Carbon Credits - Project Financing the 'Green' Way

In 1997, Kyoto Protocol, a voluntary treaty was signed by 141 countries to reduce the emissions of Global House Gases by 5.2% below 1990 levels by 2012. Certified Emissions Reductions (CER) or Carbon credits are certificates issued certifying reduction in emissions. The developing countries have been exempted from any such restrictions. These certificates can be traded in the market and purchased by firms which find purchasing emission credits to offset its emissions lower in cost. Thus an opportunity has emerged for firms in developing countries like India, Brazil and China to boost their earnings by complying with norms. These additional cash flows from sales of credits result in an incremental Internal Rate of Return by 2-7%. This has opened up a new source of cash flow in project financing making unviable projects viable by exceeding the hurdle rate for investment returns. It will be pragmatic on part of firms to consider this mode of cash flows in project financing.