Carbon Trading - India Story

what is Carbon Trading?

Carbon Trading provides a way to reduce greenhouse gas emissions on an industrial scale by capping total annual emissions and letting the market assign a monetary value to any shortfall.

Let’s rewind to the Kyoto Protocol of 1997 by which all countries are required to reduce their greenhouse gas emissions by 5% from 1990 levels in the next ten years, ie 2008 and a subsequent 5 year review period until 2012 or pay a price to those that do. 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. Say a company in India can prove it has prevented the emission of x-tonnes of carbon, it can sell this good carbon-karma to a company in say, the US which has a bad karma. An environment-fundamentalist may say it’s all a bit like an indulgent epicure paying someone else to diet for him, but then that’s another story. Right now, there is a market opportunity for India but only till 2012. Closer to that clean-up date prices of carbon credits will rise and in the years leading up to it there will be a scramble to buy credits cheap. 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 [CDM] in 2000. Or more commonly, Carbon Trading.

How buying carbon credits attempts to reduce emissions?

Carbon credits create a market for reducing greenhouse emissions by giving a monetary value to the cost of polluting the air. This means that carbon becomes a cost of business and is seen like other inputs such as raw materials or labor.

By way of example, assume a factory produces 100,000 tonnes of greenhouse emissions in a year. The government then enacts a law that limits the maximum emissions a business can have. So the factory is given a quota of say 80,000 tonnes. The factory either reduces its emissions to 80,000 tonnes or is required to purchase carbon credits to offset the excess.

A business would buy the carbon credits on an open market from organizations that have been approved as being able to sell legitimate carbon credits. One seller might be a company that will plant so many trees for every carbon credit you buy from them. So, for this factory it might pollute a tonne, but is essentially now paying another group to go out and plant trees which will, say, draw a tonne of carbon dioxide from the atmosphere.

As emission levels are predicted to keep rising over time, it is envisioned that the number of companies wanting/needing to buy more credits will increase, which will push the market price up and encourage more groups to undertake environmentally friendly activities that create for them carbon credits to sell. Another model is that companies that use below their quota can sell their excess as 'carbon credits.' The possibilities are endless hence making it an open market.

Carbon credits and it's benefit to India

India being a developing country, is a major beneficiary of the carbon credit market. Indian companies have a strategic advantage as the cost of emission reduction in India is very low as compared to the developed countries. The many projects initiated by Indian companies after January 1, 2000, in diverse areas such as energy efficiency, co-generation, natural gas, alternative auto fuels and hydel power, will also add to the country’s dominance as a large seller in the carbon credit market.

Indian companies have mainly concentrated on renewable energy (biomass, wind power, etc.) or waste heat recovery projects that generate much less certified emission reductions (CERs) compared with the Chinese who have several projects in high CER-yielding HFC23 projects. Companies investing in windmills, Bio-Diesel, Co-Generation, Bio-Gas are the ones that will generate Carbon Credits for selling to the developed nations.

Figure above depicts some of the top Indian carbon traders