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Such policies could include economic nstruments, government funding and regulation, while noting that a tradable permit system is one of the policy instruments that has been shown to be environmentally effective In the industrial sector, as long as there are reasonable levels of predictability over the initial allocation mechanism and price. UNFCCC had formed a protocol called Kyoto protocol under which, the Clean Development Mechanism (CDM) has been formed. The CDM alms to control the Green House Gas Emissions (GHG) which pollutes environment.
The mechanism was formalized in the Kyoto Protocol, an international agreement between more than 170 countries, and the arket mechanisms were agreed through the subsequent Accords. Carbon credits is a mechanism adopted by national and international governments to mitigate the effects of Green House Gases(GHGs). One Carbon Credit Is equal to one ton of Carbon. Greenhouse Gases are capped and markets are used to regulate the emissions from the sources. The idea is to allow market mechanisms to drive Industrial and commercial processes In the direction of low Greenhouse Gases(GHGs).
These mitigation projects generate credits, which can be traded in the international markets for monetary benefits. nder Kyoto Protocol, companies can earn Carbon Reduction Certificates [CERI through reduction in their Green House Gas Emissions by shifting to environment friendly technologies. The CDM executive board of the UN awards one CER certificate for each tonne of Carbon Dioxide (C02) avoided or reduced. These Carbon Reduction Certificate [CER] are the Carbon Credits which can be traded like any other commodities.
The UN-Kyoto Protocol prescribes targets on Green House Gas emission level for the companies mostly in developed countries. There is a tremendous pressure on companies to reduce their emission level below this target. Those companies who cannot reduce the emission level are compelled to purchase the Carbon Credits or Carbon Reduction Certificate that are available in the market. These Carbon Credits are used to offset the excess level in targets fixed for emission. oys A credit can be an emissions allowance which was originally allocated or auctioned by the national administrators of a cap-and-trade program, or it can be an offset of emissions. Such offsetting and mitigating activities can occur in any developing country which has ratified the Kyoto Protocol, and has a national agreement in place o validate its carbon project through one of the UNFCCC’s approved mechanisms. Once approved, these units are termed Certified Emission Reductions, or CERs. The Protocol allows these projects to be constructed and credited in advance of the Kyoto trading period.
The Kyoto Protocol provides for three mechanisms that enable countries or operators in developed countries to acquire greenhouse gas reduction credit. Under Joint Implementation 01) a developed country with relatively high costs of domestic greenhouse reduction would set up a project in another developed country. Under the Clean Development Mechanism (CDM) a developed country can sponsor’ a greenhouse gas reduction project in a developing country where the cost of greenhouse gas reduction project activities is usually much lower, but the atmospheric effect is globally equivalent.
The developed country would be given credits for meeting its emission reduction targets, while the developing country Nould receive the capital investment and clean technology or beneficial change in land use. Under International Emissions Trading (IET) countries can trade in the international carbon credit market to cover their shortfall in allowances. Countries Nith surplus credits can sell them to countries with capped emission commitments under the Kyoto Protocol. These carbon projects can be created by a national government or by an operator within the country.
Need for Carbon Trading and Clean Development Mechanism: The need for carbon trading was felt when it was realized that the industries have been the biggest polluter of greenhouse gases that has resulted in global warming. A lot of effort has been put in by NGOs and other institutions to bring the attention of the world towards the problem of global warming. But this issue is not taken very seriously and as a result of which nothing much was done in this regard. Thus it was realized that the only way to get the attention of the world towards these problems Nas by attaching some financial incentive to it.
As a result the concept of Carbon trading was introduced. Clean Development Mechanism: The Clean Development Mechanism (CDM), defined in Article 12 of the Protocol, allows a country with an emission-reduction or emission-limitation commitment under the Kyoto Protocol (Annex B Party) to implement an emission-reduction project in developing countries. Carbon Trading in India: Companies in developing countries like India generate Carbon Credits by implementing environmental friendly clean technologies.
These Carbon Credits are saleable either as an over the counter (OTC) product or as a future contract like any As outlined earlier, these credits are bought by companies in developed countries Nhich exceed their permissible emission levels. The trade is part of the Kyoto protocol which allows companies in industrialized nations (mostly in Europe and lapan) to offset the Green House Gas Emission limits by the purchase of the Carbon Credits. India is predominantly a CER sellers’ market.
In India, the National Clean lopment Mechanism has been set up under the ministry of Environment and Forests to audit and approve projects that plan to cut emissions. Companies in Europe are currently the largest buyers of credits generated from these projects. According to World Bank, India is expected to earn atleast $100 millions annually by trading in Carbon Credits. In recent times Carbon Credit Prices have hit an all time high. This is because, European Power Plants are diverting to the purchase of coal Instead of expensive Natural Gas for power production. Consumption of Coal enhances the demand for pollution offsets by Carbon Credits.
