CARBON CREDIT

UNIVERSITY OF MUMBAI
PROJECT ON

BACHELOR OF COMMERCE
(BANKING AND INSURANCE)

SEMESTER V
(2010-2010)
SUBMITED BY
Miss. Pooja. R. Yadav
PROJECT GUIDE
Prof. Shanthilakshmi

Hindi Vidya Prachar Samitis

Ramninrajan Jhunjhunwala College
Ghatkopar (West), Mumbai – 400086

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BACHELOR OF COMMERCE
BANKING INSURANCE

SEMESTER V
(2010-2011)
SUBMITTED

In Partial Fulfillment of the requirements

For the Award of Degree of Bachelors of Commerce –
Banking and Insurance

By

Miss. Pooja. R. Yadav

Roll No. 52

Hindi Vidya Parchar Samiti’s

RAMNIRANJAN JHUNJHUNWALA COLLEGE

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Ghatkopar (West), Mumbai – 400086

CERTIFICATE

This to certify that Miss. Pooja.R.Yadav of B.Com Banking and

Insurance Semester V (2010-2011) has successfully completed the
Project on “CARBON CREDIT” under the Guidance of Prof.
Shanthilaksmhi

Course Co-ordinator / Principal

Project Guide / Internal Examiner

External Examiner

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DECLARATION

I, Miss. Pooja.R.Yadav the student of B.Com Bankning and Insurance

Semester V (2010-2011) hereby declare that I have completed the
project on carbon credit
“”

The Information submitted is true and original to the best of

my knowledge.

Signature of Student

Miss. Pooja Ramlal Yadav

Roll No. 52

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ACKNOWLEDGEMENT

A student always collects some bouquets and brickbats while

collecting information about the project he/she has undertaken. If there
is a bouquet, I would like to share them with those who have played a
part in its making. I wish to express my gratitude to my guide “Mrs.”
Shantilakshmi who made me confident to choose this topic & helped me
to get the information and also ahead with the preparation of the
project. I am also thankful for the insight that I have gained through
that I have gained through numerous discussion with her.

I am grateful to the Principal Dr. Usha Mukundan.

Prof. Lakshmi Chandrashekar and Prof. Nanadini Jagannarayan

faculty members of the B.com (Banking & Insurance) also deserve
sincere thanks for guiding and helping me with material of the project.

I would also like to give my sincere gratitude to my parents who

have supported me throughout my project. Lastly my friends who have
helped me in various stages are also to be thank

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INDEX

PAGE
SR.NO. TOPICS
NO.

1 INTRODUCTION TO CARBON CREDIT 1-9

2 KYOTO PROTOCOL 8-16

3 HOW IT WORKS 17-23

4 CARBON CREDIT – INDIAN SCENARIO 24-27

5 BANKS ROLE IN CARBON CREDIT 28-30

6 CHANLLENGES FACED IN CARBON CREDIT 31-36

7 CASE STUDY 37-40

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CHAPTER 1

INTRODUCTION TO CARBON CREDIT

1.1 Introduction:-

Carbon dioxide, the most important greenhouse gas produced by combustion

of fuels, has become a cause of global panic as its concentration in the
Earth's atmosphere has been rising alarmingly.

This devil, however, is now turning into a product that helps people,
countries, consultants, traders, corporations and even farmers earn billions
of rupees. This was an unimaginable trading opportunity not more than a
decade ago.

Carbon credits are a part of international emission trading norms. The total
annual emissions are capped and the market allocates a monetary value to
any shortfall through trading. Businesses can exchange, buy or sell carbon
credits in international markets at the prevailing market price.

India and China are likely to emerge as the biggest sellers and Europe is
going to be the biggest buyers of carbon credits.

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Last year global carbon credit trading was estimated at $5 billion, with
India's contribution at around $1 billion. India is one of the countries that
have 'credits' for emitting less carbon. India and China have surplus credit to
offer to countries that have a deficit.

India has generated some 30 million carbon credits and has roughly another
140 million to push into the world market. Waste disposal units, plantation
companies, chemical plants and municipal corporations can sell the carbon
credits and make money.

Carbon, like any other commodity, has begun to be traded on India's Multi
Commodity Exchange since last the fortnight the MCX has become first
exchange in Asia to trade carbon credits.

In step with the dramatic rise in C02 emissions and other pollutants in recent
years, a variety of new financial markets have emerged, offering businesses
key incentives — aside from taxes and other punitive measures — to slow
down overall emissions growth and, ideally, global warming itself.

