This article has been written by Nehal Misra, a student at Nirma University, Ahmedabad. In this article, she discusses the insights related to carbon trading and its legality.
Table of Contents
Introduction
Carbon trading is a method of emissions trading that directly targets carbon dioxide (calculated in tons of equivalent carbon dioxide or tCO2) and is currently the bulk of emissions trading. This form of license trading is a common tool that countries use to fulfill their obligations set out in the Kyoto Protocol, namely reducing carbon emissions to minimize (mitigate) potential climate change. Under Carbon trading, a country or a polluter with more emissions of carbon can purchase the right to emit more, and the country or individual with fewer emissions sells the right to emit carbon to other countries or entities. Therefore the countries or polluting organizations that emit more carbon meet their carbon emission criteria, and the trading process contributes to the most cost-effective methods of carbon mitigation being used first.
Businesses in the developed world are expected to meet certain goals set by their respective government on carbon emissions. However, if these businesses are unable to achieve their pollution goals, they have an option to purchase such carbon credits from the market, i.e. from someone who is effective in meeting such goals and who has a surplus of those credits. This process is referred to as carbon trading. Carbon trading is also very useful for developed world businesses because it provides monetary benefits in return for carbon credits that help these businesses purchase or improve their technologies. The technology change eventually helps businesses reduce their carbon emissions.
Carbon Trading
Carbon trading is a credit exchange between nations designed to cut carbon dioxide emissions. Trading of carbon emissions accounts for most emissions trading operations. If nations use fossil fuels and generate carbon dioxide, they don’t compensate for the effects of burning such fossil fuels. There are some costs they incur, like the fuel price itself, but then there are other costs that are not included in the fuel price. Those are considered externalities. In the case of the use of fossil fuel, these externalities are mostly negative, and the use of the good has adverse effects on third parties.
Such externalities include health costs (such as the link to heart disease, cancer, stroke, and lung disease from burning fossil fuels) and environmental costs (such as environmental degradation, deforestation, climate change, and global warming). Ironically, research has shown that, sometimes, climate change pressures impact countries with the lowest greenhouse emissions the most directly. And, if a nation consumes fossil fuels and creates such negative externalities, the idea is they will pay for it. The carbon exchange began with the Kyoto Protocol of 1997, aimed at lowering carbon emissions and minimizing climate change and potential global warming. At the time, the measure devised was intended to reduce overall carbon dioxide emissions to roughly 5% below 1990 levels between 2008 and 2012.
Each country has a limit on how much carbon it is allowed to emit. Carbon emissions trading then enables countries with higher carbon emissions to buy the right of countries with lower carbon emissions to emit more carbon dioxide into the atmosphere. The carbon trade also refers to the ability of individual companies to trade polluting rights through a regulatory system known as cap and trade. Companies that pollute less can sell their unused pollution rights to companies that pollute more. The goal is to ensure that businesses do not surpass a target amount of emissions in the aggregate and provide a financial incentive for companies to pollute less. The trading of carbon emissions has been widely and strongly criticized. It’s seen as a dangerous distraction, and a half-measure to solve the large and pressing issue of global warming. Corruption reports were also reported. Despite this, carbon pricing remains a key principle in climate change and global warming mitigation or reduction proposals.
Need for Carbon Trading and Clean Development Mechanism
The need for carbon trading was felt when it was realized that the industries were the biggest greenhouse gas polluter that has resulted in global warming. The NGOs and other institutions put a lot of effort into bringing the world’s attention to the problem of global warming. Yet this topic was not taken very seriously as a result of which nothing much has been done in this regard. It was thus recognized that the best way to get the world’s attention to these problems was by adding some financial rewards. As a result, the concept of Carbon trading was introduced.
Examples of Carbon trading in India
Jindal Vijaynagar Steel
The Jindal Vijaynagar Steel has recently declared that by the next ten years it will be ready to sell $225 million worth of saved carbon. This has been made possible because their steel plant uses the Corex furnace technology that prevents the release of 15 million tons of carbon into the atmosphere.
Powerguda in Andhra Pradesh
Andhra Pradesh’s village sold 147 tons of saved carbon dioxide credits equivalent. The company claims to have saved 147 MT of CO2. It was achieved by extracting biodiesel from 4500 Pongamia trees in their village.
