Another Dose of Carbon Trading

Here is the term carbon trading decoded, yet again!

Carbon trading has surely emerged as a lucrative business in the modern times but it has its own limitations and regulations as all businesses have. However, the fact that keeps it miles away from the most daunting difficulty, licensing, is that it is for a greener cause.

Carbon trading has a series of three very simple steps. It starts with registration, under which the firm has to be registered under the authorized agency of the region or of the country. In India, the nodal agency for registration and validation is Ministry of Environment and Forests, Government of India.

The second step is to prepare the Project Design Document (PDD). This is a very important document in which you have to give all the technical and practical aspects of your project. The first thing that comes under PDD is the site selection. The site must be suitable for your project and must be suitably placed according to the environmental norms. The second and most important thing is the Return on Investment (RoI) of the project. The RoI of the project must be so that it must be less than the Internal Rate of Return (IRR) before the use of Clean Development Mechanisms (CDMs) and should be above IRR with the use of CDMs. This means that the project must be financially non-viable without the use of CDMs and should be profitable with the use of CDMs. IRR accounts for the RoI that one can get from the conventional sources of investment such as Fixed Deposits (FDs) or Mutual Funds. Another important terminology that comes in PDD is Base Line. Base line is the weighted mean of the cost of power in the country through all the sources, viz thermal, hydal, nuclear, etc. The cost of the energy produced or saved in your proposed project must be less than the Base Line cost of the energy for it to be financially viable.

All the above rules are made to regulate the business of Carbon Trading. The main advantage of having the rules such as IRR and Base Line is that only the technologies that also have financial backing and that are practical, can survive. In addition, these mechanisms indirectly promote the use of financially practical technologies.

After the preparation of the Project Design Document, the project has to be validated from the nodal agency. This is the checking of the facts that you have furnished in PDD. Validation is done every year by the nodal agency. Then, a verification is carried out which is the final process, after which, you can sign a contract of the mentioned time frame (usually 7-10 years). For contacting the buyers of our carbon credits being saved or being produced from our project, we have to hire Intermediaries of Carbon Credit Brokers. As the buyers are generally of foreign origin, so one normally does not know how they function. Intermediaries help you in finding the buyer, in making the contract and in transfer of the contract money. They also work as consultants to make your project practical. Brokers usually charge about 10-20 percent of the money, depending upon the project scale. Usually, intermediaries do not settle for less than 1000 tones of Carbon Credits, i.e. one lakh Kilograms of Carbon (as 1 ton = 1000 kg). This minimum requires a carpet area of 8500 square meters (as normal AC building produces 200 units per per annum). Here lies the main bottleneck of the whole business because in cities, it is difficult to find carpet area as large as 8500 sq.mts. So one can either have a project of this size or can collect the carbon credits of multiple projects.

With this, you know all the rules, both formal and informal, of the Carbon biz. All you now got to do is to have an idea, have the money and a grey-green mind! All the best!

Saurabh Sharma

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