Projects between industrialized nations to earn emission by BevHde9


Executive Summary ................................................................................... 1
INTRODUCTION ......................................................................................... 2
EVOLUTION OF CARBON CREDIT ................................................................. 5
  Kyoto Protocol ........................................................................................ 5
  The Kyoto Mechanisms ............................................................................ 6
  Objectives of Kyoto Protocol: .................................................................... 7
CARBON CREDITS – A MARKET OF THE 21st CENTURY ................................... 8
CARBON CREDIT TRADING MECHANISM ..................................................... 10
  Buyers ................................................................................................. 11
  Sellers ................................................................................................. 11
  Drawbacks ........................................................................................... 15
SECTORS TO BENEFIT .............................................................................. 16
ACCOUNTING OF CARBON CREDIT ............................................................. 18
CARBON FINANCING ................................................................................ 21
  Risk-reward trade-off............................................................................. 23
  Global trends ........................................................................................ 24
  DOING C-BUSINESS AROUND THE WORLD ............................................... 27
  BEYOND CARBON .................................................................................. 28
  REGULATORY OUTLOOK ......................................................................... 30
CURRENT GLOBAL TRENDS ....................................................................... 31
CARBON CREDIT AND INDIA ..................................................................... 34
Companies in India participating in Carbon Credits ....................................... 37
Companies who don’t invest in carbon credits .............................................. 41
CONCLUSION .......................................................................................... 42
BIBLIOGRAPHY ........................................................................................ 43

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                             Executive Summary

Ideas are like dreams. And, such one is carbon trading – an idea that lays its foundation
on earn by giving. Born in the 1997 World Earth Summit held at Kyoto, Japan, this
dreamchild can make miracles on society if practised rightly.

The convention, participated by 160 countries of the world, was to negotiate binding
limitations on greenhouse gases for the developed nations pursuant to the objective of
the Framework Convention on Climate Change of 1992. The outcome was the Kyoto
Protocol, in which the developed nations agreed to limit their greenhouse gas emissions,
relative to the levels emitted in 1990 or pay a price to those that do. At this point comes
the carbon trading.

The idea was to make developed countries pay for their wild ways with emissions while
at the same time monetarily rewarding countries with good behaviour in this regard.
Since developing countries can start with clean technologies, they will be rewarded by
those stuck with ‘dirty’ ones. This system poises to become a big machine for partially
transferring wealth from wealthy, industrialised countries to poor, undeveloped

While the demand for carbon credits in relation to the Kyoto Protocol looks substantial,
there is a significant risk to this industry that an absence of or at least a delay to an
agreement on a post 2012 regime. While the value of carbon credits prior to 2012 is
hotly debated, there is general agreement amongst industry commentators that without
a regulated system of some sort these credits will lose their value and the companies
established over the past few years to supply them will be out of business. There is an
optimistism that a global agreement will emerge over the next few years of international

While the EU’s decision to commit to 20% emission reductions by 2020 is seen as
positive for the European carbon market, a global agreement will be required to secure
the future of these global trading specialists.

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Burning of fossil fuels is a major source of industrial greenhouse gas emissions,
especially for power, cement, steel, textile, and fertilizer industries. The major
greenhouse gases emitted by these industries are carbon dioxide, methane, nitrous
oxide, hydro fluorocarbons (HFCs), etc, which all increase the atmosphere's ability to
trap infrared energy and thus affect the climate.

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 incentivise
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

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

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. MCX has become first exchange in Asia to trade carbon credits.

Carbon credits as a concept was discussed and formalized in the Kyoto Protocol. In
December 1997, the Third Conference of Parties (COP) to the United Nations Framework
Convention on Climate Change (UNFCCC) adopted the Kyoto Protocol. The protocol
requires developed countries and developing to limit their Greenhouse Gas (GHG)
emissions to individual targets.

The Protocol agreed 'caps' or quotas on the maximum amount of Greenhouse gases that
each participating country can produce. In turn these countries set quotas on the
emissions of installations run by local business and other organizations, generically
termed 'operators'. Countries manage this through their own national 'registries', which
are required to be validated and monitored for compliance by the UNFCCC. Each
operator has an allowance of credits, where each unit gives the owner the right to emit
one metric tonne of carbon dioxide or other equivalent Green House Gases (GHG).

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Operators that have not used up their quotas can sell their unused allowances as carbon
credits, while businesses that are about to exceed their quotas can buy the extra
allowances as credits, privately or on the open market. As demand for energy grows
over time, the total emissions must still stay within the cap, but it allows industry some
flexibility and predictability in its planning to accommodate this.

Global warming is the new buzzword haunting environmentalists all over the world.
According to UNFCCC, since the 19th century, the average temperature of the earth has
increased by 0.6 °C. The average temperature is believed to be rising and to increase by
another 1.4 to 5.8 °C till the year 2100.

The primary reason for this increase is rapid growth of industrialization, burning of great
quantities of gasoline, coal and oil, urbanization and cutting down of forests and certain
methods of farming.

These activities have lead to an increase in the Greenhouse Gases (GHGs), especially
carbon dioxide, methane, and nitrous oxide, etc. These gases are necessary in the
atmosphere to absorb the heat of the sun; and without them, the earth's atmosphere
would be uninhabitable, cold and barren. However, an excess of these gases in the
atmosphere leads to the phenomenon called global warming which leads to an artificial
and unnecessary increase in temperature which ultimately alters the climate on the

Sources of Green House Gases:

      Burning of fossil fuels and deforestation leading to higher carbon dioxide

      Livestock enteric fermentation and manure management, paddy rice farming,
       land use and wetland changes, pipeline losses, and covered vented landfill
       emissions leading to higher methane atmospheric concentrations.

      Use of chlorofluorocarbons (CFCs) in refrigeration systems, and use of CFCs and
       halons in fire suppression systems and manufacturing processes.

      Agricultural activities, including the use of fertilizers that lead to higher nitrous
       oxide (N2O) concentrations.

C omposition of Green House Gases:

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The Dangers of Global Warming:

      Extinction of many species of plants and animals.

     Frequent storms, droughts and floods. For instance Rajasthan is facing floods
      while eastern India is facing draughts. This type of a drastic climatic change is
      attributed to global warming by many environmentalists.

     Global warming causes the waters in the oceans to expand which can cause
      havoc and destruction for low lying and island countries. Rise in temperatures can
      also cause glaciers to melt, which will ultimately add more water to the oceans.
      The average sea level has been increasing every century. It has been predicted
      that an increase of 9-88 cm may take place in the 21st century.

     Agricultural produce is likely to decrease in tropical, sub-tropical and temperate
      regions because of the increase in temperature because of soil erosion and

         GHG Market Is Evolving
                                     Kyoto Protocol:
                                     Drives Demand          United Kingdom:
                US$208 million in
                                       and System           Began April 2002;
                                      Development            Tax discount in
                tenders for GHG
                   reductions                                 exchange for
                                                             reduction target

                 Other EU
               Countries:                                      Denmark:
               Planning to                                 GHG cap in power
                implement                                  sector, 2001-2003;
            domestic trading                                 Danish and UK
           programs in 2005                                   allowances
          in line with EU plan                                  swapped

                      Japan:            Netherlands:
                  Ratified Kyoto                           European Union:
                                        Purchased $31        Ratified Kyoto
                  Protocol; GHG         million in GHG
               trading simulations                          Protocol; GHG
                                     reductions; 2 more     trading system
                     in 2002;
                                      tenders issued for   operational 2005
                implementation of      JI and CDM-like
               domestic measures          reductions

                                                                                 Page 4


Some nations have made voluntary efforts towards controlling these GHGs, but they are
not enough and not proportionate to the increase in GHGs in the atmosphere. Hence, the
United Nations Framework Convention on Climate Change (UNFCCC) came into effect.
Under the aegis of the UNFCCC, 189 countries around the world have joined an
international treaty that sets general goals and rules for confronting climate change.

The Convention has set an ultimate objective of stabilizing GHG emissions "at a level
that would prevent dangerous anthropogenic (human induced) interference with the
climate system." It states that "such a level should be achieved within a time-frame
sufficient to allow ecosystems to adapt naturally to climate change, to ensure that food
production is not threatened, and to enable economic development to proceed in a
sustainable manner."

The "base year" for tabulating GHG emissions has been set as 1990. Hence all the
member countries have to work towards bringing the pollution levels below the levels
which existed in 1990.

 Those countries which have already ratified the treaty are called "Parties to the
Convention". These countries will strive towards reducing GHGs from their atmosphere
by giving impetus to technology for efficient energy utilization and power production,
agriculture practices which prevent soil erosion, conservation and optimal use of natural
resources, etc. These countries have started developing programs for slowdown of
environmental change.

