Carbon Trading: 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. For this reason, some people prefer the term “emission trading,” to emphasize the fact that far more than just carbon is being traded.

Get Help With Your Essay
If you need assistance with writing your essay, our professional essay writing service is here to help!
Essay Writing Service

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.
Scope of Carbon Trading in India:
Indian Market of Carbon Trading: The carbon market is divided into two parts-that which is compliance driven and the other being the voluntary market. The more dominant and lucrative compliance market only accepts carbon credits under the CDM programme, while there are various regional non UN administered voluntary programs worldwide.
For carbon credit trading, India follows a scheme called Clean Development Mechanism (CDM) or more commonly, carbon trading. CDM is an arrangement under the Kyoto Protocol allowing industrialized countries with a greenhouse gas reduction commitment to invest in emission reducing projects in developing countries as an alternative to what is generally considered more costly emission reductions in their own countries. Under CDM, a developed country can take up a greenhouse gas (GHG) reduction project activity in a developing country where the cost of GHG reduction project activities is usually much lower. The developed country would be given carbon credits for meeting its emission reduction targets, while the developing country would receive the capital and clean technology to implement the project. Carbon credits are certificates issued to countries that reduce their emission of GHG, which causes global warming. Developed countries that have exceeded the levels can either cut down emissions, or borrow or buy carbon credits from developing countries.
The Indian market is extremely receptive to CDM. Having cornered more than half of the global total in tradable certified emission reduction (CERs), Indias dominance in carbon trading under the CDM of the UN Convention on climate change is beginning to influence business dynamics in the country. Carbon credits are measured in units of CERs, which is equivalent to one tonne of carbon dioxide reduction.
Future scope: India’s huge potential for generation and sale of CERs needs to be harnessed especially to tap the huge opportunity in the European Union Emission Trading System (EU-ETS). Hence, in order to bring vibrancy to the emission market in the country, there is a need for a transparent platform that will help buyers and sellers get a fair deal and reduce the margins of the intermediaries to reflect the economic value-addition. With technology at India’s side, it is time the country leveraged it for a sustained growth of the carbon credit market. “Indian industries, which looked at CDM implementation in their process have failed to realize fair prices in most cases due to the currently thriving OTC (over-the-counter) markets that have fleeced most sellers by buying at prices much lower than that provided by buyers. The MCX-CCX (Chicago Climate Exchange) tie-up is expected to ensure better price discovery of carbon credits besides helping the participants cover the risks associated with selling and buying of carbon credits. Further, the exchange, with its various ways of educating the eco-system participants, would enhance the benefits accruing to them in its endeavor to make India a major global commodity-trading hub.
Objectives:
The objectives for study are as follows:
To know what is carbon trading and its impact on atmosphere.
To know world market of Carbon trading.
To know about the Carbon trading market in India
To know future growth and scope in India in carbon trading.
Review of Literature:
According to Shilpa Shanbhag,[Dataquest the business of InfoTech] India needs to put a price on carbon, since true leaders do not wait for international climate mandates. There is nothing stopping India from setting up a domestic environmental exchange based on the guidelines of the international carbon market and converting air and water pollutants such as CO2, SO2, NOx and BoD into tradable instruments. NOx and SOx trading schemes in the US have shown that it is possible to reduce emissions and acid rain under an environmental trading scheme. Later she add instead of switching off light bulbs for an hour each year or holding concerts to raise climate change awareness, it would be much sensible to invest in a wind mill, which produces clean power. This mill would offer two-fold benefits of supplying power to the state grid for the next 25 years and it would also earn carbon credits.
A 2007 study by the Financial Times discovered the following:
 * Widespread instances of people and organizations buying worthless credits that do not yield any reductions in carbon emissions.
* Industrial companies profiting from doing very little–or from gaining carbon credits on the basis of efficiency gains from which they have already benefited substantially.
* Brokers providing services of questionable or no value.