A key feature of these markets is emissions trading, or cap-and-trade

schemes, which allow companies to buy or sell “credits” that collectively
bind all participating companies to an overall emissions limit. While
markets operate for specific pollutants such as greenhouse gases and acid
rain, by far the biggest emissions market is for carbon. In 2007, the trade
market for C02 credits hit $60 billion worldwide — almost doubles the

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amount from 2006. Size of global carbon credit market: Approximately $60
billon

1.2 What is carbon credit?

As nations have progressed we have been emitting carbon, or gases which

result in warming of the globe. Some decades ago a debate started on how to
reduce the emission of harmful gases that contributes to the greenhouse
effect that causes global warming. So, countries came together and signed
an agreement named the Kyoto Protocol.

Developed countries, mostly European, had said that they will bring down
the level in the period from 2008 to 2012. In 2008, these developed
countries have decided on different norms to bring down the level of
emission fixed for their companies and factories.

A company has two ways to reduce emissions. One, it can reduce the GHG
(greenhouse gases) by adopting new technology or improving upon the
existing technology to attain the new norms for emission of gases. Or it can
tie up with developing nations and help them set up new technology that is

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eco-friendly, thereby helping developing country or its companies 'earn'

credits.

India, China and some other Asian countries have the advantage because
they are developing countries. Any company, factories or farm owner in
India can get linked to United Nations Framework Convention on Climate
Change (UNFCCC) and know the 'standard' level of carbon emission
allowed for its outfit or activity. The extent to which I am emitting less
carbon (as per standard fixed by UNFCCC) I get credited in a developing
country. This is called carbon credit.

Carbon dioxide, the most important greenhouse gas produced by combustion

of fuels, has become a cause of global panic as its concentration in the
Earth's atmosphere has been rising alarmingly.

This devil, however, is now turning into a product that helps people,
countries, consultants, traders, corporations and even farmers earn billions
of rupees. This was an unimaginable trading opportunity not more than a
decade ago.

Carbon credits are a part of international emission trading norms. They

incentives companies or countries that emit less carbon. The total annual
emissions are capped and the market allocates a monetary value to any
shortfall through trading. Businesses can exchange, buy or sell carbon
credits in international markets at the prevailing market price.

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1.3 The Advantages the Disadvantages

THE ADVANTAGES

Companies in different industries face dramatically different costs to lower

their emissions. A market-based approach allows companies to take carbon-
reducing measures that everyone can afford. “The private sector is better at
developing diversified approaches to manage the costs and risks [of
reducing emissions],” says Jesse Fahnestock, spokesman at Swedish power
company Vattenfall, which is a member of a global Combat Climate Change
coalition.

Reducing emissions and lowering energy consumption is usually good for

the core business. For example, in 1997 British Energy Company BP
committed to bring its emissions down to 10 percent below 1990 levels.
After taking simple steps like tightening valves, changing light bulbs, and
improving operations efficiency, BP implemented an internal cap-and-trade
scheme and met its emissions goal by the end of 2001 — nine years ahead
of schedule. Using the combined C02 reduction strategy, BP reported saving
about $650 million.

Then there’s the long-term investment angle: Buying into the carbon market
boom now suggests significant dividends later on. Carbon credits are

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relatively cheap now, but their value will likely rise, giving companies
another reason to participate.

The Disadvantages

As with any financial market, emissions traders are vulnerable to significant

risk and volatility. The EU’s trading scheme (EU-ETS), for instance, issued
so many permits between 2005 and 2007 that it flooded the market. Supply
soared and carbon prices bottomed out, removing incentives for companies
to trade. Enforcement of trading rules can be just as unpredictable, though
Fahnestock says the EU is working to correct the problems.

Carbon offsets have their own drawbacks, which reflect a fast-growing and
unregulated market. Some offset firms in the United States and abroad have
been caught selling offsets for normal operations that do not actually take
any additional C02 out of the atmosphere, such as pumping C02 into oil wells
to force out the remaining crude. In 2008 the Climate Group, the
International Emissions Trading Association, and the World Economic
Forum will work to develop a Voluntary Carbon Standard to verify that
offsetting projects are beyond business-as-usual and have lasting
environmental value.

The lack of offset regulations has also made marketing problematic.

Recently, companies have taken to declaring themselves “carbon neutral.”

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But until the Federal Trade Commission determines the guidelines for such
terms, it’s unclear which companies actually merit the distinction. Already
Vail Resorts, the organizers of the Academy Awards, and other
organizations have taken heat for touting their investments in carbon offset
projects that were not entirely environmentally sound.

1.4 Effect of Global Warming

Seawaters could rise almost a meter in this century, and will continue to
move up. Some coastal regions already see seasonal flooding, and the
situation is expected to worsen as water levels rise. Coral reefs are under
pressure from changes in water level and temperature. As most carbon goes
into sea, plankton could suffer, and that would affect species higher up the
food chain.

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1.5 What is Greenhouse effect?

