Emissions Trading

Emission Trading or Cap & Trade is one of the so called Kyoto Mechanisms under the UNFCCC. In this, the central authority sets a limit of cap on the amount of a pollutant that can be emitted. This limit is sold to the firms in the form of emission permits. An emission permit represents the right to emit the specific volume of a particular pollutant. The Firm would need to hold the number of permits equivalent to their emissions. The number of these permits can not exceed a cap. If a firm wants to increase the emission permits, it would buy from those who need fewer permits. This transfer of permits is called Emission Trade.

Thus the centreline is that: The buyer is paying a charge for polluting, while the seller is being rewarded for having reduced emissions.

The emission trading schemes have great potential to lower the pollution while minimizing the costs for industries. On the industry side, units are able to choose for themselves the cheapest way to reduce pollution.

These programmes are better compared to the traditional command- and-control regulations. The command- and-control regulations do not allow for differences across industries and mandate the same standard everywhere. This generally misses the best opportunities for abatement.

Emission Trading System also provide a self- regulating system that makes pollution control more efficient. In the longer run, the reduced costs of compliance can also make it easier to introduce new regulations that increase environmental quality.

Components of emission trading

The Components of the emission trading are as follows:

  • Setting the Cap- The target for aggregate emissions from the sector where trading is introduced must be set to produce reasonable prices and emissions reductions.
  • Allocating Permits –The permits to emit must be distributed in an equitable way to build support for the scheme. In many successful cases this allocation has been made for free relative to baseline emissions, greatly reducing the cost of compliance for industries.
  • Monitoring – The quantity of emissions from each industrial plant must be reliably and continuously monitored with high integrity recognized by all sides.
  • Compliance – The regulatory framework must make industries confident that buying permits is the only reliable way to meet environmental obligations.

Emissions Trading in India: Market Friendly Emissions Scheme (MFES)

India has launched a pilot Market Friendly Emissions Scheme (MFES) in April 2012. This scheme was launched in 3 states viz. Gujarat, Tamil Nadu and Maharashtra, which are three most industrialized states of India. The overall objective of the scheme was to meet the National Ambient Air Quality Standards (NAAQS).

The scheme was launched by Ministry of Environment and Forests, in association with the Central Pollution Control Board (CPCB) and the State Pollution Control Boards (SPCBs) of Gujarat, Maharashtra and Tamil Nadu. This emission trading scheme was proposed by two professors from the Massachusetts Institute of Technology (MIT) in the US, one from Harvard University and another from the Harvard Kennedy School.

The composting plant in Okhla, New Delhi has become the first in India to receive the carbon credits from the United Nations Framework Convention on Climate Change (UNFCCC). The plant has received Rs 25 lakh as an advance against the Carbon Emission Reduction (CER) earnings from this plant.

Legal Aspects of this scheme

The regulatory framework and technical capacity to implement emissions trading and achieve these ambitious goals already exist.  The Ministry is empowered by the Environment (Protection) Act, 1986 and accompanying rules to limit net adverse environmental impact from industrial activity and is ready to apply this power to support an emissions trading scheme.  The State Pollution Control Boards have the power to implement such a scheme on the ground by modifying the terms of environmental Consent.

Organizational framework of MFES

The government documents say that the Ministry of Environment & Forests will introduce the required regulatory framework for an emissions trading scheme.  The Central Pollution Control Board will set technical standards for continuous monitoring and review bids.  The State Pollution Control Boards will revise industry Consents, implement the adoption of continuous monitoring and enforce the requirement of holding permits to emit.  The evaluation of this scheme will be led by two of J-PAL’s Board Members, Professor Michael Greenstone, MIT and Professor Rohini Pande, Harvard University as well as Nicholas Ryan, MIT and Anant Sudarshan, Harvard Kennedy School and J-PAL South Asia. The evaluation is being undertaken by J-PAL South Asia at the Institute for Financial Management and Research (IFMR). J-PAL South Asia will monitor the progress of the scheme and evaluate its effect on pollution emissions and industry costs.

Carbon Credit , Kyoto Units  and Assigned Amount Units

Carbon credit is a generic term for any tradable certificate or permit representing the right to emit One Tonne of Carbon dioxide or the mass of another greenhouse gas with a carbon dioxide equivalent equivalent to one tonne of carbon dioxide. The concept of carbon credits came into existence as a result of increasing awareness of the need for controlling emissions.

Carbon credit facility has been introduced with an aim to allow market mechanisms to drive industrial and commercial processes in the direction of low emissions or less carbon intensive approaches than those used when there is no cost to emitting carbon dioxide and other Green House Gases (GHGs) into the atmosphere. Since GHG mitigation projects generate credits, this approach can be used to finance carbon reduction schemes between trading partners and around the world.

The carbon credits can also be traded on exchanges like Carbon Trade Exchange, which is like a stock exchange for carbon credits. If it is traded internationally then each transfer is validated by the UNFCCC.

The emissions trading can be international or domestic. Under the International Emissions Trading (IET), the countries can trade in the international carbon credit market to cover their shortfall in Assigned amount units. Countries with surplus units can sell them to countries that are exceeding their emission targets under Annex B of the Kyoto Protocol. This are mentioned in article 17 of the Kyoto Protocol.

Assigned amount units / Kyoto Units

The Assigned Amount Unit of AAU refers to an allowance to emit greenhouse gases comprising one metric ton of carbon dioxide equivalents calculated using their Global Warming Potential. The name is synonymous with Carbon Credit or “Kyoto Units”.

Exchanges trading Carbon Credits:

Currently there are 5 exchanges trading in carbon allowances:

  • The European Climate Exchange
  • NASDAQ OMX Commodities Europe
  • PowerNext
  • Commodity Exchange Bratislava
  • The European Energy Exchange

Certified Emission Reductions (CERs)

Certified Emission Reductions are one of the types of the Kyoto Units. They are issued under the Clean Development Mechanism.

The Annex-I countries can use the CERs to comply with their emission limitation targets or by operators of installations covered by the European Union Emission Trading Scheme (EU ETS) in order to comply with their obligations to surrender EU Allowances, CERs or Emission Reduction Units (ERUs) for the CO2 emissions of their installations. The Government and Private entities can hold the CERs on electronic accounts with the UN.

Types of CERs

There are two types of CERs based upon their likely duration of benefit. They can be long duration (lCER) or temporary (tCER). The original entity that makes the reduction can sell both of them in the primary market. When they are resold, it becomes the secondary market.  The approved CERs are recorded in CDM Registry accounts.


CERT refers to the “Carbon Emission Reduction Target”. The term is used in United Kingdom, where it was earlier known as Energy Efficiency Commitment. The target is imposed on the gas and electricity transporters and suppliers under Section 33BC of the Gas Act 1986 and Section 41A of the Electricity Act 1989, as modified by the Climate Change and Sustainable Energy Act 2006.

White Certificates

In US and UK, the Energy Savings Certificate (ESC), Energy Efficiency Credit (EEC) are known as White Certificates or White Tags. They are issued by the authorities and are documents certifying that a certain reduction of energy consumption has been attained. The White Certificates are tradable and are combined with an obligation to achieve a certain target of energy savings