CARBON CREDIT

A carbon credit is a generic term for any tradable
certificate or permit representing the right to emit
one tonne of carbon dioxide or the mass of another
greenhouse gas with a carbon dioxide equivalent
(tCO
2
e) equivalent to one tonne of carbon
dioxide.
[1][2][3]

Carbon credits and carbon markets are a
component of national and international attempts
to mitigate the growth in concentrations of
greenhouse gases (GHGs). One carbon credit is
equal to one metric tonne of carbon dioxide, or in
some markets, carbon dioxide equivalent gases.
Carbon trading is an application of an emissions
trading approach. Greenhouse gas emissions are
capped and then markets are used to allocate the
emissions among the group of regulated sources.
The goal is to allow market mechanisms to drive
industrial and commercial processes in the direction
of low emissions or less carbon intensive
approaches than those used when there is no cost
to emitting carbon dioxide and other GHGs into the
atmosphere. Since GHG mitigation projects
generate credits, this approach can be used to
finance carbon reduction schemes between trading
partners and around the world.
There are also many companies that sell carbon
credits to commercial and individual customers who
are interested in lowering their carbon footprint on
a voluntary basis. These carbon offsetters purchase
the credits from an investment fund or a carbon
development company that has aggregated the
credits from individual projects. Buyers and sellers
can also use an exchange platform to trade, such as
the Carbon Trade Exchange, which is like a stock
exchange for carbon credits. The quality of the
credits is based in part on the validation process
and sophistication of the fund or development
company that acted as the sponsor to the carbon
project. This is reflected in their price; voluntary
units typically have less value than the units sold
through the rigorously validated Clean
Development Mechanism.
[4]

What is carbon credit?
As nations have progressed we have been emitting
carbon, or gases which result in warming of the
globe. Some decades ago a debate started on how
to reduce the emission of harmful gases that
contributes to the greenhouse effect that causes
global warming. So, countries came together and
signed an agreement named the Kyoto Protocol.
The Kyoto Protocol has created a mechanism under
which countries that have been emitting more
carbon and other gases (greenhouse gases include
ozone, carbon dioxide, methane, nitrous oxide and
even water vapors) have voluntarily decided that
they will bring down the level of carbon they are
emitting to the levels of early 1990s.
Developed countries, mostly European, had said
that they will bring down the level in the period
from 2008 to 2012. In 2008, these developed
countries have decided on different norms to bring
down the level of emission fixed for their
companies and factories.
A company has two ways to reduce emissions. One,
it can reduce the GHG (greenhouse gases) by
adopting new technology or improving upon the
existing technology to attain the new norms for
emission of gases. Or it can tie up with developing
nations and help them set up new technology that
is eco-friendly, thereby helping developing country
or its companies 'earn' credits.
India, China and some other Asian countries have
the advantage because they are developing
countries. Any company, factories or farm owner in
India can get linked to United Nations Framework
Convention on Climate Change and know the
'standard' level of carbon emission allowed for its
outfit or activity. The extent to which I am emitting
less carbon (as per standard fixed by UNFCCC) It get
credited in a developing country. This is called
carbon credit.
These credits are bought over by the companies of
developed countries -- mostly Europeans -- because
the United States has not signed the Kyoto Protocol.
How are carbon credits created?
The carbon market can be divided
into two: the voluntary market and
the regulatory (compliance)
market.
In the compliance market, carbon
credits are generated by projects
that operate under one of the
United Nations Framework
Convention on Climate Change
(UNFCCC) approved mechanisms
such as the Clean Development Mechanism
(CDM).Credits generated under this mechanism are
known as Certified Emissions Reductions (CERs). In
the voluntary market, carbon credits are generated
by projects that are accredited to independent
international standards such as the Verified Carbon
Standard (VCS). These credits are known as Verified
Emission Reductions (VERs). Carbon Trade Exchange
supports the trading of both voluntary and
compliance credits. It is important to note that
carbon credits differ from carbon allowances
although the term carbon credit is interchangeably
used to represent both. Although in most cases they
both represent one tonne of carbon dioxide
equivalent, allowances do not originate from
carbon projects but are allocated to companies
under a ‘cap and trade’ system such as the EU
Emissions Trading Scheme – therefore, they
represent the right to emit.
How do carbon credits impact global emissions?
Carbon credits are an immediate answer to
reducing the amount of Green House Gas (GHGs)
emissions in the atmosphere. The generation and
sale of carbon credits funds carbon projects which
would not have gone ahead i.e additional to
business as usual. Carbon credits also help lower
the costs of renewable and low carbon technologies
as well as assisting in the technology transfer to
developing countries.
What are the different types of carbon projects?
Carbon credits can be generated from various types
of projects including:
 Renewable energy: a switch from fossil fuels to
a ‘clean’ energy e.g. wind and solar energy
 Forestation and Afforestation: The planting of
new trees as trees sequester and store CO2 e.g.
forest regeneration
 Energy efficiency: reducing emissions though an
increase in energy efficiency e.g. installation of
energy-efficient machinery
 Methane capture: avoiding methane emissions
through capture and burning to create energy
e.g. landfill methane capture
Project eligibility for carbon credits depends on
whether a project follows one of the Kyoto
Protocol’s project-based mechanisms or an
independent voluntary standard.
How are carbon credits issued?
1. All projects listed on CTX are certified, verified
and registered, ensuring that actual emission
reductions take place before the credits are
issued thus providing a secure and transparent
environment for carbon trading. The process of
getting credits issued varies depending on the
credit type i.e (CERs vs VERs). However, below is a
very general overview of the process a project
developer needs to follow before credits can be
issued: The selection of a approved methodology
which quantifies the GHG benefits of a project
2. The development of a Project Design Document
(PDD) which describes the whole project in detail
including the project crediting period and the
demonstration of additionality
3. An independent auditor reviews the PDD and
validates the project
4. The project is monitored to ensure that GHG
reductions are occurring
5. The monitoring reports are verified by an
independent auditor
6. The project gets credits issued into a appropriate
registry account
Where are carbon credits held?
Carbon credits are stored electronically in
‘registries’. Registries are essential for issuing,
holding, and transferring carbon credits. Once a
carbon project is issued with credits, the registry
gives each one a unique serial number so that they
can be tracked through their entire life-cycle.
Registries also facilitate the retirement
(surrendering) of credits for carbon neutrality
purposes, ensuring credits are not resold at a later
date.
In the voluntary carbon market, the largest registry
is the Markit Environmental Registry which CTX is
directly connected to. In the compliance markets,
each scheme has its own arrangements with
regards to registries. CTX is connected to various
national registries in the EU via CDC Climat’s
Registry Electronic Interface (REI).
How does MCX trade carbon credits?
This entire process was not understood well by
many. Those who knew about the possibility of
earning profits, adopted new technologies, saved
credits and sold it to improve their bottom line.
Many companies did not apply to get credit even
though they had new technologies. Some
companies used management consultancies to
make their plan greener to emit less GHG. These
management consultancies then scouted for buyers
to sell carbon credits. It was a bilateral deal.
However, the price to sell carbon credits at was not
available on a public platform. The price range
people were getting used to was about Euro 15 or
maybe less per tonne of carbon. Today, one tonne
of carbon credit fetches around Euro 22. It is traded
on the European Climate Exchange. Therefore, you
emit one tonne less and you get Euro 22. Emit less
and increase/add to your profit.

