Carbon Trading

CARBON TRADING
Over the last hundred years, the amount of carbon dioxide in the atmosphere has increased by 28 percent (and analysts estimate that it could rise by more than 40 percent in the next hundred years) due to increased global emissions. To check the increasing menace of greenhouse gases, Kyoto Protocol was adopted for use on 11 December 1997 in Kyoto, Japan and which entered into force on 16 February 2005. The Kyoto Protocol has created a mechanism under which countries that have been emitting more carbon and other gases have voluntarily decided that they will bring down the level of carbon they are emitting to the levels of early 1990s ( 5.2 % below).
The six greenhouse gases to be limited are:
 Carbon dioxide
 Methane
 Nitrous oxide
 Hydro fluorocarbons
 Per fluorocarbons
 Sulphur hexafluoride
The Protocol provides for three mechanisms that enable countries or operators in developed countries to acquire greenhouse gas reduction credits
 Under Joint Implementation (JI) a developed country with relatively high costs of domestic greenhouse reduction would set up a project in another developed country.
 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.
 Under International Emissions Trading (IET) countries can trade in the international carbon credit market to cover their shortfall in allowances. Countries with surplus credits can sell them to countries with capped emission commitments under the Kyoto Protocol
The size of each country's annual limit in the 2008-2012 period is expressed as a percentage of its emissions level as measured in 1990 (i.e. the baseline year). A company has two ways to reduce emissions. One, it can reduce the GHG (greenhouse gases) by adopting new technology or improving upon the existing technology to attain the new norms for emission of gases. Or it can tie up with developing nations using any of above methods. Under UNFCCC the polluters cannot buy 100 per cent of the carbon credits they are required to reduce.
All countries have been divided into Annex -1 (industrialized or developed) and non- Annex -1 (developing like India and China). Factories or farm owner in non Annex-1 countries can get linked to UNFCC and know the 'standard' level of carbon emission allowed for its outfit or activity. The extent to which they are emitting less carbon (as per standard fixed by UNFCCC) they get credited in a developing country. This is called carbon credit. These credits are bought over by the companies of
developed countries -- mostly Europeans -- because the United States has not signed the Kyoto Protocol.

Kyoto enables a group of several Annex I countries to join together to create a market-within-amarket. The EU elected to be treated as such a group, and created the EU Emissions Trading Scheme (ETS). The EU ETS uses EAUs (EU Allowance Units), each equivalent to a Kyoto AAU.
TRADING
Like any other asset, carbon credits are tradeable instruments with a transparent price; financial investors can buy them on the spot market for speculation purposes, or link them to futures contracts. A high volume of trading in this secondary market helps price discovery and liquidity, and in this way helps to keep down costs.
MCX (Multi Commodity Exchange, India) has entered into a strategic alliance with CCX (Chicago Climate Exchange) in September 2005 to initiate carbon trading in India. MCX can list its mini version of ECX Carbon Financial Instruments (CFI) and Chicago Climate Futures Exchange (CCFE)
Sulphur Financial Instrument (SFI) on the MCX trading platform.MCX is the futures exchange. The commodity traded on CCX is the CFI contract, each of which represents 100 metric tons of CO2 equivalents.
CFI contracts are comprised of Exchange Allowances and Exchange Offsets. Exchange Allowances are issued to emitting Members in accordance with their emission baseline and the CCX Emission Reduction Schedule. Exchange Offsets are generated by qualifying offset projects. People here are
getting price signals for the carbon for the delivery in next five years. The exchange is only for Indians and Indian companies. Every year, in the month of December, the contract expires and at that time people who have bought or sold carbon will have to give or take delivery. They can fulfil the deal prior to December too, but most people will wait until December because that is the time to meet the norms in Europe. People who are coming to buy from Indians are actually financial investors.
They are thinking that if the Europeans are unable to meet their target of reducing the emission levels by 2009 or 2010 or 2012, then the demand for the carbon will increase and then they may make more money.

Terms in brief:
CER (certified emission reductions (CERs) - One tonne of carbon dioxide reduced through the Clean
Development Mechanism (CDM) project, when certified by a designated entity, becomes a tradable
CER
UNFCC: United Nations Framework of Climate Change Convention (UNFCCC).
CCX: Chicago Climate Exchange, Inc.