* A shortage of verification, making it difficult for buyers to assess the true value of carbon credits (“Industry Caught in Carbon Smokescreen,” Financial Times, April 25, 2007)
Accordind to Ecosecuriites ,The highest price projection found in the survey resulted from the ACCF/NAM model, estimating that a carbon price of $257 would be needed by 2025 to accomplish the emissions reduction objective in its “High Cost” scenario. This model’s “High Cost” scenario assumed that only 14% of GHG emissions could be offset, while the remaining emissions had to be internally mitigated. This scenario also strictly limited the rate at which technologies are developed and implemented, including a constraint on nuclear by allowing only 10-25 GW of additional capacity by 2030.The lower price projections profiled in this report resulted from the PACE model, estimating that a carbon price of only $0.41 would be needed by 2025 to accomplish the emissions reduction objective in its “Multigas” scenario, and the MERGE and MiniCAM models, estimating a required carbon price of only $0.30 in 2020 for the “6.7 W/m2” scenario. The PACE model gave low values partially as a result of assuming a relatively low GHG emissions baseline and emissions growth over time.
Analysis:
The Carbon trading is one of the fastest growing financial markets in the world. It is the most visible result of early regulatory efforts to mitigate climate change, and grew out of the Kyoto Protocol, which was adopted in 1997. The protocol requires that by 2012, developed countries will achieve greenhouse gas emission reductions of at least 5% against baseline levels of 1990. To help countries achieve that goal it established the Clean Development Mechanism (CDM), which promotes sustainable development in developing countries while spurring cost-effective reductions in greenhouse gas emissions in the more polluting developed countries. India offers a large potential for CDM because of its inherent dependence on fossil fuels for development. So countries with relatively low abatement and transaction costs like India are a major attraction for CDM projects.
The market is emerging strongly despite various global factors, according to the World Bank. Regulation that caps greenhouse gas emissions has spawned an emerging carbon trade that was valued at US $64 billion (€47 billion) in 2007. For the third consecutive year, China was the world leader in CDM supply with a 73% market share in terms of 2007 transacted volume. Brazil and India, at 6% market share each, transacted the highest volumes after China. Africa followed with 5% of the market.
India is the fourth largest emitter of greenhouse gases in the world in absolute terms. But its per capita emission of 1.2 tons per person per year is much lower than the West’s figure of 20 tons, or than the global average of 8 tons. If India has to realize its ambitions of economic growth and take large sections of its population out of the low income trap, it must grow. That means greenhouse gas emission reductions will
CLEAN DEVELPOMENT MECHANISM (CDM) AND CARBON TRADING IN INDIA
CLEAN DEVELOPMENT MECHANISM GLOBAL WARMING- THE ISSUE
The Earth has an atmosphere of the proper depth and chemical composition. About 30% of incoming energy from the sun is reflected back to space while the rest reaches the earth, resulting in warming the air, oceans, and land, and maintaining an average surface temperature of about 15 °C. The chemical composition of the atmosphere is also responsible for nurturing life on our planet. Most of it is nitrogen (78%); about 21% is oxygen, which all animals need to survive; and only a small percentage (0.036%) is made up of carbon dioxide which plants require for photosynthesis. The atmosphere carries out the critical function of maintaining life-sustaining conditions on Earth, in the following way: each day, energy from the sun is absorbed by the land, seas, mountains, etc. If all this energy were to be absorbed completely, the earth would gradually become hotter and hotter. But actually, the earth both absorbs and, simultaneously releases it in the form of infra red waves (which cannot be seen by our eyes but can be felt as heat, for example the heat that you can feel with your hands over a heated car engine). All this rising heat is not lost to space, but is partly absorbed by some gases present in very small (or trace) quantities in the atmosphere, called greenhouse gases (GHGs). Greenhouse gases (for example, carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), water vapour), re-emit some of this heat to the earth’s surface. If they did not perform this useful function, most of the heat energy would escape, leaving the earth cold (about -18 °C) and unfit to support life.
