CARBON TRADING: A PERCEPTUAL STUDY

1. INTRODUCTION Global warming has spawned a new form of commerce: the carbon trade. This new economic activity involves the buying and selling of environmental services, including the removal of greenhouse gases from the atmosphere, which are identified and purchased by eco-consulting firms and then sold to individual or corporate clients to offset their polluting emissions. While some NGOs and green businesses favor the carbon trade and view it as a win-win solution that reconciles environmental protection with economic prosperity, other environmentalists and grassroots organizations claim that it is no solution to environmental problems such as global warming. Carbon Trading is a market based mechanism for helping mitigate the increase of CO2 in the atmosphere. Carbon trading markets are developing that bring buyers and sellers of carbon credits together with standardized rules of trade. Carbon trading is a practice which is designed to reduce overall emissions of carbon dioxide, along with other greenhouse gases, by providing a regulatory and economic incentive. In fact, the term carbon trading is a bit misleading, as a number of greenhouse emissions can be regulated under what are known as cap and trade systems. This practice is part of a system which is colloquially referred to as a cap and trade. Under a cap and trade system, a government sets a national goal for total greenhouse gas emissions over a set period of time, such as a quarter or a year, and then allocates credits to companies which allow them to emit a certain amount of greenhouse gases. If a company is unable to use all of its credits, it can sell or trade those credits with a company which is afraid of exceeding its allowance. Carbon trading provides a very obvious incentive for companies to improve their efficiency and reduce their greenhouse gas emissions, by turning such reductions into a physical cash benefit. In addition, it is a disincentive for being inefficient, as companies are effectively penalized for failing to meet emissions goals. In this way, regulation is

accomplished largely through economic means, rather than through draconian government measures, encouraging people to engage in carbon trading because it's potentially profitable. As a general rule, carbon trading is paired with an overall attempt to reduce carbon emissions in a country over an extended period of time, which means that each year, the number of available credits will be reduced. By encouraging companies to become more efficient ahead of time, a government can often more easily meet emissions reduction goals, as companies will not be expected to change practices overnight, and the carbon trading system creates far more flexibility than setting blanket baseline levels. In some countries, carbon exchanges have opened up, operating much like stock exchanges. These organizations facilitate the exchange of carbon credits, ensuring that they flow smoothly through the market, and they provide standard set prices for credits, based on market demand and general economic health. In some cases, individual citizens can also participate in carbon trading, purchasing credits to offset their own greenhouse gas emissions, and some advocates have suggested that carbon trading should be formally expanded to all citizens, encouraging global and individual involvement in reduction of greenhouse gas emissions. 1.2 OVERVIEW OF CARBON TRADING Carbon trading lies at the centre of global climate policy and is projected to become one of the worlds largest commodities markets, yet it has a disastrous track record since its adoption as part of the Kyoto Protocol. The overall goal of an emissions trading plan is to minimize the cost of meeting a set emissions target. The cap is an enforceable limit on emissions that is usually lowered over time aiming towards a national emissions reduction target. In other systems a portion of all traded credits must be retired, causing a net reduction in emissions each time a trade occurs. In many cap-and-trade systems, organizations which do not pollute may also participate, thus environmental groups can purchase and retire allowances or credits and hence drive up the price of the remainder

according to the law of demand. Corporations can also prematurely retire allowances by donating them to a nonprofit entity and then be eligible for a tax deduction. Because an emission trading uses markets to address pollution, it is often touted as an example of free market environmentalism. However, emissions trading require a cap to effectively reduce emissions, and the cap is a government regulatory mechanism. After a cap has been set by a government political process, individual companies are free to choose how or if they will reduce their emissions. Failure to reduce emissions is often punishable by a further government regulatory mechanism, a fine that increases costs of production. Firms will choose the least-costly way to comply with the pollution regulation, which will lead to reductions where the least expensive solutions exist, while allowing emissions that are more expensive to reduce. 1.3 HISTORY OF CARBON TRADING The efficiency of what later was to be called the cap-and-trade approach to air pollution abatement was first demonstrated in a series of micro-economic computer simulation studies between 1967 and 1970 for the National Air Pollution Control Administration (predecessor to the United States Environmental Protection Agency's Office of Air and Radiation) by Ellison Burton and William Sanjour. These studies used mathematical models of several cities and their emission sources in order to compare the cost and effectiveness of various control strategies. Each abatement strategy was compared with the least cost solution produced by a computer optimization program to identify the least costly combination of source reductions in order to achieve a given abatement goal. In each case it was found that the least cost solution was dramatically less costly than the same amount of pollution reduction produced by any conventional abatement strategy. This led to the concept of cap and trade as a means of achieving the least cost solution for a given level of abatement. The development of emissions trading over the course of its history can be divided into four phases:

1. Gestation: Theoretical articulation of the instrument (by Coase, Crocker, Dales, Montgomery etc.) and, independent of the former, tinkering with flexible regulation at the US Environmental Protection Agency. 2. Proof of Principle: First developments towards trading of emission certificates based on the offset-mechanism taken up in Clean Air Act in 1977. 3. Prototype: Launching of a first cap-and-trade system as part of the US Acid Rain Program, officially announced as a paradigm shift in environmental policy, as prepared by Project 88, a network-building effort to bring together environmental and industrial interests in the US. 4. Regime Formation: Branching out from the US clean air policy to global climate policy and from there to the European Union, along with the expectation of an emerging global carbon market and the formation of the carbon industry. 1.4 KEY FEATURES OF CARBON TRADING