The sun heats up the earth by sending solar rays towards us. Some of these
rays don’t get through our atmosphere. Those that do, warm up the earth.
When the earth warms up it radiates its own rays of heat – infrared rays.
Greenhouse gases absorb those, which don’t escape past the atmosphere.
These greenhouse gases warm the earth so it is at the temperature we
experience now. Without this process the earth would be some 30o C cooler
and life on our planet would be very different. However, we are producing
too many greenhouse gases, which mean they are absorbing more heat and
warming the earth too much – this is called global warming. One of the
main greenhouse gases is carbon dioxide, which can be created from
chopping down and burning of trees. The fuel used in cars and machinery

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also creates carbon dioxide, as do coal and natural gas. Therefore, if we

reduce the use of fuel and reduce deforestation, the amount of greenhouse
gas around earth should also be reduced. Scientists say it is already too late
to prevent global warming and therefore climate change, but by reducing
greenhouse gases we could still limit the impact. Even a change in
temperature of under 1 o C is enough to cause changes in rainfall and sea.

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CHAPTER 2

KYOTO PROTOCOL

2.1 MEANING

“The Kyoto Protocol is a legally binding agreement under which

industrialized nations will reduce their collective emissions of greenhouse
gases by 5.2% compared to the year 1990 (but note that, compared to the
emission levels that would be expected by 2010 without the Protocol, this
target represents a 29% cut). The goal is to lower overall emissions from six
greenhouse gases – carbon dioxide, methane, nitrous oxide, sulfur
hexafluoride, HFCs and PFCs – calculated at an average over the five-year
period of 2008-12. National targets range from 8% reductions for European
Union and some others to 7% for the US, 6% for Japan, 0% for Russia, and
permitted increases of 8% for Australia and 10% for Iceland.” The protocol
also reaffirms the principle that developed countries have to pay and supply
technology to other countries for climate related studies and projects. The
protocol provides three mechanisms to the developed nations to meet the
emission targets.

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1) Joint Implementation (JI): The Kyoto Protocol provides for developed

countries to implement projects that reduce emissions, or remove carbon
from the atmosphere in other developed countries in lieu of Emission
Reduction Units (ERUs). These ERUs can be used to meet the emission
reduction targets. A JI project might involve, for example, replacing a coal-
fired power plant with a more efficient combined heat and power plant. JI
projects must have approval of all the parties involved, and must lead to
emissions reductions or removal that are additional to any that would have
occurred without the project. Projects from the year 2000 that meet the JI
requirements may be listed as JI projects. However, ERUs may only be
issued in relation to periods from 2008 onwards.

2) Clean Development Mechanism (CDM) Projects: The CDM provides

for developed countries to implement project activities that reduce emissions
in developing countries in return for Certified Emission Reductions (CERs).
The CERs generated by such project activities can be used by developed
countries to help meet their emission targets under the Protocol. The
protocol also stresses that such project activities are to assist the developing
country host parties in achieving sustainable development. A CDM project
activity might involve, for example, a rural electrification project using solar
panels or the installation of more energy efficient boilers. The protocol

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refrains developed countries from using CERs generated out of nuclear

facilities to meet the targets.

3) Emissions Trading: The Kyoto Protocol provides that developed

countries can acquire units from other developing parties and use them
towards meeting their emissions target. This enables developed countries to
make use of low cost opportunities to reduce emissions. Only developed
countries in specified in Annexure I to the Kyoto Protocol with emission
limitation and reduction commitments inscribed in Annex B to the Protocol
may participate in such trading. Such countries must therefore be prepared
to transfer units when they do not require them for compliance with their
own emission targets.

2.2 Where does India qualify?

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India being a developing country is not included in the Annexure I of the

protocol. Hence, India cannot qualify for JI and emission trading
mechanisms. It qualifies to be a host country for the CDM projects.

2.3 CER(Certified Emission Reductions) Trading

A transaction in CER trading involves buying of GHG emissions credits by

entities (companies, Governments, etc.) from companies or Governments
involved in projects related to carbon emission reduction in developing
countries. The idea is to make developed countries pay for their wild ways
with emissions while at the same time rewarding countries with good
behavior in this regard. For example, a company in India can prove it that it
has prevented emission of x-tons of carbon, it can sell this much amount of
points or carbon credits to a company in say, the US which has been

emitting carbon. This allows industries in developed countries to offset their

emissions of carbon dioxide by investing in reforestation and clean energy
projects in developing countries such as large-scale tree plantations as a

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lucrative alternative to reducing emissions. Planting 100,000 hectares of

new forest can remove 1mn ton of carbon per year from the atmosphere.

CER Trading

15 IIPM-INTERNATIONAL, AHEMDABAD Monday, November 03,

Carbon Credits : Emitting Gains 2008

2.4

Benefits likely to be derived from CDM Projects

Developed countries will be able to meet their targets of reducing emissions

at much lower cost.

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Country US $/ ton Carbon

Japan 400
USA 200
India 25

Developing countries will be able to access the latest technology. Further,

the parties involved in carbon credit sale would be able to put in additional
investments into their routine business through the carbon credit earnings.
Overall it will lead to reduction of GHG emissions.

