Some facts about Carbon Credits and its trading.

Since the middle of the 20^th century, environmentalists have been debating ways to cut green house gas emissions that cause global warming. So, 191 countries came together and signed an agreement named the Kyoto Protocol on 11^th December,1997 with the notable exception of the United States of America. Its aim was to bring down emissions to the levels of early 1990s.

A mechanism was created under the United Nations Framework Convention on Climate Change (UNFCCC), a precursor to the Kyoto Protocol, where countries would be given emission allowances or “points” for prudent management of carbon emissions. Under the mechanism, standards are fixed by the UNFCCC to determine the level of carbon emissions to be allowed for an outfit or activity. The extent to which these outfits emit less carbon, as per the quotas set by UNFCCC, they get points. This is called carbon credit.  One unit of carbon credit is equal to one tonne of carbon dioxide emitted.

Contrariwise, an outfit exceeding its quota of emissions would have to buy extra credits from other entities who have excess credits to compensate the deficit. Thus, this system intends to incentivise environmental frugality and disincentivise those indulging in wasteful practices.

For example, if a steel company located in Britain emits more carbon than its allotted quota, it can tie up with SAIL(a steel major in India) and buy carbon credits either through direct payments or by eco-savvy technology transfers. It can also buy credits from the open market just like shares from a stock exchange.

Carbon credits trading vis-à-vis India:

India being a developing country has excess credit allocation as industrial activity levels haven’t reached saturation levels.

Currently India earns about $1.5 billion(Rs.7,500 Crores) a year by selling carbon credits to developed regions such as Europe. This mechanism is turning out to be a great foreign exchange earner.  There is a lot of untapped potential as the global carbon trade levels are in excess of $6 billion(Rs.30,000 Crores) per annum and growing.

Criticisms:

One major criticism of this system is that it simply re-allocates excess credits to developed economies thereby allowing them to maintain same levels of pollutants by paying for it, thus defeating the fundamental purpose of reducing the level of pollutants.