The burning of fossil fuels like coal, oil and natural gas – in which carbon, being stored for millions of years along with rapid land clearance has led to huge level of greenhouse gas emissions. Further the Carbon sinks can’t keep up with this pace and thereby concentration of greenhouse gases in the atmosphere have raised very dramatically thus, leading to an enhanced greenhouse effect. Most scientists are of the belief that with the rise in concentration of these gases, there would be a general and very rapid warming of the world’s climate taking place in the future years. It is not certain as to what effect this warming will have on the regional climate, but predictions include widespread ecological changes in agricultural production, and rising sea levels. While not all the model predictions are so dire, the possibility of costly disruption from rapid climatic change would require greater attention and precautionary measures to be put in place.
Under the Kyoto Protocol, developed countries are required to limit their greenhouse gas emissions according to the following formula:
Actual emissions must be less than or equal to the assigned amount +/- carbon sinks and Kyoto emissions.
The allowable carbon sinks under the Kyoto Protocol includes aforestation and reforestation activity undertaken since 1990.
Under the UNFCCC (United Nations Framework Convention on Climate Change), the countries are permitted to use a trading system to help meet their emissions target. In principle, a country further allocates permit to individual companies for the emission of a certain quantity of greenhouse gases. If the country meets its target then it caters its Kyoto commitment (assuming that the measures of its emissions are accurate). But in case it turns incapable of meeting its target, it can buy permits from countries that are under their targets. Similarly, companies within a country that prove more able to reduce their emissions are allowed to ‘trade’ excess permits to other, more polluting, enterprises. Emissions become an internal cost of doing business and are visible on the balance sheet alongside raw materials and other liabilities or assets. China for instance has become the world’s largest source of developing world carbon credits purchased by foreign firms.
After costing up alternatives the business may decide that it is uneconomical or infeasible to invest in new machinery for that year. Instead it may choose to buy carbon credits on the open market from organizations that have been approved as being able to sell legitimate carbon credits.
There are various trading programs like the European Union Emission Trading Scheme for greenhouse gases. In the United States there is a national market to reduce acid rain and several regional markets in nitrous oxide. Markets for other pollutants tend to be smaller and more localized. Carbon trading is a better approach than direct carbon tax or direct regulation. It avoids the consequences and compromises that often accompany those other methods. It is cheaper and politically preferable for existing industries because the initial allocation of allowances is often been allocated with a grandfathering provision wherein the rights are issued in proportion to historical emissions. In addition, most of the money in the system is spent on environmental activities, and the investment is directed at sustainable projects that earn credits in the developing world which contributes to the Millennium Development Goals.
India is a dominant player in the global carbon market with almost a third of the total Clean Development Mechanism (CDM) projects registered with the United Nations under the Kyoto Protocol. These projects help the Indian industry generate a large amount of carbon credits to be traded in international exchanges.
India generated over 27 million carbon credits (growth of 100% from 2006) in 2007, showcasing its unflinching commitment towards global environment conservation. There is a huge potential for the Indian companies to generate substantial foreign exchange revenues through CDM projects. Further, the potential of these projects to attract foreign capital and technology is enormous too.
Analysts forecast that India’s trading in carbon credits would touch US$ 100 billion by 2010. At present the total registered CDM projects are more than 300, almost 1/3rd of the total CDM projects registered with the UNFCCC. The total issued CERs (Certified Emission Reductions) with India as a host country stood at 34,101,315 (around 34 million), around 1/3rd of the total CERs issued by the UNFCCC. It is expected that with the increase in awareness this would further rise in future.
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