For an Indian company one lakh Carbon Credits (CER) are today worth a cool Rs. 1 1. 50 Crore in the International market and they would continue to gain value as long as the price of Natural Gas moves up. A growing number of Indian Firms, irrespective of their size and nature of industries, are now reaping this New Monetary Harvest by carbon trading realizing the importance of this trade. India’s largest conglomerate, the TATA Group, has formed a 10 member committee comprising top executives from various TATA Group ompanies headed by Mr. J. J. lrani Director, to examine and monitor how much can the Group possibly earn from Carbon Credits.
Chennai’s Olympia Technology Park is one of the first commercial Buildings in India to go in for carbon trading. Expected annual earning in Olympia through carbon credit is a whooping six million dollars, by adopting clean energy efficient systems. Consultancy firms also assist companies in the carbon business. For example Mitcon Consultancy Services Ltd helped a construction company from Pune to become the first Indian company to receive money for carbon credit in 2006. Last [ear ICICI bank signed an MOU with Mitcon to Jointly provide One-Top solutions to industries for CDM Projects and emissions trade including Carbon Credit Business.
Recently Multi Commodity Exchange (MCX) also launched trading on Carbon Credit futures. Indian industries were able to cash in on the sudden boom in the carbon market making it a preferred location for carbon credit buyers. It is expected that India will gain at least $5 billion to $10 billion from carbon trading (Rs 22,500 to Rs 45,000 crore) over a period of time. Also India is one of the largest beneficiaries of the otal world carbon trade through the Clean Development Mechanism claiming about 31 per cent (CDM). India’s carbon market is one of the fastest growing markets in the world and has transacted volume in the world.
The carbon trading market in India is growing even faster than information technology, bio technology, and BPO sectors. Nearly 850 projects with an investment of Rs 650,000 million are in the pipeline. Carbon is also now being traded on India’s Multi Commodity Exchange. It is the first exchange in Asia to trade carbon credits. Examples of Carbon trading in India: Jindal VIJaynagar Steel The Jindal Vijaynagar Steel has recently declared that by the next ten years it will be ready to sell $225 million worth of saved carbon.
This was made possible since their steel plant uses the Corex furnace technology which prevents 15 million tonnes of carbon from being discharged into the atmosphere. erguda in Andhra Pradesh The village in Andhra Pradesh was selling 147 tonnes equivalent to saved carbon dioxide credits. The company has made a claim of having saved 147 MT of C02. This was done by extracting bio-diesel from 4500 Pongamia trees in their village. Legal aspect of Carbon Trading in India The Multi Commodity exchange started future trading on January 2008 after the Government of India recognized carbon credit as commodities on 4th January.
The National Commodity and Derivative Exchange by a notification and with due approval from Forward Market Commision (FMC) launched Carbon Credit future contact, whose aim was to provide transparency to markets and help the producers to earn remuneration out of the environment projects. Carbon credit in India is traded on NCDEX only as a future contract. Futures contract is a standardized contract between two parties to buy or sell a specified asset of tandardized quantity and quality at a specified future date at a price agreed today (the futures price). The contracts are traded on a future exchange.
These types of contracts are only applicable to goods that are in the form of movable property other than actionable claims, money and securities.. Forward contracts in India are governed by the Indian Contract Act, 1872. Under the present provision of the Forward Contracts Regulation Act, the trading of forward contracts will be considered as void as no physical delivery is issued against these contracts. To rectify this The Forward Contracts (Regulation) Amendment Bill 006 was introduced in the Indian Parliament. The Union Cabinet on January 25, 2008 approved the ordinance for amending the Forward Contracts (Regulation) Act, 1952.
This ordinance has to be passed by the Parliament and is expected to come up for consideration this year. This Bill also amends the definition of forward contract’ to include ‘commodity derivatives’. Currently the definition only covers ‘goods’ that are physically deliverable. However a government notification on January 4th paved the commodities. lalue Added Tax: The government of Delhi in a recent notification has declared that the Certified Emission Reductions (or ‘Carbon Credits’ as we know) are to be considered as goods and thus their sale is liable to value added tax in the State.
The Commissioner of Trade and Taxes has declared that the nature and aspects of Carbon credits have to be examined and tested against the definition of goods to arrive at the conclusion that carbon credit are no different from ordinary commodities bought and sold in the market and thus a sale transaction of carbon credit would attract value added tax on Epilogue: Even though India is the largest beneficiary of carbon trading and carbon credits are raded on the MCX, it still does not have a proper policy for trading of carbons in the market.