CARBON CREDIT

INTRODUCTION
Ideas are like dreams. Unbelievably romantic. And, such one is carbon trading an idea
that lays its foundation on tena thyektena bhunjeeta (earn by giving). Born in the 1997 World
Earth Summit held at Kyoto, Japan, this dreamchild can make miracles on society if practised
rightly. The convention, participated by 160 countries of the world, was to negotiate binding
limitations on greenhouse gases for the developed nations pursuant to the objective of the
Framework Convention on Climate Change of 1992.
KYOTO PROTOCOL:
The outcome was the Kyoto Protocol, in which the developed nations agreed to limit their
greenhouse gas emissions, relative to the levels emitted in 1990 or pay a price to those that do. At
this point comes the carbon trading. The idea was to make developed countries pay for their
wild ways with emissions while at the same time monetarily rewarding countries with good
behaviour in this regard. Since developing countries can start with clean technologies, they will
be rewarded by those stuck with dirty ones. This system poises to become a big machine for
partially transferring wealth from wealthy, industrialised countries to poor, undeveloped
countries. Say a company in India can prove it has prevented the emission of x-tonnes of carbon,
it can sell this much amount of points (or carbon credits) to a company in say, the US which has
been emitting carbons. The World Bank has built itself a role in this market as a referee, broker
and macro-manager of international fund flows. The scheme has been entitled Clean
Development Mechanism, or more commonly, Carbon Trading.
This allows industries in developed countries to off-set their emissions of carbon dioxide
by investing in reforestation and clean energy projects in developing countries such as largescale tree plantations as a lucrative alternative to reducing emissions.
Planting 100,000 hectares of new forest can remove one million tones of carbon per year from
the atmosphere. As trees grow, they absorb carbon dioxide from the air. They use this to make
sugar, starch and complex molecules like cellulose and lignin, forming wood, branches, roots,
leaves and bark. About 50 per cent of a trees dry weight is carbon. If a forest is planted on land,
which has already been cleared, the growth of the trees dramatically increases the total carbon
stored on the land.

The amount of carbon captured by trees is estimated from the volume of the trees, calculated
from the heights and diametres. The tree volume is then converted to tonnes of dry wood. The
weight of dry wood is then divided into the weight of carbon and other elements such as
hydrogen and oxygen.
For example, a fast-growing eucalypt plantation averaging a stem growth rate of 20 cubic
metres of wood per hectare may yield 500kg of dry wood per cubic metre, that is 10 tonnes per
hectare and contain 50 per cent carbon, that is 5 tonnes per hectare of carbon in one year.
Such carbon projects could potentially recover habitat on millions of hectares of heavily
populated forest and farmlands. This would bring social, economic, and local environmental
benefits to hundreds of thousands, and potentially millions, of poor rural people in the
developing world. According to the researchers, there are 126 million hectares (311 million
acres) of low-yielding crop and pastureland. Converting some of these areas to higheryielding
agro forestry would sequester five to 50 tons of carbon per hectare per year. Rehabilitating dry
forests in India could double sequestration from 27 to 55 tons of carbon yearly for every hectare
of dry forest improved.
For example, in the Handia Forest range of Madhya Pradesh, India, 95 very poor rural villages
would jointly earn at least US$300,000 every year from carbon payments by restoring 10,000
hectares of degraded community forests, if their project succeeds. Healthy forests bring all kinds
of other benefits too. They would help to protect endangered leopards and monkeys and improve
local water supplies. At the same time, villagers, many of whom own no cropland would earn
money from the sale of fuel wood, highvalue timber, and tendu leaves used for wrapping cigars.
Many communitybased projects can sell carbon credits at the expected global market price of
US$15 to $20 per ton of sequestered carbon.
Few countries are close to making the Kyoto limits without buying credits. So there is
considerable demand. Even as more countries get their emissions in order, the emissions allowed
will gradually decline over time, making the remaining credits inevitably more expensive.
Countries will therefore have an economic incentive to be carbon credit producers instead of
consumers. It is definitely an incentive for developing countries to adopt cleaner technologies
sooner, so as to continue being sellers and not buyers as they continue to grow. Were now
starting to see how these markets will play out.