INDIA AND CARBON CREDITS
ANALYZING INDIAN SCENARIO
India being a developing country has no emission
targets to be followed. However, she can enter into
CDM projects. As mentioned earlier, industries like
cement, steel, power, textile, fertilizer etc emit
green houses gases as an outcome of burning fossil
fuels. Companies investing in Windmill, Bio-gas, Bio-
diesel, and Co-generation are the ones that will
generate Carbon Credits for selling to developed
nations. Polluting industries, which are trying to
reduce emissions and in turn earn carbon credits
and make money include steel, power generation,
cement, fertilizers, waste disposal units, plantation
companies, sugar companies, chemical plants and
municipal corporations.

DELHI METRO RAIL CORPORATION (DMRC):
A must mention project is The Delhi Metro Rail
Corporation (DMRC): It has become the first rail
project in the world to earn carbon credits because
of using regenerative braking system in its rolling
stock. DMRC has earned the carbon credits by using
regenerative braking system in its trains that
reduces 30% electricity consumption.
Whenever a train applies regenerative braking
system, the released kinetic energy starts a machine
known as converter-inverter that acts as an
electricity generator, which supplies electrical
energy back to the Over Head Electricity (OHE)
lines. This regenerated electrical energy that is
supplied back to the OHE that is used by other
accelerating trains in the same service line. DMRC
can now claim 400,000 CERs for a 10-year crediting
period beginning December 2007 when the project
was registered by the UNFCCC. This translates to Rs
1.2 crore per year for 10 years. India has the highest
number of CDM projects registered and supplies the
second highest number of Certified Emission
Reduction units. Hence, India is already a strong
supplier of Carbon Credits and can improve on it.
(Refer Annexure No. 3 & 4 for projects registered
and expected average annual CERs generated
respectively)