A long-term carbon budget is established at the national level to reduce emissions whereby there is a maximum quantity of carbon emissions. Each individual is given a free and equal allowance (quota) of carbon units. This allowance is adjusted over time as the carbon budget reduces. Individuals will need to surrender carbon units when purchasing fossil-fuel based energy for home energy use and personal transport. All participants in the scheme have the ability to save, buy and sell carbon units. The scheme is mandatory and administer electronically. Companies purchase carbon credits that are bought and sold in the market in the carbon trading model. Carbon trading motivates companies to check their emission levels by giving economic rewards for doing so. One more benefit of the carbon trading method is its free market model that allows any organization to buy carbon credits or offer them for sale.

1.1.1 Carbon credit A carbon credit is a generic term for any tradable certificate or permit representing the right to emit one tones of carbon or carbon dioxide equivalent (CO2-e). Carbon credits and carbon markets are a component of national and international attempts to mitigate the growth in concentrations of greenhouse gases (GHGs). One carbon credit is equal to one ton of carbon dioxide, or in some markets, carbon dioxide equivalent gases. Carbon trading is an application of an emissions trading approach. Greenhouse gas emissions are capped and then markets are used to allocate the emissions among the group of regulated sources. The goal is to allow market mechanisms to drive industrial and commercial processes in the direction of low emissions or less carbon intensive approaches than those used when there is no cost to emitting carbon dioxide and other GHGs into the atmosphere. Since GHG mitigation projects generate credits, this approach 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. 1.1.2 Background Burning of fossil fuels is a major source of industrial greenhouse gas emissions, especially for power, cement, steel, textile, fertilizer and many other industries which rely on fossil fuels (coal, electricity derived from coal, natural gas and oil). The major

greenhouse gases emitted by these industries are carbon dioxide, methane, nitrous oxide, hydro fluorocarbons (HFCs), etc., all of which increase the atmosphere's ability to trap infrared energy and thus affect the climate. The concept of carbon credits came into existence as a result of increasing awareness of the need for controlling emissions. The IPCC (Intergovernmental Panel on Climate Change) has observed that: Policies that provide a real or implicit price of carbon could create incentives for producers and consumers to significantly invest in low-GHG products, technologies and processes. Such policies could include economic instruments, 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 long-term price. The mechanism was formalized in the Kyoto Protocol, an international agreement between more than 170 countries, and the market mechanisms were agreed through the subsequent Marrakesh Accords. The mechanism adopted was similar to the successful US Acid Rain Program to reduce some industrial pollutants. Under the Kyoto Protocol, the 'caps' or quotas for Greenhouse gases for the developed Annex 1 countries are known as Assigned Amounts .The quantity of the initial assigned amount is denominated in individual units, called Assigned amount units (AAUs), each of which represents an allowance to emit one metric tones of carbon dioxide equivalent, and these are entered into the country's national registry. By permitting allowances to be bought and sold, an operator can seek out the most costeffective 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 trading takes two main forms:

Cap and Trade Carbon off setting

CAP & TRADE (EMISSIONS TRADING) A cap and trade system is a method for managing pollution, with the end goal of reducing the overall pollution in a nation, region, or industry. Many proponents of pollution control support the concept of cap and trade systems, arguing that they are extremely effective, and that they make sense economically as well. Such a system is only one option among many for reducing the emission of pollutants, most notably carbon dioxide, a greenhouse gas which has attracted a great deal of attention due to its environmental impacts. Under a cap and trade system, a government authority first sets a cap, deciding how much pollution in total will be allowed. Next, companies are issued credits, essentially licenses to pollute, based on how large they are, what industries they work in, and so forth. If a company comes in below its cap, it has extra credits which it may trade with other companies. For companies which come in below their caps, a cap and trade system is great, because they can sell their extra credits, profiting while reducing their pollution. For companies which cannot get their pollution under control, a cap and trade system penalizes them for their excess pollution while still bringing overall pollution rates down. In a sense, the need to purchase credits acts as a fine, encouraging companies to reduce their emissions. Cap and trade has largely been successful in reducing the emissions of pollutants. Its enactment came to place after growing concern over global warming and its irreversible

damage to the environment. Ever since the government intervened by introducing the cap, global warming and the cap and trade program are still hotly debated among scientists, politicians and those in the energy industry. Consensus shows global warming is real, but the seriousness of the issue and whether or not humans are the cause of global warming are still debatable. Even among scientists, there is disagreement. Climatologists are unanimous in their belief that humans are the primary cause for global warming, but petroleum geologists and meteorologists are not as certain. This leads to the question whether or not our preventative actions are enough to reduce the effects of global warming. Are we concerned enough as we should be? The cap and trade program is a step in the right direction towards building environmentally-conscious fuel industries. But can the cap and trade program meet its ambitious goal to reduce emissions by 80% in 2050? This site will have detailed information on cap and trade, the different programs that exist today in the U.S. and in the world and future programs that are being planned. The site is intended to give an objective view of the impact of carbon trading from an environmental and business stand point. The science behind carbon emissions will also be explained. Also a discussion about how emissions are measured and regulated today will be here. Some of the concerns over existing carbon trading programs are also discussed such as the distribution of credits and offsets and whether or not cap and trade is promoting cleaner fuel technologies. In short, cap and trade is a market-based policy tool for protecting human health and the environment by controlling large amounts of emissions from a group of sources. The government initiates a cap and trade program by having Congress set a cap, or maximum limit, on all global warming emissions. The cap is intended to be lowered within a set time frame to achieve the eventual goal of lowering emissions. Sources such as electric utilities and oil refineries then receive authorizations to emit in the form of emissions allowances, with the total amount of allowances limited by the cap. These allowances are attained by initial auction or by trading from other sources in the form of carbon credits. A carbon credit is equivalent to a ton of carbon dioxide emissions or equivalent

