Carbon Emissions Trading: Making the World a Better Place ?

Posted in Finance Articles, Total Reads: 4875 , Published on May 17, 2011

India is one of the fastest growing economies of the world. Industries form a significant part of the economy which includes automobiles, mining, manufacturing, equipment and machinery etc. These also contribute a lot to the emission of harmful gases which in turn has ill effects on the climate. The Government of India is all set to create the world's first market for trading credits for energy savings. With the help of this, the Government expects to set compulsory energy-savings targets for energy-intensive sectors such as cement, aluminum, steel, power, textiles, fertilizers, railway, paper and pulp. The country's Bureau of Energy Efficiency is working on a program to establish credits for industrial plants that save energy beyond the government requirement. The plan has been modeled after emissions-trading markets at work in the EU.


Carbon Trading-A commodity or a resource ?

India-based Multi Commodity Exchange (MCX) launched futures trading in carbon credits in India. Under the energy- savings plan, separate targets would be established for each large industrial unit and plant in order to take into account the different sizes and type of companies in each sector. The mandatory reductions would then go into effect three years later. Companies surpassing energy savings requirements would get credits that can be sold through existing power exchanges to companies that fail to meet their targets. Companies failing to meet targets that do not buy credits would then be penalized by the government. The PM’s climate council is responsible for analyzing reporting and approving the energy saving market.

The move is part of India's National Action Plan on Climate Change. India has decided one of its best contributions could be to use less energy from polluting sources because despite being growing stably in the industrial sector, India has quite low emissions. India has generated about 30 million carbon credits and is one of the largest beneficiaries in the carbon credit trade, according to MCX. Under the plan, private companies would be responsible for measuring energy educations.

What is Emissions Trading?

Emissions trading is an governmental approach which is used to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants. It is sometimes called cap and trade.

A central authority (usually a government or international body) sets a limit or cap on the amount of a pollutant that can be emitted. Companies or other groups are issued emission permits and are required to hold an equivalent number of allowances (or credits) which represent the right to emit a specific amount. The total amount of allowances and credits cannot exceed the cap, limiting total emissions to that level. Companies that need to increase their emission allowance must buy credits from those who pollute less. The transfer of allowances is referred to as a trade. Thus effectively the buyer has to pay a charge for polluting, while the seller is rewarded for reducing emissions by a significant amount. Thus pollution reduction at the lowest possible cost to society would be achieved having positive results in preventing climate change.

International Emissions Trading Association (IETA)

The International Emissions Trading Association or the IETA, created in June 1999, is a nonprofit business organization to establish a functional international framework for trading in greenhouse gas emission reductions.

As of March 2009, IETA comprises more than 160 international companies from OECD and non-OECD countries. IETA has formed several partnerships such as with, among others, the World Bank, Eurelectric, the World Business Council for Sustainable Development (WBCSD) and the California Climate Action Registry.

IETA is dedicated to ensuring that the objectives of the United Nations Convention on Climate Change and ultimately climate protection are met through the establishment of effective systems for trading in greenhouse gas emissions by businesses, in an economically efficient manner while maintaining societal equity and environmental integrity.

India and Emissions Market

Worldwide trading in emissions added up to less than $400million in 2008. But it is early days yet. Turnover is growing rapidly, as is the price at which emissions are being traded. About 107million tonnes of carbon dioxide equivalent (tCO2e) was exchanged in 2004 through `Kyoto Protocol' projects, mostly purchased by rich countries in developing countries, emerging economies and in countries with economies in transition; up 38 per cent compared to the 78 million tCO2e traded in 2003. It is estimated that 43million tCO2e have been exchanged so far this year. Prices for project-based emissions increased by 20-25 per cent over the last year. Verified Emissions Reductions now trade at a weighted average price of $4.22. Certified Emissions Reductions command a premium of one dollar per tCO2e.

Critics of carbon trading, such as carbon trade watch, argue that it places disproportionate emphasis on individual lifestyles and carbon footprints, distracting attention from the wider, systemic changes and collective political action that needs to be taken to tackle climate change.

Industrialization would seemingly grow in the next few decades to cater to the needs of the ever growing population and human demands. This would indirectly have irreversible ill-effects on the climate. Thus, carbon emission trading would just make sure that the damage to mother- nature remains within limited boundaries.


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