Overview regarding Carbon Credits

The industrialisation has proven to be very beneficial for the overall development of the world by improving people's living standards, generating more economy and increasing employment rates. But, often, by seeing this development, these outcomes of industrialisation are negated because of its harmful effects on the environment. It has contributed to unpredictable climate change, carbon credit, and an increase in the greenhouse effect. Some experts claim that the planet is constantly heating faster in 10,000 years.

The American Meteorological Society has defined climate change as any fundamental change in the long-term statistics of climate components over several decades. The increasing global climate and its impact on the environment and human health have pursued many international and domestic authorities to take stringent steps against institutions and businesses responsible for the emission of greenhouse gasses and damaging the environment.

The establishment of carbon credits as a concept was to fulfil the international policy to regulate the emission of greenhouse gases. It is defined as the authorisation certificate for businesses that give them the right to emit one ton of carbon dioxide.

The harmful effect of Greenhouse gases

Greenhouse gases significantly contribute to global warming, climate change and carbon credit. The carbon gases that are included in greenhouse gases are: -

• Carbon dioxide- Carbon dioxide contributes around 50-60 per cent to global warming.
• Hydro-fluorocarbons – This gas is mainly emitted from filing and refrigeration equipment leaks.
• Methane gas - This is the leading cause of trapping heat in the Earth’s atmosphere.
• Sulphur-hexafluoride- This gas is mainly emitted from the magnesium production industry andby the electrical and electronics manufacturing units.

International and domestic regulations

After seeing the rise in the temperature of the surface of the Earth at an alarming rate, many international agencies urged domestic authorities to implement international norms relating to regulating carbon credit and emissions of green gasses.

Kyoto Protocol

Kyoto protocol was introduced on 11 December 1997 and came into force on 16 February 2005. It is one of the widely accepted protocols with around 192 signatories. Kyoto was enacted to implement the United Nations Framework Convention on Climate Change relating to committing the developing countries and other industrialised states to reduce greenhouse gas (GHGs) emissions according to the targets provided. The convention also asks those states and countries to submit yearly reports on the measures taken to fulfil the same.

India's obligation toward Kyoto Protocol

India became a party to the Kyoto protocol in August 2002, having no obligation to fulfil the condition of carbon emission and developing a national report on anthropogenic emissions. Under the protocol, developing nations have further obligations to execute national and regional policies to decrease global warming while promoting innovative technology and reducing or preventing anthropogenic emissions of GHGs not controlled by the Montreal Protocol in all relevant sectors.

National Action Plan on Climate Change consists of eight public missions focused on enhancing the efficiency of vitality productivity, solar technology, and feasible ecosystems. To date, 7,814 Clean Development Mechanism (CDM) projects have been registered globally, and 1,527 billion Certified Emission Reductions (CERs) from 2574 CDM projects have been released.

Carbon Credits

Carbon credits are the market mechanism that is introduced for the minimisation of the emission of greenhouse gases. Government authorities have set a limit on the amount of GHGs emissions. But, for some companies or plants, adhering to those limits is impossible. Therefore, they are allowed to purchase carbon credits to comply with the emission caps from the market from someone who has complied with the target. This process is called Carbon Trading.

Types of Carbon Credits

Carbon credits are of mainly two types:

• Voluntary Emissions Reduction (VER): Carbon offset exchange in the voluntary market or over the counter for credits.
• Certified Emissions Reduction (CER): Intending to offset a project's emissions regulatory framework creates emission credits. A third-party certifying body is the main difference between Voluntary Emissions Reduction and Certified Emissions Reduction.

Market overview of Carbon Trading in India

Recently, India has promoted and launched the market for Carbon Trading. This has made India one of the fastest-growing carbon trading economies, generating carbon credits worth approximately 30 million, the second highest transacted volume globally. The carbon trading market in India is developing at higher rates than any other sector, including IT, biotechnology and Business Process Outsourcing. India has almost 850 projects with an investment of approximately Rs. 650,000 million. Carbon is traded on our country's Multi Commodity Exchange, the first exchange to trade carbon credits in Asia.

For carbon trading, two types of markets generally operate the compliance market and the voluntary market. The compliance market is primarily the cap and trade market, where one can certify the project as per a clean development mechanism (CDM) and claim the credits by adhering to all the processes. On the other hand, in the voluntary market, there are separate autonomous registries with their own rules and parameters. Based on these rules and guidelines, the applicant needs to get his/her project registered, audited, and verified by approved third-party assessors and acquire the carbon credits from these registries.

So, the concerned party can claim carbon credits from either or both the compliance and intended registry. They can then trade them in the global market. One carbon credit is equivalent to 1000 kilogram of carbon emission decrease corresponding or CO2 emission decrease corresponding. This was the base limit set by United Nations Framework Convention on Climate Change under the Clean Development Mechanism when the Kyoto Protocol was launched. Among the six recognised greenhouse gases, CO2 has been chosen as the baseline for calculating carbon credits.

India is quite potential in carbon trading business with its sudden growth in the market and the participation of some big companies in this field like TATA, Reliance, Birla, Ambuja, Bajaj etc. Furthermore, many other corporations are increasing the credit of this market more.

Legal aspects governing carbon trading

Indias government initiative to regularise carbon trading is reflected in the newly introduced Energy Conservation (Amendment) Bill. The recent reports of the World Bank indicate that India is estimated to control over 20-25 per cent of carbon trade globally, making it the world's largest beneficiary of carbon trading.

In India, carbon credit has been on National Commodity &Derivatives Exchange limited to only a future contract. A futures contract is a consistent agreement between two parties to trade a definite asset of consistent quantity and quality at a stated date at a future price agreed today. The agreements are dealt with on a futures exchange. These agreements are only appropriate to goods in the form of movable property other than actionable claims, money and securities. Moreover, contracts made for carbon credits in India are governed by the Indian Contract Act, 1872.

Energy Saving Certificates

Energy saving certificates are authorised under National Mission for Enhanced Energy Efficiency. It is issued to manufacturing plants that have saved energy by employing various methods over their targets. Further, if any industry has not achieved its targets, purchasing energy-saving certificates from overachievers is facilitated through trading certificates on the Power Exchanges Platform.

How can India benefit more from carbon credit and trading?

India can use various methods to extract benefits out of carbon credits and trading in the following ways: -

• The financial gain generated from carbon credit trading can be used to create profitable renewable energy projects.
• Carbon credits can be a driving force for many energy-saving initiatives if adequately used.
• The industry of carbon credit trading can also be used to open the market to new businesses related to the renewal of energy sources. Hence, creating more job opportunities for people and increasing our country's GDP.

Carbon trading and reduction in carbon emission

Under the Kyoto protocol, it is prescribed that developing countries do not have an obligation to reduce their generation of greenhouse gasses as compared to developed countries. So, suppose the countries reduce their carbon emission by adopting various methods like solar panel plants or planting trees. In that case, they could sell their carbon credit to the developed countries to complete their target. This strategy will encourage developing countries to reduce their carbon emissions, and developed countries already have their obligations to fulfil.

Challenges faced during carbon trading

The carbon credit system is based on the Kyoto protocol, which set targets expired in 2012. After this, there have been a lot of changes and amendments in the market which were not taken into account.

In India, some projects have a tremendous amount of carbon credits, but their market value is not estimated correctly, discouraging new businesses and the overall market environment. Apart from this, taxation is also a very big concern. There has been an ambiguity about the tax imposed on income generated through carbon credits. There is a considerable demand from a particular section of carbon credit investors that the income generated from it needs to be tax-free.

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