How does carbon credit work in solar?

A carbon credit is a mechanism for reducing or mitigating the concentration of greenhouse gases in the atmosphere.

Global warming is affecting our earth.

This is the result of significant GHG (greenhouse gas) emissions.

And

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

To start a mechanism where industrial and commercial processes are motivated to reduce greenhouse gas emissions.

Kyoto Protocol

The meeting was held in Japan, in Kyoto.

The goal was to reduce the concentration of GHGs to such a level that it does not harm the Earth’s climate system.

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 has been decided that each Annex I country (developed countries) will not exceed the permitted level of emissions beyond the assigned amount.

These countries can increase or decrease their level of allocated units by trading units with other parties.

If an Annex I country has created fewer emissions than it is allocated, it can sell the excess to other countries that have not met its Kyoto emissions targets.

However, the total number of units allocated to Annex I countries remains the same.

Also, through this mechanism, Annex I countries can invest in GHG reduction technologies in countries outside their territory.

As the investment cost is less in these 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 tradable certificate that allows the buyer to release the defined amount of CO₂ (or any equivalent greenhouse gas) into the atmosphere.

Possession of 1 carbon credit allows the buyer to emit/reject 1 ton of CO₂ into the atmosphere.

Developed Annex I countries are allocated carbon credits.

The government of these countries assigns carbon credits to their companies and factories based on their past carbon emissions.

Mechanism for buying and selling carbon credits

Developed countries that are part of the Kyoto Protocol have mandatory emission reduction targets.

Each Annex I country is assigned a CO₂ or GHG equivalent release limit to air.

And this limit is based on the emissions of their previous years.

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

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

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

Let’s understand with the help of an example.

Assuming that two companies A and B are awarded carbon credits of 1,000 units each for 1 year.

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

In one year, company A emitted 800 tonnes of CO₂.

Whereas

Company B did not maintain its levels within the prescribed limit of 1000 tons of CO₂.

It released 1200 tonnes of CO₂ into the air.

In order to avoid penalties and to compensate for the additional quantity of GHG released into the air.

She will buy 200 credits from company B.

Company B can sell it to Company A at the then competitive price.

This is carbon trading.

Carbon credit trading platforms

These exchanges take place on exchanges that facilitate the buying and selling of carbon credits.

The largest commercial market is the European Union.

The main carbon exchanges are:

• European climate change
• NASDAQ OMX Commodities Europe
• Next power
• Bratislava Commodity Exchange
• European Energy Exchange

There are buyers’ and sellers’ platforms in the same way as stock market platforms.

They facilitate the purchase and sale of carbon credits.

Types of carbon credit

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

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

VER is traded over the counter and is generally less valuable.

In VER, industries and businesses voluntarily invest in projects to reduce carbon emissions and contribute to the preservation and mitigation of climate change.

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

These third parties are businesses and finance companies that sell carbon credits to buyers.

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

They assessed the value of these carbon credits using their own verification methods.

Carbon offsets can buy the carbon credits from these fund houses and companies.

Whereas

CER units are created within a regulatory framework. These are validated by the Clean Development Mechanism according to the rules set out in the Kyoto Protocol.

Therefore, they have a higher value than the REV.

What are carbon offsets?

When a company or organization performs an activity or investment that contributes to reducing carbon emissions into the atmosphere, it has the ability to issue carbon offsets.

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

Which was otherwise fueled by burning coal.

The amount of carbon emissions reduced by going solar becomes equivalent to the 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 companies can offset their carbon emissions into the air.

I list a few:

• Afforestation: 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 source of energy.

Nearly 95% of the hydrogen produced in the world comes from the combustion of fossil fuels.

This releases carbon emissions into the air.

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

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

Improve energy efficiency: by replacing old equipment with new ones. A 15 watt LED produces a light intensity equivalent to a 100 watt bulb. In a light bulb, 80% of the energy is lost in the form of heat.

How can India benefit from it?

Although India is part of the Kyoto Protocol.

As a developing country, it has no obligation to reduce emissions.

But by investing in GHG reduction technologies and projects.

India can offset carbon emissions into the atmosphere and earn lots of carbon credits.

Thanks to these carbon credits, it can help countries in need to offset their additional GHG emissions.

India can sell these credits to these countries.

These countries can buy and sell on the internationally recognized free market.

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

Because reducing GHGs in any part of the world has the same benefit for the planet in terms of climate change. Carbon dioxide has no local but global impact.

How can solar help?

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

However, solar photovoltaic technology is very favorable for India.

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

And the project developers can get the credits for it.

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

Income from the sale of these credits is not taxed.

It is a return of capital.

This makes it even more profitable.

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

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

This is true for the process of energy production.

But when I consider its manufacture, transport, construction, maintenance and dismantling. There are carbon emissions in the air).

Whereas

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

Income from the sale of these credits is not taxed.

It is a return of capital.

This makes it even more profitable.

Carbon reduction through solar energy

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

A 1 kW solar power system after compensating system losses produces 4 units or 4 kWh per day.

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

4x 365 = 1460 kWh.

If I calculate the reduction in CO₂ emissions by going solar. It would be:

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

Or

1.454 tons of CO₂ in one year.

Similarly, a 5 kW solar power system can reduce 7,270 tonnes of CO₂ from the air.

cost of 5kw solar power system

The cost of any system depends on many factors.

Such as solar panel technology, 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.