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Carbon Trading
Carbon Trading
Carbon trading, or carbon offsetting, is a way to balance or compensate for carbon emissions in one geographical place, with a reduction in emissions in another. Since it doesnt matter where Greenhouse Gases (GHG) are emitted, as their effect on climate change is global, reducing emissions in any other country is as effective as doing so locally. Carbon emissions refers to carbon dioxide (CO), and are a form of GHG, as is methane and nitrous oxide, but for most of us it is easier to think in terms of carbon emissions. Carbon offsetting reduces emissions with a minimum of effort and cost. Offsetting means paying someone else to reduce CO in the atmosphere on our behalf. In that way we pay for the damage we are causing and the money stimulates the development of green technologies.
This was an idea presented in response to the Kyoto Protocol that involves the trading of greenhouse gas (GHG) emission rights between nations. For example, if Country A exceeds its capacity of GHG and Country B has a surplus of capacity, a monetary agreement could be made that would see Country A pay Country B for the right to use its surplus capacity. The Kyoto Protocol presents nations with the challenge of reducing greenhouse gases and storing more carbon. A nation that finds it hard to meet its target of reducing GHG could pay another nation to reduce emissions by an appropriate quantity.
Application
An entity that receives money in exchange for its carbon credits will then use the money to launch or support a project intended to reduce carbon emissions, increasing the overall positive impact on the environment. Carbon trading allows entities that cannot directly reduce their own carbon emissions to contribute to others efforts, making an indirect but measurable impact on carbon dioxide reduction. In one hypothetical example of carbon trading, an energy company might buy carbon credits that will pay for the construction and operation of a commercial wind turbine.
Advantages
Example
Carbon trading is the name given to the exchange of emission permits. This transition may take place within the economy or may take the form of international transition. There are two types of carbon trading namely emission trading and offset trading. Carbon trading is a new mechanism designed to allow firms that fail to meet the emission standards set by the 1997 Kyoto protocol, to buy credits from other firms that meet their target The Kyoto Protocol also envisaged carbon credit trade between countries with carbon sinks i.e. planted forests and other that produce higher level of pollution. Each Auuex-I has been assigned fixed amount in Kyoto protocol agreement. This amount is actually the amount of emission which is to be reduced by the concerned country.
Such fixed amount implies that the country is permitted to emit the remaining amount. This emission allowance is actually one kind of carbon credit. The total amount of allowance is then subdivided into certain units. The units are expressed in terms of carbon equivalent. Each unit gives the owner the right to emit one metric tone of carbon dioxide or other equivalent green house gases. Another variant of carbon credit is to be earned by a country by investing some amount in such project, known as carbon projects which will emit lesser amount of green house gas in the atmosphere. The exchange of first variant of carbon credit is known as emission trading or cap-and trade whereas exchange of second variant of carbon credit is termed as offset trading. It is one of the ways through which countries can meet their obligation under the Kyoto Protocol.
The world's only mandatory carbon trading programme is the European Union. Emissions Trading Scheme, created in conjunction with the Kyoto Protocol, it took effect in 2005, and it caps the amount of large installations, such as power plants and factories in the European Union countries. Global carbon trading has gained momentum. The world watch Institute drawing from various studies, places the value of the trade at about 60 billion dollars in 2007. Asian countries are biggest sellers and western countries are biggest buyers.
India is considered a major supplier of certified emission reductions because of the largest number of projects registered with the clean development mechanism. More than a hundred projects from India have been issued CERs for a total of 25 million. India has also taken a highly proactive approach to CDM from the very beginning and playing a major role in the design of the mechanism and its modalities. India also ranks first in registration of CDM projects followed by Brazil, Mexico and China. About 740 million CERs are expected from registered projects till 2012. The large scale CDM development in India is due to the fact that the country is endowed with skilled human resources to handle this task. The growing Indian economy and its diverse sectors offer huge potential for emission reduction. Most of the CDM projects in renewable energy sector. The energy efficiency and industrial process were other sector. However, the average six of the CDM projects from India is 3000-5000 CERS per annum per project. India has also offered the largest number of CDM projects so far to the CDM Executive Board.