Those nations which are highly industrialized cannot of course be expected to cut down
their industrial activity drastically. Hence they have agreed to support the developing
and underdeveloped countries in the reduction of climate change. They extend their
support financially, through a system of loans and grants set up by UNFCCC. These
countries also share technology with the less developed countries.

Kyoto Protocol

Owing to the increased awareness about the need of pollution control, an international
agreement took place among several nations of the world. This agreement is known as
the Kyoto Protocol. Representatives of different countries came together in Kyoto, Japan,
to bring a solution to the rising pollution problem. The Kyoto Protocol was implemented
in 1997, whereby emission targets were determined for countries, and key elements as
to the achievement of such targets were identified. It is basically the agreement in which
the member as well as non-member countries have decided to reduce the emission of six
GHGs to a certain level and decided to provide credit for reduction in emission.

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The Kyoto Protocol is an international treaty to reduce GHGs emissions blamed for global
warming. The protocol came into force on February 16, 2005. The treaty was concluded
in Kyoto, hence the name. The main aim of the agreement is to reduce global warming.
As mentioned earlier, global warming causes unwanted and harmful climate changes.
Reduction in global warming can delay this climate change. Global warming can be
controlled by reducing the emission of GHGs. Hence, an understanding was reached
under the purview of the treaty, wherein developed and transition economies are
supposed to reduce total GHG emissions to 5% below the level they were in 1990s. This
has to be achieved between 2008 and 2012 (the first commitment period). The protocol
is lead by the United Nations and different countries have different targets which they
have to achieve. Only countries that ratify the protocol are bound by it.

The Kyoto Protocol along with a host of other organizations such as the United Nations,
EBRD (European Bank for Reconstruction and Development), etc. have helped create a
market for Carbon Credits. The whole mechanism can be simply understood like this:
Those businesses or countries which cause less pollution are given benefit of Carbon
credits. These carbon credits can be sold to those businesses or countries which have
high pollution levels. Countries in Russia, Eastern Europe and Central Asia are highly
energy-efficient and hence they can benefit from the protocol by reducing energy costs
and emissions.

The Kyoto Mechanisms

   1. International Emissions Trading:

      Emissions trading (ET) is a mechanism that enables countries with legally binding
       emission targets to buy and sell emissions allowances among themselves.

      Each country has a certain number of emission allowances (amount of carbon
       dioxide it can emit) in line with its Kyoto reduction targets.

      The IET allows industrialized countries to trade their surplus credits on the
       international carbon credit market.

      Emissions trading transfers "assigned amount units" or AAU

      The buyer will then use the credits to meet their emissions targets

   2. Joint Implementation (JI):

      Projects between industrialized nations to earn emission offsets

      A developed country or a business house in a developed country can set up a
       project that reduces emissions in another industrialized country for which it will
       gain credits.

      It is done because of geographical or cost implications

      Emission reduction units (ERUs) created through joint implementation is treated
       in the same way as those from emissions trading

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     The government of the investing company gets benefited by sale of these credits
      and the recipient country gets the benefit of foreign investment.

  3. Clean Development Mechanism (CDM):

     The purpose of CDM is reduce to emissions and also contribute to sustainable
      development in developing countries.

     The CDM is administered by the CDM Executive Board (CDM Board) which reports
      and is accountable to the Conference of Parties (COP).
     A Carbon emission reduction (CER) is given by the CDM Executive Board.
     One CER is equivalent to one tonne of carbon dioxide reduced.
     Steps involved for issuance of CER:

             The first stage is at the domestic level, where the project gets approved
              by National CDM Authority (NCM).
              After NCM's approval, the project is sent to the United Nations
              Framework Convention on Climate Changes.
              After this, the project is reviewed by the executive board of UNFCCC.
              The project gets evaluated on every front and is then registered under
              UNFCCC only if it meets all the norms.
              Thereafter, certification is done for the reduction in emission and credits
              are issued.

Objectives of Kyoto Protocol:

  • Enhancement of energy efficiency.

  • Protection and enhancement of sinks and reservoirs of GHGs.

  • Promotion of sustainable forms of agriculture in light of climate change

  • Research on, and promotion, development and increased use of, new and
  renewable forms of energy, of carbon dioxide sequestration technologies.

  • Progressive reduction or phasing out of market imperfections, fiscal incentives, tax
  and duty exemptions and subsidies in all GHG emitting sectors.

  • Reduction of methane emissions through recovery and use in waste management,
  as well as in the production, transport and distribution of energy.

                                                                                   Page 7

With growing concerns among nation to curb pollution level while maintaining the growth
in their economic activities, the emission trading (ET) industry has come to life. And,
with increase in ratification of Kyoto protocol (KP) by countries and rising social
accountability of polluting industries in the developed nations, the carbon emission
trading is likely to emerge as multibillion-dollar market in global emission 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 year to come.



Carbon credit is the evolving concept derived by public and private entities. Mahdi Al-
Kaisi, professor of Biosystems in his article defines the concept of carbon credits as that
"Which involves buying carbon units which are emitted, mainly in tons, through a middle
entity carbon sequestration through adoption of a range of conservation practices. The
carbon units are then sold to a buyer that is the industrial sector needing to offset the
CO2 generated to the atmosphere through their manufacturing activities."

Carbon credits are a key component of national and international emissions trading
schemes. They provide a way to reduce greenhouse effect emissions on an industrial
scale by capping total annual emissions and letting the market assign a monetary value
to any shortfall through trading. Credits can be exchanged between businesses or
bought and sold in international markets at the prevailing market price. Credits can be
used to finance carbon reduction schemes between trading partners and around the

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

The Kyoto Protocol has created a mechanism under which countries that have been
emitting more carbon and other gases (greenhouse gases include ozone, carbon dioxide,
methane, nitrous oxide and even water vapour) have voluntarily decided that they will
bring down the level of carbon they are emitting to the levels of early 1990s.

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

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

                                                                                    Page 8
them set up new technology that is 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 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.

These credits are bought over by the companies of developed countries -- mostly
Europeans -- because the United States has not signed the Kyoto Protocol.

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-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.
 Simply put, one carbon credit is equivalent to one tonne of carbon dioxide or its
equivalent greenhouse gas (GHG). Carbon credits are “Entitlement Certificates” issued
by the United Nations Framework Convention on Climate Change (UNFCCC) to the
implementers of the approved Clean Development Mechanism (CDM) projects. The
potential buyers of carbon credits shall be corporates in various Annexure I countries
that need to meet the compliance prevailing in their countries as per the Kyoto Protocol
or those investors who would like buy the credits and with the expectation of selling
them at a higher price during the KP phase (2008-12).

Let us say that India decided to invest in a new power station, and has decided on a
particular technology at the cost of X crore. An entity from an industrialized country
(which could even be a company) offers to provide India with slightly better technology,
which costs more (say Y crore), but will result in lower emissions. The industrialized
country will only pay the incremental cost of the project – viz. Y minus X.

This is a very good deal indeed – but for the investing country. Not only do they sell
developing countries their technology, but they also meet their Kyoto commitments
without lifting a finger to reduce their domestic emissions. Countries like the US can
continue to pollute at home, so long as it makes the reductions elsewhere.The World
Bank has built itself a role in this market as a referee, broker and macro-manager of
international fund flows. The scheme has been entitled Clean Development Mechanism,
or more commonly, Carbon Trading.

The survey on the carbon emission with due reference to the expenditure incurred by
different countries of the world reveals that developed countries are spending nearly
$300 to 500 and the developing countries are spending $10 to 25 every year. In
countries such as India, GHG emission is very low to the target fixed by Kyoto Protocol
and so, they are excluded from reduction of GHG emission. However, the trading takes
place in selling surplus credits to the developed countries. Thus, India claims 31% of the
world carbon trade through Clean Development Mechanism (CDM).

                                                                                     Page 9

Types of Transactions Carbon transactions can be grouped
into two main categories:

• Allowance-based Transactions: Here, the buyer purchases emissions allowances
created and allocated (or auctioned) by regulators under cap-and-trade regimes, such as
Assigned Amount Units (AAUs) under the Kyoto Protocol, or EUAs under the European
Union Emission Trading Scheme.

• Project-based Transactions: In these transactions, the carbon credits that are
bought, are generated from projects that help in reducing GHG emissions, for e.g., the
projects which come under the purview of CDM and JI framework.

The trading takes place on two stock exchanges, the Chicago Climate Exchange and the
European Climate Exchange. Western European countries and Japan are the major
buyers of carbon credits. The hazardousness of each GHG can be compared using the
Global Warming Potential (an index under the Kyoto Protocol).

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Figure 2 shows the buyers of carbon credits from January 2005 to March 2006.

From Figure 2 it is clear that buyers from Europe and Japan largely dominated the
market scene. Significant purchases were also seen from Scandinavian countries.