2.5 CDM Applicability

The industries, which can qualify for the CDM projects, are as follows:

Renewable energy

Wind power

Solar energy

Biomass power

Hydel power

Geothermal

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Tydel Power

2. Fuel switching from fossil fuel to green fuel like biomass, rice
husk, etc.

Energy efficiency measures related to

Boiler

Pumps

Turbines

Installation of various speed drives

Efficient cooling systems

Back pressure turbines, etc

3 Cogeneration in industries having both steam and power

requirement

In waste management

Capturing of landfill methane emission to generate power

Utilization of waste and waste water emissions for generation of energy for

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captive use of power generation

4 In transport

Fuel switch from gasoline and diesel to natural gas

Modal shift from air to train, road to train at macro level

Replacement of shipment of certain raw materials through road to pipelines

2.6

KEY PLAYERS

Bank of America is a leader in carbon-reduction strategies. The bank

recently launched a $20 billion, 10-year initiative to finance emission-
reduction projects, invest in green technology, and facilitate carbon-credit
trading.

BP is among the most well-known companies to implement an internal cap-

and-trade system. The company assigned its 150 units an emissions quota
and allowed them to buy and sell carbon credits among themselves.

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The European Union Emission Trading Scheme (EU ETS) is the mandatory
cap-and-trade program for the EU.

The Chicago Climate Exchange (CCX) is a U.S. carbon-trading scheme in

which companies make a voluntary but legally binding commitment to meet
emissions targets.

CHAPTER 3

How It Works :-

Emissions limits and trading rules vary country by country, so each

emissions-trading market operates differently. For nations that have signed
the Kyoto Protocol, which holds each country to its own C02 limit,
greenhouse gas-emissions trading is mandatory. In the United States, which
did not sign the environmental agreement, corporate participation is
voluntary for emissions schemes such as the Chicago Climate Exchange.
Yet a few general principles apply to each type of market.

Under a basic cap-and-trade scheme, if a company’s carbon emissions fall

below a set allowance, that company can sell the difference — in the form
of credits — to other companies that exceed their limits. Another fast-
growing voluntary model is carbon offsets. In this global market, a set of
middlemen companies, called offset firms, estimate a company’s emissions
and then act as brokers by offering opportunities to invest in carbon-
reducing projects around the world. Unlike carbon trading, offsetting isn’t

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yet government regulated in most countries; it’s up to buyers to verify a

project’s environmental worth. In theory, for every ton of C02 emitted, a
company can buy certificates attesting that the same amount of greenhouse
gas was removed from the atmosphere through renewable energy projects
such as tree planting.

Why It Matters Now

Industry watchers say carbon markets will continue to grow at a fast clip —
especially in the United States, where Fortune 500 powerhouses such as
DuPont, Ford, and IBM are voluntarily capping and trading their emissions.
Even though a national cap on carbon emissions doesn’t yet exist in the
United States, most consider it inevitable, and legislators are already
pushing the issue in Congress.

It’s not just governments who are demanding emissions compliance —

consumers want it, too. The commitment a company makes to curb its
pollutant output is an increasingly public aspect of strategy. More and more
employees are taking these factors into account when deciding where to
work. A recent study from Monster TRAK found that 80 percent of young
professionals want their work to impact the environment in a positive way,
and 92 percent prefer to work for an environmentally friendly company.

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How to Talk About It

Cap-and-trade scheme: A market approach to reducing greenhouse gases

that works by setting emissions targets. Governments or businesses that
reduce their carbon outputs in excess of the target can sell the difference to
those who produce more than the limit. This is the favored solution of many
business groups.

MACs (Marginal Abatement Costs) refer to the cost of cutting C02 emission,
which varies from country to country and industry to industry.

Free-market environmentalism: This theory holds that the free market,

which offers economic incentives, is the best tool to address global
warming. This view goes against the traditional approach to
environmentalism, which looks to government regulation to prevent
environmental destruction.

Trade in carbon credits has the potential to make forestry more profitable,
and enhance the environment at the same time. It has therefore attracted
considerable attention of the likely buyers of credits, producers (ie forest
growers), and others. However, it is difficult to stay fully informed about