CARBON CREDIT AND HOW YOU CAN MAKE MONEY FROM IT

Carbon dioxide, the most important greenhouse gas produced by combustion of fuels, has
become a cause of global panic as its concentration in the Earth's atmosphere has been rising
alarmingly.
This devil, however, is now turning into a product that helps people, countries, consultants,
traders, corporations and even farmers earn billions of rupees. This was an unimaginable trading
opportunity not more than a decade ago.
Carbon credits are a part of international emission trading norms. They incentivise companies or
countries that emit less carbon. The total annual emissions are capped and the market allocates a
monetary value to any shortfall through trading. Businesses can exchange, buy or sell carbon
credits in international markets at the prevailing market price.
India and China are likely to emerge as the biggest sellers and Europe is going to be the biggest
buyers of carbon credits.
Last year global carbon credit trading was estimated at $5 billion, with India's contribution at
around $1 billion. India is one of the countries that have 'credits' for emitting less carbon. India
and China have surplus credit to offer to countries that have a deficit.
India has generated some 30 million carbon credits and has roughly another 140 million to push
into the world market. Waste disposal units, plantation companies, chemical plants and municipal
corporations can sell the carbon credits and make money.
Carbon, like any other commodity, has begun to be traded on India's Multi Commodity Exchange
since last the fortnight. MCX has become first exchange in Asia to trade carbon credits.
WHAT IS CARBON CREDIT?
As nations have progressed we have been emitting carbon, or gases which result in warming of
the globe. Some decades ago a debate started on how to reduce the emission of harmful gases

that contributes to the greenhouse effect that causes global warming. So, countries came together
and signed an agreement named the Kyoto Protocol.
The Kyoto Protocol has created a mechanism under which countries that have been emitting
more carbon and other gases (greenhouse gases include ozone, carbon dioxide, methane, nitrous
oxide and even water vapour) have voluntarily decided that they will bring down the level of
carbon they are emitting to the levels of early 1990s.
Developed countries, mostly European, had said that they will bring down the level in the period
from 2008 to 2012. In 2008, these developed countries have decided on different norms to bring
down the level of emission fixed for their companies and factories.
A company has two ways to reduce emissions. One, it can reduce the GHG (greenhouse gases)
by adopting new technology or improving upon the existing technology to attain the new norms
for emission of gases. Or it can tie up with developing nations and help them set up new
technology that is eco-friendly, thereby helping developing country or its companies 'earn'
credits.
India, China and some other Asian countries have the advantage because they are developing
countries. Any company, factories or farm owner in India can get linked to United Nations
Framework Convention on Climate Change and know the 'standard' level of carbon emission
allowed for its outfit or activity. The extent to which I am emitting less carbon (as per standard
fixed by UNFCCC) I get credited in a developing country. This is called carbon credit.
These credits are bought over by the companies of developed countries -- mostly Europeans -because the United States has not signed the Kyoto Protocol.
HOW DOES IT WORK IN REAL LIFE?
Assume that British Petroleum is running a plant in the United Kingdom. Say, that it is emitting
more gases than the accepted norms of the UNFCCC. It can tie up with its own subsidiary in,
say, India or China under the Clean Development Mechanism. It can buy the 'carbon credit' by

