All about Carbon Credits.


These days ‘Development’ and ‘Innovation’ are the key words for every nation. For over a century  the human habitation on the earth has left no stone unturned to keep up the pace with the developed part of the globe. Thus, there is a rapid socio- and economic transformation from an agrarian society to an industrialized one. Industrialization  is one of the prime aspect for the development of a nation. A country being industrialized means setting up of more factories, commercial enterprises and production houses. More industries, more the pollution. And it is this ‘pollution’ that has set the alarm bells ringing. The release of hazardous gases like carbon mono-oxide, nitrous oxide, methane, chlorofluorocarbon carbons, etc  in the environment have adversely affected the ozone layer , our protective sheath, in the atmosphere. Day-by-day their increasing concentration is thinning the sheath up in the atmosphere. As a result, the ozone layer is losing its strength to emit these gases off the environment, thus, reflecting it back to the earth’s atmosphere. This trapping of the gases is gradually raising the earth’s temperature, a phenomenon called ‘global warming’. Multitudinous efforts have been taken up to combat this problem. One such phenomenal solution is the concept of ‘CARBON CREDIT’.

In order to understand the concept, it is mandatory to comprehend the meaning of carbon credit. It is, basically, a generic term for a tradable certificate or permit that grants the right upon an organization or a group to emit one metric tonne of carbon dioxide or any other gas that has mass equivalent to one tonne of carbon dioxide. For example if an environmental group plants trees that are enough to decrease the carbon dioxide emission by one tonne then that group will be awarded one credit.. This group can then trade this one carbon credit by selling it to an industrial group who has emission quota of suppose 12 tonnes but is expecting to produce 13 tonnes of carbon dioxide.

Carbon credits are generated from carbon dioxide or any other greenhouse gas emission reduction activities such as afforestation and reforestation activities. Developing nations are the highest producers of carbon credits as these locations are considered to be environmental ‘hot-spots’.

Carbon Credit and Kyoto Protocol 

To address the problems arising due to rapid climate change and to combat the issue of global warming , the United Nations passed the Kyoto Protocol in 1997, which was ratified by 170 countries. The Protocol have set the target of reducing the emission of green house gases by an average of 5.2% by the year 2012. Nations signatory to the Kyoto Protocol have accepted the targets for reducing the emissions and these targets are expressed as levels of allowed emissions, which are divided into Assigned Amount Units (AAU).

Kyoto Protocol provides for three mechanisms for the industrialized countries to greenhouse gas reduction credits.

1) Emission Trading (ET): It allows countries that have emission units to spare- emissions permitted but not used, to sell this excess capacity to countries that are over their emission targets.

2) Joint Implementation (JI): In this , where an industrialized nation with high costs of domestic greenhouse gas reductions would be able to set up a project in another developed nation.

3) Clean Development Mechanism (CDM): It aspires  to advocate clean development in developing nation. In this system a developed country sponsors a greenhouse reduction project in the developing country where the costs of project activities is low. Developed country would be given credits for meeting its emission reduction targets whereas the developing nation would be benefited with capital investment and clean technology initiatives.

CDM has Certified Emission Reductions (CERs) as their tradable units, which are commonly known as ‘carbon credits’, where each unit is equivalent to reduction of one metric tonne of carbon dioxide. CDM is supervised by CDM Executive Board and is under guidance of the Conference of the Parties of UNFCCC (United Nations Framework Convention on Climate Change). UNFCCC is an international environmental treaty negotiated at the UN Conference, Earth Summit, held in Rio de Janerio in 1992, to stabilize the concentrations of the greenhouse gases in the atmosphere at a level that would prevent dangerous anthropogenic interference with climate system.

Potential Markets for Carbon Credits

Broadly speaking, there are two types of markets for trading carbon credits. First, is the compliance market , which comprises of legally-binding mandatory emission trading schemes largely established under Kyoto Protocol. Second is the voluntary market , which enables the companies and individuals to purchase carbon credits on voluntary bases to satisfy personal or Corporate Social Responsibility (CSR).

For trading purposes CER ( equivalent to one metric tonne of carbon dioxide emission) is considered which can be traded either privately or in the international market at the prevailing market price. Each international transfer is validated by UNFCCC.

India and Carbon Credits

India is a developing nation. Companies that opt for eco-friendly mode  for achieving their production targets or invest in windmill, bio-gas or bio-diesel production projects are the one which generate carbon credits whereas industries dealing in cement, steel, textile, fertilizer production , that pollute the environment but also try to reduce their emissions, can buy the credits and make money. India is a strong supplier of carbon credit and supply second highest number of CERs. One CER in Indian rupees is Rupees 1600. The must mention example is of Delhi Metro Rail corporation (DMRC) that has become the world’s first rail project to earn carbon credits using regenrative braking system.

India has two Commodity Exchanges trading in carbon credits. First is the Multicommodity Exchange (MCX) , which is the Asia’s first ever commodity exchange to offer trade in carbon credits ( other examples being Chicago Climate Exchange and European Carbon Exchange), and second is National Commodity and Derivatives Exchange (NCDEX) that has also offered trading in carbon credits since 2008.

India , being a developing nation , has a huge growth potential by opting Clean Development Mechanism as it would bring in more opportunities for clean technology development, foreign investments and reduction of greenhouse gas emissions.


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