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carbon credits because of the complexity and the pace of developments on

the subject. This market report looks at the current situation on carbon credit
markets and trade from the viewpoint of small scale growers. It also gives
stumpage prices recently received by growers in Australia. Forests that
qualify for carbon credit It is widely accepted that if the concentrations of
greenhouse gases (eg carbon dioxide and methane) continue to increase in
the atmosphere, it will bring about major changes to the global climate.
This, in turn, will seriously threaten human welfare worldwide. A global
problem of this kind requires a global solution. So under the auspices of the
United Nations, all developed countries agreed in 1997 in Kyoto, Japan, to
reduce or limit emissions of their greenhouse gases. The agreement is called
the Kyoto Protocol. The protocol recognizes forests as carbon sinks and
provides for carbon trading as a means of offsetting emissions of greenhouse
gases and meeting the Kyoto targets. Before the protocol can come in to
force, it must be ratified by at least 55 countries, including the developed
countries representing 55 per cent or more of the 1990 greenhouse gas
emissions from that group. But at the time of writing (in April 2000) neither
Australia nor any other developed country has ratified it. Nor has the
Australian government taken any decision on carbon credit trading.
However, for the purpose of this report, it is assumed that the protocol will
be ratified and come in to force, and that a carbon credit trade will
commence. Under the protocol, carbon sequestered in trees (ie carbon

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credit) must come from ‘Kyoto forests’, which are new forests: planted on
land, which historically has not been covered by forest (i.e. afforestation);

• Planted on land which historically has contained forest but which has been
used for another purpose since last being covered by forests (ie
reforestation); and

• Additional to those that would otherwise have been planted. The Kyoto
forests must arise from a change in landuse, and planted not before 1990.
Growers must have evidence to prove their forests meet these qualifications.

Note also that carbon sequestered by the forests during 2008–2012 alone is
tradable. Decision is pending about the period after 2012. Decision is also
pending on the definition of the term ‘forest’. The ambiguity on the meaning
of ‘forest’ had led to the suggestion that certain forest types (e.g.
windbreaks) may not qualify as Kyoto forests. It shows that many of the
issues central to carbon credit markets and trade are yet to be clarified. The
costs a first step in selling the sequestered carbon is to measure its quantity
in trees. A range of simple to complex techniques is available for the
purpose. In general, the techniques are more reliable for plantations of
species such as radiate pine and certain eucalypts, but less so for plantations
of other species or of mixed ages and mixed species. Other things remaining
the same, measurements of carbon with a higher statistical accuracy will
result in a higher cost for the grower. The next series of steps in selling the
carbon involve: aggregation of individual growers’ carbon in to a sizeable

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pool; verification of the pool; issuance of carbon credit certificates by an

independent agent; registration of the certificates and their lodgment with an
authorized market clearing house (e.g. the Sydney Futures Exchange) for
sale; and exchange of the certificates and the monies. Besides the costs of
the afore-mentioned steps, growers may also incur some other costs. An
example is the cost of extra insurance against the loss of trees through fire,
windstorm, and the like. The costs of services and transactions associated
with selling carbon are subject to economies of scale. Hence, small scale
growers will pay a higher cost per unit of carbon. People designing the
trading mechanism are very conscious of the problem, and are trying hard to
find ways and means to keep the costs low for growers. However, growers
themselves could also take steps to reduce their costs by joining or forming
growers’ cooperatives or groups that offer economies of scale. Growers
need to be aware of one more major ‘cost’. If a grower, who has sold carbon
credits from his/her forest, but then goes on to harvest the forest, he/she will
incur carbon debits. The quantity of debits will be at least equal to the
quantity of carbon credits sold. In this situation the grower will be required
to fully offset the debits by buying carbon credits in the market place; or
having additional Kyoto forests; or using a mix of both. What is the total of
all the costs a grower is likely to pay for producing certified carbon credits
suitable for trade? It is a very important question. So, it is especially

disappointing to say that reliable information on the costs is unavailable, and

therefore the question is unanswerable. It would be most helpful to growers

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if reliable information on the costs were readily available to them. Carbon

credit prices. A few studies have attempted to estimate the prices of carbon
credit under various hypothetical scenarios. Their estimates of the price
range from $10 to $700 per tones of carbon. Some indication of the market
prices will, however, be available when the Sydney Futures Exchange starts
forward trading in carbon credits later this year. (Forward trading involves
trade in contracts to buy or to sell a commodity at a specified future date and
a fixed price. It differs from the much more common spot trade, in which a
commodity is bought and sold with immediate effect.)

Summing up

So, is it worthwhile for small scale growers to undertake production of

carbon credits for trading? Despite the vast number of studies on various
aspects of carbon credits, the economics of carbon credits for small scale
growers has not yet been adequately investigated. However, a few studies
have commented on the issue. They include: Kyoto forests: Prospective
providers of carbon-sequestration services? by Neil Byron and Andrew
Coleman, March 1999; Greenhouse, carbon trading and land management
by Hassall & Associates, November 1999; and Is carbon farming
worthwhile? by Chris Borough, March 2000. A general thrust of these
studies is that, under the current rules, many small scale growers may not
find carbon credit trade sufficiently rewarding. This is because of the

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relatively high total cost per unit of carbon credit, and the enormous
technical, financial and institutional risks and uncertainties. To capture the
potential benefits of carbon credit trade, growers should monitor the forward
trade prices of carbon credits; seek more information; stay informed on the
changes in the Kyoto rules and the government policy; keep records of their
own forestry operations; and take other actions to reduce the costs, risks and
uncertainties. Future issues of this market report will also try to inform
growers on the latest developments on carbon credit trade.

