Carbon credits are a tradable permit scheme under the United Nations Framework Convention for Climate Change (UNFCCC), which gives the owner the right to emit one metric ton of carbon dioxide equivalent. They provide an efficient mechanism to reduce greenhouse gas (GHG) emissions by monetizing the reduction in emissions.

Global warming is caused by the emission of GHGs that get trapped in the at­mosphere. Table 8.1 shows the global warming (GW) potential of gases. The potent GHGs are carbon dioxide, methane, nitrous oxide, hydroflourocarbons, perflouro — carbons, and sulfur hexafluoride (Humbad et al. 2009).

CERs awarded =

Tons of GHG reduced x GW potential of the gas (metric tons of C) (8.2)

GW is an imminent catastrophe with irreversible consequences. The Kyoto Proto­col was adopted in Kyoto, Japan on 11 December 1997 and entered into force on 16 February 2005. One hundred eighty countries have ratified the treaty to date. It aims to reduce GHG emissions by 5.2% against the 1990 levels over the 5-year period 2008-2012. Developed countries are categorized under Annex 1 countries and are legally bound by the protocol, while the developing nations, categorized as Non-Annex 1 countries, which ratify the protocol, are not legally bound by it. The

Kyoto Protocol has three mechanisms: joint implementation (JI), a clean develop­ment mechanism (CDM), and international emission trading (IET).

The CDM mechanism allows Annex 1 countries to meet their reduction targets by implementing emission reduction projects in Non-Annex 1 developing nations. A certified emission reduction (CER) is a certificate given by the CDM board to projects in developing countries to certify that they have reduced GHG emissions by one metric ton of carbon dioxide equivalent per year. These CERs are bought by the Annex 1 countries to meet their emission reduction targets.

Under JI, an Annex 1 party may implement an emission reduction project or a project that enhances removal by sinks in another Annex 1 country. It can use the resulting emission reduction units (ERUs) for meeting its target. Under the IET mechanism, countries can trade their surplus credits in the international carbon cred­its market to those countries with quantified emission limitation and reduction com­mitments under the Kyoto Protocol.