Carbon Credit by- Pankaj Bhutra

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Project Report On

“STUDY OF CARBON CREDITS”

SUBMITTED BY

PANKAJ M BHUTRA

MMS FINANCE

BATCH: 2007-09

SUBM ITTED TO

PROF. P. L. ARYA

UNIVERSITY OF MUM BAI

N. L. DALMIA INSTITUTE OF MANAGEMENT STUDIES &

RESEARCH



CERTIFICATE

This is to certify that Mr. PANKAJ M BHUTRA , student of N.L. Dalmia

Institute of Management Studies and Research, has successfully carried out

the project titled “ STUDY OF CARBON CREDITS” , under my supervision

and guidance as partial fulfilment of the requirements of MMS course,

Mumbai University Batch 2007-2009

Prof. P. L. Arya Prof. P.L. Arya

Project Guide Director

Date:

Place: MUMBAI



ACKNOWLEDGEMENT

THE SUCCESS OF ANY PROJECT IS THE RESULT OF HARD WORK & ENDEAVOR OF

NOT ONE BUT MANY PEOPLE AND THIS PROJECT IS NO DIFFERENT.

I TAKE THIS AS A PROSPECT TO AVOW THAT IT WAS AN ACHIEVEMENT TO

HAVE SUCCEEDED IN MY FINAL PROJECT, WHICH WOULD NOT HAVE BEEN THE

POSSIBLE WITHOUT THE GUIDANCE OF PROF. P. L. ARYA (DIRECTOR – N. L.

DALMIA INSTITUTE OF MANAGEMENT STUDIES & RESEARCH) MY PROJECT

GUIDE FOR HIS VALUABLE CONTRIBUTION TOWARDS THE PROJECT.

I ALSO EXPRESS MY APPRECIATION AND GRATITUDE TOWARDS ALL THE

FACULTY MEMBERS AT N.L. DALMIA INSTITUTE OF MANAGEMENT STUDIES

AND RESEARCH FOR MAKING THE M.M.S. DEGREE AND THIS PROJECT A

MEMORABLE LEARNING EXPERIENCE.

FINALLY I AM THANKFUL TO ALL MY FRIENDS, FACULTY MEMBERS AND STAFF

WHO HAVE GIVEN THEIR FULL SUPPORT IN COLLECTING THE REQUIRED

INFORMATION AND CONTINUOUS HELP DURING THE PREPARATION OF THE

PROJECT.

PANKAJ M BHUTRA MMS FINANCE



CONTENT

1

TOPIC PAGE NO

Introduction 2

Evolution of Carbon Credit 5

Carbon Credit Trading Mechanism 10

Sectors to Benefit 16

Accounting of Carbon Credit 19

Carbon Financing 22

Current Global Trends 31

Carbon Credit and India 35

Conclusion 39

Bibliography 40



INTRODUCTION

"M os t peop l e wou l d cons i de r t he f o l l owi ng pas t s oc i e t i e s t o have been

f amous v i c t i ms o f f u l l - f l edged co l l aps es r a t he r t han o f j u s t m i nor

dec l i nes : t he Anas az i and Cahod i a w i t h i n t he boundar i e s o f t he moder n

US, t he M aya c i t i e s i n Cen t r a l Amer i ca , M oche and T i wanaku s oc i e t i e s i n

Sou t h Amer i ca , M ycenean Gr eece and M i noan Cr e t e i n Eur ope , Gr ea t

Z i mbabwe i n Af r i ca , Angkor W at and t he Har appan I ndus Va l l ey c i t i e s i n

As i a , and Eas t e r I s l and i n t he Pac i f i c Ocean .

I t has l ong been s us pec t ed t ha t many o f t hos e mys t e r i ous abandonment s

wer e a t l eas t pa r t l y t r i gge r ed by eco l og i ca l p r ob l ems : peop l e i nadver t en t l y

des t r oy i ng t he env i r onmen t a l r e s our ces on wh i ch t he i r s oc i e t i e s depended .Th i s s us p i c i on o f un i n t ended eco l og i ca l s u i c i de - ecoc i de— has been

conf i r med by d i s cover i e s made i n r ecen t decades by a r chea l og i s t s ,

c l i ma t o l og i s t s , h i s t o r i ans , pa l eon t o l og i s t s and pa l yno l og i s t s ( po l l en

s c i en t i s t s ) .

The p r oces s t h r ough whi ch pas t s oc i e t i e s have under mi ned t hems e l ves by

damag i ng t he i r env i r onmen t s f a l l i n t o e i gh t ca t egor i e s , whos e r e l a t i ve

i mpor t ance d i f f e r s f r om, cas e t o cas e : de f o r es t a t i on and hab i t a t

des t r uc t i on , s o i l p r ob l ems ( e r os i on , s a l i n i s a t i on , and s o i l f e r t i l i t y l o s s es ) ,wa t e r managemen t p r ob l ems , ove r hun t i ng , ove r f i s h i ng , human

popu l a t i on g r owt h , and i nc r eas ed pe r cap i t a i mpac t o f peop l e . The r i s k o f

s uch co l l aps es t oday i s now a ma t t e r o f i nc r eas i ng conce r n . "

J a r ed D i amond ( 2006) .

2



Gl oba l war mi ng i s t he new buzzwor d haun t i ng env i r onmen t a l i s t s a l l ove r

t he wor l d . Accor d i ng t o UNFCCC, s i nce t he 19 t h cen t u r y , t he ave r age

t emper a t u r e o f t he ea r t h has i nc r eas ed by 0 .6 ° C . The ave r age t emper a t u r e

i s be l i eved t o be r i s i ng and t o i nc r eas e by ano t he r 1 .4 t o 5 .8 ° C t i l l t he

yea r 2100 .

The p r i mar y r eas on f o r t h i s i nc r eas e i s r ap i d g r owt h o f i ndus t r i a l i za t i on ,

bu r n i ng o f g r ea t quan t i t i e s o f gas o l i ne , coa l and o i l , u r ban i za t i on and

cu t t i ng down o f f o r es t s and ce r t a i n me t hods o f f a r mi ng .

Thes e ac t i v i t i e s have l ead t o an i nc r eas e i n t he Gr eenhous e Gas es

( GHGs ) , e s pec i a l l y ca r bon d i ox i de , me t hane , and n i t r ous ox i de , e t c . Thes e

gas es a r e neces s a r y i n t he a t mos pher e t o abs o r b t he hea t o f t he s un ; and

wi t hou t t hem, t he ea r t h ' s a t mos pher e wou l d be un i nhab i t ab l e , co l d and

bar r en . However , an exces s o f t hes e gas es i n t he a t mos pher e l eads t o t hephenomenon ca l l ed g l oba l war mi ng whi ch l eads t o an a r t i f i c i a l and

unneces s a r y i nc r eas e i n t emper a t u r e wh i ch u l t i ma t e l y a l t e r s t he c l i ma t e

on t he p l ane t .

Sources o f Green Hous e Gas es :

• Bur n i ng o f f os s i l f ue l s and de f o r es t a t i on l ead i ng t o h i ghe r

ca r bon d i ox i de concen t r a t i ons .

• Li ves t ock en t e r i c f e r men t a t i on and manur e managemen t , paddyr i ce f a r mi ng , l and us e and we t l and changes , p i pe l i ne l o s s es ,and cover ed ven t ed l andf i l l emi s s i ons l ead i ng t o h i ghe rmet hane a t mos pher i c concen t r a t i ons .

• Us e o f ch l o r o f l uo r oca r bons ( CFCs ) i n r e f r i ge r a t i on s ys t ems ,and us e o f CFCs and ha l ons i n f i r e s uppr es s i on s ys t ems andmanuf ac t u r i ng p r oces s es .

• Agr i cu l t u r a l ac t i v i t i e s , i nc l ud i ng t he us e o f f e r t i l i ze r s t ha tl ead t o h i ghe r n i t r ous ox i de ( N 2 O) concen t r a t i ons .

3



Compos i t i on o f Green Hous e Gas es :

The Dangers o f Gl oba l Warmi ng:

• Ex t i nc t i on o f many s pec i e s o f p l an t s and an i ma l s .

• F r equen t s t o r ms , d r ough t s and f l oods . Fo r i n s t ance Ra j as t han i sf ac i ng f l oods wh i l e eas t e r n I nd i a i s f ac i ng d r augh t s . Th i s t ype

of a d r as t i c c l i ma t i c change i s a t t r i bu t ed t o g l oba l war mi ng by

many env i r onmen t a l i s t s .

• G l oba l war mi ng caus es t he wa t e r s i n t he oceans t o expand

whi ch can caus e havoc and des t r uc t i on f o r l ow l y i ng and i s l and

coun t r i e s . R i s e i n t emper a t u r es can a l s o caus e g l ac i e r s t o me l t ,

wh i ch w i l l u l t i ma t e l y add mor e wa t e r t o t he oceans . The

aver age s ea l eve l has been i nc r eas i ng eve r y cen t u r y . I t has

been p r ed i c t ed t ha t an i nc r eas e o f 9 - 88 cm may t ake p l ace i n

t he 21 s t cen t u r y .

4

• Agr i cu l t u r a l p r oduce i s l i ke l y t o dec r eas e i n t r op i ca l , s ub -

t r op i ca l and t emper a t e r eg i ons becaus e o f t he i nc r eas e i n

t emper a t u r e becaus e o f s o i l e r os i on and de f o r es t a t i on .



EVOLUTION OF CARBON CREDIT

UNFCCC

Some na t i ons have made vo l un t a r y e f f o r t s t owar ds con t r o l l i ng t hes eGHGs , bu t t hey a r e no t enough and no t p r opor t i ona t e t o t he i nc r eas e i n

GHGs i n t he a t mos pher e . Hence , t he Un i t ed Na t i ons F r amewor k

Conven t i on on C l i ma t e Change ( UNFCCC) came i n t o e f f ec t . Under t he

aeg i s o f t he UNFCCC, 189 coun t r i e s a r ound t he wor l d have j o i ned an

i n t e r na t i ona l t r ea t y t ha t s e t s gene r a l goa l s and r u l e s f o r conf r on t i ng

c l i ma t e change .

The Conven t i on has s e t an u l t i ma t e ob j ec t i ve o f s t ab i l i z i ng GHG

emi s s i ons "a t a l eve l t ha t wou l d p r even t danger ous an t h r opogen i c ( human

i nduced) i n t e r f e r ence w i t h t he c l i ma t e s ys t em." I t s t a t e s t ha t " s uch a l eve l

s hou l d be ach i eved w i t h i n a t i me- f r ame s u f f i c i en t t o a l l ow ecos ys t ems t o

adap t na t u r a l l y t o c l i ma t e change , t o ens u r e t ha t f ood p r oduc t i on i s no t

t h r ea t ened , and t o enab l e economi c deve l opmen t t o p r oceed i n a

s us t a i nab l e manner . "

The "bas e yea r " f o r t abu l a t i ng GHG emi s s i ons has been s e t a s 1990 .

Hence a l l t he member coun t r i e s have t o wor k t owar ds b r i ng i ng t he

po l l u t i on l eve l s be l ow t he l eve l s wh i ch ex i s t ed i n 1990 .

Thos e coun t r i e s wh i ch have a l r eady r a t i f i ed t he t r ea t y a r e ca l l ed "Pa r t i e s

t o t he Conven t i on" . Thes e coun t r i e s w i l l s t r i ve t owar ds r educ i ng GHGs

f r om t he i r a t mos pher e by g i v i ng i mpe t us t o t echno l ogy f o r e f f i c i en t

ene r gy u t i l i za t i on and power p r oduc t i on , ag r i cu l t u r e p r ac t i ces wh i ch

pr even t s o i l e r os i on , cons e r va t i on and op t i ma l us e o f na t u r a l r e s our ces ,

e t c . Thes e coun t r i e s have s t a r t ed deve l op i ng p r ogr ams f o r s l owdown o f

env i r onmen t a l change .

5

Thos e na t i ons wh i ch a r e h i gh l y i ndus t r i a l i zed canno t o f cour s e be

expec t ed t o cu t down t he i r i ndus t r i a l ac t i v i t y d r as t i ca l l y . Hence t hey have

agr eed t o s uppor t t he deve l op i ng and under deve l oped coun t r i e s i n t he

r educ t i on o f c l i ma t e change . They ex t end t he i r s uppor t f i nanc i a l l y ,

t h r ough a s ys t em o f l oans and g r an t s s e t up by UNFCCC. Thes e coun t r i e s

a l s o s ha r e t echno l ogy wi t h t he l e s s deve l oped coun t r i e s .



Kyot o Prot oco l

Owi ng t o t he i nc r eas ed awar enes s abou t t he need o f po l l u t i on con t r o l , an

i n t e r na t i ona l ag r eemen t t ook p l ace among s eve r a l na t i ons o f t he wor l d .

Th i s ag r eemen t i s known as t he Kyo t o P r o t oco l . Repr es en t a t i ves o f

d i f f e r en t coun t r i e s came t oge t he r i n Kyo t o , J apan , t o b r i ng a s o l u t i on t o

t he r i s i ng po l l u t i on p r ob l em. The Kyo t o P r o t oco l was i mpl emen t ed i n

1997 , wher eby emi s s i on t a r ge t s wer e de t e r mi ned f o r coun t r i e s , and key

e l emen t s a s t o t he ach i evemen t o f s uch t a r ge t s wer e i den t i f i ed . I t i s

bas i ca l l y t he ag r eemen t i n wh i ch t he member a s we l l a s non- member

coun t r i e s have dec i ded t o r educe t he emi s s i on o f s i x GHGs t o a ce r t a i n

l eve l and dec i ded t o p r ov i de c r ed i t f o r r educ t i on i n emi s s i on .