Figure 3 shows sellers of carbon credits. Asia forms 73% of the total transactions,
however, the share of India is observed to have decreased significantly from that in
2004. This can be attributed to the fact that most companies decided against selling of
Carbon Credits this year, in order to accumulate them and get a better price for a chunk
later on. Some companies decided against selling CCs in the anticipation of getting
better prices in future when the demand is more.

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Nowadays, several companies are looking at emission trading as a key part of their
environment strategies. An emission trade typically occurs when a company which wants
to reduce its emissions, purchases emission credits from another company that has
already reduced its emissions beyond its specified requirement. This transaction can
benefit both participants. Purchasers are able to reach goals that require emission
reductions cost-effectively without undergoing massive overhaul of plant, machinery and
processes and spending more on operational changes. Sellers are rewarded financially
for their investments in emission reductions. A country (or a group of countries) caps its
carbon emissions at a certain level (this is known as cap and trade) and then issues
permits to firms and industries that grant the firm the right to emit a stated amount of
carbon dioxide over a time period. Firms are then free to trade these credits in a free
market. Firms whose emissions exceed the amount of credits they possess will be
heavily penalized.

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These permits can also be traded on various carbon trading exchanges like Chicago
Climate Exchange (CCX). The CCX was the first carbon exchange when it opened in
2003. Today, it is the only exchange of its kind in North America. In Europe, big
producers of greenhouse gases are required to take part in emission trading. The CCX
owns the European Climate Exchange (ECX), in the Netherlands. A carbon exchange is
like a stock exchange for pollution. The carbon exchange provides a market for
businesses to trade on the release and capture of carbon dioxide and other greenhouse
gases. Trading takes place when members release less than their limit. The idea of
trading in greenhouse gases has its roots in the Kyoto Protocol.

Market forces drive the price of the credits. The credits are called carbon financial
instruments (CFIs). Each credit is equal to 100 metric tons of carbon dioxide, the most
common greenhouse gas. In this way, the desired carbon reductions are met at the
lowest cost possible to society. In addition, a few large companies have developed
internal trading mechanisms in order to reach companywide goals cost-effectively. For
example, the energy majors, British Petroleum (BP) started an internal emission trading
system and sought third-party verification of GHG inventory way back in 2000. Similarly,
Shell too started its internal trading emission scheme, the Shell Tradable Emission
Permit System (STEPS), also in 2000.

 Shell wanted to use the scheme as an aid in reaching the company's emission reduction
targets, allowing permits worth 100 tons of carbon dioxide (or its methane equivalent) to
be traded via an internal website.

The trading takes place on two stock exchanges, the CCX and the ECX. Japan and
Western European countries are the major buyers of carbon credits. The Scandinavian
countries also play a major role. One significant fact to be noted here is the growth of
private players. The share of private players increased from 80% to 90% at the
beginning of 2006. As far as sale of carbon credits is concerned, Asia accounts for 73%
of the total transactions. However, according to the World Bank Report, State and
Trends of the Carbon Credits, 2006, the transactions by India decreased significantly
from that in 2004. This can be attributed to the fact that most of the companies decided
against selling carbon credits, in anticipation of a future appreciation of prices. The
Global Warming Potential, an index under the Kyoto Protocol, is used to compare the
hazardousness of each GHG.

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Figure 4

           Page 14

• A CER contract (as opposed to an issued, delivered CER) has certain
risks inherent with it:

     - A CER does not legally exist until it is issued; its volume depends on project
     performance (and verification), actual issuance, and its delivery into the
     compliance buyer's registry requires that the International Transaction Log is

     - Once it is delivered into a buyer's account in the CDM registry, it loses its ability
     to be transferred across borders prior to 2008.

     - Another drawback in project-based transactions is that it involves higher costs
     and time as implementation of a planned project in not as simple as it appears on
     paper. Delays in implementation can lead to a disarray of the cost benefit

• Markets created by binding constraints:

     - The reason the carbon markets grew in 2005 was due to the binding constraints
     of Kyoto Protocol, EU ETS, etc., and the legally binding voluntary commitments
     under the Chicago Climate Exchange.

     - The market demand is determined by the assigned emission units of each
     country. These caps have to be set realistically, or the whole market may have too
     face a demand pull inflation in cost of carbon credit.

     - It is important that the main objective of UNFCCC and the Kyoto Protocol is
     (reduction of GHG emissions and global warming) kept in mind by the buyers and
     sellers. If the whole trade becomes too profit- oriented, then it will lose its central

• Emergence of market institutions

  - The emergence of viable market institutions is usually a sign of a market's
     maturity. In this regard, the carbon market is considered to be still in its infancy.
     Thus, carbon markets need to become institutionally and geographically stronger
     which will result in fairer pricing of carbon credits and generate a transparency in
     the system.

                                                                                      Page 15
                           SECTORS TO BENEFIT

1. Agricultural Sector

Within the agricultural sector, credits may be generated in two ways:

   • Reduction of GHGs: Reduction of GHG emissions from fossil fuels, fertilizers and
   livestock on farms.

   • Removal of GHGs: Forming biological sinks; and through them, absorbing the CO2
   into terrestrial processes.

   However reduction and removal of GHGs should be in compliance with the Kyoto

   • Credits should be given based on net atmospheric reductions, which means that,
   there should be a net reduction of GHG emissions. Reduction or removal in one GHG
   should not lead to an increase in another GHG.

   • The reduction needs to be in addition to what would have occurred in a business as
   usual situation.

   • Efforts to remove or reduce GHG emissions cannot result in increased emissions
   elsewhere—either in space or time.

2. Forestry

   • Afforestation : establishing trees on previously unforested land.

   • Reforestation: the process of replanting forests where they once existed but were
   destroyed in the past

Forests that Qualify for Carbon Credit

The Kyoto Protocol recognizes forests as carbon sinks and provides for carbon trading as
a means of offsetting emissions of GHGs and meeting the Kyoto targets.

Under the protocol, carbon sequestered in trees (i.e. carbon credit) must come from
'Kyoto Forests', which are new forests, that are:

   • Planted on land, which historically has not been covered by forest (afforestation).

   • Planted on land which historically had contained forests that had been destroyed in
   the past and the land had been used for other purposes.

Eligible forsets should be ones which were not planted before 1990, i.e., they have to be
new forests; and secondly, must arise from a change in the use of land. Another
condition is that carbon sequestered by forests during 2008-2012 alone is tradable.

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3. Renewable Energy

The renewable sources of energy include:

   • Wind power,

   • Solar energy,

   • Biomass power,

   • Hydel power,

   • Geothermal, and

   • Tydel Power.

   Energy Supply

   • Renewable energy (eg., windmills, biogas, solar energy generation).

   • Biomass (heat and/or power) and cogeneration.

   • Improving energy efficiency by replacing existing equipment (installing new
   efficient machinery).

   • Fuel switch: Fuel switching from fossil fuel to green fuel like biomass, rice husk,

   • Energy efficiency measures related to boiler, pumps, turbines, installation of
   various speed drives, efficient cooling systems, back pressure turbines, etc.

   • Cogeneration in industries having both steam and power requirements.

4. 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.

5. Waste Management

   • Capture of landfill methane emissions to generate power.

   • Utilization of waste and wastewater emissions for generation of energy for captive
   use of power generation.

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Accounting Issues

The mechanism of carbon trading is similar to the US Acid Rain Program which reduced
some industrial pollutants but had the following multifarious accounting dimensions.

   • What are the costs and revenues involved in it and how they are to be identified,
   measured and reported for better decision-making?

   • What is the financial and operational effect of carbon credit and its trading on the
   capital expenditure and earning of the institution in the current year and on future

   • How to amortize the capital expenditures?

   • How to treat additional expenditure incurred on required training, research and

   • How to identify, measure and disclose the process, product, fiscal benefits of
   earning carbon credit on environments?

   • What should be the auditable system, i.e., auditable documents, composition of
   audit team and reporting by auditors as a part of statutory report or otherwise
   reporting separately?

   • How to recognize the effect of carbon credit and its trading on conventional
   accounting practice and framing accounting policies accordingly?

   • What should be the code of good corporate governance in carbon trading?

                                                                                 Page 18
Accounting and Reporting

Accounting refers to the measurement of economic events and summarizing and
reporting them in the form of financial statements.

Increased GHG emission has brought with it many challenges and opportunities and also
put greater focus on the role of accounting profession for accounting and reporting of
carbon credits and their trading. The profession, today, is facing an important challenge
of implementation of an appropriate model of regulation and the achievement of
international convergence in accounting, reporting and auditing of carbon credit and its
trading so that relevant and reliable financial information are available for use by various
stakeholders, bankers, debtors, creditors, etc. In this context, the requirement is to
identify the role of accounting in measuring economically the carbon credits and
preparing financial statements in compliance with GAAP. It should use methodology that
is well-defined, constantly applied and auditable. The institutions are required to
maintain written documents for all the transactions and financial statement. This
methodology should be reviewed and upgraded from time to time based on the new
findings. Major perceived thrust point for accounting, auditing and reporting of carbon
trading and its trading have already been listed above.

