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We are in debt to Carbon Dioxide (CO2) and other green house gases for our
presence on earth. As they help in stabilizing temperatures to levels sustainable
for organic life – by what is known as green house effect. In modern times
burning of fossil fuels like coal, oil, and natural gas combined with fast
deforestation has led to unprecedented level of green house gas emission. Here
came in to existence the concept of Carbon Emission Trading developed during
the Kyoto Protocol in 1997. The Kyoto Protocol sets limits on total emissions by
world’s developed economies. The protocol allows countries that have emission
units to spare, to sell this excess capacity to countries that are over their targets.
This research paper discusses what is Carbon Credit, its requirement, and its
status in India and how India is gaining through Carbon Credit. Currently India
holds second position behind China in the global CDM market.
INTRODUCTION
Climate change and global warming is happening all around us. Soon it will start
to shape every aspect of our lives in ways that we might not comprehend: from
how we travel and what products we buy, to where we live and how we work.
Hence, there is a concern that the use of non-renewable fuels and other human
activities are increasing greenhouse gases in the atmosphere, contributing to
global warming. To avoid this a new currency is emerging in world markets.
Unlike the dollars, Euros and Yen that trade for tangible goods and human
services, this new money exchanges for pollution--particularly emissions of
carbon dioxide, which are caused by burning fossil fuels and are the leading
cause of global climate change. Carbon credits, as they are called, are poised to
transform the world energy system and thus the world economy.
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and planting carbon sinks are being funded by carbon credits. Companies and
individuals are becoming carbon neutral by reducing their emissions and
offsetting. Many types of activities can generate carbon offsets. Renewable
energy such as the wind farms, installations of solar panels, small hydro
turbines, geothermal energy, and biomass energy can all create carbon offsets by
displacing fossil fuels.
Developed countries have to spend nearly $300-500 for every ton reduction in
CO2, against $10-$25 by developing countries. India’s GHG emission is below
the target and so, it is entitled to sell surplus credits to developed countries. India
is considered to claim about 31% of the total world carbon trade, which can give
$25billion by 2010.This is what makes trading in carbon credits such a great
business opportunity.
India has emerged as the dark horse in this race as more than 200 Indian entities
have applied for registering their CDM Project for availing carbon credits.
Indian companies can have higher incomes more from carbon credits than their
core business. The carbon credit market $25 billion last year and is growing at
tremendous space, and there is a demand to reduce 1 billion ton of carbon
emissions in the world, so that threats like global warming could be dealt with.
Wal-Mart, Dell, GE are all going GREEN & reducing GHG & also purchasing
carbon credits. These companies are bolstering their brand name and consumer
confidence in their products.
“If these companies can see the benefits, you should be thinking going
GREEN as well”.
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STATEMENTOFPROBLEM
A study has been conducted in order to understand the concepts related to
Carbon Credit and also its status in India titled “ANALYSIS OF
CARBON CREDITS (SPECIAL REFERENCE TO INDIA)” .
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OBJECTIVES
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RESEARCHMETHODOLOGY
A. Type of Research:
Descriptive and Analytical
Secondary Data:
Internet.
Management Institute Reports.
Books.
Magazines.
C. Data Analysis:
Statistical models and Financial Management Capital Budgeting
Models (like Internal Rate of Return).
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LIMITATIONSOFTHESTUDY
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CONCEPT OF CARBON CREDITS
Carbon credits have emerged as an important instrument in the financial markets.
The primary goal is to reduce emission of green house gases. By permitting
allowances to be bought and sold, an operator can seek out the most cost-effective
way of reducing its emissions, either by investing in cleaner machinery and
practices or by purchasing emissions from another operator who already has excess
capacity.
Carbon credits are a key component of national and international emissions trading
schemes that have been implemented to mitigate global warming. They provide a
way to reduce greenhouse effect emissions on an industrial scale by capping total
annual emissions and letting the market assign a monetary value to any shortfall
through trading. Credits can be exchanged between businesses or bought and sold in
international markets at the prevailing market price. Credits can be used to finance
carbon reduction schemes between trading partners and around the world. There are
also many companies that sell carbon credits to commercial and individual
customers who are interested in lowering their carbon footprint on a voluntary basis.
