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Sr no Title PAGE
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1 Introduction 2
2 Various definations of carbon credit 3
3 Emission allowances 3
4 Setting a market price for carbon 4
5 How buying carbon credits can reduce emissions 5
6 Creating real carbon credits 6
7 Additionality and its importance 6
8 Criticisms 6
9 Charts 7,8,9
10 References 9

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A carbon credit is a term for any permit or tradeable certificate representing the right to emit
one tonne of carbon dioxide or carbon dioxide equivalent (CO2-e).

Carbon credits and carbon markets represent a component of national and international
attempts to mitigate the growth in concentrations of greenhouse gases (GHGs). One carbon
credit is equivalent to one ton of carbon dioxide, or in some markets. An application of an
emissions trading approachis carbon trading . Greenhouse gas emissions are capped and then
markets are used to allocate the emissions among the group of regulated sources. The goal is
to allow market mechanisms to drive industrial and commercial processes in the direction of
less carbon intensive approaches or low emissions than those used when there is no cost to
emitting carbon dioxide and other GHGs into the atmosphere generate credits. This approach
can be used to finance carbon reduction schemes between trading partners and around the
world since GHG mitigation projects generate carbon credits.


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It is a certificate showing that a government or company has paid to have a certain amount of
carbon dioxide removed from the environment.

It also represents a generic term to assign a value to a reduction or offset of gresenhouse gas
emissions.. usually equivalent to one tonne of carbon dioxide equivalent (CO2-e) and a
permit that allows the holder to emit one ton of carbon dioxide which can be traded in the
international market at their current market price.

Burning of fossil fuels is now a major source of industrial greenhouse gas emissions,
especially for power, cement, steel, textile, fertilizer and many other industries which rely on
fossil fuels (coal, electricity derived from coal, natural gas and oil). The major greenhouse
gases emitted by these industries methane,carbon dioxide, nitrous oxide, hydrofluorocarbons
(HFCs), etc.These increase the atmosphere's ability to trap infrared energy and thus affect the
climate.

The concept of carbon credits came into existence as a result of increasing awareness of the
need for controlling emissions.



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For trading purposes, one allowance or CER is considered equal to one metric ton of CO2
emissions. These allowances can be sold in the international market at the prevailing market
price or privately. These trade and settle internationally and therefore allow allowances to be
transferred between countries. Each international transfer is validated by the UNFCCC. Each
transfer of ownership within the European Union is additionally validated by the European
Commission.

Climate exchanges have therefore been established to provide a spot market in allowances.
Carbon prices are quoted in Euros per tonne of carbon dioxide or its equivalent (CO2 e). Other
greenhouse gasses can also be traded, but these are quoted as standard multiples of carbon
dioxide with respect to their global warming potential. These features reduce the quota's

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financial impact on business, while ensuring that the quotas are met at a national and
international level.

Till now there are five exchanges trading in carbon allowances: European Climate
Exchange,the Chicago Climate Exchange , Nord Pool, PowerNext and the European Energy
Exchange. NordPool listed a contract to trade offsets which were generated by a CDM
carbon project called Certified Emission Reductions (CERs). Many companies are now
engaging in offsetting, and sequestration programs to generate credits that can be sold on one
of the exchanges.

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To keep rising over time unchecked, energy use and hence emission levels are predicted.
Therefore the number of companies needing to buy credits will rise up, and the rules of
supply and demand will therefore push up the market price.So more groups will undertake
environmentally friendly activities that create carbon credits to sell.

An individual allowance like an Assigned amount unit (AAU) or its near-equivalent

European Union Allowance (EUA), might have a different market value to an offset such as a
CER due to the lack of a developed secondary market for CERs, a deficiency of homogeneity
between projects which causes difficulty in pricing. Offsets generated by a carbon project
under the Clean Development Mechanism are potentially limited in value as operators in the
EU ETS are restricted as to what % of their allowance can be met through these mechanisms.

Raising the price of carbon can achieve four goals:.


, it will provide signals to consumers of goods and services which are high-carbon ones
and should therefore be used more sparingly.

?, it will provide signals to producers about which inputs use more carbon (such as coal
and oil) and which use less or none (such as natural gas or nuclear power), thereby inducing
firms to substitute low-carbon inputs.


, it will give market incentives for innovators and inventors to develop and introduce
low-carbon products and processes which can replace the current generation of various
technologies.

 , a high carbon price will economize on the information that is required to do all three
of these tasks. Through the market mechanism, a high carbon price will raise the price of
products according to their carbon content.

The social cost of carbon is therefore additional damage caused by an additional ton of
carbon emissions. The market price (or carbon tax) on carbon emissions which balances the
incremental costs of reducing carbon emissions with the incremental benefits of reducing
climate damages is the optimal carbon price .If a country wishes to impose a carbon tax of
$30 per ton of carbon, it would have to consider a tax on gasoline of about 9 cents per gallon.