   • The following methodology has to be followed for carbon credit trade accounting.
   The separate methodology of accounting is to be adopted for self-generated CERs
   and purchased CERs.

   • The CERs (self-generated) should be initially recognized at fair value through profit
   or loss accounts.

   • The acquired/purchased CERs for availing carbon credit should be initially
   recognized at fair value plus transaction costs that are directly attributable to it.

   • CERs if acquired out of government grant are initially recorded at fair value plus
   transaction costs that are directly attributable to it minus government grants.

   • It is difference of initial recognition and recognition on balance sheet date and are
   charged to profit and loss account. In this, AS28 is automatically complied.

   • On balance sheet date, CERs initially recorded at fair value plus transaction costs
   that are directly attributable to it, are to be again measured at fair value without any
   deduction for transaction cost it may incur on disposal and any gain or loss arising
   out of initial and subsequent measurement should be charged to revaluation reserve
   account. However, when there is objective evidence those CERs are impaired; the
   cumulative loss that has been recognized in revaluation reserve account should be
   removed and recognized in profit and loss account.

   • On disposal, gain or loss of CERs initially recognized at fair value through profit or
   loss accounts should be charged to profit and loss account of that period.

                                                                                   Page 19
   • On disposal, cumulative gain or loss of CERs initially recorded at fair value plus
   transaction costs that are directly attributable to it are charged to profit and loss
   account after routing it through revaluation reserve account.

   • The sale proceed of CERs should not be clubbed with turnover and have to be
   shown separately in profit and loss account.


   • Disclosure is required in notes on accounts that procedure adopted for
   measurement and recognition of profit or loss either through P&L account or through
   revaluation reserve account

   • Disclosure is similarly required for measurement and profit or loss recognition of
   acquired/purchased CERs.

   • Disclosure is required in notes on accounts for restriction if any imposed on trading
   of CERs by some authority.

                                                                                 Page 20
                            CARBON FINANCING
The growing sense of urgency among countries worldwide to combat the impending
catastrophic effects of global warming has paved the way for the birth and growth of a
multimillion dollar international market for carbon emission trading of buying and selling
Greenhouse Gases (GHGs). As a non-Annex I country with approximately 12% market
share in the total number of contracts signed so far in the world market, India has bright
scope as its carbon market is largely driven by Clear Development Mechanism (CDM)
opportunity. The Federation of Indian Chambers of Commerce and Industry (FICCI)
expects Indian companies to earn $4 bn through carbon credit sales in the near future.
The consulting firm Ernst & Young has reported that since its takeoff nearly two years
ago in India, domestic companies have earned close to $500 mn from carbon credit
sales. According to the World Bank India Newsletter (January 2008), carbon market is
the fastest growing market in the world. The volume of carbon credits traded by
developing nations doubled between 2003 and 2004 and tripled between 2004 and 2005.
In 2006 alone, global carbon transactions worth $30 bn were conducted.

What is carbon financing?

Carbon financing is the term used for carbon credits to help finance GHG reduction
projects where industrialized countries can make up for their carbon reducing obligations
under Kyoto (industrialized countries collectively agreed to reduce GHG emissions by 5%
by 2012 compared with 1990 levels) through purchase of emission reduction credits
from projects in developing countries. Carbon trade offers double benefits: first,
encouraging companies to cut and reduce their GHG emissions by penalizing those who
do not adhere to Kyoto norms and rewarding those who conform; and, second, making
available the investment and expertise of low-carbon technologies to poor countries,
though many of the poorest countries are yet to reap the benefits.

Under Kyoto Protocol, governments are separated into two general categories:
developed countries, referred to as Annex I countries which have GHG emission
reduction obligations and developing countries, referred to as non-Annex I countries
which have no GHG emission reduction obligations but may participate in the CDM.

 Failure on the part of any Annex I country to meet its Kyoto obligation will incur
penalization resulting in submission of 1.3 emission allowances in a second commitment
period for every ton of GHG emissions in excess of cap in the first commitment period
(2008-2012). Annex I countries can purchase GHG emission reductions from financial
exchanges, from CDM projects of non-Annex I economies, from other Annex I countries
under the Joint Implementation (JI) or from Annex I countries with excess allowances.
When non-Annex I countries with no GHG emission restrictions undertake GHG emission
reduction projects under CDM they receive carbon credits which can then be
traded/exchanged with Annex I countries in the world market. Both the Annex I and
non-Annex I economies have established designated National Authorities to manage
their GHG portfolios under Kyoto, actively promoting government carbon funds and
working closely with their major utility, energy, oil and gas, and chemical conglomerates
to acquire GHG certificates.

                                                                                 Page 21
Banks enter the fray

Domestic banks such as ICICI, IDBI, HDFC and SBI are gearing up to tap this new high-
risk and high-reward business of carbon financing, where the margins are quite lucrative
in the range of 1-3%, higher than for other projects. Citing the nature of deals as one of
the reasons for the growing opportunity in carbon financing, K Uma Maheshwaran of
Carbon Procurement Unit, GTZ International Services, said, "In China, European
companies buying carbon credit enter into agreement at the beginning of the project and
also provide finance for project development. But in India, since the project size is small,
many companies are seeking finance from financial institutions."

The global carbon trading market is unique in the sense that the sellers are from India or
other developing nations, while the buyers are from industrialized countries. The
objectives of both the parties are quite contrary; while buyers want carbon credits at
cheaper rates, sellers want to maximize the value. Being unknown to each other, they
will be carrying preconceived notions and misgivings about the genuineness of the
contract. This is where banks have a pivotal role to play—act as financiers of emission
reduction projects and bring together buyers and sellers on a common platform through
credit mechanisms.

 Letter of Credit (L/C) is one such financing mechanism, where a buyer guarantees
payment through his banker for goods received from the seller. L/C is an assurance to
the seller that he will receive the payment and the same can be availed through an
escrow account with the bank. This apart, carbon delivery guarantee is another
mechanism through which banks provide guarantee to the buyers of carbon credits that
the same will be delivered by sellers as per the terms of the contract (quantity, delivery
schedule, etc.) This enables buyers and sellers to enter into long-term future contracts.
Banks can thus tap the investment potential of receiving huge amounts by way of
advances to these projects from overseas buyers.

Apart from financing CDM projects and providing loans against carbon credit receivables,
banks offer a single point delivery of services such as advisory services, value-added
products like securitization of carbon credit receivables, delivery guarantees, escrow
mechanism, etc., to their customers. Many banks have joined the carbon credit
bandwagon; for instance, SBI in September 2007 entered into MoUs with MITCON
Consultancy Services Ltd., Ecosecurities India Private Ltd., and Cantor CO2e India
Private Ltd. to provide one-stop destination to industries for CDM projects and emissions
trade. It has also recently entered into an MoU with KFW (a German firm) carbon fund
for jointly exploring financing of sustainable CDM opportunities in various development
and industrial sectors. The bank has also cleared one such loan valued at Rs 8 cr,
against the receivable to a biomass-based power plant in Indore. Also in the offing are 3-
4 such loans pending clearance which will be considered once they complete purchase
agreement formalities with their buyers.

ICICI Bank has signed a $200 mn line of credit from Japan Bank for International
Cooperation (JBIC) to fund carbon credit-related projects. It has also signed an MoU with
Agrienergy Consultancy (the Indian arm of the UK-based consultancy, Agrienergy Ltd.)
to promote carbon credit business in the country. Under this bilateral arrangement, they
propose to offer a large spectrum of CDM-related services to government bodies, SME
units and other services.

                                                                                   Page 22
Agrienergy's services will include participation throughout the carbon credit project cycle,
right from assistance to clients in identification of CDM projects, their registration with
UN Executive Board.

ICICI will provide services in the areas of commercialization of Certified Emission
Reduction Certificate (CERC), coordination and banking services and debt-financing of
CDM projects. The bank is also working with SMEs for carbon credit market and has
formed specific vertical team to tap opportunities arising to Indian SMEs from climate
change and carbon credits. By adopting a multi-pronged approach, it has tied up with
consultants to offer advice to its clients on carbon credit linked projects, energy
conservation, etc. Besides, the bank is also planning to create an energy efficient
awareness program for their clients.

Similarly, IDBI has set up special desk offering end-to-end solutions to corporates of
carbon credit business. The bank has certain tie-ups for technical and financial
assistance, and the products developed include providing guarantees for carbon
deliveries and escrow services for payment. Going a step further, both ICICI Bank and
IDBI Bank have plans to form alliances, "We have formed a dedicated team for carbon
credit. Efforts are also taken to forge alliances for this initiative. The bank has launched
`Go Green'—a program which gives SMEs an opportunity to reduce their carbon
footprint," said Sanjeev Mantri, GM, Small Enterprises Group of ICICI Bank.