BENEFITS FOR INDIA
By, switching to Clean Development Mechanism
Projects, India has a lot to gain from Carbon Credits:
a) It will gain in terms of advanced technological
improvements and related foreign investments.
b) It will contribute to the underlying theme of
green house gas reduction by adopting alternative
sources of energy
c) Indian companies can make profits by selling the
CERs to the developed countries to meet their
emission targets.
Financing support in India:
Carbon Credits projects requires huge capital
investment. Realizing the importance of carbon
credits in India,
• The World Bank has entered into an agreement
with Infrastructure Development Finance Company
(IDFC), wherein IDFC will handle carbon finance
operations in the country for various carbon finance
facilities.
• The agreement initially earmarks a $10-million aid
in World Bank-managed carbon finance to IDFC-
financed projects that meet all the required
eligibility and due diligence standards.
• IDBI has set up a dedicated Carbon Credit desk,
which provides all the services in the area of Clean
Development Mechanism/Carbon Credit (CDM).
• In order to achieve this objective, IDBI has entered
into formal arrangements with multi-lateral
agencies and buyers of carbon credits like IFC,
Washington, KfW, Germany and Sumitomo
Corporation, Japan and reputed domestic technical
experts like MITCON.
• HDFC Bank has signed an agreement with Cantor
CO2E India Pvt Ltd and MITCON Consultancy
Services Limited (MITCON) for providing carbon
credit services. As part of the agreement, HDFC
Bank will work with the two companies on
awareness building, identifying and registering
Clean Development Mechanism (CDM) and
facilitating the buy or sell of carbon credits in the
global market.
India Inc takes to carbon trading?
More than 112 Indian companies, including
Hindustan Lever Ltd and Tata Steel, are set to trade
in carbon credits.
These companies are ready with clean technologies
to bring down the emission levels of greenhouse
gases and sell certified emission reductions (CERs)
to developed countries.
According to World Bank estimates, India is
expected to rake in $100 million annually by trading
in carbon credits and Indian companies are
expected to corner at least 10 per cent of the global
market in the initial years.
They can also buy CERs from developing countries,
which do not have any reduction obligations, in
case their industries are not in a position to lower
the emission levels themselves.
One tonne of carbon dioxide reduced through the
Clean Development Mechanism (CDM) project,
when certified by a designated entity, becomes a
tradable CER.
"It is cheaper for developing countries to reduce
emissions than developed countries. As a result,
buyers are coming to Indian shores," said Teri
Associate Fellow Vivek Kumar. Brazil and China are
emerging two of India's strong competitors.
According to industry estimates, some Indian
companies have entered into forward contracts
with buyers from the European Union. These
contracts are estimated at $325 million.
The projects range from cement, steel, biomass
power, bagasse co-generation and municipal solid
waste to energy, municipal water pumping and
natural gas power.
While the ministry has given the host-country
clearance, the CDM projects will have to be
approved by the executive board of the UNFCCC. Of
the 15 projects approved by the UNFCCC so far, four
are Indian.
These four are: Gujarat Flurochemicals, Kalpataru
Power Transmission Ltd, the Clarion power project
in Rajasthan and the Dehar power project in
Himachal Pradesh.
India is the world's sixth largest emitter of carbon
dioxide with its present share in global emissions
estimated at 6 per cent.
How buying carbon credits attempts to reduce
emissions?
Carbon credits create a market for reducing
greenhouse emissions by giving a monetary value to
the cost of polluting the air. This means that carbon
becomes a cost of business and is seen like other
inputs such as raw materials or labor.
By way of example, assume a factory produces
100,000 tonnes of greenhouse emissions in a year.
The government then enacts a law that limits the
maximum emissions a business can have. So the
factory is given a quota of say 80,000 tonnes. The
factory either reduces its emissions to 80,000
tonnes or is required to purchase carbon credits to
offset the excess.
As emission levels are predicted to keep rising over
time, it is envisioned that the number of companies
wanting to buy more credits will increase, which will
push the market price up and encourage more
groups to undertake environmentally friendly
activities that create for them carbon credits to sell.
Another model is that companies that use below
their quota can sell their excess as 'carbon credits.'

The possibilities are endless; hence making it an
open market.

Companies who also offset their residual emissions
include:
Google
Google have been carbon neutral since 2007 and
recognise the importance of combatting climate
change in order to preserve a sustainable
environment for their business and the generations
to come. They have a three-way approach to
becoming a greener company: they optimise their
energy by optimising their efficiency, maximise their
renewable energy sources where they can and
offset their residual emissions.
At Google, they see carbon offsets “as a tool that
allows (them) to take full responsibility of (their)
impact today. When considering an offset project,
(they) carefully examine the project’s
environmental integrity, its ability to be monitored
and verified, and ensure that the carbon savings of
the project are real and additional to what would
have happened without (their) investment.”
Climate cars
Climate cars is a green car service company in
London who take their environmental responsibility
very seriously. Their policy adheres to the following
key principles: investment in low-emission
technology, reduction and recycling of waste,
offsetting residual emissions and finally, ensuring a
low carbon supply chain.
Climatecars “conduct an assessment annually of all
of (their) hybrid cars’ emissions and then purchase
carbon credits to offset all of them.”
PUMA
PUMA published its first Environmental Profit and
Loss Account (EP&L) in 2010, a sustainability
initiative that reported the group’s total
environmental impact for key areas of greenhouse
gas emissions. The EP&L valued PUMA’s water, land
air and waste pollution generated by its operations
at €145 million for that year.
This innovative approach to evaluating its
environmental impacts has encouraged PUMA to
improve its energy use and innovate to develop
more sustainable products. The group is also
engaging in carbon neutral supply chain and helping
its suppliers become carbon neutral. PUMA are
eager to “continue to grow toward (their) mission
to be the most desirable and sustainable sport-
lifestyle company in the world, (…) and to further
(their) commitment to collaborate with (their)
partners to find solutions to offset (their) carbon
footprint.”