The dramatic imagery of global warming frightens people.

Melting glaciers, freak storms and stranded polar bears - the mascots of
climate change - show how quickly and drastically greenhouse gas
emissions (GHG) are changing our planet. Such graphic examples,
combined with the rising price of energy, drive people to want to reduce
consumption and lower their personal shares of global emissions. But
behind the emotional front of climate change lays a developing framework
of economic solutions to the problem. Two major market-based options
exist, and politicians around the world have largely settled on carbon
trading to regulate GHG emissions.

It is estimated that 60-70% of Green House Gases emission is through

fuel combustion in industries like cement, steel, textiles and fertilizers.
They are released as by-products of certain industrial process, which
adversely affect the ozone layer, leading to global warming. With growing
concerns among nations to curb pollution levels while maintaining the
growth in their economic activities, the emission trading (ET) industry has
come to life.

And, with the increasing ratification of Kyoto Protocol (KP) by countries

and rising social accountability of polluting industries in the developed
nations, the carbon emissions trading is likely to emerge as a multibillion-

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dollar market in global emissions trading. The recent surge in carbon
credits trading activities in Europe is an indication of how the emissions
trading industry is going to pan out in the years to come. Carbon credits
seek to reduce these emissions by giving them a monetary value. One
credit gives the owner the right to emit one ton of carbon dioxide. Such a
credit can be sold in the international market at the prevailing market
price. This means that carbon becomes a cost of business and is seen like
other inputs such as raw materials or labor.

LIST OF TOP 10 COUNTRIES BY CARBON DIOXIDE EMISSION

(In „000 of metric tons)

Country % of total
Annual CO2 emissions
emissions

01 China & Taiwan 7,010,170 24.4 %

02 United States 6,049,435 22.2 %
- European Union 4,001,222 14.7 %
03 Russia 1,524,993 5.6 %
04 India 1,342,962 4.9 %
05 Japan 1,257,963 4.6 %
06 Germany 860,522 3.1 %
07 Canada 639,403 2.3 %
08 United Kingdom 587,261 2.2 %
09 South Korea 465,643 1.7 %
10 Italy 449,948 1.7 %
TABLE: 1. (Source: www.unfccc.org)

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Following diagram shows emission of carbon dioxide by different countries

FIGURE: 1. (Source: www.unfccc.org)

FACTS ABOUT CARBON EMISSION:

Global greenhouse gas emissions rose 70 % between 1970 & 2004

and would rise another 25 to 90 % above 2000 levels by 2030
without new restraints. The Intergovernmental Panel on Climate
Change 2007 assessment report said world temperatures are likely
to rise between 1.1 to 6.4 degrees Celsius by 2100, triggering more
frequent floods, droughts, melting of icecaps and threatening
species extinction.
Carbon emissions from the next five years of burning rainforests will
be greater than that for the entire history of aviation up to 2025,
according to the Global Canopy Programme. An estimated 30 per
cent of the world‟s total greenhouse emissions in 1997 came from
wildfires in Borneo, which destroyed one million hectares of forests.
Since 1751 roughly 315 billion tonnes of carbon have been released
to the atmosphere from the consumption of fossil fuels and cement
production. Half of these emissions have occurred since the mid
1970s.

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Worldwide carbon dioxide emissions in 2005 are estimated to be
slightly more than 24 billion tonnes. Every litre of gasoline or petrol
used in motor vehicles produces 2.4 kilograms of carbon dioxide
emissions. For diesel fuel, every litre produces 2.7 kilograms carbon
dioxide.
The average US citizen emits as much carbon dioxide in one day as
someone in China does in more than a week, or someone in
Tanzania, one of the world's poorest countries, emits in seven
months, according to International Energy Agency (IEA) statistics.
The World Health Organization has estimated that climate change
leads to more than 150,000 deaths every year and at least 5 million
cases of illness. Global sea levels will increase by 11 to 13 inches by
2100, according to 2006 estimates by Australia's science research
agency CSIRO.
According to International Energy Agency statistics, world energy-
related CO2emissions in 2004 were 16.4 per cent above their 1990
level. In 2002 alone, they increased by 2%.
Ten countries account for two-thirds of global forest area, according
to the UN Food and Agriculture Organization: Australia, Brazil,
Canada, China, The Democratic Republic of Congo, India,
Indonesia, Peru, Russia and United States.
China says its reforestation and afforestation programmes over the
last two decades have it on track to lift forest cover to 20 per cent
of its land mass by 2010, compared to just 8.6 per cent in 1949.
The United States is the world's leading greenhouse-gas emitter,
accounting for 22 % of total emissions. US annual greenhouse
emissions per capita are about 20 tonnes.

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2.1 CARBON CREDITS:

The carbon market is the most visible result of early regulatory efforts to
mitigate climate change. Regulation constraining carbon emissions has
spawned an emerging carbon market that was valued at €47 billion in
2007. Its biggest success so far has been to send market signals for the
price of mitigating carbon emissions. This, in turn, has stimulated
innovation and carbon abatement worldwide, as motivated individuals,
communities, companies and governments have cooperated to reduce
emissions.

Allowance Markets:
Market has been successful in its mission of reducing emissions, and
stimulating emission reductions abroad. The European Commission,
learning from the experience of Phase I, has strengthened several
important design elements for EU ETS Phase II. Along with recent EU
proposals for Phase III, these improvements include tighter emission
targets, stronger flexibility provisions for compliance more attention to
internal EU harmonization and, most importantly, longer-term visibility for
action to reduce emissions until 2020. These proposed reforms create
confidence in emissions trading as a credible and cost-effective tool of
carbon mitigation.

CDM delivers on clean energy:

Carbon contracts from clean energy projects accounted for nearly two-
thirds of the transacted volume in the project-based market,
appropriately reflecting the CDM‟s mission of supporting emission
reductions and sustainable development. These project types typically use
sound, road-tested technology, are operated by utilities or experienced
operators, and have predictable performance, resulting in CER issuances
that are expected to yield between 70-90% of expected Project Design
Document (PDD) volumes, based on current expectations.

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Prices and price differentiation:
The growth in transacted values reflected higher prices for primary
forward contracts, which had an average price of €10 in 2007. Prices for
primary market forward transactions were in the range of €8-13 in 2007
and early 2008. The generally higher prices reflected the intense
competition and activity in the global market to encourage projects that
reduce global emissions. Prices in the higher end of that range typically
rewarded projects that were further along in the CDM process (such as
registered projects), projects that were being developed by experienced
and established sponsors (low credit risk and performance risk), and/or
for projects with high expected issuance yields. Spot contracts of issued
Certified Emission Reductions were transacted at €16-17, a nice premium
to the primary CER, but still at a discount to the EUA, reflecting a
combination of the impact of the European Commission‟s 2020 proposal,
the time value of money, and some remaining procedures related to the
delay in connectivity of the International Transaction Log (ITL) to the EU.

Climate-friendly investment:
Analysts estimated that US$9.5 billion were invested in 2007-08 in 58
public and private funds that either purchase carbon directly or invest in
projects and companies that can generate carbon assets. The total
capitalization of carbon vehicles could reach US$13.8 billion in 2008-09,
with 67 such carbon funds and facilities. This capital inflow was
characterized by a substantial increase in the number of funds seeking to
provide cash returns to investors and by more funds getting involved
earlier in the project development process, taking larger risks through
equity investment in expectation of larger returns. The authors estimated
that in 2007-08 alone, CDM leveraged US$33 billion in additional
investment for clean energy, which exceeded what had been leveraged
cumulatively for the previous five years since 2002.

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Secondary markets:

The biggest overall market development in 2007-08 and early 2008 was the
emergence of the secondary markets. A segment of the secondary markets that
the authors had discussed in the 2007 report had largely involved primary
project developers providing project-specific guarantees, often along with credit
enhancement. In 2007-08, as a wide range of procedural delays and risks of CER
registration and issuances grew, the carbon market innovated by providing
portfolio-based guarantees. In these transactions, a secondary seller, typically a
market aggregator sold guaranteed CER (gCER) contracts that were secured
through a slice of its carbon portfolios. These guarantees were also usually
credit-enhanced through the balance sheet of a highly-rated bank engaged by
the secondary seller for this purpose.

MARKETS FOR CARBON CREDITS:

Emerging carbon credit markets offer enormous opportunities for the

upcoming manufacturing/public utility projects to employ a range of
energy saving devices or any other mechanisms or technology to reduce
GHG emissions and earn carbon credits to be sold at a price. The carbon
credits can be either generated by project participants who acquire carbon
credits through implementation of CDM in Non Annexure I countries or
through Joint Implementation (JI) in Annexure I countries or supplied into
the market by those who got surplus allowances with them. The buyers of
carbon credits are principally from Annexure I countries. They are:

 Especially European nations, as currently European Union Emission

Trading Scheme (EU ETS) is the most active market;
 Other markets include Japan, Canada, New Zealand, etc
 The major sources of supply are Non-Annexure I countries such as
India, China, and Brazil.

Emission trading is a mechanism that enables countries with legally

binding emissions targets to buy and sell emissions allowances among
themselves. Currently, futures contracts in carbon credits are actively
traded in the European exchanges. In fact, many companies actively

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participate in the futures market to manage the price risks associated
with trading in carbon credits and other related risks such as project risk,
policy risk, etc. Keeping in view the various risks associated with carbon
credits, trading in futures contracts in carbon allowances has now become
a reality in Europe with burgeoning volumes.

Currently, project participants, public utilities, manufacturing entities,

brokers, banks, and others actively participate in futures trading in
environment-related instruments. The European Climate Exchange, a
subsidiary of Chicago Climate Exchange, remains the leading exchange
trading in European environmental instruments that are listed on the
Intercontinental Exchange, previously known as International Petroleum
Exchange. Carbon Credit Trading is a process whereby organizations
purchases carbon credits to neutralize their Carbon Dioxide impact on
global warming. The two types of markets for carbon credits are:
1. Compliance Market and
2. Voluntary Market

1. COMPLIANCE MARKET:
Compliance markets have set a “cap and trade” system whereby the
total annual emissions for an industry or country are capped by law or
agreement, and carbon credits can be traded between businesses or
sold in trading markets. Those producers who exceed their emission
reductions can trade their credits to others in the marketplace who
have not reached their emission goals. Voluntary markets exist for
businesses or individuals to lower their “carbon footprint” by
voluntarily purchasing carbon credits from an investment fund or
company that has aggregated credits from individual projects that
reduce emissions.
The compliance markets are mainly a result of the Kyoto Protocol, a
cap and trade system that resulted from the international Framework

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 rd
Convention on Climate Change. The protocol was adopted at the 3
Conference of the Parties in Kyoto, Japan, on December 11, 1997.