Risk-reward trade-off

High and varying degrees of risks are associated with carbon credit financing depending
on the nature of the project and the level of its financing. According to Somak Ghosh,
Group President, Corporate Finance & Development Banking, Yes Bank, there are several
project specific risks which include underperformance, capital/operational costs overrun,
currency risks caused by inflation and market risks such as the insolvency of
counterparty, and banks need to develop proper financing mechanisms factoring in the
unique risks presented by CDM projects. In India, despite huge potential, the initiative
taken by banks to fund carbon finance projects is moving at a snail's pace, further
aggravating the risk factors for new financial institutions which are entering the carbon
market. According to Timothy Patrick Fox, Carbon Finance Expert, Institute for Financial
Management & Research, "Financial institutions will be forced to carry a higher
component of risk with a diminished rate-of-return due to higher capital costs and will
require careful evaluation of projects."

However, "there is a huge potential in financing carbon credit-related projects," says BK
Batra, Chief General Manager, IDBI. He opines that carbon trade provides scope for
other businesses like technology transfer, capital investments, cross-border funding
products and remittances. Apart from generating high margins that include commission,
brokerage, etc. from the carbon credit transactions, banks cite broadening of the product
portfolio as key incentive to enter this market. The project enables banks to provide an
international platform for buyers and sellers and increase the scope of allied business. PV
Anantha Krishnan, Executive Vice-President and Country Head, HDFC Bank, observes,
"Financing of CDM projects becomes an extension of banking services that we provide to
retain our customers." However, Batra cautions that there is high risk involved since the
market is future-based and, as with any business, returns are commensurate with risks.
"The risks include projects not being implemented in the manner they were envisaged or

                                                                                   Page 23
not being able to generate estimated CER revenues and even the uncertainty of prices
crashing," reckons he.

Banking sector experts opine that trading in carbon products is completely different from
the regular participation in financial markets as the characteristics of market participants
differ in both these trades. This is due to the vast volume involved and lack of staff with
sufficient expertise to evaluate the projects, as also a number of risks at various levels of
the project finance cycle. Novel financing instruments, such as special purpose vehicles,
CDM bonds, etc., can be developed with efficient and transparent procedures. Regulatory
risks at central and state levels form the core element of commercial risk which can be
overcome with effective approval rules. The other risks include failure of technology,
procedural delays, political risk, credit risk, negligence in dealing with carbon instrument
delivery risk, etc. Balancing the risk-reward trade-off forms the crux of carbon financing.
Financing projects that are not supported by strong balance sheet pose significant
challenges and entail additional risks, such as operational risk, price risk, default risks,
project registration risk, execution risk, policy risk, etc., observes Mantri. He adds that
banks can earn good returns by their involvement and total participation in the project
right from financing to CDM registration to trading of the issued carbon credits.

Another hurdle is the exchange risk. While banks can apply hedging tools for forward
contracts involving huge amounts to mitigate the risk, effective regulatory clarity will
strengthen and encourage banks to actively participate.

Global trends

Though the impact of emissions has likely started but may not be completely felt for
many more years to come, the future climate policy is taking a definite and concrete
shape. As the initial year of the first Kyoto commitment period (2008-2012) has
commenced, it is expected that by 2012 the world carbon market will witness an
exponential growth at $200 bn p.a. transferring half of that amount from the
industrialized nations to the developing ones. As per the World Bank's State and Trends
of Carbon Market 2008 report, Asia continues to dominate the market with about 87% of
volumes transacted and 91% of values, led by China with CDM transactions at 73%,
followed by India and Brazil (6%), Africa (5%), Eastern Europe and Central Asia (1%).

Though India has 259 projects, the average annual income from registered projects
through 2012 is expected to be only 15% as compared to China with 101 registered
projects with annual income at 44%. China's success has resulted in CDM being
nicknamed as `China Development Mechanism', the main reason (for China's success)
being an opportunity it offers its buyers to diversify their portfolios. China with its large
industrial base, economies of scale in origination and favorable investment climate is
continuing to reap the benefits. The market power of China played a vital role in
maintaining an informal pricing policy by raising the minimum price floor in the
US$10.40-11.70 range, which was acceptable to private European buyers who continued
to show strong demand.

The scenario in India is different, in the sense, Indian projects generate small volumes of
carbon credits, and since the market is driven mainly by SMEs, the same have to be
procured from different projects, which is cumbersome. PSUs and private sector can club

                                                                                    Page 24
these small projects together and significantly improve the market growth, while in
China, large quantity of credits can be traded from one single project.

Banks in other parts of the world are trying to reach areas that have failed to benefit
much from carbon trading. Banco Sumitomo Mitsui Brasileiro in Brazil increased its
portfolio of carbon credits last year by 1.5 million credits, generated from 15 small and
medium-sized projects, including biomass power generation, small hydro projects and
methane technology. The United Nations is trying to come up with measures to bring
more banks into the market. Yvo de Boer, Executive Secretary of the UN Framework
Convention on Climate Change, said the system could be adjusted to help governments
issue `climate bonds', which would help a developing country government to set up a
national emissions target. Also, Merrill Lynch Global Research has recently launched the
MLCX Global CO2 Emissions Index based on guidelines governing the EU carbon market,
while JP Morgan would acquire ClimateCare, a British company that builds clean-energy
projects in the developing world.

The future outlook for carbon markets is enticing. According to estimates, the Indian
carbon market has the potential to supply 30-50% of the projected global market of 700
million CERs by 2012. Major projects sold so far include renewable energy (such as wind
power, biomass co-generation and hydropower), energy efficiency measures in sectors
like cement, petrochemicals and power generation, and also reduction of industrial gases
contributing to climatic changes. However, trading on the international platform requires
clear-cut, well-laid and incentive-based policies in the areas of selection and criteria of
projects, timing, seller-buyer communication, eligibility of participants, etc.

Hitherto, the SMEs were availing the benefits of carbon market in India with very little or
no participation from PSUs. As the exclusive rights to deal with carbon markets rests
with policy makers and regulators, it is incumbent upon them to chalk out an effective
strategy to expand their reach to PSUs and also encourage private participation. Also,
lack of regulatory clarity is prohibiting many interested players from obtaining bids
through public trading.

A report prepared by Confederation of Indian Industry (CII) suggests creation of a
carbon market fund for accelerating the capacity, development of carbon finance

                                                                                  Page 25
opportunities, growth and strengthening of carbon markets. The report also emphasizes
the need for an organized carbon exchange with e-auctioning facility allowing only one
side bidding, where intermediaries can buy CERs and at the opportune time sell in the
international markets for higher prices. This will assure the project developers of getting
reasonable rates with low procedural costs.

Last but not the least, Indian carbon market in relation to its potential is relatively small.
To consolidate and tap the opportunities, creation of a carbon unit under government's
control will help in preparation and monitoring of projects, financing, registration and
accounting, collecting state duty for the registration and revenue from sale of carbon
units. A robust structure with simplified procedures, creating awareness and providing
updated information about related benefits to project owners, promoting local expertise
on project development and encouraging international participation of buyers and
investors, and providing tax incentives to banks for financing CDM projects will cost-
effectively reduce GHG emissions, while contributing to the growth of their economies in
a sustainable manner. That will further spawn new opportunities for banks.

                                                                                     Page 26


Why do some countries succeed in attracting CDM? Clearly, several respondents to our
survey pointed to the overall investment climate, the size and growth of the economy
and its structure, i.e. the more industrialized developing countries had greater
opportunities for generating carbon credits.       Poland was cited as an attractive JI
destination on account of the “entrepreneurial spirit” in the country.     Others cited the
size of the potential carbon assets (which brings economies of scale in exploration,
sourcing and transactions costs), for example Chile was cited for project replicability,
while China was cited as being attractive now that standard application flow was now
available (besides for the availability of large volumes of reductions).

One criteria almost universally cited by respondents to our survey was the host country
regulatory frameworks, i.e. the Designated National Authority (DNA) rules for review and
project approval, DNA efficiency, transparency and track record for projects approval.
India and Mexico were thus cited in our interviews as being attractive for the CDM
because of efficient DNAs.      A United Nations Development Program (UNDP) report
suggested that three to five years may be needed to build adequate host country
capacity, implying that the Kyoto 2012 clock has all but run out for most countries who
have not begun creating the required infrastructure.

India (in 2004) and then China (since 2005) have led in terms of market share.         The
dynamic – and the contrasts – between the two countries’ paths to success could not be
more different. Market data suggests that China still maintains a commanding lead in
the market and that several additional transactions are at advanced stages of
preparation. However, Indian sellers have re-bounded since the middle of the year with
strong pipelines of projects and buyers reported “more realistic” price expectations from
Indian sellers than earlier in the year.

