Carbon Credits

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Carbon Credits
By Anand Wadadekar

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Environmental Management - Introduction

Environmental Law is perceived as one of the most important tools of environmental

management. Protection of environment from degradation has now not just remained a legal
issue but a management issue.

In India environmental management is largely carried out at the state level. This is true for
natural resources such as forests and land as well as for air, water quality and solid waste
pollution.

It is observed that just compliance of environmental law on paper does not result in effective
control of pollution. An alternate paradigm for pollution abatement for more effective methods
of environmental control beyond traditional "command-and-control (CAC)" style regulation is to
use economic instruments (EIs) or market-based instruments (MBIs). Introduction of market
based instruments will help to reduce emissions, pollution and increase social responsibility of
industries. Eco-taxes, tradable emission allowances and negotiated agreements are some of the
types of instruments.

Market Based Instruments (MBI) for Environmental Benefits:

"Market Based Instruments refer to the environmental policies which encourage change in
technology, behavior or products through financial incentives like subsidies, taxes, price
differentiation or market creation."
MBIs use the market & price mechanism to encourage firms or households to adopt environment
friendly practices. They comprise a wide range of instruments from traditional ones like taxes on
pollution, tradable permits to input taxes, product charges and differential tax rates.

The common element among all MBIs is that they work through the market and affect the
behavior of economic agents (such as firms and households) by changing the nature of
incentives/disincentives these agents face.

CARBON CREDIT - As one of the most effective MBIs:

What does Carbon Credit mean?

A permit that allows the holder to emit one ton of carbon dioxide; Credits are awarded to
countries or groups that have reduced their green house gases below their emission quota.

Its goal is to stop the increase of carbon dioxide emissions. The Kyoto Protocol presents nations
with the challenge of reducing greenhouse gases and storing more carbon. A nation that finds it
hard to meet its target of reducing GHG could pay another nation to reduce emissions by an
appropriate quantity. The carbon credit system was ratified in conjunction with the Kyoto
Protocol.

For example, if an environmentalist group plants enough trees to reduce emissions by one ton,
the group will be awarded a credit. If a steel producer has an emissions quota of 10 tons, but is
expecting to produce 11 tons, it could purchase this carbon credit from the environmental group.
The carbon credit system looks to reduce emissions by having countries honor their emission
quotas and offer incentives for being below them.

What is Carbon Trade?

An idea presented in response to the Kyoto Protocol that involves the trading of greenhouse gas
(GHG) emission rights between nations.
For example, if Country X exceeds its capacity of GHG and Country Y has a surplus of capacity,
a monetary agreement could be made that would see Country X pay Country Y for the right to
use its surplus capacity.

Credits versus Taxes

Credits were chosen by the signatories to the Kyoto Protocol as an alternative to Carbon taxes. A
drawback of tax-raising schemes is that, they are not frequently hypothecated, and so some or all
of the taxation raised by a government may be applied inefficiently or not used to benefit the
environment.

By treating emissions as a 'market commodity' it becomes easier for business to understand and
manage their activities, while economists and traders can attempt to predict future pricing using
well understood market theories. Thus the main advantages of a tradable carbon credit over a
carbon tax are:
1. the price is more likely to be perceived as fair by those paying it, as the cost of carbon is set by
the market, and not by politicians. Investors in credits have more control over their own costs.

2. the flexible mechanisms of the Kyoto Protocol ensure that all investment goes into genuine
sustainable carbon reduction schemes, through its internationally-agreed validation process.

Conclusion

Carbon credits are now a key component of national and international emissions trading
schemes. They provide a way to reduce greenhouse effect emissions on an industrial scale by
capping total annual emissions and letting the market assign a monetary value to any shortfall
through trading. Credits can be exchanged between businesses or bought and sold in
international markets at the prevailing market price. Credits 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 off-
setters purchase the credits from an investment fund or a carbon development company that has
aggregated the credits from individual projects. 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.

Carbon credits create a market for reducing greenhouse emissions by giving a monetary value to
the cost of polluting the air. Emissions become an internal cost of doing business and are visible
on the balance sheet alongside raw materials and other liabilities or assets. The ultimate objective
of regulating pollution through MBIs is improved environmental quality.