Business Dimensions, Vol.

2(1), 1-12, January 2015

www.business-dimensions.org

ISSN 2348-2737 (Print)

ISSN 2348-2745 (Online)

Carbon Credit - A Birds Eye View

MD. Arshad Jamal
Research Scholar,
Department of Commerce & Business Studies,
Jamia Millia Islamia, Delhi, INDIA.
(Received on: October 12, 2014)
ABSTRACT
As nations have progressed we are emitting more carbon dioxide and other
gases which resulted in warming of the globe. So, countries came together and
signed an agreement named the Kyoto Protocol. This Protocol gave birth to the
concept of Carbon Credit, and it is now turning into a product that helps people,
countries, consultants, traders, corporations and even farmers earn billions of rupees.
Indian Economy is a developing economy. While adopting the Kyoto Protocol,
Indian Economy decided to focus on certain area.
India is the second largest in population, fourth largest in energy
consumption and third largest in greenhouse gases production and burns ten folds
fuel wood as compare to United States. To control these emissions on the global
scale the environmental carbon trading practices are done on the basis of the carbon
credits earned. In India the Coal based power generation is the biggest polluter and
so it provides the biggest opportunity for emission reduction and hence can be the
biggest carbon credits producers. Presently, next to china India is generating the
highest number of carbon credits in the world. In comparison to the developed
nations the carbon emission level in India is much less. This provides enough
opportunities for its industries to produce carbon units and harness benefits out of its
trading. Indias average annual CERs (Certified Emission Reduction) stand at 12.6%
or 11.5 million which can go up to 25 %. Hence India has a large potential to earn
carbon credits and in this context the carbon consultancy service has a greater part to
play and is going to add a new dimension to the environmental and financial
services arena.
Keywords: Carbon, Credit, Kyoto Protocol.
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MD. Arshad Jamal, Bus. Dimn.,Vol.2 (1), 1-12 (2015)

INTRODUCTION
Carbon credits have emerged as an important instrument in the financial markets.
The primary goal is to reduce emission of green house gases. By permitting allowances to be
bought and sold, an operator can seek out the most cost-effective way of reducing its
emissions, either by investing in cleaner machinery and practices or by purchasing emissions
from another operator who already has excess capacity. Carbon credits are a key component
of national and international emissions trading schemes that have been implemented to
mitigate global warming. 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 carbons 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. This is reflected in their price; voluntary units typically
have less value than the units sold through the rigorously-validated Clean Development
Mechanism.
ABOUT KYOTO PROTOCOL
The Kyoto Protocol was initiated by the United Nations Framework Convention on
Climate Change and ratified by 181 countries and the European Union as a whole, individual
entity in 1997, and was put into effect in 2005.
This protocol was proposed by the international community to address and reduce
greenhouse gas emissions that have led to global climate change. The Protocol makes it
mandatory for commercial entities emitting above the permitted limit of carbon dioxide to
cut down their emissions to prescribed levels, or they should buy carbon credits certificates
which can be transacted in the market, or alternatively pay a charge for the emissions, which
is referred to as carbon tax.
ABOUT CARBON CREDIT
International treaties have set quotas on the amount of GHG countries can produce,
which in turn set quotas for businesses. Instruments like carbon credits and carbon offset
were introduced in order to improve the scenario by encouraging firms to be more
environment friendly in conducting their business. One carbon credit allows one tonne of
carbon dioxide or a corresponding amount of other greenhouse gases to be discharged in the
air. Businesses that are over their quotas must buy carbon credits for excess emissions, while
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MD. Arshad Jamal, Bus. Dimn.,Vol.2 (1), 1-12 (2015)