These carbon offsetters purchase the credits from an investment fund or a carbon
development company that has aggregated the credits from individual projects. The
quality of the credits is based in part on the validation process and sophistication of
the fund or development company that acted as the sponsor to the carbon project.
This is reflected in their price; voluntary units typically have less value than the
units sold through the rigorously-validated Clean Development Mechanism.
Carbon credit as defined by Kyoto Protocol, is one metric ton of carbon emitted by
burning of fossil fuel. To bring the buyers and sellers of carbon trading on one
platform and to augment the process of carbon trading, carbon credits are traded at
CO2E exchange in Britain, CDM (Clean Development Mechanism) exchange in
Europe.
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So both the companies pollution account will be matched and the environment is
able to digest a certain scientifically fixed amount of pollutants. This transfer from
“A” to “B” will be for some monetary consideration and hence it is referred as
carbon trading.
RISINGSEALEVEL
(Sealevel willriseby45cmby
2009)
FIG 1 : Need for Carbon Credit
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while the second phase starts from 2008. The penalty for non-compliance in the first
phase is Euro 40 per ton of carbon dioxide (CO 2) equivalent. In the second phase,
Carbon credits are certificates issued to countries that reduce their emission of GHG
(greenhouse gases) which causes global warming. Carbon credits or Certified
Emissions Reductions (CER) are a "certificate" just like a stock. A CER is given by
the CDM Executive Board to projects in developing countries to certify they have
reduced green house gas emissions by one ton of carbon dioxide per year. For
example, if a project generates energy using wind power instead of burning coal, it
can save 50 tons of carbon dioxide per year. There it can claim 50 CERs (one CER
is equivalent to one ton of carbon dioxide reduced).
IMPLEMENTATION ROADMAP
In 1990, UNO (United Nations Organization) feeling an immediate need to decrease
the emission of greenhouse gases into the atmosphere released the Kyoto Protocol.
As a result under the UNFCC (United Nations Framework Convention on Climatic
Change) industrialized nations entered into a legally binding agreement to reduce
the collective emissions of greenhouse gases (GHG) by 5.2% compared to the 1990
level; calculated at an average over the five year period of 2008-12. Separate
national targets have been given to US (7%), European Union (8%), Japan (6%) and
Russia (0%). The reduction is to be done on six greenhouse gases – carbon dioxide,
methane, nitrous oxide, sulphur hexafluoride, HFCs and PFCs. Further the protocol
reaffirms the principle that industrialized countries have to pay and supply
technology to other countries for climate related studies and projects. The Protocol
came into force in February 2005 giving GHG emission limits for each developed
(Annex I) country included in the protocol. In order to facilitate reaching emission
limits, three additional mechanisms were agreed upon. These are :
1. JI (Joint Implementation)
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Emission Reductions). These CERs can be used to meet the emission targets. The
protocol stresses that such projects are to assist the developing countries host parties
in achieving sustainable development. Further the protocol refrains developed
countries from using CERs generated out of nuclear facilities to meet the targets .
3. Emissions Trading
The protocol provides that developed countries can acquire units from other
developing parties and use them towards meeting their emissions targets, but must
be prepared to transfer the units when they do not require them for compliance. This
enables developed countries to make use of low cost opportunities to reduce
emissions. Only some developed countries with emission limitation and reduction
commitments specified in the protocol can engage in such an activity.
