Many companies have taken the lead in corporate governance, social and environmental responsibility. The self-motivation of these companies is highly recommended. But the proportion of such companies is still much lower. I always wonder how an organization can be motivated to invest in society and the environment. How can an organization convince its stakeholders about its investments if they don’t make any economic sense?

After corporate greed and the downfall of organizations like Enron, World Com, Tyco, and others, companies have realized the importance of corporate governance for long-term survival. Companies have realized the importance of ethical behavior because of its benefits, such as respect in society and increased brand recognition, which translates into increased sales in the long run. We have many examples of product recalls by companies for even minor defects. These actions have long improved the perceived value of the brand. But even bigger issues like society and the environment still fail to capture an organization’s attention, as there is no visible effect of these issues on its bottom line or survival. In this sense, I consider that carbon trading is a pioneering measure that encourages organizations to contribute to the protection of the environment. Recently, there has been a lot of activity in ‘Carbon Trading’ with increasing trading volumes, new exchanges opening, and the arrival of new tradable and tradable instruments. In India, many Indian villages and Indian corporate companies have jumped on the bandwagon and are selling carbon credits.

What is ‘carbon trading’? For readers new to this term, the word ‘carbon’ in carbon trading stands for carbon dioxide, the most widely produced greenhouse gas. Emissions of other greenhouse gases may be recorded and accounted for in terms of carbon dioxide equivalents. The genesis of carbon credits dates back to the 1997 Kyoto Protocol, which required all countries to reduce their greenhouse gas emissions by 5% (from 1990 levels) by the end of 2012, or pay a price to those who do. The nations that have contributed the most to global warming tend to benefit directly from higher trade profits and higher living standards. On the other hand, the negative effects of global warming are felt all over the world. The idea of ​​the protocol was to make developed countries pay for emissions and to reward those countries that followed good environmental behaviour. Developing countries start with clean technologies and are rewarded by those that stick with polluting ones. This is popularly known as the ‘Cap and Trade’ approach.

The rules and operating mechanisms of the ‘Cap and Trade’ approach were not elaborated until the Marrakesh Agreements in 2001. Three flexible mechanisms were established to allow polluting entities (covering sectors such as power generation, steel, oil, glass, cement, ceramics and paper) ) to acquire rights to pollute beyond their assigned limits/caps. These mechanisms are the Clean Development Mechanism (CDM), Joint Implementation (JI) and Emissions Trading. CDM and JI are environmental projects that reduce greenhouse gas emissions and therefore generate carbon credits. These carbon credits can then be purchased by an entity whose pollution exceeds the emissions limit. Polluting entities are granted specific Pollution Allowances (ie, rights to pollute, such as EUA – European Union Allowances). These emission rights can be traded in emissions trading.

Any polluting entity that exceeds the cap can take one of three steps.

» The first option is the payment of a tax at the end of the compliance period, which is generally very high.

» The second option is to buy Pollution Allowances (such as EUA) from an Emissions Trading entity, which has polluted less than its quota.

And the third option is to buy carbon credits from CDM or JI projects. Carbon credits generated by CDM/JI and Pollution Rights constitute today’s carbon market.

The main buyers of carbon credits have been Europe and Japan. Pollution permit-based markets are the European Union Emissions Trading Scheme (EU ETS), the New South Wales Greenhouse Gas Reduction Scheme, the Chicago Climate Exchange (CCX) and the UK Emissions Trading Scheme (UK ETS). In 2006-07, the carbon market has grown by leaps and bounds. Of these, the EU ETS is by far the largest carbon market and is fully compliant with the Kyoto Protocol. According to the World Bank, the carbon market grew to 30 billion dollars in 2006. The market for carbon credits, including CDM and JI, in 2006 was worth 146.2 million dollars, three times that of 2005. Transactions during the first three months of 2007 exceeded the total transactions for 2006. This clearly indicates that carbon trading is here to stay. But like any other innovative approach, it had its teething problems. The European Union has been too generous in its allocation of allocations. As a result, there was great price volatility in EU ETS. Additionally, concessions from Phase I (January 5-December 7) could not be transferred to Phase II (January 8-December 10). These led to a market crash. Taking Phase I as a learning experience, the limits in Phase 2 of the EU ETS are going to tighten. The continuity of the commercialization and banking of carbon credits will also be incorporated.

While Carbon Trading is a step in the right direction, it cannot be considered the ultimate panacea for environmental problems. The enormity of climate change will require a profound transformation in the way industries work to achieve a cleaner environment. These include making public and private investments in cleaner technology research and development and diffusion, economic and fiscal policy changes to promote environmental protection, and the removal of distortionary subsidies for high-carbon technologies and fuels. In essence, devising a viable popular market mechanism does not exempt politicians from their responsibility towards the environment and society.

Carbon trading has influenced me in two main ways. First, it symbolizes a remarkable, pioneering and innovative market-based approach to countering global warming, a radical departure from traditional means like direct taxation and regulation. It is a classic example of human ingenuity. Based on 2005 emissions data, CO2 emissions were reduced by between 50 and 200 metric tons in 2005. In 2006 alone, 493 metric tons of CO2 emissions were prevented or destroyed through environmental projects under the CDM/JI . With further policy refinement, carbon trading is likely to become more powerful in the future. These innovative, paradigm-shifting solutions inspire me to break away from traditional methods and seek new, innovative approaches to problems. Second, I am excited by the promise that Carbon Trading offers for developing countries.

India, being a developing country, is a signatory to the Kyoto Protocol as a Non-Annex I country. Only Annex I countries are required to limit and reduce emissions. It implies that there is no cap yet for India, and India can host environmental projects and sell carbon credits to Annex I countries for compliance. GFL and SRF are two Indian companies that have sold carbon credits worth $87 million and $37 million respectively in 2006. This sale has contributed hugely to their profits and all they did was install an incinerator to destroy the pollutant. HFC23 (waste from your industry). ). Carbon trading makes an average business opportunity significantly more lucrative. Many environmental projects that traditional business thinking considered not worth undertaking are now being carried out thanks to carbon trading. India also receives funding for such projects. The World Bank has recently allocated $10 million to the India Infrastructure Development Finance Company to finance ‘clean’ projects, providing an additional stimulus for the development of environmental projects, which otherwise would not have been carried out normally. With India developing at a rate of 8% per year, this is the right time for the infusion of clean technologies because a developed India in the future will be based on clean technologies, unlike the current countries which are stuck with polluting technologies.

The best part is the role of rural India in the emerging carbon trading market. The first time was in 2004, when a village in India called ‘Powerguda’ sold $645 worth of carbon credits to the World Bank. These carbon credits came from the CO2 saved by Bio Diesel (a pioneer in India) that was extracted from 4,500 Pongamia trees. Biodiesel does not pollute the air at all compared to gasoline. Since then, many towns have started to follow this trend. In India, 75% of the population lives in villages and indeed it is very encouraging to see that carbon credit trading has opened the door to Indian village development.

Carbon trading is here to stay and promises a clean and healthy environment for our offspring and posterity. The example of the synergy created between environmental objectives and economic objectives by carbon trading is worth emulating in other areas such as social welfare, organizational culture, etc. The only requirement is to devise an innovative mechanism to integrate apparently opposite objectives.