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By giving a monetary value to the cost of polluting the air, carbon credits create a market for
reducing greenhouse emissions. Emissions become an internal cost of doing business and are
therefore visible on the balance sheet alongside raw materials, other liabilities or assets.|

Eg- consider a business that owns a factory putting out 100,000 tonnes of greenhouse gas
emissions in a year. Its government is Annex I country that makes a law to limit the
emissions that the business will be produce. So the factory is given a quota of say 80,000
tonnes per year. The factory has 2 options:it either reduces its emissions to 80,000 tonnes or
purchase carbon credits to offset the excess. After choosing these alternatives the business
may decide that it is uneconomical or infeasible to invest in new machinery for that year. It
may choose to buy carbon credits on the open market from organizations which have
approved themselves of being able to sell legitimate carbon credits.

One should consider the impact of manufacturing alternative energy sources. For example,
the energy consumed and the Carbon emitted during the manufacture and transportation of a
large wind turbine would prohibit a credit being issued for a predetermined period of time.

@| One seller might be a company that will offer to offset emissions through a project in t
such as recovering methane from a swine farm to feed a power station that previously
would use fossil fuel. Although the factory still continuing to emit gases, it would pay
another group to reduce the equivalent of 20,000 tonnes of carbon dioxide emissions
from the atmosphere for that year.
@| Another seller may have already invested in new low-emission machinery and might
have allowances as a result. By buying 20,000 tonnes of allowances from them,the
factory could make up for its emissions. The cost of the seller's new machinery would
therefore be subsidized by the sale of allowances. Both the buyer and the seller would
submit accounts for their emissions to prove that their allowances were met correctly.

Credits versus taxes

Credits were chosen as an alternative to Carbon taxes. The main advantages of a tradable
carbon credit over a carbon tax are argued to be:

@| the price could be more likely to be perceived as fair by those paying it.. Investors in
credits can have more control over their own costs.
@| some proponents state that if it is correctly implemented a target level of emission
reductions may somehow be achieved with more certainty, while under a tax the
actual emissions could vary over time.
@| it may provide a framework for rewarding people or companies who plant trees or
otherwise meet standards which are recognized as "green."

The advantages of a carbon tax can be

@| less expensive,complex and time-consuming to implement. This advantage is

especially great when it is applied to markets like gasoline or home heating oil.
@| reduced risk of certain types of cheating, though under both credits and taxes,
emissions should be verified.

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@| reduced incentives for companies to delay efficiency improvements prior to the

establishment of the baseline if credits are distributed in proportion to past emissions.
@| allows more centralized handling of acquired gains
@| worth of carbon is therefore stabilized by government regulations rather than market
fluctuations.Weak investor interest and poor market conditions have a lessened
impact on taxation as opposed to carbon trading.

 
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The first step in determining if a carbon project has legitimately led to the reduction of real,
measurable, permanent emissions is to understand the CDM methodology process. This is the
process by which project sponsors submit their concepts for emissions reduction creation
through a Designated Operational Entity (DOE).




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The concept of additionality addresses the question of whether the project would have
happened anyway, even in the absence of revenue from carbon credits.. Carbon projects that
yield strong financial returns even in the absence of revenue from carbon credits; or that are
compelled by regulations; or that represent common practice in an industry are usually not
considered additional, although a full determination of additionality requires specialist
review.

It is generally agreed that voluntary carbon offset projects must also prove additionality to
ensure the legitimacy of the environmental stewardship claims which results from the
retirement of the carbon credit (offset).




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Environmental restrictions and activities have been imposed on businesses through
regulation. Many are uneasy with this approach to managing emissions.

A key concept behind the cap and trade system is that national quotas have to be chosen to
represent genuine and meaningful reductions in national output of emissions. This ensures 2
things: overall emissions are reduced, the costs of emissions trading are carried fairly across
all parties to the trading system.

Grandfathering of allowances is the issue. Countries within the EU ETS have granted their in
businesses most or all of their allowances for free.Accusations of power generators getting a
'windfall' profit by passing on these emissions 'charges' to their customers are also there. As
the EU ETS moves into its second phase and joins up with Kyoto, it seems likely that these
problems will be reduced as more allowances would be auctioned.

Establishing a meaningful offset project is too complex: voluntary offsetting activities outside
the CDM mechanism are effectively unregulated and there have been criticisms of offsetting
in these unregulated activities. This applies to some voluntary corporate schemes in uncapped
countries and for some personal carbon offsetting schemes.

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India may be the leader in the number of carbon credits issued so far and the number of clean
development (CDM) projects registered with international CDM body, but it lags behind
China in the volume of average annual credits expected till 2012.

India has cornered nearly 43% of the carbon credits (CERS) issued so far by the CDM
executive board, the highest international body under the Kyoto Protocol to register projects
and issue credits. In comparison, only 17% of the CERs has been issued to China. But the
expected average annual CERs from registered projects till 2012 has China (44%) far ahead
of India (15%), although India, with 259 projects, leads China (101) in the number of
registered projects.

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