greenhouse gas. There are two distinct types of Carbon Credits: Carbon Offset Credits (COCs) and Carbon Reduction Credits (CRCs). Carbon Offset Credits consist of clean forms of energy production, wind, solar, hydro and biofuels. Carbon Reduction Credits consists of the collection and storage of Carbon from our atmosphere through biosequestration (reforestation, forestation), ocean and soil collection and storage efforts. This market scheme encourages carbon-emitting industries to find cost effective ways to run their facilities. They will invest in low-carbon technologies, purchase allowances, and install pollution controls, etc. Each emission source must surrender allowances equal to its actual emissions in order to comply. Sources must also completely and accurately measure and report all emissions in a timely manner to guarantee that the overall cap is achieved. CARBON OFFSETTING The second type of carbon trading is off setting. Instead of cutting emissions at source, companies, and sometimes international financial institutions, governments and individuals, finance emissions-saving projects outside the capped area. The UNadministered Clean Development Mechanism (CDM) is the largest such scheme, with almost 1,800 registered projects as of September 2009, and over 2,600 further projects awaiting approval. Based on current prices, the credits produced by approved schemes could generate over US$ 55 billion by 2012. Although off sets are often presented as emissions reductions, they do not reduce emissions. Pollution continues at one location on the assumption that an equivalent emissions saving will happen elsewhere. The projects that count as emissions savings range from building hydro-electric dams to capturing methane from industrial livestock facilities. The carbon savings are calculated according to how much less greenhouse gas is presumed to be entering the atmosphere than would have been the case in the absence of the project. But even the World Bank officials, accounting firms, financial analysts,

brokers and carbon consultants involved in devising these projects often admit privately that no ways exist to demonstrate that it is carbon finance that makes the project possible. Researcher Dan Welch sums up the difficulty: Off sets are an imaginary commodity created by deducting what you hope happens from what you guess would have happened. Since carbon off sets replace a requirement to verify emissions reductions in one location with a set of stories about what would have happened in an imagined future elsewhere, the net result tends to be an increase in greenhouse gas emissions. A carbon offset is a financial instrument aimed at a reduction in greenhouse gas emissions. Carbon offsets are measured in metric tons of carbon dioxide-equivalent (CO2e) and may represent six primary categories of greenhouse gases. One carbon offset represents the reduction of one metric ton of carbon dioxide or its equivalent in other greenhouse gases. Offsets are typically achieved through financial support of projects that reduce the emission of greenhouse gases in the short- or long-term. The most common project type is renewable energy, such as wind farms, biomass energy, or hydroelectric dams. Others include energy efficiency projects, the destruction of industrial pollutants or agricultural byproducts, destruction of landfill methane, and forestry projects. Some of the most popular carbon offset projects from a corporate perspective are energy efficiency and wind turbine projects. Features of carbon offsets Carbon offsets have several common features:

Vintage: The vintage is the year in which the carbon reduction takes place. Source: The source refers to the project or technology used in offsetting the carbon emissions. Projects can include land-use, methane, biomass, renewable energy and industrial energy efficiency. Projects may also have secondary benefits (co-benefits). For example, projects that reduce agricultural greenhouse gas emissions may improve water quality by reducing fertilizer usage.

Certification regime: The certification regime describes the systems and procedures that are used to certify and register carbon offsets. Different methodologies are used for measuring and verifying emissions reductions, depending on project type, size and location. For example, the Chicago Climate Exchange uses one set of protocols, while the CDM uses another. In the voluntary market, a variety of industry standards exist. These include the Voluntary Carbon Standard and the CDM Gold Standard that are implemented to provide third-party verification of carbon offset projects.

1.1.3 SOURCES OF CARBON OFFSETS The CDM identifies over 200 types of projects suitable for generating carbon offsets, which are grouped into broad categories. These project types include renewable energy, methane abatement, energy efficiency, reforestation and fuel switching.[9]

Renewable energy

Renewable energy offsets commonly include wind power, solar power, hydroelectric power and biofuel. Some of these offsets are used to reduce the cost differential between renewable and conventional energy production, increasing the commercial viability of a choice to use renewable energy sources. Renewable Energy Credits (RECs) are also sometimes treated as carbon offsets, although the concepts are distinct. Whereas a carbon offset represents a reduction in greenhouse gas emissions, a REC represents a quantity of energy produced from renewable sources. To convert RECs into offsets, the clean energy must be translated into carbon reductions, typically by assuming that the clean energy is displacing an equivalent amount of conventionally produced electricity from the local grid. This is known as an indirect offset (because the reduction doesn't take place at the project site itself, but rather at an external site), and some controversy surrounds the question of whether they truly lead to

"additional" emission reductions and who should get credit for any reductions that may occur.

