How does carbon credit work in solar?

A carbon credit is a mechanism to reduce or mitigate the concentration of greenhouse gases in the atmosphere.

Global warming is affecting our earth.

It is a result of large emissions of GHG (greenhouse gases).

And

CO₂ is the main greenhouse gas emitted by burning fossil fuels such as coal, oil, and methane.

In order to start a mechanism where industrial and commercial processes are motivated to low greenhouse gas emissions.

Kyoto Protocol

The meeting was held in Japan, Kyoto.

The objective was to reduce the concentration of GHG to the level that it does not harm the climate system of the earth.

In this attempt, a maximum allowable limit (based on their previous years’ emissions) for GHG emissions for each Annex I country was assigned.

And

It was decided that each Annex I countries (developed countries) will not exceed the allowable level of emissions beyond the assigned amount.

These countries can raise or lower their level of assigned units by trading units with other parties.

If a country in annex I has created less emission than allocated then it can sell the extra to other countries that did not achieve its Kyoto emissions goals.

However, the total units assigned for annex I countries remain the same.

Also, through this mechanism, the annex I countries can invest in GHG reduction technologies in countries outside their territories.

As the cost of investing is less in those countries due to cheap raw materials and labor.

The Kyoto protocol divided the world into developed and developing economies.

What is a carbon credit?

It is a tradeable certificate that allows/permits the buyer to release the set amount of CO₂ (or any other equivalent greenhouse gas) in the atmosphere.

Possession of 1 carbon credit allows the buyer to emit/release 1 tonne of CO₂ into the atmosphere.

The developed countries in annex I are assigned carbon credits.

The government of these countries assigns carbon credits to their businesses and factories on the basis of their previous carbon emissions.

Carbon credit buying selling mechanism

The developed countries which are the part of Kyoto protocol have mandatory emission reduction targets.

Each country in annex I is given a limit of releasing CO₂ or equivalent GHG in the air.

And this limit is based on their previous years’ emissions.

Once set, the governments of each of these countries further set emissions limits for different companies in their countries.

Thereafter, the credits are issued each year on the basis of the set limits.

And this whole mechanism come under the Cap-and-trade program.

Let us understand with the help of an example.

Assuming, two companies A and B are assigned carbon credits of 1000 units each for 1 year.

This means both are allowed to release up to 1000 tonnes of CO₂ each in the air.

In a year, company A released 800 tonnes of CO₂.

While

Company B didn’t keep its levels within the prescribed limit of 1000 tonnes of CO₂.

It released 1200 Tonne of CO₂ into the air.

In order to avoid penalties and offset the extra amount of GHG released in the air.

It will buy 200 credits from company B.

Company B can sell it to company A at the competitive price prevailing at that time.

This is carbon trading.

Carbon credit trading platforms

This trading takes place in exchanges that facilitate the buying and selling of carbon credits.

The biggest trading market is European Union.

The top carbon trading exchanges are:

• European Climate Change
• NASDAQ OMX Commodities Europe
• Power Next
• Commodity Exchange Bratislava
• European Energy Exchange

There are buyers’ and sellers’ platforms just like stock exchange platforms.

They facilitate the buying and selling of carbon credits.

In News:

Types of carbon credit

There are 2 types of carbon credits (based on their quality) available in the market.

• Voluntary Emission Reduction (VER)
• Certified Emission Reduction (CER)

The VER is exchanged over the counter and generally has less value.

In VER, the industries and companies voluntarily invest in carbon emission reduction projects and contribute toward preserving and mitigating climate change.

VER is usually certified through a voluntary certification process by independent third parties.

These third parties are companies and fund houses that sell carbon credits to the buyers.

These companies and the fund houses have aggregated these credits from the individual projects.

They have evaluated the value of these carbon credits through their own verification methods.

The carbon offsetters can buy the carbon credits from these fund houses and the companies.

While

The CER units are created through a regulatory framework. These are validated through the Clean Development Mechanism under the rules set in the Kyoto protocol.

Hence they have a higher value than the VER.

What are carbon offsets?

When a company or an organization does some activity or an investment that helps in reducing carbon emissions in the atmosphere has the ability to issue carbon offsets.

For example, a company installs a 1 MW solar plant to provide clean electricity in the township.

Which was otherwise fed through burning coal.

The amount of carbon emissions reduced by adopting solar becomes equivalent to carbon offsets.

Now the company has the ability to issue these carbon offsets to others.

How companies can offset carbon emissions?

There are many ways through which companies can offset their carbon emissions from the air.

I am listing a few of them:

• Afforestation: The trees are a very efficient source of absorbing CO₂ from the air. Planting more trees or saving forests from deforestation will absorb excess CO₂ from the air.

Thus, reducing carbon emissions from the atmosphere.

Green hydrogen: Hydrogen is a very efficient energy source.

Nearly 95% of the hydrogen produced in the world is produced from burning fossil fuels.

This releases carbon emissions into the air.

Companies are investing in green hydrogen technology that produces hydrogen through the electrolysis of water.

And this electrolysis is done through renewable energy sources such as solar.

Improving energy efficiency: by replacing old equipment with new ones. A 15-watt LED produces light intensity equivalent to 100 watts bulb. In a bulb, 80% of energy is lost as heat.

How India can benefit?

Although India is a part of the Kyoto protocol.

As a developing country, it has no emission reduction bindings.

But by investing in GHG reduction technologies and projects.

India can offset carbon emissions in the atmosphere and can earn a good number of carbon credits.

Through these carbon credits, it can help those countries who are in need of carbon credits to offset their extra GHG emissions.

India can sell these credits to these countries.

These countries can buy and sell in the open market recognized internationally.

Why carbon reduction in one country is accepted in other countries?

Because the reduction in GHG in any part of the world has the same benefit to the planet in terms of climate change. Carbon dioxide has no local but global impact.

How solar can help?

India is a sunshine country and has many renewable energy resources.

However, solar PV technology is very favorable for India.

And investing in solar PV technology can significantly reduce the carbon emissions in the air.

And the project developers can get the credits for that.

They can sell these credits to developed countries that are in need and have not met or exceeded the GHG emissions.

The income earned by selling these credits is not taxed.

It is a capital receipt.

That makes it even more profitable.

NREL estimated that emissions from solar panels are 40g when 1 unit of electricity is produced.

(It is a misconception that solar panels produce zero carbon emissions.

It is true for the power generation process.

But when I consider its manufacturing, transport, construction, maintenance, and de-commissioning. There are some carbon emissions in the air).

While

The same unit generated by burning coal produces 1000 g of CO₂ in the air.

The income earned by selling these credits is not taxed.

It is a capital receipt.

That makes it even more profitable.

Carbon reduction by using solar

The average Peak Sun Hours (PSH) in India is over 5.

A 1 kW of solar power system after compensating for the system losses produces 4 units or 4 kWh in a day.

In 1 year, the same 1 kW system will produce:

4x 365 = 1460 kWh.

If I calculate CO₂ emission reduction by adopting solar. It would be:

1460 x (1000g – 40g) = 1454 kg CO₂ emissions in 1 year.

Or

1.454 tonne of CO₂ in a year.

Similarly, a 5-kW solar power system can reduce 7.270 tonnes of CO₂ from the air.

cost of a 5-kW solar power system

The cost of any system depends on many factors.

Such as technology of the solar panels, roof type, transportation, labor cost, installation cost, and others.

The average cost of a 5 kW grid-tied solar power system in India is Rs. 3,10,000.