                                                                                   Page 27

Twelve months ago, the dominant business model in the carbon space was managing
risk and abitraging price between CERs and EUAs. Most buyers had forward contracts
with sellers and their business model was primarily to source and sell carbon.    In our
May 2006 report, we noted that the most successful deals were those that went beyond
contracting for carbon and included other relationships, viz. equity, debt, equipment
sales, other commodity sales etc. This trend has increased, as the market volatility of
carbon has grown, making the earnings of pure play carbon suppliers very sensitive to
the price of EUAs. Not surprisingly, many carbon companies have been diversifying their
businesses by investing in a range of opportunities in the environmental and clean
energy sectors14. We expect such types of investment activity to continue and rapidly
increase as carbon becomes just one of the many assets from which investors seek to
correctly value and grow.

                                                                                 Page 28

China and India have very different processes to manage their Designated National
Authorities (DNAs) which position their countries in the carbon markets. While both
countries screen projects for sustainable development15 and technology transfer, China
differentiates the treatment of projects on the basis of sectors and whether they
promote development in priority regions.

Both China and India also provide important information about approved projects and
volumes publicly on the DNA website. In addition China identifies carbon credits buyers
by name.

China, which has approved 79 projects so far, only approves CDM projects that are
either wholly Chinese-owned or have joint ventures that have majority Chinese-
ownership.17 The price of the CERs is fixed at the time of the submission for the Letter
of Approval (LOA). The National Development and reform Commission (NDRC) exercises
price control on the CERs to be in line with prevailing market prices in similar projects
around the world. There is no official fixed base price, although buyers report being
aware of NDRC guidelines on price. There is some evidence that Chinese projects are
leveraging China’s strength in the market by proposing higher prices as we have seen
some primary bids that are in the €11-14 range. However, we have very little evidence
that transactions   are closing at that price point, with most transactions in China
reportedly still settling in the range of $10-$12. Buyers report that the high fixed floor
price for Chinese CERs makes it difficult for them to offer Chinese sellers with upside
through the use of partially fixed and partially indexed contracts.

In contrast, the India National CDM Authority (NCA) does not limit issuance of letters of
approval to Indian companies or majority-Indian companies. The NCA does not get
involved or influence CER price discussions or negotiations which are strictly between
buyer and seller. However, the NCA works closely with industry associations to promote
India Inc. as a destination for carbon purchases. The NCA states that it does not plan to
levy a tax on CERs at the moment, but it has not ruled out the possibility of levying a tax
once the CDM market develops in due course. The NCA had accorded host country
approval to about 400 CDM projects by September 2006, which is by far the largest
number of approved projects in any country. However, the CDM projects in India tend to
be smaller than the average thus indicating the need for aggregation. Indian projects
lost significant market share in late 2005 and early 2006 as they waited for prices to
keep rising. Indian sellers have a strong pipeline to offer to the market and buyers

                                                                                  Page 29
report that it has been considerably easier to find and close fair deals in India since the
events of May 2006.


Smart and well-designed market-based mechanisms as an integral tool to meet
emissions targets. In this regard, the 2005 EU ETS Phase I experience had important
lessons about what worked and what could be improved. The flexible mechanisms of the
UNFCCC and its protocols are reasonably good, if not perfect, examples of effective
environmental markets. These lessons need to be internalized and used to improve the
design of markets, both for Phase II and for the new carbon and environmental markets

                                                                                  Page 30
                        CURRENT GLOBAL TRENDS
As per a World Bank's study report, the carbon credits traded globally in 2007 was slow,
as against rapid growths recorded in the previous years. The findings suggest that the
number of GHG reduction projects funded by industrialized nations and their private
sector entities in developing countries has effectively stalled. The volume of carbon
credits created by the CDM totaled 551 million tons worth of carbon in 2007, up slightly
from 537 million tons in 2006, compared with 350 million tons in 2005, nearing 100
million tons in 2004 and 50 million tons in 2003. However, value-wise, the global carbon
market grew to a whopping $64 bn in 2007. As per Point Carbon, a consulting firm
estimates, the global market in carbon is expected to be worth €34 bn by the end of this
decade. A glimpse of some selected countries' commitments (targets for emission
reductions) under Kyoto Protocol for the period 2008-12 is provided in Table 1.

The Annex 1 countries include: Germany, Australia, Austria, Belarus, Belgium, Bulgaria,
Canada, European Community, Denmark, Spain, US, Estonia, Russia, Finland, France
Greece, Hungary, Ireland, Iceland, Italy, Japan, Latvia, Lithuania, Luxemburg, Norway,
New Zealand, Netherlands, Poland, Portugal, UK, Czech-Slovakia, Rumania, Sweden,
Switzerland, Turkey and Ukraine. (Source: Brazilian Ministry of Foreign Relations).

North America - US

US, the world's biggest polluter, withdrew from the Kyoto Protocol Treaty in 2001 on the
pretext that this treaty would cause adverse effects on US economy. However, US are
well aware of the harmful effects of the carbon emissions leading to greenhouse effect
and global warming. Therefore, US developed voluntary initiatives such as Voluntary
Carbon Markets (VCMs) and Renewable Energy Credit (REC) systems which differ from
CERs used for carbon trading under the CDM of the Kyoto Protocol. While CERs are
compliance-based (GHG regulated), VCMs are those which are created by trading firms
who take on voluntary commitments to reduce GHG emissions for a variety of reasons.
Carbon credits developed in the US cannot be traded, sold, or purchased in the global
markets operating under the Kyoto Protocol regulations.

Though there are no national programs in the US, there are several state or regional
level programs for voluntary GHG reductions. For example, the US companies which
develop renewable energy projects are able to set up and obtain RECs, which is the
offset crediting mechanism in many states in the US. However, there are no national
standards or certification process for RECs. However, CCX is North America's first
voluntary carbon market based on cap-and-trade scheme, which is also prevalent in
Canada and Mexico. It has a set of flexible rules that helps a wide variety of projects to
participate. The targets were to be met through internal reduction efforts or purchasing
credits from other firms or through emission reduction projects. There was a
commitment to reduce the GHG emissions by 4% below 1998-2001 level by 2006.

                                                                                 Page 31

The Alberta Carbon Market is a compliance-based market in Canada, where CCs are
traded. CCX is implementing as a new auxiliary platform in Canada named as `Montreal
Climate Exchange'. However, the framework CCX used to deliver offsets to this trading
platform at Montreal Climate Exchange and it is similar to the requirements of project-
based systems. Thus Alberta has just started (in late 2007) the first compliance-based
market in North America. British Columbia State in Canada has made a proposal to cut
annual greenhouse gas emissions 33% below the current levels by 2020 through a
legislation which will make a suitable proposal.


Carbon trading is most developed in the European Union (EU) where the EU Emission
Trading Scheme accounts for 80% of the global carbon trading market.


The UK Emission Trading Scheme is a voluntary emissions program, formed to give the
UK government and various UK companies the necessary familiarity in carbon trading.
These UK companies join in exchange for a 90% discount on their climate change levy
and such discount would not be allowed if a member company falls in commitment.
There were 38 participants in this scheme which lasted from 2002-2006 and the extent
of emission releases avoided was of the order of 11.88 million tons. Future Forests is the
largest and oldest retail offset provider in UK, which invests in GHG offset forestry
projects in UK and abroad. Another UK firm viz. Climate Care focuses on energy-based
projects with lofty expansion benefits in developing countries.


Germany is the leading country in protecting climate and has undertaken to cut
emissions by 21% from 2008-2012 compared to 1990 GHG emissions level, under EU
burden-sharing within the purview of Kyoto Protocol. Atmosfair is an offset contributor in
Germany, loyal in providing high quality energy-based offsets placed in developing
countries. Germany sensed climatic crisis a decade ago and offered several incentives for
undertaking many renewable energy projects like solar and wind power.


Russia is the third largest GHG emitter in the world. Energy and transport related CO2
emissions constitute 84% of Russia's total GHG emissions. Russia has the principal
emissions allowance surplus and is a key player in the areas of energy and climate
policies. It has been taking adequate energy efficiency measures to participate in the
Kyoto Protocol Flexible Mechanism.


                                                                                 Page 32
MyClimate is an offset provider in Switzerland committed to provide sustainable
development benefits to energy offsets in developing countries. Europe is the biggest
buyer of carbon credits from the developing countries from Asia.

Asian Countries Malaysia

Carbon trading market in Malaysia is expected to be worth between RM 3.2 bn and RM
6.4 bn in the next five years, as more companies in this country are concerned about
high GHG emission levels forcing them to participate in environmentally sustainable

The palm oil plantation industry is expected to benefit from carbon trading, as it is an
energy-intensive industry which can receive carbon credits from its operations. As per
the research findings of the Malaysia Energy Centre, Malaysia has potentially 100 million
tons of carbon credit, which is worth $60 bn globally and can go up to $1 tn in a decade.