Handia Forest in Madhya Pradesh
In Madhya Pradesh, it is projected that by restoring 10,000 hectares of depleted community forests, 95 very poor rural villages will jointly receive at least US$ 300,000 per year from carbon payments.
The legality of carbon trading in India
Industries’ emissions of greenhouse gases (GHG) affect the natural environment and are the major cause of global warming and climate change. Carbon dioxide being the major constituent of GHG, carbon trading or carbon trading is an approach to pollution control by providing financial incentives to reduce pollutant emissions. Under GHG, the government authority requires polluters (say industries) to discharge specific contaminants in limited amounts for a specified period. The applicant must purchase permits from those who are willing to sell if the pollution is increased above the amount stated in the permit. They can buy it from those with excess permits from reduced emissions or secondary markets. This carbon credits transition is also known as Certified Emission Reductions (CERs). One carbon credit is equivalent to the reduction of one tonne of CO2 emission. The main goal of this trading is to achieve emission reduction at the lowest cost such that the seller minimizing emissions is benefited by selling permits and the pollutant has to pay for polluting.
After the adoption of the Kyoto Protocol in 1997 which aimed to limit carbon emissions in developed countries, this permit trading has become instrumental. Though India is a developing country with no obligation to make reduction commitments, it ratified the 2002 Kyoto Protocol for the greater interest of humanity. In 2009 India submitted a voluntary target of reducing its GDP’s emission intensity by 20-25 percent by 2020, considering 2005 as the base year. India also signed the historic Paris Agreement in April 2016 along with 180 other members of the United Nations Framework Convention on Climate Change ( UNFCCC) where it has agreed to restrict the global average temperature rise to 1.50 C by 2030 by reducing the GHG emission. The country submitted its National Climate Action Plan to UNFCCC on 1st October 2015 to reduce emissions and to promote clean energy. All these indicate India’s seriousness to address the problem.
Clean Development Mechanism (CDM) and the present Indian scenario
Article 12 of the Kyoto Protocol stated that CDM is the mechanism that allows a country with a commitment to emission reduction to implement related projects in developing countries. Thus CDM contributes to the growth and business cooperation. The Indian government has seized this opportunity and has been a major gainer since the 2003 implementation of CDM. More than 20 percent of them (1541 out of 7581) approved projects by the CDM Executive Board were from India by the end of 2014.
Legal Aspects
Tax-Related
VAT (Value Added Tax):
The question about CER’s legal position regarding VAT submission evolved in 2009. The then Joint Commissioner (L&J), Trade and Tax Department applied to the Commissioner’s Court to find out about the status of carbon credits. He sought clarity on whether the sale of CERs is taxable under Delhi Value Added Tax (DVAT) Act, 2004, and if so, what should be the rate of tax? The commission resolved that it had gained the status of a commodity due to the intrinsic nature of the carbon credits and is traded on India’s Multi Commodity Exchange (MCX). Also, the Clean Development Mechanism (CDM) established under Article 12 of the Kyoto Protocol certifies CER.
The essence of this certificate is to have a market value that has transferability. So CERs is covered under Entry No. 3 of the IIIrd schedule of the DVAT Act, 2004, and the rate of tax is 4 percent. The government of Delhi announced that the Certified Emission Reductions (or ‘Carbon Credits’ as we know) are to be regarded as products and therefore their sale is liable to value-added tax in the City. The Commissioner of Trade and Taxes has stated that the essence and aspects of Carbon credits have to be investigated and checked against the concept of products to conclude applied based on ordinary commodities bought and sold in the market and therefore a selling transaction of carbon credit would attract value-added tax on the sale.
Income Tax:
Several cases such as M/S Home Power Ltd. vs. DCIT [151 TTJ 616, 2014(6) TMI/82], Ambika Cotton Mills Ltd. vs. DCIT(27 ITR 44), Velayudhaswamy Spinning Mills (P) Ltd. vs. DCIT ([(2013) 27 ITR (Trib.) 106], SubhashKabini Power Corpn Ltd. vs. CIT, Bangalore (ITA No. 258, Decision Date 28/11/2014) found the selling of carbon credit as the receipt of capital and not as a receipt of revenue and is not taxable.
