The Carbon Credit Market

The carbon credit market in India is all set to rake in more than $120 billion by the end of 2010. According to the World bank[1], one of the biggest intermediaries in carbon credit trading, India along with China could emerge as one of the biggest beneficiaries, accounting for as much as 25 per cent of the total world trade.

Emergence of Carbon credit trading and clean development mechanisms (CDM) –

Since industrialization began almost two centuries ago, man made activities and commercial activities have added significant amounts of green house gases (GHGs) to the atmosphere. According to a report by Intergovernmental Panel on Climate Change[2], the amounts of the following gases have increased significantly between the periods of 1750 – 2009

  • Carbon dioxide (CO2) – 31%
  • Nitrous oxide (N2O) – 17%
  • Methane (CH4) – 151%
  • Other gases such as SF6, Hydro Fluorocarbons(HFC) and Per Fluorocarbons (PFC)

These gases allow the penetration of inbound UV and Infra red from the sun but trap the outbound rays reflected from the earth’s surface therefore resulting in rise in temperature of the earth’s surface. This leads to a phenomena called as global warming eventually leading to climate change. These GHGs along with a few more have a capability to trap radiations and each of these gases can stay in the atmosphere for a certain period of time. Studies use the terminology GWP[3] to compare between the gases. Carbon dioxide is used as the benchmark so all the gases are measured in Carbon dioxide equivalence (CO2 emissions) The numbers indicate the heat trapping abilities and the time a gas stays for in the atmosphere[4] The Kyoto Protocol – The Kyoto protocol was signed in Kyoto, Japan in the year 1997. The protocol required the industrialized countries, also called as Annex 1 countries to reduce their greenhouse gases (namely carbon dioxide, methane, nitrous oxide, sulphur hexafluoride, CFC etc.) by at least 5.2% from their 1990 levels by 2012. The Kyoto protocol facilitates several flexible mechanisms such as emissions trading, and clean development mechanism (CDM) or carbon credit trading for Annex 1 countries to meet their GHG emissions shortcomings by purchasing GHG reduction units from other countries possessing excess of these. The protocol comes as a blessing to the developing countries which can generate additional revenues by adopting green technologies and selling carbon credits to developed countries, say USA which are already stuck with old technologies and need carbon credits in abundance[5]. The preliminary phase of Kyoto protocol started in 2007 and the second phase commenced in 2008. The countries which have voluntary signed this treaty include European Union, Japan and Canada among many others and USA which nearly accounts for one third of GHG emissions is yet to join this treaty. The Kyoto protocol has facilitated three important mechanisms for developed countries to acquire GHG reduction credits and minimize the cost of purchasing certified emission reduction. These are

  • Joint implementation (JI)
  • Clean development mechanism (CDM)
  • International emissions trading (IET)

CDM has already been discussed in the paper. Under JI, a developed country with relatively higher cost of GHG reduction would set up its project in another country with a relatively lower cost of implementation and cost of GHG units. CDM PROJECT TYPES Carbon Credits are sold to entities in Annex-I countries, like power utilities, who have emission reduction targets to achieve & find it cheaper to buy „offsetting? certificate rather than do a clean-up in their backyard. Type of projects, which are being applied for CDM and which can be of valuable potential, are:

Energy efficiency projects[6]

  • Introducing the concept of green building or getting a LEED rating (leadership in energy and environmental design) and acquiring a green building certificate. For example, technopolis building in Kolkata.
  • Carrying out the modernization of existing traditional thermal power plants and switching from carbon intensive fuels to renewable sources of fuel.

Transport

    • Switching to hybrid, CNG based and fuel cell vehicles.
    • Switching to better modes of public transport such as metro trains in Delhi

Methane recovery

    • Recovering methane from animal waste
    • Utilizing anaerobic digester and obtaining methane
    • Recovery of methane gas from coal mining projects
    • Collecting and utilizing methane gas from coal mining and also from landfills;
    • Capture of biogas;
    • Capture & utilization of fugitive gas from gas pipelines;
    • Collecting and utilizing methane from industrial and biogas waste

Industrial process changes

    • Any industrial process change resulting in the reduction of any category greenhouse gas emissions

Cogeneration

    • Use of waste heat from electric generation, such as exhaust from gas turbines, for industrial purposes or heating (e.g. Distillery-Molasses and bagasse)

Agricultural sector

  • Energy efficiency by employing less carbon intensive energy for the use of water pumps for irrigational purposes
  • Using animal waste by obtaining methane for generating energy
  • Any other changes in an agricultural practices resulting in reduction of any category of greenhouse gas emissions.

