Global warming is the increase in the average temperature of the earth?s near-surface air and oceans since the mid-20th century and its projected continuation. Global surface temperature increased 0.74 ? 0.18 ?C (1.33 ? 0.32?F) during the last century. This is caused primarily by increases in greenhouse gases (GHGs), which are gases in an atmosphere that absorb and emit radiation within the thermal infrared range. This process is the fundamental cause of the greenhouse effect. Common greenhouse gases in the earth?s atmosphere in the order of abundance are water vapour, carbon dioxide, methane, nitrous oxide, ozone, and CFCs.
Carbon credits are a key component of national and international attempts to mitigate the growth in concentrations of GHGs. One carbon credit is equal to one tonne of carbon. Carbon trading is an application of an emissions trading approach. GHG emissions are capped and markets are used to allocate emissions among the group of regulated sources. The idea is to allow market mechanisms to drive industrial and commercial processes in the direction of less carbon-intensive approaches than are used when there is no cost to emitting carbon dioxide and other GHGs into the atmosphere.
Since GHG mitigation projects generate credits, this approach can be used to finance carbon reduction schemes between trading partners around the world. There are two types of carbon credits. Carbon offset credits and carbon reduction credits. Carbon offset credits consist of clean forms of energy production, wind, solar, hydro and biofuels. Carbon reduction credits consist collection and storage of carbon from our atmosphere through reforestation, forestation, ocean and soil collection and storage efforts. Both approaches are recognised as effective ways to reduce the global carbon emission crisis.
A variety of approaches are being implemented to reduce GHG emissions. These include efforts by individuals and firms to reduce their climate footprints to initiatives at city, state, regional and global levels. Among these are the commitments of governments to reduce emissions through the 1992 UNFCCC and its 1997 Kyoto Protocol.
As per the Protocol, emission caps were set for each Annex-I countries, amounting in total to an average reduction of 5.2% below the aggregate emission level in 1990 till 2012. However, no emission cap is imposed on Non-Annex I countries. But to encourage the participation of Non-Annex I in GHG emission reduction process, a mechanism known as CDM has been provided.
The CDM allows net global GHG emissions to be reduced at a much lower global cost by financing emissions reduction projects in developing countries where costs are lower than in industrialised countries.
India has a great scope of earning and trading carbon credits through its diversified and potential sources of developing technologies. While industrial segments started exploring the opportunities, public utilities like electrical power distribution segment are also in the race. This involves bringing in a lot of awareness about efficient use of energy and energy conservation. Urban communities are getting aware of energy conservation, demand side management, use of clean fuels, renewable energy harnessing technologies and efficient use of energy. Even mass transport system has a big potential to generate carbon credits. For example, the Delhi Metro Rail Corporation is the world?s first railway system to register a CDM project with the UNFCCC.
There are many companies that sell carbon credits to commercial and individual customers who are interested in lowering their carbon footprint on a voluntary basis. These carbon offsetters purchase the credits from an investment fund or a carbon development company that has aggregated the credits from individual projects. The quality of the credits is based in part on the validation process and sophistication of the fund or development company that acted as the sponsor to the carbon project. This is reflected in their price; voluntary units typically have less value than the units sold through the rigorously-validated CDM.
More than 112 Indian companies, including Hindustan Lever Ltd and Tata Steel, are set to trade in carbon credits. These companies are ready with cleantech to bring down the emission levels of GHGs and sell certified emission reductions to developed countries.
According to World Bank estimates, India is expected to rake in $100 million annually by trading in carbon credits and Indian companies are expected to corner at least 10% of the global market in the initial years. Analysts with several research agencies such as the New Carbon Finance and Barclays have rated carbon credit prices in the range between euro 17-26 per unit and estimate the prices to move even higher due to limited supply of carbon credits. Some of the Indian companies who have been actively pursuing carbon benefits include Reliance Power, Torrent Power and Arvind Mills.
?The writer is dean of executive post-graduate programme and professor of economics at Management Development Institute, Gurgaon