What is Carbon Trading?

Carbon Trading is a market based mechanism for helping mitigate the increase of CO2 in the
atmosphere. Carbon trading markets are developing that bring buyers and sellers of carbon
credits together with standardized rules of trade.

Who are potential buyers for Carbon credits?

Any entity, typically a business, that emits CO2 to the atmosphere may have an interest or may
be required by law to balance their emissions through mechanism of Carbon sequestration.
These businesses may include power generating facilities or many kinds of manufacturers.

Who are potential sellers of Carbon credits?

Entities that manage forest or agricultural land might sell carbon credits based on the
accumulation of carbon in their forest trees or agricultural soils. Similarly, business entities that
reduce their carbon emission may be able to sell their reductions to other emitters.

European Union Emission Trading System

The European Union Emissions Trading Scheme (EU ETS) also known as the European Union
Emissions Trading System, is the largest multi-national emissions trading scheme in the world.

Under the EU ETS, large emitters of carbon dioxide within the EU must monitor and annually
report their CO2 emissions, and they are obliged every year to return an amount of emission
allowances to the government that is equivalent to their CO2 emissions in that year. In order to
neutralize annual irregularities in CO2-emission levels that may occur due to extreme weather
events (such as harsh winters or very hot summers), emission credits for any plant operator
subject to the EU ETS are given out for a sequence of several years at once.

The ETS (Emissions Trading System) covers installations performing specified activities. Since
the start it has covered, above certain capacity thresholds, power stations and other combustion
plants, oil refineries, coke ovens, iron and steel plants and factories making cement, glass, lime,
bricks, ceramics, pulp, paper and board. As for greenhouse gases, it currently only covers carbon
dioxide emissions, with the exception of the Netherlands, which has opted in emissions from
nitrous oxide.

As from 2013, the scope of the ETS will be extended to also include other sectors and
greenhouse gases. CO2 emissions from petrochemicals, ammonia and aluminium will be
included, as will N2O emissions from the production of nitric, adipic and glyocalic acid
production and perfluorocarbons from the aluminium sector. The capture, transport and
geological storage of all greenhouse gas emissions will also be covered. These sectors will
receive allowances free of charge according to EU-wide rules, in the same way as other
industrial sectors already covered.
Experts from the 27-member bloc agreed on a list of industries ranging from plastics
manufacturing to iron and food processing that will be largely exempted from CO2 trading after
2013 for fears that their inclusion would move production abroad.

National experts agreed on a list of 164 sectors deemed to be at risk of relocating their activities
to foreign countries that have not adopted greenhouse gas emission restrictions similar to the
EU's. The threat is dubbed "carbon leakage" because industries and their related polluting
emissions would simply move abroad without any benefit for the environment.

The list, covering the most carbon-intensive industries such as steel, cement and chemicals,
represents 77% of the total manufacturing emissions under the EU's emissions trading scheme
(EU ETS). These will continue to get a higher share of their emission allowances (EUAs) for
free after the EU ETS has been revamped in 2013, after which date the power sector in the EU-
15 will be obliged to pay for all its permits.

The Commission's calculations are based on two criteria: the intensity of trade with third
countries and the increase in production costs as a result of complying with the directive. This
approach qualified a range of industries for permit exemptions, ranging from plastics and iron to
food processing and weapons manufacturing

The EU is eyeing an international climate agreement as a way of ensuring that other

industrialized countries put in place similar emissions reduction targets, relieving the pressure on
its industry.

Moreover, the carbon leakage discussion is far from over, as the actual number of free
allowances that each installation gets will not be decided until 2011. These will be determined on
the basis of "performance benchmarks", meaning that only the 10% most efficient installations
will receive all their allowances for free.

The Commission hopes that the benchmarks will give manufacturers additional incentives to cut
emissions. On the other hand, environmentalists have voiced concerns that the process of setting
these will give industries another chance to dilute the environmental impact of the ETS by
bargaining for as flat a benchmark as possible, allowing them to collect the maximum free
allocation.

