How to Cite:

Tiwari, D. S. (2022). Carbon trading: A tool to control global warming. International Journal of Health
Sciences, 6(S1), 5713–5722. https://doi.org/10.53730/ijhs.v6nS1.6246

Carbon trading: A tool to control global

warming

Daya Shankar Tiwari

Assistant Professor, Faculty of Law, Kalinga University, Raipur Chattisgarh

Abstract---In current scenario Global Warming has given rise to a

new form of commerce i.e. the carbon trade. Carbon trading is
advance format where firms or countries buy and sell carbon permits
as part of a program to trim out carbon emission. It is a widespread
method countries utilize in order to meet their obligations specified by
international Kyoto Protocol (1997) of United Nations Framework
Convention on Climate Change; namely the reduction of carbon
emissions in order to mitigate future climate changes. It specifically
targets carbon dioxide calculated in terms of CO2 equivalent or CO2.
India signed and ratified the Kyoto Protocol in August 2002. Since
India is exempted from framework of the treaty, it is expected to gain
from the protocol in terms of transfer of technology and related foreign
investments. India was an early player in the market and was doing
well, but after the entry of China in 2005, it gradually out performed
Indian the carbon market. The objective of the paper is to discuss the
regulatory mechanism of carbon trading in international market with
special reference to opportunities for the emissions market in Indian
context. The author has also made an attempt to throw some light on
the future prospects of carbon trading business.

Keywords---Carbon trading, global warming, control.

Introduction

Global warming has spawned a new form of commerce: the carbon trade. This
new economic activity involves the buying and selling of “environmental services,”
including the elimination of greenhouse gases from the atmosphere, which are
identified and purchased by eco-consulting firms and then sold to individual or
corporate clients to “offset” their polluting emissions. While some NGOs and
“green” businesses support the carbon trade and view it as a wining solution that
reconciles environmental protection with economic prosperity, and other
environmentalists and grassroots organizations claim that it is not the solution to
environmental problems such as global warming.

International Journal of Health Sciences ISSN 2550-6978 E-ISSN 2550-696X © 2022.

Manuscript submitted: 09 Feb 2022, Manuscript revised: 27 March 2022, Accepted for publication: 18 April 2022
5713
5714

Carbon is the universal denominator in all-polluting gases that cause global

warming. Carbon dioxide is the gas most commonly thought of as a greenhouse
gas; it is responsible for about half of the atmospheric heat retained by trace
gasses. It is produced primarily by burning of fossils fuels and deforestation
accompanied by burning and biodegradation of biomass. Analyses of gas trapped
in polar ice samples indicate that pre-industrial levels of CO2 in the atmosphere
was approximately 260 parts per million. Over the last 300 years, this level has
increased to current value of around 375 ppm; most of the increase by far has
taken place at an accelerating pace over the last 100 years. About half of the
increase in carbon dioxide in the last 300 years can be attributed to deforestation,
which still accounts for approximately 20% of the annual increase in this gas. It
is estimated that if the carbon increases in the atmosphere at the present rate
and no positive efforts are pursued, the level of carbon in the atmosphere would
go up to 800–1000 ppm by the end of current century, which may create havoc
for all living creatures on earth.1

Various firms scour the world in search of environmental services that could
offset its client’s emissions. These services are usually forests and tree-planting
projects and are known in the business as carbon assets or carbon sinks,
because trees remove carbon from the atmosphere and sequesters it in their
wood. The activity of these sinks is often called carbon sequestration.

The carbon trade is an initiative that came about in response to the Kyoto
Protocol. The Kyoto Protocol is an agreement under which industrialized countries
will reduce their greenhouse gas emissions between the years 2008 to 2012 to
levels that are 5.2% lower than those of 1990. The idea behind carbon trading is
quite similar to the trading of securities or commodities in a marketplace. Carbon
would be given an economic value, allowing people, companies or nations to trade
it. If a nation bought carbon, it would be buying the rights to burn it, and a
nation selling carbon would be giving up its rights to burn it. The value of the
carbon would be based on the capability of the country owning the carbon to
store it or to prevent it from being released into the atmosphere. A market would
be created to make easy buying and selling of the rights to emit greenhouse gases.
The industrialized nations for which reducing emissions is a daunting task could
buy the emission rights from another nation whose industries do not produce as
much of these gases. The market for carbon is possible because the goal of the
Kyoto Protocol is to reduce emissions as a collective.