Another important aspect of the CDM is that proposed CDM project activities must
demonstrate their contributions to environmental integrity and the host country's
sustainable development goals (UNFCCC 2001b, 20). Reducing GHG emissions
alone may not suffice to meet this requirement. Many host country governments
provide information on their prerequisites, often referred to as "sustainable
development criteria"
BASELINE CRITERIA
The project proposal must clearly and transparently describe methodology of determination of
baseline. It should confirm to following:
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• Role of externalities should be brought out (social, economic and environmental);
The project proponent could develop a new methodology for its project activity or
could use one of the approved methodologies by the CDM Executive Board. For
small scale CDM projects, the simplified procedures can be used by the project
proponent. The project proposal should indicate the formulae used for calculating
GHG offsets in the project and baseline scenario. Leakage, if any, within or outside
the project boundary, should be clearly described. Determination of alternative
project, which would have come up in absence of proposed CDM project activity
should also be described in the project proposal.
1. Social well being: The CDM project activity should lead to alleviation of poverty
by generating additional employment, removal of social disparities and
contribution to provision of basic amenities to people leading to improvement in
quality of life of people
2. Economic well being: The CDM project activity should bring in additional
investment consistent with the needs of the people
4. Technological well being: The CDM project activity should lead to transfer of
environmentally safe and sound technologies that are comparable to best
practices in order to assist in upgradation of the technological base. The transfer
of technology can be within the country as well from other developing countries
also .
INDUSTRIES ELIGIBLE
A Transaction in CER involves buying of GHG emissions credits by entities from
companies or governments involved in projects related to carbon emission reduction
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in developing countries. For example, a company in India can prove it has prevented
emission of x-tons of carbon and can sell this much amount of points or carbon
credits to a company in the Germany which has been emitting carbon. The
industries which qualify for CDM projects are as follows:
RENEWABLE ENERGY
Fuel switching from fossil fuel to green fuel like biomass, rice husk etc. Energy efficiency
measures related to
Boiler, Pumps, Turbines, Installation of various speed drives, Efficient cooling systems,
Back Pressure turbines
Waste Management
Transport
Fuel switch from gasoline and diesel to natural gas, odal shift from air to train,
M
road to train at macro level, Replacement of shipment of certain raw materials
through road to pipelines
CDM PROCESS
The CDM also allows an industrial actor in the non-Annex I country to reduce its
Green House Gas emissions and to sell the reduction units to a party in the Annex I
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countries. The GHG reductions and the way to reduce them have to be approved by
the CDM Board. The GHG reduction achieved through a CDM project is quantified
as a Certified Emission Reduction (CER), one CER corresponding to one tonne of
CO2 equivalent. A methodology is a description detailing the new way of operating
with the result of generating less GHG emissions than in a business-as-usual case.
The business-as-usual case is referred to as the baseline in the methodology
description.
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FIG 3 : CDM Process (Project Realisation and Execution Phase)
2
%
2
%
FIG 4 : Distribution Based on Project Status (180 Samples)
FIG 4 – INFERENCE : “Out of 180 projects, only 36 are registered and started
functioning. The large amount (out of 180) ,i.e., 124 is still under validation and has
3
%
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O
NR
A
IS
TE
L
to wait for more days to get it registered which will reduce the earnings that can be
made if the projects are approved for functioning earlier.”
India qualifies to be a host country for the CDM projects. The total CO2 reduction
potential through CDM projects in India is estimated to be around 300 million
tonnes. The largest potential is in the renewable energy sector with 90 million
tonnes CO2 equivalents. The total expected average annual CER’s from registered
projects by India are about 22 million ( 21,239,372 CERs) having a 15% world
share.
(Source : www.ficci.com/press/287/FICCI_CDM_Delegation_to_UK.doc)
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FIG 5 – INFERENCE : “Out of the total projects registered at UNFCCC, only China
is ahead of India in generating CERs and got the highest share of 43% followed by
India (15% ; 21,239,372 CERs).”
Out of the total 633 projects registered at the UNFCCC, 220 projects (34.76%) are
from India that are expected to generate an annual volume of 21,239,372 CERs.
Reg
FIG 6 : Registered Project Activities by Host Party
Republicof
(Source : www.ficci.com/press/287/FICCI_CDM_Delegation_to_UK.doc)
FIG 6 – INFERENCE : “India tops the chart in registering its Projects at the global
level. Out of 633 projects, India’s share include 221 projects followed by Brazil (94
Korea
projects) which is far behind India. The closest rival ,i.e., China has got only 70
projects registered.”
