The global trade in carbon credits is growing rapidly. Despite complex and uncertain regulations, Indian companies, assisted by local and international law firms, have been fast to cash in on the opportunity. Raghavendra Verma reports from New Delhi

In September 2007 Tata Motors reaped a handsome reward from a sale. Nothing unusual there, one might imagine, except for the commodity on offer – air. Clean air to be precise. Tata was selling carbon credits it earned by using windmills to develop power. The auction on the Chicago Climate Futures Exchange was 13 times oversubscribed.

Carbon credits are derivative-like instruments introduced under the terms of the Kyoto Protocol to help curb global warming. They are designed to place an economic cost on carbon dioxide (CO2) emissions and create a system through which permitted emissions can be valued and distributed by market forces.

In developed countries, carbon credits are typically allocated by national authorities to corporations, which subsequently own the right to emit a certain quantity of carbon dioxide. However, in developing countries, like India, that have ratified the Kyoto Protocol, credits may be earned through activities that mitigate the impact of global warming. Carbon credits earned through such schemes are known as certified emission reductions (CERs).

A company that emits less than its designated quota of CO2, or earns CERs through offset schemes in a developing country, may sell its excess credits on the international markets. Buyers are typically companies in developed countries that are unable or unwilling to reduce their own greenhouse gas emissions to match the number of carbon credits they have been allocated by their national authorities. Each carbon credit gives its owner the right to emit one metric tonne of CO2 or other greenhouse gases.

Seizing opportunity

The global trade in carbon credits is booming and India is blazing a trail for others to follow. Its companies have been among the first in the world to reap the financial rewards of CERs, establishing more than 321 carbon credit projects and accounting for more than 31% of the global trade in carbon credits through the Kyoto Protocol’s Clean Development Mechanism (CDM). Indian businesses have already generated close to 30 million carbon credits and a further 140 million are in the pipeline, mostly in industries like cement, power generation, transport and manufacturing. The trade in carbon credits is more likely to benefit companies in energy-intensive industries, explains Chris Carr at Vinson & Elkins in Houston.

Tata Steel, which anticipates adding US$19 million a year to its bottom line as a result of CERs, is exchanging technology and equipment for carbon credits with Japan’s New Energy and Industrial Technology Development Organization (NEDO). Other Tata companies are also planning to earn and trade CERs through substantial reductions in carbon dioxide emissions. Indeed, the group has established a 10-member commission under the leadership of JJ Irani, a director of Tata Sons, to coordinate its entry into the carbon credits business. “The group has always been conscious of being cost efficient. The focus is now shifting towards the environment. We want to be efficient not just economically, but environmentally too. This is Tata’s mandate,” Irani told the Times of India.

Meanwhile, Reliance Industries, India’s largest private sector company, has registered five CDM projects with potential earnings of US$7.5 million per year, and Delhi Metro has announced an ambitious scheme to harness the energy that is released when trains apply their brakes. The plan, which is backed by the Japan Carbon Finance investment fund, is expected to generate 400,000 CERs in the next 10 years.

Many other Indian corporations including Aditya Birla, JK Cement and Gujarat Fluorochemicals are following suit. “This new industry is catching fire and everybody wants to be in India,” says Viney Sawhney, president of Boston National Capital Partners, a consultancy that advises Indian clients on setting up units to generate CERs.

Towards brighter futures

The construction of CDM projects has been boosted by new financing strategies that enable developers to sell carbon credits in advance as a means of raising development capital for their projects. “Whatever is not fossil fuel is eligible for carbon credits and carbon traders are willing to give entrepreneurs loans against the potential credits that are expected to be generated,” says Sawhney.

“The proportion of these upfront payments during a purchase transaction has recently become a matter of detailed and elongated discussion,” adds Aparajit Bhattacharya of Delhi-based law firm Hemant Sahai Associates, who is currently dealing with five CDM projects.

This strategy, however, is not without its risks. “There have been cases when the sellers agreed a price in forwards, but at the time of delivery tried to renegotiate as the price had shot up,” says Kishore Butani, co-founder of, a website dedicated to the trade in carbon credits.

Furthermore, small developers may struggle to raise capital through this route. Without significant market standing, buyers may not be convinced that they have the expertise or long-term commitment to complete the project and deliver the credits. They may therefore be required to produce bank guarantees, letters of credit or other instruments of security before they can raise funds through the sale of future credits.

On 21 January, India’s Multi Commodity Exchange (MCX) launched Asia’s first futures exchange for carbon credits, a breakthrough that heralds unprecedented opportunities for Indian corporates and overseas buyers. MCX has also entered into a licensing agreement with the Chicago Climate Exchange, enabling it to list small futures contracts based on European Climate Exchange Carbon Financial Instruments and the Chicago Climate Futures Exchange Sulfur Financial Instrument.

In another welcome step, the government is amending the Forward Contracts (Regulation) Act, 1952, to permit trading in non-deliverable products such as commodity options, weather derivatives, index futures and other intangible assets. The change will make it possible to trade in project idea note contracts.

