Carbon trading is the name given to the exchange of emission permits. This transition may take place within the economy or may take the form of international transition. There are two types of carbon trading namely emission trading and offset trading.
Carbon trading is a new mechanism designed to allow firms that fail to meet the emission standards set by the 1997 Kyoto protocol, to buy credits from other firms that meet their target The Kyoto Protocol also envisaged carbon credit trade between countries with carbon sinks i.e. planted forests and other that produce higher level of pollution. Each Auuex-I has been assigned fixed amount in Kyoto protocol agreement. This amount is actually the amount of emission which is to be reduced by the concerned country.
Such fixed amount implies that the country is permitted to emit the remaining amount. This emission allowance is actually one kind of carbon credit. The total amount of allowance is then subdivided into certain units. The units are expressed in terms of carbon equivalent. Each unit gives the owner the right to emit one metric tone of carbon dioxide or other equivalent green house gases.
Another variant of carbon credit is to be earned by a country by investing some amount in such project, known as carbon projects which will emit lesser amount of green house gas in the atmosphere. The exchange of first variant of carbon credit is known as emission trading or cap-and trade whereas exchange of second variant of carbon credit is termed as offset trading. It is one of the ways through which countries can meet their obligation under the Kyoto Protocol.
The world’s only mandatory carbon trading programme is the European Union. Emissions Trading Scheme, created in conjunction with the Kyoto Protocol, it took effect in 2005, and it caps the amount of large installations, such as power plants and factories in the European Union countries.
Global carbon trading has gained momentum. The world watch Institute drawing from various studies, places the value of the trade at about 60 billion dollars in 2007. Asian countries are biggest sellers and western countries are biggest buyers.
India is considered a major supplier of certified emission reductions because of the largest number of projects registered with the clean development mechanism. More than a hundred projects from India have been issued CERs for a total of 25 million. India has also taken a highly proactive approach to CDM from the very beginning and playing a major role in the design of the mechanism and its modalities. India also ranks first in registration of CDM projects followed by Brazil, Mexico and China. About 740 million CERs are expected from registered projects till 2012. The large scale CDM development in India is due to the fact that the country is endowed with skilled human resources to handle this task.
The growing Indian economy and its diverse sectors offer huge potential for emission reduction. Most of the CDM projects in renewable energy sector. The energy efficiency and industrial process were other sector. However, the average six of the CDM projects from India is 3000-5000 CERS per annum per project. India has also offered the largest number of CDM projects so far to the CDM Executive Board.