Carbon credit: An instrument to reduce green house gases VP Srivastav A carbon credit is a tradable certificate or permit representing the right to emit one tonne of carbon-dioxide or the mass of another greenhouse gas (GHG) equivalent to one tonne of carbon-dioxide. Such credits are awarded to countries or groups that have reduced their green house gas emission below their emission quota. Its goal is to stop the increase of carbon dioxide and other greenhouse gases which are responsible for greenhouse effect leading to global warming. Kyoto Protocol: - Carbon credits have been created through Kyoto Protocol which was adopted in Kyoto, Japan in 1997. There are currently 192 parties to the Protocol. Kyoto Protocol implemented the objective of United Nations Framework Convention on Climate Change 1992 (UNFCCC) to fight global warming by reducing green house gas concentrations in the atmosphere to a level that would prevent dangerous anthropogenic interference with the climate system. The Protocol puts the obligation to reduce current emissions on developed countries on the basis that they are historically responsible for the current levels of green house gases in the atmosphere. The Protocol has created mechanisms under which countries that have been emitting greener house gases have decided that they will bring down the level of carbon they are emitting to the levels of 1990 during commitment period 2008-12. In order to control emission by developed countries Kyoto Protocol assigns some responsibilities on this country â€“ one of them being emission trading or carbon trading. Every developed country has been assigned certain quota of units called Kyoto unit- each unit being equivalent to emission of 1 tonne of carbon dioxide or equivalent emission of other greenhouse gases. If any country exceeds that quota it needs to purchase Kyoto units from other countries which saved Kyoto units by reducing their emissions and bring below the assigned units. All these transactions are expressed in terms of carbon credits which gives right to emit 1 tonne of carbon dioxide or equivalent amount of other greenhouse gases. Carbon Credits are Incentives to Reduce Greenhouse Gases Carbon credits are an incentive given to an industrial undertaking or and organization or a country for reduction in emission of green house gases (GHGs) including carbon dioxide, which is done through several ways such as by switching over to wind and solar energy, or installation of energy efficient machinery. The Kyoto Protocol (1997) commits certain developed countries to reduce their GHG emission and for this they will be given carbon credits. The reduction in GHG emission entitles the entity to a credit in the form of a Certified Emission Reduction (CER) certificate. This CER is termed as the carbon credit which is tradable and its holder can transfer it to an entity that needs carbon credits to overcome an unfavorable position on the same. The entity can also tie up with developing nations and help them set up new technology that is eco friendly, thereby helping the developing country or its companies â€˜earnâ€™ credits. The approach can be understood through an example. If an environmentalist or a group plants enough trees to reduce emission of carbon dioxide by 1 tonne, it will be awarded one carbon credit. At the same place if a steel producer has emission quota of 10 tonnes but expecting to produce 11 tonne of carbon dioxide, it could purchase one carbon credit from the above environmentalist or the group. The Carbon Credit system looks to reduce emission by having countries honour their emission quotas and offer incentives for being below them. Thus, it is a market approach to reducing GHGs that works by setting emission targets. Governments or businesses that reduce their carbon outputs in excess of the target can sell the difference to those who produce more that the limit. So carbon trading refers to the means of generating income through sale of carbon credit earned through reduction in emission of green houses gases. Carbon Credit creates market for reducing greenhouse emission by giving a monetary value to the cost of polluting the air such as carbon emitted by burning of fossil fuels such as coal and natural gases. This means that carbon becomes a cost of business for those creating more carbon than authorized by norms and is seen like other inputs such as raw material and labour. Many types of activities can generate carbon credits (or carbon offsets). Renewable energy such as wind farms, or installation of solar, small hydro, geothermal and biomass energy can all create carbon offset by displacing fossil fuels. Others include those resulting from energy efficiency projects or carbon-dioxide saving projects such as use of renewable energies, methane capture from landfills or livestock, destruction of potent greenhouse gases such as halocarbons, and carbon sequestrian projects such as aforestation and reforestation that absorbs carbon dioxide from the atmosphere. Carbon credits are a part of international emission trading norms. They incentivize companies or countries that emit less carbon. The total annual emission is capped and the market allocates a monetary value to any shortfall through trading. Businesses can exchange, buy or sell carbon credits in international markets at the prevailing market price. Managing emission through carbon credits is one of the fastest growing financial services in London. It is predicted that carbon will be the worldâ€™s biggest commodity market and it could become the worldâ€™s biggest market overall. India and China are likely to emerge as the biggest sellers and Europe is going to be the biggest buyer of carbon credits. India has generated some 30 million carbon credits and has roughly 140 million to push into the world market. Waste disposal units, plantation companies, municipal corporations can earn carbon credits and sell them to make money. It is estimated that Indiaâ€™s gross earnings from carbon trading will be around 40 crore in the coming 3-5 years. Sale & Purchase of Carbon Credits For trading purposes, as discussed above, one carbon credit, or one allowance or CER (Certified Emission Reduction) is equivalent to one tonne of carbon dioxide emission. These carbon credits can be sold privately or in the international market at the prevailing rate. Each international transfer is validated by UNFCCC and each transfer within the European Union is additionally validated by European Commission. Climate Exchanges have been established for trading of the credits. Currently there are five Exchanges for trading in the carbon credits and they are- European Climate Exchange, NASDAQ OMX Commodities Europe, Power Next, Commodity Exchange Bratislava, and European Energy Exchange.