CARBON CREDITS & EMISSION TRADING

CARBON CREDITS & EMISSION TRADING

Carbon Credits are key components in emission trading schemes.
The concept of Carbon Credits formally came into existence as a result of Kyoto Protocol
Kyoto protocol envisages a cap and trade system. The cap lays down that the developed
countries should reduce their emissions 5.2% below their 1990 levels over the five year
period from 2008-2012.Since Carbon Credits are tradable instruments with a transparent price, financial investors like banks, brokers, funds, and private traders have also started buying them for pure trading purposes.

Kyoto protocol envisages a cap and trade system. The cap lays down that the developed countries mentioned in the Annexure I of United Nations Framework Convention on Climate Change (UNFCCC) should reduce their emissions 5.2% below their 1990 levels over the five year period from 2008-2012 (current commitment period). These are national level targets for participating countries. Countries manage their emission quotas through registries at the national level. These registries are
required to be validated by the UNFCCC. In turn countries may set quotas on the emissions of installations run by various business entities and organisations (operators).

Each operator (business entity or organisation) will get Assigned Allocation Units or in short ‘Allowances’ of emission quotas. Each unit of allowance (credit) allows an operator to emit one metric tonne of Carbon Dioxide or other equivalent greenhouse gas. The operators who have not used up their quotas (or prevented the emission to that extent) can sell their unused allowances as Carbon Credits and those who have exceeded their quotas can buy the extra allowance as credit from other operators directly or from the market place. By allowing credits to be bought and sold, an operator can decide the most cost-effective way of reducing its emissions either by investing in low emission machineries or production processes or by purchasing credits from others.
Under Kyoto Protocol, developed countries and operators who exceed their quotas can acquire emission credits by: Setting up a greenhouse gas emission reduction project in another developed country (known as JI or Joint Implementation) Sponsor a greenhouse gas emission reduction project in a developing country (known as CDM or Clean Development Mechanism) Buy it from countries with surplus credits under International Emission Trading system.

Indian share in carbon trading has crossed $5 billion and the country is expected to be a major player in the arena by 2012 generating 30 to 50% of the estimated 700 million units of carbon credits traded globally. Indian companies have a strategic advantage as the cost of emission reduction in India is very low as compared to the developed countries. However the regulatory framework in India in respect of carbon trading
is somewhat in a nascent stage and yet to have clear guidelines in various aspects including taxation of income from carbon credits, financing of CDM projects etc.
Meanwhile, Multi-Commodity Exchange of India Ltd (MCX) had already entered into a strategic alliance with the Chicago Climate Exchange (CCX) and is all set to launch trading in carbon credits shortly.