The Kyo t o P r o t oco l i s an i n t e r na t i ona l t r ea t y t o r educe GHGs emi s s i ons

b l amed f o r g l oba l war mi ng . The p r o t oco l came i n t o f o r ce on Febr ua r y 16 ,2005 . The t r ea t y was conc l uded i n Kyo t o , hence t he name . The ma i n a i m

of t he ag r eemen t i s t o r educe g l oba l war mi ng . As men t i oned ea r l i e r ,

g l oba l war mi ng caus es unwan t ed and ha r mf u l c l i ma t e changes . Reduc t i on

i n g l oba l war mi ng can de l ay t h i s c l i ma t e change . G l oba l war mi ng can be

con t r o l l ed by r educ i ng t he emi s s i on o f GHGs . Hence , an under s t and i ng

was r eached under t he pu r v i ew o f t he t r ea t y , wher e i n deve l oped and

t r ans i t i on economi es a r e s uppos ed t o r educe t o t a l GHG emi s s i ons t o 5%

be l ow t he l eve l t hey wer e i n 1990s . Th i s has t o be ach i eved be t ween 2008

and 2012 ( t he f i r s t commi t men t pe r i od ) . The p r o t oco l i s l ead by t heUni t ed Na t i ons and d i f f e r en t coun t r i e s have d i f f e r en t t a r ge t s wh i ch t hey

have t o ach i eve . On l y coun t r i e s t ha t r a t i f y t he p r o t oco l a r e bound by i t .

The Kyo t o P r o t oco l a l ong w i t h a hos t o f o t he r o r gan i za t i ons s uch a s t he

Uni t ed Na t i ons , EBRD ( Eur opean Bank f o r Recons t r uc t i on and

Deve l opmen t ) , e t c . have he l ped c r ea t e a mar ke t f o r Car bon Cr ed i t s . The

whol e mechan i s m can be s i mpl y under s t ood l i ke t h i s : Thos e bus i nes s es o r

coun t r i e s wh i ch caus e l e s s po l l u t i on a r e g i ven bene f i t o f Car bon c r ed i t s .

Thes e ca r bon c r ed i t s can be s o l d t o t hos e bus i nes s es o r coun t r i e s wh i ch

have h i gh po l l u t i on l eve l s . Coun t r i e s i n Rus s i a , Eas t e r n Eur ope and

Cen t r a l As i a a r e h i gh l y ene r gy- e f f i c i en t and hence t hey can bene f i t f r om

t he p r o t oco l by r educ i ng ene r gy cos t s and emi s s i ons .

6



The Kyot o Mechani s ms

1 . I nt ernat i ona l Emi s s i ons Tradi ng:

• Emi s s i ons t r ad i ng ( ET) i s a mechan i s m t ha t enab l es coun t r i e s w i t h

l ega l l y b i nd i ng emi s s i on t a r ge t s t o buy and s e l l emi s s i ons

a l l owances among t hems e l ves .

• Each coun t r y has a ce r t a i n number o f emi s s i on a l l owances ( amoun t

o f ca r bon d i ox i de i t can emi t ) i n l i ne w i t h i t s Kyo t o r educ t i on

t a r ge t s .

• The I ET a l l ows i ndus t r i a l i zed coun t r i e s t o t r ade t he i r s u r p l us c r ed i t s

on t he i n t e r na t i ona l ca r bon c r ed i t mar ke t .

• Emi s s i ons t r ad i ng t r ans f e r s " as s i gned amoun t un i t s " o r AAU

• The buyer w i l l t hen us e t he c r ed i t s t o mee t t he i r emi s s i ons targets

2 . Jo i nt I mpl ement at i on ( JI ) :

• Pr o j ec t s be t ween i ndus t r i a l i zed na t i ons t o e a r n emi s s i on o f f s e t s

• A deve l oped coun t r y o r a bus i nes s hous e i n a dev e l oped coun t r y can

s e t up a p r o j ec t t ha t r educes emi s s i ons i n ano t he r i ndus t r i a l i zed

coun t r y f o r wh i ch i t w i l l ga i n c r ed i t s .

• I t i s done becaus e o f geogr aph i ca l o r cos t i mp l i ca t i ons

• Emi s s i on r educ t i on un i t s ( ERUs ) c r ea t ed t h r ough j o i n t

i mpl emen t a t i on i s t r ea t ed i n t he s ame way as t hos e f r om emi s s i ons

t r ad i ng

• The gover nmen t o f t he i nves t i ng company ge t s bene f i t ed by s a l e o f

t hes e c r ed i t s and t he r ec i p i en t coun t r y ge t s t he bene f i t o f f o r e i gn

i nves t men t .

3 . Cl ean Deve l opment Mechani s m ( CDM) :

7

• The pur pos e o f CDM i s r educe t o emi s s i ons and a l s o con t r i bu t e t o

s us t a i nab l e deve l opmen t i n deve l op i ng coun t r i e s .



The CDM i s admi n i s t e r ed by t he CDM Execu t i ve Boar d ( CDM

Boar d ) wh i ch r epor t s and i s accoun t ab l e t o t he Conf e r ence o f

Pa r t i e s ( COP) .

A Car bon emi s s i on r educ t i on ( CER) i s g i ven by t he CDM Execu t i ve

Boar d .

One CER i s equ i va l en t t o one t onne o f ca r bon d i ox i de r educed .

St eps i nvo l ved f o r i s s uance o f CER:

The f i r s t s t age i s a t t he domes t i c l eve l , wher e t he p r o j ec t ge t s

appr oved by Na t i ona l CDM Aut hor i t y ( NCM ) .

Af t e r NCM ' s appr ova l , t he p r o j ec t i s s en t t o t he Un i t ed

Nat i ons F r amewor k Conven t i on on C l i ma t e Changes .

Af t e r t h i s , t he p r o j ec t i s r ev i ewed by t he execu t i ve boa r d o f

UNFCCC. The p r o j ec t ge t s eva l ua t ed on eve r y f r on t and i s

t hen r eg i s t e r ed under UNFCCC on l y i f i t mee t s a l l t he no r ms .

Ther ea f t e r , ce r t i f i ca t i on i s done f o r t he r educ t i on i n emi s s i on

and c r ed i t s a r e i s s ued .

Obj ect i ves o f Kyot o Prot oco l :

• Enhancemen t o f ene r gy e f f i c i ency .

• P r o t ec t i on and enhancemen t o f s i nks and r e s e r vo i r s o f GHGs .

• P r omot i on o f s us t a i nab l e f o r ms o f ag r i cu l t u r e i n l i gh t o f c l i ma t e change

cons i de r a t i ons .

• Res ea r ch on , and p r omot i on , deve l opmen t and i nc r eas ed us e o f , new and

r enewab l e f o r ms o f ene r gy , o f ca r bon d i ox i de s eques t r a t i on t echno l og i es .

• P r ogr es s i ve r educ t i on o r phas i ng ou t o f mar ke t i mper f ec t i ons , f i s ca l

i ncen t i ves , t ax and du t y exempt i ons and s ubs i d i e s i n a l l GHG emi t t i ng

s ec t o r s .

• Reduc t i on o f me t hane emi s s i ons t h r ough r ecover y and us e i n was t e

managemen t , a s we l l a s i n t he p r oduc t i on , t r ans por t and d i s t r i bu t i on o f

ene r gy .

8



Carbon Cred i t

Car bon c r ed i t i s t he evo l v i ng concep t de r i ved by pub l i c and p r i va t e

en t i t i e s . M ahd i A l - Ka i s i , p r o f es s o r o f B i os ys t ems i n h i s a r t i c l e de f i nes

t he concep t o f ca r bon c r ed i t s a s t ha t "W hi ch i nvo l ves buy i ng ca r bon un i t s

whi ch a r e emi t t ed , ma i n l y i n t ons , t h r ough a mi dd l e en t i t y ca r bon

s eques t r a t i on t h r ough adop t i on o f a r ange o f cons e r va t i on p r ac t i ces . The

ca r bon un i t s a r e t hen s o l d t o a buyer t ha t i s t he i ndus t r i a l s ec t o r need i ng

t o o f f s e t t he CO 2 gener a t ed t o t he a t mos pher e t h r ough t he i r manuf ac t u r i ng

ac t i v i t i e s . "

Car bon c r ed i t s encour ages t hos e coun t r i e s by r ewar d i ng t he i r e f f o r t s i n

r educ i ng GHG emi s s i on . Tha t i s , i f a coun t r y ea r ns one c r ed i t i t means i t

has r educed one t onne o f CO 2 emi s s i on i n t o t he a t mos pher e . Thes e c r ed i t s

p r ov i de f i nanc i a l i ncen t i ves t o t hos e compan i es wh i ch s ys t emat i ca l l ydeve l op r enewab l e ene r gy p r o j ec t s .

The s u r vey on t he ca r bon emi s s i on w i t h due r e f e r ence t o t he expend i t u r e

i ncur r ed by d i f f e r en t coun t r i e s o f t he wor l d r evea l s t ha t deve l oped

coun t r i e s a r e s pend i ng nea r l y $300 t o 500 and t he deve l op i ng coun t r i e s

a r e s pend i ng $10 t o 25 eve r y yea r . I n coun t r i e s s uch a s I nd i a , GHG

emi s s i on i s ve r y l ow t o t he t a r ge t f i xed by Kyo t o P r o t oco l and s o , t hey

a r e exc l uded f r om r educ t i on o f GHG emi s s i on . However , t he t r ad i ng t akes

p l ace i n s e l l i ng s u r p l us c r ed i t s t o t he deve l oped coun t r i e s . Thus , I nd i ac l a i ms 31% of t he wor l d ca r bon t r ade t h r ough C l ean Deve l opmen t

M echan i s m ( CDM ) .

Car bon c r ed i t s a r e a l s o ca l l ed a s "cap & t r ade r eg i mes " . The compan i es

emi t a s e t amoun t o f CO 2 i n t he g i ven t i me pe r i od and endeavor i n

emi t t i ng l e s s t han t ha t f i xed by Kyo t o p r o t oco l . Though t h i s t hey can s e l l

t he i r c r ed i t s f o r money t o t hos e compan i es wh i ch a r e unab l e t o con t r o l

emi s s i on w i t h i n t he capped l eve l .

Today ' s wor l d i s a t r ade r ' s pa r ad i s e , wher e i n eve r y t h i ng— t ang i b l e andi n t ang i b l e— i s t r adab l e , and i n abs o l u t e t e r ms , t he l a t e s t o f f e r i ng i s

po l l u t i on .

9



CARBON CREDIT TRADING MECHANISM

Types o f Trans act i ons Carbon t rans act i ons can be grouped i n t o t wo

mai n ca t egor i es :

• A l l owance- bas ed Trans act i ons : Her e , t he buyer pu r chas es emi s s i ons

a l l owances c r ea t ed and a l l oca t ed ( o r auc t i oned) by r egu l a t o r s under cap -

and- t r ade r eg i mes , s uch a s As s i gned Amount Un i t s ( AAUs ) under t he

Kyo t o P r o t oco l , o r EUAs under t he Eur opean Uni on Emi s s i on Tr ad i ng

Scheme .

• Proj ec t - bas ed Trans act i ons : I n t hes e t r ans ac t i ons , t he ca r bon c r ed i t s

t ha t a r e bough t , a r e gene r a t ed f r om p r o j ec t s t ha t he l p i n r educ i ng GHG

emi s s i ons , f o r e . g . , t he p r o j ec t s wh i ch come under t he pu r v i ew o f CDM

and J I f r amewor k .

10



The t r ad i ng t akes p l ace on t wo s t ock exchanges , t he Ch i cago C l i ma t e

Exchange and t he Eur opean C l i ma t e Exchange . W es t e r n Eur opean

coun t r i e s and J apan a r e t he ma j o r buyer s o f ca r bon c r ed i t s . The

haza r dous nes s o f each GHG can be compar ed us i ng t he G l oba l W ar mi ng

Po t en t i a l ( an i ndex under t he Kyo t o P r o t oco l ) .

Buyers

Fi gur e 2 s hows t he buyer s o f ca r bon c r ed i t s f r om J anuar y 2005 t o M ar ch

2006 .

11

Fr om F i gur e 2 i t i s c l ea r t ha t buyer s f r om Eur ope and J apan l a r ge l y

domi na t ed t he mar ke t s cene . S i gn i f i can t pu r chas es wer e a l s o s een f r om

Scand i nav i an coun t r i e s .



Se l l ers

Fi gur e 3 s hows s e l l e r s o f ca r bon c r ed i t s . As i a f o r ms 73% of t he t o t a l

t r ans ac t i ons , however , t he s ha r e o f I nd i a i s obs e r ved t o have dec r eas ed

s i gn i f i can t l y f r om t ha t i n 2004 . Th i s can be a t t r i bu t ed t o t he f ac t t ha t

mos t compan i es dec i ded aga i ns t s e l l i ng o f Car bon Cr ed i t s t h i s yea r , i n

o r de r t o accumul a t e t hem and ge t a be t t e r p r i ce f o r a chunk l a t e r on . Some

compan i es dec i ded aga i ns t s e l l i ng CCs i n t he an t i c i pa t i on o f ge t t i ng

be t t e r p r i ces i n f u t u r e when t he demand i s mor e .