Emerging funds promote green ventures

Carbon funds provide another opportunity for domestic and international corporations to earn carbon credits in India. Money from various sources is pooled and invested in clean energy projects. The credits earned are then distributed on a pro-rata basis to the investors.

Green Ventures International recently launched its US$300 million India Carbon Fund I, which will sell CERs earned in India to buyers in Europe. To earn the purchase rights for the CERs, Green Ventures will provide consulting services and obtain the necessary approvals from the United Nations Framework Convention on Climate Change (UNFCCC) and the host country. It may also hold an equity stake in the projects in which it participates.

According to Christopher Tung, a Hong Kong-based partner at Australian law firm Mallesons Stephen Jaques, these funds allow investors to gain exposure to the carbon market while diversifying across different CDM projects and avoiding the regulatory hurdles and transaction costs associated with developing their own projects and obtaining the credits directly.

Multiple approvals

Tung’s sentiments are likely to resonate with companies that do set up their own CDM projects, as they will find themselves grappling with a complex approval process at national and international levels. To qualify for CDM status, projects must first obtain authorization at the domestic level from the National Clean Development Mechanism Authority, a body made up of secretaries from several government departments. This process normally takes around 60 days.

Once the local approval has been granted, projects must be validated by a “designated operational entity” – often an auditor, consultant or law firm – under the guidelines of the UNFCCC. Five such entities are authorized to validate India-based projects: TUV Suddeutschland India, SGS United Kingdom, Det Norske Veritas, tüv Rheinland India and BVQI.

The main stumbling block at this stage is the requirement that all CDM projects must demonstrate the concept of “additionality”. This means they should be undertaken specifically to mitigate climate change and not merely as part of a company’s normal business activities. “Only those projects that pass the test of additionality can earn carbon credits … that’s the buzzword,” explains Sawhney. “It has to be proved that unless carbon credits are granted, the project will be incurring significant losses.”

If validation is successful, proposals are forwarded to the Executive Board of the CDM for formal registration. And once this has been completed, construction may begin.

The carbon credits are issued later, after a monitoring process to verify that the promised emission reductions are actually achieved.

Law firms join the party

Aware of the legal and regulatory complexities involved in establishing CDM projects and trading in carbon credits, forward-looking law firms have been quick to develop the capabilities that their clients demand. Indeed, of the largest 100 firms in the US, more than 20% have already established dedicated teams to focus on carbon credits and climate change.


“Being an energy lawyer, I see carbon credits as a natural extension of my practice and I am sure that an environmental lawyer, natural resources lawyer, or mining rights lawyer would see it in the same way,” says Manuel E Maisog, a Beijing-based partner at Hunton & Williams, adding that it is “not just interesting, but fascinating” to view his energy practice from an entirely different perspective.

Even in India where the practice of environmental law is in its infancy, Eric Silverman of Milbank Tweed Hadley & McCloy believes that law firms that identify the trend early, and develop their practices in pace with the level of market activity, will find it to be an extremely rewarding opportunity.

The critical task for law firms begins soon after the registration of a CDM project, when the intermediary carbon trading companies prepare a sophisticated document for the sellers of carbon credits to sign. “As these companies offer loans against the carbon credits that will be accrued in future, they entice the local companies to sign their draft,” says Sawhney. “However, before executing these documents, the Indian clients should get them reviewed in depth by their lawyers.”

Simon Read, a London-based lawyer at Pinsent Masons agrees: “It’s important to have legal advisers if one wants the best results and the most appropriate balance between risks and rewards.”

The responsibility of law firms runs much deeper than simply drafting and negotiating contracts. They also play a key role in helping buyers, sellers, consultants and fund managers to understand and allocate the legal risks involved in the transactions, and avoiding – and if necessary resolving – any disputes that arise out of them.


“We have to make sure that the project inherency is one that can be executed, the permits, consents and approvals for their projects are in place, and the land on which the project will be coming up has a clear title,” explains Akshay Jaitley of Trilegal, a full service law firm that is involved in several CDM projects in India.

International law firms, meanwhile, are sometimes getting involved on an even wider level. “In the US, lawyers act as business consultants,” observes Sawhney. “I think Indian lawyers should also be looking at carbon credit contracts from a business angle.”

Poorvi Chothani of LawQuest, a Mumbai-based law firm that recently added environment law to its list of practice areas, agrees: “Internationally, attorneys are not only helping clients to finance clean energy projects, but also to build systems to monitor, report and verify carbon credits … some are even advising companies on climate change, thus becoming the best-paid environmentalists,” she says.

For example, the list of services offered by the climate change group at Latham & Watkins includes analysis of the structure and operation of the European Union’s Emission Trading Scheme, the Regional Greenhouse Gas Initiative and California’s Climate Change Program; evaluation and advocacy regarding US climate change legislation; and advice on emissions reductions purchase agreements and the quantification and disclosure issues associated with greenhouse gases.