On the one hand, the idea of carbon trade seems like a win-win situation:
greenhouse gas emissions may be reduced while some countries reap economic
benefit. On the other hand, critics of the idea suspect that some countries will try
exploit the trading system and the consequences will be negative. While the
proposal of carbon trade does have its merits, debate over this type of market is
inevitable since it involves finding a compromise between profit, equality and
ecological concerns. 2

1
Current science, vol 91, No. 7,10 October 2006.
2
www.investopedia.com
 5715

UNFCC and Kyoto Protocol

UNFCC

The United Nations Environment Programme (UNEP) and the World

Meteorological Organization (WMO) established the Intergovernmental Panel on
Climate Change (IPCC) in the year 1988. Its role is to assess a range of
information relevant for the understanding of the risk of human-induced climate
change.

The UN Framework Convention on Climate Change (UNFCCC) is one of a series of

international agreements and treaties on global environmental issues that were
adopted at the 1992 Earth Summit at Rio. The Convention provides the overall
policy framework for addressing the climate change issue and so forms the
foundation of global efforts to fight global warming. The ultimate goal of the
UNFCCC is: ‘Stabilization of greenhouse gas concentrations in the atmosphere at
a level that would prevent dangerous anthropogenic human induced interference
with the climate system.’ (UNFCCC, 1992).

The UNFCCC does not yet identify what the stabilization level should be, with
another 10 years probably needed before the uncertainties can be largely removed
and an ideal target GHG level decided upon. The treaty promotes action against
global warming in spite of the current uncertainty on the basis that it’s better to
be precautionary than wait until irreversible damage is done.
The UNFCCC entered into force in March 1994 following ratification by 50 of its
signatory parties. In 1995 the UNFCCC set out some guiding principles and
general commitments for the international response to climate change. This was
the first Conference of the Parties (COP).

Kyoto Protocol

The Kyoto Protocol broke new ground by defining three innovative “flexibility
mechanisms” to lower the overall costs of achieving its emissions targets. These
mechanisms enable Parties to access cost-effective opportunities to reduce
emissions, or to remove carbon from the atmosphere, in other countries. While
the cost of limiting emissions varies considerably from region to region, the effect
for the atmosphere of limiting emissions is the same, irrespective of where the
action is taken.

All these three mechanisms under the Kyoto Protocol are based on the Protocol’s
system for the accounting of targets. Under this system, the amount to which an
Annex I Party (with a commitment inscribed in Annex B of the Kyoto Protocol)
must reduce its emissions over the five year commitment period (known as its
“assigned amount”) is divided into units each equal to one ton of carbon dioxide
equivalent. These assigned amount units (AAUs)*, and other units defined by the
Protocol, contribute the basis for the Kyoto mechanisms by providing for a Party
to gain credit from action taken in other Parties that may be counted towards it
own emissions target.3

3
www.unfccc.int
5716

Regulatory instruments for flexibility under Kyoto Protocol

The three Kyoto mechanisms are:

1. Joint Implementation,
2. Clean Development Mechanism and
3. Emissions Trading.

Joint implementation

This is one of the so called 'flexibility mechanisms' are defined in Article 6 of the
Kyoto Protocol designed to help rich (annex 1) countries meet their Kyoto
commitment using methods other than directly via cuts in their own emissions.
Under Joint Implementation, an Annex I Party (with a commitment inscribed in
Annex B of the Kyoto Protocol) may implement an emission-reducing project or a
project that enhances removals by sinks in the territory of another Annex I Party
(with a commitment inscribed in Annex B of the Kyoto Protocol) and count the
resulting emission reduction units (ERUs) towards meeting its own Kyoto target.

Clean development mechanism

The clean development mechanism allows governments or private entities in rich

countries to set up emission reduction projects in developing countries. They get
credit for these reductions as 'certified emission reductions (CER's)*. This system
is different from the Joint Implementation as it promotes sustainable development
on developing countries. The Clean Development Mechanism (CDM) is the entry
point for developing countries (non-Annex I) into the Kyoto Protocol on Climate
Change. The mechanism was established under Article 12 of the Kyoto Protocol
adopted by the Third Conference of the Parties to the Framework Convention on
Climate Change on December 11, 1997.

