What is Carbon Trading?

Imagine a typical cold winter morning, you wake up and the first thing you do is to make yourself a hot cup of coffee, in your new coffee filter your aunt just gifted you. Then you head along, light the fire place, to have a moment to yourself, sit and sip your coffee. Its your breakfast time, you put the pan on the stove and realize the cylinder renewal bill is about to come. Now, you're ready to get started with your day. You get ready to head to your office, and you'll barely make it in time, chances are slim.

No wait, there are no chances at all. You'll have to stop by the gas station to fuel up your car. The first half of your day has hardly begun and your carbon production is already high in quantity. The point of absolute commonality in our actions above is our use of fossil fuel. From electrically operating your coffee machine, to the utilization of coal for lightening your fireplace and buying petrol and LPG. At one point you might rest but even at that time, these fuels are in action.

The above example was on an individual level. Now, think about these energies used on an industrial level. Like, the phone you're holding right now, the factories that made small parts of it and the factory that assembled it, through heavy machinery. Can you imagine the quantity of fuels necessary to run these machines? Every small thing we possess today, from our clothes, to our cups, are in fact manufactured in these factories, through heavy machineries.

Industries' emissions of greenhouse gases affect the natural environment and are the major cause of global warming and climate change. Burning fossil fuels, as we know, emits high quantity of green house gasses. USA, which is known to be a developed nation, sources 81% of its energies from fossil fuels. Therefore, we can reasonably calculate that the number in India must be much higher, given its developing stage and high population.

So, keeping in mind the sustainable use of fossil fuel and to cut down excess production of green house cases (which largely constitutes of carbon dioxide), the concept of carbon trading was introduced. According to an international treaty, named Kyoto protocol, a restriction was placed on the free emiction of carbon dioxide. Each country is given a limit to which it can emit carbon dioxide with consideration to their size and population. After careful researches on industries and environment, the degree to which carbon can relatively safely be produced, globally, was found out and distributed.

Now, there are countries with advanced development who needs their production to be at par to their demands. They have certain goals to meet. Therefore, these countries buy their carbon emiction rights from other countries which emits less carbon than their maximum limit. The buying and selling of carbon emiction rights is known is carbon trading. The monetary aspect in carbon emiction was introduced to insure conscious execution of the laws. Providing financial incentives, instigated the reduction of carbon production. Carbon credit in India is traded on NCDEX only under Forward Contracts (Regulation) Act, (FCRA) 1952.

One of the biggest examples of carbon trading in India has to be of Jindal Vijaynagar Steel. JVS introduced an advanced technology in their system, by the name of Corex Furnace. This particular technology ensures prevention of release of 15 million tons of carbon into the atmosphere. In the course of ten years, they will be entitled to sell $225 million worth of saved carbon.

Indian Legal Regime On Carbon Trading:

Kyoto Protocol

India signed an international treaty named Kyoto protocol in the August of 2002. Kyoto protocol directs the utilization of natural resources in a way that the climate and environment doesn't get negatively affected. It obliges the countries to fund and promote constant researches to find an optimal solution to the environmental problems and to abide by the environmental laws. India comes under Non-Annex I country, which means it has no binding order to be a part of this protocol and cut carbon emiction. But India willfully became a part of this treaty for the greater good and also politico-economic reasons.

National Action Plan And State Action Plan

A national action plan on climate change was prepared to align domestic actions with the provisions of Kyoto act. NAPCC comprises of eight National Missions that is the, National Mission for Enhanced Energy Efficiency National Mission on Sustainable Habitat and National Solar Mission that talks going to restrict and lessen the ozone harming substance discharges in India, all States and Union Territories have likewise executed a State Action Plan on Climate Change (SAPCC) that lines up with the embodiment of NAPCC.

National Environmental Policy, 2006

NEP'S primarily directs regulatory reforms and projects. The goal of NEP is to protect the environment but also to ensure the prosperity of the nation. It encourages large industrial organizations to invest in social development for concessions on public charges i.e., tax etc. Social development here can mean setting up large non-profit plantations, sponsoring researches etc.

Energy Conservation Act, 2001

According to the Energy Conservation (EC) Act 2001, industries that require high energy consumption like railways, iron, steel, aluminum, cement and many others, are tagged as designated consumers. Designated consumers are required to submit an yearly report on the quantity of energy used, to the Bureau of energy efficiency. If the energy requirement is more than the allowance, the energy manager take charge of article 57 of the act and allocate the emiction allowance from the industry which still has a margin left. It facilitates local carbon trading, which takes place between the industries.

Renewable Energy Credit Trading System

Renewable Energy Credit Trading System trading system was started in India in November 2010, it intends to advance renewable energy in areas that have a low potential for renewable power generation. GOI plans for this system to contribute altogether to sustainable power source age objectives illustrated by the NAPCC and the Electricity Act, 2003. REC mechanism has created a national level market for the renewable producer to compensate for their cost. One REC (Renewable Energy Certificate) represents 1 MWh of energy generated from renewable sources.

Under this REC mechanism, a renewable energy generator will produce power in any part of the world by renewable resources and the generator gets the cost equal to that from any traditional source when the environmental characteristic is sold at the market-determined exchanges.

Tax Related Legal Aspects:

Value Added Tax

Under Delhi value added tax act, 2004, carbon emiction rights has gained the status of a commodity because of its demand in industries and credits gained through international trades. It is traded under India's multi commodity exchange and also clean development mechanism under article 12 of Kyoto protocol. Therefore, carbon credits have a value added tax of 4% on sale.

Income Tax

On 28-11-2014, in the case of Subhash Kabini Power Corporation Ltd. vs. CIT, it was held that selling of carbon credits is a receipt of capital, not revenue. Therefore, income tax in not charged.

Carbon trading seems like a proper solution to the environmental degradations on paper. But in reality, carbon market can neither be controlled nor monitored. There is no international organizations or a capable strategy, to handle this intangible market. Because of various loopholes, the protocol is deliberately cheated on. The international legal framework is typically very weak. Lawless and corrupt countries gladly accept doctored carbon credits for incoming foreign currencies.

In my opinion, carbon trading is an easy way out of the provisions of the Kyoto protocol. The government finds it cheaper to pay for their inabilities of abiding by the laws than shutting businesses and cutting down incomes. Companies facilitating fossil fuel to the general public encourages its reckless use to avoid any price cut downs. The Kyoto Protocol has been hijacked by carbon traders. Carbon trading is an excuse to avoid real emissions reductions.