TNN Aug 29, 2005, 12.50AM IST
Amidst growing concern and increasing awareness on the need for pollution control, the concept of carbon credit came into vogue as part of an international agreement, popularly known as the Kyoto Protocol. Carbon credits are certificates issued to countries that reduce their emission of GHG (greenhouse gases) which causes global warming.
It is estimated that 60-70% of GHG emission is through fuel combustion in industries like cement, steel, textiles and fertilisers. Some GHG gases like hydro fluorocarbons, methane and nitrous oxide are released as by-products of certain industrial process, which adversely affect the ozone layer, leading to global warming.
What is the Kyoto protocol?
Kyoto Protocol is a voluntary treaty signed by 141 countries, including the European Union, Japan and Canada for reducing GHG emission by 5.2% below 1990 levels by '12. However, the US, which accounts for one-third of the total GHG emission, is yet to sign this treaty.
The preliminary phase of the Kyoto Protocol is to start in '07 while the second phase starts from '08. The penalty for non-compliance in the first phase is E40 per tonne of carbon dioxide (CO2) equivalent. In the second phase, the penalty will be hiked to E100 per tonne of CO2.
How does trading in carbon credit (CC) take place.
The concept of carbon credit trading seeks to encourage countries to reduce their GHG emissions, as it rewards those countries which meet their targets and provides financial incentives to others to do so as quickly as possible.
Surplus credits (collected by overshooting the emission reduction target) can be sold in the global market. One credit is equivalent to one tonne of CO2 emission reduced. CC are available for companies engaged in developing renewable energy projects that offset the use of fossil fuels.
Developed countries have to spend nearly $300-500 for every tonne reduction in CO2, against $10-$25 to be spent by developing countries. In countries like India, GHG emission is much below the target fixed by Kyoto Protocol and so, they are excluded from reduction of GHG emission. On the contrary, they are entitled to sell surplus credits to developed countries.
It is here that trading takes place. Foreign companies who cannot fulfil the protocol norms can buy the surplus credit from companies in other countries through trading.
Thus, the stage is set for Credit
Emission Reduction (CER) trade to flourish. India is considered as the largest beneficiary, claiming about 31% of the total world carbon trade through the Clean Development Mechanism (CDM), which is expected to rake in at least $5-10bn over a period of time.
Where does the trading take place?
The trading takes place on two stock exchanges, the Chicago Climate Exchange and the European Climate Exchange. CC trading can also take place in the open market. European countries and Japan are the major buyers of carbon credit.
Under the Kyoto Protocol, global warming potential (GWP) is an index that allows comparison of greenhouse gases with each other in the context of their relative potential to contribute to global warming. For trading purposes, one credit is considered equivalent to one tonne of CO2 emission reduced.
What is JI, CDM and IET?
The Kyoto Protocol provides for three mechanisms that enable developed counties with quantified emission limitation and reduction commitments to acquire greenhouse gas reduction credits. These mechanisms are Joint Implementation (JI), Clean Development Mechanism (CDM) and International Emission Trading (IET). Under JI, a developed country with relatively higher costs of domestic greenhouse reduction would set up a project in another developed country which has a relatively low cost.
Under CDM, a developed country can take up a greenhouse gas 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 credits for meeting its emission reduction targets, while the developing country would receive the capital and clean technology to implement the project.
Under IET mechanism, countries can trade in the international carbon credit market. Countries with surplus credits can sell the same to countries with quantified emission limitation and reduction commitments under the Kyoto Protocol.
Who approves CDM?
Getting carbon credits certified for Kyoto is a lengthy and complex process. There are four stages of CDM approval. The first stage is at the domestic level, where the project gets approved by National CDM Authority (NCM). After NCM's approval, the project is sent to the United Nations Framework Convention on Climate Changes.
After this, the project is reviewed by the executive board of UNFCCC. The project gets evaluated on every front and is then registered under UNFCCC only if it meets all the norms. Thereafter, certification is done for the reduction in emission and credits are issued.