those below can sell their remaining credits. This exchange of credits between businesses has
encouraged carbon trading globally. These credits can be exchanged between businesses or
bought and sold in international markets at prevailing market price at two exchanges, namely
the Chicago Climate Exchange and the European Climate Exchange. The Multi-Commodity
Exchange of India (MCX) may soon become the third exchange in the world to trade in
carbon credits. The amount of global emissions can be controlled through the buying and
selling of carbon credits in the carbon trading method. It is quite simple and convenient to
purchase Carbon Credits from a number of firms, just like any other monetary instrument, as
they are traded in an open market. Carbon trading is used when the companys emissions
exceed its quota of carbon credits, forcing it to purchase credits from other companies which
have spare carbon credits. As a result, the worldwide carbon emissions stay within
permissible levels, and the companies come up with ecologically sustainable ways of
conducting business .The system also motivates the organisations to be more eco friendly so
that they can increase their earnings by selling carbon credits. As carbon credits are freely
traded in the market, they make it very easy for businesses to follow the system. There are no
complex rules or procedures to adhere to, which enhances their acceptance and makes the
system highly successful. Carbon credits can also be purchased even if you are not a part of
any organisation in order to lower your own carbon footprint. The money that you put in this
manner is routed to fund ecological projects in any region on the planet so that the emissions
made as a result of your activities can be neutralized. This sale and purchase in carbon
credits helps limit the unchecked emissions of greenhouse gases throughout the world.
Organizations responsible for atmospheric pollution are made to pay for their acts while ones
taking positive steps are rewarded. In the present scenario, the market of carbon credits has a
direct impact on the firms financial analysis. This has caused firms to actively seek ways to
decrease their emissions and adopt cleaner ways of doing business. Thus, the whole system
motivates companies and governments to promote environment friendly processes that
reduce greenhouse gas emission. Carbon trading, also referred as emissions transacting, it is
a joint effort designed to limit the amount of carbon that businesses, organizations and other
entities produce over a specific period of time. The ones who are selling are companies that
use clean technology and those buying are the worlds polluters. In future, the menace of
global warming can be effectively handled by this system.
EMERGENCE OF CARBONCREDIT
Kyoto Protocol, the issue of climate change and global warming became the topic of
International concern in the 1980s and since then has been subject to debate and several
agreements on scientific issues, voluntary actions, legally binding greenhouse gas emission
targets, rules for implementation and mechanisms. At the 1997 Climate Change Convention
in Kyoto, the primary topic of discussion was the reduction of greenhouse gases (GHG),
which are believed to be the principal cause of global warming. Kyoto Protocol is a
voluntary treaty signed by 141 countries, including the European Union, Japan and Canada
for reducing GHG emission by 5.2% below 1990 levels by 2012. However US who accounts
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MD. Arshad Jamal, Bus. Dimn.,Vol.2 (1), 1-12 (2015)

for one-third of the total GHG emission, is yet to sign the treaty. The preliminaryphase of the
Kyoto Protocol ended in 2007 while the second phase started from 2008. The penalty for
non-compliance in the first phase is Euro 40 per ton of carbon dioxide (CO2) equivalent. In
the second phase, the penalty is hiked to Euro 100 per ton of CO2.
Carbon credits are certificates issued to countries that reduce their emission of GHG
(greenhouse gases) which causes global warming. Carbon credits or Certified Emissions
Reductions (CER) are a certificate just like a stock. A CER is given by the CDM
Executive Board to projects in developing countries to certify they have reduced green house
gas emissions by one ton of carbondioxide per year. For example, if a project generates
energy using wind power instead of burning coal, it can save 50 tons ofcarbon dioxide per
year. There it can claim 50 CERs (one CER is equivalent to one ton of carbon dioxide
reduced).
Ideally, Carbon credits can essentially be viewed as a means of empowering the
market to care for the environment.
The legislations can set inflexible environmental
targets for the industrywith the flexibilityto meet the objectives in any manner, it chooses to.
The industry must find the lowest cost solutions to meet these objectives with all the
flexibility at their disposal. The emissions cap is decided under the Kyoto Protocol and the
level of reductions by time frames has been specified. The emissions are easily tradable and
thus results in lower abatement costs. All this allows permanent reduction in emissions from
a certain decided baseline. However, a certainindustry can purchase emission credits to offset
its emissions from somewhere else at a lower cost.
Implementation roadmap
In 1990 UNO (United Nations Organization) feeling an immediate need to decrease
the emission of greenhouse gases into the atmosphere released the Kyoto Protocol. As a
result under the UNFCC (United Nations Framework Convention on Climatic Change)
industrialized nations entered into a legally binding agreement to reduce the collective
emissions of greenhouse gases (GHG) by 5.2% compared to the 1990 level; calculated at an
average over the five year period of 2008-12. Separate national targets have been given to
US (7%), European Union (8%), Japan (6%) and Russia (0%). The reduction is to be done on
six greenhouse gases carbon dioxide, methane, nitrous oxide, sulphur hexafluoride, HFCs
and PFCs. Further the protocol reaffirms the principle that industrialized countries have to
pay and supply technology to other countries for climate related studies and projects. The
Protocol came into force in February 2005 giving GHG emission limits for each developed
(Annex I) country included in the protocol. In order to facilitate reaching emission limits,
three additional mechanisms were agreed upon in the Marrakesh Accords in 2001. These are
the Clean
Development Mechanism(CDM),Joint Implementation (JI) and Emission
Trading (ET).
JI (Joint Implementation): Developed countries can implement projects that reduce
emissions or remove carbon from the atmosphere in other developed countries in lieu of
ERUs (Emission Reduction Units). These ERUs can be used to meet the emission reduction
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MD. Arshad Jamal, Bus. Dimn.,Vol.2 (1), 1-12 (2015)