12



Nowadays , s eve r a l compan i es a r e l ook i ng a t emi s s i on t r ad i ng a s a key

par t o f t he i r env i r onmen t s t r a t eg i es . An emi s s i on t r ade t yp i ca l l y occur s

when a company whi ch wan t s t o r educe i t s emi s s i ons , pu r chas es emi s s i on

c r ed i t s f r om ano t he r company t ha t has a l r eady r educed i t s emi s s i ons

beyond i t s s pec i f i ed r equ i r emen t . Th i s t r ans ac t i on can bene f i t bo t h

pa r t i c i pan t s . Pu r chas e r s a r e ab l e t o r each goa l s t ha t r equ i r e emi s s i on

r educ t i ons cos t - e f f ec t i ve l y w i t hou t under go i ng mas s i ve ove r hau l o f p l an t ,

mach i ne r y and p r oces s es and s pend i ng mor e on ope r a t i ona l changes .

Se l l e r s a r e r ewar ded f i nanc i a l l y f o r t he i r i nves t men t s i n emi s s i on

r educ t i ons . A coun t r y ( o r a g r oup o f coun t r i e s ) caps i t s ca r bon emi s s i ons

a t a ce r t a i n l eve l ( t h i s i s known as cap and t r ade ) and t hen i s s ues pe r mi t s

t o f i r ms and i ndus t r i e s t ha t g r an t t he f i r m t he r i gh t t o emi t a s t a t ed

amoun t o f ca r bon d i ox i de ove r a t i me pe r i od . F i r ms a r e t hen f r ee t o t r ade

t hes e c r ed i t s i n a f r ee mar ke t . F i r ms whos e emi s s i ons exceed t he amoun t

o f c r ed i t s t hey pos s es s w i l l be heav i l y pena l i zed .

Thes e pe r mi t s can a l s o be t r aded on va r i ous ca r bon t r ad i ng excha nges l i ke

Chi cago C l i ma t e Exchange ( CCX) . The CCX was t he f i r s t ca r bon

exchange when i t opened i n 2003 . Today , i t i s t he on l y exchange o f i t s

k i nd i n Nor t h Amer i ca . I n Eur ope , b i g p r oduce r s o f g r eenhous e gas es a r e

r equ i r ed t o t ake pa r t i n emi s s i on t r ad i ng . The CCX owns t he Eur opean

Cl i ma t e Exchange ( ECX) , i n t he Ne t he r l ands . A ca r bon exchange i s l i ke a

s t ock exchange f o r po l l u t i on . The ca r bon exchange p r ov i des a mar ke t f o r

bus i nes s es t o t r ade on t he r e l eas e and cap t u r e o f ca r bon d i ox i de and o t he rg r eenhous e gas es . T r ad i ng t akes p l ace when member s r e l eas e l e s s t han

t he i r l i m i t . The i dea o f t r ad i ng i n g r eenhous e gas es has i t s r oo t s i n t he

Kyo t o P r o t oco l .

13

M ar ke t f o r ces d r i ve t he p r i ce o f t he c r ed i t s . The c r ed i t s a r e ca l l ed ca r bon

f i nanc i a l i n s t r umen t s ( CFI s ) . Each c r ed i t i s equa l t o 100 me t r i c t ons o f

ca r bon d i ox i de , t he mos t common g r ee nhous e gas . I n t h i s way , t he des i r ed

ca r bon r educ t i ons a r e me t a t t he l owes t cos t pos s i b l e t o s oc i e t y . I n

add i t i on , a f ew l a r ge compan i es have deve l oped i n t e r na l t r ad i ng

mechan i s ms i n o r de r t o r each companywi de goa l s cos t - e f f ec t i ve l y . Fo r

exampl e , t he ene r gy ma j o r s , B r i t i s h Pe t r o l eum ( BP) s t a r t ed an i n t e r na l

emi s s i on t r ad i ng s ys t em and s ough t t h i r d - pa r t y ve r i f i ca t i on o f GHG

i nven t o r y way back i n 2000 . S i mi l a r l y , She l l t oo s t a r t ed i t s i n t e r na l

t r ad i ng emi s s i on s cheme , t he She l l T r adab l e Emi s s i on Pe r mi t Sys t em

( STEPS) , a l s o i n 2000 .



She l l wan t ed t o us e t he s cheme as an a i d i n r each i ng t he company ' s

emi s s i on r educ t i on t a r ge t s , a l l owi ng pe r mi t s wor t h 100 t ons o f ca r bon

d i ox i de ( o r i t s me t hane equ i va l en t ) t o be t r aded v i a an i n t e r na l webs i t e .

The t r ad i ng t akes p l ace on t wo s t ock exchanges , t he CCX and t he ECX.

J apan and W es t e r n Eur opean coun t r i e s a r e t he ma j o r buyer s o f ca r bon

cr ed i t s . The Scand i nav i an coun t r i e s a l s o p l ay a ma j o r r o l e . One

s i gn i f i can t f ac t t o be no t ed he r e i s t he g r owt h o f p r i va t e p l aye r s . The

s ha r e o f p r i va t e p l aye r s i nc r eas ed f r om 80% t o 90% a t t he beg i nn i ng o f

2006 . As f a r a s s a l e o f ca r bon c r ed i t s i s conce r ned , As i a accoun t s f o r 73%

of t he t o t a l t r ans ac t i ons . However , acco r d i ng t o t he W or l d Bank Repor t ,

S t a t e and Tr ends o f t he Car bon Cr ed i t s , 2006 , t he t r ans ac t i ons by I nd i a

dec r eas ed s i gn i f i can t l y f r om t ha t i n 2004 . Th i s can be a t t r i bu t ed t o t he

f ac t t ha t mos t o f t he compan i es dec i ded aga i ns t s e l l i ng ca r bon c r ed i t s , i n

an t i c i pa t i on o f a f u t u r e appr ec i a t i on o f p r i ces . The G l oba l W ar mi ng

Po t en t i a l , an i ndex under t he Kyo t o P r o t oco l , i s u s ed t o compar e t he

haza r dous nes s o f each GHG.

14

Figure 4



Drawbacks

• A CER con t r ac t ( a s oppos ed t o an i s s ued , de l i ve r ed CER) has ce r t a i n

r i s ks i nhe r en t w i t h i t :

- A CER does no t l ega l l y ex i s t un t i l i t i s i s s ued ; i t s vo l ume depends on

pr o j ec t pe r f o r mance ( and ve r i f i ca t i on ) , ac t ua l i s s uance , and i t s de l i ve r y

i n t o t he compl i ance buyer ' s r eg i s t r y r equ i r e s t ha t t he I n t e r na t i ona l

Tr ans ac t i on Log i s ope r a t i ona l ;

- Once i t i s de l i ve r ed i n t o a buyer ' s accoun t i n t he CDM r eg i s t r y , i t l o s es

i t s ab i l i t y t o be t r ans f e r r ed ac r os s bo r de r s p r i o r t o 2008 .

- Ano t he r d r awback i n p r o j ec t - bas ed t r ans ac t i ons i s t ha t i t i nvo l ves h i ghe r

cos t s and t i me as i mpl emen t a t i on o f a p l anned p r o j ec t i n no t a s s i mpl e a si t appea r s on pape r . De l ays i n i mpl emen t a t i on can l ead t o a d i s a r r ay o f

t he cos t bene f i t p l ann i ng .

• M ar ke t s c r ea t ed by b i nd i ng cons t r a i n t s :

- The r eas on t he ca r bon mar ke t s g r ew i n 2005 was due t o t he b i nd i ng

cons t r a i n t s o f Kyo t o P r o t oco l , EU ETS, e t c . , and t he l ega l l y b i nd i ng

vo l un t a r y commi t men t s under t he Ch i cago C l i ma t e Exchange .

- The mar ke t demand i s de t e r mi ned by t he a s s i gned emi s s i on un i t s o f eachcoun t r y . Thes e caps have t o be s e t r ea l i s t i ca l l y , o r t he who l e mar ke t may

have t oo f ace a demand pu l l i n f l a t i on i n cos t o f ca r bon c r ed i t .

- I t i s i mpor t an t t ha t t he ma i n ob j ec t i ve o f UNFCCC and t he Kyo t o

Pr o t oco l i s ( r educ t i on o f GHG emi s s i ons and g l oba l war mi ng) kep t i n

mi nd by t he buyer s and s e l l e r s . I f t he who l e t r ade becomes t oo p r o f i t -

o r i en t ed , t hen i t w i l l l o s e i t s cen t r a l f ocu s .

• Emer gence o f mar ke t i n s t i t u t i ons

15

- The emer gence o f v i ab l e mar ke t i n s t i t u t i ons i s u s ua l l y a s i gn o f a

mar ke t ' s ma t u r i t y . I n t h i s r ega r d , t he ca r bon mar ke t i s cons i de r ed t o be

s t i l l i n i t s i n f ancy . Thus , ca r bon mar ke t s need t o become i ns t i t u t i ona l l y

and geogr aph i ca l l y s t r onger wh i ch w i l l r e s u l t i n f a i r e r p r i c i ng o f ca r bon

cr ed i t s and gene r a t e a t r ans pa r ency i n t he s ys t em.



SECTORS TO BENEFIT

1 . Agr i cu l t ura l Sec t or

W i t h i n t he ag r i cu l t u r a l s ec t o r , c r ed i t s may be gene r a t ed i n t wo ways :

• Reduc t i on o f GHGs : Reduc t i on o f GHG emi s s i ons f r om f os s i l f ue l s ,

f e r t i l i ze r s and l i ves t ock on f a r ms .

• Remova l o f GHGs : For mi ng b i o l og i ca l s i nks ; and t h r ough t hem,

abs o r b i ng t he CO 2 i n t o t e r r e s t r i a l p r oces s es .

However r educ t i on and r emova l o f GHGs s hou l d be i n compl i ance w i t h

t he Kyo t o P r o t oco l :

• Cr ed i t s s hou l d be g i ven bas ed on ne t a t mos pher i c r educ t i ons , wh i ch

means t ha t , t he r e s hou l d be a ne t r educ t i on o f GHG emi s s i ons . Reduc t i on

or r emova l i n one GHG s hou l d no t l ead t o an i nc r eas e i n ano t he r GHG.

• The r educ t i on needs t o be i n add i t i on t o wha t wou l d have occur r ed i n a

bus i nes s a s us ua l s i t ua t i on .

• E f f o r t s t o r emove o r r educe GHG emi s s i ons canno t r e s u l t i n i nc r eas ed

emi s s i ons e l s ewher e— ei t he r i n s pace o r t i me .

2 . Fores t ry

• Af f o r es t a t i on : e s t ab l i s h i ng t r ees on p r ev i ous l y u n f o r es t ed l and .

• Ref o r es t a t i on : t he p r oces s o f r ep l an t i ng f o r es t s wher e t hey once ex i s t ed

bu t wer e des t r oyed i n t he pas t

Fores t s t hat Qual i f y f or Carbon Cred i t

The Kyo t o P r o t oco l r ecogn i zes f o r es t s a s ca r bon s i nks and p r ov i des f o r

ca r bon t r ad i ng a s a means o f o f f s e t t i ng emi s s i ons o f GHGs and mee t i ng

t he Kyo t o t a r ge t s .

16



Under t he p r o t oco l , ca r bon s eques t e r ed i n t r ees ( i . e . ca r bon c r ed i t ) mus t

come f r om ' Kyo t o For es t s ' , wh i ch a r e new f o r es t s , t ha t a r e :

• P l an t ed on l and , wh i ch h i s t o r i ca l l y has no t been cover ed by f o r es t

( a f f o r es t a t i on ) .

• P l an t ed on l and whi ch h i s t o r i ca l l y had con t a i ned f o r es t s t ha t had been

des t r oyed i n t he pas t and t he l and had been us ed f o r o t he r pu r pos es .

E l i g i b l e f o r s e t s s hou l d be ones wh i ch wer e no t p l an t ed be f o r e 1990 , i . e . ,

t hey have t o be new f o r es t s ; and s econd l y , mus t a r i s e f r om a change i n t he

us e o f l and . Ano t he r cond i t i on i s t ha t ca r bon s eques t e r ed by f o r es t s

dur i ng 2008- 2012 a l one i s t r adab l e .

3 . Renewabl e Energy

The r enewab l e s our ces o f ene r gy i nc l ude :

• W i nd power ,

• So l a r ene r gy ,

• B i omas s power ,

• Hyde l power ,

• Geo t he r mal , and

• Tyde l Power .

Energy Suppl y

• Renewab l e ene r gy ( eg . , w i ndmi l l s , b i ogas , s o l a r ene r gy gene r a t i on ) .

• B i omas s ( hea t and / o r power ) and cogener a t i on .

• I mpr ov i ng ene r gy e f f i c i ency by r ep l ac i ng ex i s t i ng equ i pmen t ( i n s t a l l i ng

new e f f i c i en t mach i ne r y ) .

17

• Fue l s w i t ch : Fue l s w i t ch i ng f r om f os s i l f ue l t o g r een f ue l l i ke b i omas s ,

r i ce hus k , e t c .



• Ener gy e f f i c i ency meas ur es r e l a t ed t o bo i l e r , pumps , t u r b i nes ,

i n s t a l l a t i on o f va r i ous s peed d r i ves , e f f i c i en t coo l i ng s ys t ems , back

p r es s u r e t u r b i nes , e t c .

• Cogener a t i on i n i ndus t r i e s hav i ng bo t h s t eam and power r equ i r emen t s .

4 . Trans port

• Fue l s w i t ch f r om gas o l i ne and d i e s e l t o na t u r a l gas .