Indonesia, which suffered through three decades of civil war and heavy human loss in
2004 tsunami, is expected to see $26 mn in carbon credits for protecting rainforest and
environment. Its Ulu Mason project, backed by the Government of Aceh, Fauna and Flora
International and Carbon Conservation for protecting 1.9 million acre of Ulu Mason forest
is expected to reduce emissions from deforestation in developing countries.


China is expected to be the largest seller of CERs in the world and Europe will be the
largest buyer. Of late, the Chinese government has been making good efforts to save
energy and reduce CO2 emission levels. By 2010, China proposes to achieve energy
consumption reduction of 20% per unit of GDP. It had drawn energy saving plans for its
new as well as old coal-based power plants. It has proposals to replace or modernize its
outdated plants to reduce carbon emissions. However, different private business sectors
also have their individual plans to reduce carbon emissions.

                                                                                 Page 33
                          CARBON CREDIT AND INDIA
Among the developing countries, India was the foremost to offer a hedging tool for
carbon credits earned through the CDM projects. The Indian government issued a
notification on January 4, 2008 by bringing CERs under the realm of tradable
commodities. But, the forward market is still in a nascent stage. However, a fresh
beginning is being made by some companies to enter into forward contracts for carbon
trading. India has recently begun to trade on its carbon credit trading exchanges viz.
Multi Commodity Exchange of India Ltd. (MCX) and National Commodity and Derivatives
Exchange of India Ltd. (NCDEX).

MCX entered into an alliance with CCX in 2005 to introduce carbon credits in India. MCX,
which is into futures trading, has become the first carbon commodity exchange in Asia.
MCX is only for Indians and Indian companies. Those Indian companies which adhere to
the UNFCCC norms and take up new technologies alone can sell carbon credits. In India,
there are nearly 400 companies which adhere to UNFCCC norms and as a result can sell
carbon credits to the European countries. The companies here are getting price signals
for the carbon for the delivery in the next four to five years. But these companies are
looking for best suited price. MCX trades in carbon credits emanating from CDM projects,
mostly in key sectors of the Indian economy. These Indian companies are thinking that if
the Europeans fail to meet their emission target levels by 2010, or 2012, the demand
will go up significantly and they can get a better price. The CER futures for February
2009 on MCX platform is reportedly trading at Rs. 1,427 per contract.

CERs or carbon credits are traded on the NCDEX also. However, till today, the companies
which are into carbon trading are still unclear on the physical delivery mechanism which
is creating confusion in the trading system. Within a few days of the trading on NCDEX,
the trading volume had touched Rs.15-20 cr on a daily basis which was three to four
times the expectation. But, global companies requiring offsetting their emissions by
buying carbon credits from India are not able to participate in NCDEX trading. Thus the
trading on NCDEX is only from price discovery point of view and not from the point of
physical delivery of CERs.

 However, MCX as well as NCDEX initiatives serve to address these inefficiencies in the
carbon markets by providing the price discovery and hedging platforms to the buyers
and the sellers of CERs. The Final Settlement Price will be relevant to certain deliverable
CERs. The Indian companies have been hesitating to enter the forward markets in
expectation of appreciation in prices of carbon credits. But of late, they have been
availing the services of the reputed consultants in the field for following prudent
strategies and a balanced portfolio of carbon credits.

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India signed a Kyoto Protocol in 2002 regarding carbon emission but trading was
commenced in 2007. There is huge scope for India in Carbon Credit Trading (CCT) as it
is one of the leading generations of CER through CDM. CCT is the post Kyoto Protocol
implementation phase. It brings a platform that provides transparency and vibrant
situation in emission market. It helps the buyers and sellers of carbon credit to settle a
fare deal in the commodities market.

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

The success of CER depends upon the fetching of economical prices for the implementers
of CDM. Effective control of GHG particularly carbon is a function of transparent and
effective pricing of CER received by CDM. In the present scenario, commodity exchanges
appear to be a better mode by which greater extent of governance of transparency can
be extended to carbon market. MCX is the national level online commodity exchange
which provides the platform for trading carbon credit online. Carbon Credit Futures
Contract (CCFC) is expected to cash in Indian firms by curbing energy usage through
clean technologies. MCX is expected to have a level of around 130-150 million tons of
carbon credit generation by the Indian companies.

"Launching of carbon credit futures on the Indian trading platform would provide
transparency to markets and help producers earn remunerative returns out of
environmentally clean projects", said Joseph Massey, Deputy Managing Director of MCX.

Trading in new generation commodities like carbon credits has placed MCX on the global
map of innovative exchange for providing global products to the Indian industry. On
January 21, 2008 MCX launched futures trading in carbon credits. It is the exchange
where futures trading in carbon credits can be done, making it Asia's first ever
commodity exchange, and among the select few in league with the CCX and the ECX.

                                                                                  Page 35
MCX has entered into a strategic alliance with CCX in September 2005 to initiate carbon
trading in India. As per the licensing agreement with CCX, MCX can list its mini version
of ECX Carbon Financial Instruments (CFI) and Chicago Climate Futures Exchange
(CCFE), Sulphur Financial Instrument (SFI) on the MCX trading platform. The Indian
market is a potential market for CCT and MCX is going to make this happen. Normally,
the contract expires on a yearly basis in the month of December and people/traders
which are involved in buying and selling can make settlements. These settlements may
also happen prior to December.

The total trading volume of carbon credits reached 9,600 tons (48 lots) on the first day
of trading on MCX.

Recently, five contracts of carbon credits are working on MCX platform with expiry in
December 2008, December 2009, December 2010, December 2011 and December 2012.
India, China, other Asian and European countries are the potential market for carbon

India, the world's fourth-largest emitter of carbon dioxide, formed eight commissions to
promote solar power, energy efficiency and water conservation as it seeks to mitigate
damage from the changing climate. They are:

   • National Solar Mission

   • National Mission for Enhanced Energy Efficiency

   • National Mission for Sustainable Habitat

   • National Water Mission

   • National Mission for Sustaining the Himalayan Ecosystem

   • National Mission for a Green India

   • National Mission for Sustainable Agriculture

   • National Mission on Strategic Knowledge for Climate Change.

Each of the eight panels has an institutional structure consisting of government
departments, industry experts, academics and citizen representatives. Each so-called
mission will devise a state-funded plan and have authority to carry it out. The missions
include developing efficient building technologies and better managing waste, conserving
water, and sustaining the environment of the Himalayas.

India's commitment to ensure that its per-capita emissions of green-house gases do not
exceed those of developed nations. But the new action plan makes no commitment to
cutting overall emissions. Despite mounting international pressure, India has refused to
make any specific commitments so far on reducing GHG emissions, pointing out that its
per-capita emissions are a fraction of those in rich nations.

                                                                                 Page 36
     Companies in India participating in Carbon Credits


In the Tata fold, group companies like Tata Steel, Tata Motors, Tata Chemicals, Tata
Metaliks, Tata Sponge, among others, have either already, or are in the process of
implementing clean development mechanism (CDM) projects. Tata Steel, the largest
company within the group, hopes to earn a million certified emission reductions (CER),
or carbon credits, per annum. At current prices, that will add close to Rs 76 crore to Tata
steel’s bottom line.

Carbon credits are also the backbone on which Tata Steel has gotten into a unique
arrangement with New Energy and Industrial Technology Development Organisation, a
Japanese company.

This firm supplied technology and equipment to two of Tata Steel’s projects in exchange
for carbon credits that will be generated by the projects for a period of 10 years. One
such project has the potential to earn 1.5 lakh carbon credits a year. In all, there are
about 14-15 projects in Tata Steel’s pipeline.

Another group company, Tata Power is in the process of applying for all its renewable
(hydro, wind and solar plants) and other appropriate power sources for earning carbon
credits. "We are also making an inventory of in-house gases and have plans to further
reduce our green house gas emissions," said an executive of Tata Power.

Meanwhile, Tata Motors has reduced carbon emissions of 1.63 lakh metric tonnes by
generating energy from wind in Satara and Supe region in Maharashtra, thus earning
carbon credits.

The automobile major recently auctioned some of these credits on the Chicago Climate
Futures Exchange. Said a Tata Motors spokesperson, "The company has invested in a 42
mw wind farm in Maharashtra in 1999-2000 to promote the use of wind energy. The
benefit of this initiative, in terms of CERs up to 2011, is projected to be 32,433 CERs per
annum valued at anywhere between Rs 1.5 crore and Rs 2 crore."


A carbon reduction supply-chain project has enabled HUL to become the first Unilever
business worldwide to be awarded carbon credits under the Clean Development
Mechanism (CDM) scheme operated by the United Nations Framework Convention on
Climate Change (UNFCCC).