Methane collection and combustion

Some offset projects consist of the combustion or containment of methane generated by farm animals (by use of an anaerobic digester),[29] landfills[30] or other industrial waste. Methane has a global warming potential (GWP) 23 times that of CO2; when combusted, each molecule of methane is converted to one molecule of CO2, thus reducing the global warming effect by 96%.

Energy efficiency

While carbon offsets which fund renewable energy projects help lower the carbon intensity of energy supply, energy conservation projects seek to reduce the overall demand for energy. Carbon offsets in this category fund projects of several types: 1. Cogeneration plants generate both electricity and heat from the same power source, thus improving upon the energy efficiency of most power plants which waste the energy generated as heat. 2. Fuel efficiency projects replace a combustion device with one which uses less fuel per unit of energy provided. Assuming energy demand does not change, this reduces the carbon dioxide emitted. 3. Energy-efficient buildings reduce the amount of energy wasted in buildings through efficient heating, cooling or lighting systems. In particular, the replacement of incandescent light bulbs with compact fluorescent lamps can have a drastic effect on energy consumption. New buildings can also be constructed using less carbon-intensive input materials.

Destruction of industrial pollutants

Industrial pollutants such as hydro fluorocarbons (HFCs) and per fluorocarbons (PFCs) have a GWP many thousands of times greater than carbon dioxide by volume. Because

these pollutants are easily captured and destroyed at their source, they present a large and low-cost source of carbon offsets. As a category, HFCs, PFCs, and N2O reductions represent 71% of offsets issued under the CDM.

Land use, land-use change and forestry

Land use, land-use change and forestry (LULUCF) projects focus on natural carbon sinks such as forests and soil. Deforestation, particularly in Brazil, Indonesia and parts of Africa, account for about 20% of greenhouse gas emissions. Deforestation can be avoided either by paying directly for forest preservation, or by using offset funds to provide substitutes for forest-based products. There is a class of mechanisms referred to as REDD schemes (Reducing emissions from deforestation and forest degradation), which may be included in a post-Kyoto agreement. REDD credits provide carbon offsets for the protection of forests, and provide a possible mechanism to allow funding from developed nations to assist in the protection of native forests in developing nations. Purchase of carbon allowances from emissions trading schemes

Voluntary purchasers can offset their carbon emissions by purchasing carbon allowances from legally mandated cap-and-trade programs such as the Regional Greenhouse Gas Initiative or the European Emissions Trading Scheme. By purchasing the allowances that power plants, oil refineries, and industrial facilities need to hold to comply with a cap, voluntary purchases tighten the cap and force additional emissions reductions. Voluntary purchases can also be made through small-scale and sometimes uncertified schemes such as those offered at South African based Promoting Access to Carbon Equity Centre (PACE). Links with emission trading schemes

Once it has been accredited by the UNFCCC a carbon offset project can be used as carbon credit and linked with official emission trading schemes, such as the European Union Emission Trading Scheme or Kyoto Protocol, as Certified Emission Reductions.

European emission allowances for the 2008-2012 second phase were selling for between 21 and 24 Euros per metric ton of CO2 as of July 2007. By creating a cap, nations make it clear that they want to reduce overall emissions, rather than just fining companies for excessive emissions or trying to force all companies to reduce their emissions by a set percentage. Cap and trade systems allow for flexibility, which usually benefits the market. Some people view the cap and trade concept as preferable to taxation or fining system, because it is easier to administer and it results in a pollution reduction. These systems are most commonly used for carbon emissions, leading people to refer to it as carbon trading, and there is a potential for a global carbon trading market, in which more efficient nations could trade credits with other countries. 1.1.4 GREEN HOUSE EFFECT The greenhouse effect is a process by which thermal radiation from a planetary surface is absorbed by atmospheric greenhouse gases, and is re-radiated in all directions. Since part of this re-radiation is back towards the surface, energy is transferred to the surface and the lower atmosphere. As a result, the temperature there is higher than it would be if direct heating by solar radiation were the only warming mechanism. This mechanism is fundamentally different from that of an actual greenhouse, which works by isolating warm air inside the structure so that heat is not lost by convection. The greenhouse effect is a process by which thermal radiation from a planetary surface is absorbed by atmospheric greenhouse gases, and is re-radiated in all directions. Since part of this re-radiation is back towards the surface, energy is transferred to the surface and the lower atmosphere. As a result, the temperature there is higher than it would be if direct heating by solar radiation were the only warming mechanism. A greenhouse gas (sometimes abbreviated GHG) is a gas in an atmosphere that absorbs and emits radiation within the thermal infrared range. This process is the fundamental cause of the greenhouse effect. The primary greenhouse gases in the Earth's atmosphere are water vapor, carbon dioxide, methane, nitrous oxide, and ozone. In the Solar System, the

