The concept of Carbon credit was emerged from Kyoto protocol. The Kyoto Protocol operationalizes the United Nations Framework Convention on Climate Change by committing industrialized countries to limit and reduce greenhouse gases emissions in accordance with agreed individual targets. The Kyoto Protocol was adopted on 11 December 1997, it entered into force on 16 February 2005. Currently, there are 192 Parties to the Kyoto Protocol. In Doha, Qatar, on 8 December 2012, the Doha Amendment to the Kyoto Protocol was adopted for a second commitment period, starting in 2013 and lasting until 2020.
India accepted Kyoto in August 2002 itself. This protocol clearly states that developed countries have to reduce their GHG emission levels by at least 5% against the baseline levels of 1990 in five years’ time from 2008 to 2012.
What is Carbon Credit
A carbon credit is a tradable permit or certificate that provides the holder of the credit the right to emit one ton of carbon dioxide or an equivalent of another greenhouse gas. In other words (as defined by Kyoto protocol), For one Metric tonne of carbon emitted by burning of fossil fuels Companies are allocated a certain number of credits that they may use over a period. In case they are burning less then the allocated amount then they are surplus of the number allocated to them. These surplus number can be used for trading off and can be sold as per convenience in global market.
Here it is noted that the one credit is equivalent to one tonne of Carbon dioxide emission reduced. I.e If a company has reduced emission of 1 tonne of CO₂ then company can be rewarded with 1 Carbon credit. This was the primary goal for Kyoto protocol where industrialised countries agreed to reduce the emission of Greenhouse gases primarily CO₂ to a certain extent.
Types of Carbon Credits
There are two types of the carbon credits:
Voluntary emissions reduction (VER): A carbon offset that is exchanged in the over-the-counter or voluntary market for credits. Voluntary carbon offsetting schemes allow companies of every part of the world to generate and to commercialize carbon credits, which are equivalent to an emission reduction of one tone of CO2. As a result of this, companies highly demonstrate their commitment to reduce greenhouse gas emissions related to the global warming process. Voluntary emission trading schemes work in line with the principles defined by UNFCCC in this way, companies are capable to offset their emissions under an internationally recognized standard.
Certified emissions reduction (CER): Emission units (or Carbon credits) created through a regulatory framework with the purpose of offsetting a project’s emission. The main difference between the two is that there is a third-party certifying body that regulates the CER as opposed to the VER.
The Kyoto Protocol reflects its signatory countries’ commitment to reducing emissions. Greenhouse gas-emitting companies are now subject to strict emissions quotas. If they exceed these quotas, companies can offset their emissions through several flexible mechanisms.
Trading of Carbon Credits
Carbon credits can be traded on both private and public markets. Current rules of trading allow the international transfer of carbon credits. The prices of carbon credits are primarily driven by the levels of supply and demand in the markets. Due to the differences in the supply and demand in different countries, the prices of the carbon credits fluctuate.
India and China are likely to emerge as the biggest sellers and Europe is going to be the biggest buyers of carbon credits. India is one of the countries that have ‘credits’ for emitting less carbon and is therefore having surplus credit to offer to countries that have a deficit