The treaty required ratification by no less than 55 countries & enough

industrialized countries to represent at least 55 % of the total carbon
dioxide emissions. 55 countries agreed by May 23, 2002, but the 55
percent requirement was not met until Russia agreed on November 18,
2004. The treaty came into force 90 days later on February 15, 2005.
As of May 2008, 182 countries had ratified the protocol.

Of these 182 countries, 36 developed countries are required to reduce

greenhouse gas emissions to the levels specified in the treaty. The
U.S. has not ratified the Kyoto Protocol. Brazil, China, India, and 134
other developing countries have ratified the protocol, but have no
obligation beyond monitoring and reporting emissions. The Kyoto
Protocol created specific rules for registering and certifying carbon
credits. Carbon credit markets have been developing for several years,
especially in Europe.
2. VOLUNTARY MARKET:

The number of voluntary markets has been increasing. Trading prices

have been variable. For the Chicago Climate Exchange, the price per
metric ton of CO2 in 2008 went from $2 in early 2008 to $7 in mid-
summer, and back to $2 in the fall. The price rose dramatically during
mid-2008 in anticipation of legislation, but dropped just as
dramatically when legislation stalled.

In 2008 in North Carolina, NC Green Power initiated a program for

selling carbon offsets. The initial price was $4 per 500 pounds of
carbon dioxide equivalent offset. Under the program, certain
participating utilities offer their customers the option to subscribe to
available tariffs to support carbon offsets. These tariffs allow
customers to subsidize the mitigation of greenhouse gases. These
carbon offsets will be offered on a monthly basis for a premium. Each
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 block of carbon offset subsidized by a consumer or business will allow
the NC Green Power carbon offset program administrator to buy an
equivalent block of carbon dioxide equivalents mitigated by an
emission reduction project and sourced directly from the project or
from the voluntary carbon offset market. Some of the requirements
for the emission reduction projects are that there be no renewable
energy credits, the reduction must be permanent, and the project
must have “additionality”.

Interest in reducing GHG emissions is increasing worldwide, and this

has led to attempts to create new markets for carbon credits. The
potential for having cap and trade programs in various states or
potentially for the entire United States under an agreement such as
the Kyoto Protocol leads to speculation that the price of carbon credits
could increase substantially.

2.2 KYOTO PROTOCOL:

2.2.1: INTRODUCTION:

The Kyoto Protocol, an international treaty

on climate change that came into force in
2005, dominates the mandatory carbon
market. It serves as both a model and a
warning for every emerging carbon program.
The major feature of the Kyoto Protocol is that
it sets binding targets for 37 industrialized
countries and the European community for reducing greenhouse gas
(GHG) emissions .These amount to an average of five per cent against
1990 levels over the five-year period 2008-2012.

The major distinction between the Protocol and the Convention is that
while the Convention encouraged industrialized countries to stabilize GHG
emissions, the Protocol commits them to do so.

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Recognizing that developed countries are principally responsible for the
current high levels of GHG emissions in the atmosphere as a result of
more than 150 years of industrial activity, the Protocol places a heavier
burden on developed nations under the principle of “common but
differentiated responsibilities.”

In the early 1990s, nearly every member state of the United

Nations resolved to confront global warming and manage its
consequences. Although the resulting United Nations Framework
Convention on Climate Change (UNFCCC) international treaty
recognized a unified resolve to slow global warming, it set only loose
goals for lowering emissions. In 1997, the Kyoto amendment
strengthened the convention.

Under the Protocol, members of the convention with industrialized or

transitional economies (Annex I members) receive specific reduction
targets. Member states with developing economies are not expected to
meet emissions targets -- an exception that has caused controversy
because some nations like China and India produce enormous levels of
GHG. The Protocol commits Annex I members to cut their emissions 5
percent below 1990 levels between 2008 and 2012. But because the
Protocol does not manage the way in which members reduce their
emissions, several mechanisms have arisen. The largest and most famous
is the European Trading Scheme (ETS), still in its two-year trial phase.

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2.2.2. INDIA AND KYOTO PROTOCOL:

India signed and ratified the Protocol in August, 2002. Since India is
exempted from the framework of the treaty, it is expected to gain from
the protocol in terms of transfer of technology and related foreign
investments.

At the G8 meeting in June 2005, Indian Prime Minister Manmohan

Singh pointed out that the per-capita emission rates of the developing
countries are a tiny fraction of those in the developed world. Following the
principle of common but differentiated responsibility, India maintains that
the major responsibility of curbing emission rests with the developed
countries, which have accumulated emissions over a long period of time.

However, the U.S. and other Western nations assert that India, along with
China, will account for most of the emissions in the coming decades,
owing to their rapid industrialization and economic growth.

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3.1. INTRODUCTION:

Kyoto is a 'cap and trade' system that imposes national caps on the
emissions of Annex I countries. On average, this cap requires countries to
reduce their emissions 5.2% below their 1990 baseline over the 2008 to
2012 period. Although these caps are national-level commitments, in
practice most countries will devolve their emissions targets to individual
industrial entities, such as a power plant or paper factory.

Individual companies will purchase credits directly from another party

with excess allowances, from a broker, from a JI/CDM developer, or on an
exchange.

The Kyoto Protocol shares the ultimate objective of the Convention to

stabilize atmospheric concentrations of GHGs at a level that will prevent
dangerous interference with the climate system. Each Annex I Party has a
binding commitment to limit or reduce GHG emissions and innovative
mechanisms have been established for Parties to facilitate compliance
with this commitment. Other commitments include:
 Each Annex I Party must undertake domestic policies and measures to
reduce GHG emissions and to enhance removals by sinks & they must
provide additional financial resources to advance the implementation
of commitments by developing countries;
 In implementing these policies and measures, each Annex I Party
must strive to minimize any adverse impact of these policies and
measures on other Parties, particularly developing country Parties;

Both Annex I and non-Annex I Parties must co-operate in the areas of:
a) The development, application and diffusion of climate friendly
technologies;
b) Research on and systematic observation of the climate system;
c) Education, training, and public awareness of climate change; and
d) The improvement of methodologies and data for GHG inventories.

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Under the Treaty, countries must meet their targets primarily through
national measures. However, the Kyoto Protocol offers them an additional
means of meeting their targets by way of three market
based mechanisms.

National governments, some of whom may not have devolved

responsibility for meeting Kyoto obligations to industry, and that have a
net deficit of allowances, will buy credits for their own account, mainly
from JI/CDM developers.

Since allowances and carbon credits are tradable instruments with a

transparent price, financial investors can buy them on the spot market for
speculation purposes, or link them to futures contracts. This market has
grown substantially, with banks, brokers, funds, arbitrageurs and private
traders now participating in a market valued at about $60 billion in 2007.
Emissions Trading PLC, for example, was floated on the London Stock
Exchange's AIM market in 2005 with the specific remit of investing in
emissions instruments.

Although Kyoto created a framework and a set of rules for a global carbon
market, there are in practice several distinct schemes or markets in
operation today, with varying degrees of linkages among them.

The Kyoto mechanisms are:

 Emissions trading – known as “the carbon market"

 Clean development mechanism (CDM)
 Joint implementation (JI).

The mechanisms help stimulate green investment and help Parties meet
their emission targets in a cost-effective way.

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 TYPES OF KYOTO MECHANISM

The Clean Development Mechanism is a mechanism, which

Clean
allows developing countries to receive investments for the
Development
construction of new facilities in order to replace old ones.
Mechanism

Joint Implementation is a mechanism that permits the

industrialized countries, which are unable to reach their
Joint reduction target solely by domestic means, to reduce their
Implementation greenhouse gases emissions through investing in the
economies of the countries in transition. The donors receive a
share of the reduced emissions.

International Emission Trading is a mechanism that allows

trading the parts of the reduced emissions, which exceed the
commitments. Countries who fail to diminish their emissions
can buy these 'credits' from countries, which have reduced
their greenhouse gases below the committed level. Emission
International
trading is a market based scheme for environmental
Emission Trading
improvement that allows parties to buy and sell permits for
emissions or credits for reductions. Emission trading allows
established emission goals to be met in a cost effective way,
letting the market determine the lowest cost pollution control
opportunities. Emissions trading can work within a region or
country or on a global basis.

Chart 1: Types of Kyoto Mechanism

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4.1. INTRODUCTION:

The CDM market is like any other commodity market. The CDM market is
rising sharply and is getting matured with time. Currently, it is the second
largest carbon market after the EUA market. The market is nearly
doubling every year. Majority of the trading is done in the Primary
market. The secondary market is not as expanded as the primary mainly
because of the high volatility of the carbon prices.

The CER market is an evolving market and has not yet become matures
enough to be completely independent. The CER market is closely linked to
EUA market. Thus the volatility of EUA market is inherently transferred to
the CER market. Fluctuations in EUA market cause price fluctuations in
CER market. The Buyers of CERs can be broadly classified into:

1. Compliance Buyers
2. Carbon Funds (e.g. Prototype Carbon Fund of World Bank)
3. Traders

India is a big market for CDM projects. As per the rating system of Point
Carbon, India ranks second in terms of attractiveness for CDM project
participants. In other words, India has a good climate for investment into
CDM projects. In the registered projects category, India has the largest
share 31.00%. However, in the issued CER category, India ranks second
after China.

The total Number of projects registered till 17 March 2008 was 1023 and
the total no of CERs issued were 196635114. However, the registration
process is getting more and more stringent lately mainly to safeguard the
mechanism‟s integrity and the quality of CERs.

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4.2. CLEAN DEVELOPMENT MECHANISM:

The Clean Development Mechanism (CDM) is a mechanism whereby an

Annex I party may purchase emission reductions which arise from
projects located in non-Annex I countries. The carbon credits that are
generated by a CDM project are termed Certified Emission Reductions
(CERs) , expressed in tonnes of CO2 equivalent (tCO2-e).

The key stages in the CDM project cycle are the initial feasibility
assessment, development of a Project Design Document (PDD), host
country approval, project validation, registration, emission reduction
verification and credit issuance. The interdependencies of the activities
that need to be undertaken as part of the process, and which
stakeholders are responsible for carrying out each activity.These
stakeholders include the CDM project developer and the CDM Executive
Board (EB), as well as the Designated Operational Entity (DOE),
responsible for validation and verification of the project.

The CDM EB supervises the CDM under the authority and guidance of the
Conference of the Parties. The EB‟s core tasks are the following:

 Accreditation of independent auditors for validation and verification

 Review of validation reports and PDDs

 Approval of new baseline and monitoring methodologies

 Registration of projects

 Issuance of CERs

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All CDM projects must satisfy certain requirements specified in either the
Kyoto Protocol. These include requirements that the project:

 Complies with the eligibility criteria (e.g. sustainable development

criteria) of the host country and other parties, and receives project
approval by the host country

 Provides real, measurable, and long-term benefits related to the

mitigation of climate change using an approved baseline and
monitoring methodology

 Delivers reductions in emissions that are additional to any that

would occur in the absence of the project activity

 Does not result in significant environmental impacts and

undertakes public consultation

Each of these requirements is dealt with in greater detail below.

