My notes as I explore various business and financial topics

Tuesday, February 15, 2011

You're Getting Paid for What? (a summary on carbon credits)

I worked for a financial leasing company once and was quite amused when they put together various financial packages and referred to them as their "product".

And then I read about carbon credits.  Wow!  Name one other item where you create a product out of nothing and then sell it for a 450% markup.

Here is a quick summary of how Carbon Credits works.

A pig farm in the Philippines normally dumps  manure into ponds, where they decompose, releasing massive amounts of methane (a big contributor of greenhouse gases).

Technology exists to cap the ponds and capture the methane, which can be used to generate energy. It costs $200,000 for the equipment, though.

Certified Emissions Reductions or CERs are created by preventing 1 ton of carbon dioxide from entering the atmosphere.  Methane gas, a far larger contributor of green house gases, generates 23 CERs, also known as carbon credits

A broker buys the carbon credits generated by the pig farm at $4 each.  They sell these credits to European banks for $18 each.

The banks can either hold onto the carbon credits as investments, betting that the market value for these will increase, as companies hit their emmission quotas and compete to purchase more carbon credits to offset them.  Or, they can sell them to clients, such as power companies.

For a more detailed view, read more at the source below.

Source: Fortune Magaze 04/28/2008

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