Carbon credit concept came into existence due to anincreasing amount of greenhouse gases into the atmosphere like carbon dioxide, methane, nitrous oxide, etc. The result of this increased GHG (greenhouse gas) leads to anincrease in temperature level, a rise in sea levels, etc. Because of these, the world may lead to serious trouble like floods, drought, heat, waves, etc.


To resolve this issue UNFCCC (united nations framework convention on climate change) an international environmental treaty was produced at united nations conference on environment and development (UNCED), informally known as “Earth Summit” , which was held in Rio de Janeiro in June 1992.

This framework sets non-binding limits on GHG emissions for individual countries. Its aim is to “stabilize GHG concentrations in the atmosphere at a level to prevent dangerous anthropogenic interference with the climate system.

Kyoto protocol:

In 1997,  the representatives of more than 160 countries met in Kyoto, Japan to form rules and regulations regarding carbon emission.  The countries were divided as Annex 1 and Non Annex 1 countries.

Annex 1 (developed countries) agreed to reduce their GHG’s by 5.2% in first level commitment period i.e from 2008 to 2012.

Non Annex 1 countries do not have legally binding targets to reduce emissions.

Carbon credit, Cap and Trade:

The Carbon credit is calculated on the following basis:

1 carbon credit = 1 ton of CO2or its equivalent GHG less emission.

Every country is allowed to emit a certain ton of emission which will be the highest limit for emission also known as the CAP. If any country exceeds this limit, they will have to buy carbon credits from the country with less emission (trading).

In India, the carbon credit is like a commodity which is traded on INDIA’S MULTI COMMODITY EXCHANGE.

Areas of carbon generation:

  • Solar Energy
  • Biomass Energy
  • Reforestation
  • Ethanol Fuel
  • Windmills

By using these methods company’s carbon emission will reduce, which will result in more carbon credit.


  • Developing nations can earn revenue by selling carbon credits to company with more fossil fuel demand.
  • The carbon trade market is without any economic intervention and regulation by government except to regulate against frauds.
  • Threshold limits encourage industries to harness alternative sources of energy and invest in green technology globally.


  • Industries in the ratified nations are purchasing legal rights to pollute the atmosphere.
  • Industries are opting the easy way i.e purchasing more allowances rather than implementing greener technologies.
  • Leads to carbon reduction in one place and results in carbon emission at some other place.

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Qualification: Student - CA/CS/CMA
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Location: Pune, Maharashtra, IN
Member Since: 11 Jan 2019 | Total Posts: 2

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  1. Savinay Gaikwad says:

    Ma’am, thank you for the article. You explained the concept very nicely. Can you please briefly elaborate more on laws in India on this subject. Mainly related to the limits or any specific industries or companies which can enter the Carbon Credit market.

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January 2021