Stumpage prices

ANU Forestry has collected information on actual stumpage recently

received by small scale growers. As the collected information was
insufficient for deriving averages and trends, it is presented in case study
format in the following table. Users should exercise due care in using it for
assessing stumpage for a particular situation.

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CHAPTER 4

CARBON CREDIT – INDIAN SCENARIO

4.1 ANLYZING INDIAN SCENARIO

India being a developing country has no emission targets to be followed.

However, she can enter into CDM projects. As mentioned earlier, industries
like cement, steel, power, textile, fertilizer etc emit green houses gases as an
outcome of burning fossil fuels. Companies investing in Windmill, Bio-gas,
Bio-diesel, and Co-generation are the ones that will generate Carbon Credits
for selling to developed nations. Polluting industries, which are trying to
reduce emissions and in turn earn carbon credits and make money include
steel, power generation, cement, fertilizers, waste disposal units, plantation
companies, sugar companies, chemical plants and municipal corporations.

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4.2

BENEFITS FOR INDIA

By, switching to Clean Development Mechanism Projects, India has a lot to

gain from Carbon Credits:

a) It will gain in terms of advanced technological improvements and related

foreign investments.

b) It will contribute to the underlying theme of green house gas reduction by

adopting alternative sources of energy

c) Indian companies can make profits by selling the CERs to the developed
countries to meet their emission targets.

4.3

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TRADING OF CERS

• As a welcome scenario, India now has two Commodity exchanges trading

in Carbon Credits. This means that Indian Companies can now get a better
trading platform and price for CERs generated.

• Multi Commodity Exchange (MCX), India’s largest commodity exchange,

has launched futures trading in carbon credits. The initiative makes it Asia's
first-ever commodity exchange and among the select few along with the
Chicago Climate Exchange (CCE) and the European Climate Exchange to
offer trades in carbon credits. The Indian exchange also expects its tie-up
with CCX which will enable Indian firms to get better prices for their carbon
credits and better integrate the Indian market with the global markets to
foster best practices in emissions trading.

• On 11th April 2008, National Commodity and Derivatives Exchange

(NCDEX) also has started futures contract in Carbon Trading for delivery in
December 2008.

• 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

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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. If the Indian buyer thinks that the current price is low for
him he will wait before selling his credits. 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 who are
actually financial investors. They are thinking that if the Europeans are
unable to meet their target of reducing the emission levels by 2009, 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.

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CHAPTER 5

Financing support in India

• Carbon Credits projects requires huge capital investment. Realizing the

importance of carbon credits in India,

• The World Bank has entered into an agreement with Infrastructure

Development Finance Company (IDFC), wherein IDFC will handle carbon

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finance operations in the country for various carbon finance facilities.

• The agreement initially earmarks a $10-million aid in World Bank-

managed carbon finance to IDFC-financed projects that meet all the required
eligibility and due diligence standards.

• IDBI has set up a dedicated Carbon Credit desk, which provides all the
services in the area of Clean Development Mechanism/Carbon Credit
(CDM).

• In order to achieve this objective, IDBI has entered into formal

arrangements with multi-lateral agencies and buyers of carbon credits like
IFC, Washington, KfW, Germany and Sumitomo Corporation, Japan and
reputed domestic technical experts like MITCON.

• HDFC Bank has signed an agreement with Cantor CO2E India Pvt Ltd and
MITCON Consultancy Services Limited (MITCON) for providing carbon
credit services. As part of the agreement, HDFC Bank will work with the
two companies on awareness building, identifying and registering Clean
Development Mechanism (CDM) and facilitating the buy or sell of carbon
credits in the global market

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CHAPTER 6.

6.1 How does it work in real life?

Assume that British Petroleum is running a plant in the United Kingdom.

Say, that it is emitting more gases than the accepted norms of the UNFCCC.
It can tie up with its own subsidiary in, say, India or China under the Clean
Development Mechanism. It can buy the 'carbon credit' by making Indian or
Chinese plant more eco-savvy with the help of technology transfer. It can tie

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up with any other company like Indian Oil , or anybody else, in the open
market.

In December 2008, an audit will be done of their efforts to reduce gases and
their actual level of emission. China and India are ensuring that new
technologies for energy savings are adopted so that they become entitled for
more carbon credits. They are selling their credits to their counterparts in
Europe. This is how a market for carbon credit is created.

Every year European companies are required to meet certain norms,

beginning 2008. By 2012, they will achieve the required standard of carbon
emission. So, in the coming five years there will be a lot of carbon credit
deals.

