CARBON CREDITS/TRADING

BRIEF:

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.

Carbon dioxide, the most important greenhouse gas produced by combustion of fuels, has
became a cause of global panic as its concentration in the Earth's atmosphere has been rising
alarmingly. This devil, however, is now turning into a product that helps people, countries,
consultants, traders, corporations and even farmers earn billions of rupees. This was an
unimaginable trading opportunity not more than a decade ago.. 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 idea is
to allow market mechanisms to drive industrial and commercial processes in the direction of
low emissions or less "carbon intensive" approaches than are used when there is no cost to
emitting carbon dioxide and other GHGs into the atmosphere. Businesses can exchange, buy
or sell carbon credits in international markets at the prevailing market price.
What are carbon credits:

Carbon credits are a key 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. As nations have
progressed we have been emitting carbon, or gases which result in warming of the globe.
Some decades ago a debate started on how to reduce the emission of harmful gases that
contributes to the greenhouse effect that causes global warming. So, countries came together
and signed an agreement named the Kyoto Protocol.

The Kyoto Protocol has created a mechanism under which countries that have been emitting
more carbon and other gases (greenhouse gases include ozone, carbon dioxide, methane,
nitrous oxide and even water vapour) have voluntarily decided that they will bring down the
level of carbon they are emitting to the levels of early 1990s.

There are two distinct types of Carbon Credits: Carbon Offset Credits (COC's) and Carbon
Reduction Credits (CRC's). Carbon Offset Credits consist of clean forms of energy
production, wind, solar, hydro and bio-fuels. 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. Both approaches are
recognized as effective ways to reduce the Global Carbon Emissions "crises".

Carbon trading:

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.

Any entity, typically a business, that emits CO2 to the atmosphere may have an interest or
may be required by law to balance their emissions through mechanism of Carbon
sequestration can be a seller of carbon credit.   These businesses may include power
generating facilities or many kinds of manufacturers. Entities that manage forest or
agricultural land might sell carbon credits based on the accumulation of carbon in their forest
trees or agricultural soils.  Similarly, business entities that reduce their carbon emission may
be able to sell their reductions to other emitters.

Emission allowance

The Protocol agreed 'caps' or quotas on the maximum amount of Greenhouse gases for
developed and developing countries. In turn these countries set quotas on the emissions done
by local business and other organizations, generically termed 'operators'. Each operator has
an allowance of credits, where each unit gives the owner the right to emit one metric tonne of
carbon dioxide or other equivalent greenhouse gas. Operators that have not used up their
quotas can sell their unused allowances as carbon credits, while businesses that are about to
exceed their quotas can buy the extra allowances as credits, privately or on the open market.

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'.

For trading purposes, one allowance or CER is considered equivalent to one metric tonne of
CO2 emissions. These allowances can be sold privately or in the international market at the
prevailing market price.

UNDER KYOTO

A credit can be an emissions allowance which was originally allocated or auctioned by the
national administrators of a cap-and-trade program, or it can be an offset of emissions. Such
offsetting and mitigating activities can occur in any developing country which has ratified the
Kyoto Protocol, and has a national agreement in place to validate its carbon project through
one of the UNFCCC's approved mechanisms. Once approved, these units are termed
Certified Emission Reductions, or CERs. The Protocol allows these projects to be
constructed and credited in advance of the Kyoto trading period.
The Kyoto Protocol provides for three mechanisms that enable countries or operators in
developed countries to acquire greenhouse gas reduction credit

 Under Joint Implementation

Joint implementation (JI) is used to help countries with binding greenhouse gas emissions
targets (so-called Annex I or developed countries) meet their obligations. Any Developed
country can invest in emission reduction projects in any other Developed country as an
alternative to reducing emissions domestically. In this way countries can lower the costs of
complying with their Kyoto targets by investing in greenhouse gas reductions in a Developed
country where reductions are cheaper, and then applying the credit for those reductions
towards their commitment goal.

The Clean Development Mechanism (CDM) is an arrangement under the Kyoto Protocol
allowing industrialized countries with a greenhouse gas reduction commitment to invest in
ventures that reduce emissions in developing countries as an alternative to more expensive
emission reductions in their own countries. The developed country would be given credits for
meeting its emission reduction targets, while the developing country would receive the
capital investment and clean technology or beneficial change in land use.

Under International Emissions Trading (IET) countries can trade in the international
carbon credit market to cover their shortfall in allowances. Countries with surplus credits can
sell them to countries with capped emission commitments under the Kyoto Protocol.

Carbon credits create a market for reducing greenhouse emissions by giving a monetary value
to the cost of polluting the air. Emissions become an internal cost of doing business and are
visible on the balance sheet alongside raw materials and other liabilities or assets.