• M oda l s h i f t f r om a i r t o t r a i n , r oad t o t r a i n a t macr o l eve l .

• Rep l acemen t o f s h i pmen t o f ce r t a i n r aw mat e r i a l s t h r ough r oad t o

p i pe l i nes .

5 . Was t e Management

• Cap t u r e o f l andf i l l me t hane emi s s i ons t o gene r a t e power .

• U t i l i za t i on o f was t e and was t ewa t e r emi s s i ons f o r gene r a t i on o f ene r gy

f o r cap t i ve us e o f power gene r a t i on .

18



ACCOUNTI NG OF CARBON CREDI T

Account i ng I s s ues

The mechan i s m o f ca r bon t r ad i ng i s s i mi l a r t o t he US Ac i d Ra i n P r ogr am

whi ch r educed s ome i ndus t r i a l po l l u t an t s bu t had t he f o l l owi ng

mul t i f a r i ous accoun t i ng d i mens i ons .

• W ha t a r e t he cos t s and r evenues i nvo l ved i n i t and how t hey a r e t o be

i den t i f i ed , meas u r ed and r epor t ed f o r be t t e r dec i s i on - mak i ng?

• W ha t i s t he f i nanc i a l and ope r a t i ona l e f f ec t o f ca r bon c r ed i t and i t s

t r ad i ng on t he cap i t a l expend i t u r e and ea r n i ng o f t he i n s t i t u t i on i n t he

cur r en t yea r and on f u t u r e pe r i ods ?

• How t o amor t i ze t he cap i t a l expend i t u r es ?

• How t o t r ea t add i t i ona l expend i t u r e i ncu r r ed on r equ i r ed t r a i n i ng ,

r e s ea r ch and deve l opmen t ?

• How t o i den t i f y , meas u r e and d i s c l os e t he p r oces s , p r oduc t , f i s ca l

bene f i t s o f ea r n i ng ca r bon c r ed i t on env i r onmen t s ?

• W ha t s hou l d be t he aud i t ab l e s ys t em, i . e . , aud i t ab l e documen t s ,

compos i t i on o f aud i t t eam and r epor t i ng by aud i t o r s a s a pa r t o f s t a t u t o r yr epor t o r o t he r wi s e r epor t i ng s epa r a t e l y?

• How t o r ecogn i ze t he e f f ec t o f ca r bon c r ed i t and i t s t r ad i ng on

conven t i ona l accoun t i ng p r ac t i ce and f r ami ng accoun t i ng po l i c i e s

accor d i ng l y?

• W ha t s hou l d be t he code o f good co r por a t e gover nance i n ca r bon

t r ad i ng?

Account i ng and Report i ng

Accoun t i ng r e f e r s t o t he meas ur emen t o f economi c even t s and

s ummar i z i ng and r epor t i ng t hem i n t he f o r m o f f i nanc i a l s t a t emen t s .

19



I nc r eas ed GHG emi s s i on has b r ough t w i t h i t many cha l l enges and

oppor t un i t i e s and a l s o pu t g r ea t e r f ocus on t he r o l e o f accoun t i ng

pr o f es s i on f o r accoun t i ng and r epor t i ng o f ca r bon c r ed i t s and t he i r

t r ad i ng . The p r o f es s i on , t oday , i s f ac i ng an i mpor t an t cha l l enge o f

i mp l emen t a t i on o f an appr opr i a t e mode l o f r egu l a t i on and t he ach i evemen t

o f i n t e r na t i ona l conver gence i n accoun t i ng , r epor t i ng and aud i t i ng o f

ca r bon c r ed i t and i t s t r ad i ng s o t ha t r e l evan t and r e l i ab l e f i nanc i a l

i n f o r ma t i on a r e ava i l ab l e f o r u s e by va r i ous s t akeho l de r s , banker s ,

deb t o r s , c r ed i t o r s , e t c . I n t h i s con t ex t , t he r equ i r emen t i s t o i den t i f y t he

r o l e o f accoun t i ng i n meas ur i ng economi ca l l y t he ca r bon c r ed i t s and

pr epa r i ng f i nanc i a l s t a t emen t s i n compl i ance w i t h GAAP. I t s hou l d us e

met hodo l ogy t ha t i s we l l - de f i ned , cons t an t l y app l i ed and aud i t ab l e . The

i ns t i t u t i ons a r e r equ i r ed t o ma i n t a i n wr i t t en documen t s f o r a l l t he

t r ans ac t i ons and f i nanc i a l s t a t emen t . Th i s me t hodo l ogy s hou l d be

r ev i ewed and upgr aded f r om t i me t o t i me bas ed on t he new f i nd i ngs .

M aj o r pe r ce i ved t h r us t po i n t f o r accoun t i ng , aud i t i ng and r epor t i ng o f

ca r bon t r ad i ng and i t s t r ad i ng have a l r eady been l i s t ed above .

• The f o l l owi ng me t hodo l ogy has t o be f o l l owed f o r ca r bon c r ed i t t r ade

accoun t i ng . The s epa r a t e me t hodo l ogy o f accoun t i ng i s t o be adop t ed f o r

s e l f - gene r a t ed CERs and pur chas ed CERs .

• The CERs ( s e l f - gene r a t ed ) s hou l d be i n i t i a l l y r ecogn i zed a t f a i r va l ue

t h r ough p r o f i t o r l o s s accoun t s .

• The acqu i r ed / pur chas ed CERs f o r ava i l i ng ca r bon c r ed i t s hou l d be

i n i t i a l l y r ecogn i zed a t f a i r va l ue p l us t r ans ac t i on cos t s t ha t a r e d i r ec t l y

a t t r i bu t ab l e t o i t .

• CERs i f acqu i r ed ou t o f gover nmen t g r an t a r e i n i t i a l l y r eco r ded a t f a i r

va l ue p l us t r ans ac t i on cos t s t ha t a r e d i r ec t l y a t t r i bu t ab l e t o i t m i nus

gover nmen t g r an t s .

• I t i s d i f f e r ence o f i n i t i a l r ecogn i t i on and r ecogn i t i on on ba l ance s hee tda t e and a r e cha r ged t o p r o f i t and l os s accoun t . I n t h i s , AS28 i s

au t omat i ca l l y compl i ed .

20



• On ba l ance s hee t da t e , CERs i n i t i a l l y r eco r ded a t f a i r va l ue p l us

t r ans ac t i on cos t s t ha t a r e d i r ec t l y a t t r i bu t ab l e t o i t , a r e t o be aga i n

meas ur ed a t f a i r va l ue w i t hou t any deduc t i on f o r t r ans ac t i on cos t i t may

i ncur on d i s pos a l and any ga i n o r l o s s a r i s i ng ou t o f i n i t i a l and

s ubs equen t meas u r emen t s hou l d be cha r ged t o r eva l ua t i on r e s e r ve

accoun t . However , when t he r e i s ob j ec t i ve ev i dence t hos e CERs a r e

i mpa i r ed , t he cumul a t i ve l o s s t ha t has been r ecogn i zed i n r eva l ua t i on

r es e r ve accoun t s hou l d be r emoved and r ecogn i zed i n p r o f i t and l os s

accoun t .

• On d i s pos a l , ga i n o r l o s s o f CERs i n i t i a l l y r ecogn i zed a t f a i r va l ue

t h r ough p r o f i t o r l o s s accoun t s s hou l d be cha r ged t o p r o f i t and l os s

accoun t o f t ha t pe r i od .

• On d i s pos a l , cumul a t i ve ga i n o r l o s s o f CERs i n i t i a l l y r eco r ded a t f a i rva l ue p l us t r ans ac t i on cos t s t ha t a r e d i r ec t l y a t t r i bu t ab l e t o i t a r e cha r ged

t o p r o f i t and l os s accoun t a f t e r r ou t i ng i t t h r ough r eva l ua t i on r e s e r ve

accoun t .

• The s a l e p r oceed o f CERs s hou l d no t be c l ubbed wi t h t u r nover and have

t o be s hown s epa r a t e l y i n p r o f i t and l os s accoun t .

Di s c l os ures

• D i s c l os u r e i s r equ i r ed i n no t es on accoun t s t ha t p r ocedur e adop t ed f o r

meas ur emen t and r ecogn i t i on o f p r o f i t o r l o s s e i t he r t h r ough P&L accoun t

o r t h r ough r eva l ua t i on r e s e r ve accoun t

• D i s c l os u r e i s s i mi l a r l y r equ i r ed f o r meas u r emen t and p r o f i t o r l o s s

r ecogn i t i on o f acqu i r ed / pur chas ed CERs .

• D i s c l os u r e i s r equ i r ed i n no t es on accoun t s f o r r e s t r i c t i on i f any

i mpos ed on t r ad i ng o f CERs by s ome au t hor i t y .

21



CARBON FI NANCI NG

The g r owi ng s ens e o f u r gency among coun t r i e s wor l dwi de t o comba t t he

i mpend i ng ca t a s t r oph i c e f f ec t s o f g l oba l war mi ng has paved t he way f o r

t he b i r t h and g r owt h o f a mul t i mi l l i on do l l a r i n t e r na t i ona l mar ke t f o r

ca r bon emi s s i on t r ad i ng o f buy i ng and s e l l i ng Gr eenhous e Gas es ( GHGs ) .

As a non- Annex I coun t r y w i t h appr ox i ma t e l y 12% mar ke t s ha r e i n t he

t o t a l number o f con t r ac t s s i gned s o f a r i n t he wor l d mar ke t , I nd i a has

b r i gh t s cope a s i t s ca r bon mar ke t i s l a r ge l y d r i ven by C l ea r Deve l opmen t

M echan i s m ( CDM ) oppor t un i t y . The Feder a t i on o f I nd i an Chamber s o f

Commer ce and I ndus t r y ( F I CCI ) expec t s I nd i an compan i es t o ea r n $4 bn

t h r ough ca r bon c r ed i t s a l e s i n t he nea r f u t u r e . The cons u l t i ng f i r m Er ns t

& Young has r epor t ed t ha t s i nce i t s t akeof f nea r l y t wo yea r s ago i n I nd i a ,

domes t i c compan i es have ea r ned c l os e t o $500 mn f r om ca r bon c r ed i t

s a l e s . Accor d i ng t o t he W or l d Bank I nd i a News l e t t e r ( J anuar y 2008) ,

ca r bon mar ke t i s t he f a s t e s t g r owi ng mar ke t i n t he wor l d . The vo l ume o f

ca r bon c r ed i t s t r aded by deve l op i ng na t i ons doub l ed be t ween 2003 and

2004 and t r i p l ed be t ween 2004 and 2005 . I n 2006 a l one , g l oba l ca r bon

t r ans ac t i ons wor t h $30 bn wer e conduc t ed .

What i s carbon f i nanc i ng?

Car bon f i nanc i ng i s t he t e r m us ed f o r ca r bon c r ed i t s t o he l p f i nance GHG

r educ t i on p r o j ec t s wher e i ndus t r i a l i zed coun t r i e s can make up f o r t he i rca r bon r educ i ng ob l i ga t i ons under Kyo t o ( i ndus t r i a l i zed coun t r i e s

co l l ec t i ve l y ag r eed t o r educe GHG emi s s i ons by 5% by 2012 compar ed

wi t h 1990 l eve l s ) t h r ough pur chas e o f emi s s i on r educ t i on c r ed i t s f r om

pr o j ec t s i n deve l op i ng coun t r i e s . Car bon t r ade o f f e r s doub l e bene f i t s :

f i r s t , encour ag i ng compan i es t o cu t and r educe t he i r GHG emi s s i ons by

pena l i z i ng t hos e who do no t adhe r e t o Kyo t o no r ms and r ewar d i ng t hos e

who conf o r m; and , s econd , mak i ng ava i l ab l e t he i nves t men t and exper t i s e

o f l ow- ca r bon t echno l og i es t o poor coun t r i e s , t hough many o f t he poor es t

coun t r i e s a r e ye t t o r eap t he bene f i t s .

22

Under Kyo t o P r o t oco l , gove r nmen t s a r e s epa r a t ed i n t o t wo gene r a l

ca t egor i e s : deve l oped coun t r i e s , r e f e r r ed t o a s Annex I coun t r i e s wh i ch

have GHG emi s s i on r educ t i on ob l i ga t i ons and deve l op i ng coun t r i e s ,

r e f e r r ed t o a s non- Annex I coun t r i e s wh i ch have no GHG emi s s i on

r educ t i on ob l i ga t i ons bu t may pa r t i c i pa t e i n t he CDM .



Fa i l u r e on t he pa r t o f any Annex I coun t r y t o mee t i t s Kyo t o ob l i ga t i on

wi l l i ncu r pena l i za t i on r e s u l t i ng i n s ubmi s s i on o f 1 .3 emi s s i on a l l owances

i n a s econd commi t men t pe r i od f o r eve r y t on o f GHG emi s s i ons i n exces s

o f cap i n t he f i r s t commi t men t pe r i od ( 2008- 2012) . Annex I coun t r i e s can

pur chas e GHG emi s s i on r educ t i ons f r om f i nanc i a l exchanges , f r om CDM

pr o j ec t s o f non- Annex I economi es , f r om o t he r Annex I coun t r i e s under

t he J o i n t I mpl emen t a t i on ( J I ) o r f r om Annex I coun t r i e s w i t h exces s

a l l owances . W hen non- Annex I coun t r i e s w i t h no GHG emi s s i on

r es t r i c t i ons under t ake GHG emi s s i on r educ t i on p r o j ec t s under CDM t hey

r ece i ve ca r bon c r ed i t s wh i ch can t hen be t r aded / exchanged wi t h Annex I

coun t r i e s i n t he wor l d mar ke t . Bo t h t he Annex I and non- Annex I

economi es have e s t ab l i s hed des i gna t ed Na t i ona l Au t hor i t i e s t o manage

t he i r GHG por t f o l i o s under Kyo t o , ac t i ve l y p r omot i ng gover nmen t ca r bon

f unds and wor k i ng c l os e l y w i t h t he i r ma j o r u t i l i t y , ene r gy , o i l and gas ,

and chemi ca l cong l omer a t e s t o acqu i r e GHG ce r t i f i ca t e s .