targets. JI projects must have the approval of all parties involved and must lead to emission
reductions or removals that are additional to any that would have occurred without the
project. ERUs can only be issued from periods onwards of year 2008 although JI projects can
be started from year 2000 onwards.
Emissions Trading: The protocol provides that developed countries can acquire units from
other developing parties and use them towards meeting their emissions targets, but must be
prepared to transfer the units when they do not require them for compliance. This enables
developed countries to make use of low cost opportunities to reduce emissions. Only some
developed countries with emission limitation and reduction commitments specified in the
protocol can engage in such an activity.
INTERNATIONAL SCENARIO
Formally the first world climate conference 1979 recognized climate change as a
serious problem. A number of intergovernmental conferences focusing on climate change
were held in 1980s and early 1990s.
Most often, climate change mitigation scenarios involve reduction in the concentration of the
greenhouse gases, either by reducing their sources or by increasing their sinks. ICCA (The
International Council for Chemical Association) has developed a set of eight policy principle
to help guide globalclimate discussion.
The ICCA has set eight principles for reducing worldwide green house gas emission.
1. Develop a global framework to accelerate green house gas reduction, avoid market
distortions and minimize carbon leakage. The movement of industrial production and
green house gas emission from one nation to another is known as Carbon Leakage.
2. Focus on the largest, most effective and lowest cost abatement opportunities.
3. Push for energy efficiency is to improve the energy efficiency to reduce the greenhouse
gas emission. A recent study found that for every unit of green house gases emitted
directly or indirectly by the chemical industry, the industry enables more than two units
emission saving via products and technologies provided to other industries and
consumers.
4. Support the development and Implementation of new technology.
5. Support the development of the most efficient and sustainable use of available
feedstocks and energy.
6. Provide incentive for faster action by rewarding early movers that proactively reduce
their carbon emission.
7. Push for the most efficient and sustainable disposal, recovery and recycling options.
8. Develop technology cooperation to support abatement in developing countries
If, Industry, policy makers and other stakeholders take step to facilitate emission reduction
and fully utilize chemical products, the study suggests the ratio of emissions saving to
emission could increase to more than 4 to 1 by 2030. Many countries, both developing
and developed, are aiming to use cleaner technologies. The national and international
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policies to reduce the GHG emission aims for emission reduction, increased use of
renewable energy and increased energy efficiency.

