Carbon

emissions

trading is

form

of emissions

trading that

specifically

targets carbon dioxide (calculated in tonnes of carbondioxide equivalent or (CO2e) and

it currently constitutes the bulk ofemissions trading.

DEFINITION OF 'CARBON TRADE'

An exchange of credits between nations designed to reduce emissions of carbon
dioxide. The carbon trade allows countries that have higher carbon emissions to
purchase the right to release more carbon dioxide into the atmosphere from countries
that have lower carbon emissions. The carbon trade originated with the 1997 Kyoto
Protocol and is intended to reduce overall carbon dioxide emissions to 5% below 1990
levels between 2008 and 2012.
Economics of carbon pricing
Many economic properties of carbon pricing hold regardless of whether carbon is priced
with a cap or a tax. However, there are a few important differences. Cap-based prices
are more volatile and so they are riskier for investors, consumers and for governments
that auction permits. Also, caps tend to short-out the effect of non-price policies such
are renewables subsidies, while carbon taxes do not.
Efficiency of carbon pricing
Carbon pricing is considered by economists to be among the most efficient way to
reduce emissions. This means that it reduces emissions for the least possible cost,
where these costs include the cost of efficiency measures as well as the cost of the
inconvenience of making do with less of the goods and services provided by fossil fuel.
This efficiency comes about by eliminating a market failure (the un-priced external costs
of carbon emissions) at its source by pricing these costs.[20] This is best explained
example
Consider an example market with 100 emitters, each of which gets a different benefit
from using carbon (and emitting CO2). Each emitter would like to use enough fossil fuel
to emit 1 ton per year. Suppose the benefits from that ton range from $1 for the user
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with the least need for carbon to $100 (in $1 increments) for the user who would benefit
most. Now consider this market under two different pricing policies, a cap-and-trade
policy and a tax. Further suppose that the tax is $60.01/ton and the cap has been set at
40 tons, so that 40 one-ton permits have been issued.
Under the tax, it is clear that no one with an emission value of less than $60.01 will emit
because they would have to pay $60.01 for less than $60.01 in value. So the 40 carbon
users with values ranging from $61 to $100 will pay the tax and emit their ton of carbon.
Under cap and trade, suppose the price turned out be less than $60.01 and someone
other than a top-40 emitter (ranked by value) got a permit. In that case a top-40 emitter
without a permit would offer that someone more than $60 and they would sell because
that is more that the value they would get from using the permit themselves. This will
drive the price up to the point where only top-40 emitters get permits and the price is a
little more (say $60.01) than any bottom-60 emitter would pay.
Several conclusions are drawn by economics from a somewhat more rigorous
application of this type of analysis. First the same people end up emitting under a tax
and under a cap that pushes the price equally high. Second, only the highest value
emitters end up emitting. Third, the total value of emitters is greater than under any
other distribution of permits. This final conclusion is the reason carbon pricing is
considered efficient by economist.
Finally, economics points out that since regulators would have an extremely hard time
finding out the value that each emitter receives from emitting, this efficient outcome is
extremely unlikely if the regulator chooses who can emit and who cannot. This is why
economics teaches that command-and-control regulation will not be efficient, and will be
less efficient than a market mechanism, such as carbon pricing.
The state of carbon pricing: Around the world in 46 carbon markets
Europe
Some European countries have a carbon tax where the government sets a price for
each tonne of carbon dioxide emitted. Others have cap-and-trade systems where the
governing body sets a gradually reducing limit on emissions covered by the scheme,
and let the market set the price.