Banks ent er t he f ray

Domes t i c banks s uch a s I CI CI , I DBI , HDFC and S BI a r e gea r i ng up t o t ap

t h i s new h i gh- r i s k and h i gh - r ewar d bus i nes s o f ca r bon f i nanc i ng , wher e

t he mar g i ns a r e qu i t e l uc r a t i ve i n t h e r ange o f 1 - 3%, h i ghe r t han f o r o t he r

p r o j ec t s . C i t i ng t he na t u r e o f dea l s a s one o f t he r eas ons f o r t he g r owi ng

oppor t un i t y i n ca r bon f i nanc i ng , K Uma M ahes hwar an o f Car bon

Pr ocur emen t Un i t , GTZ I n t e r na t i ona l Se r v i ces , s a i d , " I n Ch i na , Eur opeancompan i es buy i ng ca r bon c r ed i t en t e r i n t o ag r eemen t a t t he beg i nn i ng o f

t he p r o j ec t and a l s o p r ov i de f i nance f o r p r o j ec t deve l opmen t . Bu t i n

I nd i a , s i nce t he p r o j ec t s i ze i s s ma l l , many compan i es a r e s eek i ng f i nance

f r om f i nanc i a l i n s t i t u t i ons . "

23

The g l oba l ca r bon t r ad i ng mar ke t i s un i que i n t he s ens e t ha t t he s e l l e r s

a r e f r om I nd i a o r o t he r deve l op i ng na t i ons , wh i l e t he buyer s a r e f r om

i ndus t r i a l i zed coun t r i e s . The ob j ec t i ves o f bo t h t he pa r t i e s a r e qu i t e

con t r a r y ; wh i l e buyer s wan t ca r bon c r ed i t s a t cheape r r a t e s , s e l l e r s wan t

t o max i mi ze t he va l ue . Be i ng unknown t o each o t he r , t hey w i l l be

ca r r y i ng p r econce i ved no t i ons and mi s g i v i ngs abou t t he genu i nenes s o f

t he con t r ac t . Th i s i s wher e banks have a p i vo t a l r o l e t o p l ay— act a s

f i nanc i e r s o f emi s s i on r educ t i on p r o j ec t s and b r i ng t oge t he r buyer s and

s e l l e r s on a common p l a t f o r m t h r ough c r ed i t mechan i s ms .



Let t e r o f Cr ed i t ( L / C) i s one s uch f i nanc i ng mechan i s m, wher e a buyer

guar an t ees paymen t t h r ough h i s banker f o r goods r ece i ve d f r om t he s e l l e r .

L / C i s an a s s u r ance t o t he s e l l e r t ha t he w i l l r ece i ve t he paymen t and t he

s ame can be ava i l ed t h r ough an e s c r ow accoun t w i t h t he bank . Th i s apa r t ,

ca r bon de l i ve r y gua r an t ee i s ano t he r mechan i s m t h r ough whi ch banks

pr ov i de gua r an t ee t o t he buyer s o f ca r bon c r ed i t s t ha t t he s ame wi l l be

de l i ve r ed by s e l l e r s a s pe r t he t e r ms o f t he con t r ac t ( quan t i t y , de l i ve r y

s chedu l e , e t c . ) Th i s enab l es buyer s and s e l l e r s t o en t e r i n t o l ong- t e r m

f u t u r e con t r ac t s . Banks can t hus t ap t he i nves t men t po t en t i a l o f r ece i v i ng

huge amoun t s by way o f advances t o t hes e p r o j ec t s f r om over s eas buyer s .

Apar t f r om f i nanc i ng CDM pr o j ec t s and p r ov i d i ng l oans aga i ns t ca r bon

cr ed i t r ece i vab l es , banks o f f e r a s i ng l e po i n t de l i ve r y o f s e r v i ces s uch a s

adv i s o r y s e r v i ces , va l ue - added p r oduc t s l i ke s ecu r i t i za t i on o f ca r bon

cr ed i t r ece i vab l es , de l i ve r y gua r an t ees , e s c r ow mechan i s m, e t c . , t o t he i r

cus t omer s . M any banks have j o i ned t he ca r bon c r ed i t bandwagon ; f o r

i ns t ance , SBI i n Sep t ember 2007 en t e r ed i n t o M oUs wi t h M I TCON

Cons u l t ancy Se r v i ces L t d . , Ecos ecur i t i e s I nd i a P r i va t e L t d . , and Can t o r

CO2e I nd i a P r i va t e L t d . t o p r ov i de one - s t op des t i na t i on t o i ndus t r i e s f o r

CDM pr o j ec t s and emi s s i ons t r ade . I t has a l s o r ecen t l y en t e r ed i n t o an

M oU wi t h KFW ( a Ger man f i r m) ca r bon f und f o r j o i n t l y exp l o r i ng

f i nanc i ng o f s us t a i nab l e CDM oppor t un i t i e s i n va r i ous deve l opmen t and

i ndus t r i a l s ec t o r s . The bank has a l s o c l ea r ed one s uch l oan va l ued a t Rs 8

c r , aga i ns t t he r ece i vab l e t o a b i omas s - bas ed power p l an t i n I ndor e . A l s oi n t he o f f i ng a r e 3 - 4 s uch l oans pend i ng c l ea r ance wh i ch w i l l be

cons i de r ed once t hey compl e t e pu r chas e ag r eemen t f o r ma l i t i e s w i t h t he i r

buyer s .

I CI CI Bank has s i gned a $200 mn l i ne o f c r ed i t f r om J apan Bank f o r

I n t e r na t i ona l Cooper a t i on ( J BI C) t o f und ca r bon c r ed i t - r e l a t ed p r o j ec t s . I t

has a l s o s i gned an M oU wi t h Agr i ene r gy Cons u l t ancy ( t he I nd i an a r m o f

t he UK- bas ed cons u l t ancy , Agr i ene r gy L t d . ) t o p r omot e ca r bon c r ed i t

bus i nes s i n t he coun t r y . Under t h i s b i l a t e r a l a r r angemen t , t hey p r opos e t o

o f f e r a l a r ge s pec t r um o f CDM - r e l a t ed s e r v i ces t o gover nmen t bod i es ,

SM E un i t s and o t he r s e r v i ces .

24

Agr i ene r gy ' s s e r v i ces w i l l i nc l ude pa r t i c i pa t i on t h r oughou t t he ca r bon

cr ed i t p r o j ec t cyc l e , r i gh t f r om as s i s t ance t o c l i en t s i n i den t i f i ca t i on o f

CDM pr o j ec t s , t he i r r eg i s t r a t i on w i t h UN Execu t i ve Boar d .



I CI CI w i l l p r ov i de s e r v i ces i n t he a r eas o f commer c i a l i za t i on o f Cer t i f i ed

Emi s s i on Reduc t i on Cer t i f i ca t e ( CERC) , coor d i na t i on and bank i ng

s e r v i ces and deb t - f i nanc i ng o f CDM pr o j ec t s . The bank i s a l s o wor k i ng

wi t h SM Es f o r ca r bon c r ed i t mar ke t and has f o r med s pec i f i c ve r t i ca l t eam

t o t ap oppor t un i t i e s a r i s i ng t o I nd i an SM Es f r om c l i ma t e change and

ca r bon c r ed i t s . By adop t i ng a mul t i - p r onged appr oach , i t has t i ed up w i t h

cons u l t an t s t o o f f e r adv i ce t o i t s c l i en t s on ca r bon c r ed i t l i nked p r o j ec t s ,

ene r gy cons e r va t i on , e t c . Bes i des , t he bank i s a l s o p l ann i ng t o c r ea t e an

ene r gy e f f i c i en t awar enes s p r ogr am f o r t he i r c l i en t s .

S i mi l a r l y , I DBI has s e t up s pec i a l des k o f f e r i ng end- t o - end s o l u t i ons t o

co r por a t e s o f ca r bon c r ed i t bus i nes s . The bank has ce r t a i n t i e - ups f o r

t echn i ca l and f i nanc i a l a s s i s t ance , and t he p r oduc t s deve l oped i nc l ude

pr ov i d i ng gua r an t ees f o r ca r bon de l i ve r i e s and e s c r ow s e r v i ces f o r

paymen t . Go i ng a s t ep f u r t he r , bo t h I CI CI Bank and I DBI Bank have p l ans

t o f o r m a l l i ances , "W e have f o r med a ded i ca t ed t eam f o r ca r bon c r ed i t .

E f f o r t s a r e a l s o t aken t o f o r ge a l l i ances f o r t h i s i n i t i a t i ve . The bank has

l aunched ` Go Gr een ' — a p r ogr am whi ch g i ves SM Es an oppor t un i t y t o

r educe t he i r ca r bon f oo t p r i n t , " s a i d San j eev M an t r i , GM , Smal l

En t e r p r i s e s Gr oup o f I CI CI Bank .

Ri s k- reward t rade- o f f

25

Hi gh and va r y i ng degr ees o f r i s ks a r e a s s oc i a t ed w i t h ca r bon c r ed i tf i nanc i ng depend i ng on t he na t u r e o f t he p r o j ec t and t he l eve l o f i t s

f i nanc i ng . Accor d i ng t o Somak Ghos h , Gr oup P r es i den t , Cor por a t e

F i nance & Deve l opmen t Bank i ng , Yes Bank , t he r e a r e s eve r a l p r o j ec t

s pec i f i c r i s ks wh i ch i nc l ude under pe r f o r mance , cap i t a l / ope r a t i ona l cos t s

ove r r un , cu r r ency r i s ks caus ed by i n f l a t i on and mar ke t r i s ks s uch a s t he

i ns o l vency o f coun t e r pa r t y , and banks need t o deve l op p r ope r f i nanc i ng

mechan i s ms f ac t o r i ng i n t he un i que r i s ks p r es en t ed by CDM pr o j ec t s . I n

I nd i a , des p i t e huge po t en t i a l , t he i n i t i a t i ve t aken by banks t o f und ca r bon

f i nance p r o j ec t s i s mov i ng a t a s na i l ' s pace , f u r t he r aggr ava t i ng t he r i s k

f ac t o r s f o r new f i nanc i a l i n s t i t u t i ons wh i ch a r e en t e r i ng t he ca r bon

mar ke t . Accor d i ng t o T i mot hy Pa t r i ck Fox , Car bon F i nance Exper t ,

I n s t i t u t e f o r F i nanc i a l M anagemen t & Res ea r ch , "F i nanc i a l i n s t i t u t i ons

wi l l be f o r ced t o ca r r y a h i ghe r componen t o f r i s k w i t h a d i mi n i s hed r a t e -

o f - r e t u r n due t o h i ghe r cap i t a l cos t s and w i l l r equ i r e ca r e f u l eva l ua t i on o f

p r o j ec t s . "



However , " t he r e i s a huge po t en t i a l i n f i nanc i ng ca r bon c r ed i t - r e l a t ed

pr o j ec t s , " s ays BK Ba t r a , Ch i e f Gener a l M anager , I DBI . He op i nes t ha t

ca r bon t r ade p r ov i des s cope f o r o t he r bus i nes s es l i ke t echno l ogy t r ans f e r ,

cap i t a l i nves t men t s , c r os s - bor de r f und i ng p r oduc t s and r emi t t ances . Apar t

f r om gener a t i ng h i gh mar g i ns t ha t i nc l ude commi s s i on , b r oke r age , e t c .

f r om t he ca r bon c r ed i t t r ans ac t i ons , banks c i t e b r oaden i ng o f t he p r oduc t

por t f o l i o a s key i ncen t i ve t o en t e r t h i s mar ke t . The p r o j ec t enab l es banks

t o p r ov i de an i n t e r na t i ona l p l a t f o r m f o r buyer s and s e l l e r s and i nc r eas e

t he s cope o f a l l i ed bus i nes s . PV Anan t ha Kr i s hnan , Execu t i ve V i ce -

Pr es i den t and Coun t r y Head , HDFC Bank , obs e r ves , "F i nanc i ng o f CDM

pr o j ec t s becomes an ex t ens i on o f bank i ng s e r v i ces t ha t we p r ov i de t o

r e t a i n ou r cus t omer s . " However , Ba t r a cau t i ons t ha t t he r e i s h i gh r i s k

i nvo l ved s i nce t he mar ke t i s f u t u r e - bas ed and , a s w i t h any bus i nes s ,

r e t u r ns a r e commens ur a t e w i t h r i s ks . "The r i s ks i nc l ude p r o j ec t s no t be i ng

i mpl emen t ed i n t he manner t hey wer e env i s aged o r no t be i ng ab l e t o

gener a t e e s t i ma t ed CER r evenues and even t he unce r t a i n t y o f p r i ces

c r as h i ng , " r eckons he .