The purpose of the CDM was defined under Article 12 of the Kyoto Protocol. The
CDM is meant to benefit both industrial and developing countries. For industrial
countries, the CDM will provide access to emission reduction credits based on
GHG abatement projects undertaken in developing countries where the costs of
reducing emissions might be considerably lower than the costs of comparable
reductions at home. The CDM provides developing countries with opportunities to
become active participants in international efforts to curb GHG emissions. The
CDM will provide a vehicle through which investment flows and the transfer of
climate-friendly technologies can take place. The CDM will also set aside a portion
of the proceeds from qualifying projects to pay administrative costs and help
those developing countries that are the most vulnerable to the adverse impacts of
climate change cope with the costs of adaptation.

The dual goals of the CDM are to promote sustainable development in developing
countries, and to allow industrialized countries to earn emissions credits from
their investments in emission-reducing projects in developing countries. To earn
credits under the CDM, the project proponent must prove and have verified that
the greenhouse gas emissions reductions are real, measurable and additional to
what would have occurred in the absence of the project.
 5717

To prevent industrialized countries from making unlimited use of CDM, Article 6.1
d) has a provision that use of CDM be ‘supplemental’ to domestic actions to
reduce emissions.

National CDM Authority

The Ministry of Environment and Forests (MoEF) deals with climate change and
CDM issues in India. It established the Designated National Authority (DNA) in
December 2003 as the National CDM Authority (NCDMA). The NCDMA is chaired
by the Secretary of MoEF. The other members are from the Ministry of External
Affairs Secretary, the Ministry of Finance Secretary, the Secretary, Department of
Industrial Policy and Promotion, the Ministry of Non-conventional Energy Sources
Secretary, the Ministry of Power Secretary, the Planning Commission Secretary
and the MoEF Joint Secretary of Climate Change. The Member-Secretary of the
NCDMA is the Climate Change Director of MoEF.

The project developers first submit the Project Concept Note (PCN) and the Project
Design Document (PDD). These documents are circulated for review by the
NCDMA members, who then call the project developers for a presentation at a
regularly scheduled once-a-month meeting. Any clarifications/additional
information from the project developers are sought when required by the NCDMA
members. If all the requirements are met, India gives host country approval. The
entire process for host country approval takes 60 days. No fees are charged by the
National CDM Authority. The project developers then present their documents to
the CDM Executive Board for approval and registration.

Emission Trading

Article 17 of the Kyoto Protocol authorizes Annex B countries to engage in

international emissions trading. This means that the Annex B countries will have
the option of buying or selling some portion of their emission allowances. These
allowances are called "assigned amount units" (AAUs) in the Kyoto Protocol.
Emissions’ trading is one of the flexibility mechanisms allowed under the Kyoto
Protocol to enable countries to meet their emissions reduction target.
Countries/companies with high internal emission reduction costs would be
expected to buy certificates from countries/companies with low internal emission
reduction costs. The latter entities would also be expected to maximize their
production of low cost emission reduction so as to maximize their ability to sell
certificates to high cost entities. The overall outcome is that the emission
reduction target is met, but at a much lower cost than would be incurred by
requiring each entity to achieve the emission reduction target on their own.

Principles of Kyoto Protocols

At its heart, Kyoto establishes the following principles:

• Kyoto is underwritten by governments and is governed by global legislation
enacted under the UN’s aegis.
• Governments are separated into two general categories: developed
countries, referred to as Annex 1 countries (who have accepted GHG
5718

emission reduction obligations); and developing countries, referred to as

Non-Annex 1 countries (who have no GHG emission reduction obligations).
• Any Annex 1 country that fails to meet its Kyoto target will be penalized by
having its reduction targets decreased by 30% in the next period.
• By 2008-2012, Annex 1 countries have to reduce their GHG emissions by
around 5% below their 1990 levels (for many countries, such as the EU
member states, this corresponds to some 15% below their expected GHG
emissions in 2008). Reduction targets expire in 2013.
• Kyoto includes "flexible mechanisms" which allow Annex 1 economies to
meet their GHG targets by purchasing GHG emission reductions from
elsewhere. These can be bought either from financial exchanges (such as
the new EU Emissions Trading Scheme) or from projects which reduce
emissions in non-Annex 1 economies under the Clean Development
Mechanism (CDM), or in other Annex-1 countries under the JI.
• Only CDM Executive Board-accredited Certified Emission Reductions (CER)
can be bought and sold in this manner. Under the aegis of the UN, Kyoto
established this Bonn-based Clean Development Mechanism Executive
Board to assess and approve projects (“CDM Projects”) in Non-Annex 1
economies prior to awarding CERs. (A similar scheme called “Joint
Implementation” or “JI” applies in transitional economies mainly covering
the former Soviet Union and Eastern Europe).