ROLE OF INDIA IN CARBON TRADING

India is emerging as a serious player in the global carbon credits market. This has
prompted originator, developer and trader of carbon credits, to set up office in India. Carbon
credit is very emerging domain now a days especially in India but very few corporate are
aware of this emerging segment. At present it is quite essential to create awareness about this
business segment .As, Indias GHG emission is below the target and so, it is entitled to sell
surplus credits to developed countries. India is considered to claim about 31% of the total
world carbon trade, which can give $25bn by 2010.This is what makes trading in carbon
credits such a great business opportunity. Foreign companies which cannot fulfil the norms
can buy the surplus credit from companies in other countries. Many Indian companies have
been re-rated on the stock markets on the basis of the bonanza that will accrue to them when
carbon trading kicks off. SRF Ltd and Shell Trading International have entered into sale and
purchase Credit Emission Reduction. Suzlon Energy and Shriram EPC have business in wind
energy which is eligible for carbon credit benefits. Shree Renuka Sugars is also expected to
benefit from carbon credits. Gujarat Flourochemicals was among the early companies
to
register forClean DevelopmentMechanism (CDM) project. India has emerged as the dark
horse in this race as more than 200 Indian entities have applied for registering their CDM
Project for availing carbon credits. The 800 million farming community in India has also a
unique opportunity where they can sell Carbon Credits to developed nations. The Indias
Delhi Metro Rail Corporation (DMRC) has become the first rail project in the world to earn
carbon credits because of using regenerative braking system in its rolling stock. DMRC has
earned the carbon credits by using regenerative braking system in its trains that reduces 30%
electricity consumption.
It is believed that it is not the penalty awarded to erring companies, but the rewards
and recognition given to green firms is what makes this system so popular and exclusive.
This means that companies with limited emissions will devise strategies to further reduce
emissions so that they can sell more carbon credits in the international market and thereby
increase their profits. Thus, the system keeps on de-polluting the environment increasingly
INDIAN MARKET OF CARBON TRADING
Carbon credits have become the key element of national and international counter
measures to neutralize the growth of such green house gases. The reduction in emission is
supported by offering monetary value in such cases. Each CER is equivalent to one tons of
carbon dioxide reduction. Such a credit can be sold in the international market at the
prevailing market price. This has become an entirely new industry with great potential and
opportunities for the companies (including Indian ones) and individual investors alike.
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India could emerge as one of the largest beneficiaries accounting for more than 25 %
of the total global carbon trade based on World Bank Report. Indian companies have started
generating carbon credits and carbon credit trading in India has gained a lot of momentum in
recent years. India has a huge potential of gaining from Carbon trading market.
Table below shows enough opportunities for Indian companies to produce carbon
credits and capitalize its economic benefits by trading. The growing Indian Economy and its
diverse sector offer huge potential for CERs. Besides the CDM, the concept of voluntary
carbon markets has been also picking up in India. Indian companies like L & T, Wipro,
Asian Paints, ACC, and Tata Steel are at the forefront to reduce their carbon emission.
Year
2006