Contractual Issue Related : Future Trading
Carbon credit transaction in India is carried out based on a Futures contract. This type of contract only applies in the form of movable property to the goods. The Indian Contracts Act, 1872, and the Forward Contracts ( Regulation) Act, (FCRA) 1952 govern advance contracts in India. To overcome the situation, on 25 January 2008, the Union Cabinet passed the Ordinance to amend the 1952 Foreign Contracts (Regulation) Act, but since the bill could not be adopted by Parliament, the Ordinance has lapsed and the Foreign Contracts (Regulation) Amendment Bill, 2010 is still pending in the House. However, a notice from the Union Government dated 4 January 2008 claimed that the provisions of section 15 of the 1952 Forwards Contracts (Regulation) Act (which deals with forwarding contracts in notified goods) would apply to carbon credits. This paved the way for future carbon loan trading.
The Multi Commodity exchange started future trading in January 2008 after the Indian government on 4th January accepted carbon credit as commodities. Through notification and with due approval from the Forwards Market Commission (FMC), the National Commodity and Derivative Exchange introduced Carbon Credit future communication to provide market transparency and help producers earn remuneration from environmental projects. Carbon loans in India are traded on NCDEX as a potential contract only. A futures contract is a standard contract between two parties for the purchase or sale of a specified asset of standardized quantity and quality at a specified future date at a price agreed today (the futures price). The contracts are traded on a futures exchange. Such forms of contracts are only applicable to products that are in the form of movable property other than actionable claims, assets, and securities. The Indian Contract Act, 1872 governs forward contracts in India.
Under the current provision of the Forward Contracts Regulation Act, the trading of forwarding contracts will be considered as void as against these contracts no physical delivery will be issued. The amendment Bill 2006 was introduced in the Indian Parliament to rectify this The Forward Contracts (Regulation) The ordinance to amend the Forward Contracts (Regulation) Act, 1952, was approved by the Union Cabinet on 25 January 2008. Parliament has to pass this ordinance and is scheduled to come up for consideration this year. The bill also amends the ‘forward contract’ concept to include ‘derivatives of commodities.’ The meaning currently only includes physically deliverable ‘goods’. A government notification on January 4th, however, paved the way for future CER trading by bringing carbon credit into the tradable commodities.
Indian companies have been able to cash in on the carbon market’s sudden boom making it a favored spot for buyers of carbon credits. India is expected to reap in some time from carbon trading (Rs 22,500 crore to Rs 45,000 crore) at least $5 billion to $ 10 billion. Interestingly, India is one of the main beneficiaries of the overall world carbon exchange through the Clean Development Mechanism claiming about 31 percent (CDM). India’s carbon market is one of the world’s fastest-growing markets and has already generated around 30 million carbon credits, the world’s second-highest transacted volumes. India’s carbon trading market is growing faster than even those sectors of information technology, biotechnology, and BPO. Nearly 850 projects are in the pipeline with an investment of 650,000 million Rs. Carbon is now also traded on Multi Commodity Exchange in India. It is the first carbon credits exchange in Asia.
Carbon Trading is Contrary to Social Justice
The largest resource grab in history
You can’t trade in something that you don’t own. When governments and companies ‘trade’ in carbon, they establish de facto property rights over the atmosphere; a commonly held global commons. Such atmospheric property rights have not been debated or negotiated at any level-their ownership with any carbon exchange is founded by stealth.
The carbon trade will strengthen existing inequalities
Market shares will be allocated in the new carbon market based on who is already the biggest polluter and who is the fastest to exploit the market. Therefore, the new ‘carbocrats’ would be the global oil, chemical, and automotive industries and the richest nations; the same groups that first created the climate change issue. Moreover, with the present lack of ‘supplementarity’ the richest nations and corporations will be able to further increase their global share of emissions by outstripping poorer carbon credit interests.
The clean development mechanism poses a direct threat to vulnerable peoples
Some of the projects proposed within the CDM, in particular tree planting and dams, are subject to the same criticism as other large-scale development projects-they claim foreign control of local resources, they expand the power of undemocratic leaders, they push people out of their land, they threaten local self-sufficient economies and low carbon cultures.
Many of the sources of carbon trading are scams
Tree planting is not a solution to climate change
Forest-absorbed carbon is removed from the carbon cycle only as long as the tree remains alive and stands. Industrial forestry isn’t going to sequester carbon. Permanent reforestation is a one-time reduction of carbon from the environment and can not compensate for continuous overproduction.