making Indian or Chinese plant more eco-savvy with the help of technology transfer. It can tie up
with any other company like Indian Oil , or anybody else, in the open market.
In December 2008, an audit will be done of their efforts to reduce gases and their actual level of
emission. China and India are ensuring that new technologies for energy savings are adopted so
that they become entitled for more carbon credits. They are selling their credits to their
counterparts in Europe. This is how a market for carbon credit is created.
Every year European companies are required to meet certain norms, beginning 2008. By 2012,
they will achieve the required standard of carbon emission. So, in the coming five years there
will be a lot of carbon credit deals.
WHAT IS CLEAN DEVELOPMENT MECHANISM?
Under the CDM you can cut the deal for carbon credit. Under the UNFCCC, charter any
company from the developed world can tie up with a company in the developing country that is a
signatory to the Kyoto Protocol. These companies in developing countries must adopt newer
technologies, emitting lesser gases, and save energy.
Only a portion of the total earnings of carbon credits of the company can be transferred to the
company of the developed countries under CDM. There is a fixed quota on buying of credit by
companies in Europe.
HOW DOES MCX TRADE CARBON CREDITS?
This entire process was not understood well by many. Those who knew about the possibility of
earning profits, adopted new technologies, saved credits and sold it to improve their bottomline.
Many companies did not apply to get credit even though they had new technologies. Some
companies used management consultancies to make their plan greener to emit less GHG. These
management consultancies then scouted for buyers to sell carbon credits. It was a bilateral deal.
However, the price to sell carbon credits at was not available on a public platform. The price
range people were getting used to was about Euro 15 or maybe less per tonne of carbon. Today,

one tonne of carbon credit fetches around Euro 22. It is traded on the European Climate
Exchange. Therefore, you emit one tonne less and you get Euro 22. Emit less and increase/add to
your profit.
We at the MCX decided to trade carbon credits because we are in to futures trading. Let people
judge if they want to hold on to their accumulated carbon credits or sell them now.
MCX is the futures exchange. People here are getting price signals for the carbon for the delivery
in next five years. Our 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.
Say, 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 are actually
financial investors. They are thinking that if the Europeans are unable to meet their target of
reducing the emission levels by 2009 or 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. In India, already 300 to 400 companies have carbon credits after meeting UNFCCC
norms. Till MCX came along, these companies were not getting best-suited price. Some were
getting Euro 15 and some were getting Euro 18 through bilateral agreements. When the contract
expires in December, it is expected that prices will be firm up then.
On MCX we already have power, energy and metal companies who are trading. These
companies are high-energy consuming companies. They need better technology to emit less
carbon.

IS THIS MARKET ALSO GOOD FOR THE SMALL INVESTORS?

These carbon credits are with the large manufacturing companies who are adopting UNFCCC
norms. Retail investors can come in the market and buy the contract if they think the market of
carbon is going to firm up. Like any other asset they can buy these too. It is kept in the form of
an electronic certificate.
We are keeping the registry and the ownership will travel from the original owner to the next
buyer. In the short-term, large investors are likely to come and later we expect banks to get into
the market too. This business is a function of money, and someone will have to hold on to these
big transactions to sell at the appropriate time.
ISN'T IT BIT DUBIOUS TO ALLOW POLLUTERS IN EUROPE TO BUY CARBON
CREDIT AND GET AWAY WITH IT?
It is incorrect to say that because under UNFCCC the polluters cannot buy 100 per cent of the
carbon credits they are required to reduce. Say, out of 100 per cent they have to induce 75 per
cent locally by various means in their own country. They can buy only 25 per cent of carbon
credits from developing countries.
WHAT'S THE FLIP SIDE OF YOUR BUSINESS?
Like in the case of any other asset, its price is determined by a function of demand and supply.
Now, norms are known and on that basis European companies will meet the target between
December 2008 and 2012. People are wondering how much credit will be available in market at
that time. To what extent would norms be met by European companies. . .
As December gets closer, it is possible that some government might tinker with these norms a
little if the targets could not be met. If these norms are changed, prices can go through a
correction. But, as of now, there is a very transparent mechanism in which the norms for the next
five years have been fixed.
Governments have become signatories to the Kyoto Protocol and they have set the norms to
reduce the level of carbon emission. Already companies are on way to meeting their target.