26

Bank i ng s ec t o r expe r t s op i ne t ha t t r ad i ng i n ca r bon p r oduc t s i s

compl e t e l y d i f f e r en t f r om t he r egu l a r pa r t i c i pa t i on i n f i nanc i a l mar ke t s a s

t he cha r ac t e r i s t i c s o f mar ke t pa r t i c i pan t s d i f f e r i n bo t h t hes e t r ades . Th i s

i s due t o t he vas t vo l ume i nvo l ved and l ack o f s t a f f w i t h s u f f i c i en t

exper t i s e t o eva l ua t e t he p r o j ec t s , a s a l s o a number o f r i s ks a t va r i ous

l eve l s o f t he p r o j ec t f i nance cyc l e . Nove l f i nanc i ng i ns t r umen t s , s uch a ss pec i a l pu r pos e veh i c l e s , CDM bonds , e t c . , can be deve l oped w i t h

e f f i c i en t and t r ans pa r en t p r ocedur es . Regu l a t o r y r i s ks a t cen t r a l and s t a t e

l eve l s f o r m t he co r e e l emen t o f commer c i a l r i s k wh i ch can be ove r come

wi t h e f f ec t i ve appr ova l r u l e s . The o t he r r i s ks i nc l ude f a i l u r e o f

t echno l ogy , p r ocedur a l de l ays , po l i t i ca l r i s k , c r ed i t r i s k , neg l i gence i n

dea l i ng w i t h ca r bon i ns t r umen t de l i ve r y r i s k , e t c . Ba l anc i ng t he r i s k -

r ewar d t r ade - o f f f o r ms t he c r ux o f ca r bon f i nanc i ng . F i nanc i ng p r o j ec t s

t ha t a r e no t s uppor t ed by s t r ong ba l ance s hee t pos e s i gn i f i can t cha l l enges

and en t a i l add i t i ona l r i s ks , s uch a s ope r a t i ona l r i s k , p r i ce r i s k , de f au l tr i s ks , p r o j ec t r eg i s t r a t i on r i s k , execu t i on r i s k , po l i cy r i s k , e t c . , obs e r ves

M ant r i . He adds t ha t banks can ea r n good r e t u r ns by t he i r i nvo l vemen t

and t o t a l pa r t i c i pa t i on i n t he p r o j ec t r i gh t f r om f i nanc i ng t o CDM

r eg i s t r a t i on t o t r ad i ng o f t he i s s ued ca r bon c r ed i t s .



Anot he r hu r d l e i s t he exchange r i s k . W hi l e banks can app l y hedg i ng t oo l s

f o r f o r war d con t r ac t s i nvo l v i ng huge amoun t s t o mi t i ga t e t he r i s k ,

e f f ec t i ve r egu l a t o r y c l a r i t y w i l l s t r eng t hen and encour age banks t o

ac t i ve l y pa r t i c i pa t e .

Gl obal t rends

Though t he i mpac t o f emi s s i ons has l i ke l y s t a r t ed bu t may no t be

compl e t e l y f e l t f o r many mor e yea r s t o come , t he f u t u r e c l i ma t e po l i cy i s

t ak i ng a de f i n i t e and concr e t e s hape . As t he i n i t i a l yea r o f t he f i r s t Kyo t o

commi t men t pe r i od ( 2008- 2012) has commenced , i t i s expec t ed t ha t by

2012 t he wor l d ca r bon mar ke t w i l l w i t nes s an exponen t i a l g r owt h a t $200

bn p . a . t r ans f e r r i ng ha l f o f t ha t amoun t f r om t he i ndus t r i a l i zed na t i ons t o

t he deve l op i ng ones . As pe r t he W or l d Bank ' s S t a t e and Tr ends o f Car bon

M ar ke t 2008 r epor t , As i a con t i nues t o domi na t e t he mar ke t w i t h abou t87% of vo l umes t r ans ac t ed and 91% of va l ues , l ed by Ch i na w i t h CDM

t r ans ac t i ons a t 73%, f o l l owed by I nd i a and Br az i l ( 6%) , Af r i ca ( 5%) ,

Eas t e r n Eur ope and Cen t r a l As i a ( 1%) .

Though I nd i a has 259 p r o j ec t s , t he av e r age annua l i ncome f r om r eg i s t e r ed

pr o j ec t s t h r ough 2012 i s expec t ed t o be on l y 15% as compar ed t o Ch i na

wi t h 101 r eg i s t e r ed p r o j ec t s w i t h annua l i ncome a t 44%. Ch i na ' s s ucces s

has r e s u l t ed i n CDM be i ng n i cknamed as ` Ch i na Deve l opmen t

M echan i s m ' , t he ma i n r eas on ( f o r Ch i na ' s s ucces s ) be i ng an oppo r t un i t y i to f f e r s i t s buyer s t o d i ve r s i f y t he i r po r t f o l i o s . Ch i na w i t h i t s l a r ge

i ndus t r i a l bas e , economi es o f s ca l e i n o r i g i na t i on and f avor ab l e

i nves t men t c l i ma t e i s con t i nu i ng t o r eap t he bene f i t s . The mar ke t power

o f Ch i na p l ayed a v i t a l r o l e i n ma i n t a i n i ng an i n f o r ma l p r i c i ng po l i cy by

r a i s i ng t he mi n i mum pr i ce f l oo r i n t he US$10 .40- 11 .70 r ange , wh i ch was

accep t ab l e t o p r i va t e Eur opean buyer s who con t i nued t o s how s t r ong

demand .

27

The s cena r i o i n I nd i a i s d i f f e r en t , i n t he s ens e , I nd i an p r o j ec t s gene r a t e

s mal l vo l umes o f ca r bon c r ed i t s , and s i nce t h e mar ke t i s d r i ven ma i n l y by

SM Es , t he s ame have t o be p r ocur ed f r om d i f f e r en t p r o j ec t s , wh i ch i s

cumber s ome . PSUs and p r i va t e s ec t o r can c l ub t hes e s ma l l p r o j ec t s

t oge t he r and s i gn i f i can t l y i mpr ove t he mar ke t g r owt h , wh i l e i n Ch i na ,

l a r ge quan t i t y o f c r ed i t s can be t r aded f r om one s i ng l e p r o j ec t .



Banks i n o t he r pa r t s o f t he wor l d a r e t r y i ng t o r eac h a r eas t ha t have f a i l ed

t o bene f i t much f r om ca r bon t r ad i ng . Banco Sumi t omo M i t s u i Br as i l e i r o

i n Br az i l i nc r eas ed i t s po r t f o l i o o f ca r bon c r ed i t s l a s t yea r by 1 .5 mi l l i on

c r ed i t s , gene r a t ed f r om 15 s ma l l and med i um- s i zed p r o j ec t s , i nc l ud i ng

b i omas s power gene r a t i on , s ma l l hydr o p r o j ec t s and me t hane t echno l ogy .

The Uni t ed Na t i ons i s t r y i ng t o come up w i t h meas ur es t o b r i ng mor e

banks i n t o t he mar ke t . Yvo de Boer , Execu t i ve Sec r e t a r y o f t he UN

Fr amewor k Conven t i on on C l i ma t e Change , s a i d t he s ys t em cou l d be

ad j us t ed t o he l p gover nmen t s i s s ue ` c l i ma t e bonds ' , wh i ch wou l d he l p a

deve l op i ng coun t r y gover nmen t t o s e t up a na t i ona l emi s s i ons t a r ge t .

A l s o , M er r i l l Lynch Gl oba l Res ea r ch has r ecen t l y l aunched t he M LCX

Gl oba l CO2 Emi s s i ons I ndex bas ed on gu i de l i nes gove r n i ng t he EU ca r bon

mar ke t , wh i l e J P M or gan wou l d acqu i r e C l i ma t eCar e , a Br i t i s h company

t ha t bu i l ds c l ean - ene r gy p r o j ec t s i n t he deve l op i ng wor l d .

The f u t u r e ou t l ook f o r ca r bon mar ke t s i s en t i c i ng . Accor d i ng t o e s t i ma t es ,

t he I nd i an ca r bon mar ke t has t he po t en t i a l t o s upp l y 30 - 50% of t he

p r o j ec t ed g l oba l mar ke t o f 700 mi l l i on CERs by 20 12 . M aj o r p r o j ec t s s o l d

s o f a r i nc l ude r enewab l e ene r gy ( s uch a s w i nd power , b i omas s co -

gene r a t i on and hydr opower ) , ene r gy e f f i c i ency meas ur es i n s ec t o r s l i ke

cemen t , pe t r ochemi ca l s and power gene r a t i on , and a l s o r educ t i on o f

i ndus t r i a l gas es con t r i bu t i ng t o c l i ma t i c changes . However , t r ad i ng on t he

i n t e r na t i ona l p l a t f o r m r equ i r e s c l ea r - cu t , we l l - l a i d and i ncen t i ve - bas ed

po l i c i e s i n t he a r eas o f s e l ec t i on and c r i t e r i a o f p r o j ec t s , t i m i ng , s e l l e r -buyer communi ca t i on , e l i g i b i l i t y o f pa r t i c i pan t s , e t c .

28



Hi t he r t o , t he SM Es wer e ava i l i ng t he bene f i t s o f ca r bon mar ke t i n I nd i a

wi t h ve r y l i t t l e o r no pa r t i c i pa t i on f r om PSUs . As t he exc l us i ve r i gh t s t o

dea l w i t h ca r bon mar ke t s r e s t s w i t h po l i cy maker s and r egu l a t o r s , i t i s

i ncumben t upon t hem t o cha l k ou t an e f f ec t i ve s t r a t egy t o expand t he i r

r each t o PSUs and a l s o encour age p r i va t e pa r t i c i pa t i on . A l s o , l ack o f

r egu l a t o r y c l a r i t y i s p r oh i b i t i ng many i n t e r es t ed p l aye r s f r om ob t a i n i ng

b i ds t h r ough pub l i c t r ad i ng .

A r epor t p r epa r ed by Conf ede r a t i on o f I nd i an I ndus t r y ( CI I ) s ugges t s

c r ea t i on o f a ca r bon mar ke t f und f o r acce l e r a t i ng t he capac i t y ,

deve l opmen t o f ca r bon f i nance oppor t un i t i e s , g r owt h and s t r eng t hen i ng o f

ca r bon mar ke t s . The r epor t a l s o emphas i zes t he need f o r an o r gan i zed

ca r bon exchange w i t h e - auc t i on i ng f ac i l i t y a l l owi ng on l y one s i de

b i dd i ng , wher e i n t e r med i a r i e s can buy CERs and a t t he oppor t une t i me

s e l l i n t he i n t e r na t i ona l mar ke t s f o r h i ghe r p r i ces . Th i s w i l l a s s u r e t he

p r o j ec t deve l ope r s o f ge t t i ng r eas onab l e r a t e s w i t h l ow p r ocedur a l cos t s .

29



Las t bu t no t t he l eas t , I nd i an ca r bon mar ke t i n r e l a t i on t o i t s po t en t i a l i s

r e l a t i ve l y s ma l l . To cons o l i da t e and t ap t he oppor t un i t i e s , c r ea t i on o f a

ca r bon un i t unde r gover nmen t ' s con t r o l w i l l he l p i n p r epa r a t i on and

moni t o r i ng o f p r o j ec t s , f i nanc i ng , r eg i s t r a t i on and accoun t i ng , co l l ec t i ng

s t a t e du t y f o r t he r eg i s t r a t i on and r evenue f r om s a l e o f ca r bon un i t s . A

r obus t s t r uc t u r e w i t h s i mpl i f i ed p r ocedur es , c r ea t i ng awar enes s and

pr ov i d i ng upda t ed i n f o r ma t i on abou t r e l a t ed bene f i t s t o p r o j ec t owner s ,

p r omot i ng l oca l expe r t i s e on p r o j ec t deve l opmen t and encour ag i ng

i n t e r na t i ona l pa r t i c i pa t i on o f buyer s and i nves t o r s , and p r ov i d i ng t ax

i ncen t i ves t o banks f o r f i nanc i ng CDM pr o j ec t s w i l l cos t - e f f ec t i ve l y

r educe GHG emi s s i ons , wh i l e con t r i bu t i ng t o t he g r owt h o f t he i r

economi es i n a s us t a i nab l e manner . Tha t w i l l f u r t he r s pawn new

oppor t un i t i e s f o r banks .

30



CURRENT GLOBAL TRENDS

As pe r a W or l d Bank ' s s t udy r epor t , t he ca r bon c r ed i t s t r aded g l oba l l y i n

2007 was s l ow , a s aga i ns t r ap i d g r owt hs r eco r ded i n t he p r ev i ous yea r s .

The f i nd i ngs s ugges t t ha t t he number o f GHG r educ t i on p r o j ec t s f unded

by i ndus t r i a l i zed na t i ons and t he i r p r i va t e s ec t o r en t i t i e s i n deve l op i ng

coun t r i e s has e f f ec t i ve l y s t a l l ed . The vo l ume o f ca r bon c r ed i t s c r ea t ed by

t he CDM t o t a l ed 551 mi l l i on t ons wor t h o f ca r bon i n 2007 , up s l i gh t l y

f r om 537 mi l l i on t ons i n 2006 , compar ed w i t h 350 mi l l i on t ons i n 2005 ,

nea r i ng 100 mi l l i on t ons i n 2004 and 50 mi l l i on t ons i n 2003 . However ,

va l ue - wi s e , t he g l oba l ca r bon mar ke t g r ew t o a whopp i ng $64 bn i n 2007 .

As pe r Po i n t Car bon , a cons u l t i ng f i r m es t i ma t es , t he g l oba l mar ke t i n

ca r bon i s expec t ed t o be wor t h €34 bn by t he end o f t h i s decade . A

g l i mps e o f s ome s e l ec t ed coun t r i e s ' commi t men t s ( t a r ge t s f o r emi s s i on

r educ t i ons ) under Kyo t o P r o t oco l f o r t he pe r i od 2008- 12 i s p r ov i ded i n

Tab l e 1 .