Carbon trading encourages companies to profit from efficiencies that would have been introduced anyway
Because we can’t know the future, we can’t be sure that any project that sells carbon credits has reduced their emissions further than they would have done without the intervention. Profit competition and technical innovation ensure that the cost of energy to the industry is consistently reduced. A carbon market could provide an automatic cash subsidy for any low-energy investment. These should be clear, focused, and accountable if these opportunities do exist.
‘Hot air’ trading : an accounting fraud
Since 1990, Russia’s economic collapse has reduced emissions by 30%. Russia intends to sell this incidental windfall (often referred to as ‘hot air’) as international carbon credits, which could swamp the market. If countries subsidize their emissions with these Russian credits, the total global emissions would inevitably be the same as without a carbon market or a Kyoto protocol.
Huge incentives for cheating
There are strong opportunities to cheat and build fake credits that do not reflect any real emission reductions. The seller gets the cash without changing anything, and the customer gets cheap money. There are similar incentives for misrepresentation and ‘leakage’-transferring polluting activities to non-representable areas.
Carbon trading cannot work
The carbon market can neither be controlled nor monitored
The incentive for both parties to cheat requires a review of every transaction and approval of every sale. There is no multinational organization or accounting structure capable of handling the market’s complexities.
The legal framework will never be strong enough
International legal systems are typically extremely poor. Countries who intend to use carbon credits to subsidize their pollution also advocate for regulations that are so poor that they won’t deter cheating. Many of Annex 1 (Russia, Turkey, Ukraine, Romania) are among the most corrupt and lawless countries that are corrupt or desperate for foreign currency and will gladly accept doctored carbon credits.
CO2 is not SO2
Sulfur Dioxide (SO2) emissions trading under the US Clean Air Act, 1990, is the main model for carbon trading. This program faced none of the above-mentioned problems-it was small (a few hundred companies), easy to monitor (one pollutant from a single source-power generation), it had permanent targets and, above all, it was carried out within one country with strong enforcement mechanisms.
CO2 IS NOT CFC
Under the Montreal Protocol, the only international emissions trading was in CFCs. The program was once again small (only 17 producer companies), easy to monitor (one pollutant from an industrial process), and within a strong legal framework.
Carbon credits from different sources are not equivalent
The market believes that carbon credits from various sources are entirely interchangeable (in carbospeak, ‘fungible’). Carbon sequestered in sinks, however, is a different commodity from carbon ‘saved’ by a technological breakthrough which is again different from carbon ‘saved’ by a change in social or lifestyle. To add to this the complexity of trading in various greenhouse gases, Each source needs specific legislation on supervision, different requirements, and different agencies. Forcing them into one market to be interchangeable is a recipe for corruption and fraud.
The real reasons for carbon trading
Carbon trading supporters will argue that these are not issues- they’re challenges. ‘That doesn’t mean that we shouldn’t take action just because it’s hard,’ they say. Let’s be clear that there is no support for carbon trading because it will solve climate change. This would kill even the already planned pathetic emissions reductions. The actual reasons to trade in carbon are:
- Governments want a cheap way to buy off their inability to reach their Kyoto goals to keep the public and businesses silent.
- Brokers, accountants, and financial firms are excited to think about the scale of their cut in a new global $2.3 trillion market.
- Corporations and other major polluters want pliant governments that don’t punish them for their emissions and donate public money to pay for any emissions they’re forced to produce.
- Oil companies are encouraging carbon trading as a way of preventing any cuts in oil production.
- From becoming ‘experts’ in the new market, academics and financial consultants see rich pickings.
Carbon trading will not solve climate change
The Kyoto Protocol has been hijacked by carbon traders
Corporations, the finance industry, and their supporters in government demanded the inclusion of carbon trading throughout the Kyoto Protocol as a condition for their continued support of the process. Now the intergovernmental talks are almost entirely concerned with the arrangement and management of this vast international carbon trading scheme.
Carbon trading is an excuse to avoid real emissions reductions
The hopelessly corrupted Kyoto Protocol currently requires countries to achieve all their emission cuts through carbon credits obtained through three types of carbon trading; Joint Implementation, Clean Development Mechanism, Global Emissions Trading; Certain countries will be choosing to buy credits instead of making any serious attempt to reduce their underlying dependence on fossil fuels.
