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Wednesday, November 17, 2010

What is Carbon Trading?

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An administrative approach at global level that tries to keep control on pollution by producing economic incentives for achieving reduction in the emission of pollutants is called as emission trading. Along the same line the carbon Trading can be defined as – The administrative approach which is used to control emissions by providing economic incentives for achieving reductions in the emissions of carbon dioxide and other carbon compounds , is called as carbon trading.

In emission trading, a central authority or a government agency fixes a limit on the amount of a pollutant that can be emitted out. The pollutants- emitting bodies (companies, groups or industries) are given credits or allowances which represents the right to some particular pollutant only in a limited amount. The companies or the industrial units that pollute beyond their allowances are pressurized to buy credits from those who pollute less than their allowances. This transfer is called as a trade. If these rules are applied for carbon related pollutants like carbon dioxide or carbon monoxide gases, then the trade of this type is called as carbon trading.

The aim of Carbon Trading or the emission trading is to air reduce pollution at global level. In carbon trading, free market is used in order to determine how to deal with the problem of air pollution. The industrial units can reduce their emissions by applying whatever the technology these companies want to apply.

The countries of the world that have signed the treaty of the Kyoto- protocol of 1997 are under obligation to reduce their green house gas- emissions or to pay a price for that. The central idea behind it, was to make developed countries pay for their carbon emissions while at the same time monetarily rewarding the countries cutting down the GHG emissions. Suppose if a company in India applies Clean Technology and cuts x-tonnes of carbon emission, it can sell this carbon to a company located in, suppose- United States, which emits more GHGs.

Here is a complete report from ‘The Hindu” that had appeared in its may 06, 2004 issue - COME GLOBALISATION, and trade takes on different hues. The latest comes from quite unconventional quarters — trading of carbon credits or more specifically carbon dioxide credits between developing and developed nations. When global warming is the watchword and reducing carbon dioxide emission is the buzzword, can trade be far behind?

This becomes particularly relevant when CO{-2} emissions from developed countries are way beyond those from the developing countries. Add to this the compulsion faced by developed countries to reduce emissions by 2008-2012. The catch however is the cost — developed countries have to spend nearly $300-500 for every tonne reduction in CO{-2} emission. Contrast this with $10-25 to be spent by the developing countries. The stage is thus set for trade to flourish. Trading carbon credits is hence seen as a less expensive option. Yet, there is a limit to which developed nations can buy credits.

The United Nations Framework Convention on Climate Change's Clean Development Mechanism (CDM) has been put in place to facilitate the trade of carbon credits between the developing and developed nations. Till date CDM held little significance, as there was no accrediting body recognised by the United Nations. Not any more.

In March this year, Det Norske Veritas (DNV) of Oslo, Norway, well known in the field of ISO certification was accredited by the UN to act as a validating body. The first organisation to get the accreditation, DNV has already lapped a few projects around the world. In India, DNV is in the process of validating 9-10 projects.

What does a company in a developing country gain by trading carbon credits? Monetary gain is of course the first and foremost. Every tonne of CO{-2} not emitted is considered as one credit and every carbon credit fetches the company $3-6. The remuneration continues year after year. And the best part is that it is quite easy to implement technologies known to reduce emissions provided the project meets certain criteria.

"The most important criterion is for the project proponent to prove that it is `not business as usual' and is a sustainable project," said C. Kumaraswamy, Station Manager & Registered Lead Auditor at DNV, Bangalore. For instance, it is considered business as usual if it is a binding requirement (on the company) to change the fuel or technology. Thus the change over by the Delhi buses to CNG will not fall under the "is not business as usual" clause.

"Only those getting overseas assistance to implement the project will be allowed to trade credits. Again, the government has to first approve the project before the project is validated and a developed country should be ready to buy the credit," explained Mr. Kumaraswamy. "Even projects implemented after 2000 can engage in carbon credit trading and small companies using similar technology can come together to claim credits and trade them."

The companies trading credits have two options to choose from depending on the life of the project — fixed crediting period of ten years or first period of seven years extendable twice for a total period of 21 years.
Mr. Kumaraswamy feels that India, like China has a big potential to trade credits. According to him even projects like biomass gasifiers are seen as sustainable. Despite emitting CO{-2}, it is seen as a zero CO{-2} emitter. Similarly, solid waste management projects are sure credit earners. "Someone collecting the waste and converting the methane to power can claim carbon credits," Mr. Kumaraswamy explained.

Another advantage of implanting cleaner and sustainable technologies is the ability to avail funding from Prototype carbon Fund which is under the aegis of the World Bank. The fund is formed by contributions from many developed nations. The only catch being that the carbon credit trading will be at a discounted price.
With the European Union Emission Trading Scheme about to be passed any time by the European Union, the Clean Development Mechanism is here to stay. And Indian companies may well take the lead to use cleaner technologies to earn credits and secure funds.

Key Words : Carbon Trading, Carbon Credit, Clean Development Mechanism, China, European Union

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