Pollution-busting carbon credits — a derivative instrument designed to scrub greenhouse gases from the earth’s atmosphere — is coming to India.

Carbon credits basically seek to encourage countries to reduce their greenhouse gas (GHG) emissions, as it rewards those countries that meet their targets and provides financial incentives to others to do so as quickly as possible.

There is moolah to be made in all this. Surplus credits that are acquired by overshooting the emission reduction target can be sold in the global market. One credit is equivalent to one tonne of CO2 emission reduced. Carbon credits are available for companies engaged in developing renewable energy projects that offset the use of fossil fuels.

The Multi-Commodity Exchange of India (MCX), the country’s leading commodity exchange, may soon become the third exchange in the world with a licence to trade in carbon credits.

The Chicago Climate Exchange (CCX), North America’s first and only multi-sector marketplace for reducing and trading greenhouse gas (GHG) emissions, today announced a licensing agreement with MCX. Many Indian companies have already been re-rated on the stock markets on the basis of the bonanza that will accrue to them when carbon trading kicks off.

Under the agreement, the Chicago exchange will list mini-sized versions of its European Climate Exchange (ECX) Carbon Financial Instruments (CFI) and Chicago Climate Futures Exchange, Sulfur Financial Instrument futures contracts on the MCX trading platform.

Jignesh Shah, managing director & CEO of MCX, said: “The next generation commodities exchanges have an important role to play in price discovery of all renewable and non-renewable natural resources for most optimal resource allocation. With the increasing global environment related concerns, this role assumes significance for environmental related resources.”

At present, the trading in carbon credits takes place on two stock exchanges — the Chicago Climate Exchange and the European Climate Exchange.

“Environment related products are the new generation commodities and MCX being market leader in globally referenced commodities has once again taken the lead to bring most innovative product in this segment to Indian markets for the first time,” Shah added.

The Kyoto Protocol is a voluntary treaty signed by 141 countries, including the European Union, Japan and Canada to reduce GHG emission by 5.2 per cent below 1990 levels by 2012. However, the US, which accounts for one-third of the total GHG emission, is yet to sign this treaty. The preliminary phase of the Kyoto Protocol is to start in 2007 while the second phase starts from 2008.

Developed countries have to spend nearly $300 to $500 for every tonne reduction in CO2, against $10 to $25 to be spent by developing countries. In developing countries like India, the emission levels are much below the target fixed by the Kyoto Protocol. So, they are excluded from reduction of GHG emission. On the contrary, they are entitled to sell surplus credits to developed countries. The European countries and Japan are the major buyers of carbon credits.

This is what makes trading in carbon credits such a great business opportunity. Foreign companies which cannot fulfil the protocol norms can buy the surplus credit from companies in other countries. This lead to a flourishing trade in Credit Emission Reduction.

India is considered as the largest beneficiary, claiming about 31 per cent of the total world carbon trade through the Clean Development Mechanism (CDM). It is expected to rake in at least $5 billion to $10 billion (Rs 22,500 crore to Rs 45,000 crore) over a period of time.

ECX, an entity 51 per cent owned by CCX and 49 per cent by Climate Change plc, a company listed on the AIM division of London Stock Exchange, offers futures contracts based on emission allowances issued under the European Union emissions trading scheme.

Neil Eckert, chairman of ECX, said, “The introduction of CCX environmental financial products in Asia represents a new milestone both for CCX and the region. India has vast natural resources and new generation organised sector, which will provide an important reason for the Indian industry to benefit from these products.”