However, ever since the Industrial Revolution began about 150 years ago, man-made activities have added significant quantities of GHGs to the atmosphere. The atmospheric concentrations of carbon dioxide (CO2), methane (CH4), and nitrous oxide (N2O) have grown by about 31%, 151% and 17%, respectively, between 1750 and 2000 (Intergovernmental Panel on Climate Change, IPCC 2001).
As the GHGs are transparent to incoming solar radiation, but opaque to outgoing longwave radiation, an increase in the levels of GHGs could lead to greater warming, which, in turn, could have an impact on the world’s climate, leading to the phenomenon known as climate change. Indeed, scientists have observed that over the 20th century, the mean global surface temperature increased by 0.6°C (IPCC 2001). They also observed that since 1860 (the year temperature began to be recorded systematically using a thermometer), the 1990’s have been the warmest decade.
Important greenhouse gases are: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFC), perfluorocarbons (PFC), and sulfur hexafluoride (SF6). Water vapor is also an important greenhouse gas, but since humans do not generally have a direct affect on water vapor concentration in the atmosphere, it is not included in this paper. Because each greenhouse gas traps different amounts of heat and stays in the atmosphere for different lengths of time, studies use measures of global warming potential (GWP) to compare between gases. Carbon dioxide is used as the benchmark, so all other gases are measured in carbon dioxide equivalence (CO2e)2. Table 1: The global warming potential of six major greenhouse gases (This measure takes into account the heat trapping abilities and the time the gas stays in the atmosphere (IPCC 2001a, 2001b))
Gas
Global Warming
Potential Atmospheric Life (years)
CO2
1
5 to 200
CH4
21
12
N2O
310
114
HFC
140 to 11,700
1.4 to 260
PFC
6,500 to 9,200
10,000 to 50,000+
SF6
23,900
3200
NATURAL AND ANTHROPOGENIC CAUSES OF GLOBAL WARMING
Another IPCC publication states that there is a “very high confidence” that human activities have caused a net warming of the planet (IPCC 2007a). KYOTO PROTOCOL Presently, a variety of approaches are being implemented to reduce carbon emissions. These range from efforts by individuals and firms to reduce their climate footprints to initiatives at city, state, regional and global levels. Among these are the commitments of governments to reduce emissions through the 1992 United Nations Framework Convention on Climate Change (UNFCCC) and its 1997 Kyoto Protocol. In 1992 famous Rio earth summit, United Nation Framework Convention on Climate Change (UNFCCC) was adopted with an objective to stabilize atmospheric concentration of GHG at levels that would prevent dangerous humane interference with climate system. The UNFCCC came into effect on 21st March, 1994 according to which industrialized countries shall have the main responsibility to mitigate climate change. Such countries are listed as Annex- I countries. Under UNFCCC all the member countries were to report on their national GHG emissions inventories and propose climate change mitigation strategies. After two and half years of intense negotiation between Annex-I countries, an agreement was struck at the now famous Kyoto protocol on 11 December 1997 in Kyoto, Japan. Born in the 1997 World Earth Summit held at Kyoto, Japan, this Protocol is making miracles in society today. The convention, participated by 160 countries of the world, was to negotiate binding limitations on greenhouse gases for the developed nations pursuant to the objective of the Framework Convention on Climate Change of 1992.