Carbon Credits are sold to entities in Annex-I countries, like power utilities, who have emission reduction targets to achieve & find it cheaper to buy offsetting certificate rather than do a clean-up in their backyard. Type of projects, which are being applied for CDM and which can be of valuable potential, are: Energy efficiency projects Increasing building efficiency (Concept of Green Building/LEED Rating), eg. Technopolis Building Kolkata Increasing commercial/industrial energy efficiency (Renovation & Modernization of old power plants) Fuel switching from more carbon intensive fuels to less carbon intensive fuels; and Also includes re-powering, upgrading instrumentation, controls, and/or equipment Transport Improvements in vehicle fuel efficiency by the introduction of new technologies Changes in vehicles and/or fuel type, for example, switch to electric cars or fuel cell vehicles (CNG/Bio fuels) Switch of transport mode, e.g. changing to less carbon intensive means of transport like trains (Metro in Delhi); and Reducing the frequency of the transport activity
Methane recovery Animal waste methane recovery & utilization Installing an anaerobic digester & utilizing methane to produce energy Coal mine methane recovery Collection & utilization of fugitive methane from coal mining; Capture of biogas Landfill methane recovery and utilization Capture & utilization of fugitive gas from gas pipelines; Methane collection and utilization from sewage/industrial waste treatment facilities Industrial process changes Any industrial process change resulting in the reduction of any category greenhouse gas emissions
Cogeneration Use of waste heat from electric generation, such as exhaust from gas turbines, for industrial purposes or heating (e.g. Distillery-Molasses) Agricultural sector Energy efficiency improvements or switching to less carbon intensive energy sources for water pumps (irrigation) Methane reductions in rice cultivation Reducing animal waste or using produced animal waste for energy generation (see also under methane recovery) and Any other changes in an agricultural practices resulting in reduction of any category of greenhouse gas emissions
Emissions trading is an administrative approach used to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants. The development of a carbon project that provides a reduction in Greenhouse Gas emissions is a way by which participating entities may generate tradeable carbon credits. Say a company in India can prove it has prevented the emission of x-tonnes of carbon, it can sell this much amount of points (or carbon credits) to a company in say, the US which has been emitting carbons. The World Bank has built itself a role in this market as a referee, broker and macro-manager of international fund flows. A central authority (in our case CDM India, an authority under the Ministry of Environment and Forests) sets a limit or cap on the amount of a pollutant that can be emitted in a country. Companies or other groups that emit the pollutant are given credits (CERs Certified Emission Reductions) or allowances which represent the right to emit a specific amount. The total amount of credits cannot exceed the cap, limiting total emissions to that level. Companies that pollute beyond their allowances must buy credits from those who pollute less than their allowances or face heavy penalties. This transfer is referred to as a trade. In effect, the buyer is being fined for polluting, while the seller is being rewarded for having reduced emissions. Thus companies that can easily reduce emissions will do so and those for which it is harder will buy credits which reduce greenhouse gasses at the lowest possible cost to society. Countries which have companies having higher credits will enable them to sell the credits in the international market.
There are a number of international markets -- most notably the EU, with its European Union Greenhouse Gas Emission Trading Scheme (EU ETS) that began its operations on 1 January 2005. Companies which accumulate CERs sell them there in this market to interested buyers. The international market for CERs has crossed the $30 bn mark in 2006, largely driven by the trading of EUA (European Union Allowances). EUA are the equivalent of CERs (Certified Emission Reductions). China is the largest seller in the CDM market with about 61% share, followed by India with 12% share. So far, India approved about 513 (as of April 2007) projects with a potential to generate about 355 mn CERs (Certified Emission Reductions). Each CER can trade for anywhere between $6 and $16 in the international market.