The European Union's emissions trading scheme (ETS) is the world's largest cap-andtrade scheme, covering about half the bloc's carbon dioxide emissions. But the ETS has
hit trouble in recent years.
The European Commission scrambled to boost the price after it plummeted to record
lows in 2013. Its plan to temporarily remove 900 million permits - known
as backloading - is only a temporary fix, however.
The commission has introduced a new proposal that would allow it to tinker with the
number of permits, known as a strategic reserve. But experts remain unconvinced the
reform would be able to save the market.
A number of domestic schemes have popped up to bolster the EU-ETS.
The UK introduced a carbon price floor in 2012 which put a minimum price on
emissions. But the media blamed it and other green levies for high consumer bills,
leading the UK Chancellor to curb the policy.
Sweden also has its own carbon tax. With a price of $168 per tonne of carbon dioxide, it
has the highest carbon price in the world. A number of industries - such as those not
covered by the EU ETS and agriculture - are partially exempt from the tax, however,
limiting its effect.
France and Ireland also have limited taxes on the use of fossil fuels.
US
America's Congress has failed on numerous occasions to establish a nationwide capand-trade programme. But it does have two regional schemes.
The Regional Greenhouse Gas Initiative (RGGI) covers nine states: Connecticut,
Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island
and Vermont. California also has its own scheme.
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While symbolically important, the RGGI isn't particularly ambitious - the carbon price is
consistently between $2 to $3. California's market has fared slightly better, with a
carbon price of around $10 to $15 during its first full year of trading. Both schemes show
a desire for climate action in the US at the sub-national level which the national
government has so far struggled to match.
President Obama is expected to make an announcement on Monday which could
strengthen the schemes, however. A new rule capping coal emissions could encourage
states to join existing cap-and-trade schemes or set up their own.
China
Perhaps the biggest news in the carbon trading world this year was the start of six
regional cap-and-trade schemes in China. 1,115 megatonnes of carbon dioxide
emissions are covered by the schemes, making China the second largest carbon
market in the world.
Each of the schemes is slightly different, with the carbon price fluctuating between 20
($3) and 80 ($13). China's national government is hoping to learn which works best
before rolling out a nationwide programme, possibly as early as 2016, the World Bank
reports.
Australia
In contrast to China's exciting early success, a change of government has seen
Australia's carbon market implode.
Tony Abbott was elected as Australia's prime minister in 2013 on a largely climate
skeptic platform. A centrepiece of his Liberal Party's environmental policy is to scrap
Australia's carbon tax and stop its planned integration into the EU ETS. Instead, the
government wants to implement a 'Direct Action Plan' in which companies 'bid' to
reduce emissions.

The proposal switches the emphasis of Australia's emissions reduction policies to

paying businesses to curb emissions, rather than taxing their pollution. Experts remain
unconvincedby the plans economic or environmental credentials, however.

An Overview Of Carbon Trading In India And Its Legal Aspect

The companies in the developed world are required to meet certain carbon emission
target set by their respective government. However if these companies are not able to
meet their emission targets, they have an alternative of purchasing these carbon credits
from the market i.e. from someone who is successful in meeting these targets and who
has a surplus of these credits. This process is known as carbon trading. Carbon trading
is also very advantageous for the companies of the developing world as it provides
monetary gains in exchange of carbon credits which help these companies to purchase
or change their technology. This change in technology eventually helps the companies
to reduce carbon emission.

Need for Carbon Trading and Clean Development Mechanism

The need for carbon trading was felt when it was realized that the industries have been
the biggest polluter of green house gases which has resulted in global warming. A lot of
effort was put in by the NGOs and other institutions to bring the attention of the world
towards the problem of global warming. But this issue was not taken very seriously as a
result of which nothing much was done in this regard. Thus it was realized that the only
way to get the attention of the world towards these problems was by attaching some
financial incentive to it. As a result the concept of Carbon trading was introduced.

Clean Development Mechanism

The Clean Development Mechanism (CDM), defined in Article 12 of the Protocol,
allows a country with an emission-reduction or emission-limitation commitment under
the Kyoto Protocol (Annex B Party) to implement an emission-reduction project in
developing countries.
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Carbon Trading in India

Indian industries were able to cash in on the sudden boom in the carbon market
making it a preferred location for carbon credit buyers. It is expected that India will gain
at least $5 billion to $10 billion from carbon trading (Rs 22,500 crore to Rs 45,000 crore)
over a period of time. Also India is one of the largest beneficiaries of the total world
carbon trade through the Clean Development Mechanism claiming about 31 per cent
(CDM).
Indias carbon market is one of the fastest growing markets in the world and has already
generated approximately 30 million carbon credits, the second highest transacted
volumes in the world. The carbon trading market in India is growing faster than even
information technology, bio technology and BPO sectors. Nearly 850 projects with an
investment of Rs 650,000 million are in the pipeline. Carbon is also now being traded on
Indias Multi Commodity Exchange. It is the first exchange in Asia to trade carbon
credits.