HOST COUNTRY APPROVAL:

Obtaining host country approval is a critical step in the CDM project cycle.
Without it, a project is not eligible for the CDM. In order for a CDM project
to receive formal host country approval, the host country must have
ratified the Kyoto Protocol and have nominated a Designated National
Authority (DNA) to the UNFCCC.

The DNA is formally responsible for managing the CDM approval process
in the host country. This approval should be provided in writing, in the
form of a Letter of Approval (LoA). Such a letter must include:

 Confirmation that the host country has ratified the Kyoto Protocol

 A statement that the host country's participation in the CDM is

voluntary

 A statement that the project contributes to the host country‟s

sustainable development.

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It is up to each DNA to specify rules and procedures for obtaining host
country approval, including setting any criteria that will be applied in
determining whether or not the project contributes to the host country‟s
sustainable development.

BASELINE AND MONITORING METHODOLOGY

At the heart of CDM project development is a baseline study which

quantifies the emissions reduced and therefore the carbon revenue
potential of a project. The determination of a baseline is defined in a
baseline methodology. Related to this, the procedures for the
measurement of the actual emissions reduced by a project over time are
defined in a monitoring methodology. A CDM project can only be
submitted for validation if it has been developed in accordance with an
approved baseline and monitoring methodology.

A baseline methodology describes each of the steps that must be taken to

characterize baseline emissions, and ultimately to calculate the project
emission reductions. To facilitate project development, the EB has set out
a process through which methodologies developed for one project can be
used for similar activities.

The EB has approved a number of methodologies that can be applied to a

variety of project activities.

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4.3. CDM PROCESS CYCLE:

CDM Process Cycle

Procedure Project Cycle Key role

Project Design Project Proponent

Project
development (CDM (Analysis, PIN, PDD,
concept Application) Buyer’s Letter of Intent)

Govt. Approval Validation DOE

UNFCCC CDM
Registration EB

Project Monitoring Project

Implementation Proponent

Verification and
DOE
Certification

CERs CDM EB

PIN: Project Idea Note

PDD: Project Design Document
DOE: Designated Operational Entity
CERs: Certified Emission Reduction
EB: Executive Board (UNFCCC)
UNFCCC: United Nations Framework Convention on Climate Change
CDM: Clean Development Mechanism
Chart 2: CDM process flow

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 Simplified CDM Process Flow

Identification of Project and development of Project concept note Project Developer

Development of project design document

Host Govt. (National

Host country approval
Authority)

Submission of the PDD and host country approval validator Project Developer

Make PDD completely available for 30 days Operational Entity

Validation of Project Operational Entity

Submission of validation report and PDD

Registration with the CDM CDM executive board

Project implementation and monitoring Project Developer

Verification and Certification Operational Entity

Possible review by CDM executive board CDM executive board

Issuance of CERs to project developers CDM executive board

Chart 3: Simplified CDM process flow

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4.4. CHALLENGES IN CDM:

Procedural delays in the CDM:

In spite of its success, or perhaps even because of it, 7 the carbon market
came under close public scrutiny in 2007-08. The success of the CDM is
threatened by a creaking infrastructure that, despite some efforts to
streamline, is struggling to process the overwhelming response from
project developers worldwide in a timely manner. Procedural inefficiencies
and regulatory bottlenecks have strained the capacity of the CDM
infrastructure to deliver CERs on schedule, as too many projects await
registration and issuance:
 Out of 3,188 projects in the currently pipeline, 2,022 are at
validation stage.
 Market participants report that it is currently taking them up to six
months to engage a Designated Operational Entity (DOE), causing
large backlogs of projects even before they reach the CDM pipeline.
 Projects face an average wait of 80 days to go from registration
request to actual registration.
 The Executive Board has requested a review of several projects
received for registration, has rejected some of them, and has asked
project developers to re-submit their projects using newly revised
methodologies. There is a very short grace period allowed to
grandfather the older methodology, and the additional work adds to
delays and backlogs.
 Projects are currently taking an average of 1-2 years to be issued
from the time they enter the pipeline. Over 70% of issued CERs
come from industrial gas projects, with the vast majority of energy
efficiency and renewable energy projects remaining stuck
somewhere in the pipeline

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Complex rules and the capacity constraint:

DOEs, who are accredited to validate and verify CDM projects, are unable
to keep up with a large backlog of projects awaiting registration, and are
finding it difficult to recruit, train and retain qualified, technical staff to
apply the complex rules consistently. As a result, some projects have
been registered incorrectly, resulting in a call for more reviews being
requested by the CDM Executive Board, which, in turn, causes even more
delays. Important concerns have been voiced about CDM on issues of its
additionality, its procedural efficiency and ultimately, its sustainability.
Some critics of the CDM maintain that its rules are too complex, that they
change too often and that the process results in excessively high
transaction cost; they ask for relief from the rules. Other critics question
whether certain project activities are truly additional, or whether CDM can
create perverse incentives; they ask for even more rules.

Impact of delays on carbon payments:

CDM project registration and CER issuances are generally lower and
slower than expected and regulatory efforts to reform and streamline the
process are urgently needed. Delays for any reason in a project‟s
schedule can jeopardize elements of its financing package, and ultimately
its construction and implementation. Those delays, in turn, affect
expected CER delivery schedule as well as dampen enthusiasm for further
innovation, which is urgently needed to mitigate climate change. Delays
in payments also increase a systematic bias in favor of those projects that
can be self-financed by large, wealthy project developers. Projects that
really need the carbon payments to overcome barriers are more likely to
fail as a result of these delays. Conversely, projects that are not as reliant
on carbon payments for their construction and implementation are more
likely to be able to take the financial hit from the delays.

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5.1. INTRODUCTION:

Under an emissions trading system, the quantity of emissions is fixed

(often called a "cap") and the right to emit becomes a tradable
commodity. The cap (say 10,000 tonnes of carbon) is divided into
transferable units (10,000 permits of 1 tonne of carbon each). Permits are
often referred to as "GHG units," "quotas" or "allowances." To be in
compliance, actors participating in the system must hold a number of
permits greater or equal to their actual emissions level. Once permits are
allocated (by auction, sale or free allocation) to the actors participating in
the system, they are then tradable. This enables emissions reductions to
take place where least costly.

5.2. SHOULD THERE BE TRADING OF EMISSIONS?

When a given volume of GHG‟s has been defined by an international

agreement as permissible over a certain period of time, emission
allowances become scarce goods. As demand will be higher than
supply, allowances will command exchange value. This value will
basically be determined by the size of supply on the one hand and by the
perceived utility of fossil-based combustion (in the case of CO2) on the
other. Where the threshold regulating the permissible amount of global
emissions is set depends on what kind of risk is politically accepted over
what period of time and for whom. The more inclusive the ethical
storyline adhered to; the lower will most likely be the level of risk
accepted. And the desire for combustion will, inter alia, depend on the
extent to which a society has embarked upon a sustainable development
path; the more national income is decoupled from carbon emissions and
the more well-being from national income, the less will be the pressure to
emit.
Trade regimes have been criticized for turning parts of the global
commons into saleable pieces of property, i.e. commodities. Indeed, such
a conception would clearly contradict ethical narratives that see the

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atmosphere as common heritage of mankind, as integral to the Earth‟s
bio-community, or as God‟s creation. Possibly for these reasons, the
Indian government has demanded to ensure “that the Protocol has not
created any asset, commodity or goods for exchange”. However, these
objections would not hold if one considered the price of emission permits
not as a rent yielded by a property, but as a fee to be paid for the
temporary right to use the atmospheric commons beyond its sink
capacity.
In fact, the temporary nature of permits along with the fact that a price
tag will be attached not to the use but to the overuse of the commons,
suggests interpreting the price for a permit not as a price for acquired
property but the price for obtaining a user right. Money gives the right to
access, but not to ownership.
Following this consideration, a trade in permits takes on a different
meaning. It would not be instituted in the first place for identifying the
most efficient allocation of abatement investments, but for forming the
price of user rights. After all, the market, under conditions of relative
symmetry among players, is the most ingenious technology for
determining prices.

Carbon Taxes:
Carbon taxes are simply direct payments to government, based on the
carbon content of the fuel being consumed. Given that the primary
objective of the abatement policy is to lower carbon dioxide emissions,
carbon taxes make sense economically and environmentally because they
tax the externality directly. Coal generates the greatest amount of carbon
emissions and is therefore taxed in greater proportion than oil and natural
gas, which have lower carbon concentrations (Coal contains .03 tonnes of
carbon per million Btu of energy, while oil and natural gas contain only
0.024 & 0.016 tonnes respectively).

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5.3. WHICH ONE’S BETTER, EMISSION TRADING/CARBON TAXES?

There is no simple yes or no answer, and the policies are not necessarily
mutually exclusive. Several important advantages and drawbacks of the
respective policies are outlined below.

The Case for Emissions Trading:

 A well functioning emissions trading system allows emissions

reductions to take place wherever abatement costs are lowest,
regardless of international borders. E.g.: If emissions reductions are
cheaper to make in India than in France, emissions should be
reduced first in the former where costs are lower.
 Emission trading has the advantage of fixing a certain
environmental outcome - the aggregate emissions levels are
fixed, and companies/countries pay the market rate for the rights
to pollute. This also makes emissions trading more conducive to
international environmental agreements, such as the Kyoto
Protocol, because specific emissions reduction levels can be agreed
upon more easily than tax rates or policy instruments, which may
vary in appropriateness and applicability between states.
 Emission trading is more appealing to private industry. By
decreasing emissions, firms can actually profit by selling their
excess greenhouse gas allowances. Creating such a market for
pollution could potentially drive emissions reductions below targets.
In general, transferring resources between private entities is more
appealing than transfers to government.
 Emission trading is better equipped than taxes to deal with all six
GHGs included in the Kyoto Protocol and sinks (e.g. trees which
absorb and store carbon) in one comprehensive strategy. Each gas
has a "greenhouse gas potential". Thus firms emitting more than
one GHG have more flexibility in making reductions.

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The Case for Carbon Taxes:

 A carbon tax would offer a broader scope for emissions reductions.