atmospheres of Venus, Mars, and Titan also contain gases that cause greenhouse effects. Greenhouse gases greatly affect the temperature of the Earth; without them, Earth's surface would be on average about 33 C (59 F)[note 1] colder than at present.[2][3][4] Since the beginning of the Industrial revolution, the burning of fossil fuels has increased the levels of carbon dioxide in the atmosphere from 280ppm to 390ppm.[5][6] Unlike other pollutants, carbon dioxide emissions do not result from inefficient combustion: CO2 is a product of ideal, stoichiometric combustion of carbon. directly proportional to energy consumption. 1.1.5 CARBON DIOXIDE Carbon dioxide (chemical formula CO2) is a chemical compound composed of two oxygen atoms covalently bonded to a single carbon atom. It is a gas at standard temperature and pressure and exists in Earth's atmosphere in this state. CO2 is a trace gas comprising 0.039% of the atmosphere. As part of the carbon cycle known as photosynthesis, plants, algae, and cyan bacteria absorb carbon dioxide, sunlight, and water to produce carbohydrate energy for themselves and oxygen as a waste product. By contrast, during respiration they emit carbon dioxide, as do all other living things that depend either directly or indirectly on plants for food. Carbon dioxide is also generated as a by-product of combustion; emitted from volcanoes, hot springs, and geysers; and freed from carbonate rocks by dissolution. As of October 2010, carbon dioxide in the Earth's atmosphere is at a concentration of 388 ppm by volume. Atmospheric concentrations of carbon dioxide fluctuate slightly with the change of the seasons, driven primarily by seasonal plant growth in the Northern Hemisphere. Concentrations of carbon dioxide fall during the northern spring and summer as plants consume the gas, and rise during the northern autumn and winter as plants go dormant, die and decay. Taking all this into account, the concentration of CO 2 grew by about 2 ppm in 2009. Carbon dioxide is a greenhouse gas as it transmits visible light but absorbs strongly in the infrared and near-infrared. As the chemically most stable non-condensing greenhouse gas, it acts as a critical 'climate control knob'.
[7]

The emissions of carbon are

Before the advent of human-caused release of carbon dioxide to the atmosphere, concentrations tended to increase with increasing global temperatures, acting as a positive feedback for changes induced by other processes such as orbital cycles. There is a seasonal cycle in CO2 concentration associated primarily with the Northern Hemisphere growing season. Carbon dioxide has no liquid state at pressures below 5.1 standard atmospheres (520 kPa). At 1 atmosphere (near mean sea level pressure), the gas deposits directly to a solid at temperatures below 78 C (108 F; 195.1 K) and the solid sublimes directly to a gas above 78 C. In its solid state, carbon dioxide is commonly called dry ice. CO2 is an acidic oxide: an aqueous solution turns litmus from blue to pink. It is the anhydride of carbonic acid, an acid which is unstable in aqueous solution, from which it cannot be concentrated. In organisms carbonic acid production is catalyzed by the enzyme, carbonic anhydrates. CO2 + H2O H2CO3 CO2 is toxic in higher concentrations: 1% (10,000 ppm) will make some people feel drowsy.[6] Concentrations of 7% to 10% cause dizziness, headache, visual and hearing dysfunction and unconsciousness within a few minutes to an hour. 1.1.6 CARBON TRADING SCHEME A system whereby countries or individual companies are set emission targets. Those that cannot meet their targets can buy credit from countries or companies that bear theirs. In economics, carbon trading is a form of emissions trading that allows a country to meet its carbon dioxide emissions reduction commitments, often to meet Kyoto Treaty requirements, in as low a cost as possible by utilizing the free market. It is a means of privatizing the public cost or societal cost of pollution by carbon dioxide. Carbon trading is the term applied to the trading of certificates representing various ways in which carbon-related emissions reduction targets might be met. Participants in carbon

trading buy and sell contractual commitments or certificates that represent specified amounts of carbon-related emissions that either: are allowed to be emitted; comprise reductions in emissions (new technology, energy efficiency, renewable energy); or comprise offsets against emissions, such as carbon sequestration (capture of carbon in biomass). People buy and sell such products because it is the most cost-effective way to achieve an overall reduction in the level of emissions, assuming that transaction costs involved in market participation are kept at reasonable levels. It is cost-effective because the entities that have achieved their own emission reduction target easily will be able to create emission reduction certificates "surplus" to their own requirements. These entities can sell those surpluses to other entities that would incur very high costs by seeking to achieve their emission reduction requirement within their own business. Similarly, sellers of carbon sequestration provide entities with another alternative, namely offsetting their emissions against carbon sequestered in biomass. (The Carbon Trade, BBC News, Thursday 20 April 2006). There are two kinds of carbon trading. The first is emissions trading. The second is trading in project-based credits. Often the two categories are put together in hybrid trading systems. (Carbon Trading, 2006.Made in USA-A Short History Of Carbon Trading) 1.1.7 EMISSIONS TRADING Emissions trading is also sometimes called cap-and-trade. A cap and trade system is an emissions trading system, where total emissions are limited or 'capped'. The Kyoto Protocol is a cap and trade system in the sense that emissions from Annex B countries are capped and that excess permits might be traded. However, normally cap and trade

