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Carbon Credit

Carbon Credit

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Published by: mmjmmj on Apr 10, 2011
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12/27/2012

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Carbon Credits
MFC, UTKAL UNIVERSITY Page 1
Carbon Credit Trading
A project report submitted in partial fulfillment of the degree of Master of Finance and control
Submitted by Under the guidance of 
Sikha Jain (09MFC033)
 
P
rof. Anil SwainBinita Sunadhar (09MFC013)
P
.G. Dept. of Commerce
P
.G. Dept. of Commerce Utkal University, BhubaneswarUtkal University, Bhubaneswar
MA
STER OF FIN
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ND CONTROLP.G. DEP
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Carbon Credits
MFC, UTKAL UNIVERSITY Page 2
CARBON CREDITS  A MARKET OF THE 21st CENTURY 
A
midst growing concern and increasing awareness on the need for pollution control, theconcept of carbon credit came into vogue as part of an international agreement, popularlyknown as the Kyoto Protocol.And, with the increasing ratification of Kyoto Protocol (KP) bycountries and rising social accountability of polluting industries in the developed nations, thecarbon emissions trading is likely to emerge as a multibillion-dollar market in global emissionstrading. The recent surge in carbon credits trading activities in Europe is an indication of howthe emissions trading industry is going to pan out in the years to come.It is estimated that 60-70% of GHG emission is through fuel combustion in industries like cement, steel, textiles andfertilizers. Some GHG gases like hydro fluorocarbons, methane and nitrous oxide are releasedas by-products of certain industrial process, which adversely affect the ozone layer, leading toglobal warming. The Concept of Carbon credit came into existence as a result of increasingawareness on the need for pollution control.
Kyoto Protocol
The Kyoto Protocol is an international treaty to reduce greenhouse gas (GHG) emissions blamedfor global warming. The Protocol, in force as of 16 February 2005 following its ratification in late2004 by Russia, provides the means to monetize the environmental benefits of reducing GHGs.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 2012. However, theUS, which accounts for one-third of the total GHG emission, is yet to sign this treaty. Thepreliminary phase of the Kyoto Protocol is to start in 2007 while the second phase starts from2008. 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. TheProtocol and new European Union emissions rules have created a market in which companiesand governments that reduce GHG gas levels can sell the ensuing emissions credits. These arepurchased by businesses and governments in developed countries  such as the Netherlands that are close to exceeding their GHG emission quotas. Major contributors of Greenhouse Gasemissions are cement, steel, textiles, and fertilizer manufacturers. The major gases emitted bythese industries are methane, nitrous oxide, hydro fluro carbons, etc. which directly deplete theozone layer. For trading purposes, one credit is considered equivalent to one tonne of CO2emission reduced. Such a credit can be sold in the international market at a prevailing marketrate. The trading can take place in open market. However there are
two exchanges
for carboncredit viz
Chicago Climate Exchange and the European Climate Exchange
.The Kyoto Protocol provides for three mechanisms that enable developed countries withquantified emission limitation and reduction commitments to acquire greenhouse gasreduction credits. These mechanisms are Joint Implementation
(JI)
, Clean DevelopmentMechanism
(CDM)
and International Emission Trading
(IET)
. Under JI, a developed country withrelatively higher costs of domestic greenhouse reduction would set up a project in anotherdeveloped country, which has a relatively low cost. Under CDM, a developed country can take
 
Carbon Credits
MFC, UTKAL UNIVERSITY Page 3
up a greenhouse gas reduction project activity in a developing country where the cost of GHGreduction project activities is usually much lower. The developed country would be givencredits for meeting its emission reduction targets, while the developing country would receivethe capital and clean technology to implement the project. Under IET mechanism, countries cantrade in the international carbon credit market. Countries with surplus credits can sell the sameto countries with quantified emission limitation and reduction commitments under the KyotoProtocol. The EBRD region  former centrally planned economies of central and Eastern Europe,Russia, the Caucasus and central Asia  is rich in possibilities for using the Protocol to reduceemissions and energy waste and costs. Such economies are highly energy inefficient: it takestwice as much energy to produce a unit of GDP in Hungary and Czech Republic as it does inWestern Europe and 10 times as much in Russia and Ukraine.
Understanding Carbon Credit 
Carbon credits are measured in units of certified emission reductions (CERs). Each CER isequivalent to one ton of carbon dioxide reduction. India has emerged as a world leader inreduction of greenhouse gases by adopting Clean Development Mechanisms (CDMs) in the pasttwo years. Developed countries that have exceeded the levels can either cut down emissions,or borrow or buy carbon credits from developing countries.
Trading in Carbon Credit (CC)
The concept of carbon credit trading seeks to encourage countries to reduce their GHGemissions, as it rewards those countries which meet their targets and provides financialincentives to others to do so as quickly as possible. Surplus credits (collected
 
by overshootingthe emission reduction target) can be sold in the global market. One credit is equivalent to onetonne of CO2 emission reduced. CCs are available for companies engaged in developingrenewable energy projects that offset the use of fossil fuels. Developed countries have to spendnearly $300-500 for every tonne reduction in CO2, against $10-$25 to be spent by developingcountries. In countries like India, GHG emission is much below the target fixed by KyotoProtocol and so, they are excluded from reduction of GHG emission. On the contrary, they areentitled to sell surplus credits to developed countries. It is here that trading takes place. Foreigncompanies who cannot fulfill the protocol norms can buy the surplus credit from companies inother countries through trading. Thus, the stage is set for Credit Emission Reduction (CER) tradeto flourish. India is considered as the largest beneficiary, claiming about 31% of the total worldcarbon trade through the Clean Development Mechanism (CDM), which is expected to rake inat least $5-10bn over a period of time.To implement the Kyoto Protocol, the EU and other countries have set up
Cap and Trade
 systems. Under these systems, companies are obliged to match their greenhouse gas emissionswith equal volumes of emission allowances. The Government initially allocates a number of allowances to each company. Any company that exceeds its emissions beyond its allocatedallowances will either have to either buy allowances or pay penalties. A company that emitsless than expected can sell its surplus allowances to those with shortfalls. Companies orcountries will buy these allowances as long as the price is lower than the cost of achieving

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