Carbon credits: Understanding the factors behind low price of CERs from Indian CDM Projects

Abstract

The threat posed by climate change has severe long term impacts on people and environment. This climate change is a culmination of several natural as well as human factors. Focussing more on the anthropogenic climate change, it has been found that the human influence has been mostly through increasing emissions of green house gases (GHGs) such as carbon dioxide and methane. Particularly, actions like combustion of coal, oil and gas for energy and changes in the land use alone contribute to emission of 8-9 billion tonnes of carbon dioxide in the atmosphere every yearxxi. With a growing public consciousness about such human influence on climate change, the global community is addressing this challenge through a multilateral and co-operative process to establish a carbon market which will enable buying and selling of the rights to emit greenhouse gases. This would help to tackle the fundamental problem of tackling global warming by issuing ‘allowances’ or ‘credits’. This way a market has been created that has created two choices for the market participants; either they buy rights to create pollution or spend money to control pollution themselves. This works on a cap and trade mechanism. A cap is placed on the amount of pollution that can be emitted by an entity from specific sources say electricity/steel production etc. Based on these sources the net amount of pollution is then allocated in the form of an allowance to the entity. For emitting more carbon than that is allowed as per the cap, the concerned entity has to purchase additional allowances from entities which have excess of it (as they would have adopted ‘cleaner’ technologies. Similarly, many emission trading schemes also include a baseline and credit system by virtue of which, entities can purchase emission credits or allowances from sources which have emissions below the baseline level. This way carbon becomes a source of economic value which allows people, companies and nations to trade it.