The project in question is the development of a new process for making soap known as
Ploughshare Technology, which took four years to develop and is now being used across
HUL's eight plants in India.

                                                                                  Page 37
By eliminating the need for steam—which is used intensively in the traditional soap-
making process—and using 'ploughshare mixers', the new technology patented by HUL,
cuts carbon emissions by 15,000 tonne a year.

The HUL soap project has been externally verified and registered under the CDM scheme
and awarded 15,000 carbon credits, which are known as CERs (certified emission
reductions), per year.

HUL executive director (supply chain) Dhaval Buch told TOI: "The technology has been
developed at the Unilever Research Centre in India. Other Unilever group companies
across the globe will be able to use this technology to reduce emissions in soap making."

HUL was granted the CERs on August 31, 2007, for a period of 10 years. Though,
according to Buch, the objective is to lead the way forward in emission reductions, not
with the aim of capitalizing on carbon credits.

Experts feel that if HUL were to cash in on these carbon credits at the prevailing rates, it
would earn an income of around Rs 1 crore per annum.

Though this is not significant compared to industries like cement, steel, etc., which have
larger greenhouse gas emissions, companies are seen to be contributing to the process
of emissions reductions in some way or the other. This is being done through a number
of schemes that enable companies to invest in technologies to reduce carbon emissions
to sell the subsequent carbon savings through carbon trading markets.


Shree Renuka Sugars has entered into an agreement with a large European utility
company for the sale of about 11,500 CERs (certified emission reductions) from their
Munoli Project in Karnataka. The sale of the CERs was done through Agrinergy Ltd.

It has a gas co-generation project registered with the UN. It is a 20,000 tonnes per year
project and it will be valid upto 2012.

Managing Director at Shree Renuka Sugars, Narendra Murkumbi says that the company
expects average realisations of USD10 per tonne of carbon credit.

The company is also putting another 30 mw of co-generation, which will be
commissioned next year. That might also be eligible for carbon credit upto 2012, he

The Munoli Unit was the first Bagasse cogeneration plant in the world to be registered as
a clean development mechanism (CDM) project with the United Nations Framework for
Climate Change Convention (UNFCCC).

Shree Renuka Sugars is a fully integrated company focused on the manufacturing and
marketing of sugar, power and ethanol. For the 9 months ended June 30, 2006, the
company posted a total consolidated income of Rs.8034 million and net profit of
Rs.1007.6 million.

                                                                                   Page 38

Global warming has become a hot business opportunity. It was in 2000 that the topic
piqued the interest of S.K. Maheswari, the executive vice-president of Mumbai-based
Grasim Industries, cement major. He studied the impact of the Kyoto Protocol on his
company and realised that it meant ‘good’ business to clean up the environment. But by
2003, Grasim’s attempt to register under the carbon credit scheme was failing. Its clean
development mechanism (CDM) projects, where it produced goods while reducing carbon
emissions, suffered from inexperienced consultants. But Maheswari persisted. Last year,
his company registered its first gains (Rs 17 crore) in carbon credits. Today, he beams
confidently, “Give us your waste and we can convert it into gold.”


Rabo India Finance (a wholly owned subsidiary of Rabobank International) has launched
a carbon credit trading product.

Carbon credit trading helps companies meet internationally accepted emission control
norms by purchasing these credits from companies who have surplus credits or have
projects that generate carbon credits.

Rabo India Finance will help companies buy carbon credits, locate buyers and sell them
to a final buyer. It will also provide a "credit wrap", i.e. guarantee the delivery of
contracted carbon credits to the overseas buyer, besides providing hedging products.

YES BANK is the outcome of the professional commitment of its Indian promoters, Mr.
Rana Kapoor and Mr. Ashok Kapur, to establish a high quality, technology driven, state-
of-the-art private Indian Bank catering to “EMERGING INDIA”.Rabobank, Netherlands, a
part of the Rabobank Group, which is the only ‘AAA’ rated private bank in the world, has
approximately 17% of YES Bank’s financial ownership.

YES BANK commenced operations in Mumbai and New Delhi in Q3 of 2004. It is
gradually building wholesale banking, financial markets, corporate and transactional
banking, retail and private banking business lines across the country.


Indian Railways will go green to earn green back.Seeking to benefit from monetary spin
offs of efforts to check climate change, railways are gearing up to earn carbon credits by
running new generation trains on clean fuel.

According to the Kyoto Protocol, one carbon credit can be earned by preventing
generation of a tonne of carbon dioxide. One carbon credit is worth USD 10 as per the
UN Framework Convention on Climate Change guidelines.

Railways have signed two letters of intent with the World Bank to get carbon credits for
its projects dealing with regenerative braking system and locomotives.

                                                                                 Page 39
"This is the first such project in transport sector where railway will earn carbon credit
worth millions," said a senior railway official. The new train will be fuel-efficient and will
run on low-emission fuel. This would enable the railways to reduce the pollution level to
a great extent besides earning carbon credits.

"We are trying to negotiate with a few global train manufacturers for acquiring a few
next generation environment- friendly trains", said the official adding, "We are in the
process of introducing energy-efficient technology by using light-weight coaches and

Introduction of solar-based lighting at level crossings and use of renewable sources of
energy for railway applications are some of the measures undertaken by the railways to
generate certified emission reduction.

                                                                                     Page 40
         Companies who don’t invest in carbon credits
India Inc is sitting on a goldmine, but seems hesitant to go for it. Companies ranging
from Reliance Energy to National Thermal Power Corporation, and Tata Chemicals to
Chambal Fertilizers, have failed to take advantage of carbon credits, where certified
reductions in the emission of greenhouse gases (GHG) can be sold at a premium on
exchanges to companies in developed countries.

Under the Kyoto Protocol to reduce greenhouse gas emissions, signed voluntarily by 150
countries - the US is a major exception - global companies that have exceeded their
emission levels can either cut down emissions or buy carbon credits from developing

To avail themselves of this extra stream of income, companies in developing countries
like India have to make some technology changes that will result in a lowering of carbon
emissions. Once this reduction is certified by organizations like Ernst & Young and
Ecosecurities, the value of this credit is tradable at a premium.

About 60-70% of greenhouse gas emissions are created by fuel combustion in industries
like cement, steel, textiles and fertilizers, apart from power. But bureaucratic sloth and a
general lack of awareness on ways of monetizing carbon credits has resulted in many
Indian companies losing an opportunity while Chinese and Brazilian companies are
making hay, say carbon credit experts.

A majority of power generating, transmitting and distributing companies in India,
including Tata Power, Reliance Energy and Power Grid, have so far not partaken of this
multi-million euro bonanza. Nor have fertilizer companies such as National Fertilizers,
Deepak Fertilizers, Tata Chemicals and GNFC.

Indian companies have long known of business opportunities in the Kyoto Protocol. But
lack of expertise, controversies over the measure and methodology of the certification
process, as well as low awareness have left them behind their Chinese counterparts in
the search for making money out of carbon credits.

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The international carbon market is a key development in the global capital market and is
the world's fastest growing market. Today, the importance of the innovative carbon
credits as a part of the international emission trading norms, to reduce GHG emissions
which pollute the air, cannot be overemphasized. The carbon credit trading has received
a tremendous interest across the globe and is a great opportunity for the Indian and
other global companies.

However, a recent view of some experts is that the emissions cap will choke global
growth. Rather a direct tax can reduce carbon emissions more effectively than the
complex cap-and-trade system. In some of the Asian countries, CDM is actually
contributing to sales of fake credits by developing new hydroelectric projects with little to
no environmental benefit, worsening the climate crisis. Though the outlook for the
landmark treaty, i.e. the Kyoto Protocol, is somewhat bleak today due to various flaws
and frauds in carbon trading and its continuance beyond 2012 is being debated, still
carbon trading continues to be a great opportunity for the developing as well as the
developed countries of the world.

India and China are likely to emerge as the biggest sellers and Europe is going to be the
biggest buyer of carbon credits. Carbon credit market is a liquid market. Recently, Martin
Stuchtey, partner with Mckinsey (Economic Times dated March 19, 2008) conducted a
study in which it has been found that 60% of global executives regard climate change as
being strategically important. It is surprisingly noted that one-third of the companies
seldom considered climate change. But now climate change has become the corporate
social responsibility and accordingly has a dimension of CER which leads to CCT. Martin
also argued that there is a requirement of World Carbon Bank at the global level which
makes business viable in the long-term giving prominence to low carbon economy.
Indian companies are finding carbon credit market as an opportunity to become the
leading protectionists of environment. They treat it as a win-win situation and it is hoped
that in the coming year, companies will be able to confront bigger changes in CCT.

                                                                                    Page 42

1. Jared Diamond (2005), Collapse: How Societies Choose to Fail or Succeed, Viking.














15. Times News Network, August 29, 2005.

16. World Bank Report (2006), State and Trends of the Carbon Market: 2006.



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