Carbon trading opens avenue for Kenyan firms

December 15, 2008 12:00 am

, NAIROBI, Kenya Dec 15 – Kenyan companies could reap millions of shillings annually by selling their greenhouse gas emissions to companies in the developed world as part of the effort to roll back global warming.

Carbon credits fetch high premiums as companies in developed countries collectively referred to as Annex 1 signatories to the Kyoto Protocol, are forced to pay for emitting into the air more carbon than the legal limit.

Kyoto Protocol places emission limits on signatory countries, which in turn place restrictions on firms, organisations and institutions. The Protocol, however, allows companies that find themselves unable to stay within the limit to purchase extra “credit” that sort of raises the roof on their emissions.

Companies that are able to produce less than the limit can sell the difference to those that need it. How does it work?

Imagine a clear demarcation of “right” and “sin” where, for instance, the right-hand side represents what is right and the left hand side what is sin.

To be on the left-hand side is sinful and punishable, while to be on the right earns rewards. Imagine further a situation where free trade of these “sins” and “rights” is allowed. Obviously, because of the high cost of sin, nobody wants to buy. The “sinners” are however, offered an escape – pay up in proportion to the amount of sins you have acquired or want to acquire. Only in this case, we substitute “carbon credits” for “miles.”

According to Kyoto, one carbon credit allows a business operating within the emissions trading scheme to emit one tonne of carbon dioxide.

A good example is the recent signing of a deal between the East African Portland Cement Company (EAPCC) and JP Morgan Climate Care (JPM) in which JPM is to help EAPCC to reduce its carbon emissions by 105,000 tonnes a year. EAPCC is expected to earn more than Sh80 million annually from the sale of this amount of carbon emissions.

“It works by our analysing your system and identifying how you can reduce your carbon dioxide and earn carbon credit,” explains JPM Climate Care executive director Tom Morton.

“Once we’ve agreed and signed a contract, we set about putting in place a system that reduces your carbon emissions. The system is tested on completion, after which, if and when confirmed, you are issued with a certified emission reduction (CER) accreditation, Your carbon credits are paid for on issuance of the certificate.”

The carbon market is legally overseen by the United Nations and the CER certificate is issued by the United Nations Framework Convention on Climate Change (UNFCCC). The process – from agreement to issuance of certificate – takes anywhere between one and two years.

JP Morgan Climate Care is working with several other Kenyan firms to reduce their carbon emissions and set them on the way to earning carbon credits. For many others, however, the whole process is still quite incomprehensible.

“We looked for companies that offer projects that could make a difference (financially?),” Morton says. “We also picked up voluntary small projects to showcase the process. The reception has been good.”

JPM offers a full service, Mr Morton explains, meaning they help reduce the carbon emissions, buy and sell them. “The company has lots of projects around the world.”

Morton explains that it is possible not just for companies but individuals as well to calculate their carbon ‘footprint’, which is described as the amount of carbon emission for which an individual or a corporate organisation is responsible. To calculate one’s carbon footprint, one merely takes a look at what they use – the petrol for the car, the LPG used for cooking in Kenya, etc. There are standard calculators for this.

Among the many ways of cutting down on carbon emissions, Mr Morton explains, is by replacing fossil fuel gases with biogas, which is renewable. Lots of companies are already involved, among them Magadi Soda, Bamburi Portland Cement and others. However, Mumias Sugar’s case has been particularly high profile, climaxing in the government licensing the company to generate electricity.

The question that perhaps quickly comes to mind is, what is JP Morgan, the world’s foremost financial institution and therefore the quintessential symbol of capitalism, doing in saving the world from the consequences of human activity? Capitalism, after all, has received much flak, blamed by some for everything from poverty to depletion of the world’s resources, including Mother Earth’s capacity to sustain life.

Indeed, the USA, leader of the free enterprise world and the chief polluter of the environment, is not even a signatory to the Kyoto Protocol.

There is no mystery to it. “Carbon credits are tradable instruments with transparent prices,” an on-line explanation goes. Financial investors can buy them purely for the purpose of speculation or tie them to future contracts. Considering the span of nations, firms and societies involved in the climate change affair, it does make absolutely fantastic business sense to be involved. Besides, JP Morgan, the world’s largest bank with assets valued at around $1.3 trillion, is by its size, investments and business partners a large enough entity to contribute significantly to climate change and the efforts to roll back the global warming phenomenon.

The system of trading in carbon credits has not won accolades everywhere but it seems to have gained acceptance as the best incentive to getting companies and nations to see great benefit in saving the planet. The Kyoto Protocol that gave birth to it is an international treaty that came into existence in 1997 in Kyoto, Japan, and bound certain developed nations (known as Annex 1 nations) to the reduction of six greenhouse gases (carbon dioxide, methane, nitrous oxide, sulfur hexafluoride, hydrofluorocarbons, and perfluorocarbons, and collectively simply known as carbon emissions) responsible for global warming.

Under this treaty, industrialised countries agreed to reduce their collective carbon emissions by 5.2% compared to the year 1990. At the time of the treaty, some of the current group of the world’s fastest developing nations, especially India and China, were not included in the Annex 1 list. For these countries and other developing ones like Kenya, the treaty offers an in-built incentive – pursue systems that reduce carbon emissions and earn carbon credits, which convert into cash. Right there a commodity market was invented where the laws of demand and supply rule. The overall objective of Kyoto, however, is the reduction of carbon emissions.

It would seem that while JP Morgan would do business with large entities, there is a market for smaller firms to sprout and help environment-conscious Kenyans reduce their carbon emissions in their homes and offices – and hopefully make a few thousand shilling son the side.


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