Advantages of an MCX carbon contract In India, currently only bilateral deals and trading through
intermediaries are widely prevalent leading to sellers being denied fair prices for their carbon credits. Advantages that the MCX platform offers are: Sellers and intermediaries can hedge against price risk; Advance selling could help projects generate liquidity and thereby, reduce costs of implementation; There is no counterparty risk as the Exchange guarantees the trade; The price discovery on the Exchange platform ensures a fair price for both the buyer and the seller; Players are brought to a single platform, thus, eliminating the laborious process of identifying either buyers or sellers with enough credibility; and The MCX futures floor gives an immediate reference price. At present, there is no transparency related to prices in the Indian carbon credit market, which has kept sellers at the receiving end with no bargaining power.
Three Flexibility Mechanisms: As part of the agreement, three flexibility mechanisms were developed to help developed countries meet their emission reduction targets namely, Clean Development Mechanism (CDM), Joint Implementation (JI) and International Emission Trading (IET). Of these, JI and IET are executable amongst developed countries while CDM is between developed and developing countries. It is a mechanism allowing industrialized countries with a greenhouse gas reduction commitment to invest in emissionreducing projects in developing countries. Clean Development Mechanism Explained: 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.
Indias carbon market is one of the fastest growing markets in the world and has already generated approximately 30 million carbon credits, the second highest transacted volumes in the world. The carbon trading market in India is growing faster than even 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 Indias Multi Commodity Exchange. It is the first exchange in Asia to trade carbon credits. India being a developing country has no emission targets to be followed. However, she can enter into CDM projects. The Indian government has not fixed any norms nor has it made it compulsory to reduce carbon emissions to a certain level. So, people who are coming to buy from Indians are actually financial investors. They are thinking that if the Europeans are unable to meet their target of reducing the emission levels by 2009 or 2010 or 2012, then the demand for the carbon will increase and then they may make more money.
Legal aspect of Carbon Trading in India: Commodity exchange started future trading on January 2008 after The Multi
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 Commission (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 standardized 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 which 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 2006 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 way for future trading in CER by bringing carbon credit under the tradable commodities.
Trading of CERS: As a welcome scenario, India now has two Commodity exchanges trading in Carbon Credits. This means that Indian Companies can now get a better trading platform and price for CERs generated. Multi Commodity Exchange (MCX), Indias largest commodity exchange, has launched futures trading in carbon credits. The initiative makes it Asia's first-ever commodity exchange and among the select few along with the Chicago Climate Exchange (CCE) and the European Climate Exchange to offer trades in carbon credits. The Indian exchange also expects its tie-up with CCX which will enable Indian firms to get better prices for their carbon credits and better integrate the Indian market with the global markets to foster best practices in emissions trading. On 11th April 2008, National Commodity and Derivatives Exchange (NCDEX) also has started futures contract in Carbon Trading for delivery in December 2008. MCX is the futures exchange. People here are getting price signals for the carbon for the delivery in next five years. The exchange is only for Indians and Indian companies. Every year, in the month of December, the contract expires and at that time people who have bought or sold carbon will have to give or take delivery. They can fulfill the deal prior to December too, but most people will wait until December because that is the time to meet the norms in Europe. If the Indian buyer thinks that the current price is low for him he will wait before selling his credits. The Indian government has not fixed any norms nor has it made it compulsory to reduce carbon emissions to a certain level. So, people who are coming to buy from Indians who are actually financial investors. They are thinking that if the Europeans are unable to meet their target of reducing the emission levels by 2009, 2010 or 2012, then the demand for the carbon will increase and then they may make more money. So investors are willing to buy now to sell later. There is a huge requirement of carbon credits in Europe before 2012. Only those Indian companies that meet the UNFCCC norms and take up new technologies will be entitled to sell carbon credits. There are parameters set and detailed audit is done before you get the entitlement to sell the credit.
MCX decided to trade carbon credits because they are in to futures trading. People can judge if they want to hold on to their accumulated carbon credits or sell them now.MCX is the futures exchange. People here are getting price signals for the carbon for the delivery in next five years. This exchange is only for Indians and Indian companies.