Trading systems can only be implemented among private firms or
countries - not individual consumers (transaction costs would
be prohibitively high if commuters needed permits to fill up their car
with gas). Carbon taxes extend to all carbon-based fuel
consumption, including gasoline, home heating oil and aviation
fuels. Trading systems may not be able to reach parts of the
transportation and service sectors which could account for 30-
50% of emissions.
 A system of tradable permits entails significant transaction costs,
which include search costs, such as fees paid to brokers or
exchange institutions to find trading partners; negotiating costs;
approval costs, such as delays or fees incurred during the
approval process; and insurance costs. Conversely, taxes involve
little transaction cost, over all stages of their lifetime.
 Carbon taxes have dynamic efficiency advantages that trading
lacks because taxes offer a permanent incentive to reduce
emissions. Trading systems may not be able self-adjust in response
to rapid change, and thus provide the permanent incentive of a tax
system to reduce emissions. In short, emissions trading must have
some method of removing permits from the system or other
method of ratcheting-up permit prices.
 Emissions trading proposals are highly complicated and technical,
unlike taxes which are an extremely familiar instrument to
policymakers. Many technical issues would need to be resolved
before trading could begin, including treatment of sinks, different
GHGs, monitoring, enforcement, etc. Ongoing costs are also low for
tax systems because of the lack of monitoring and enforcement
requirements.

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  Carbon taxes earn revenue, which can be "recycled" back into the
economy by reducing taxes on income, labor and/or capital
investment. This is often referred to as a "revenue neutral" tax and
may be part of a broader program of "environmental tax reform"
(ETR) which attempts to shift the tax burden from "goods" like
labor, to "bads" like pollution. Evidence indicates that there can be
profound employment, distributional and political benefits to such
an approach. Permit systems have the potential to earn revenue,
but only if permits are auctioned.

5.4. THE POLITICS: WHO LIKES WHICH POLICY, AND WHY?

United States is the strongest proponent of emissions trading and fought

hard to include trading in the Kyoto Protocol. The reasons are
straightforward. Relative to other industrialized countries, the US is
energy inefficient and has high per capita carbon dioxide emissions levels.
Thus carbon taxes would penalize the US relative to other, less fossil fuel
dependent nations. US industry is also strongly against any taxation
measures to achieve GHG reductions. Trading would allow US firms to
purchase emissions allowances from other countries, and avoid domestic
reductions.

The European Union has traditionally been in favor of strong

coordinated policies, such as energy/carbon taxes, among countries.
Because the EU is already relatively energy efficient, carbon taxes would
be less of a burden than in the US. In Kyoto, the EU was against
emissions trading, but was unable to overcome US support for trading.
Therefore, EU efforts have been channeled into developing effective rules
and guidelines for a trading system.

The Russian Federation and the Ukraine are major supporters of

emissions trading, and would stand to gain financially. Their emissions
reduction targets are 0%; reductions by 2008-2012 based on 1990 levels

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(i.e. to remain at 1990 levels through 2012). However, because of the
economic collapse of the former Soviet bloc, and the closure of inefficient
power plants, these countries are already 30%; below 1990 levels. If they
were allocated trading permits, they would be able to immediately flood
the market and receive major cash inflows.

Developing countries are extremely cautious of emissions trading, and

view it primarily as a "loophole" that the US and Japan can use to avoid
their domestic responsibility. They are in favor of rules and guidelines that
ensure equitable allocation of allowances and monitoring provisions.
Currently, trading is being discussed only as a means for Annex 1, since
developing countries do not have binding emissions reduction targets.
However, if the system were to be extended globally in the future,
developing countries would demand that permit allocations be based on
population, rather than historic national emissions levels. This position is
indicative of the strong equity concerns held by developing countries.
Developing countries favor the principle of carbon taxes - as long as they
are levied on rich countries and not poor ones.

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6.1. INTRODUCTION:

Joint implementation (JI) is a project-based mechanism by which one

Annex I Party can invest in a project that reduces emissions or enhances
sequestration in another Annex I Party, and receive credit for the
emission reductions or removals achieved through that project. The unit
associated with JI is called an emission reduction unit (ERU). ERUs are
converted from existing AAUs and RMUs before being transferred. JI does
not affect the total assigned amount of Annex I Parties collectively; rather
it redistributes the assigned amount among them.

There are two approaches for verification of emission reductions under JI,
commonly called „JI Track 1‟ and „JI Track 2‟. Under Track 1, a host
Party that meets all of the eligibility requirements may verify its own JI
projects and issue ERUs for the resulting emission reductions or removals.
Annex I Parties may also choose to use the JI Track 2 verification
approach. The eligibility requirements for JI Track 2 are less strict than
those for Track 1. Under JI Track 2, each JI project is subject to
verification procedures established under the supervision of the Joint
Implementation Supervisory Committee. JI Track 2 procedures require
that each project be reviewed by an accredited independent entity to
determine whether the project meets the requirements established under
Article 6.

The emission reductions or removals resulting from the project must also
be verified by an accredited independent entity in order for the Party
concerned to issue ERUs. All Annex I Parties participating in JI,
irrespective of whether they use Track 1 or 2, are required to inform the
secretariat of their national guidelines and procedures for approving,
monitoring and verifying these projects. They are also required to make
information about each project publicly available.

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6.2. JI IN 2006-07:

JI project market saw 20.5 Mt CO2e transacted in 2006. Of that, 16.7 Mt

CO2e represents confirmed transactions registered in Point Carbon‟s
transaction database while the remaining 3.8 Mt CO2e are estimated
using data from Point Carbon‟s project database and regular contact with
market participants. The quarterly average was 5.1 Mt, with a somewhat
smaller volume of contracts in the second quarter and higher volumes in
Q4.

Reported ERU prices in 2006 were between €4.5 and €12.5. The price did
not see any abrupt changes, partly because JI is still dominated by
governmental buyers which have limits on their budgets and are not very
flexible with the prices they offer. They also usually negotiate the price at
early stages of the projects, and the resulting price at the date of contract
signature does not necessarily reflect the latest market trends.

6.3. JI IN 2007-08:

During 2007, 16 Emission Reduction Purchase Agreements (ERPAs) with a

total volume of 12.7 Mt were confirmed by market players. The ERUs for
these contracts are generated by projects represented by renewables,
nitrous oxide, biomass, energy efficiency and fugitive emissions types. It
is notable that the N2O projects account for one-third of total volume,
followed by renewables and landfill projects (19 and 13 % respectively).
Early-stage negotiations have been reported by market players in energy
efficiency and landfill gas projects.

On average, ERU price ranges have increased compared to the previous

year, with the price range across contracts becoming narrower. While
cited ERU prices for standard off-take contracts varied from €6 to €10
depending on project risk, sellers‟ expectations for the ERU price were

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higher due to the significant increase of CER prices throughout the past
year.

In 2007, the numbers and volumes of projects submitted to the JI

supervisory committee (JISC) for verification were boosted. Overall, 84
projects with a total volume of 117m ERUs were submitted to the JI
Supervisory Committee (JISC) for public comment during 2007, taking
the pipeline to a total of 107 projects that are capable of generating up to
34.5m ERUs annually during 2008 – 2012.

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7.1. INTRODUCTION:

A carbon trading system allows the development of a market through

which carbon (carbon dioxide) or carbon equivalents can be traded
between participants, whether countries or companies. Each carbon credit
is equal to one hundred metric tons of carbon dioxide, which can be
traded or exchanged in market.

TYPES CARBON TRADING:

There are two kinds of carbon trading – Emission trading and trading in
Project-based Credits. The two categories are put together as Hybrid
trading System. Carbon trading is also called Pollution trading.

1. EMISSION TRADING:
A company can reduce its emission by half the cost of allowance bought
from other company. On the other hand, a company with higher
expenditure for reduction of its emissions buys the required allowance
from other company to save its emission cost. In either ways, the
company saves half the expenditure they would have to spend for
reduction of carbon emissions without carbon trading. Some emissions
trading scheme allow companies to save any surplus allowances they
have for their own use in future years, rather than selling them. Emission
trading is also sometimes call „cap-and-trade‟. The development of
emissions trading over the course of its history can be divided into four
phases:

I. Gestation:

Theoretical articulation of the instrument and, independent of the

former, tinkering with "flexible regulation" at the US Environmental
Protection Agency

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 II. Proof of Principle:

First developments towards trading of emission certificates based

on the "offset-mechanism" taken up in Clean Air Act in 1977.

III. Prototype:

Launching of a first "cap and trade" system as part of US Acid Rain

Program, officially announced as a paradigm shift in environmental
policy, as prepared by "Project 88", a network building effort to
bring together environmental and industrial interests in the US

IV. Regime formation:

Branching out from US clean air policy to global climate policy and
from there to the European Union, along with the expectation of an
emerging global carbon market and the formation of the "carbon
industry"

2. TRADING IN PROJECT-BASED CREDITS:

Government and World Bank subsidized credit for such project-based
trading to the companies, covering part of the cost of building the
projects and calculating how much carbon dioxide equivalent they save.
Project-based Credit trading includes „baseline-and-credit‟ trading and
„offset‟ trading.

3. HYBRID TRADING SYSTEM:

In Hybrid trading system, both emission trading and offset trading are
used and try to make allowance exchangeable for project-based credits.
Hybrid trading system is enormously complex as it is not only difficult to
try to create credible „credit‟ and make them equivalent to „allowance‟.
Mixing emission and project-based credit trading also changes the
economics

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7.2. UNDERSTANDING CARBON TRADING:

Carbon trading, or more generically emissions trading, is the term applied

to the trading of certificates representing various ways in which carbon-
related emissions reduction targets might be met. Participants in carbon
trading buy and sell contractual commitments or certificates that
represent specified amounts of carbon-related emissions that either:
 are allowed to be emitted;
 comprise reductions in emissions (new technology, energy
efficiency, renewable energy); or
 Comprise offsets against emissions, such as carbon sequestration
(capture of carbon in biomass).

People buy and sell such products because it is the most cost-effective
way to achieve an overall reduction in the level of emissions, assuming
that transaction costs involved in market participation are kept at
reasonable levels.

It is cost-effective because the entities that have achieved their own

emission reduction target easily will be able to create emission reduction
certificates "surplus" to their own requirements.

These entities can sell those surpluses to other entities that would incur
very high costs by seeking to achieve their emission reduction
requirement within their own business.
Similarly, sellers of carbon sequestration provide entities with another
alternative, namely offsetting their emissions against carbon sequestered
in biomass.

Emissions trading are one of the flexibility mechanisms allowed under the
Kyoto Protocol to enable countries to meet their emissions reduction
target. Countries/companies with high internal emission reduction costs
would be expected to buy certificates from countries or companies with
low internal emission reduction costs.

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The latter entities would also be expected to maximize their production of
low cost emission reduction so as to maximize their ability to sell
certificates to high cost entities.

The overall outcome is that the emission reduction target is met, but at a
much lower cost than would be incurred by requiring each entity to
achieve the emission reduction target on their own.

7.3. CARBON TRADING MARKET MECHANISM:

The simplest type of carbon trade involves an entity preparing a contract

that describes and specifies the kind of activity they are undertaking to
either reduce or offset emissions. The contract may or may not be
independently verified, although doing so will increase buyer confidence
and probably attract a higher price. This contractual commitment is then
sold to another entity that wishes to make use of the specified amount of
the reduction or offset.

