The carbon credit market in India is all set to rake in more than $120 billion by the end of 2010. According to the World bank, one of the biggest intermediaries in carbon credit trading, India along with China could emerge as one of the biggest beneficiaries, accounting for as much as 25 per cent of the total world trade.
Since industrialization began almost two centuries ago, man made activities and commercial activities have added significant amounts of green house gases (GHGs) to the atmosphere. According to a report by Intergovernmental Panel on Climate Change, the amounts of the following gases have increased significantly between the periods of 1750 – 2009
These gases allow the penetration of inbound UV and Infra red from the sun but trap the outbound rays reflected from the earth’s surface therefore resulting in rise in temperature of the earth’s surface. This leads to a phenomena called as global warming eventually leading to climate change. These GHGs along with a few more have a capability to trap radiations and each of these gases can stay in the atmosphere for a certain period of time. Studies use the terminology GWP to compare between the gases. Carbon dioxide is used as the benchmark so all the gases are measured in Carbon dioxide equivalence (CO2 emissions) The numbers indicate the heat trapping abilities and the time a gas stays for in the atmosphere The Kyoto Protocol – The Kyoto protocol was signed in Kyoto, Japan in the year 1997. The protocol required the industrialized countries, also called as Annex 1 countries to reduce their greenhouse gases (namely carbon dioxide, methane, nitrous oxide, sulphur hexafluoride, CFC etc.) by at least 5.2% from their 1990 levels by 2012. The Kyoto protocol facilitates several flexible mechanisms such as emissions trading, and clean development mechanism (CDM) or carbon credit trading for Annex 1 countries to meet their GHG emissions shortcomings by purchasing GHG reduction units from other countries possessing excess of these. The protocol comes as a blessing to the developing countries which can generate additional revenues by adopting green technologies and selling carbon credits to developed countries, say USA which are already stuck with old technologies and need carbon credits in abundance. The preliminary phase of Kyoto protocol started in 2007 and the second phase commenced in 2008. The countries which have voluntary signed this treaty include European Union, Japan and Canada among many others and USA which nearly accounts for one third of GHG emissions is yet to join this treaty. The Kyoto protocol has facilitated three important mechanisms for developed countries to acquire GHG reduction credits and minimize the cost of purchasing certified emission reduction. These are
CDM has already been discussed in the paper. Under JI, a developed country with relatively higher cost of GHG reduction would set up its project in another country with a relatively lower cost of implementation and cost of GHG units. CDM PROJECT TYPES Carbon Credits are sold to entities in Annex-I countries, like power utilities, who have emission reduction targets to achieve & find it cheaper to buy „offsetting? certificate rather than do a clean-up in their backyard. Type of projects, which are being applied for CDM and which can be of valuable potential, are:
MCX was the 1st derivatives exchange in India to launch Carbon Credits Contract trading to the country. MCX is the biggest commodity trading platform in India and it commenced trading on Carbon credits on 21st January, 2008. A few other exchanges in the world dealing in the same are Chicago Climate Exchange (CCX) and European Climate Exchange (ECX). Launching of carbon credit trading in India would help producers earn remunerative returns from implementing environmentally friendly projects. The markets for trading in carbon credits is roughly estimated to be at $70 billion annually and India is the leading beneficiary arising out of this trade with the possession of 30 million carbon credits and another 140 million in the pipeline already. MCX has already entered into a strategic alliance with the Chicago climate exchange (CCX) in september 2005 to initiate carbon trading in India in a view to realize better price discovery and cover risks associated with buying and selling. The trading unit of carbon credits will contain 200 units (metric tones) of carbon dioxide or carbon dioxide equivalent gases. Trading is being done in the form of carbon future contracts which will be available on the MCX platform with expiry on the 15th of December 2008, December 2009, December 2010, December 2011, December 2012.
The future carbon credit trading markets offer numerous oppurtunities for the future financial/industrial/technical projects to adopt eco-friendly techniques and incorporate green techno-logies in their production activities, thereby earning carbon credits which will reward them with a good price. These carbon credits can be earned by the use of Joint implementation (JI) in annex 1 countries or by CDM in Non annex 1 or developing countries. The principal buyers of carbon credits are mainly Annex 1 countries such as
The major sources of supply are Non-Annexure I countries such as India, China, and Brazil.
Currently green project participants, manufacturing units, brokers, banks and investors involved in futures trading in environment related financial instruments take part in the trade. The ECX, a subsidiary of CCX is the leading exchange in terms of trade
By 2010, india will have as much as USD 100 billion worth of CERs and close to 300 CDM based projects out of 900 total projects with the UNFCCC. In number, these CERs come out to be around 35 million with each CER containing almost 200 metric tones of carbon dioxide equivalent gases. The worth of each of these CER is estimated to be around 15 to 22 euros. India annually produces an average of 28 million CER, the revenues of which could run into over Rs. 2500 crores.
In India, currently only bilateral deals and trading through intermediaries are widely prevalent leading to sellers being denied fair prices for their carbon credits. Advantages that the MCX platform offers are:
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