FIG 5 and 6 – INFERENCE : “From the above figures, we can say that China is able
to generate more of CERs ,i.e., 43% of the total with just 70 projects registered and
2%
India with highest registered projects numbering more than 220 is able to generate
only 15% of the total CERs ,i.e., 22 million as against of 58 million of China. If we
analyses it, we can say that India has registered thrice the projects as of China but
receiving less than one – third of CERs as compared to China.”
Malaysia
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2%
ESTIMATED CDM POTENTIAL IN INDIA
100
FIG 7 : Estimated Potential of CDM Projects of tCO2e per annum in
different sectors.
(Source : http://www.ficci-cdm.biz/potential.asp)
FIG 7 – INFERENCE : “In India, Renewable Energy sector has got the highest
potential of generating tonnes of carbon dioxide equivalent gases followed by Land
80
Use; Land Use Change; and Forestry.The lowest is amongst Municipal Solid
Waste.”
60
SECTOR – WISE BREAKUP OF PROJECTS
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Energy Efficiency 166 113377354
MSW 9 4155341
Forestry 3 960051
TABLE 2 – INFERENCE : “Out of the total 599 projects, Renewable (Biomass) has
got the highest preference. It is followed by Energy Efficiency and then Renewable
Energy (having the maximum potential of generating CERs).If the maximum
projects were in Renewable Energy, then India would have secured good credits and
earnings.”
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F
IG 8 : Sector Wise Breakup of Projects Approved by NCDMA
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S. No. State Wise No. of Projects
1 Andhra Pradesh 68
2 Assam 3
3 Bihar 1
4 Chhattisgarh 40
5 Delhi 3
6 Goa 2
7 Gujarat 43
8 Haryana 1
9 Himachal Pradesh 21
10 Jharkhand 8
11 Karnataka 67
12 Madhya Pradesh 16
13 Maharashtra 68
14 Meghalaya 1
15 Multi State 17
16 Orissa 13
17 Punjab 25
18 Rajasthan 46
19 Sikkim 1
20 Tamil Nadu 50
21 Uttaranchal 11
22 Uttar Pradesh 69
23 West Bengal 25
Total 599
TABLE 3 : State Wise CDM Projects
(Source : http://www.ficci.com/press/287/FICCI_CDM_Delegation_to_UK.doc)
0 – 10 8 33.33
10 – 20 4 16.67
20 – 30 3 12.5
30 – 40 1 0.04
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40 – 50 3 12.5
50 – above 4 16.67
FINANCING SOURCES
The financing patterns of CDM projects in India vary widely. Central and state
government financing institutions give financing support to CDM projects. So far
there have not been CDM projects totally financed by Indian banks, but they are
starting to show an interest. The State Bank of India, ICICI, IDBI and Yes bank are
to name a few. Banks do not act as outright CER buyers but have began to offer
specific financing for CDM projects. In return for a certain share of CERs, they
offer lower interest rates on the project financing. Future developments might
include loan schemes including carbon (future CER) collaterals. Financial
institutions such as IREDA, IDFC and PFC/REC have been active in renewable
energy financing and might become increasingly active in CDM project financing.
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CDM FINANCING INSTRUMENTS
CER PURCHASERS
CER purchasers can be divided into two groups: public and private CER
purchasers. The private CER purchasers can be further divided into traders and end-
users, while the public purchasers can be divided into governmental and
multinational organizations. The public CER purchasers are the various
governmental purchasing organizations, the most active ones being Japanese,
Canadian and German organizations. In the private sector, British broker companies
have been active, and they have organized tours with several potential purchasers
visiting different areas to find suitable projects.
ORGANISATION EXAMPLE
TYPE
Japan Carbon Fund, UK DEFRA’s CCPO, Italy,
Governmental Purchase Spain, Netherlands, Canada, Austria, Portugal,
Organisations Germany, France, Belgium, Sweden
World Bank
Multinational Organisations
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concerned more than half of the global total in tradable CERs, India’s dominance in
carbon trading under the CDM of the UN Convention on Climate Change (UNFCCC) is
beginning to influence business dynamics in the country.
