there are two types of markets – those associated with the Kyoto Protocol and the other so-called voluntary markets.  By and large the voluntary markets are not regulated.  There are some safeguards to ensure that credits are properly regulated in some markets, but others are unregulated.  For the markets associated with the Kyoto Protocol, there is an international Executive Board that regulates the market and approves transactions.  Transactions in these markets also need to be approved by the country that is hosting the project.  So there are more safeguards built into the Kyoto Protocol markets.
Capital: There are fears that Africa’s industrial development will be affected Would you like to comment?
Verchot : Any company that enters into carbon trading or that wants to use carbon finance for development of projects needs to look closely at the deal and decide whether the financing is right for its operations. This is the same for carbon financing or financing associated with carbon credits.  When a company takes a loan form the bank, there are conditions attached to repayment, defaulting etc.  The same is the case for carbon related financing.  But I think we need to understand that investments from carbon trading represents a new source of investment for Africa and that is to be welcomed.
Capital: Is it true that carbon trading is an approach by which African countries pay for problems that the developed world has created? 
Verchot : No. This is a common misconception and I am glad that you have given me the opportunity to clear this up.  The first point that I want to make, is that African countries are not paying; it is the developed countries who are paying.  The money comes from developed countries that need to reduce emissions.  From the point of view of the atmosphere it does not matter where a ton of carbon is emitted.  A ton of carbon from Africa does as much damage to the world’s climate system as a ton of carbon from Europe or America.  So if a European company can invest in a project in Africa and avoid emission of that ton in Africa, it does as much good to the atmosphere as if it had reduced its emission in Europe.  The carbon trading schemes are designed to create double win opportunities. The Europeans who need to reduce carbon emissions win because they can look for the most cost effective means of doing this and can include options elsewhere in the world.  Developing countries receive additional investment.  These schemes have been implemented successfully elsewhere and for other pollutants and have been very effective.
I would like to point out that the rules in some of these markets make it particularly difficult for African countries to participate.  The European Trading Scheme, for example does not allow credits from forestry or agro-forestry projects.  This is one type of project where Africa could compete well with India, China or Brazil.  These rules were created under a lot of pressure from European NGOs, but the unintended consequences of this decision is that it is particularly difficult for Africa to compete in these markets.
Capital: Africa has a very low carbon footprint at present. What trends do you for see?
Verchot : Yes, Africa does have a small footprint at the moment.  I think it is unquestionable that its footprint will increase, it has to, Africa needs to develop.  At the same time, Africa’s population is growing rapidly.  So the combination of development and population growth mean that Africa will contribute an increasing share of pollution to the atmosphere.  However, new and cleaner technologies are available and Africa does not need to repeat the errors that the industrialized countries have made to reach sustainable development.  Northern countries are paying dearly to clean up the mess, Africa does not have to go that route.
Capital: Which African countries will be the focus of future project launch? Can you tell us the status of these projects?
Verchot : We are discussing with partners in several development agencies and with COMESA.  We hope to launch 5-7 projects in the next year and more projects in the coming several years.  These projects will be models and will hopefully stimulate similar projects elsewhere.  They will also serve as opportunities for capacity building.  Final decisions have not been made, much depends on being able to find the right partners and the probability of success.  Kenya and Tanzania are leading candidates, in part because they are close and ICRAF has significant capabilities in these countries, other projects further afield should follow quickly. 
Capital: Any concluding comments?
Verchot : I would like to say that I am optimistic that we can make carbon trading work in Africa for sustainable development, and particularly for sustainable land management.  There has been a significant disinvestment in rural areas in recent years across the continent.  I am hopeful that carbon markets and investments from carbon sequestration can make a significant difference in rural areas and contribute to turning this situation around.