Author: Mahesh Kumar Malav, Sandeep Kumar, Lal Chand Malav, Sushil Kharia
Introduction
The concept of carbon credits came into existence as a result of increasing awareness of the need for controlling emissions. The IPCC has observed that: Policies that provide a real or implicit price of carbon could create incentives for producers and consumers to significantly invest in low-GHG products, technologies and processes. A tradable credit can be an emissions allowance or an assigned amount unit which was originally allocated or auctioned by the national administrators of a Kyoto-compliant cap-and-trade scheme, or it can be an offset of emissions. Such offsetting and mitigating activities can occur in any developing country which has ratified the Kyoto Protocol, and has a national agreement in place to validate its carbon project through one of the UNFCCC's approved mechanisms. Once approved, these units are termed Certified Emission Reductions, or CERs. These allowances can be sold privately or in the international market at the prevailing market price. Each international transfer is validated by the UNFCCC (Depledge, J., 2000)
Introduction to Carbon Credits Carbon credits must be real, quantifiable, verified reductions in GHG emissions. 6 gases are eligible for carbon credits. Gases have different values depending on their global warming potential Methane 21 - 23 times more potent than CO2. All GHGs expressed as metric tons of CO2 equivalents.
Carbon Dioxide Equivalent (CO2e) refers to the amount of different greenhouse gases in terms of the amount of CO2. CO2e is measured by converting amount of Global Warming Potential of greenhouses gases other than CO2 to the equivalent of CO2’s Global Warming Potential of similar amount. Carbon dioxide equivalents are commonly expressed as million metric tons of carbon dioxide equivalents, abbreviated as MMTCDE.
For example, the GWP for methane is 21 and for nitrous oxide 310. This means that emissions of 1 million metric tons of methane and nitrous oxide respectively are equivalent to emissions of 21 and 310 million metric tons of carbon dioxide.
Objective of trading carbon credits
It is to steer companies and countries to lower their greenhouse gas emissions. Those that do not exhaust their cap are allowed to sell them in the market or to those companies in need of them. So, those who do not use up their entire permissible amount are rewarded by being allowed to sell their credits, while those who exceed their cap are penalized by having to pay for more credits.
• By giving a currency value to the price of polluting the atmosphere, carbon credits establish a market to reduce greenhouse emissions.
• By making carbon credits part of the manufacturing scenario, companies are forced to look at alternative and safer sources of energy.
• Participating companies save money by implementing carbon credit reduction techniques.
• Carbon credits make a positive impact on global warming because it is implemented by all countries of the world.
• Companies based in developing countries earn an extra income from this.
• It is an innovative investment avenue for people.
Global Scenario
With the progress of mankind there has been an increasing adverse effect on the global environment due to hazardous emissions including carbon. This has caused what we know of as global warming. To address this issue of global warming, the United Nations Framework Convention on Climate change (UNFCCC) was adopted in 1992, with the objective of limiting the concentration of green house gases in the atmosphere. Subsequently, to supplement the convention, the Kyoto Protocol came into force in February 2005, which sets limits to the maximum amount of emission of GHGs by the countries. This protocol has created a mechanism under which more than 189 countries have agreed to reduce green house gas emissions globally.
Carbon market is the brain child of the Kyoto Protocol for controlling green house gas emissions. This market is mainly regulated by Clean Development Mechanism (CDM), which allows carbon credit earnings and carbon trading between countries and companies, establishing carbon credit exchange in the business world. As the first commitment period of the Kyoto Protocol in 2012 is completing nearly, it is important to take stock of global scenario of the carbon business and its achievement level (ITARC, 2012).
According to Kyoto Protocol, countries with binding emission reduction targets (which are represented by Annex- I countries) in order to meet the assigned reduction targets are issued allowances (carbon credits) equal to the amount of emissions allowed. An allowance or carbon credit represents one metric tonne of carbon credit equivalent. To meet the emission reduction target, binding countries ask their local businesses and entities to purchase carbon credits from the developing countries (non Annex-I countries) who are not bound by the amount of GHG emissions. At present, European Union is the major purchaser of carbon credit and Asia dominates the seller market led by China.
The volume of carbon markets mainly depend on the national emission reduction target of GHG gases of the developed countries. National targets range from 8% reductions for EU, 6% for Japan and 10% for Iceland. Market analysts estimate that should the industrialized nations adopt an aggressive emission reduction target of 50% or more by mid century, and should they meet half of their emission reduction commitments through the purchase of project based emission reductions from developing countries such as India & China, the carbon market could grow to $100 billion sales annually. In 2005, after the Kyoto Protocol was in force, the carbon markets were worth $10 billion which enhanced to $30 billion in the year 2006. In 2008, there were more than 800 projects registered worldwide to participate in the carbon trading mechanism.
Eligibility Requirements
According to the United Nations, to participate in the mechanisms, Annex I Parties must meet, among others, the following eligibility requirements:
• They must have ratified the Kyoto Protocol.
• They must have calculated their assigned amount in terms of tones of CO2-equivalent emissions.
• They must have in place a national system for estimating emissions and removals of greenhouse gases within their territory.
• They must have in place a national registry to record and track the creation and movement of ERUs, CERs, AAUs and RMUs and must annually report such information to the secretariat.
• They must annually report information on emissions and removals to the secretariat.