CARBON TRADING IN INDIA

MCX (Multi commodities exchange)

MCX was the 1st derivatives exchange in India to launch Carbon Credits Contract trading to the country. MCX is the biggest commodity trading platform in India and it commenced trading on Carbon credits on 21st January, 2008. A few other exchanges in the world dealing in the same are Chicago Climate Exchange (CCX) and European Climate Exchange (ECX). Launching of carbon credit trading in India would help producers earn remunerative returns from implementing environmentally friendly projects. The markets for trading in carbon credits is roughly estimated to be at $70 billion annually and India is the leading beneficiary arising out of this trade with the possession of 30 million carbon credits and another 140 million in the pipeline already. MCX has already entered into a strategic alliance with the Chicago climate exchange (CCX) in september 2005 to initiate carbon trading in India in a view to realize better price discovery and cover risks associated with buying and selling. The trading unit of carbon credits will contain 200 units (metric tones) of carbon dioxide or carbon dioxide equivalent gases. Trading is being done in the form of carbon future contracts which will be available on the MCX platform with expiry on the 15th of December 2008, December 2009, December 2010, December 2011, December 2012.

Demand and supply –

The future carbon credit trading markets offer numerous oppurtunities for the future financial/industrial/technical projects to adopt eco-friendly techniques and incorporate green techno-logies in their production activities, thereby earning carbon credits which will reward them with a good price. These carbon credits can be earned by the use of Joint implementation (JI) in annex 1 countries or by CDM in Non annex 1 or developing countries. The principal buyers of carbon credits are mainly Annex 1 countries such as

  • European markets
  • Other countries include Japan, Canada, New Zealand, etc.

The major sources of supply are Non-Annexure I countries such as India, China, and Brazil.

Participants in the carbon credit trade in India

Currently green project participants, manufacturing units, brokers, banks and investors involved in futures trading in environment related financial instruments take part in the trade. The ECX, a subsidiary of CCX is the leading exchange in terms of trade

Factors that influence the price of carbon credits:

    • Supply-demand mismatch between the credits required by Annex 1 countries and Non Annex 1 (developing countries)
    • Crude oil prices and coal prices – bigger economies are heavy consumers of fuel. Therefore if fuel prices go up. The consumption tends to fall and so does the GHG emissions. The CER supplying countries will see a contraction in demand during this phase
    • CO2 emissions
    • European Union Allowances (EUAs)
    • Forex fluctuations
    • Trade during a global financial slowdown

The role of India as a major supplier of CER

By 2010, india will have as much as USD 100 billion worth of CERs and close to 300 CDM based projects out of 900 total projects with the UNFCCC. In number, these CERs come out to be around 35 million with each CER containing almost 200 metric tones of carbon dioxide equivalent gases. The worth of each of these CER is estimated to be around 15 to 22 euros. India annually produces an average of 28 million CER, the revenues of which could run into over Rs. 2500 crores.

Trading carbon credits with MCX

In India, currently only bilateral deals and trading through intermediaries are widely prevalent leading to sellers being denied fair prices for their carbon credits. Advantages that the MCX platform offers are:

  • These sellers and intermediaries can help reduce price risks by the use of appropriate hedging instruments;
  • Early participation in selling can help generate liquid cash and therefore help in implementation of projects;
  • Since the trade is exchange backed, the counterparty risk is eliminated;
  • The price discovery mechanism is beneficial for both buyers and sellers;
  • The participants are brought to a single platform so the hassle and cost of locating buyers or sellers in eliminated; and
  • The MCX futures floor gives an immediate reference price. At present, there is no transparency related to prices in the Indian carbon credit market, which has kept sellers at the receiving end with no bargaining power
  1. https://info.worldbank.org/etools/bspan/PresentationView.asp?PID=213&EID=112
  2. IPCC 2001 reference
  3. Global warming potential
  4. IPCC 2001a, IPCC 2001b reference
  5. https://www.volpe.dot.gov/infosrc/journal/spring99/global.html
  6. https://www.carbonexis.com/solutions_services.html
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