Every year, in the month of December, the contract expires and at that time people who have bought or sold carbon will have to give or take delivery. They can fulfill the deal prior to December too, but most people will wait until December because that is the time to meet the norms in Europe. Say, if the Indian buyer thinks that the current price is low for him he will wait before selling his credits. The Indian government has not fixed any norms nor has it made it compulsory to reduce carbon emissions to a certain level. So, people who are coming to buy from Indians are actually financial investors. They are thinking that if the Europeans are unable to meet their target of reducing the emission levels by 2009 or 2010 or 2012, then the demand for the carbon will increase and then they may make more money. So investors are willing to buy now to sell later. There is a huge requirement of carbon credits in Europe before 2012. Only those Indian companies that meet the UNFCCC norms and take up new technologies will be entitled to sell carbon credits. There are parameters set and detailed audit is done before you get the entitlement to sell the credit. In India, already 300 to 400 companies have carbon credits after meeting UNFCCC norms. Till MCX came along, these companies were not getting best-suited price. Some were getting Euro 15 and some were getting Euro 18 through bilateral agreements. When the contract expires in December, it is expected that prices will be firm up then. On MCX we already have power, energy and metal companies who are trading. These companies are high-energy consuming companies. They need better technology to emit less carbon.
Even though India is the largest beneficiary of carbon trading and carbon credits are traded on the MCX, it still does not have a proper policy for trading of carbons in the market. As a result the Centre has been asked by The National Commodity and Derivatives Exchange Limited (NCDEX) to put in place a proper policy framework for allowing trading of certified emission reductions (CERs), carbon credit, in the market. Also, India has huge number of carbon credits sellers but under the present Indian law, the buyers based in European market are not permitted to enter the market. To increase the market for carbon trading Forward Contracts (Regulation) Amendment Bill has been introduced in the Parliament. This amendment would also help the traders and farmers to utilize NCDEX as a platform for trading of carbon credits. However, to unleash the true potential of carbon trading in India, it is important that a special statue be created for this purpose as the Indian Contracts Act is not enough to govern the contractual issues relating to carbon credits. The carbon credits market will grow to as much as $5 trillion if major countries such as the United States sign up for binding cap emissions. India should be ready to take advantage of this growing global market. Post-2012 policies are expected to open many new gates for India to leverage the growing carbon market. The government bodies are also planning for a domestic energy efficiency cap-and-trade scheme.
The Indian economy strictly needs a regulator for the carbon market. The forward Contracts (Regulation) Amendment Bill, which would define the regulation on carbon credits trading and introduce options based on them, is the need of the hour. This will build confidence in the market, and trade volumes will be back on track for the Indian commodity exchanges.
Handia Forest in Madhya Pradesh: In Madhya Pradesh, it is estimated that 95 very poor rural villages would jointly earn at least US$300,000 every year from carbon payments by restoring 10,000 hectares of degraded community forests.
Delhi Metro Rail Corporation (Dmrc): It has become the first rail project in the world to earn carbon credits because of using regenerative braking system in its rolling stock. DMRC has earned the carbon credits by using regenerative braking system in its trains that reduces 30% electricity consumption. Whenever a train applies regenerative braking system, the released kinetic energy starts a machine known as converter-inverter that acts as an electricity generator, which supplies electrical energy back to the Over Head Electricity (OHE) lines. This regenerated electrical energy that is supplied back to the OHE that is used by other accelerating trains in the same service line. DMRC can claim 400,000 CERs for a 10-year crediting period beginning December 2007 when the project was registered by the UNFCCC. This translates to Rs 1.2 crore per year for 10 years.
India has the highest number of CDM projects registered and supplies the second highest number of Certified Emission Reduction units. Hence, India is already a strong supplier of Carbon Credits and can improve on it. The Union government has approved 550 projects complying the Kyoto Protocol to earn carbon credits, and 330 more are awaiting the government's approval. The Designated National Authority (DNA) has registered the approved projects with the United Nations Framework Convention on Climate Change (UNFCC). The other 330 projects are at the design document stage. DNV is an Oslo-based consultancy firm, accredited to the UNFCCC for conducting the third party verification of projects, which have adopted the clean development mechanism (CDM) to comply with the Kyoto Protocol.