The Annex 1 count r i e s i nc l ude: Ger many , Aus t r a l i a , Aus t r i a , Be l a r us ,

Be l g i um, Bu l ga r i a , Canada , Eur opean Communi t y , Denmar k , Spa i n , US ,

Es t on i a , Rus s i a , F i n l and , F r ance Gr eece , Hungar y , I r e l and , I ce l and , I t a l y ,

J apan , La t v i a , L i t huan i a , Luxembur g , Nor way , New Zea l and , Ne t he r l ands ,

Po l and , Por t uga l , UK, Czech- S l ovak i a , Rumani a , Sweden , Swi t ze r l and ,

Tur key and Ukr a i ne . ( Sour ce : Br az i l i an M i n i s t r y o f For e i gn Re l a t i ons ) .

Nort h Amer i ca - US

31

US, t he wor l d ' s b i gges t po l l u t e r , w i t hd r ew f r om t he Kyo t o P r o t oco l T r ea t y

i n 2001 on t he p r e t ex t t ha t t h i s t r ea t y wou l d caus e adve r s e e f f ec t s on US

economy. However , US a r e we l l awar e o f t he ha r mf u l e f f ec t s o f t he

ca r bon emi s s i ons l ead i ng t o g r eenhous e e f f ec t and g l oba l war mi ng .

Ther e f o r e , US deve l oped vo l un t a r y i n i t i a t i ves s uch a s Vo l un t a r y Car bon

M ar ke t s ( VCM s ) and Renewab l e Ener gy Cr ed i t ( REC) s ys t ems whi ch

d i f f e r f r om CERs us ed f o r ca r bon t r ad i ng under t he CDM of t he Kyo t o

Pr o t oco l . W hi l e CERs a r e compl i ance - bas ed ( GHG r egu l a t ed ) , VCM s a r e

t hos e wh i ch a r e c r ea t ed by t r ad i ng f i r ms who t ake on vo l un t a r y

commi t men t s t o r educe GHG emi s s i ons f o r a va r i e t y o f r eas ons . Car bon

cr ed i t s deve l oped i n t he US canno t be t r aded , s o l d , o r pu r chas ed i n t he

g l oba l mar ke t s ope r a t i ng under t he Kyo t o P r o t oco l r egu l a t i ons .



Though t he r e a r e no na t i ona l p r ogr ams i n t he US , t he r e a r e s eve r a l s t a t e

o r r eg i ona l l eve l p r ogr ams f o r vo l un t a r y GHG r educ t i ons . Fo r exampl e ,

t he US compan i es wh i ch deve l op r enewab l e ene r gy p r o j ec t s a r e ab l e t o s e t

up and ob t a i n RECs , wh i ch i s t he o f f s e t c r ed i t i ng mechan i s m i n many

s t a t e s i n t he US . However , t he r e a r e no na t i ona l s t anda r ds o r ce r t i f i ca t i on

pr oces s f o r RECs . However , CCX i s Nor t h Amer i ca ' s f i r s t vo l un t a r y

ca r bon mar ke t bas ed on cap - and- t r ade s cheme , wh i ch i s a l s o p r eva l en t i n

Canada and M ex i co . I t has a s e t o f f l ex i b l e r u l e s t ha t he l ps a w i de va r i e t y

o f p r o j ec t s t o pa r t i c i pa t e . The t a r ge t s wer e t o be me t t h r ough i n t e r na l

r educ t i on e f f o r t s o r pu r chas i ng c r ed i t s f r om o t he r f i r ms o r t h r ough

emi s s i on r educ t i on p r o j ec t s . The r e was a commi t men t t o r educe t he GHG

emi s s i ons by 4% be l ow 1998- 2001 l eve l by 2006 .

Canada

The Al be r t a Car bon M ar ke t i s a compl i ance - bas ed mar ke t i n Canada ,

wher e CCs a r e t r aded . CCX i s i mp l emen t i ng a s a new aux i l i a r y p l a t f o r m

i n Canada named as ` M ont r ea l C l i ma t e Exchange ' . However , t he

f r amewor k CCX us ed t o de l i ve r o f f s e t s t o t h i s t r ad i ng p l a t f o r m a t

M ont r ea l C l i ma t e Exchange and i t i s s i mi l a r t o t he r equ i r emen t s o f

p r o j ec t - bas ed s ys t ems . Thus A l be r t a has j u s t s t a r t ed ( i n l a t e 2007) t he

f i r s t compl i ance - bas ed mar ke t i n Nor t h Amer i ca . Br i t i s h Co l umbi a S t a t e

i n Canada has made a p r opos a l t o cu t annua l g r eenhous e gas emi s s i ons

33% be l ow t he cu r r en t l eve l s by 2020 t h r ough a l eg i s l a t i on wh i ch w i l lmake a s u i t ab l e p r opos a l .

Europe

Car bon t r ad i ng i s mos t deve l oped i n t he Eur opean Uni on ( EU) wher e t he

EU Emi s s i on Tr ad i ng Scheme accoun t s f o r 80% of t he g l oba l ca r bon

t r ad i ng mar ke t .

UK

32

The UK Emi s s i on Tr ad i ng Scheme i s a vo l un t a r y emi s s i ons p r ogr am,

f o r med t o g i ve t he UK gover nmen t and va r i ous UK compan i es t he

neces s a r y f ami l i a r i t y i n ca r bon t r ad i ng . Thes e UK compan i es j o i n i n

exchange f o r a 90% d i s coun t on t he i r c l i ma t e change l evy and s uch

d i s coun t wou l d no t be a l l owed i f a member company f a l l s i n commi t men t .



Ther e wer e 38 pa r t i c i pan t s i n t h i s s cheme whi ch l a s t ed f r om 2002- 2006

and t he ex t en t o f emi s s i on r e l eas es avo i ded was o f t he o r de r o f 11 .88

mi l l i on t ons . Fu t u r e For es t s i s t he l a r ges t and o l des t r e t a i l o f f s e t p r ov i de r

i n UK, wh i ch i nves t s i n GHG of f s e t f o r es t r y p r o j ec t s i n UK and ab r oad .

Ano t he r UK f i r m v i z . C l i ma t e Car e f ocus es on ene r gy- bas ed p r o j ec t s w i t h

l o f t y expans i on bene f i t s i n deve l op i ng coun t r i e s .

Germany

Ger many i s t he l ead i ng coun t r y i n p r o t ec t i ng c l i ma t e and has under t aken

t o cu t emi s s i ons by 21% f r om 2008- 2012 compar ed t o 1990 GHG

emi s s i ons l eve l , unde r EU bur den- s ha r i ng w i t h i n t he pu r v i ew o f Kyo t o

Pr o t oco l . A t mos f a i r i s an o f f s e t con t r i bu t o r i n Ger many , l oya l i n

p r ov i d i ng h i gh qua l i t y ene r gy- bas ed o f f s e t s p l aced i n deve l op i ng

coun t r i e s . Ger many s ens ed c l i ma t i c c r i s i s a decade ago and o f f e r eds eve r a l i ncen t i ves f o r under t ak i ng many r enewab l e ene r gy p r o j ec t s l i ke

s o l a r and w i nd power .

Rus s i a

Rus s i a i s t he t h i r d l a r ges t GHG emi t t e r i n t he wor l d . Ener gy and t r ans por t

r e l a t ed CO 2 emi s s i ons cons t i t u t e 84% of Rus s i a ' s t o t a l GHG emi s s i ons .

Rus s i a has t he p r i nc i pa l emi s s i ons a l l owance s u r p l us and i s a key p l aye r

i n t he a r eas o f ene r gy and c l i ma t e po l i c i e s . I t has been t ak i ng adequa t eene r gy e f f i c i ency meas ur es t o pa r t i c i pa t e i n t he Kyo t o P r o t oco l F l ex i b l e

M echan i s m.

Swi t zer l and

M yCl i ma t e i s an o f f s e t p r ov i de r i n Swi t ze r l and commi t t ed t o p r ov i de

s us t a i nab l e deve l opmen t bene f i t s t o ene r gy o f f s e t s i n deve l op i ng

coun t r i e s . Eur ope i s t he b i gges t buyer o f ca r bon c r ed i t s f r om t he

deve l op i ng coun t r i e s f r om As i a .

As i an Count r i e s Mal ays i a

33

Car bon t r ad i ng mar ke t i n M al ays i a i s expec t ed t o be wor t h be t ween RM

3.2 bn and RM 6 .4 bn i n t he nex t f i ve yea r s , a s mor e compan i es i n t h i s

coun t r y a r e conce r ned abou t h i gh GHG emi s s i on l eve l s f o r c i ng t hem t o

pa r t i c i pa t e i n env i r onmen t a l l y s us t a i nab l e p r o j ec t s .



The pa l m o i l p l an t a t i on i ndus t r y i s expec t ed t o bene f i t f r om ca r bon

t r ad i ng , a s i t i s an ene r gy- i n t ens i ve i ndus t r y wh i ch can r ece i ve ca r bon

cr ed i t s f r om i t s ope r a t i ons . As pe r t he r e s ea r ch f i nd i ngs o f t he M al ays i a

Ener gy Cen t r e , M al ays i a has po t en t i a l l y 100 mi l l i on t ons o f ca r bon c r ed i t ,

wh i ch i s wor t h $60 bn g l oba l l y and can go up t o $1 t n i n a decade .

I ndones i a

I ndones i a , wh i ch s u f f e r ed t h r ough t h r ee decades o f c i v i l war and heavy

human l os s i n 2004 t s unami , i s expec t ed t o s ee $26 mn i n ca r bon c r ed i t s

f o r p r o t ec t i ng r a i n f o r es t and env i r onmen t . I t s U l u M as on p r o j ec t , backed

by t he Gover nmen t o f Aceh , Fauna and F l o r a I n t e r na t i ona l and Car bon

Cons e r va t i on f o r p r o t ec t i ng 1 .9 mi l l i on ac r e o f U l u M as on f o r es t i s

expec t ed t o r educe emi s s i ons f r om de f o r es t a t i on i n deve l op i ng coun t r i e s .

Chi na

34

Chi na i s expec t ed t o be t he l a r ges t s e l l e r o f CERs i n t he wor l d and Eur ope

wi l l be t he l a r ges t buyer . Of l a t e , t he Ch i nes e gover nmen t has been

mak i ng good e f f o r t s t o s ave ene r gy and r educe CO 2 emi s s i on l eve l s . By2010 , Ch i na p r opos es t o ach i eve ene r gy cons umpt i on r educ t i on o f 20%

per un i t o f GDP. I t had d r awn ene r gy s av i ng p l ans f o r i t s new as we l l a s

o l d coa l - bas ed power p l an t s . I t has p r opos a l s t o r ep l ace o r moder n i ze i t s

ou t da t ed p l an t s t o r educe ca r bon emi s s i ons . However , d i f f e r en t p r i va t e

bus i nes s s ec t o r s a l s o have t he i r i nd i v i dua l p l ans t o r educe ca r bon

emi s s i ons .



CARBON CREDIT AND INDIA

Among t he deve l op i ng coun t r i e s , I nd i a was t he f o r emos t t o o f f e r a

hedg i ng t oo l f o r ca r bon c r ed i t s ea r ned t h r ough t he CDM pr o j ec t s . The

I nd i an gover nmen t i s s ued a no t i f i ca t i on on J anuar y 4 , 2008 by b r i ng i ngCERs under t he r ea l m o f t r adab l e commodi t i e s . Bu t , t he f o r war d mar ke t i s

s t i l l i n a nas cen t s t age . However , a f r e s h beg i nn i ng i s be i ng made by

s ome compan i es t o en t e r i n t o f o r war d con t r ac t s f o r ca r bon t r ad i ng . I nd i a

has r ecen t l y begun t o t r ade on i t s ca r bon c r ed i t t r ad i ng exchanges v i z .

M ul t i Commodi t y Exchange o f I nd i a L t d . ( M CX) and Na t i ona l Commodi t y

and Der i va t i ves Exchange o f I nd i a L t d . ( NCDEX) .

M CX en t e r ed i n t o an a l l i ance w i t h CCX i n 2005 t o i n t r oduce ca r bon

cr ed i t s i n I nd i a . M CX, wh i ch i s i n t o f u t u r es t r ad i ng , has become t he f i r s t

ca r bon commodi t y exchange i n As i a . M CX i s on l y f o r I nd i ans and I nd i an

compan i es . Thos e I nd i an compan i es wh i ch adher e t o t he UNFCCC nor ms

and t ake up new t echno l og i es a l one can s e l l ca r bon c r ed i t s . I n I nd i a , t he r e

a r e nea r l y 400 compan i es wh i ch adher e t o UNFCCC nor ms and as a r e s u l t

can s e l l ca r bon c r ed i t s t o t he Eur opean coun t r i e s . The compan i es he r e a r e

ge t t i ng p r i ce s i gna l s f o r t he ca r bon f o r t he de l i ve r y i n t he nex t f ou r t o

f i ve yea r s . Bu t t hes e compan i es a r e l ook i ng f o r bes t s u i t ed p r i ce . M CX

t r ades i n ca r bon c r ed i t s emana t i ng f r om CDM pr o j ec t s , mos t l y i n key

s ec t o r s o f t he I nd i an economy. Thes e I nd i an compan i es a r e t h i nk i ng t ha t

i f t he Eur opeans f a i l t o mee t t he i r emi s s i on t a r ge t l eve l s by 2010 , o r

2012 , t he demand wi l l go up s i gn i f i can t l y and t hey can ge t a be t t e r p r i ce .