A work in progress

In India, the business of earning and trading carbon credits faces additional legal complexities because the regulatory structure is still a work in progress. There is no designated regulator for the trade and the Institute of Chartered Accountants of India (ICAI) is only now in the process of drafting the applicable accounting and disclosure requirements.

“We have to make sure that companies don’t fudge their accounts to show fictitious earnings,” says Amarjit Chopra, chairman of the Accounting Standards Board of the ICAI, who is busy compiling the new guidelines. His work is behind schedule. The ICAI had been due to publish its recommendations on 31 March but the deadline has slipped to 30 June. Final approval for the guidelines is now expected in September and Chopra is confident that the standards will be in place by the end of the year.

In the meantime, his team is consulting with industry and the International Accounting Standards Board to resolve a number of outstanding issues. It is still unclear, for example, how expenditure on CDM projects and revenue from the sale of CERs should be disclosed in company accounts and notes. And if carbon credits are to be accounted for, at what point in time should they be recognized, and at what value?

Silverman of Milbank Tweed says that some CDM projects generate credits over several years, raising difficult questions as to when the property rights over the credits are actually created. “Is it at one given point in time or is it something that has to be recognized over a period of time while the credits are actually created?”

Another issue that is yet to be resolved is taxation. Butani of wants India to follow the practice of Singapore, where no taxes are levied on profits from carbon credits. “On one hand the government wants companies to go green and cut emissions, while on the other it wants to tax them from these profits,” he says.

International uncertainty

Even more ambiguities exist at an international level. The first commitment period under the Kyoto Protocol ends in 2012 and several environmental groups are campaigning for change. They argue that carbon trading has been hijacked by corporations which view it purely as a means of developing new revenue streams. “CDM has become a mere financial mechanism – not a measure to combat climate change,” lamented a recent editorial in Down to Earth magazine.

The nature of any successor to the Kyoto Protocol will therefore be very important to the future of CDM projects. “There’s a lot of uncertainty about the continuation of the present CDM regime,” warns Read at Pinsent Masons.

Chothani at LawQuest agrees, stressing the importance of keeping up to date with changes to the Kyoto rules, as well as with local policies and new regulations that the government might introduce.

But in spite of the uncertainties, many observers remain optimistic. Maisog at Hunton & Williams explains that “there are a number of greenhouse gas initiatives currently under way, including regional initiatives in the United States, and that a successor framework to the Kyoto Protocol could be built upon concepts arising from one of these initiatives”.

And Owen Lomas, a partner at Allen & Overy, points out that intergovernmental negotiations in Bali have already started the process of taking the Kyoto Protocol beyond 2012 and creating an environment in which carbon credit trading will continue to flourish.


“Climate change legislation represents an exciting new area in which forward-thinking companies and financial institutions are developing commercial advantages over their competitors,” he says.

Despite the carbon credits euphoria, climate change remains a serious threat to businesses in India

For Indian corporations, carbon credits have been an unexpected silver lining around the cloud of greenhouse gases that has brought climate change to the forefront of the global consciousness. And while many have been quick to seize the opportunities presented by CERs, they must also face up to the new business risks and compliance requirements associated with operating in an environmentally aware market.

“As the global climate markets and regulatory regimes continue to develop, more and more companies are facing critical decisions and potential risks associated with their carbon footprints that are impacting investment opportunities, risk management, corporate disclosures, and even shareholder activism,” cautions David Hayes, the global chair of the environment, land and resources group at Latham & Watkins.

“Businesses are now realizing that the issues relating to environment cannot be treated as external factors,” adds Sunil Sinha, a senior economist at ratings company Crisil. “For the long-term sustainability and viability of a company, [environmental issues] are like any other business risk,” he adds.

Dina Dattani at Nishith Desai Associates, a Mumbai-based law firm that has set up a climate practice group, agrees: “With increased concerns across various strata of society, environmental issues and the enforcement of environmental laws will no longer remain the business of the courts,” she explains. “It will be more of a political issue and businesses will be affected at a much larger scale.”

The Air (Prevention and Control of Pollution) Act, 1981, is an example of this move away from the courts. It empowers state boards not only to cut off supplies of electricity and water from polluting industries, but also to force their closure. The Environment Protection Act, 1986, meanwhile, lays down industry-specific emissions standards for CO2 and other pollutants.

Compliance with increasingly onerous regulations will inevitably lead to a rise in operating costs. There is also a growing risk that non-compliant businesses could face damaging and costly action, not only from government departments and regulators, but also from environmental organizations and public interest groups.

But many companies are finding that the sheer weight of environmental legislation is making it difficult to ensure full compliance. According to Dattani, there are now more than 200 pieces of legislation from central and state governments dealing with environmental protection.

Indeed, the government’s enthusiasm for drafting and enacting environmental laws has caught the attention of the country’s Supreme Court: In the case of Indian Council of Enviro-Legal Action v Union of India, the court commented that “If mere enactment of laws relating to the protection of the environment was to ensure a clean and pollution free environment, then India would, perhaps, be the least polluted country in the world; but it is not so.”