Financial support and participation in India
Carbon Credits projects requires huge capital investment. Realizing the importance of carbon credits in India, the World Bank has entered into an agreement with Infrastructure Development Finance Company (IDFC), wherein IDFC will handle carbon finance operations in the country for various carbon finance facilities. The agreement initially earmarks a $10-million aid in World Bank-managed carbon finance to IDFC-financed projects that meet all the required eligibility and due diligence standards. IDBI has set up a dedicated Carbon Credit desk, which provides all the services in the area of Clean Development Mechanism/Carbon Credit (CDM).
India signed and ratified the Kyoto Protocol in August 2002. Since India is exempted from framework of the treaty, it is expected to gain from the protocol in terms of transfer of technology and related foreign investments. India was an early player in the market and it hosted the Eighth conference of parties to the UNFCCC in Delhi in October 2002, to sensitize the business community about the opportunity provided by the carbon finance and the modalities of the emerging CDM.
• As a welcome scenario, India now has two Commodity exchanges trading in Carbon Credits. This means that Indian Companies can now get a better trading platform and price for CERs generated.
• Multi Commodity Exchange (MCX), India’s largest commodity exchange, has launched futures trading in carbon credits. The initiative makes it Asia's first-ever commodity exchange and among the select few along with the Chicago Climate Exchange (CCE) and the European Climate Exchange to offer trades in carbon credits. The Indian exchange also expects its tie-up with CCX which will enable Indian firms to get better prices for their carbon credits and better integrate the Indian market with the global markets to foster best practices in emissions trading. On 11th April 2008, National Commodity and Derivatives Exchange (NCDEX) also has started futures contract in Carbon Trading for delivery in December 2008.
• MCX is the futures exchange. People here are getting price signals for the carbon for the delivery in next five years. The exchange is only for Indians and Indian companies. Every year, in the month of December, the contract expires and at that time people who have bought or sold carbon will have to give or take delivery. They can fulfill the deal prior to December too, but most people will wait until December because that is the time to meet the norms in Europe. If the Indian buyer thinks that the current price is low for him he will wait before selling his credits. The Indian government has not fixed any norms nor has it made it compulsory to reduce carbon emissions to a certain level. So, people who are coming to buy from Indians who are actually financial investors. They are thinking that if the Europeans are unable to meet their target of reducing the emission levels by 2009, 2010 or 2012, then the demand for the carbon will increase and then they may make more money. So investors are willing to buy now to sell later. There is a huge requirement of carbon credits in Europe before 2012. Only those Indian companies that meet the UNFCCC norms and take up new technologies will be entitled to sell carbon credits. There are parameters set and detailed audit is done before you get the entitlement to sell the credit.
India's role in world carbon trade
Since India is a developing nation, it does not come under the ambit of the Kyoto Protocol. So, we can use our developing country status to let any Indian company, factory or farmer link up with the United Nations Framework Convention on Climate Change and determine the permissible ‘standard’ level of carbon emission for its specific field of activity. For the amount of low carbon emissions made by an Indian company, the developed nation earns carbon credits.
Already, India’s contribution to carbon credits stands at $1 billion, out of a global trading of about $5 billion. India has generated about 30 million carbon credits and has a line-up of about 140 million to introduce into the global market. These comprise chemical units, plantation companies, municipal corporations and waste disposal units that can easily sell their carbon credits for good amounts of money. This is possible because India has credits for emitting carbon below the permissible limits and so has enough credit to offer defaulting countries. With this facility, India can trade her carbon credits for large loans, better social visibility and ecological facilities and lucrative incentives by multinationals in their home countries. Some of the Indian countries that have already jumped on to this bandwagon include Tata Steel, Gujarat Fluoro Chemicals, NTPC, etc. Out of the 391 projects sanctioned by the UNFCCC, 114 were registered from India-the highest ever for any country.
Conclusion
Carbon credit is an umbrella term for a certificate or permit that allows an organization or a country to manufacture a fixed amount of carbon emissions which can be bartered if the full fixed allowance is not fully used. Though Carbon Credit is definitely a very lucrative proposition for both the buying and selling countries, it is the environment which pays the heaviest price, as the GHG emitting countries cause environmental degradation by polluting it. We live in a world where a balance has to be maintained but in the present situation we are disrupting the balance and the future generations will have to pay a heavy price as they will live in an unhealthy environment. Hence strict laws should be imposed to limit the buying and selling Carbon Credits. Scientists must use their time, money, and all available resources in order to find substitutes for the carbon emitting fuels currently being used so that the environment does not suffer any damage at all. They could use sustainable development programs via renewable or zero carbon emission fuel. Countries need to be the change which they want to see in this world. Having cornered more than half of the global total in tradable certified emission reduction (CERs), India’s dominance in carbon trading under the CDM of the UNFCCC is beginning to influence business dynamics in the country.
References:
1. The World Bank, Environmental Assessment, Country data: India, 2011.
2. Depledge, J. (2000). United Nations framework convention on climate change (UNFCCC) technical paper: Trading the origins of the kyoto protocol: An article-by-article textual history, August, 2000.
3. Energy Information Administration, Country Analysis Brief: India, 2011.
4. International Trade & Academic Research Conference, 2012
About Author / Additional Info:
I am currently pursuing Ph. D in Environmental science