Carbon Trading

It is a system whereby countries or individual companies are set emission targets.

Those that cannot meet their targets can buy credit from countries or companies
that bear theirs. In economics, carbon trading is a form of emissions trading that
allows a country to meet its carbon dioxide emissions reduction commitments,
often to meet Kyoto Treaty requirements, in as low a cost as possible by utilizing
the free market. It is a means of privatizing the public cost or societal cost of
pollution by carbon dioxide.

Carbon trading is the term used for the trading of certificates representing various
ways in which carbon-related emissions reduction targets might be met.
Participants in carbon trading buy and sell contractual commitments or
certificates that represent specified amounts of carbon-related emissions that
either:
• are allowed to be emitted;
• comprise reductions in emissions (new technology, energy efficiency,
renewable energy); or
• comprise offsets against emissions, such as carbon sequestration (capture
of carbon in biomass).

People buy and sell such products because it is the most cost-effective way to
achieve an overall reduction in the level of emissions, assuming that transaction
costs involved in market participation are kept at reasonable levels. It is cost-
effective because the entities that have achieved their own emission reduction
target easily will be able to create emission reduction certificates "surplus" to their
own requirements. These entities can sell those surpluses to other entities that
would incur very high costs by seeking to achieve their emission reduction
 5719

requirement within their own business. Similarly, sellers of carbon sequestration

provide entities with another alternative, namely offsetting their emissions against
carbon sequestered in biomass.4

Legal aspect of carbon trading in India

The Multi Commodity exchange started future trading in the year 2008 after
Government of India recognized carbon credit as commodities on 4th of January.
The National Commodity and Derivative Exchange by a notification and with due
approval from Forward Market Commission (FMC) launched Carbon Credit future
contact whose aim was to provide transparency to markets and help the
producers to earn remuneration out of the environment projects.

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, of 1872.

Under the present provision of the Forward Contracts Regulation Act, the trading
of forward contracts will be considered as void if no physical delivery is issued
against these contracts. To rectify this The Forward Contracts (Regulation)
Amendment Bill 2006 was introduced in the Indian Parliament. The Union
Cabinet on January 25, 2008 approved the ordinance for amending the Forward
Contracts (Regulation) Act, 1952. This ordinance has to be passed by the
Parliament and is expected to come up for consideration this year. This Bill also
amends the definition of ‘forward contract’ to include ‘commodity derivatives’.
Currently the definition only covers ‘goods’ that are physically deliverable.
However a government notification on January 4th paved the way for future
trading in CER by bringing carbon credit under the tradable commodities.

Benefits of carbon trading

The benefits to the general public of trading emission reduction/offset certificates

in a market include:
1. The reduction in overall cost of meeting emission reduction targets, as
mentioned above;
2. The progressively improved definition of a "price" for carbon, particularly as
the market becomes more liquid and active, and assuming that all carbon
certificate products are fungible, meaning that they are equivalent ways of
addressing emission reduction;
3. The opportunity to generate more income from activities that previously
attracted no additional revenue, such as investment in emission reduction,
renewable energy generation, greenhouse friendly fuels and carbon

4
. The Carbon Trade, BBC News, Thursday 20 April 2006.
5720

sequestration.
4. The ability to use revenue from carbon sequestration to help fund additional
planting of trees and other vegetation, for benefits such as salinity
amelioration, biodiversity enhancement, conversion to greenhouse gas
friendly fuels and energy, and employment and wealth creation in rural
areas.

Carbon market: the regulatory instruments

The emerging global carbon market is growing exponentially as states and

countries around the world use the power of the “market’ to control greenhouse
gas emissions. In the US, a voluntary market has sprung up to help provide a
method to track these emission reductions for concerned individuals and
businesses. Carbon offset and renewable energy credits typically represent
investments in alternative energy enterprises, energy efficiency technology
development and forestry- or agricultural-related (carbon sequestration) projects.
Evolution Sage has made an organizational decision to only support projects that
cut emissions directly, such as energy efficiency and renewable energy efforts.

Carbon Market refers to the buying and selling of emissions permits that have
been either distributed by a regulatory body or generated by greenhouse gas
emission reductions projects. Six greenhouse gases are generally included in
“carbon: markets: carbon dioxide, methane, nitrous oxide, sulfur hexafluoride,
hydro fluorocarbons and perfluorocarbons. Carbon markets enable units of
pollution to be converted into units of property, making it possible to exchange
pollution from one place in the world with somewhere else. This leads to polluters
having to decide between accepting the cost of added pollution, changing of fuel
mixes or conserving of energy.

