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The need for a reduction in carbon emissions was debated at the United Nations Conference on Environment & Development (The Earth Summit) in Rio de Janeiro in 1992, resulting in the adoption of United Nations Framework Convention on Climate Change (UNFCCC), an international treaty on environment. The Kyoto Protocol, 1998, was adopted by the parties to the UNFCCC with the objective of achieving quantified emission limitations through specific policies and measures to minimising the adverse effects of climate change. The protocol provides for various mechanisms like joint implementation, a clean development mechanism (CDM) and international emission trading to boost the cost effectiveness of climate change mitigation.
Carbon credits are generated by enterprises in the developing world that shift to cleaner technologies and thereby save on energy consumption, consequently reducing their greenhouse gas emissions. For each tonne of carbon dioxide (the major GHG) emission avoided, the entity can get a carbon emission certificate which they can sell either immediately or through a futures market, just like any other commodity.

The certificates are sold to entities in rich countries, like power utilities, who have emission reduction targets to achieve and find it cheaper to buy 'offsetting' certificates rather than do a clean-up in their own backyard.

This trade is carried out under a UN-mandated international convention on climate change to help rich countries reduce their emissions.

India, along with other developing nations, is at an advantage as it can implement approved CDM projects for the purposes of trading CERs. One third of the total CDM projects registered with UNFCCC are from India. India’s carbon credits’ trading is expected to reach $100 billion by 2010. In 2007, a total of 160 new projects were registered with UNFCCC. As a consequence, Indian industry managed to generate over 27 million carbon credits. Indian projects receive further impetus by way of investments and finance from developed nations who are potential buyers of CERs.

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