Carbon Credits and how it works in various countries

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 – it’s essentially an offset for producers of such gases.

The trading of Carbon Credit started back in 1997 when 180 countries signed Kyoto Protocol to reduce their carbon emissions between 2008- 2012 to 5% below 1990 levels, the agreement had set the emission reduction targets for several countries signed for it, unfortunately never meet, hence in 2001 USA pulled out from the protocol followed by others later.

The Kyoto Protocol was divided countries into two categories; industrialized and developing economies. The Industrialized countries operated in their own emissions trading market. In a condition where a country emitted less than its target amount of hydrocarbons, that country could sell its surplus credits to countries that didn’t reach its Kyoto level goals.

How Does Carbon Credit Work?

For minimizing the greenhouse gases emissions, Governments or other regulatory authorities have set the caps on the greenhouse gas emissions produced by the company.

For some companies which can’t afford for immediate reduction of emissions, it isn’t viable to reduce the emission, hence they purchase carbon credits to comply with the emission cap.

And on other hand, companies which can successfully reduce the emissions of greenhouse gases are usually awarded with additional carbon credits. Later, the surplus of the carbon credit could be used to subsidize the reduction emissions for future projects.

There are two types of Carbon Credit as follows:

a)???Voluntary emissions reduction (VER): These are a type of carbon offset exchanged in the voluntary or over-the-counter market for carbon credits.

b)???Certified emissions reduction (CER): These are a type of emissions unit (or carbon credits) issued by the Clean Development Mechanism (CDM) Executive Board for emission reductions achieved by CDM projects and verified by a DOE (Designated Operational Entity) under the rules of the Kyoto Protocol.

?Carbon Credit Implementation & Current Scenario by Countries around the globe

1.???New Zealand- a trading scheme is their government’s main tool for reducing emissions, known as New Zealand Emissions Trading Scheme (NZ ETS) which was setup in 2008. The purpose of the scheme is to meet the international obligations under Paris Agreement & to meet their 2050 target set by the Climate Change Response Act 2002 & emissions budget. Participants in the New Zealand Emissions Trading Scheme (ETS) are required to meet a number of obligations in the scheme.

?All sectors of New Zealand’s economy apart from agriculture pay for carbon pollutants through it, making it one of the world’s most wide-ranging emissions trading schemes.

There are currently around 40 market participants in the New Zealand scheme. Auctions, managed by New Zealand’s Exchange (NZX) and the European Energy Exchange (EEX), are run every calendar quarter, generating around NZD $200m

2.???Japan- They have introduced a scheme called, The J-Credit Scheme which is designed to certify the amount of greenhouse gas emissions reduced and removed by sinks within Japan.

Under the J-Credit Scheme, the government certifies the amount of greenhouse gas emissions (such as CO2) reduced or removed by sinks through efforts to introduce energy-saving devices and manage forests, as "credit.“ which is totally managed by the Central Government.

In recent update in Joe Biden’s Climate change summit it has set a target to continue strenuous efforts in its challenge to meet the lofty goal of cutting its emission by 50 percent.

By 2030, Japan says that about 100 million tonnes of CO2 will be avoided through international carbon trading using the country's Joint Crediting Mechanism (JCM).

JCM is a system to cooperate with developing countries for reducing greenhouse gas emissions, in which the result of reduction is assessed as contribution by both partner countries and Japan.

3.???Australia- The carbon market relates to the production and buying and selling of Australian carbon credit units (ACCUs). These units (or credits) are generated primarily from land restoration projects that re-establish native vegetation in the landscape and in turn remove carbon dioxide from the atmosphere. The country aims of cutting country-wide GHG emissions by 26-28% compared with 2005 levels by 2030.

AN Emissions Reduction Fund was introduced by the Australian Federal Government (Federal Government) in late 2014 as part of the Federal Government's climate change policies. The aim of the fund is to provide an incentive for business, land owners, and governments to reduce carbon emissions or utilise carbon abatement through carbon storage.

Under the scheme, landowners and farmers who adopt approved ERF methods can earn Australian Carbon Credit Units (ACCUs). These units can be sold to the government or on the secondary private market to generate additional income streams, while benefitting the environment. Emissions reduction methods set out the rules for estimating emissions reductions from different activities.

4.???United States- In the United States, several voluntary and regulatory markets have emerged which allow for purchases of carbon offsets. In many of these markets, agricultural conservation can be a source of offsets. These markets can help incentivize carbon sequestration and GHG mitigation in the agricultural sector while providing farmers compensation for environmental benefits.

In the United States, eleven states participate in the Regional Greenhouse Gas Initiative (RGGI), a cap-and-trade program established in 2009. Cap and trade is an approach that harnesses market forces to reduce emissions cost-effectively. There, California began operating a cap-and-trade program in 2013.

5.???India- India’s carbon market is one of the fastest growing markets in the world and has already generated approximately 30 million carbon credits, the second highest transacted volumes in the world. The carbon trading market in India is growing faster than even information technology, biotechnology and BPO sectors. Nearly 850 projects with an investment of Rs 650,000 million are in the pipeline. Carbon is also now being traded on India’s Multi Commodity Exchange. It is the first exchange in Asia to trade carbon credits.

?Carbon credit in India is traded on NCDEX only as a future contract. Futures contract is a standardized contract between two parties to buy or sell a specified asset of standardized quantity and quality at a specified future date at a price agreed today (the futures price). The contracts are traded on a future exchange. These types of contracts are only applicable to goods which are in the form of movable property other than actionable claims, money and securities. Forward contracts in India are governed by the Indian Contract Act, 1872.]

The current government has set robust growth targets for the country’s manufacturing sector, which includes increasing its contribution to GDP from the current 16 percent to 25 percent by 2025.

Even though India is the largest beneficiary of carbon trading and carbon credits are traded on the MCX, it still does not have a proper policy for trading of carbons in the market. As a result, the Centre has been asked by The National Commodity and Derivatives Exchange Limited (NCDEX) to put in place a proper policy framework for allowing trading of certified emission reductions (CERs), carbon credit, in the market. Also, India has huge number of carbon credits sellers but under the present Indian law, the buyers based in European market are not permitted to enter the market. To increase the market for carbon trading Forward Contracts (Regulation) Amendment Bill has been introduced in the Parliament. This amendment would also help the traders and farmers to utilize NCDEX as a platform for trading of carbon credits.

?Summary

It is estimated that demand for carbon credits could increase by a factor of 15 or more by 2030 and by a factor of up to 100 by 2050. Overall, the market for carbon credits could be worth upward of $50 billion in 2030.

The market size for carbon credits trading is around $300 billion per year, and this is set to become twice as large.