Carbon Credits
Our earth is undoubtedly warming. This warming is largely the result of emissions of carbon dioxide and other Greenhouse Gases (GHG’s) from human activities including industrial processes, fossil fuel combustion, and changes in land use, such as deforestation etc. Addressing climate change is not a simple task. To protect ourselves, our economy, and our land from the adverse effects of climate change, we must reduce emissions of carbon dioxide and other greenhousegases. To achieve this goal the concept of Clean Development Mechanism (CDM) has come into vogue as a part of Kyoto Protocol.
The objective is the “stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system”. Kyoto Protocol is an agreement made
under the United Nations Framework Convention on Climate Change (UNFCCC). The treaty was negotiated in Kyoto, Japan in December 1997, opened for signature on March 16, 1998, and closed on March 15, 1999. The agreement came into force on February 16, 2005, under which the industrialised countries will reduce their collective emissions of greenhouse gases by 5.2% compared to the year 1990 (but note that, compared to the emissions levels that would be expected by 2010 without the Protocol, this target represents
a 29% cut). The aim is to lower overall emissions of six greenhouse gases - carbon dioxide, methane,
nitrous oxide, sulfur hexafluoride, HFCs(Hydrofluro Carbon), and PFCs - calculated as an average over the five-year period of 2008-12. National targets range from 8% reductions for the European Union and some others to 7% for the US, 6% for Japan, 0% for Russia, and permitted increase of 8% for Australia and 10% for Iceland.
The Clean Development Mechanism (CDM) is an arrangement under the Kyoto Protocol allowing industrialized countries with a greenhouse gas reduction commitment to invest in emission reducing projects in developing countries as an alternative to what is generally considered more costly emission reductions in
their own countries. Under CDM, a developed country can take up a greenhouse gas reduction project activity in a developing country where the cost of GHG reduction project activities is usually much lower. The developed country would be given credits (Carbon Credits) for meeting its emission reduction targets, while the developing country would receive the capital and clean technology to implement the project.
Carbon credits are certificates issued to countries that reduce their emission of GHG (greenhouse gases) which causes global warming. Carbon credits are measured in units of certified emission reductions (CERs). Each CER is equivalent to one tonne of carbon dioxide reduction. Its rate stood at 22 Euros in April, fell to below 7
Euros, before stabilizing at 12-13 Euros. Under IET (International Emissions Trading) mechanism, countries can trade in the international carbon credit market. Countries with surplus credits can sell the same to countries with quantified emission limitation and reduction commitments under the Kyoto Protocol. Developed countries that have exceeded the levels can either cut down emissions, or borrow or buy carbon credits from
developing countries.
The UNFCCC divides countries into two main groups: A total of 41 industrialized countries are currently listed in the Convention’s Annex-I , including the relatively wealthy industrialized countries that were members of the Organization for Economic Co-operation and Development (OECD) in 1992, plus countries with economies
in transition (EITs), including the Russian Federation, the Baltic States, and several Central and Eastern European States. The OECD members of Annex-I (not the EITs) are also listed in the Convention’s Annex-II There are currently 24 such Annex-II Parties. All other countries not listed in the Convention’s Annexes, mostly the developing countries, are known as non-Annex-I countries. They currently number 145. Annex I countries such as United States of America, United Kingdom, Japan, New Zealand, Canada, Australia, Austria, Spain, France, Germany etc. agree to reduce their emissions (particularly carbon dioxide) to target levels below their 1990 emissions levels. If they cannot do so, they must buy emission credits from developing
countries or invest in conservation. Countries like United States of America, United Kingdom, Japan, Newzealand, Canada, Australia, Austria, Spain etc are also included in Annex-II. Developing countries (non-Annex I) such as India, Srilanka, Afghanistan, China, Brazil, Iran, Kenya, Kuwait, Malaysia, Pakistan,
Phillippines, Saudi Arabia, Sigapore, South Africa, UAE etc have no immediate restrictions under the
UNFCCC. This serves three purposes:
a) Avoids restrictions on growth because pollution is strongly linked to industrial growth, and developing economies can potentially grow very
b) It means that they cannot sell emissions credits to industrialized nations to permit those nations to over-pollute.
c) They get money and technologies from the developed countries in Annex II.
Indian scenario:
India comes under the third category of signatories to UNFCCC. India signed and ratified the Protocol in August, 2002 and has emerged as a world leader in reduction of greenhouse gases by adopting Clean Development Mechanisms (CDMs) in the past few years. According to Report on National Action Plan
for operationalising Clean Development Mechanism(CDM) by Planning Commission, Govt. of India, the total CO2-equivalent emissions in 1990 were 10, 01, 352 Gg (Gigagrams), which was approximately 3% of global emissions. If India can capture a 10% share of the global CDM market, annual CER revenues to the country could range from US$ 10 million to 300 million (assuming that CDM is used to meet 10-50% of the global demand for GHG emission reduction of roughly 1 billion tonnes CO2, and prices range from US$ 3.5-5.5
per tonne of CO2). As the deadline for meeting the Kyoto Protocol targets draws nearer, prices can be
expected to rise, as countries/companies save carbon credits to meet strict targets in the future. India is well ahead in establishing a full-fledged system in operationalising CDM, through the Designated National Authority (DNA).