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Understanding Carbon Credit

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Understanding Carbon Credit

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Second half of the 20th century saw numerous international agreements which were signed to save the earth from persistently increasing environment pollution which is degrading the ecosystem and Kyoto Protocol under United Nations Framework Convention for Climate Change (UNFCCC) was the most significant agreement signed by the world community. Kyoto protocol provided the quantified targets in terms of Carbon dioxide equivalent to reduce the emission of polluting gases. However it calls were developed countries to reduce the target and while developing countries were not given the binding targets. The Kyoto Protocol provides for three mechanisms that enable countries or operators in developed countries to acquire greenhouse gas reduction credit-
 
1.Under Joint Implementation (JI) a developed country with relatively high costs of domestic greenhouse reduction would set up a project in another developed country.
 
2.Under the Clean Development Mechanism (CDM) a developed country can 'sponsor' a greenhouse gas reduction project in a developing country where the cost of greenhouse gas reduction project activities is usually much lower, but the atmospheric effect is globally equivalent. The developed country would be given credits for meeting its emission reduction targets, while the developing country would receive the capital investment and clean technology or beneficial change in land use.
 
3.Under International Emissions Trading (IET) countries can trade in the international carbon credit market to cover their shortfall in Assigned amount units. Countries with surplus units can sell them to countries that are exceeding their emission targets. These carbon projects can be created by a national government or by an operator within the country. In reality, most of the transactions are not performed by national governments directly, but by operators who have been set quotas by their country
 
Carbon credits are a part of international emission trading norms. One carbon credit signifies one tonne of carbon dioxide equivalent reduction. They incentivize companies or countries that emit less carbon. The total annual emissions are capped and the market allocates a monetary value to any shortfall through trading. Businesses can exchange, buy or sell carbon credits in international markets at the prevailing market price. India and China are likely to emerge as the biggest sellers and Europe is going to be the biggest buyers of carbon credits.
 
If British Petroleum is running a plant in the United Kingdom and is emitting more gases than the accepted norms of the UNFCCC, it can tie up with a company in India or China under the Clean Development Mechanism. It can buy the 'carbon credit' by making Indian or Chinese plant more environment savvy with the help of technology transfer. It can tie up with any other company like Indian Oil, or anybody else, in the open market. China and India are ensuring that new technologies for energy savings are adopted so that they become entitled for more carbon credits. They are selling their credits to their counterparts in Europe. This is how a market for carbon credit is created. Every year European companies are required to meet certain norms, beginning 2008.  By 2012, they will achieve the required standard of carbon emission. So, in the coming five years there will be a lot of carbon credit deals.
 
Today India is one of the largest producers of carbon credits in the world. Carbon credits are considered to be sunrise sector in India and magnitude can be surmised from the fact that in August 2011, the Income Tax Department had its sights on the carbon credits trading business in the country with a view to crack down on tax evasion in the sector, which was estimated at Rs 1,000 crore. According to IT department, as many as 200 small and large Indian companies are trading in carbon credits and have also stated this in their annual reports.
Carbon credits are traded at the Chicago Climate Exchange, the European Climate Exchange and the Multi-Commodity Exchange of India (MCX), which launched futures trading in carbon credits in 2009.
 
However current international events also predicts a gloomy future for carbon credit market.. Carbon Credit business was adversely affected by slow down in Europe as the futures traded on the European Climate Exchange hit a high of just over 24 euros in July 2008, but plunged to 7.35 euros in early 2009. However they are stabilized later and was traded at around 12 to 13 euros in 2010, reached 19.5 Euros in early 2011 but failure of international community to start negotiations on emission reduction for the post Kyoto modalities led to the crash in prices and situation is once again gloomy. CERs fell to a record low of 3.80 euros ($4.92) on December 14 2011. 
 
Thus the failure of international community to agree upon the terms of agreement is taking toll on the business. Major bone of contention between the developed and the developing countries is the reduction targets with respect to the developing countries. Developing countries are for binding targets for developing countries like India and China which are also a significant producer of carbon in the world but developing countries insist that their per capita emission levels are still much lower than that of developed world and therefore vehemently oppose any binding targets.
 
Lack of consensus will affect the carbon credit business severely in the developing countries and thereby closing the doors for an opportunity to increase the green income in developing countries but not for merely economic reasons, agreement is necessary for the clean development, sustainable development, green development and wholesome development. Already, affects of climate change has become quite visible in the form of more frequent  spells of drought and floods, drying of Aral sea in Central Asia, more frequent occurrence of el nino and la nina (a phenomenon taking place at Peruvian coast effecting Indian climate as well), melting of snow in Himalayas and Antarctica etc. 
 
Hence every country must proactively endeavor for an acceptable agreement where developing country must also come forward with some amount of responsibility. Already much damage has been done and instruments like carbon credits, joint implementation etc provides the necessary incentive for the green development and therefore pro active effort for rejuvenation of carbon credit market is necessary.
 
For such topics of Basic understanding on the subject matter which will keep you motivated to crack  GD & PI at CAT 2011, NMAT, XAT, SNAP  and forthcoming  exams Feb.MAT2012, ATMA, MHCET 2012, CMAT 2012 along with various other state specific MBA entrance tests. This would also be useful for WAT, Extempore speaking, Essays. 
Please stay tuned to   www.mbarendezvous.com  Portal with Management by objective approach

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