The CER f u t u r es f o r Febr ua r y 2009 on M CX p l a t f o r m i s r epor t ed l y

t r ad i ng a t Rs . 1 ,427 pe r con t r ac t .

35

CERs o r ca r bon c r ed i t s a r e t r aded on t he NCDEX a l s o . However , t i l l

t oday , t he compan i es wh i ch a r e i n t o ca r bon t r ad i ng a r e s t i l l unc l ea r on

t he phys i ca l de l i ve r y mechan i s m whi ch i s c r ea t i ng conf us i on i n t he

t r ad i ng s ys t em. W i t h i n a f ew days o f t he t r ad i ng on NCDEX, t he t r ad i ng

vo l ume had t ouched Rs .15 - 20 c r on a da i l y bas i s wh i ch was t h r ee t o f ou rt i mes t he expec t a t i on . Bu t , g l oba l compan i es r equ i r i ng o f f s e t t i ng t he i r

emi s s i ons by buy i ng ca r bon c r ed i t s f r om I nd i a a r e no t ab l e t o pa r t i c i pa t e

i n NCDEX t r ad i ng . Thus t he t r ad i ng on NCDEX i s on l y f r om p r i ce

d i s cover y po i n t o f v i ew and no t f r om t he po i n t o f phys i ca l de l i ve r y o f

CERs .



However , M CX as we l l a s NCDEX i n i t i a t i ves s e r ve t o addr es s t hes e

i ne f f i c i enc i es i n t he ca r bon mar ke t s by p r ov i d i ng t he p r i ce d i s cover y and

hedg i ng p l a t f o r ms t o t he buyer s and t he s e l l e r s o f CERs . The F i na l

Se t t l emen t P r i ce w i l l be r e l evan t t o ce r t a i n de l i ve r ab l e CERs . The I nd i an

compan i es have been hes i t a t i ng t o en t e r t he f o r war d mar ke t s i n

expec t a t i on o f appr ec i a t i on i n p r i ces o f ca r bon c r ed i t s . Bu t o f l a t e , t hey

have been ava i l i ng t he s e r v i ces o f t he r epu t ed cons u l t an t s i n t he f i e l d f o r

f o l l owi ng p r uden t s t r a t eg i es and a ba l anced por t f o l i o o f ca r bon c r ed i t s .

36

I nd i a s i gned a Kyo t o P r o t oco l i n 2002 r ega r d i ng ca r bon emi s s i on bu tt r ad i ng was commenced i n 2007 . Ther e i s huge s cope f o r I nd i a i n Car bon

Cr ed i t T r ad i ng ( CCT) a s i t i s one o f t he l ead i ng gene r a t i ons o f CER

t hr ough CDM . CCT i s t he pos t Kyo t o P r o t oco l i mp l emen t a t i on phas e . I t

b r i ngs a p l a t f o r m t ha t p r ov i des t r ans pa r ency and v i b r an t s i t ua t i on i n

emi s s i on mar ke t . I t he l ps t he buyer s and s e l l e r s o f ca r bon c r ed i t t o s e t t l e

a f a r e dea l i n t he commodi t i e s mar ke t .



I nd i a and Ch i na a r e l i ke l y t o emer ge a s t he b i gges t s e l l e r s and Eur ope i s

go i ng t o be t he b i gges t buyer o f ca r bon c r ed i t s .

The s ucces s o f CER depends upon t he f e t ch i ng o f economi ca l p r i ces f o r

t he i mpl emen t e r s o f CDM . Ef f ec t i ve con t r o l o f GHG par t i cu l a r l y ca r bon

i s a f unc t i on o f t r ans pa r en t and e f f ec t i ve p r i c i ng o f CER r ece i ved by

CDM . I n t he p r es en t s cena r i o , commodi t y exchanges appea r t o be a be t t e r

mode by whi ch g r ea t e r ex t en t o f gover nance o f t r ans pa r ency can be

ex t ended t o ca r bon mar ke t . M CX i s t he na t i ona l l eve l on l i ne commodi t y

exchange whi ch p r ov i des t he p l a t f o r m f o r t r ad i ng ca r bon c r ed i t on l i ne .

Car bon Cr ed i t Fu t u r es Con t r ac t ( CCFC) i s expec t ed t o cas h i n I nd i an

f i r ms by cu r b i ng ene r gy us age t h r ough c l ean t echno l og i es . M CX i s

expec t ed t o have a l eve l o f a r ound 130- 150 mi l l i on t ons o f ca r bon c r ed i t

gene r a t i on by t he I nd i an compan i es .

"Launch i ng o f ca r bon c r ed i t f u t u r es on t he I nd i an t r ad i ng p l a t f o r m wou l d

pr ov i de t r ans pa r ency t o mar ke t s and he l p p r oduce r s ea r n r emuner a t i ve

r e t u r ns ou t o f env i r onmen t a l l y c l ean p r o j ec t s " , s a i d J os eph M as s ey ,

Depu t y M anag i ng D i r ec t o r o f M CX.

Tr ad i ng i n new gener a t i on commodi t i e s l i ke ca r bon c r ed i t s has p l aced

M CX on t he g l oba l map o f i nnova t i ve exchange f o r p r ov i d i ng g l oba l

p r oduc t s t o t he I nd i an i ndus t r y . On J anuar y 21 , 2008 M CX l aunched

f u t u r es t r ad i ng i n ca r bon c r ed i t s . I t i s t he exchange wher e f u t u r es t r ad i ngi n ca r bon c r ed i t s can be done , mak i ng i t As i a ' s f i r s t eve r commodi t y

exchange , and among t he s e l ec t f ew i n l eague w i t h t he CCX and t he ECX.

M CX has en t e r ed i n t o a s t r a t eg i c a l l i ance w i t h CCX i n Sep t ember 2005 t o

i n i t i a t e ca r bon t r ad i ng i n I nd i a . As pe r t he l i cens i ng ag r eemen t w i t h CCX,

M CX can l i s t i t s m i n i ve r s i on o f ECX Car bon F i nanc i a l I n s t r umen t s ( CFI )

and Ch i cago C l i ma t e Fu t u r es Exchange ( CCFE) , Su l phur F i nanc i a l

I ns t r umen t ( SFI ) on t he M CX t r ad i ng p l a t f o r m. The I nd i an mar ke t i s a

po t en t i a l mar ke t f o r CCT and M CX i s go i ng t o make t h i s happen .

Nor mal l y , t he con t r ac t exp i r e s on a yea r l y bas i s i n t he mon t h o f December

and peop l e / t r ade r s wh i ch a r e i nvo l ved i n buy i ng and s e l l i ng can make

s e t t l emen t s . Thes e s e t t l emen t s may a l s o happen p r i o r t o December .

37

The t o t a l t r ad i ng vo l ume o f ca r bon c r ed i t s r eached 9 ,600 t ons ( 48 l o t s ) on

t he f i r s t day o f t r ad i ng on M CX.



Recen t l y , f i ve con t r ac t s o f ca r bon c r ed i t s a r e wor k i ng on M CX p l a t f o r m

wi t h exp i r y i n December 2008 , December 2009 , December 2010 ,

December 2011 and December 2012 . I nd i a , Ch i na , o t he r As i an and

Eur opean coun t r i e s a r e t he po t en t i a l mar ke t f o r ca r bon c r ed i t s .

I nd i a , t he wor l d ' s f ou r t h - l a r ges t emi t t e r o f ca r bon d i ox i de , f o r med e i gh t

commi s s i ons t o p r omot e s o l a r power , ene r gy e f f i c i ency and wa t e r

cons e r va t i on a s i t s eeks t o mi t i ga t e damage f r om t he chang i ng c l i ma t e .

They a r e :

• Na t i ona l So l a r M i s s i on

• Na t i ona l M i s s i on f o r Enhanced Ener gy Ef f i c i ency

• Na t i ona l M i s s i on f o r Sus t a i nab l e Hab i t a t

• Na t i ona l W at e r M i s s i on

• Na t i ona l M i s s i on f o r Sus t a i n i ng t he H i mal ayan Ecos ys t em

• Na t i ona l M i s s i on f o r a Gr een I nd i a

• Na t i ona l M i s s i on f o r Sus t a i nab l e Agr i cu l t u r e

• Na t i ona l M i s s i on on S t r a t eg i c Knowl edge f o r C l i ma t e Change .

Each o f t he e i gh t pane l s has an i n s t i t u t i ona l s t r uc t u r e cons i s t i ng o f

gover nmen t depa r t men t s , i ndus t r y expe r t s , academi cs and c i t i zen

r ep r es en t a t i ves . Each s o - ca l l ed mi s s i on w i l l dev i s e a s t a t e - f unded p l an

and have au t hor i t y t o ca r r y i t ou t . The mi s s i ons i nc l ude deve l op i ng

e f f i c i en t bu i l d i ng t echno l og i es and be t t e r manag i ng was t e , cons e r v i ng

wat e r , and s us t a i n i ng t he env i r onmen t o f t he H i mal ayas .

I nd i a ' s commi t men t t o ens u r e t ha t i t s pe r - cap i t a emi s s i ons o f g r een - hous e

gas es do no t exceed t hos e o f deve l oped na t i ons . Bu t t he new ac t i on p l an

makes no commi t men t t o cu t t i ng ove r a l l emi s s i ons . Des p i t e moun t i ng

i n t e r na t i ona l p r es s u r e , I nd i a has r e f us ed t o make any s pec i f i c

commi t men t s s o f a r on r educ i ng GHG emi s s i ons , po i n t i ng ou t t ha t i t s pe r -

cap i t a emi s s i ons a r e a f r ac t i on o f t hos e i n r i ch na t i ons .

38



CONCLUSION

The i n t e r na t i ona l ca r bon mar ke t i s a key deve l opmen t i n t he g l ob a l cap i t a l

mar ke t and i s t he wor l d ' s f a s t e s t g r owi ng mar ke t . Today , t he i mpor t ance

of t he i nnova t i ve ca r bon c r ed i t s a s a pa r t o f t he i n t e r na t i ona l emi s s i ont r ad i ng no r ms , t o r educe GHG emi s s i ons wh i ch po l l u t e t he a i r , canno t be

over emphas i zed . The ca r bon c r ed i t t r ad i ng has r ece i ved a t r emendous

i n t e r es t ac r os s t he g l obe and i s a g r ea t oppor t un i t y f o r t he I nd i an and

o t he r g l oba l compan i es .

However , a r ecen t v i ew o f s ome exper t s i s t ha t t he emi s s i ons cap w i l l

choke g l oba l g r owt h . Ra t he r a d i r ec t t ax can r educe ca r bon emi s s i ons

mor e e f f ec t i ve l y t han t he compl ex cap - and- t r ade s ys t em. I n s ome o f t he

As i an coun t r i e s , CDM i s ac t ua l l y con t r i bu t i ng t o s a l e s o f f ake c r ed i t s by

deve l op i ng new hydr oe l ec t r i c p r o j ec t s w i t h l i t t l e t o no env i r onmen t a l

bene f i t , wor s en i ng t he c l i ma t e c r i s i s . Though t he ou t l ook f o r t he

l andmar k t r ea t y , i . e . t he Kyo t o P r o t oco l , i s s omewha t b l eak t oday due t o

va r i ous f l aws and f r auds i n ca r bon t r ad i ng and i t s con t i nuance beyond

2012 i s be i ng deba t ed , s t i l l ca r bon t r ad i ng con t i nues t o be a g r ea t

oppor t un i t y f o r t he deve l op i ng a s we l l a s t he deve l oped coun t r i e s o f t he

wor l d .

I nd i a and Ch i na a r e l i ke l y t o emer ge a s t he b i gges t s e l l e r s and Eur ope i s

go i ng t o be t he b i gges t buyer o f ca r bon c r ed i t s . Ca r bon c r ed i t mar ke t i s al i qu i d mar ke t . Recen t l y , M ar t i n S t uch t ey , pa r t ne r w i t h M ck i ns ey

( Economi c T i mes da t ed M ar ch 19 , 2008) conduc t ed a s t udy i n wh i ch i t has

been f ound t ha t 60% of g l oba l execu t i ves r ega r d c l i ma t e change a s be i ng

s t r a t eg i ca l l y i mpor t an t . I t i s s u r p r i s i ng l y no t ed t ha t one - t h i r d o f t he

compan i es s e l dom cons i de r ed c l i ma t e change . Bu t now c l i ma t e change has

become t he co r por a t e s oc i a l r e s pons i b i l i t y and accor d i ng l y has a

d i mens i on o f CER whi ch l eads t o CCT. M ar t i n a l s o a r gued t ha t t he r e i s a

r equ i r emen t o f W or l d Car bon Bank a t t he g l oba l l eve l wh i ch makes

bus i nes s v i ab l e i n t he l ong- t e r m g i v i ng p r omi nence t o l ow ca r boneconomy. I nd i an compan i es a r e f i nd i ng ca r bon c r ed i t mar ke t a s an

oppor t un i t y t o become t he l ead i ng p r o t ec t i on i s t s o f env i r onmen t . They

t r ea t i t a s a w i n - wi n s i t ua t i on and i t i s hoped t ha t i n t he comi ng yea r ,

compan i es w i l l be ab l e t o conf r on t b i gge r changes i n CCT. .

39



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Carbon Credit by- Pankaj Bhutra