Contractual commitments are usually traded "over the counter" (OTC),

which means that the trade is usually a bilateral one between a willing
buyer and a willing seller without the need for a market to exist. OTC
trades are usually single trades where the terms are either partially or
fully confidential. OTC markets are relatively simple and operate where
there is limited "liquidity" (that is, not many trades are occurring) or
where the product being traded is somewhat unique for each trade.

In contrast, a carbon trading market is more akin to a share market.

Products traded on a market are generally more homogeneous; for
example, all types of carbon sequestration that meet the rules defining
the creation of a "carbon sequestration certificate" may be deemed to be
identical in the market. This both increases the liquidity of the product
and helps market participants understand and have more confidence in
the product being traded. The existence of a set of enforced rules

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 associated with the creation of both emission reduction and emission
offset certificates also increases market confidence in the product.

CARBON NETWORK

Seller
Buyers
Exchange
Banks Annex 1
country
Trading
Individuals Banks
exchange

Banks
NGO & Individuals
Govt.

Consultants Brokers & Consultants

Traders
Intermediary
Annex 2 & Others
service
3 countries
providers
Others Consultants NGO &
Government

Chart 4: CARBON NETWORK DIAGRAM

Carbon network or market is a complex structure as seller can sell carbon

credits in primary and secondary market and also seller and buyer can
have direct or indirect relation with or without help of consultant and
intermediaries. But by entry of brokers and consultants in market trading
becomes easier as compared to earlier trading platforms. Consultants and
brokers have opened many platforms for seller and buyer to have smooth
flow of carbon credits. Also consultants help to mitigate different types of
risk associated with carbon trading.

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 7.4. PARTIES INVOLVED IN CDM PROJECT DEVELOPMENT AND
CARBON TRADING:

Experts Other Lenders Rating agencies

Rating
Advisory contracts

Equity provider Host

Lender
government
Guarantee

Shareholder’s Loan Agreement

Agreement Permits and licenses

Supplier Project entity Buyers

Supply contract Purchase contract

Operation &
Construction contract Insurance contract maintenance contract

Constructor Insurer Operator

Chart 5: ENTITIES INVOLVED IN CDM PROJECT DEVELOPMENT

Project entity:
The project entity is often a Special Purpose Vehicle such as a joint
venture company or a limited partnership set up specifically to undertake
the project. Creating a Special Purpose Vehicle may be useful in order to
keep a project at arm‟s length from the project sponsors, for legal, tax or
financial reasons. Alternatively, the project entity may be an individual,
an existing company, a government agency, a charity, and NGO or
community organization. A project may also encompass several different
entities. In such cases it is critical to have clear contractual arrangements
in place specifying how the different entities are going to work together to
implement the project.

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Sponsor:
Sponsors are those individuals, companies or other entities that promote
or support a project because they have a direct or indirect interest in the
project. Sponsors can include owners of the land on which the project will
be situated, contractors, suppliers, buyers of the project‟s outputs, or
other users of the project.

Lender:
If the project is financed through debt, one or more banks may be
involved in providing this. A loan from a group of banks is known as a
syndicated loan. Typically one of the banks will take the lead role in
arranging the finance and syndication agreements, while another (called
the engineering or technical bank) will monitor the technical aspects of
the project. Others may be appointed to deal with other specific aspects
such as insurance. Other types of lenders may include individuals,
corporations, contractors, community groups and institutional investors
such as the World Bank and other international agencies.

Equity provider:
Equity may be provided by project sponsors or third party investors.
Equity providers will wish to ensure that the project produces a return on
their investment as set out in the business plan or prospectus.

Constructor:
Construction is usually carried out by specialist contractors who have
responsibility for the completion of the works, and often have to assume
liability for finishing construction on time and to budget. Lenders will
usually require contractors to demonstrate a good track record in
completing the same or similar project activities.

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Operator:

Operation of the project may be carried out by the project entity, one of
the sponsors, or a third party appointed to be responsible for the
operation and maintenance of the project facilities once completed.

Supplier:
Various companies will supply goods and services to the project. Lenders
will generally prefer supplier agreements and contracts to be in place for
the delivery of essentials such as fuel and equipment. Equipment
suppliers will generally be required to have a track record of supplying the
relevant equipment and to provide equipment performance guarantees.

Buyer:
A project may produce one or more outputs. Lenders will wish to have
contracts in place with buyers of the outputs constituting the majority of
the project‟s future cash flow. The nature of these contracts will be
subject to particular scrutiny and the terms of a loan may well be
dependent upon factors such as the minimum price level in a contract and
how various risks are apportioned between the buyer and the project
entity. In order for a lender to place any reliance on a purchase
agreement as an indication of a project‟s ability to repay a loan, the
lender will need to be satisfied as to the credit-worthiness of the buyer.

Insurer:
Insurers can assist in identifying and mitigating risks associated with the
project. If a risk is to be mitigated by purchasing insurance, the lender
will need to be satisfied as to the track record and credit-worthiness of
the insurer.

Rating agencies:
The rating agencies (e.g. Moody‟s, Standard & Poor‟s, and Fitch Ratings)
may be involved if the financing of the project involves the issue of
securities.

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Experts:
Project sponsors and lenders will often call upon external experts to
advise them on key technical, engineering, environmental and risk
aspects of a project. Experts need to be able to demonstrate a track
record of expertise in the relevant area.

Host government:
The objectives and role of the host government will vary but may involve
economic, social and environmental guidelines and issuance of relevant
consents, permits and licenses. In some countries, the host government
may be involved through state owned or controlled companies that may
take on any of the above roles in relation to the project.

7.5. THE ADVANTAGES OF CARBON TRADING:

1. Carbon credit trading can open up a new cash source to companies
who are able to maintain their emission levels well within the
permissible limits.
2. The overall ecological balance is preserved
3. The company or country gets rewarded for applying clean
technology in its production process.
4. A much better corporate and social image which wins public
approval
5. Encourages activities like tree plantings which would help reduce
soil salinity, improve water quality and enhance biodiversity.

7.6. KEY RISKS AND UNCERTAINTIES:

The key risks & uncertainties associated with carbon trading markets are:
1. The extent to which the Kyoto Protocol guidelines are implemented
& followed
2. The attitude of US which is the biggest polluter and had refused to
sign the treaty
3. The final rules and decisions relating to an emissions trading market

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The first Kyoto commitment period, which ends on 31 December 20121, is
set to be dominated by the EU ETS and CDM on the market side. The
interlinked EU ETS and CDM markets will see the greatest cumulative
volume and value, as they are consolidating and getting more
sophisticated. In addition, the next five years will see the JI market
deliver its first credits and possibly an emerging market in national Kyoto
allowances or AAUs. Beyond Kyoto, the ten-state RGGI has already
produced the first US compliance trade, and more is expected.

1
Source:unfccc.org; Point carbon.

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8.1. EXPECTATIONS FOR GLOBAL 2009 VOLUMES AND TRENDS:

The total traded volume in global carbon markets in 2008 was 2.7 Gt,
valued at just over €40 bn. We expect this to grow to 4.2 billion tonnes
CO2e in 2009, up 56 percent from 2008. The EU ETS maintains its
position as the largest market. Traded volume in the EU ETS is expected
to be 2.6 Gt in 2009. At current prices, this would be equivalent to €63bn.

The expected increasing traded volumes will continue as the global

market becomes more mature and sophisticated. An increase in contract
types, more players and markets and greater competition between
market players (such as exchanges and brokers) will together generate
momentum for higher volumes. As a consequence, liquidity providers will
be attracted to this market. On the other hand, turbulence in global
financial markets may contribute to less vigorous growth in transacted
volumes.

The expected 2009 carbon market will differ from 2008 in several ways.

First, the EU ETS Phase 2 is considerably tighter than Phase 1. Moreover,

the start of short-term prompt trading for Phase 2, where only forward
trading was seen previously, is expected to contribute to increased traded
volumes.

Second, the EU climate and energy package, launched on 23 January this

year, has sent a potentially bearish long-term signal to the project
markets by placing uncertainty on the future of the Clean Development
Mechanism. More immediately, the reduced average credit limits on
CER/ERU and the tight Phase 3 are expected to dampen EUA-sCER swaps.

Third, new policies in key countries such as the US and Australia imply
that we will see trading in new markets. This will be accelerated by the
ongoing negotiations under the Bali action plan.

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8.2. EUA MARKET:

In the EU ETS which covers about 2.1bn tonnes CO2e annually of

underlying assets, new financial instruments are developing and their use
is spreading. What are the main developments in the EU ETS market from
a trading perspective? What effects does the EU ETS have on company
behavior when it comes to abatement, investment, production and other
ways of managing emissions? And beyond current bid/offer spreads, what
prices do compliance and financial players foresee for the period?

8.2.1 EU ETS IN 2009

The 2008 volume in the OTC market and on the exchanges corresponds
to almost five times the annual Phase 2 shortage of about 300 Mt in the
power and heat sector. This gap needs to be filled every year. The
estimated gap in 2009 this volume will increase to about seven times the
power and heat gap. There are several reasons why growth is expected:

First, the tightness of the Phase 2 cap is expected to increase the traded
volume compared to 2008, simply because more players are short of
allowances. Industrials that were long in Phase 1 are in general balanced
or slightly in Phase 2, while power and heat installations that were short
in Phase 2 have now become even shorter.

Only 15 percent of the respondents expect to be long in Phase 2, that is,

to have an allocation that is sufficient for compliance and surplus EUAs to
sell. About one-third – expected to be in the power sector – will need
their full allocation, credit limit and extra EUAs. Shortness will mean more
trading since fewer can ignore the EU ETS. As a consequence, Phase 2
volume will go up compared to Phase 1.

Second, a tighter cap gives higher volatility because prices become more
sensitive to changes in fundamentals. This will be attractive to financial
players as well as compliance traders, consequently increasing the traded
volume.

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8.3. TOWARDS 2012 – AND BEYOND:

In its rulings on Phase 2 national allocation plans, which took place from
November 2006 to October 2007, the EC was unquestionably tough. As a
consequence, the caps in 2008-2012 are much tighter than in Phase 1.

The initial shortage in the 2008-2012 periods creates a demand for real
emission reductions, either at home or in non-Annex 1 countries. The
overall cap for Phase 2 for EU-28 (EU-27+Norway) is currently at 2 103.5
Mt/year. In total, the EC has cut the allocation by 245 Mt/year – or 10.4
percent – compared to the allocation suggested in the NAPs.

The largest cuts in volume terms have been requested in Poland (76 Mt),
Germany (29 Mt) and Bulgaria (25 Mt). The largest cuts in relative terms
have been requested in countries located in Eastern Europe, with the
three Baltic States (about half) and Bulgaria (37%) at the top of the list.

The credit limits, defined as the maximum CDM/JI volumes that can be
used for compliance purposes in Phase 2, were set quite generously, as
every country was guaranteed a minimum 10 percent.

