Sunday, February 10, 2008

Trading in Carbon credits - the next financial frontier..

As per the Kyoto Protocol, signatory countries have to bring their Carbondioxide and other Green house Gas emissions (including Ozone, methane, Nitrous oxide )  by 2012 to levels prior to 10090s. These carbon emission norms and standards to be adhered to are stipulated by the UN Framework conventions on Climate Change (UNFCC).

The European developed countries who are signatories to the Kyoto Protocol have started greening up their processes with new technologies that are less polluting. What processes they are unable to do, they turn to other developing countries to buy the excess rights these developing countries have to pollute the environment. The developing countries are not polluting the environment as much as they are allowed to and hence the excess polluting rights lying unused with these developing countres or the companies in these countries are sold in the open market to developed countries who have already exhausted their polluting limits. These are called Carbon Credits. A Carbon credit sells in the open market for upto euro 22 (Rs 1320/=) per ton of Carbon emitted into the atmosphere. In short these carbon credits incentivise developed countries to reduce their environemntal pollution and the developing countries to install new tecnologies which will in future reduce GHG emissons. The final need is to protect the environment.

Any country needs industries for development. Each individul industry can apply to get it's emissions checked as per the limits set by UNFCC and see whether they are above or below the limits. If they are above the limits, they need to  install new technologies for reducing the emissions and if they are below the limits, they can accumulate these and sell them together around December of each year. There are trading agencies who can buy these carbon credits, quantified in terms of tonnes of Carbon emitted. The companies in the developed world can buy carbon credits from these trading agencies if they are unable to met the GHG emission norms. It si expected that around 2012, the carbon credits will be in great demand and hence it can fetch greater prices in the markets then.

The developed country companies can also help developing country companies install new technologies for reducing carbon emisions and these will earn carbon credits for these companies in the developed countries.

India and China are not polluting the world as much as they can and hence can accumulate these polluting rights in the form of Carbon credits which could be sold in the open market. In India this busines is worth a cool $1 billion.

By trading in these credits UNFCC has been able to give the need for reducing green house gas emissions a commercial angle, which will get commercial enterprises in the world interested in the proposition of trading in carbon credits for money. Earlier there was no financial incentive to stop green house gas emissions.

US, the world's largest polluter, sadly, is still not a signatory to the Kyoto Protocol, even though they shout from the rooftops on the need for less polluting technologies. If US acts  bit more sincerely in this regard, I hope either Obama or McCain will take it up seriously enough, the world will still be a greener place to stay by 2012.

Kind regards,

George Easaw  (inputs from

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