Other than this, it's a question of having correct information. How much will be the demand for
carbon credit some years from now? How much will the supply be? It is a safe market because it
is a matter of having more information on the extent of demand and supply of carbon credit
market.
INDIA INC TAKES TO CARBON TRADING
More than 112 Indian companies, including Hindustan Lever Ltd and Tata Steel are set to trade
in carbon credits. These companies are ready with clean technologies to bring down the emission
levels of greenhouse gases and sell certified emission reductions (CERs) to developed countries.
This is the largest portfolio for any country signatory to the United Nations Framework of
Climate Change Convention (UNFCCC). The UN body certifies countries and companies that
can trade in carbon credits under the Kyoto Protocol.
According to World Bank estimates, India is expected to rake in $100 million annually by trading
in carbon credits and Indian companies are expected to corner at least 10 per cent of the global
market in the initial years.
Globally, greenhouse gas emissions are expected to come down by 2.5 billion tonne by 2012.
According to industry estimates, Indian companies are expected to generate at least $8.5 billion
at the going rate of $10 per tonne of CER.
Under the Kyoto Protocol, between 2008 and 2012, developed countries have to reduce
emissions of greenhouse gases to an average of 5.2 per cent below the 1990 level.
They can also buy CERs from developing countries, which do not have any reduction
obligations, in case their industries are not in a position to lower the emission levels themselves.
One tonne of carbon dioxide reduced through the Clean Development Mechanism (CDM)
project, when certified by a designated entity, becomes a tradable CER.
According to industry estimates, some Indian companies have entered into forward contracts
with buyers from the European Union. These contracts are estimated at $325 million.

The World Bank has also purchased CERs from 10 companies. Tata Steel, HLL, Jindal
Vijaynagar Steel, Essar Power and Gujarat Flurochemicals Ltd have specially designed projects
to take advantage of the opportunity. Bharat Heavy Electricals Ltd is the only public sector firm
which is planning to approach the ministry for approval.
The projects range from cement, steel, biomass power, bagasse co-generation and municipal
solid waste to energy, municipal water pumping and natural gas power.
While the ministry has given the host-country clearance, the CDM projects will have to be
approved by the executive board of the UNFCCC. Of the 15 projects approved by the UNFCCC
so far, four are Indian.
These four are: Gujarat Flurochemicals, Kalpataru Power Transmission Ltd, the Clarion power
project in Rajasthan [ Images ] and the Dehar power project in Himachal Pradesh [ Images ].
India is the world's sixth largest emitter of carbon dioxide with its present share in global
emissions estimated at 6 per cent.
GOING GREEN

India is expected to rake in $100 million annually by trading in carbon credits.

Indian firms are expected to corner 10% of the global market in the initial years.

They are likely to generate $8.5 bn at the going rate of $10/tonne of certified emission
reductions

22 THINGS YOU SHOULD KNOW ABOUT CARBON CREDITS

1. One unit of Carbon Credit equals one tonne of Carbon Di Oxide not emitted.
2. The Kyoto protocol, under which all these carbon credit trading stuff take place,
theoretically, is valid only up to 2012.

3. Installations that has been allotted credits need not pay money for getting those, however,
the allotted credits have a monetary value and can be traded for money.
4. Carbon Credit is maintained in the form of a Electronic Certificate, similar to that of a
De-Materialized (Demat) Share Certificate.
5. Credits allotted through CDM is called Certified Emission Reduction ( CER) , while
credits earned through Joint Implementation are called Emission Reduction Unit ( ERU).
6. GHG ( Green House Gases) , as defined by UNFCCC includes carbon dioxide, Methane,
Nitrous Oxide, Hydro-fluorocarbons, Perfluorocarbons, and Sulphur Hexafluoride.
7. A typical CDM Project consists of 6 main stages Project Identification > Host Country
Approval > Project Validation > Project Registration > CER Verification >Issuance
of CERs
8. Carbon Credits are usually classified as production cost and this cost is passed on to the
consumers.
9. Most companies in India are still not aware that they can earn tradable carbon
credits ( by adopting green technologies). The scope for CDM consultants in providing
advisory services is getting wider, day by day.
10. India has emerged as the second-largest seller of carbon credits globally with 489
registered CDM projects till date (24% of total projects registered under CDM globally.
11. Of the 294 Indian Projects which have attracted European buyers, 107 are biomass
projects.
12. In India, one can trade carbon credits through Multi Commodity Exchange(MCX) and
the National Commodity and Derivatives Exchange (NCDEX)
13. Carbon Credits Trading is not just for big companies. Even medium and smaller trading
companies can engage in Trading.