It is generally accepted that the EC did a good job in setting the caps, but
was more generous in setting the credit limit. Consequently, Phase 2
could in theory produce no emissions reductions in Europe, just credit
imports from CDM and JI countries.

The Commission corrected this through the EU ETS review – and the
Phase 3 proposal – in January this year. The fundamental balance of the
EU ETS in Phase 2 is now merged with that of Phase 3 (2013-2020). This
is because EUAs can be banked without limits from one year to the next.
Higher Phase 3 prices should thus also translate into higher Phase 2
prices.

All the proposals in the EC energy and climate package are to some
extent related to the overall EU climate and energy targets, i.e. a 20
percent reduction in GHG emissions, a 20 percent share of renewables in
final energy consumption and a 20 percent increase in energy efficiency.

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All targets would be achieved by 2020. The commission‟s climate and
energy package comprises a number of elements:

 Amendments to the EU ETS;

 A proposed burden-sharing among EU countries for emissions not
covered by the EU ETS;
 Promotion of renewable energy in the EU, including national
targets;
 Promotion of carbon capture and storage;
 Improvement in energy efficiency; and
 Changes to state aid rules to facilitate emission reductions

Under the EC proposal, the future allocation in the EU ETS would be

reduced by 1.74% per year compared to the allocation in the “mid-point”
of Phase 2 (2010). This gives a maximum amount of allowances to be
issued in 2020 of 1720 Mt. On average, the annual allocation in Phase 3
will be 1846 Mt. Compared to the reported 2005 emissions, the average
Phase 3 allocation implies a 14% reduction, while the annual allocation in
2020 is equivalent to a 21 percent cut from the 2005 level. The
Commission has not yet concluded on distribution of allowances at the
sector and installation levels. At this stage, the Commission states that no
installation will receive a free allocation in 2013 that is higher than its
average emissions in the 2005-2007 period. On auctioning, however, the
rules are pretty clear. For the power sector, refineries and carbon capture
and storage plants, all allowances would be auctioned from 2013.
Installations in other sectors will receive 80% of the allowances for free in
2013 decreasing to zero in 2020.

Under current EU legislation, the overall credit limit for the 2008-2012
period is set at around 1 400 Mt (about 280 Mt/year). However, unless a
“satisfactory” global climate deal is reached and the EU commits to an
overall reduction target beyond 20 percent, the Phase 2 credit limit would
effectively be extended to also cover Phase 3.

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This implies that the 1 400 Mt limit now in place for Phase 2 would apply
for the period 2008-2020, giving an average import potential of just
above 100 Mt per year. This corresponds to a credit limit of nearly 6
percent for the 2008-2020 period for the installations included in the
scheme in Phase 2.

In the event of a “satisfactory” international agreement, the EU might

increase the overall reduction target from 20 percent to up to 30 percent.
The additional reductions required by a 30 percent target would be split
between the EU ETS and the non-trading sectors. The EU ETS would take
on an additional reduction corresponding to its relative reduction effort in
the 20 percent scenario.

If the EU should aim for a 30 percent reduction target, the cap in 2020
would be set just below 1 400 Mt, while the average allocation in Phase 3
would be set at about 1 630 Mt/year. Not surprisingly, a “satisfactory”
international agreement would thus imply a significantly tighter allocation
in the EU ETS.

At the same time, a 30% reduction target will also lead to increased use
of CERs/ERUs in Phase 3. Half of the additional effort could be covered by
import of credits, under the proposal.

Until now, Phase 2 and Phase 3 have been linked through the possibility
of banking allowances into Phase 3. However, by extending the Phase 2
credit limit to 2020, the Commission has effectively merged Phases 2 and
3 of the scheme.

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9.1. INTRODUCTION:

The sudden boom in the carbon market has greatly helped Indian
industries to cash in on the carbon trading business. India certainly being
the preferred location for carbon credit buyers or project investors
because of its strategic position in the world today.

India is considered as the largest beneficiary, claiming about 31 per cent

of the total world carbon trade through the Clean Development
Mechanism (CDM). It is expected to rake in at least Rs 22,500 crore to Rs
45,000 crore over a period of time and Indian companies are expected to
corner at least 10 per cent of the global market in the initial year. Carbon
Trading has potential of exploring Indian market worth 18000 Cr.

Under the Kyoto Protocol, between 2008 and 2012, developed countries
have to reduce emissions of greenhouse gases to an average of 5.2 per
cent below the 1990 level. They can also buy CERs from developing
countries, which do not have any reduction obligations, in case their
industries are not in a position to lower the emission levels themselves.
One tonne of carbon dioxide reduced through the Clean Development
Mechanism (CDM) project, when certified by a designated entity, becomes
a tradable CER.

Developed countries have to spend nearly $300 to $500 for every tonne
reduction in CO2, against $10 to $25 to be spent by developing countries.
In developing countries like India, the emission levels are much below the
target fixed by the Kyoto Protocol. So, they are excluded from reduction
of GHG emission. On the contrary, they are entitled to sell surplus credits
to developed countries. The European countries and Japan are the major
buyers of carbon credits.

The UNFCCC divides countries into two main groups: A total of 41

industrialized countries are currently listed in the Convention‟s Annex-I,
including the relatively wealthy industrialized countries that were
members of the Organization for Economic Co-operation and

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Development (OECD) in 1992, plus countries with economies in transition
(EITs), including the Russian Federation, the Baltic States, and several
Central and Eastern European States. The OECD members of Annex-I (not
the EITs) are also listed in the Convention‟s Annex-II. There are currently
24 such Annex-II Parties. All other countries not listed in the Convention‟s
Annexes, mostly the developing countries, are known as non-Annex-I
countries. They currently number 145.

Annex I countries such as United States of America, United Kingdom,

Japan, New Zealand, Canada, Australia, Austria, Spain, France, Germany
etc. agree to reduce their emissions (particularly carbon dioxide) to target
levels below their 1990 emissions levels. If they cannot do so, they must
buy emission credits from developing countries or invest in conservation.

Countries like United States of America, United Kingdom, Japan,

Newzealand, Canada, Australia, Austria, Spain etc are also included in
Annex-II.

Developing countries (non-Annex I) such as India, Srilanka,

Afghanistan, China, Brazil, Iran, Kenya, Kuwait, Malaysia, Pakistan,
Phillippines, Saudi Arabia, Sigapore, South Africa, UAE etc have no
immediate restrictions under the UNFCCC. This serves three purposes:

a) Avoids restrictions on growth because pollution is strongly linked to

industrial growth, and developing economies can potentially grow
very fast.
b) It means that they cannot sell emissions credits to industrialized
nations to permit those nations to over-pollute.
c) They get money and technologies from the developed countries in
Annex II.

India comes under the third category of signatories to UNFCCC. India

signed and ratified the Protocol in August, 2002 and has emerged as a

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world leader in reduction of greenhouse gases by adopting Clean
Development Mechanisms (CDMs) in the past few years.

According to Report on National Action Plan for operationalizing Clean

Development Mechanism (CDM) by Planning Commission, Govt. of India,
the total CO2-equivalent emissions in 1990 were 10,01,352 Gg (Giga
grams), which was approximately 3% of global emissions. 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 tonnes CO2, and prices range from US$ 3.5-
5.5 per tonne of CO2). As the deadline for meeting the Kyoto Protocol
targets draws nearer, prices can be expected to rise, as
countries/companies save carbon credits to meet strict targets in the
future. India is well ahead in establishing a full-fledged system in
operationalising CDM, through the Designated National Authority (DNA).
Other than Industries and transportation, the major sources of GHG‟s
emission in India are as follows:

 Paddy fields
 Enteric fermentation from cattle and buffaloes
 Municipal Solid Waste

Of the above three sources the emissions from the paddy fields can be
reduced through special irrigation strategy and appropriate choice of
cultivars; whereas enteric fermentation emission can also be reduced
through proper feed management. In recent days the third source of
emission i.e. Municipal Solid Waste Dumping Grounds are emerging as a
potential CDM activity despite being provided least attention till date.

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9.2. PRESENT STATUS OF DUMPING GROUNDS IN INDIA:

In India, due to increased population & commercial development, cities

are facing problems of MSW (Municipal Solid Waste) disposal. The urban
population in larger towns and cities in India is increasing at a decadal
growth rate of above 40%. There are no Sanitary Landfill sites in India at
present. Municipal Solid Waste is simply dumped without any treatment
into land (depressions, ditches, soaked ponds) or on the outskirts of the
city in an unscientific manner with no compliance of regulations.
The existing dumping grounds in India are full and overflowing beyond
capacity. It is difficult to get new dumping yards and if at all available,
they are far away from the city and this adds to the exorbitant cost of
transportation. A study made by CPCB, (2000) shows that the cumulative
requirement of land for disposal of MSW in India would reach around
169.6 km2 by 2047 as against 20.2 km2 in 1997.

Various processes/technologies available to reduce the amount of

Municipal Solid Waste are as follows:

1. Physical (a. Pelletisation)

2. Biochemical (a. Aerobic Composting b. Anaerobic Digestion)
3. Thermal (a. Incineration b. Gasification)
Among the above options/technologies following are considered as
favorable to implement in India:
1. Pelletisation,
2. Anaerobic digestion using bio-methanation technology for production of
power,
3. Production of organic manure using controlled aerobic composting.

In India the segregation of municipal solid waste at source or at

centralized/decentralized centre is not in practice on a large scale. Hence,
90% of Municipal Solid Waste is dumped in a mixed form in the open
dumping yards without any pretreatment.

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On the other hand, technology required in the above mentioned three
options needs waste to be segregated first and then can be subjected to
further processing. To carry out segregation of bulk amount of municipal
waste at the dumping ground is practically impossible. It is not only
massive but tedious. Bulk segregation requires not only substantial large
scale labour but also considerable amount of investment. All these factors
make the above three technologies unviable for existing dumping
grounds. The waste in the dumping ground undergoes various anaerobic
reactions producing offensive odorous gases such as CO2, CH4, H2S and
Mercaptans, which foster harmful pathogens and lead to environmental,
social and public health issues.

The approximate methane emission all over India as per 2001 census was
calculated using an IPCC default (1996) method by NSWAI. The total
quantity of methane emitted out of Municipal Solid Waste generated in
India as a whole was approximately 4612.69 MT/day. An economic
feasibility study done by IGIDR (Indira Gandhi Institute of Development
Research) for Mumbai city indicates that for a total population of 10
million producing 1.82 MT of MSW per year, the net methane that can be
produced is equivalent to about 8.5 GJ (Giga Joules). According to TEDDY
(2002-2003) the energy recovery potential from different waste is as
shown in the following Fig. Energy recovery potential of MSW is 900 MWe
out of total 1700 MWe amounting to about 53%. Thus, the utilization of
MSW dumping grounds for energy production would mean a favorable and
useful solution to the existing Municipal Solid Waste disposal problem.
To efficiently recover the gases, MSW Dumping Ground Projects should
primarily have a landfill gas collection technology by means of the
following measures:
1. Implementation of vertical and/or horizontal pipes for collection of
landfill gases.
2. Construction of vertical gas extraction domes.

