Will carbon credit be the next black bubble?

D. Murali

GLENEAGLES Plan of Action on `Climate Change, Clean Energy

and Sustainable Development' has a section titled `Financing the
transition to cleaner energy'.

Paragraph 22 (c) in that section speaks of promotion of dialogue on

market-based instruments, fiscal or other incentives, and also
"tradable certificates and trading of credits for reductions of
emissions of greenhouse gases or pollutants," as one learns at
www.number-10.gov.uk.

It seems, therefore, appropriate that the Finance Minister, during

his recent trip to the US, was responding to the World Bank's call
to join hands in climate change mitigation, though with a
diplomatic line, "We would be happy to remain engaged in the
dialogue for exchange of ideas," rather than easily shrugging off
saying that India was not a party to the Plan adopted by the G8 in
July.

But Indian companies are more than engaged in emission trading

and booking carbon credit.

For instance, a press release from PricewaterhouseCoopers (PwC)

India is about the firm currently advising more than 130 potential
clean development mechanism (CDM) projects that can sell carbon
credits. And the projects are at various stages of development.

A recent report informs that SRF Ltd and Shell Trading

International have entered into a deal "for sale and purchase of
500,000 CERs (Certified Emission Reductions) to be delivered on
or before April 1, 2007". The move made a strong impact on the
charts.
Another report, commenting on Suzlon, the country's leading
manufacturer of wind turbine generators, has an analyst writing
that wind energy is eligible for carbon credit benefits under the
Kyoto Protocol for a decade from 2002.

After Chicago Climate Exchange and the European Climate

Exchange, MCX (Multi-Commodity Exchange of India) is likely to
be the third exchange in the world with a licence to trade in carbon
credits, informs yet another news report.

British Energy is the latest international energy producer to

overhaul its in-house and external legal set-ups as rising carbon
credit prices force the industry to review costs, notes a posting on
www.thelawyer.com.

What is carbon credit? It is action that helps reduce the

atmospheric concentration of CO2, such as fossil-fuel conservation
and planting trees, defines Canadian Environmental Literacy
Project (www.celp.ca).

Carbon credits as defined by Kyoto Protocol are one metric tonne

of carbon emitted by the burning of fossil fuels, says Wikipedia.

However, the text of Kyoto Protocol to the United Nations

Framework Convention on Climate Change on http://unfccc.int
shows no `credit' in a simple search.

"Tradable credits issued according to the amount of absorption of

carbon and then sold to emission sources to offset their emissions,"
is how www.watercorporation.com.au defines the phrase.

"What polluting companies might use to pay for the maintenance

of forests," is the definition in the ecological glossary on
projects.powerhousemuseum.com.
You can trace the origins of Kyoto Protocol to December 1997,
when more than 160 nations met in Kyoto, Japan, "to negotiate
binding limitations on greenhouse gases for the developed nations".

According to the protocol, the developed nations agreed to limit

their greenhouse gas emissions, relative to the levels emitted in
1990.

The US agreed to reduce emissions from 1990 levels by 7 per cent

during the period 2008 to 2012, says www.eia.doe.gov. But
http://en.wikipedia.org would hasten to point out that the protocol
is non-binding over the US until ratified.

Emissions trading is not elaborately dealt with in the protocol.

Article 17 in it gives the job of defining "the relevant principles,
modalities, rules and guidelines, in particular for verification,
reporting and accountability for emissions trading" to the CoP or
Conference of the Parties.

"The Parties included in Annex B may participate in emissions

trading for the purposes of fulfilling their commitments under
Article 3." Annex B shows a list of countries and `Quantified
emission limitation or reduction commitment', as a percentage of
base year or period.

Among the countries are those with limits that are above their
current production; and the buffer or the `extra' is what can be
sold to other countries on the open market, as tradable credit. "So,
for instance, Russia currently easily meets its targets, and can sell
off its credits for millions of dollars to countries that don't yet meet
their targets, to Canada for instance.

This rewards countries that meet their targets, and provides

financial incentives to others to do so as soon as possible," explains
The Free Encyclopedia on http://en.wikipedia.org.
That apart, CO2 sinks such as forests earn credits. Please note that
buying credits is no substitute to domestic action to reduce
emissions. And also that we're talking about intangibles.

There are different types of carbon credit, you'd learn from an

educative brochure titled `A Climate Change Projects Office
Guide' on www.dti.gov.uk. "Various types of carbon credits exist,
each with different characteristics and potential value," it begins,
and classifies the credits under three heads.

First, `credits defined in the Kyoto protocol' include Assigned

Amount Units (AAUs), Certified Emissions Reductions (CERs),
Emission Reduction Units (ERUs) and Removal units (RMUs).

Second, `credits for specific emission trading markets to assist in

achieving Kyoto targets' including UK Allowances, and European
Emission Trading Allowances (EAU). And third, `non Kyoto
compliant credits' under which are listed Emission Reductions
(ERs) and Verified/ Voluntary Emission Reductions (VERs).

