Carbon Credit & Kyoto Protocol-cdm-vrk100-25102007

AUTHOR: Rama Krishna Vadlamudi [email protected] MUMBAI October 25th, 2007 FOR REGULAR UPDATES ON AUTHOR'S DOCUMENTS: JUST CLICK www.pdfcoke.com/vrk100 OR http://groups.google.co.in/group/random-thoughts-on-investments/files?hl=en&&sort=date

KYOTO PROTOCOL The concept of carbon credits came into existence as a result of increasing awareness of the need for pollution control. It was formalized in the Kyoto Protocol, an international agreement. The genesis of Kyoto Protocol can be traced back to December 1997, when about 160 countries met in Kyoto, Japan and decided to reduce emissions of green house gases (GHGs), like, carbon dioxide. This was done with a view to bringing down the level of GHSs so that issues like global warming and climate change can be tackled in a better way. Many industrialized countries and European countries are now legally bound to reduce their combined emissions of six major GHGs. India ratified the Kyoto Protocol on August 26, 2002. The Protocol came into force in February 2005. The biggest polluter of the environment, the USA, has so far not ratified the Protocol. The Kyoto Protocol set quotas on the amount of greenhouse gases countries can produce. Countries, in turn, set quotas on the emissions of businesses. Businesses that are over their quotas must buy carbon credits for their excess emissions, while businesses that are below their quotas can sell their remaining credits.

CLEAN DEVELOMENT MECHANISM (CDM) One of the provisions of the Protocol-Clean Development Mechanism (CDM)-established a framework within which the industrialized countries can meet a part of their carbon dioxide emission reduction requirements by purchasing Certified Emission Reductions (CERs) from developing countries like India. For example, a company/entity generates clean energy with emission of GHGs that are lesser than the permitted standards. This company/entity can create CERs and sell them through exchanges, like Chicago Climate Exchange (CCX) and European Climate Exchange (ECX). As on October 23, 2007, the CERs were trading between USD 2.002.10 on the Chicago Climate Exchange. A few years back, the rates were hovering between USD 4.00-6.00 per CER.

CARBON CREDITS:

CERs, also known as, carbon credits are a tradable permit scheme. They provide a way to reduce greenhouse gas emissions by giving them a monetary value. A credit gives the owner the right to emit one tonne of carbon dioxide. Carbon credits are certificates awarded to countries, groups or companies that are successful in reducing emissions of greenhouse gases below their emission quota. Companies that fail to reduce their emissions can purchase credits from those which make extra emission cuts from energy saving projects. By allowing credits to be bought and sold, companies can purchase credits to help them meet quotas for reducing emissions. For example, if an environmentalist group plants enough trees to reduce emissions by one tonne, the group will be awarded a credit. If a steel producer has an emissions quota of 10 tons, but is expecting to produce 11 tons, it could purchase this carbon credit from the environmental group. The carbon credit system looks to reduce emissions by having countries honour their emission quotas and offer incentives for being below them. Some banks in India have started financing the receivable of companies (with energy saving projects) in terms of carbon credits that are expected to accrue in future.