systems will not include mechanisms such as the CDM, which will allow for more permits to enter the system, i.e. beyond the cap (Point Carbon). The targets cover emissions of the six main greenhouse gases, namely: Carbon dioxide (CO2); Methane (CH4); Nitrous oxide (N2O); Hydro fluorocarbons (HFCs); Per fluorocarbons (PFCs); and Sulphur hexafluoride (SF6) The maximum amount of emissions (measured as the equivalent in carbon dioxide) that a Party may emit over the commitment period in order to comply with its emissions target is known as a Partys assigned amount. 1.1.8 WORLD BANK STUDY OF THE CARBON MARKET The World Bank Study for the International Emission Trading Association (IETA) indicates that the project-based emissions traded are rapidly increasing, approaching 107 million tons in 2004, a 38 per cent increase over the preceding year. The share of volume of emission reductions purchased by various countries from January 2004 to April 2005 confirming that most of the CDM demand is from the EU and Japan. (United Nations Conference on Trade and Development, 2006). 1.1.9 CARBON TRADING IN INDIA Carbon trading allows industries in developed countries to offset their emissions of carbon dioxide by investing in reforestation and clean energy projects in developing countries. Carbon projects could potentially recover habitat on millions of hectares of heavily populated forest and farmlands. "This would bring social, economic, and local environmental benefits to hundreds of thousands, and potentially millions, of poor rural people in the developing world," (David Kaimowitz, Director General of CIFOR, 2002). "Problems with forest carbon arise when trees are being grown solely for their carbon. If there are other economic uses of the reforested land, such as producing fuel wood, rubber, fruits, and food crops, then the cost of carbon sequestration is lower.

PERSONAL CARBON TRADING Personal carbon trading has been the subject of academic study for over a decade, but it Is yet to be seen as a truly viable policy. Its potential is undeniable, but this enticingly Simple idea has grown into a tangle of different proposals and has come up against genuine obstacles. However, where incentives to useful behavioral change by individuals remain disappointingly elusive, personal carbon trading has great potential as a policy tool. Disadvantages Of Carbon Carbon is the common denominator in all-polluting gases that cause global warming. Carbon dioxide is the gas most commonly thought of as a greenhouse gas; it is responsible for about half of the atmospheric heat retained by trace gasses. It is produced primarily by burning of fossils fuels and deforestation accompanied by burning and biodegradation of biomass. Analyses of gas trapped in polar ice samples indicate that preindustrial levels of CO2 in the atmosphere was approximately 260 parts per million. Over the last 300 years, this level has increased to current value of around 375 ppm; most of the increase by far has taken place at an accelerating pace over the last 100 years. About half of the increase in carbon dioxide in the last 300 years can be attributed to deforestation, which still accounts for approximately 20% of the annual increase in this gas. It is estimated that if the carbon increases in the atmosphere at the present rate and no positive efforts are pursued, the level of carbon in the atmosphere would go up to 8001000 ppm by the end of current century, which may create havoc for all living creatures on earth (Current science, vol 91, No. 7,10 October 2006). Various firms scour the world in search of environmental services that could offset its clients emissions. These services are usually forests and tree-planting projects and are known in the business as carbon assets or carbon sinks, because trees remove carbon from the atmosphere and sequesters it in their wood. The activity of these sinks is often called carbon sequestration.

Using a variety of methodologies, the environmental services broker arrives at an estimate of how much carbon a particular sink sequesters, and then assigns it a monetary value and sells it to a client. The client then subtracts from its carbon account the carbon sequestered by its newly purchased carbon sink. The client is said to be carbon-neutral or climate-neutral when its carbon assets equal its carbon emissions. Two examples of environmental services brokers in the carbon trade are Climate Care and Future Forests. The London-based Climate Care is a non-profit organization that sells carbon offsets to individuals and companies and uses the money to invest in climatefriendly projects, like wilderness protection in Uganda, energy efficiency in the Indian Ocean island state of Mauritius, and small-scale hydropower in Bulgaria. Its corporate clients are mostly travel agencies like Ecotours, Whale Watch Azores, Nature Trek, and Andante.

REVIEW OF LITERATURE
Various studies had been conducted regarding the concept of carbon trading, emission of carbon in the environment, their impact on environment & ways for reducing carbon emission. Some of these studies are mentioned below: 1. Les Coleman showed his growing interest in carbon emissions trading to reduce the concentration of greenhouse gases in the atmosphere. It identifies the objectives and performance criteria of a price mechanism to regulate global emissions, and then compares the two most commonly proposed solutions, which are a carbon tax and emissions trading. The analysis concludes the more efficient policy is to set emission limits for each country, and then extend existing excise systems to impose a tax on carbon consumption that achieves the emissions target. An international trading scheme is simply too complex, too expensive because of the new infrastructure required to handle emission permits, and too risky because of inevitable weaknesses in emissions markets. 2. Tseming Yang concluded that In spite of the Bush Administration's rejection of the 1997 Kyoto Protocol, states and private organizations have made efforts to curb greenhouse gas emissions independent of the federal government. Among these initiative are cap and trade programs designed to lower the cost of reducing carbon emissions. Among the best known cap and trade programs are the Chicago Climate Exchange (CCX), a private trading scheme, and the New England Regional Greenhouse Gas Initiative (RGGI), a recently created multi-state government-sponsored trading arrangement that is still in the organizational set-up stage. Both of these programs follow in the footsteps of the national cap and trade sulfur dioxide trading program created by 1990 Clean Air Act Amendments. Unlike the sulfur dioxide program, however, the federal government is not involved in the enforcement of carbon emission limits in either the CCX or the RGGI. Hence, compliance with program-wide carbon emissions caps will depend on the enforcement efforts of the CCX and RGGI. This essay explores some of the challenges of emissions cap enforcement posed by the structure of the two programs.