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 3. Construction of venting equipment in order to create under-
pressure in the landfill body to prevent uncontrolled emissions of
landfill gas.
4. Gas Generator installed at LFG

Through sale of CERs the project will aid in:

1. Gaining annual CER revenues for the country

2. Locally achieving:
• Reduction in poverty by creating jobs for urban poor.
• Safe and better working conditions for the informal sector.
• Better environmental quality(Less odour, leachate, and disease
vectors)
• Enhanced public awareness on Solid Waste Management and
recycling.
• Improvement in the quality of life of the city.
• Efficient resource utilization
• Contribution to reduction of foreign expenditures (Macro-economic
Indicators)
• The increase in life of the dump sites.
• Considerable amount of power to the city.
• Reduction in cost on Solid Waste Management by municipalities.
• Reduction of ground and surface water pollution and thus reducing
health hazards.

3. Globally achieving:
• Foreign Direct Investment (FDI)
• Reduction in emissions of GHG‟s from dumping grounds which are
responsible for Global Warming.
• Project is complying with the Millennium Development Goals (MDG).

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9.3. LIST OF INDICATIVE PROJECTS AVAILABLE IN INDIA FOR
CARBON TRADING:

GENERAL
 Renewable Energy Projects (Wind Power, Solar, Biomass, Hydel)
 Fuel Switching (from fossil fuel to green fuel like biomass, rice husk,
etc.)
 Cogeneration in industries having both steam and power
requirement
 Energy Efficiency Measures
 Induction of new technologies in power sector
 Waste Management
 Transport

SPECIFIC:
 Energy & Power (Generation, Transmission & Distribution)
 Renewable Energy like wind power project, biomass based project,
solar power projects, small run of the river hydro electricity
generation projects.
 Refurbishment of existing power plants to achieve a heat rate which
is amongst the top 20% of the heat rate of all power plants in the
relevant regional grid
 Fuel shift from cal to gas or liquid fuel to gas
 Super critical or ultra super critical technologies for power
generation
 T&D loss reduction below CEA stipulated values through (HT line
bifurcation, High Voltage Distribution System, etc.)
 Power Generation through Methane recovery from municipal solid
waste/ biomethanation
 Replacement of SF6 containing equipment and destruction of SF6
etc.

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Cement:

 General energy efficiency improvement initiatives

 Waste heat recovery from kiln fuel gas
 Raw mix modification to reduce process Co2 emissions
 Use of pozzolanas (fly ash/blast furnace slag) over and above the
industry specifications
 Fuel shift from coal to gas or to biomass or high calorific value
wastes
 Initiatives to reduce kiln volume through higher conversion in
precalciners, etc.
Steel:
 Coke dry quenching
 Blast Furnace top gas heat and pressure recovery
 Basic Oxygen Furnace gas waste heat recovery
 Coal dust, oxygen and tar injection in Blast Furnace to reduce the
coke rate
 General energy efficiency improvement in rolling mill area
 Oxy Fuel use in reheating furnaces
Corex Units:
 Waste heat recovery from DRI/Midrex process for sponge iron
manufacture
 Iron making technology
 Hydrogen annealing etc.
Pulp & Paper:
 Energy efficiency improvements
 Biomass based cogeneration
 Continuous pulping, etc.
Fertilizer:
 Reduction of N2O in nitric acid/other fertilizer manufacture
 Waste heat recovery
 General energy efficiency improvement
 Methane recovery and reuse
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Coal Mining:
 Coal bed methane capture and use for power generation
 Coal mine methane capture and use for power generation
Transport:
 Fuel shift from liquid fuel to CNG/LPG
 Hybrid cars, electric cars and hydrogen fuel cells
 O&M improvement of existing vehicles, etc.
Aluminium:
 PFC reduction through reduction in anode effect duration and
frequency
 Energy efficiency improvement in alumina refining, smelting and
rolling
 Heat recovery from bauxite digestion and bauxite digestion
efficiency improvement
 Dry scrubbing of smelter fumes, waste heat recovery, etc.
Chlor-Alkali:
 Use of hydrogen to replace fossil fuel
Agriculture:
 Land use change from rice cultivation to alternative crops/cropping
pattern change
 Forestry and A forestation
 Biodiesel/Ethanol
Sugar:
 Bagasse cogeneration plants
 Energy efficiency improvement
 Ethanol (from molasses) as replacement for fossil fuels
Oil & Natural Gas:
 Methane/CNG leak reduction in T&D system
 Capture and use of natural gas which would otherwise have been
flared

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9.4. GOVERNMENT OF INDIA APPROVAL CRITERIA:

9.4.1. PURPOSE:

The purpose of the clean development mechanism (CDM) is defined in

Article 12 of the Kyoto Protocol to the United Nations Framework
Convention on Climate Change. The CDM has a two-fold purpose:

a. To assist developing country Parties in achieving sustainable

development, thereby contributing to the ultimate objective of the
Convention, and
b. To assist developed country Parties in achieving compliance with
part of their quantified emission limitation and reduction
commitments under Article 3.

Each CDM project activity should meet the above two-fold purpose.

9.4.2. ELIGIBILITY:

The project proposal should establish the following in order to qualify for
consideration as a CDM project activity:

Additionalities:

 Emission Additionality: The project should lead to real, measurable

and long term GHG mitigation. The additional GHG reductions are
to be calculated with reference to a baseline.
 Financial Additionality: The funding for CDM project activity should
not lead to diversion of official development assistance. The project
participants may demonstrate how this is being achieved.
 Technological Additionality: The CDM project activities should lead
to transfer of environmentally safe and sound technologies and
know-how.

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Sustainable development indicators:

It is the prerogative of the host Party to confirm whether a clean

development mechanism project activity assists it in achieving sustainable
development. The CDM should also be oriented towards improving the
quality of life of the very poor from the environmental standpoint. The
following aspects should be considered while designing CDM project
activities:

 Social well-being:

The CDM project activity should lead to alleviation of poverty by

generating additional employment, removal of social disparities
and contributing to provision of basic amenities to people leading
to improvement in their quality of life.

 Economic well-being:

The CDM project activity should bring in additional investment

consistent with the needs of the people.

 Environmental well-being:

This should include a discussion of the impact of the project

activity on resource sustainability and resource degradation, if any,
due to the proposed activity; biodiversity-friendliness; impact on
human health; reduction of levels of pollution in general;

 Technological well-being:

The CDM project activity should lead to transfer of environmentally

safe and sound technologies with a priority to the renewables
sector or energy efficiency projects that are comparable to best
practices in order to assist in upgradation of the technological
base.

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Baselines:
The project proposal must clearly and transparently describe the
methodology of determination of the baseline. It should conform to
following:

 Baselines should be precise, transparent, comparable and workable

 Should avoid overestimation
 The methodology for determination of baseline should be
homogeneous and reliable
 Potential errors should be indicated
 System boundaries of baselines should be established
 Interval between updates of baselines should be clearly described;
 Role of externalities should be brought out (social, economic and
environmental)
 Should include historic emission data-sets wherever available
 Lifetime of project cycle should be clearly mentioned

The baseline should be on a project-by-project basis except for those

categories that qualify for simplified procedures. The project proposal
should indicate the formulae used for calculating GHG offsets in the
project and baseline scenario. Leakage, if any, should be described.
For the purpose of Project Idea Notes (PIN), default values may be
used with justification. Determination of the base project which would
have come up in the absence of the proposed project should be clearly
described in the project proposal.

Financial indicators:

The project participants should bring out the following aspects:

 Flow of additional investment

 Cost effectiveness of energy saving
 Internal Rate of Return (IRR) without accounting for CERs
 IRR with CERs
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  Liquidity, N.P.V., cost/benefit analysis, cash flow etc., establishing
that the project has good probability of eventually being
implemented
 Agreements reached with the stakeholders, if any, including power
purchase agreements, Memoranda of Understanding, etc.
 Inclusion of indicative costs related to validation, approval,
registration, monitoring and verification, certification, share of
proceeds
 Funding available, financing agency and also description of how
financial closure seeks to be achieved

Technological feasibility:

The proposal should include following elements:

 The proposed technology/process

 Product/technology/material supply chain
 Technical complexities, if any
 Preliminary designs, schematics for all major equipment needed,
design requirement, manufacturers name and details, capital cost
estimate
 Technological reliability
 Organizational and management plan for implementation, including
timetable, personnel requirements, staff training, project
engineering, CPM/PERT chart etc.

Risk analysis:

The project proposal should clearly state risks associated with it including
apportionment of risks and liabilities; insurance and guarantees, if any.

Credentials:

The credentials of the project participants must be clearly described.

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9.5. CARBON CREDIT TRADING AT MCX:

The Multi Commodity Exchange of India Ltd entered into an alliance with
the Chicago Climate Exchange in 2005 to introduce carbon credit trading
in India. This association has integrated Indian markets with their global
counterparts to cover risks associated with futures trading of carbon
credits and ensuring best prices. CDM projects, mostly in key sectors such
as manufacturing, energy, agriculture, mining and mineral production,
would thus result in providing a boost to the Indian economy.

MCX is the futures exchange. People here are getting price signals for the
carbon for the delivery in next five years. The exchange is only for
Indians and Indian companies. Every year, in the month of December, the
contract expires and at that time people who have bought or sold carbon
will have to give or take delivery. They can fulfill the deal prior to
December too, but most people will wait until December because that is
the time to meet the norms in Europe.

The Indian government has not fixed any norms nor has it made it
compulsory to reduce carbon emissions to a certain level. So, people who
are coming to buy from Indians are actually financial investors. They are
thinking that if the Europeans are unable to meet their target of reducing
the emission levels by 2009 or 2010 or 2012, then the demand for the
carbon will increase and then they may make more money.

So investors are willing to buy now to sell later. There is a huge

requirement of carbon credits in Europe before 2012. Only those Indian
companies that meet the UNFCCC norms and take up new technologies
will be entitled to sell carbon credits.

There are parameters set and detailed audit is done before you get the
entitlement to sell the credit. In India, already 300 to 400 companies
have carbon credits after meeting UNFCCC norms. Till MCX came along,
these companies were not getting best-suited price. Some were getting
Euro 15 and some were getting Euro 18 through bilateral agreements.

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When the contract expires in December, it is expected that prices will be
firm up then.

MCX has power, energy and metal companies who are trading. These
companies are high-energy consuming companies. They need better
technology to emit less carbon.

