As nations have progressed we have been emitting carbon, or
gases which result in warming of the globe. Some decades ago a debate started
on how to reduce the emission of harmful gases that contributes to the
greenhouse effect that causes global warming. So, countries came together and
signed an agreement named the Kyoto Protocol.
The Kyoto Protocol has created a mechanism under which
countries that have been emitting more carbon and other gases (greenhouse gases
include ozone, carbon dioxide, methane, nitrous oxide and even water vapour)
have voluntarily decided that they will bring down the level of carbon they are
emitting to the levels of early 1990s.
Developed countries, mostly European, had said that they
will bring down the level in the period from 2008 to 2012. In 2008, these
developed countries have decided on different norms to bring down the level of
emission fixed for their companies and factories.
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 and help them set up new technology that is
eco-friendly, thereby helping developing country or its companies 'earn'
credits.
India, China and some other Asian countries have the
advantage because they are developing countries. Any company, factories or farm
owner in India can get linked to United Nations Framework Convention on Climate
Change and know the 'standard' level of carbon emission allowed for its outfit
or activity. The extent to which I am emitting less carbon (as per standard
fixed by UNFCCC) I 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.
Carbon credits are generated by enterprises in the
developing world that shift to cleaner technologies and thereby save on energy
consumption, consequently reducing their greenhouse gas emissions. For each
tonne of carbon dioxide (the major GHG) emission avoided, the entity can get a
carbon emission certificate which they can sell either immediately or through a
futures market, just like any other commodity.
The certificates are sold to entities in rich countries,
like power utilities, who have emission reduction targets to achieve and find
it cheaper to buy 'offsetting' certificates rather than do a clean-up in their
own backyard.