14. As per the current trends, India & China will be the biggest sellers of Carbon Credits,
and European Union, the largest buyer
15. As of March 2010,there are currently more than 2000 registered CDM projects in 58
countries, and about another 2300 projects in the project validation/registration pipeline.
Based on estimates in submitted project design documents, the CDM could generate
more than 2.9 billion certified emission reductions by the end 2012.
16. India or China ( or any developing country for that matter) , doesnt buy credits,
normally. Installations in these places adopt technology, that reduces GHG ( green house
gases) and earn credits.
17. Chicago Climate Exchange (also known as CCX) was the first carbon exchange to start
trading in six greenhouse gases in 2003.
18. Energy efficiency can account for 60%of avoided emissions in 2030.
19. In China, the majority of CDM credits come from hydro and wind energy projects.
20. Other than India and China, other countries having registered CDM projects include
Brazil, Chile, Columbia, Indonesia, Israel, Malaysia, Mexico, South Africa, South Korea,
and Thailand.
21. China represents 50% of the 918 hydro projects registered globally
22. The potential for emission reduction in Sri Lanka is around 6 million tonnes Carbon
dioxide per year, however, not a single project has been registered for CDM yet.
PROBLEMS
It should be pointed out that carbon trading is hugely contentious and many environmental
and social justice activists oppose it due to its many inherent problems. Most emissions trading
schemes have large loopholes which distort the whole system. These range from reliance on
credit-generating projects such as monoculture tree plantations, as well as lack of credible

enforcement and verification systems to the use of financial instruments such as carbon hedgefunds, banking systems, derivatives, etc.
Besides, the production of emissions such as greenhouse gases inevitably involves the
production of toxic copollutants. These often include Volatile Organic Compounds (VOCs),
Polycyclic Aromatic Hydrocarbons, Particulate Matter, benzene, arsenic, dioxins, mercury,
cadmium, etc. All of these copollutants have huge public health consequences.
Like way, trading only deals with a general reduction, while individual polluting sites and
industries may in practice actually be able to increase their emissions. The reality is that most
polluting industries are sited in areas of predominately low-income and communities of colour.
Existing schemes have actually demonstrated that massive increases have happened in such
communities, resulting in dramatic impacts on the people living there. It was the result of such
schemes, which is one of the main factors behind the emergence of the environmental justice
movement.Trading in emissions effectively creates a commodity literally out of thin air. As such,
global pollution trading is a form of privatisation of the atmospheric commons (you cant sell
what you dont own) and allows the market and corporate actors (many of whom are the worlds
biggest polluters) to determine the pace and development of the carbon market. It is precisely
for this reason which corporate lobby groups such as the WBCSD and IETA support it. It is said
that these groups have played an enormously obstructive role in efforts to negotiate effective
environmental agreements and both have some of the actors (many of whom are the worlds
biggest polluters) to determine the pace and development of the carbon market. It is precisely
for this reason which corporate lobby groups such as the WBCSD and IETA support it. It is said
that these groups have played an enormously obstructive role in efforts to negotiate effective
environmental agreements and both have some of the worlds most notorious polluters as their
key members.
Trading is a distortion of what really needs to happen which is reductions at source across the
board. No source should be allowed to increase its emissions due to the above reasons.
The carbon market creates transferable rights to dump carbon in the environment and vegetation
far in excess of the capacity of these systems to hold it. Billions of dollars worth of these rights
are to be awarded free of charge to the biggest corporate emitters of greenhouse gases in the
electric power, iron and steel, cement, paper and other sectors in industrialised nations who have
caused the climate crisis and already exploited these systems most.

CONCLUSION
Though there may be such anomalies, we can lay faith on the goodness of humankind. Private
businesses and NGOs can act as intermediaries to combine the carbon offsets produced by
communities and sell them jointly to buyers. The CDM rules should make all communitybased
forestry projects eligible for the lowcost fast-track approval process. This is too good an
opportunity to let pass by says experts. If business leaders are willing to take up this not so
difficult initiative, companies around the world stand to save money while doing good things for
people and the environment, a brave new world awaits us.