The Multi Commodity Exchange (MCX) on January 22, 2008 launched

future trading in carbon credits, becoming Asia‟s first ever commodity
exchange, and among few like Chicago Climate Exchange and European
Climate Exchange to buy and sell carbon credit through exchange.

Trading benefits:

 Sellers and intermediaries can hedge against price risk

 Advance selling could help project to generate liquidity and thereby

reducing its cost of implementation

 There is no counter party risk as exchange guarantee the trade

 The price discovery on the exchange platform ensure the fair price
for both the sellers and buyers

 Bring players to a single platform

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10.1. GLOBAL OUTLOOK:

Carbon market momentum is strong for now:

After some growing pains in its first phase, the EU ETS has created a
robust structure to cost effectively reduce greenhouse gas emissions.
Created by regulation, the carbon market‟s biggest risk is caused,
perversely, by the absence of market continuity beyond 2012 and this can
only be provided by policymakers and regulators. This will require
increased efforts well beyond what is envisaged by the current policies of
major world emitters.

The CDM is at a crossroads:

The European Commission‟s post-2012 proposal, which strengthened
several design elements of the EU ETS, however, did not provide much
comfort for the project-based market, which, after its strongest year yet,
finds itself at a significant crossroad. By linking additional EU ETS demand
for CDM and JI credits to the success of post-2012 global climate change
negotiations, the European Commission proposal has the risk, surely
unintended, of slowing the momentum for the project-based mechanisms.
Under the proposal, the issued CERs and the Emission Reductions Units
(ERUs) would be less flexible and less fungible, limiting their risk
management and compliance utility vis-à-vis the EUA. The EUA spread
over the secondary CER widened to nearly €10 at the time of this writing,
and even higher for most primary CER contracts. The key challenge, in
our view, is not how to reduce the success of the CDM, but rather how to
raise the ambition of the world, including the EU, to set science-based
emission reduction targets and meet them cost-effectively.

Time to re-think the CDM:

The CDM‟s biggest strength has been its ability to bring developing and
developed countries and the public and private sectors together to reduce
emissions cost-effectively. In the years ahead, all countries will want to

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scale up their efforts to reduce emissions while growing their economies
in a sustainable manner. As the world considers scaling up serious action
to combat climate change, it would be desirable to re-think the CDM as a
helpful tool for the challenges ahead.

The forest for the trees:

In its next phase, the CDM needs to move up the learning curve and
evolve toward approaches and methodologies that conservatively
estimate emission reduction trends on the aggregate level and away from
the current focus on trying to account for every last ton reduced or
removed from the STATE AND TRENDS OF THE CARBON MARKET 2008
atmosphere. The next generation CDM should focus on catalyzing step
changes in emission trends, and on creating incentives for large-scale,
transformative investment programs.

Built to last:
Several jurisdictions, including various states, regions, and countries are
considering whether and how to link up with international opportunities
for reducing emissions. It would be helpful to find ways for them to learn
together from and build on the CDM experience so far, with the goal of
encouraging efficiency, reducing transaction costs, avoiding unnecessary
duplication and creating, from the start, compatible infrastructure with
strong linkages and inter-operability.

Global cooperation on climate change:

Given enough incentive and a long lead time, developing countries can
deliver large volumes of cost effective emission reductions which can help
meet science-based emission reduction targets. This puts a special
responsibility on countries to cooperate under the Bali Action Plan to
reach an ambitious international agreement to reduce emissions. It also
makes it important for the EU, the U.S. and other major emitters to find
ways, even before 2009, to encourage the continued engagement of
developing countries in mitigation activities. International negotiators

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should consider providing incentives for early action with sufficient lead
time to develop emission reduction programs and projects.

Solving the problem of climate change will need ingenuity to encourage a

scaling up of action to reduce or avoid emissions as early and efficiently
and in as many sectors & countries as possible. Long-term policy signals
about intended carbon constraint policies and well-designed regulatory
systems and infrastructure will send the appropriate signals to investors.
The experience of the carbon market so far shows that the private sector
is capable and willing to cooperate in solving the problem, provided that
policies are predictable, consistent and transparent and regulations are
efficient.

10.2. OUTLOOK FOR INDIA:

10.2.1. INTRODUCTION:
The Kyoto protocol allows 35 developed nations to buy carbon credits
from countries. Incidentally, India is one of the exempted from this
protocol as they are stated as developing countries, but overseas
companies can buy carbon credits from these countries. Now companies
in India can use Carbon credits to get liberal loans, incentives by
multinationals in their countries and benefits like better social and
ecological visibility.

10.2.2. INDIAN COMPANIES: TAKING ADVANTAGE:

Some of the companies in India shall be in a position to gain some extra
money with the advent of Carbon Trading initiatives. Already some of
them have taken steps in these lines. Some of these companies are:

Gujarat Fluoro Chemicals is amongst first companies worldwide to get

its carbon emission reduction project certified. It is set to reap rewards
from the sale of carbon emission reduction (CER) credits from this year
itself. The company has entered into a deal for sale of its carbon credits to
the United Kingdom in 2005-06 and to the Netherlands the following year

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(2006-07). The deals have been struck at $13.5 per tonne and € 14.6 per
tonne, respectively.

Tata Steel is believed to have signed a memorandum of understanding

(MoU) with the Japanese government agency Nedo for sale of credits
accruing to it from carbon reduction following the implementation of an
over Rs 250 crore modernization and upgradation project.

Also, Corporates like NTPC and several state electricity boards have also
applied for carbon credit benefits. Most of them are replacing coal-based
technologies with more environment-friendly processes.

Amongst others, those Indian projects that can be verified as clean

energy projects, which lead to lower carbon dioxide emissions than would
otherwise occur, can generate CERs and sell them. These CERs, prices of
which are market determined, are generated through an international due
diligence process. In fact, many consultants and financial analysts are
emerging in the area of evaluating projects for their emission reductions

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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), India‟s
dominance in carbon trading under the clean development
mechanism (CDM) of the UN Convention 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. India‟s average annual CERs stand at 12.6% or
11.5 million. Hence, MSW dumping grounds can be a huge prospect
for CDM projects in India. These types of projects would not only be
beneficial for the Government bodies and stakeholders but also for
general public.

In the past few months MNCs, global and domestic consultancy

houses have cut carbon trades with Indian entities, which have
managed to put in place anti-emission technologies. Trades worth
about Rs 2,000 crore have taken place, but industry circles feel that
more of it is yet to come. Emission trading could earn India

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anything between Rs 20,000 crore and Rs 50,000 crore a year.
Planning Commission has also pointed out that the Indian
government and farmers would be benefited once the afforestation
and the reforestation mechanisms are finalized by the UNFCCC
board, in clearer terms. Hence India stands to benefit in a big way if
she can make full use of the opportunity provided by the carbon
credits.

There are projects range from cement, steel, biomass power, bio-
gases co-generation and municipal solid waste to energy, municipal
water pumping and natural gas power. The ministry has given the
host-country clearance, the CDM projects will have to be approved
by the executive board of the UNFCCC.

Of the 15 projects approved by the UNFCCC so far, four are Indian.

These four are:
 Gujarat Flurochemicals,
 Kalpataru Power Transmission Ltd,
 The Clarion power project in Rajasthan and
 The Dehar power project in Himachal Pradesh

The country accounted for 283 CDM projects out of the 819
registered by the CDM Executive Board, the environment ministry,
the World Bank and the International Emissions Trading Association.

The Indian National CDM Authority has accorded host country

approval to 753 projects, facilitating investment of more than Rs
63,000 crore. These projects are in areas of energy efficiency, fuel
switching, industrial processes, municipal solid waste and renewable
energy and have the potential to generate 421 million CERs by
2012.

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ANNEXURE 1: The European Union

 Austria
 Belgium
 Denmark
 Finland
 France
 Germany
 Greece
 Ireland
 Italy
 Luxembourg
 Netherlands
 Portugal
 Spain
 Sweden
 United Kingdom

ANNEXURE 2: Countries undergoing the process of transition to a

market economy

 Bulgaria
 Croatia
 Czech Republic
 Estonia
 Hungary
 Latvia
 Poland
 Romania
 Russian Federation
 Slovakia
 Slovenia
 Ukraine

ANNEXURE 3: Annex II non-EU countries that ratified the Kyoto

Protocol

 Canada
 Australia
 Japan
 Monaco
 Iceland
 New Zealand
 Norway
 Switzerland
 Liechtenstein

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ANNEXURE 4: Annex I parties not ratified

Among the Annex 1 countries that signed the Kyoto Protocol in 1997, only
the USA has not ratified it. In 1990, the USA emitted 36.4 percent of the
total GHGs in the world.

ANNEXURE 5: Non-Annex I countries having ratified the Kyoto

Protocol

A-C D-L M-P P-Y

 Antigua &
 Djibouti  Madagascar  Philippines
Barbuda
 Dominican
 Argentina  Malawi  Republic of Korea
Republic
 Republic of
 Armenia  Ecuador  Malaysia
Moldova
 Azerbaijan  El Salvador  Maldives  Rwanda
 Equatorial
 Bahamas  Mali  Saint Lucia
Guinea
 Saint Vincent and
 Bangladesh  Fiji  Malta
the Grenadines
 Marshall
 Barbados  Gambia  Samoa
Islands
 Belize  Georgia  Mauritius  Senegal
 Bhutan  Ghana  Mexico  Seychelles
 Benin  Grenada  Micronesia  Solomon Islands
 Bolivia  Guatemala  Mongolia  South Africa
 Botswana  Guinea  Morocco  Sri Lanka
 Brazil  Guyana  Myanmar  Sudan
 Burundi  Honduras  Namibia  Thailand
 Cambodia  India  Nauru  Togo
 Trinidad and
 Cameroon  Israel  Nicaragua
Tobago
 Chile  Jamaica  Niger  Tunisia
 China  Jordan  Niue  Turkmenistan
 Colombia  Kenya  Palau  Tuvalo
 Cook Islands  Kiribati  Panama  Uganda
 Papua New  United Republic
 Costa Rica  Kyrgyzstan
Guinea of Tanzania
 Lao Democratic
 Cuba People‟s  Paraguay  Uruguay
Republic
 Cyprus  Lesotho  Peru  Uzbekistan
 Liberia  Vanuatu
 Viet Nam
 Yemen

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WEBSITES REFFERED:

 www.carbontrading.com
 www.unfccc.int
 http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/0,,menuPK:
476823~pagePK:64165236~piPK:64165141~theSitePK:469372,00.
html
 http://www.primaryinfo.com/index.htm
 www.carboncreditmart.com
 www.carbon credit.org\carbon credits introduction
 www.cdmmarket.org
 www.kyotoprotocol.int
 www.cseindia.org
 www.mcxindia.com
 www.climatechangeex.int
 www.wikipedia.com
 www.google.co.in
 www.scribd.com

MAGAZINES:

 The Analyst

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