3. Carol M. Rose showed his Interest in climate change has generated many proposals for cap-and-trade programs to control greenhouse gases. Longstanding American water rights regimes may have some lessons for these new proposals. Nineteenth century eastern water law focused on the cap - keeping water instream - and particularly illustrates the importance of mobilized constituencies in any program that entails capping resource use. Western water law focused on individualized and supposedly tradable rights, and its experience shows especially the significance of rights-definition both for the content and for the tradability of rights. As with water rights, both content and tradability in the new rights regimes are likely to match only imperfectly the goals that we want a cap-and-trade program to serve. For that reason, the historical experience of both water regimes also suggests the important role that surrounding and supporting institutions will play to facilitate trade under imperfect circumstances, and to reassure participants of the standards, accountability, and acceptability of the cap-and-trade regime. 4. Peter Fairley concludes that Advocates of carbon-trading schemes in the United States like to point to Europe's cap-and-trade program as a model worthy of emulation. The European Union's Emission Trading System, which has been in place since 2005, puts a price on carbon dioxide pollution for the purpose of inducing industry to cut emissions of greenhouse gases and reduce the effects of climate change. European governments set annual caps on total carbon dioxide emissions that may be produced by a group of energy-intensive industries. They then hand out a number of allowances to each company, allotting them on the basis of past emissions. Each allowance, called an EUA, permits the company to release a ton of carbon dioxide into the atmosphere. Companies whose emissions exceed their allowances for a given year must buy more; those with fewer emissions can sell their allowances. 5. Alan Valdez concludes that under a cap and trade carbon scheme, participating governments set a limit on the carbon emissions allowed on a given period and allocate carbon permits to the industry. Those that produce less emission than expected can sell their spare permits to facilities that release emissions beyond their original allowance. Some of those carbon permits are gradually withdrawn from the market. The value of the

remaining permits increases, and more facility owners have to switch to cleaner production methods. How well does it work in practice. 6. Michelle Labbe, concluded that: The idea of carbon credits is supposed to reduce global carbon emissions. When carbon credits were first introduced, many people saw them as a win-win situation. Under the carbon credit system, personal accountability was taken out of the carbon footprint equation. Instead of businesses working to reduce their own carbon emissions, they could pay another business to reduce their emissions. But the world is learning that the carbon credit schemes may not be such a positive idea, leading only to complex and dubious credit-trading schemes that have little positive impact on reducing global carbon emissions. Discourages Long-Term Solutions The ability to trade carbon credits isn't conducive to coming up with long-term solutions to reducing carbon emissions. Any actions taken now to reduce emissions may take a long time to have a noticeable effect. Current solutions will impact emissions 10, 20 or 50 years into the future. This means that if a business trades money to gain more carbon credits, that business will be able to maintain or even increase its level of carbon emissions, while the anticipated reduction that is supposed to offset its emissions may be years in coming. Under this scheme, far from reducing carbon emissions, the system of carbon credits can lead to an overall increase in carbon emissions, speeding rather than slowing global warming and depleting fossil fuel reserves further. Volatile Trading Market The market for trading carbon credits is also a volatile one. The European Union's carbon-trading scheme issued so many permits between 2005 and 2007 that the market was flooded, with the result that carbon prices bottomed out. This removed the incentive for companies to trade their credits. 7. Maxwell Payne concludes that selling carbon credits to large companies that produce a large volume of pollution can be a lucrative way for some smaller companies to earn

revenue. Businesses that are involved in reducing carbon emissions or who produce low emissions in general can sell carbon credits on the Chicago Climate Exchange (CCX).Businesses that may be able to sell carbon credits include farms, logging companies, solar power businesses and any company or business that produces low or no carbon emissions. 8. Wendy Roltgen concludes that: Forests and agricultural land are a component of carbon trading.Carbon trading is a market-based system designed to help prevent the continuous increase of carbon dioxide and other greenhouse gasses in the atmosphere. Carbon trading brings carbon credit buyers and sellers together. Businesses emitting carbon dioxide can purchase carbon credits to offset their emissions. Individuals who own forests or agricultural land can sell credits equal to the carbon reduction they are able to produce on their land. 9. Traqqer concludes that: Understand Carbon Trading There's a lot of talk these days of global warming and the consequences. The concerns stem from the release of greenhouse gases into the atmosphere. To help combat these, nations are starting to use carbon trading to reduce emissions. First, you need to understand how the stock market works. A company sells stocks to investors who then own a piece of that company. When the value of the company increases, the stock shares increase in value. If the stocks are sold under these conditions, you will make a net profit (difference of purchase price from the selling price). Carbon emission reduction (CER) certificates can be earned through documented reductions in emissions through some action. For example, a CER can be earned by implementing a methane (CH4) capture equipment at pig farm (i.e., capture CH4 emissions from pig manure ponds). Once these CER certificates are earned, they can be sold to various companies who cannot reduce their carbon emissions. Each CER will allow a company to emit greenhouse gases by a certain amount. Similar to stocks, CER certificates can also be sold on a carbon exchange market. Indeed, they can be bought and sold when the prices rise in order to make a profit.