Under the Kyoto Protocol, emission caps were set for each Annex-I countries, amounting in total to an average reduction of 5.2% below the aggregate emission level in 1990. Each country has a predetermined target of emission reduction as compared to 1990 level. No emission cap is imposed on Non – Annex I countries. However, to encourage the participation of Non-Annex I in emission reduction process a mechanism known as Clean Development Mechanism (CDM) has been provided. The carbon markets are a prominent part of the response to climate change and have an opportunity to demonstrate that they can be a credible and central tool for future climate mitigation. The outcome was the Kyoto Protocol, in which the developed nations agreed to limit their greenhouse gas emissions, relative to the levels emitted in 1990 or pay a price to those that do. At this point comes the carbon trading. CARBON CREDITS The primary purpose of the Protocol was to make developed countries pay for their ways with emissions while at the same time monetarily rewarding countries with good behaviour in this regard. Since developing countries can start with clean technologies, they will be rewarded by those stuck with „dirty‟ ones. This system poises to become a big machine for partially transferring wealth from wealthy, industrialised countries to poor, undeveloped countries. A CER or carbon Credit is defined as the unit related to reduction of 1 tonne of CO2 emission from the baseline of the project activity. Let us say that India decided to invest in a new power station, and has decided on a particular technology at the cost of X crore. An entity from an industrialised country (which could even be a company) offers to provide India with slightly better technology, which costs more (say Y crore), but will result in lower emissions. The industrialised country will only pay the incremental cost of the project – viz. Y minus X. In return, the „investing‟ country will get certified emission reductions‟ (CERs), or credits, which it can use to meet its Kyoto commitments. This is a very good deal indeed – but for the investing country. Not only do they sell developing countries their technology, but they also meet their Kyoto commitments without lifting a finger to reduce their domestic emissions. Countries like the US can continue to pollute at home, so long as it makes the reductions elsewhere.
The World Bank has built itself a role in this market as a referee, broker and macro-manager of international fund flows. The scheme has been entitled Clean Development Mechanism, or more commonly, Carbon Trading. CDM PROJECT TYPES 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/ bagasse)
• 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
INDIAN SCENARIO- FAVOURING POINTS
India comes under the third category of signatories to UNFCCC. India signed and ratified the Protocol in August, 2002 and has emerged as a world leader in reduction of greenhouse gases by adopting Clean Development Mechanisms (CDMs) in the past few years. According to Report on National Action Plan for operationalising Clean Development Mechanism(CDM) by Planning Commission, Govt.of India, the total CO2-equivalent emissions in 1990 were 10, 01, 352 Gg (Gigagrams), which was approximately 3% of global emissions. If India can capture a 10% share of the global CDM market, annual CER revenues to the country could range from US$ 10 million to 300 million (assuming that CDM is used to meet 10-50% of the global demand for GHG emission reduction of roughly 1 billion tonnes CO2, and prices range from US$ 3.5-5.5 per tonne of CO2). As the deadline for meeting the Kyoto Protocol targets draws nearer, prices can be expected to rise, as countries/companies save carbon credits to meet strict targets in the future. India is well ahead in establishing a full-fledged system in operationalising CDM, through the Designated National Authority (DNA).Other than Industries and transportation,the major sources of GHG’s emission in India are as follows :
• Paddy fields
• Enteric fermentation from cattle and buffaloes
• Municipal Solid Waste
Of the above three sources the emissions from the paddy fields can be reduced through special irrigation strategy and appropriate choice of cultivars; whereas enteric fermentation emission can also be reduced through proper feed management. In recent days the third source of emission i.e. Municipal Solid Waste Dumping Grounds are emerging as a potential CDM activity despite being provided least attention till date.
Present status of dumping grounds in India:
In India, due to increased population & commercial development, cities are facing probles of SW (Municipal Solid Waste) disposal. The urban population in larger towns and cities in India is increasing at a decadal growth rate of above 40%. There are no Sanitary Landfill sites in India at present. Municipal Solid Waste is simply dumped without any treatment into land (depressions, ditches, soaked ponds) or on the outskirts of the city in an unscientific manner with no compliance of regulations. The existing dumping grounds in India are full and overflowing beyond capacity. It is difficult to get new dumping yards and if at all available, they are far away from the city and this adds to the exorbitant cost of transportation
Various processes/technologies available to reduce the amount of Municipal Solid Waste are as follows.
1. Physical (a. Pelletisation)
2. Biochemical (a. Aerobic Composting
b. Anaerobic Digestion)
3. Thermal (a. Incineration b. Gasification)
Among the above options/technologies
following are considered as favorable to implement
in India.
