What is a Carbon Credit?
Today’s New Currency: The Carbon Credit
What is a Carbon Credit? Its true definition is the ESO or Exchange Soil Offset or, more popularly the CO2e or Carbon Dioxide equivalent but what is it equivalent to? How many Euros are there for each Credit?
Coincidentally, today is also the first day of a new currency that is very much like the real Carbon Credit. The Savetheplanet Carbon Credit is officially launched this day 1st September 2005 to a less than rapturous welcome from all who use her. Let’s call them Credits because in Science Fiction films Credits are the currency of the future anyway. So far, I have printed off the first batch of notes you can see below, I guessed that the 20 Credit note would entitle the holder to drive for 20 weeks at current technology levels. Owners of hybrids might be entitled to drive for more weeks but until I can work out the true value of a Credit, it’s difficult to know how it compares to a loaf of bread, a litre of petrol or a pair of Levi jeans. Or a tree.
But what is currency. The Euro was launched not long ago and its value floated around on money markets until the state of Europe’s economy, stability, legal framework, ethics and industry were used to give the Euro a value relative to other currencies. The Euro remains as flexible as other currencies since the price stabilized and its value now fluctuates according to political and economic factors. Currency is the way we value things against each other.
The best currency is gold. It is subject to none of the political kerfufflings of any other currency and is never affected by the weather (which is about to change most economies). It’s lowish when things are good and highish when things are bad. Everybody wants it because it looks nice and if the king of somewhere dies, the price of gold doesn’t change.
Carbon Credits have the potential to be the next great currency. Despite us not really wanting them at all, we will have to do something that stops us having more hurricanes like the one we had yesterday in the southern US. Hurricanes cost a lot of money and insurance companies are going to say that unless parties are seen to be taking all possible action to minimize the weather’s destruction, we won’t pay out. Insurers will find any reason not to pay out. It might be almost mandatory to have Carbon Credits one day and there seems to be no alternative world currency that escapes local political intervention that we can all trust. Carbon Credits are going to hold the same value where ever you are because CO2 has a global impact.
At the moment, the Carbon market is quoting one Credit as being worth US$10 – 30, which is a bit vague really. Whether you want them or not depends on how much you are prepared to pay and maybe that’s the reason for the large price band. Still, what precisely is a Carbon Credit? It should be based on something more tangible than “the ability to decrease CO2 production to near 1990 levels” (Kyoto uses 1990 as a baseline date). Maybe we might end up issuing too many Credits as we seek to mop up CO2 judiciously and go too far. As CO2 reduction accelerates and we start to gain control over atmospheric CO2, a Credit (the ability to reduce CO2 levels) could become worthless.
It seems likely that in the initial stages of the use of the Credit, every nation is going to want them to offset their CO2 production (the Kyoto agreement states that all parties should be able to account for their CO2 output by investing in carbon sinks and buying an equal number of Carbon Credits) and the money used to buy Credits is essentially going to go towards the increased use of alternative energy sources. This is exactly what is happening right now, because the terms of the Kyoto Protocol dictate that monies are to be used in nations that do not have the resources to invest in alternatives. As weather patterns become more obviously disruptive, the need to counter CO2 emissions will increase and the demand for Carbon Credits will become greater. Essentially the Carbon Credit market will be about buying credits to ensure against extreme weather events. Since the Carbon Credit is so inextricably connected to CO2 and we need something to actually value, CO2 should be considered to be the currency, it has to be. But how much is CO2 worth and ultimately what do we have to buy to actually reduce our CO2 levels?
Let’s look at trees. Most people see trees as the solution to the CO2 problem. The tree is the only known thing we can “control” that absorbs CO2. I want to see how many trees a Credit is worth so that I can grasp the size and scale of a Credit. The oceans absorb a lot of CO2 (there are lots of shells) but we have no control over this constant. Our farming methods and the way we handle our waste affect levels of CO2 but if you try to imagine what one Credit looks like, a tree or number of trees is a great way to give it context. So what is the market value of a tree and how much CO2 does it absorb?
Well that ultimately varies from tree to tree. An Oak in the UK is not the same as a Eucalyptus in Australia. Each tree has a different ability to absorb CO2. In practice, if the lumber price of a tree is less than its value for CO2 absorption, then foresters will naturally leave the tree to stand. So far, the unit for one Carbon Credit is given as 1 Tonne of CO2. So how many trees does it take to absorb 1 Tonne of CO2? And which particular trees do we choose?
Since the terms of the Kyoto agreement are that trees should be left to stand for 25 years before being felled, I have used the example below to calculate how many 25 year old maple and pine trees are needed to absorb 1 Tonne of CO2.
Typically, a tree reaches a size of around 14” dbh (diameter at breast height and depends on species) at the age of 25 and according to forest charts this tree has a marketable volume of 130 board feet. With prices varying from US$300 – 700 per thousand board feet, this one tree can be worth anything from about US$35 – 75.
According to www.tufts.edu an average 25 year old maple tree absorbs 2.52lbs (1.1kg) of CO2 per year. Over 25 years that’s 27.5 kgs. It means that 36 trees are needed to absorb one Tonne (1000kg) of CO2 and with each tree costing $50, each Carbon Credit should cost at least 50 x 36 trees = US $1800. Otherwise there is more value in felling the trees. Using these trees to give estimates to their carbon value gives very expensive Carbon Credit prices. Clearly these particular trees are not very good at absorbing high levels of CO2.
According to the same website, an average 25 year old pine absorbs 15lbs (6.82kgs) of CO2 per year which means that the cost of a Carbon Credit when measured with this tree is approximately 6 times cheaper at US$300. In other words it takes $300 dollars (6 trees) worth of lumber of this type of tree to absorb 1 Tonne of CO2. If these trees are used as a benchmark for prices the Credit would cost $300.
It’s interesting to note from the website I refer to, how 50 year old trees consume much more CO2 than younger trees. Maybe I should base all the valuations for a Credit on 50 year old trees but this might not be practical to foresters as they will have to leave the trees to reach that age before felling them.
The dilemma is which trees are we to use as the “average tree” for giving Carbon Credits their value. By having a look at the necessary charts for lumber prices, it seems to be hugely variable from region to region and species to species with prices depending on the time of the year and three measuring tables (International, Scribner and Doyle) all measuring trees differently.
My guess at $1800 and $300 for the cost of each Credit using my simplistic theory is way off the estimates of $10-30. I had imagined that a Carbon Credit would be easy to weigh and to grasp, but just as the Signatories of Kyoto are finding out, its definition is hard to place in the context of our daily lives. It would be nice to say that a Credit is equivalent to two trees growing to 50 years of age, but it really is not that simple at all.
Maybe my note which gives the driver 20 weeks driving for 20 Carbon Credits could be an indication of how much a Carbon Credit is after all. Using a simplistic ideal for working out the value of a Credit might mean it is more frequently used.