Financial Risk Management

Research Note
Carbon Trading in India: Growth and Future

Article Details

Pub. Date	: Mar, 2022
Product Name	: The IUP Journal of Financial Risk Management
Product Type	: Article
Product Code	: IJFRM050322
Author Name	: Sachita Yadav*
Availability	: YES
Subject/Domain	: Finance Management
Download Format	: PDF Format
No. of Pages	: 6

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Introduction

The 1992 Kyoto Protocol, an international treaty under the United Nations Framework Convention on Climate Change (UNFCCC), focuses on controlling carbon emissions. There are three mechanisms in Kyoto Protocol:

Emissions trading;

The Clean Development Mechanism (CDM); and

Joint implementation.

Emission trading is a mechanism under which two developed nations could take any project of any country. The other mechanism of Kyoto Protocol is to do trading between developed and developing countries. Under this mechanism, developing countries can undertake projects that help in reducing the carbon emission, and the reduction is to be calculated on a baseline scenario. This would result in reduction in the emission of harmful gases. Then the developed country purchases the certified emission reduction from the developing country and this is considered as a compliance tool. One ton of CO2 is equivalent to one carbon credit. To reduce carbon emission, there is a need for new technologies. Global carbon market was initiated in 2008 and a billion ton of carbon trading happened.

Introduction

Carbon trading, as the name implies, involves trading in carbon through a market system with the aim to reduce greenhouse gases by connecting it to finance. This is an initiative by the financial markets to check global warming. Developed nations have made an attempt to reduce their carbon emissions by making investments in carbon lowering schemes in developing nations. To control carbon emission, Kyoto Protocol has fixed a cap for regional, national and international levels. If a country is generating carbon below that cap, it is creating carbon credit. This carbon credit can be sold in the carbon trading market. Another country generating more carbon than the permitted limit may purchase the carbon credit from the carbon trading market and thus can save itself from penalty imposition. "India is the biggest beneficiary of carbon trading and it is expected that over a period of time India will gain $5 to $10 bn. It is high time India evolves a proper policy to deal with carbon trading"¹.

This research note focuses on the concept of carbon credit and trading; growth of carbon trading market in India; and the scope and difficulties in this regard.