Examples of carbon trading in India

Jindal Vijaynagar Steel

The Jindal Vijaynagar Steel has recently declared that by the next ten years it will
be ready to sell $225 million worth of saved carbon. This was made possible
because their steel plant uses the Corex furnace technology which prevents 15
million tons of carbon from being discharged into the atmosphere.

Powerguda in Andhra Prades

The village in Andhra Pradesh was selling 147 tonnes equivalent of saved carbon
dioxide credits. The company has made a claim of having saved 147 MT of CO2.
This was done by extracting bio-diesel from 4500 Pongamia trees in their village.

Handia Forest in Madhya Pradesh

In Madhya Pradesh, it is estimated that 95 very poor rural villages would jointly
earn at least US$300,000 every year from carbon payments by restoring 10,000
hectares of degraded community forests.
 5721

Conclusion

Carbon trading is an emerging concept which is strong tool for mitigating risks
the globe is facing. Though some major pollutants are signatories to the Kyoto
protocol, it would take efforts of other nations in building up a mechanism that
ensures the temperature rise due to the GHG emissions being restricted to the
envisaged 2 degree level. The flow of investments/ technology from develops
countries to developing ones is aided by the unprecedented economic growth as
witnessed in Asia. Such rapid growth at the cost of environment would put the
future generations in jeopardy. Hence, developing nations like ours are better off
accepting Voluntary Emission cut which would ensure their readiness to face
compulsory cuts as and when they are imposed on them.

Carbon emission trading has been steadily increasing in recent years. According
to World Bank’s Carbon Finance Unit, a 374 million metric tons of carbon dioxide
were exchanged through projects in 2005, a 240% increase relative to 2004 which
was itself 41% increase relative to 2003.

Thus, Carbon Emission Trading can be seen as powerful tools in the hands of
powerful nations to maintain economic superiority and make poor countries
accountable for their inefficiencies which lead to a disparity in the concept of
Carbon Emission Trading.

References

1. Presentation on Carbon Credits and Kyoto Protocol at BIMT, 16th october

2008
2. Kyoto protocol status(pdf). UNFCCC. Retrieved on 2006-11-07.
3. Kyoto Protocol: Status of Ratification, 10 July 2006 (PDF). UNFCC. Retrieved
on October 30, 2006.
4. National Communication (2004). India’s Initial National Communication to
the United Nations Framework Convention on Climate Change. Submitted by
the Ministry of Environment and Forests, Government of India.
http://www.natcomindia.org.
5. Pandey, S. 2006.Plant roots and Carbon Sequestration, Current science, vol
91, No. 7,10 October 2006.
6. UN, 1997. Kyoto Protocol to the UN Framework Convention on Climate
Change. United Nations, New York.
7. UNEP, UCCEE & UNCTAD, 2002.An emerging market for the environment: A
guide to emissions trading, United Nation Publication, Denmark, pp.4-10.
8. UNFCCC, 1992. United Nations Framework Convention on Climate Change.
Convention on Climate Change.
http://www.unfccc.de/resource/conv/index.html
9. UNFCCC, 1997. Kyoto Protocol to the United Nations Framework Convention
on Climate Change. http://www.unfccc.int/
10. UNFCCC, 1998. Kyoto Protocol to the United Nations Framework Convention
on Climate Change (with addendum). Document FCCC/ CP/1997/7/Add.1.
http://www.unfccc.de/resource/docs/convkp/kpeng.pdf.
11. Planning Commission Report for operationalising Clean Development
Mechanism (CDM), Govt. of India
5722

12. Bhatia, Jatinder. S. and Harsh Bhargava: 2006, 'Global Warming and Clean
Development Mechanism Projects: State and Trends in India', The ICFAI
Journal of Environmental Economics, 4(3): 71-81.
13. Bhatia, Jatinder. S. and Harsh Bhargava: 2006, 'An Insight into Carbon
Trading: Understanding the Behaviour of Emissions Market with a Financial
Perspective', The ICFAI Journal.
14. Agarwal,S.K. (2006) Accounting and Taxation Aspects of Carbon Trading.
15. Silverstone, K (2002) ‘Emission trading: Sending Pollution Up in the Smoke,
Fortune.