Global CERTransactions(mCERs)
466

IndianTransactions
56

Indian(in % terms)
12

2007

551

33

2008

395

16

2009

200

04

According to Crisil Research Report, 2010, the quantum of carbon credits generated
from the carbon reduction projects undertaken in India will triple over in next three years and
the numbers are expected to increase from 72 million in November 2009 to 335 million by
December 2014. Indian market is extremely receptive to CDM. Many companies have also
already entered into the agreement of selling these credits in the International markets. Thus
India has emerged as the second largest seller of carbon credits.A must mention project is
The Delhi Metro Rail Corporation (DMRC): It has become the first rail project in the world
to earn carbon credits because of using regenerative braking system in its rolling stock.
DMRC has earned the carbon credits by using regenerative braking system in its trains that
reduces 30% electricity consumption.DMRC can now claim 400,000 CERs for a 10-year
crediting period beginning December 2007 when the project was registered by the UNFCCC.
This translates to Rs 1.2 crore peryear for 10 years. India has the highest number of CDM
projects registered and supplies the second highest number of Certified Emission Reduction
units. Hence, India is already a strong supplier of Carbon Credits and can improve on it.
FUTURE SCENARIO
If India can capture a 10% share of the global CDM market, annual CER revenues to
the country could range from US$ 10 million to 300 million (assuming that CDM is used to
meet 10-50% of the global demand for GHG emission reduction of roughly 1 billion ton
CO2, and prices range from US$ 3.5-5.5 per ton of CO2). As the deadline for meeting the
Kyoto Protocol targets draws nearer, prices can be expected to rise, as countries/companies
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save carbon credits to meet strict targets in the future. India is well ahead in establishing a
full-fledged system in operationalizing CDM, through the Designated National Authority
(DNA).
There is a great opportunity awaiting India in carbon trading which is estimated to go
up to $100 billion by 2010. In the new regime, the country could emerge as one of the largest
beneficiaries accounting for 25 per cent of the total world carbon trade, says a recent World
Bank report. The countries like US, Germany, Japan and China are likely to be the biggest
buyers of carbon credits which are beneficial for India to a great extent. The Indian market is
extremely receptive to Clean Development Mechanism (CDM). Having cornered more than
half of the global total in tradable certified emission reduction (CERs), Indias dominance in
carbon trading under the clean development mechanism (CDM) of the UNConvention on
Climate Change (UNFCCC) is beginning to influence business dynamics in the country.
India Inc pocketed Rs 1,500 crores in the year 2005 just by selling carbon credits to
developed-country clients. Various projects would create up to 306 million tradable CERs.
Analysts claim if more companies absorb clean technologies, total CERs with India could
touch 500 million. Of the 391 projects sanctioned, the UNFCCC has registered 114 from
India, the highest for any country. Indias average annual CERs stand at 12.6% or 11.5
million.
LITERATURE REVIEW
Benjamin J. Richardson:
Climate finance is becoming an important feature of the emerging legal and policy
regimes to address global warming. However, the current approach largely confines the
financial sector to a transactional agent to mobilize capital for clean energy and to broker
emission allowance trading. The sectors potential to leverage more sweeping positive
changes in the economy as sought historically through the movement for socially responsible
investment (SRI) has been insufficiently acknowledged. Indirectly, by regulating greenhouse
gases the legal system is helping to create a business case for investors to respond to climate
change threats. However, the potential contribution of SRI to address climate change
problems more comprehensively is presently limited owing to inadequate governance
frameworks, as well the sectors increasing abandonment of its traditional ethical agenda.
Parvathamma, presently working for the Deutsche Bank account of Tata Consultancy
Services(TCS) Carbon Credits Trading- Young and Emerging Market opined in his
research that Indias biggest Nationalized Bank State Bank of India says that analysts peg
the global carbon trading market at $100 billion by 2010 and the Indian carbon market has
the potential to supply30-50 per cent of the projected global market of 700 million CERs by
2012. SBI proposes to provide a single point delivery of services such as implementation of
CDM projects, advisory services and value added products like securitization of carbon
credit receivables, carbon credit delivery guarantees, and escrow mechanism for carbon
credits, besides finance related to carbon credits/Clean Development Mechanism (CDM)
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under the Kyoto Protocol to its customers. Due to Indias vast forest and agricultural land, a
significant opportunity lies ahead for India to earn carbon credits when energy saving and
environment protecting methods are adopted. But this may be short lived as India is
progressing towards being a developed country and these benefits will not be applicable
forever. When India joins the league as a developed country, it has to strictly adopt the Kyoto
protocol and it may turn out to be a potential buyer instead of a seller as it presently is.
Experts say that global carbon credit markets will have an established impact in the next 10
years and is expected to grow from $ 10 billion to $1 Trillion by2010. Carbon traders across
the world say that emission permits could become the worlds largest market if all the
developed economies agree to take part in the final phase of Kyoto Protocol implementation.
Considering the effects of economic value and environmental threats, we need to observe
how these changes affect the IT Industry and financial market as a whole.
Monika Bhardwaj and Anand Wadadekar, had undertaken research onCarbon
Credit For Environmental Management concluded, According to industry estimates, Indian