Examples of Carbon trading in India

Jindal Vijaynagar Steel

The Jindal Vijaynagar Steel has recently declared that by the next ten years it will be
ready to sell $225 million worth of saved carbon. This was made possible since their
steel plant uses the Corex furnace technology which prevents 15 million tonnes of
carbon from being discharged into the atmosphere.

Powerguda in Andhra Pradesh

The village in Andhra Pradesh was selling 147 tonnes equivalent of saved carbon
dioxide credits. The company has made a claim of having saved 147 MT of CO2. This
was done by extracting bio-diesel from 4500 Pongamia trees in their village.

Handia Forest in Madhya Pradesh

In Madhya Pradesh, it is estimated that 95 very poor rural villages would jointly earn at
least US$300,000 every year from carbon payments by restoring 10,000 hectares of
degraded community forests.

Legal aspect of Carbon Trading in India

The Multi Commodity exchange started future trading on January 2008 after
Government of India recognized carbon credit as commodities on 4th January. The
National Commodity and Derivative Exchange by a notification and with due approval
from Forward Market Commision (FMC) launched Carbon Credit future contact whose
aim was to provide transparency to markets and help the producers to earn
remuneration out of the enviourment projects.

Carbon credit in India is traded on NCDEX only as a future contract. Futures contract is
a standardized contract between two parties to buy or sell a specified asset of
standardized quantity and quality at a specified future date at a price agreed today (the
futures price). The contracts are traded on a future exchange. These types of contracts
are only applicable to goods which are in the form of movable property other than
actionable claims, money and securities. . Forward contracts in India are governed by
the Indian Contract Act, 1872.

Under the present provision of the Forward Contracts Regulation Act, the trading of
forward contracts will be considered as void as no physical delivery is issued against
these contracts. To rectify this The Forward Contracts (Regulation) Amendment Bill
2006 was introduced in the Indian Parliament. The Union Cabinet on January 25, 2008
approved the ordinance for amending the Forward Contracts (Regulation) Act, 1952.
This ordinance has to be passed by the Parliament and is expected to come up for
consideration this year. This Bill also amends the definition of forward contract to
include commodity derivatives. Currently the definition only covers goods that are
physically deliverable. However a government notification on January 4th paved the
way for future trading in CER by bringing carbon credit under the tradable commodities.
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Value Added Tax

The government of Delhi in a recent notification has declared that the Certified
Emission Reductions (or 'Carbon Credits' as we know) are to be considered as goods
and thus their sale is liable to value added tax in the State. The Commissioner of Trade
and Taxes has declared that the nature and aspects of Carbon credits have to be
examined and tested against the definition of goods to arrive at the conclusion that
carbon credit are no different from ordinary commodities bought and sold in the market
and thus a sale transaction of carbon credit would attract value added tax on sale.

Conclusion
Even though India is the largest beneficiary of carbon trading and carbon credits are
traded on the MCX, it still does not have a proper policy for trading of carbons in the
market. As a result the Centre has been asked by The National Commodity and
Derivatives Exchange Limited (NCDEX) to put in place a proper policy framework for
allowing trading of certified emission reductions (CERs), carbon credit, in the market.
Also, India has huge number of carbon credits sellers but under the present Indian law,
the buyers based in European market are not permitted to enter the market. To increase
the market for carbon trading Forward Contracts (Regulation) Amendment Bill has been
introduced in the Parliament. This amendment would also help the traders and farmers
to utilize NCDEX as a platform for trading of carbon credits. However, to unleash the
true potential of carbon trading in India, it is important that a special statue be created
for this purpose as the Indian Contracts Act is not enough to govern the contractual
issues relating to carbon credits.