Energy security, resource conservation, reduction of pollution and protection of natural habitats has got governments all around the world interested in carbon trading. Investor interest in the emerging global carbon credit market has created apt conditions for risk management products, ranging from insurance to derivatives. The carbon trading market allows polluting companies to pay others to cut carbon emissions on their behalf so as to meet the reduction targets set by Kyoto Protocol. A high volume of trading in the carbon derivatives market helps price discovery and liquidity, and in this way helps to set a clear price signal which helps businesses to plan investments. India has a unique opportunity to become the leader in Carbon trading market. By 2012 emission reduction projects from India are expected to yield around 400 million CERs but it has to guard against the prowess of China to race ahead and capture the market. Main Article
Carbon credit derivatives are contracts which allow the buyer and seller enter into a legally binding agreement to buy or sell carbon credits to be delivered at a future date at a pre-fixed price. Energy security, resource conservation, reduction of pollution and protection of natural habitats are caused governments all around the world interested in carbon trading. Investor interest in the emerging global carbon credit market has created apt conditions for risk management products, ranging from insurance to derivatives. There is a growing recognition of carbon as a commodity that can be traded in spot market, and in the form of other complex financial products, such as derivatives and exchange-traded funds. Currently the carbon credit trade in Asia is dominated by China and India with carbon emissions trading showing the potential to become the world’s leading derivatives product as companies in Asia and the US seek to lower their greenhouse gas emissions. Carbon Credit
A Carbon Credit or Certified Emission Reduction is basically the right to pollute, sold by those less-polluting companies to those cannot curb their carbon dioxide emissions yet. The unique thing about carbon credits as an asset is that their prices rely more on the laws passed by legislative bodies in respective parliaments than on any financial ratios or interest rates. A carbon credit is generated by reducing a tonne of carbon dioxide. If a group plants trees to reduce emissions by a tonne, it will be awarded a credit that can be sold in the carbon trading market. Therefore, a company which wants to emit more pollutants would need to buy extra credit from this group to be able to do so. Companies generate carbon credits from emission offset projects which can be used by the international entities to meet their emission reduction commitment under Kyoto Protocol or any regional emission trading scheme such as EU-ETS. Carbon Trading
Carbon trading is similar to the exchange of securities and commodities, under which carbon credits are the assets. It is the mechanism of trading between companies, the right related to gas emissions such as carbon dioxide, which are considered the cause of global warming. It was adopted by the Parties of the United Nations Framework Convention on Climate Change (December 1997), as a scheme to reduce greenhouse gas emissions efficiently using a market mechanism, and was incorporated into the Kyoto Protocol. Kyoto Protocol has separated the governments into two general categories: developed countries, who have accepted greenhouse gas emission reduction obligations and developing countries, who have the responsibility but no obligations of greenhouse gas emission reduction. The protocol includes mechanisms which allow developed economies to meet their greenhouse gas emission limitation by purchasing GHG emission reductions from elsewhere. These can be bought from financial exchanges, from projects which reduce emissions in...