(1) New project being set up to reduce GHG emissions also add to total output of
the firm, contributing to its turnover.
(3) Use of energy - efficient equipments reduces the total energy bill of the
companies, contributing directly to its bottom line.
(5) India may have to reduce its own GHG emissions sometimes in the future.
So, if the task is completed now, Indian companies will not have to spend any
money in the future to achieve the target.
(6) At last, sale of CERs through the Climate Exchanges help companies to earn
extra profits over and above they earn from their regular operations.
RESULT :
• India Inc pocketed Rs 1,500 crore last year just by selling carbon credits to
developed-country clients. This is a fraction of the Rs 18,000 crore experts
estimate will be India’s share in global carbon trading by 2012.
• In the pipeline are projects that would create upto 306 million tradable CERs.
Analysts claims if more companies absorb clean technologies, total CERs
with India could touch 500 million.
• The Indian CDM portfolio today boasts of 599 host country approved
projects, out of which the UNFCCC has registered 220 projects.
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• Over the next two months, about 37 Indian projects including a host
belonging to big corporates such as Reliance Industries, Birla Corporation,
Tata Sponge Iron, ACC, Gujarat Ambuja and JSW Steel are likely to be
registered at the United Nations as projects that can potentially trade Carbon
Credits.
• Gujarat Ambuja Cements Ltd, with its fly ash blend project at sic of its units,
earned between Rs 41.82 to 53.8 crore per year till 2007.
• ACC, through its blended cement projects at six units, could earn Rs 30.72 to
39.51 crore annually.
• Shree Cements could earn between Rs 8.11 to 10.43 crore by using biomass
as an alternative fuel at its Rajasthan unit.
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• Channel CDM fu nds to investment priorities – The CDM funds can be
channelized into building or improving projects, thus reinvesting it for higher
growth.
DISADVANTAGES
• Still the mechanism leads to developed countries emitting more GHG inspite
of their KYOTO caps. Historically they are the culprits for GHG emissions.
The developed countries purchase CERs rather than finding new ways of
reducing emissions by technological development.
• Pressure to accept technologies which have adverse local impacts - CDM may
attract unfavorable or unwanted technologies which adversely impact local
people. The technologies should allow for susta inable development in social
as well as economic and environmental terms.
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EXAMPLE OF A COMPANY: SRF LIMITED
It is an industrial group engaged in the manufacturing of industrial synthetics,
fluorochemicals, industrial fabrics, packaging films and pharma chemicals. It
operates a swing plant at Rajasthan, India since 1989 that produces HFC 22, CFC 11
and CFC 12 alternately on campaign basis. The main objective of the CDM project
was to reduce the GHG emission through destruction of HFC 23 gases, in a
proposed thermal oxidation system. The project cost was Rs. 13 crores and the
benefits are expected in next ten years. SRF has been releasing this gas into the
atmosphere before identification of this project as a CDM project under the Kyoto
Protocol. Since April 2004, SRF has been storing HFC 23 waste gas. Thus, with the
implementation and operation of the thermal oxidation system, the project will
reduce GHG emission (in CO2 equivalent terms) that otherwise would have
continued to occur in absence of the project. The annual sale is expected to be of
3.83 million CERs or 3.83 million tons of CO2 equivalent gases. The after tax cash
flows from the project are in table
FY06 59.362
FY07 59.362
FY08E 59.362
FY09E 59.362
FY10E 59.362
FY11E 59.362
FY12E 59.362
FY13E 59.362
FY14E 59.362
FY15E 59.362
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The CER rate is taken to be a 5 USD. The Re/USD rate has been taken as 41 and tax
rate @ 33%. The IRR in this case is calculated on the incremental expenditure
needed for meeting CDM requirements.
INTERPRETATION OF ANALYSIS
Carbon credits emanating from CDM projects can be considered as enhancers of
equity returns rather than as a reliable long term source of cash flows for projects.
