CARBON CREDITS

By:-

Sanjay Thakur
(Advocate)

Supreme Court of India

What Carbon Credits are ?

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
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.

BACKGROUND
Burning of fossil fuels is a major source of industrial
greenhouse gas emissions, especially for power,
cement, steel, textile, fertilizer and many other
industries which rely on fossil fuels (coal, electricity
derived from coal, natural gas and oil).
The major greenhouse gases emitted by these
industries are carbon dioxide, methane, nitrous
oxide, hydrofluorocarbons etc, all of which have not
yet been completely proven to increase the
atmosphere's ability to trap infrared energy and thus
affect the climate .
The concept of carbon credits came into existence
as a result of increasing awareness of the need for
controlling emissions..

Climate Change
According to the world bank Economist Mr.
Stren, the effect of climate change could be
worse than the two world war.
A famous Ecologist says that 20 billion tons of
CO2 is generated by humanity, every year and
absorbed by nature. This tolerance of nature
can be reserved, if the carbon dioxide levels
increase unabatedly.
Prof. James Lovlock, USA believes that the
90% of man kind may be wiped out if the planet
heats up.

TYPE OF GREENHOUSE GASES

S. No.

Greenhouse Gas

Global Warming
Potential (GWP)

Carbon dioxide

Methane

21

Nitrous oxide

310

Hydrofluoro
carbons

140-1170

Perfluoro carbons

6500-9200

Sulphur
hexafluoride

23900

How buying carbon credits can reduce

emissions
Carbon credits create a market for reducing greenhouse emissions by
giving a monetary value to the cost of polluting the air. Emissions
become an internal cost of doing business and are visible on the
balance sheet alongside raw materials and other liabilities or assets.
For example, consider a business that owns a factory putting out
100,000 tonnes of greenhouse gas emissions in a year.
So the factory is given a quota of say 80,000 tonnes per year. The
factory either reduces its emissions to 80,000 tonnes or is required to
purchase carbon credits to offset the excess.
One seller might be a company that will offer to offset emissions
through a project in the developing world, such as recovering methane
from a swine farm to feed a power station that previously would use
fossil fuel. So although the factory continues to emit gases, it would
pay another group to reduce the equivalent of 20,000 tonnes of carbon
dioxide emissions from the atmosphere for that year.

 Another seller may have already invested in new low-emission

machinery and have a surplus of allowances as a result. The
factory could make up for its emissions by buying 20,000 tonnes
of allowances from them. The cost of the seller's new machinery
would be subsidized by the sale of allowances.
Both the buyer and the seller would submit accounts for their
emissions to prove that their allowances were met correctly.
It is the hole process of buying carbon credit.

Project Pipe-Line Global

CLEAN DEVELOPMENT
MECHANISM (CDM)
The CDM is supervised by the CDM Executive
Board (CDM EB) and is under the guidance of the
Conference of the Parties (COP/MOP) of the
UNFCCC
Certified Emission Reductions (CERs) commonly
known as carbon credits, where each unit is
equivalent to the reduction of one metric tonne of
CO2
The value of one CER in Indian Rupees is about
Rs. 1600/-

STATUS OF CDM

I ISSUANCE

COUNTRY

CER issued

INDIA

31,122,524

CHINA

120,105,788

REPUBLIC OF KOREA

14,599,555

BRAZIL

19,433,547

STATUS OF THE CDM /

METHODOLOGIES

Scope

No. of Methodologies

Energy Industries (renewable- / non renewable

sources)

39

Manufacturing Industries

23

Afforestation and reforestation

15

Chemical Industries

14

Waste handling and disposal

12

Carbon credit in India

At last count in March 2006, India had 310 eco-friendly projects awaiting
approval by the UN. Once cleared, these projects can fetch about Rs 29,000
crore in the next seven years. Indias carbon credit market is growing, as many
players (industries) are adopting the Clean Development Mechanism (CDM),
said S K Panigrahi, Director (Environment and Forest), Planning Commission.
Elaborating on global emission trading Panigrahi added, For instance, US
accounts for 30 per cent of global emissions, while India makes for three per
cent. Now, India can transfer part of its allowed emissions to developed
countries. For this, India must first adopt CDM and accrue carbon credits. One
carbon credit or Certified Emission Reductions (CERs) is equivalent to one
tonne of emission reduced.
State Minister for Environment and Forest C Chennigappa, India has an
emerging CDM market and Karnataka is one of the three states to have
registered projects with the host country endorsements.

HOST COUNTRY APPROVED

PROJECTS IN INDIA
AP

100

Mahrashtra

142

Chattisgarh

63

MP

28

Gujarat

98

Orissa

51

HP

39

Punjab

54

Rajasthan

58

TN

120

Jharkhand

15

UP

93

Karnataka

113

Utarranchla

20

WB

47

Goa/Pondicherry

Credits versus taxes

By treating emissions as a market (commodity) it becomes
easier for business to understand and manage their
activities, while economists and traders can attempt to
predict future pricing using well understood market
theories. Thus the main advantages of a tradable carbon
credit over a carbon tax are:
1. the price is more likely to be perceived as fair by those
paying it, as the cost of carbon is set by the market, and
not by politicians. Investors in credits have more control
over their own costs.
2. the flexible mechanisms of the Kyoto Protocol ensure that
all investment goes into genuine sustainable carbon
reduction schemes, through its internationally-agreed
validation process.

Additional and Its Importance

It is also important for any carbon credit (offset) to prove a
concept called additionality. Additionality is a term used by
Kyoto's Clean Development Mechanism to describe the fact
that a carbon dioxide reduction project (carbon project)
would not have occurred had it not been for concern for the
mitigation of climate change. More succinctly, a project that
has proven additionality is a beyond-business-as-usual
project.
The Kyoto Protocol, an international agreement between
more than 170 countries, The mechanism adopted was
similar to the successful US Acid Rain Program to reduce
some industrial pollutants.
According the World Resources Institute/World Business
Council for Sustainable Development (WRI/WBCSD) : "GHG
emission trading programs operate by capping the
emissions of a fixed number of individual facilities or
sources.

Under these programs, tradable 'offset credits' are

issued for project-based GHG reductions that occur at
sources not covered by the program.
The idea is to achieve a zero net increase in GHG
emissions, because each tone of increased emissions is
'offset' by project-based GHG reductions.
The difficulty is that many projects that reduce GHG
emissions (relative to historical levels) would happen
regardless of the existence of a GHG program and without
any concern for climate change mitigation.
If a project 'would have happened anyway,' then issuing
offset credits for its GHG reductions will actually allow a
positive net increase in GHG emissions, undermining the
emissions target of the GHG program.
Additionality is thus critical to the success and integrity of
GHG programs that recognize project-based GHG
reductions."

SANJAY THAKUR
at

M/s. Wings International

Law & Consultancy Firm

We provide the complete solution from

making project reports till getting the
carbon credits.

THANK YOU.