A carbon credit or emission credit is a generic term for any tradable certificate or permit representing the right to emit

one tonne of carbon dioxide or the mass of another greenhouse gas with a carbon dioxide equivalent (tCO2e) equivalent to one tonne of carbon dioxide. . Carbon credits create a market for reducing greenhouse emissions by giving a monetary value to the cost of polluting the air ecoming a new currency ,each carbon credit represents one tonne of carbon dioxide either removed from the atmosphere or saved from being . The conception of Carbon Credits can be traced back to the Kyoto Protocol. The Kyoto Protocol is a protocol to the United Nations Framework Convention on Climate Change (UNFCC) aimed at taking active measures to reduce green house gas levels in the environment. The treaty states that the 169 signatories would try and reduce their green house gas emissions by 5.2% of their 1991 levels. The gases to be included in their final count are carbon dioxide, methane, nitrous oxide, sulphur hexafluoride hydro fluorocarbons and perfluorocarbons but would not include emissions by international aviation and shipping. Under the Kyoto Protocol, developed countries are required to limit their greenhouse gas emissions according to the following formula: Actual emissions must be less than or equal to the assigned amount +/- carbon sinks and Kyoto emissions. PRICING OF A CARBON CREDIT The foll. Issues are kept in mind while setting the price of a credit1. The price of the carbon credit should cause some burden to its purchasers so that the buyer is forced to switch to environment friendly methods or must continue to pay a hefty price for degrading the environment. 2. The seller of the credit should be adequately rewarded, for his efforts to reduce air pollution, through the sale of carbon credits. 3. The price of the carbon credit should to some extent reflect the environment cost of producing a good but at the same time the increase in the overall price should not be too severe that the common man cannot afford to purchase it. The Protocol has various provisions where by the Annex I ( a list of around 40 countries that signed the agreement before 2000) countries can in order to meet their GHG emission limitations can purchase GHG emission reductions from the non- Annex I or other Annex I countries that have excess reductions through financial transactions. There are currently 6 major exchanges that trade in carbon credit1. Chicago Climate Exchange 2. European Climate Exchange 3. Nord Pool 4. Power Next

5. Multi Commodity Exchange 6. National Commodity and Derivatives Exchange Flexible mechanisms such as the clean development mechanism (CDM), emission trading and joint implementation facilitate the above. TRADING MECHANISM CLEAN DEVELOPMENT MECHANISM The Clean Development Mechanism (CDM) has a two- fold objective i.e. to1. To assist non Annex I countries in achieving sustainable development 2. To help the Annex I countries meet their quantified emission limitation and reduction commitments. To the help achieve these objectives the concept of Certified Emission Reductions (CERs) was introduced. These CERs could be obtained through CDM emission reduction projects in developing countries. The advantage of CDM lies in the fact that the cost of reducing green house gas emissions significantly vary from country to country. Thus the Annex I countries could invest in emission reduction technology wherever it was cheapest such as China and India where labour is cheaply available. Even though the reductions are earned else place the impact of the emission reductions on the environment is still the same. Hence the same positive effect is earned at a cheaper cost. EMISSION TRADING Another of the flexible mechanisms that are in play is the concept of Emission Trading more commonly referred to as the Cap and Trade. This is a market based approach that provides monetary incentives for reducing pollutants and thus curbing pollution. A central governmental body sets a limit (cap) on the amount of pollutants that can be emitted. These emission permits are then sold to firms giving them the right to emit a certain amount of pollutants. The amount of pollutants emitted by a firm should be equal to the number of emission permits the firm owns; emissions therefore cannot exceed a certain limit hence keeping a check on the total pollutants discharged. Firms that need to increase their emissions must buy the required number of permits from those firms that have an excess of these permits , resulting in trade. The buyer in a way pays a penalty for the extra emissions while the seller is being rewarded for his emission reductions thus promoting firms to reduce emissions. There are several trade programmes that facilitate this like European Union Emission Trading Scheme. JOINT IMPLEMENTATION Under this program any Annex I country can invest in emission reduction projects in any other Annex I country instead of reducing emissions domestically. Thus countries achieve their targets of reduced emissions at a lower cost by investing in green house gas emissions reductions in countries where

these reductions are cheaper and at the same time obtaining credits to meet their targeted reductions. Emission reductions earn credits called Emission Reduction Units (ERUs), where each ERU represents an emission reduction equal to a tonne of CO2 equivalent. Each Annex I country has a predetermined number of Assigned Amount Units (AAUs) calculated on the basis of its level of green house gas emissions in 1990. The ERUs come from the reserve of the host countrys AAUs. This ensures that the amount of emission credits amongst the Annex I countries does not change during the time period mentioned in the Kyoto Protocol.