The benchmark of SRF Limited is to get 15% IRR (Internal Rate of Return). Before
using CDM they were getting only 12%. But after using CDM the IRR has been
increased to 16% ,i.e., an increase of 4%. The additional return so obtained can be
used to finance the other projects or can be used to distribute as dividend to
shareholders. Both ways the company is gaining as retaining will lead to less raising
of funds from the market and distributing will help in retaining and attracting more
and more investors. Both ways money will come.
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FIG 10 : Impact of Using Carbon Credit on IRR
CONCLUSION :
The basic idea behind the carbon credit was to create a system in which companies
would be able to buy and sell pollution permits, giving them a financial incentive to
cut their carbon dioxide emissions. It is seen by many as the glue that will hold the
system together by reducing the greenhouse gas production while generating funds
to develop clean technology and help poor countries adapt to environmental changes
such as rising sea levels. Countries that agree to reduction targets are given permits
for an amount of allowable carbon dioxide emissions which are passed on to
businesses. Companies can chose to cut their emissions by retrofitting a factory and
selling their permits for a profit or continuing to pollute and buying additional units
of carbon dioxide in the open market.
A major attraction of the carbon markets is their ability to generate money to be put
toward cutting emissions and helping countries adapt to the effects of climate
change. But carbon credits has plenty of critics, many of whom argue that it does
little or nothing to cut greenhouse gases. It is also opposed over concerns that it
would allow companies to keep polluting. The system has also been criticized for
leaving out sectors like transport and focusing on less profitable companies like
cement or make major investments to reduce emissions.
Carbon Credits has provided a new avenue for investors to earn and yet save the
environment. It’s an upcoming trade and has a huge potential for growth. A new
industry has been created with very few players. So companies willing to invest will
get a first mover advantage. Due to growing concerns across the globe and
governments omitting to make a change, the industry has a very good potential.
More and more companies are coming to India only for this trade and industry. This
upcoming industry gives a good career option and is going to be huge employment
generator in the near future. Though it has both positive and negative influences
how people take the positive aspects in principle and follow them so as to be able to
reduce the effect of global warming on our precious planet.
RECOMMENDATIONS :
• The process is very lengthy. It should be reviewed again to make it shorter so
that more and more companies will be interested in CDM Projects.
• More and more financers should join the market as 2 or 3 are not sufficient.
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• Proper education, to all the companies indulged in manufacturing and
emitting carbon dioxide, should be given.
• Proper market (like BSE) should be regulated in India for trading of carbon
credits.
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BIBLIOGRAPHY
ARTICLES / MAGAZINES
• Weyant, John P., 1993, “Costs of Reducing Global Carbon Emissions”, The
Journal of Economic Perspectives , Vol. 7, No. 4, pp 27-46.
• Sharma, Manoj; Vijay, T.Sai and Sharma, Sheetal, 2008, “Carbon Trading :
Opportunity for Indian Companies”, GNA-IMT , Vol. 3, No. 1, pp. 108-115.
• Capoor ,Karan and Ambrosi, Philippe, 2007, “State and Trends of the Carbon
Market 2007”, World Bank Carbon Finance Business’s , pp12-48.
WEBSITES
1. www.ieta.org
2. http://economictimes.indiatimes.com/articleshow/1212812.
3. http://unfccc.int/
4. http://www.cdmwatch.org
5. http://cdm.unfccc.int/
6. http://www.cliffordchance.com
7. http://www.srf-limited.com/
8. http://economictimes.indiatimes.com/articleshow/1937685.cms
9. http://www.icai.org/resource_file/102641496-1500.pdf
10. http://www.ficci-cdm.biz/potential.asp
11. http://www.indiainfoline.com
12. http://www.wikipedia.org /wiki/clean_development_mechanism
13. http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:21319781
~pagePK64257043~piPK:437376~theSitePK:4607,00.html
14. http://www.scribd.com/doc/8746421/Carbon-Credits-Implications-in-India-as-
Financing-Instrument-Kalyan-Teja
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