1. Pelletisation,
2. Anaerobic digestion using bio-methanation
technology for production of power,
3. Production of organic manure using
controlled aerobic composting.
a) India – high potential of carbon credits
b) India can capture 10% of Global CDM market
c) Annual revenue estimated range from US$10 million to 330 million
d) Wide spectrum of projects with different sizes
e) Vast technical human resource
f) Strong industrial base
g) Dynamic, transparent & speedy processing by Indian DNA (NCDMA) for host country approval h) MoU Signed between MoP and GTZ (Oct 2006)- Indo German Energy program (IGEN)
• Baseline CO2 Emissions from Power Sector already in place- first CDM country
• Improvement in EE
• CDM in Power Sector
CDM POTENTIAL FOR INDIA
POLICIES AND WAY AHEAD
Greenhouse gas abatement policy design is exceedingly difficult because GHG emissions result from nearly all modern human activities. It involves every sector of the economy as well as habits and choices of individuals. Economics is more than just a study of business, it is the science which studies human behavior as a relationship between aspirations and the scarce means to reach those goals. Individuals make decisions every day that influence the amount of greenhouse gases that enter the atmosphere. If a stable climate is one objective among the many to which society aspires, then economics is a tool well-suited to understand how those decisions are made and how efficient and effective outcomes can be reached. Indian Forum India is a Party to the United Nations Framework Convention on Climate Change (UNFCCC) and the objective of the Convention is to achieve stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system. To strengthen the developed country commitments under the Convention, the Parties adopted Kyoto Protocol in 1997, which commits developed country Parties to return their emissions of greenhouse gases to an average of approximately 5.2% below 1990 levels over the period 2008-12. The Seventh Conference of Parties (COP-7) to the UNFCCC decided that Parties participating in CDM should designate a National Authority for the CDM and as per the CDM project cycle, a project proposal should include written approval of voluntary participation from the Designated National Authority of each country and confirmation that the project activity assists the host country in achieving sustainable development. Accordingly the Central Government constituted the National Clean Development Mechanism (CDM) Authority for the purpose of protecting and improving the quality of environment in terms of the Kyoto Protocol. The CDM Authority has the powers: (a) to invite officials and experts from Government, financial institutions, consultancy organizations, non-governmental organizations, civil society, legal profession, industry and commerce, as it may deem necessary for technical and professional inputs and may co-opt other members depending upon need. (b) to interact with concerned authorities, institutions, individual stakeholders for matters relating to CDM. (c) to take up any environmental issues pertaining to CDM or Sustainable Development projects as may be referred to it by the Central Government, and (d) to recommend guidelines to the Central Government for consideration of projects and principles to be followed for according host country approval.
As discussed above, India has a vast opportunity to explore in terms of CDM and carbon-credits. Through its giant ongoing Infrastructure projects and projects on non-conventional energy sources, a new phase of development is still to be observed, moderate start of which has already begun.
Conclusion
There is a great opportunity awaiting India in carbon trading which is estimated to go up to $100 billion by 2010. In the new regime, the country could emerge as one of the largest beneficiaries accounting for 25 per cent of the total world carbon trade, says a recent World Bank report. The countries like US, Germany, Japan and China are likely to be the biggest buyers of carbon credits which are beneficial for India to a great extent. The Indian market is extremely receptive to Clean Development Mechanism (CDM). Having cornered more than half of the global total in tradable certified emission reduction (CERs), India’s dominance in carbon trading under the clean development mechanism (CDM) of the UN Convention on Climate Change (UNFCCC) is beginning to influence business dynamics in the country. India Inc pocketed Rs 1,500 crores in he year 2005 just by selling carbon credits to developed-country clients. Various projects would create up to 306 million tradable CERs. Analysts claim if more companies absorb clean technologies, total CERs with India could touch 500 million. Of the 391 projects sanctioned, the UNFCCC has registered 114 from India, the highest for any country. India’s average annual CERs stand at 12.6% or 11.5 million. Hence, MSW dumping grounds can be a huge prospect for CDM projects in India. These types of projects would not only be beneficial for the Government bodies and stakeholders but also for general public.