Although it sounds unfair, the ultimate goal is to reduce Greenhouse gas emissions worldwide. So, if emissions are reduced in South America, these credits could be used to emit more in North America. Theoretically, this should work. Although this seems like a net reduction of zero, it occurs after each country has already reduced their emissions as much as it could and cannot find any more ways to do so (at least not without economically handcuffing itself). So, trading is at least one measure to help reduce greenhouse gas emissions. It is not the complete solution, just a part of it. 10. Karen Y Larkin concluded that: Planet rescue to understand how carbon credits are created it is important to first understand the framework in which they exist and why emissions trading developed. Carbon credits are one tenet within a voluntary pledge made by over 180 countries and multitudes of corporations and individuals to reduce greenhouse gas (GHG) emissions. Rising CO2:Coal, natural gas and oil are fossil fuels, and burning these releases GHGs. These gasses include: carbon dioxide, methane, nitrous oxide and hydro-fluorocarbons. When GHGs are released into the environment they enhance the atmospheres ability to trap infrared energy, which may directly impact our climate. Birth of Carbon Credits: The creators of the Kyoto Protocol recognized some of the pledging countries would meet and exceed their GHG reduction goals, while others would struggle. They built flexibility into the plan, allowing countries to create excess GHG reductions and sell them to countries not meeting goals. For trading purposes, one carbon credit is equal to one metric ton of GHG reductions. These credits had to be measured, certified and brokered, and offset providers were developed to do just that. Hundreds of providers exist throughout the world, and they are regulated by the United Nations Framework Convention on Climate Change (UNFCCC) and the Financial Industry Regulating Authority (FINRA).

Buying and Selling: Buying carbon credits is easy. Anyone with a debit card who wants to reduce his carbon footprint may buy credits online. Offset providers expanded membership beyond countries to include corporations and individuals. Like countries, these provider members make a pledge to GHG reduction and are eligible to create and sell carbon credits. Creating Credits: Several types of programs are eligible to receive carbon credits. Examples include: planting trees; disposing of waste organically; capturing and converting methane gasses produced by landfills, coal mines and agriculture.The owner of the it offset provider to determine eligibility. If eligible, the owner contracts with an accredited verifier. Value: Carbon credits are big business. After the project owner receives carbon credits, she may sell them at the prevailing market rate, which ranges from $1 to $30. By the end of 2009, hundreds of billions of carbon credits had been issued and sold on the open market. 11.Deborah Cotton present a summary of current initiatives to climate change management including a review of existing schemes of carbon trading and the economic arguments supporting those schemes. We also outline conditions under which the existing market of carbon structures are optimal as well as those under which improvements upon the current schemes can be made. 12.Edwin Woerdman concluded that the objective of this paper is to find out whether differences between the domestic permit allocation procedures of the Member States of the European Union (EU) will distort competition and lead to state aid in a European carbon trading market. This paper shows that it depends whether one takes an efficiency or equity perspective. There is no problem from an efficiency perspective, because both grandfathered and auctioned permits have opportunity costs. However, the competitive distortion and state aid issues are relevant from an equity perspective, because (ceteris paribus) an auctioned firm has less financial resources than its grandfathered competitor abroad. A political (albeit not legal) precedent for a European permit trading market is set

by the decision of the Commission in the Danish CO2 emissions trading scheme. The Commission characterized grandfathering as state aid, but nevertheless exempted it by using not only legal and economic, but also political arguments. 13. Eric R. W. Knight concludes that the European Union Emissions Trading Scheme (EU ETS) is the worlds first regional carbon trading market. Its objective is to link European countries around a common price for carbon as a step towards helping the global economy transition to a low-carbon production base. This article is one of the first quantitative econometric attempts to understand how a carbon price operates across different economies. We find that the economic impact of a carbon price varies depending on the underlying energy market structure where the carbon price is imposed. This impact is much stronger than institutional differences associated with the volume of free carbon allowances and the carbon intensity of energy technologies. By examining the role of underlying energy market structures on the role of carbon pricing, this paper contributes to an emerging academic literature on the economic geography of carbon markets. This is relevant to governments around the world which are considering a carbon price in economies with unique energy market legacies. 14.Emilie Alberola ,Julien Chevallier ,Benot Chze concludes that the impact of industrial production for sectors covered by the EU Emissions Trading Scheme (EU ETS) on emissions allowance spot prices during Phase I (2005-2007). Using sector production indices and CO2 emissions compliance positions defined by a ratio of allowance allocation relative to baseline emissions, we show that the effect of industrial activity on EU carbon price changes shall be analyzed in conjunction with production peaks and compliance net short/long positions at the sector level. The results extend previous literature by showing that carbon price changes react not only to energy prices forecast errors and extreme temperatures events, but also to industrial production in three sectors covered by the EU ETS: combustion, paper and iron. 15.McKinsey & Company at all (2007) worked to develop a detailed, consistent fact base estimating costs & potential of different options to reduce or prevent GHG emissions within the US over a 25 year period. The team analyzed more than 250 options

encompassing efficiency gains, shifts to lower-carbon energy sources, & expanded carbon sinks. The report concluded that US could reduce GHG emissions in 2030 by 3.0 to 4.5 gigatons of CO2e using tested approaches & high potential emerging technologies.