Of current bearing would be `Summary of the Seminar on Linking

the Kyoto Project-based Mechanisms with the European Union
Emissions Trading Scheme' on www.iisd.ca; it traces the history of
the protocol and ETS.

The Saskatchewan Soil Conservation Association

(http://ssca.usask.ca) has an interesting article by John Bennett to
help "farmers understand the benefits and the risks of being short-
changed" by carbon markets.

He offers a `30-second science lesson': "A plant takes solar energy

and by the process of photosynthesis, transfers the CO2 gas into
carbon (organic matter) and then returns the oxygen to the
atmosphere. The removed carbon, which is stored in the soil and
measured as organic matter is the RMU (emission removal)."
ERU would be a credit for reducing emissions by burning less fuel,
fertiliser management with rates, timing and placement (less
Nitrous Oxide emissions), and manure management (less Methane
emissions), explains Bennett.

How is price determined for carbon credit? How big is the market?
These are questions you may like to probe further. It may be a clue
to know that a recent alert spoke of India standing to gain $5
billion from carbon credit in seven years.

Another estimate, from the UK angle, cited on www.dti.gov.uk pegs

the size of the market "at between euro 4.6 to euro 200 billion by
2010, with the former estimate based on purchases of carbon
credits limited to compliance only, and the latter estimate subject
to international political developments."

A `truly liquid market', it notes. What is however sure is that

nobody can assure you that carbon won't become the next big
black bubble.

ZeroBase@TheHindu.co.in
India's carbon credit market set to take-off
14 Nov 2007, 0011 hrs IST,Nitin Sethi,TNN

NEW DELHI: A severe winter in Europe this year will mean business worth millions of
dollars for Indian companies. Surprised? Welcome to the global trade in carbon credits.

Here's how it works. If Europe faces a severe winter, the oil and gas it will consume for
heating is bound to rise. If the energy consumption goes up, so will greenhouse gas
emissions. And with European countries having fixed targets for emissions under the
UN-mandated Kyoto Protocol, they would have to buy more carbon credits from
developing countries to offset the increased emissions.

For carbon traders in India, the stakes are high. India is the global market leader having
already generated 29 million carbon credits and has another 139 million in the pipeline
for sale. With each credit currently selling for 10-17 euros, carbon traders in the country
are praying for the cold to settle over Europe so that they get a bigger portion of the
global carbon pie for their clients.

These carbon traders work for myriad projects among steel and cement manufacturers,
hostels, hydroelectric stations and even temples. India, along with China, is one of the
largest suppliers of carbon credits in the world.

"A chill in Europe will heat up the Indian carbon market. The prices should, see a short-
term rise," said Ram Babu, managing director of CantorCO2e India Private Limited, one
of the biggest multinational players in India's carbon market.

"It's a simple principle of demand and supply. If their demand goes up, there is bound to
be a short-term spike in prices," he added.

The price of carbon credits have been steadily rising over the past two weeks. They are
currently hovering between 15-17.5 euros per certificate.

"The fact that brokers are buying the certificates and holding on to them and not selling
to the final consumer who has to meet the targets means they expect prices to go up in the
future," said Kiran Patil, country manager of Ecolutions, a climate change business
advisory.

A Deutsche Bank report suggests that prices of the certificates could go up to 35 euros by
2012. But that is a long-term trend. In the short-term, there are several other factors like
the European winter that could make a difference to Indian businesses.

"Shifts in geopolitics, along with factors like the cold in Europe are key for Indian
certificate suppliers," said Ashutosh Pandey of Emergent Ventures India, another leading
consultant in the Indian market.
"When Russia recently cut off gas supply to Europe for a while, EU had to shift to more
oil-based power production. Generating power from oil has higher emissions, so the
market saw that if the emissions rose, EU would have to buy more credits. The prices
naturally went up," he added.
Exchange for carbon credit

Business Standard / New Delhi November 08, 2007

Oddly, India, a leading seller of carbon credits under the clean development mechanism
(CDM) of the Kyoto protocol on climate change, does not have an internationally-linked
domestic exchange for undertaking spot and futures trading in carbon credits. This, as can
be imagined, is costing the Indian clean technology-based projects dearly. They are
denied full financial benefits from this multi-billion dollar global business that is
expanding rather briskly despite being viewed by some as not the ideal way to combat
global warming.

The biggest grouse of those selling certified emission reductions (CERs) is that they have
to play to the tunes of the buyers due to the lack of a price discovery mechanism and
settlement guarantee system. Consequently, they have to mostly settle for discounted
prices, besides incurring higher transaction costs of trading at international exchanges.
What is worse, the valuation of CERs of Indian origin is further discounted because of
the relatively low financial and credit rating of the Indian companies concerned, most of
which are small in size.

Besides, factors like paucity of support from financial institutions and the perceived risk
of default in actual delivery of CERs contribute to the low price of Indian carbon credits.
Moreover, the Indian suppliers have to also contend with the lack of opportunity for
hedging against adverse international price movements in the absence of any domestic
carbon trading platform that can ensure transparency and fair play