Advantages And Disadvantages Of Carbon Trading

Considering the increasing concern about global warming and greater carbon emissions into the
air, national administrations and other agencies are looking for viable options to reduce
pollution. Among many other strategies for dealing with this issue, carbon trading and carbon
offset have been highly successful.
Businesses buy carbon credits that are available in the market in the carbon trading model. The
credits restrict the amount of greenhouse gases that organizations can discharge in to the
atmosphere without being penalized for it.

The basic advantage of the carbon trading method is that it rewards reduction in emissions. The
idea is that businesses will realize that adopting greener processes of doing business is more
gainful than paying for carbon credits. If a company is made to pay for polluting the atmosphere
then it will try to embrace methods that are less polluting if it wants to stay competitive. As more
and more companies adopt this approach, the overall emission levels around the globe will
decrease gradually, thus saving the environment.

Another significant benefit of carbon trading is that it works on a free market system where any
company can buy or sell carbon credits. Due to non interference from the local administrations
such as imposition of fines or making regional laws, this system is quite successful.

The greatest disadvantage of carbon trading is lack of a comprehensive and structured global
framework for its trade. As most of the trading happens in the global markets, it is difficult for
some regional businesses to adhere to this system.

Some companies are reluctant to become a part of this method because they do not want
expenditure that they cannot include in the price tag of their items. In addition, it is quite tough
for small businesses to get the advanced machinery or develop innovative ways to reduce the
levels of greenhouse gases emitted by them. Therefore, they are caught in a situation that forces
them to incur the costs of carbon credits continuously and thus they lose out in the race against
larger companies.
What is CDM and CER ?
Clean development mechanism (CDM) allows emission reduction projects in
developing countries to earn certified emission reduction (CER) credit by reducing
greenhouse gas emissions which are then sold to industrialised countries to meet a
part of the targets.

COUNTRIES AHEAD IN CARBON CREDITS

China, India, and Brazil are the countries ahead in carbon credits. Most recent
numbers show that there are 4,782 CDM projects in the pipeline, of which 1,915
are registered, 2,590 are under validation and 277 are still registration requests.
And so far, only about 605 of the registered projects have issued 355 million CER
credits where each CER is equal to 1 tonne of carbon dioxide. China holds the
maximum share with 1,895 CDM projects, or 39.6% of those in the pipeline,
followed by India with 1,207, or 25.2% in the pipeline. Brazil, with 347 projects,
accounts for 7.3%. The fourth major contender is Mexico with 162 projects and a
3.4% share.

India with 1,207 projects, having an emission reduction potential of 112 million
CER credits that will go up to 454 million CER credits which is only 16.1% of the
total.

DIFFERENT SECTORS
The projects are primarily from sectors such as cement, iron and steel, power that
includes biomass cogeneration, and hydro and wind energy projects, according to
the data submitted by project proponents to the Environment Ministry. The
companies include Gujarat Ambuja Cement, Jindal Vijayanagar Steel, Indian
Rayon & Industries, Triveni Engineering, Balrampur Chini Mills, SRF Ltd,
Gujarat Fluorochemicals, Birla Corporation Ltd, DCM Shriram Consolidated Ltd,
Oswal Woolen Mills, Tata Steel, Usha Martin Ltd, JK Cement, Birla Cement and
Kalpataru Power Transmission Ltd (KPTL) among others.

The value of CERs has fluctuated and has seen an overall upward trend during the
past few months. According to the Norway-based research firm, Point Carbon that
tracks European exchanges, on April 19, each CER was trading at euro 17.4.
The National CDM Authority at the Environment Ministry has cleared about 90
projects for enabling the companies to seek investments under the Clean
Development Mechanism (CDM). However, these projects need to get the United
Nations Framework Convention on Climate Change (UNFCCC) clearance to trade
their CERs.

Out of these 90 projects that have been given the `host country approval,' enabling
the project proponents to seek funds by trading carbon credits, two projects have
been cleared by UNFCCC. As on date, nine projects have received UNFCCC
approvals — three from Honduras, two from India, and one each from Bolivia, Bhutan,
Republic of Korea and Brazil.

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).

India’s 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 India’s 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.