6.2 What is Clean Development Mechanism?

Under the CDM you can cut the deal for carbon credit. Under the UNFCCC,
charter any company from the developed world can tie up with a company
in the developing country that is a signatory to the Kyoto Protocol. These
companies in developing countries must adopt newer technologies, emitting
lesser gases, and save energy.

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Only a portion of the total earnings of carbon credits of the company can be
transferred to the company of the developed countries under CDM. There is
a fixed quota on buying of credit by companies in Europe

6.3 How does MCX trade carbon credits?

This entire process was not understood well by many. Those who knew
about the possibility of earning profits, adopted new technologies, saved
credits and sold it to improve their bottom line.

Many companies did not apply to get credit even though they had new
technologies. Some companies used management consultancies to make
their plan greener to emit less GHG. These management consultancies then
scouted for buyers to sell carbon credits. It was a bilateral deal.

However, the price to sell carbon credits at was not available on a public
platform. The price range people were getting used to was about Euro 15 or
maybe less per tonne of carbon. Today, one tonne of carbon credit fetches
around Euro 22. It is traded on the European Climate Exchange. Therefore,
you emit one tonne less and you get Euro 22. Emit less and increase/add to
your profit.

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We at the MCX decided to trade carbon credits because we are in to futures

trading. Let people judge if they want to hold on to their accumulated carbon
credits or sell them now.

MCX is the futures exchange. People here are getting price signals for the
carbon for the delivery in next five years. Our 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.

Say, if the Indian buyer thinks that the current price is low for him he will
wait before selling his credits. 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.

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

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

6.2 Is this market also good for the small investors?

These carbon credits are with the large manufacturing companies who are
adopting UNFCCC norms. Retail investors can come in the market and buy
the contract if they think the market of carbon is going to firm up. Like any
other asset they can buy these too. It is kept in the form of an electronic
certificate.

We are keeping the registry and the ownership will travel from the original
owner to the next buyer. In the short-term, large investors are likely to come
and later we expect banks to get into the market too. This business is a
function of money, and someone will have to hold on to these big
transactions to sell at the appropriate time.

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Isn't it bit dubious to allow polluters in Europe to buy carbon credit and get
away with it?

It is incorrect to say that because under UNFCCC the polluters cannot buy
100 per cent of the carbon credits they are required to reduce. Say, out of
100 per cent they have to induce 75 per cent locally by various means in
their own country. They can buy only 25 per cent of carbon credits from
developing countries

6.3 Tell us what's the flip side of your business?

Like in the case of any other asset, its price is determined by a function of
demand and supply. Now, norms are known and on that basis European
companies will meet the target between December 2008 and 2012. People
are wondering how much credit will be available in market at that time. To
what extent would norms be met by European companies. . .

As December gets closer, it is possible that some government might tinker

with these norms a little if the targets could not be met. If these norms are
changed, prices can go through a correction. But, as of now, there is a very
transparent mechanism in which the norms for the next five years have been
fixed.

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Governments have become signatories to the Kyoto Protocol and they have
set the norms to reduce the level of carbon emission. Already companies are
on way to meeting their target.

Other than this, it's a question of having correct information. How much will
be the demand for carbon credit some years from now? How much will the
supply be? It is a safe market because it is a matter of having more
information on the extent of demand and supply of carbon credit market.

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CHAPTER 7

CASE STUDY

7 .1

IDBI :-

IDBI is one of the premier banks engaged in funding medium and large-
scale projects, for more than 40 years, in infrastructure and non-
infrastructure sector in India for promoting fast track industrial
development. IDBI has assisted many companies in India and have strong
relationships with the companies in Textiles, Sugar, Power/Energy,
Chemicals, Fertilizers, Pharmaceuticals, Steel, Paper, Cement and other
sectors. Besides offering various banking services, IDBI has also set up a
dedicated Carbon Credit desk, which provides all the services in the area of
Clean Development Mechanism/Carbon Credit (CDM). In order to achieve
this objective, IDBI has entered into formal arrangements with multi-lateral
agencies and buyers of carbon credits like Germany and Our primary
objective is to protect long-term interests of our clients and suggest various
risk mitigation measures. By combining the experience and expertise of

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these agencies and in-house strength of IDBI, are in a position to offer a

complete range of CDM related services tailor-made to suit the needs of the
clients.