The real solutions to climate change are undermined by carbon trading
- Educate the public about the pressing need for climate change and the need for dramatic solutions. Trading in carbon is a false solution, and it undermines individual responsibility.
- Set a timetable to reduce global fossil fuel consumption by up to 60 percent. Carbon trading provides an excuse to avoid significant net cuts.
- Recognize the moral (and political) imperative for fairness and social justice by allocating targets based on equitable per capita emissions for each region. Carbon trading institutionalizes and rewards the largest polluters.
- Reduce fossil fuel supplies with an international ban on the new production of oil, gas, and coal. Cutting global subsidies for coal and oil power by $200 billion per year as a first step. Carbon trading isn’t about supplying fossil fuels, which is why oil companies are supporting it. As a result, government subsidies are increasing, reducing the energy prices and swamping any attempts to manage demand.
- Invest aggressively in renewable energy to offset all supplies of fossil fuel-While Carbon Trading markets itself as funding of renewables, this is much more costly per ton of carbon than credits from fake “hot air,” tree planting, or outright fraud. These cheap credits to carbon will set the market price and soak up the capital.
- Involving people in solutions at every level of society-Carbon trading is an inherently elitist, corporatist, technocratic solution. It provides no role for civil society and fails to address 50 percent of house and personal transport emissions.
Conclusion
The trading of carbon emissions has risen gradually over the last few years. According to the Carbon Finance Unit of the World Bank, 374 million metric tons of carbon dioxide equivalent (tCO2e) were exchanged through projects in 2005, an increase of 240 percent compared to 2004 (110 mtCO2e)[29] which was itself an increase of 41 percent compared to 2003 (78 mtCO2e). A study by the American Council for an Energy-Efficient Economy (ACEEE) in 2019 concludes that efforts to put a price on it have been made. “In addition to carbon taxes in Alberta, British Columbia and Boulder, Colorado, cap and trade programs in California, Quebec, Nova Scotia, and the nine northeastern regions are in effect from the Regional Greenhouse gas Initiative (RGGI). Several other states and provinces are currently considering putting a price on emissions.”
The increasing prices of permits have had the effect of raising the costs of carbon-emitting fuels and activities. Based on a study of 12 European countries, it was estimated that a rise in energy and fuel prices of approximately ten percent will result in a short-run increase in electrical power prices of roughly eight percent. This would suggest that a lowering limit on carbon emissions would likely lead to an increase in the costs of renewable power sources. Whereas a sudden reduction of a carbon emission cap may be detrimental to economies, a gradual reduction of the cap may risk future damage to the environment through global warming.
Chicago Climate Exchange (CCX) ceased its carbon trading in 2010. 450 CCX participants have accomplished pollution reductions of 700million tons during the duration of the cap and trade program. The seven-year CCX cap and trade plan claimed to have successfully offered carbon trading cost-effectiveness and market-based flexibility. India is among Carbon Trading’s biggest beneficiaries. The carbon credits are exchanged via MCX but amounts of carbon trading are unlikely to rise unless and until the FCRA Bill is passed. India has a large number of sellers but the purchasers focused on the European market are not allowed to access the Indian market. It is also unclear whether or not the allocation of the credits to offshore units contributes to export. The overall policy and legislative structure to control all the problems that need to be implemented as a whole.
While India is the largest beneficiary of carbon trading, and carbon credits are exchanged on the MCX, it still lacks a proper carbon trading policy on the market. As a result, The National Commodity and Derivatives Exchange Limited (NCDEX) has asked the Center to establish a proper policy framework to allow trading on the market for certified emission reductions (CERs), carbon credit. India also has a large number of sellers of carbon credits but according to present Indian legislation, buyers focused on the European market are not allowed to enter the market. The Forward Contract (Regulation) Amendment Bill was introduced in Parliament to improve the demand for carbon trading Forward Contracts (Regulation). This amendment will also help the traders and farmers use NCDEX as a carbon credit trading site. Nevertheless, a special statute must be created for this reason to unleash the true potential of carbon trading in India, as the Indian Contracts Act is not adequate to regulate the contractual issues relating to carbon credits.
References
- http://www.legalservicesindia.com/article/264/Carbon-Trading-In-India.html
- https://risingtide.org.uk/resources/factsheets/carbontrading
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