AUTHOR: Rama Krishna Vadlamudi vrk_100@yahoo.co.

in
MUMBAI
October 25th, 2007
FOR REGULAR UPDATES ON AUTHOR'S DOCUMENTS: JUST CLICK
www.scribd.com/vrk100
OR
http://groups.google.co.in/group/random-thoughts-on-investments/files?hl=en&&sort=date

KYOTO PROTOCOL
The concept of carbon credits came into existence as a result of increasing awareness of the
need for pollution control. It was formalized in the Kyoto Protocol, an international agreement.
The genesis of Kyoto Protocol can be traced back to December 1997, when about 160 countries
met in Kyoto, Japan and decided to reduce emissions of green house gases (GHGs), like, carbon
dioxide. This was done with a view to bringing down the level of GHSs so that issues like global
warming and climate change can be tackled in a better way. Many industrialized countries and
European countries are now legally bound to reduce their combined emissions of six major
GHGs. India ratified the Kyoto Protocol on August 26, 2002. The Protocol came into force in
February 2005. The biggest polluter of the environment, the USA, has so far not ratified the
Protocol. The Kyoto Protocol set quotas on the amount of greenhouse gases countries can
produce. Countries, in turn, set quotas on the emissions of businesses. Businesses that are over
their quotas must buy carbon credits for their excess emissions, while businesses that are below
their quotas can sell their remaining credits.

CLEAN DEVELOMENT MECHANISM (CDM)

One of the provisions of the Protocol-Clean Development Mechanism (CDM)-established a
framework within which the industrialized countries can meet a part of their carbon dioxide
emission reduction requirements by purchasing Certified Emission Reductions (CERs) from
developing countries like India. For example, a company/entity generates clean energy with
emission of GHGs that are lesser than the permitted standards. This company/entity can create
CERs and sell them through exchanges, like Chicago Climate Exchange (CCX) and European
Climate Exchange (ECX). As on October 23, 2007, the CERs were trading between USD 2.00-
2.10 on the Chicago Climate Exchange. A few years back, the rates were hovering between USD
4.00-6.00 per CER.

CARBON CREDITS: CERs, also known as, carbon credits are a tradable permit scheme.
They provide a way to reduce greenhouse gas emissions by giving them a monetary value. A
credit gives the owner the right to emit one tonne of carbon dioxide. Carbon credits are
certificates awarded to countries, groups or companies that are successful in reducing emissions
of greenhouse gases below their emission quota. Companies that fail to reduce their emissions
can purchase credits from those which make extra emission cuts from energy saving projects. By
allowing credits to be bought and sold, companies can purchase credits to help them meet quotas
for reducing emissions.

For example, if an environmentalist group plants enough trees to reduce emissions by one tonne,
the group will be awarded a credit. If a steel producer has an emissions quota of 10 tons, but is
expecting to produce 11 tons, it could purchase this carbon credit from the environmental group.
The carbon credit system looks to reduce emissions by having countries honour their emission
quotas and offer incentives for being below them. Some banks in India have started financing the
receivable of companies (with energy saving projects) in terms of carbon credits that are
expected to accrue in future.