7.2 DELHI METRO RAIL CORPORATION (DMRC):

A must mention project is The Delhi Metro Rail Corporation (DMRC): It

has become the first rail project in the world to earn carbon credits because
of using regenerative braking system in its rolling stock. DMRC has earned
the carbon credits by using regenerative braking system in its trains that
reduces 30% electricity consumption. Whenever a train applies regenerative
braking system, the released kinetic energy starts a machine known as
converter-inverter that acts as an electricity generator, which supplies
electrical energy back to the Over Head Electricity (OHE) lines. This
regenerated electrical energy that is supplied back to the OHE that is used
by other accelerating trains in the same service line. DMRC can now claim
400,000 CERs for a 10-year crediting period beginning December 2007
when the project was registered by the UNFCCC. This translates to Rs 1.2
crore per year for 10 years. India has the highest number of CDM projects
registered and supplies the second highest number of Certified Emission
Reduction units. Hence, India is already a strong supplier of Carbon Credits
and can improve on it. (Refer Annexure No. 3 & 4 for projects registered
and expected average annual CERs generate respectively)

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CONCLUSION:-

Globally there are number of environmental trading markets as have been

explained above which provide for balance in period of environment and
effect corporate competitiveness and profitability in terms of standards and
final finished products. There can be increased revenue and profitability and
also risk-taking measures adopted by developed nations and this in turn shall
fuel the growth of developing nations. The effects can already be seen in
India where not only does it lead to additional revenue for companies but
also thrusts the growth of small scale industries. Together, such mechanisms
for carbon credit lead to filling of the considerable gap between developed
and developing countries.

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Criticisms

Environmental restrictions and activities have traditionally been imposed on

businesses through regulation. Many people were, and still are, uneasy at the
use of a novel market-based approach to managing emissions, although the
concept of Cap and Trade eventually won the day in international
negotiations. The Kyoto mechanism is the only internationally-agreed
mechanism for regulating carbon credit activities, and, crucially, includes
checks for additionally and overall effectiveness. Its supporting
organisation, the UNFCCC, is the only organisation with a global mandate
on the overall effectiveness of emission control systems, although
enforcement of decisions relies on national co-operation. The Kyoto trading
period only applies for five years between 2008 and 2012. The first phase of
the EU ETS system started before then, and is expected to continue in a
third phase afterwards, and may co-ordinate with whatever is
internationally-agreed at but there is general uncertainty as to what will be
agreed in post-Kyoto negotiations on greenhouse gas emissions. As business
investment often operates over decades, this adds risk and uncertainty to
their plans. As several countries responsible for a large proportion of global

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emissions (notably USA, Australia, China and India) have avoided

mandatory caps, this also means that businesses in capped countries may
perceive themselves to be working at a competitive disadvantage against
those in uncapped countries as they are now paying for their carbon costs
directly. A key concept behind the cap and trade system is that national
quotas should be chosen to represent genuine and meaningful reductions in
national output of emissions. Not only does this ensure that overall
emissions are reduced but also that the costs of emissions trading are carried
fairly across all parties to the trading system. However, governments of
capped countries may seek to unilaterally weaken their commitments, as
evidenced by the 2006 and 2007National Allocation Plans for several
countries in the EU ETS, which were submitted late and then were initially
rejected by the European Commission for being too lax. A question has been
raised over there and fathering of allowances. Countries within the EU ETS
have granted their incumbent businesses most or all of their allowances for
free. This can sometimes be perceived as a protectionist obstacle to new
entrants into their markets. There have also been accusations of power
generators getting a 'windfall' profit by passing on these emissions 'charges'
to their customers. As the EU ETS moves into its second phase and joins up
with Kyoto, it seems likely that these problems will be reduced as more
allowances will be auctioned. Establishing a meaningful offset project is
complex: voluntary offsetting activities outside the CDM mechanism are
effectively unregulated and there have been criticisms of offsetting in these
unregulated activities. This particularly applies to some voluntary corporate
schemes in uncapped countries and for some personal carbon offsetting
schemes. There have also been concerns raised over the validation of CDM
credits. One concern has related to the accurate assessment of additionally.

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Others relate to the effort and time taken to get a project approved.
Questions may also be raised about the validation of the effectiveness of
some projects; it appears that many projects do not achieve the expected
benefit after they have been audited, and the CDM board can only approve a
lower amount of CER credits. For example, it may take longer to roll out a
project than originally planned, or an afforestation project may be reduced
by disease or fire. For these reasons some countries place additional
restrictions on their local implementations and will not allow credits for
some types of forestry or land use projects.

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BIBLIOGRAPHY

WEBSITE:-

www.cseindia.org

www.carboncredit.org

www.google.co.in

www.scribd.com

www.carbontrading.com

www.creditmart.com

www.cdmmarket.org

www.kyotoprotocol.int

www.wikipedia.org

www.ieta.org

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http://www.cdmwatch.org

10. http://www.indiainfoline.com

31 Jul 2007, 0000 hrs IST,Sanjeev Choudhary,TNN

http://economictimes.indiatimes.com/India_gets_43_Of_Carbon_Credits/arti
cleshow/2245328.cms

JOURNALS

ICAI. (THE INSTITUTE OF CHARTED ACCOUNTANT INDIA)

Accounting and Taxation Aspects of Carbon Trading –– CA. Sanjay K.

Agrawal

Editorial from the President readers write legal update

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