companies are expected to generate at least $8.5 billion at the going rate of $10 per ton of
CER. Tata Sponge Iron Ltd got a CDM certificate from the UN for its waste heat recovery
project in Orissa. Reliance Energy already has energy efficiency and process development
CDM projects. Its the need of the hour to think very seriously on reducing environment loss
by religiously following & implementing and innovating techniques & ways to contain the
same. This is a high time to call a revolution for reducing carbon footprint in order to
preserve whats left of the ozone layer, which is a protective layer between suns harsh ultra
violet rays and the living beings. Otherwise, the day is not far when the world will be full of
hunger; sun burnt, blind people, scary sounds and many more incurable diseases.
Manish Sachdev:
In 1997, Kyoto Protocol, a voluntary treaty was signed by 141 countries to reduce
the emissions of Global House Gases by 5.2% below 1990 levels by 2012. Certified
Emissions Reductions (CER) or Carbon credits are certificates issued certifying reduction in
emissions. The developing countries have been exempted from any such restrictions. These
certificates can be traded in the market and purchased by firms which find purchasing
emission credits to offset its emissions lower in cost. Thus an opportunity has emerged for
firms in developing countries like India, Brazil and China to boost their earnings by
complying with norms. These additional cash flows from sales of credits result in an
incremental Internal rate of Return by 27%. This has opened up a new source of cash flow in
project financing making unviable projects viable by exceeding the hurdle rate for
investment returns. It will be pragmatic on part of firms to consider this mode of cash flows
in project financing.
Deepanshi Chaudhary:
For several decades widespread concern has surfaced over the increase in disruptive
anthropogenic processes and their role in radically altering the environment and ecosystems.
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With the advent of the Kyoto Protocol the world witnessed a dramatic intensification of
interest in Climate Change Mitigation. Although this momentum was initially brought about
to meet compliance targets, it soon gave way to private businesses, NGOs, investors and
eventually individuals who took the initiative to change their prodigal ways. Parallel to the
CDM projects market, runs another smaller yet burgeoning Voluntary Carbon market. Not
bound by the rigorous procedures and high transaction costs, the Voluntary Carbon Market
empowers a wider variety of organizations and individuals to take part in the mitigation
process and sustainable future. Currently the Voluntary Carbon Market is estimated at $330
million, trading volumes of 65 million tones of CO2 with a growth rate of 240% in just one
year. Experts predict this to grow exponentially to volumes of up to 1400 million tonnes of
CO2 being traded by 2020. (Hamilton May 2008)This report deals with issues pertaining to
the Voluntary Carbon Market and its potential in the coming years. It discusses topics of
additionality, validation and verification standards and registries. Allwardt, Jennifer: The
potential of using carbon offset credits from agro-forestry projects for farmers in developing
areas has become more prevalent in both Clean Development Mechanism and voluntary
carbon markets. Since the implementation of the Kyoto Protocol, many international
development organizations have been interested in using the Clean Development Mechanism
(CDM) to help both mitigate CO2 emissions through agro-forestry projects offsets and as a
poverty reduction tool. Few organizations that have begun talking with farmers about
planting trees for carbon offset credits have been able to tell the farmers how much money
they would receive from their new tree growth or the costs they will incur in doing so.
Mr. Dhaval Sharma:
In 1996 the Kyoto Protocol established a global policy aimed at reducing green
house gas (GHG) emissions. In response, slow steady steps are being taken to implement
carbon emission limits. Markets are being established so that companies can exchange
carbon allowances. Turning the environment, a public good, into private property presents
many economic challenges. India comes under the third category of signatories to UNFCCC.
India signed and ratified the Protocol in August, 2002 and has emerged as a world leader in
reduction of greenhouse gases by adopting Clean Development Mechanisms (CDMs) in the
past few years.
SUGGESTIONS
To create an awareness among the citizen on how to reduce the carbon emission or
for to save the ecological system Regulation and exchange need to create awareness about
the carbon credits to the investors fraternity. India is gaining 32% shares on carbon emission
in the world, but the Indian investors (equity) are not aware about the carbon trading system.
Carbon credit is $ 4 billion worth of market. In the coming global years it is expected to
touch $ 100 billion. So there is a wide scope for the investment to create the wealth.
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11

CONCLUSION
Indian environmental conditions and the industrial practices have a huge potential of
gaining from carbon trading. The Carbon accounting and its disclosure has become an
important issue for the Indian companies. Public and private initiatives are urgently much
required for encouraging industries and societies to understand the different facets of
environmental pollution, its reduction strategies and the carbon financing in particular.
Hence the India has a large potential to earn carbon credits and in this context the carbon
consultancy service has a greater part to play and is going to add a new dimension to the
Environmental consultancy and financial services arena.
There are some economical factors like IIP, oil and gas, power and population etc.
are influencing the factors before taking a decision to enter this segment. There is scope for
the further research to analyze the various economic factors which influence the carbon
emission values. So that investor should take informed decision for his future investment in
this segment.
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