Carbon credits: India to emerge as a big player

Last updated : Sunday, 05 March , 2006, 09:05

Mumbai: India is emerging as a serious player in the global carbon credits market. This has prompted EcoSecurities, originator, developer and trader of carbon credits, to set up office in India.

At a conservative level, EcoSecurities has estimated the Indian market at $40-50 million annually. But the company is proceeding cautiously,

Dr Pedro Moura Costa, EcoSecurities Founder, President and COO, said. "In India, gates have just opened for CDM projects, so there is a bit of euphoria. Not all them may be eligible," he said
in an interview.

The Indian carbon credits market is estimated at $40-50 million. Could you elaborate on this?

The Indian market is extremely receptive to Clean Development Mechanism (CDM), mooted under the Kyoto Protocol. A number of ideas for CDM are being formulated and the Government is
monitoring several projects. At EcoSecurities, we are looking at a range of sectors - renewable energy projects such as wind, hydro, biomass and industrial energy efficiency projects and HFC
reduction projects. | Railway Budget 2006 |

How do you measure Certified Emission Reductions (CERs) or carbon credits?

It varies from sector to sector. To get the baseline, you calculate the amount of emissions that would be emitted in the absence of projects to take care of pollution. For instance, you measure
the number of megawatts versus emissions from a co-generation power plant and compare it with a wind plant, which is a zero emission plant. One credit or CER is equivalent to one tonne of
emission reduced.

If the credit comes with a fixed unit value, what drives their future values during trade?

Basically, the credit enables companies to comply with emission reduction obligations. In Europe, everyone is talking about the high prices in the allowances market. These companies need
allowances, if they don't they have to buy credits or pay a fine. So, it is basically a question of supply and demand of allowances and credits. So what companies in Europe try to do is to reduce
their emissions internally - switch off the lights when they go home for instance. If they have two allowances and emit three, then they try to reduce it back to two but when they cannot meet the
whole lot they go to the market.

So the value of the credit is not dependent on its intrinsic value but on the demand supply situation? |More news on India Budget 2006|

It is a commodity. The price depends on how many need the commodity. It is dependent on weather patterns. Majority of entities requiring credits are in Europe, followed by Japan and Canada.
So if there is a harsh winter and you have to generate much electricity to heat up homes, then prices go up. At the beginning of 2005, the winter was very mild and it rained instead of snow.
There was a lot of water in reservoirs, which helped to generate hydroelectric power, which has low carbon emission. At that point, the prices of carbon credits went down.

What people do is enter into long-term contracts with the promise of a certain number of credits. Promises are subject to a variety of things - country risk, credit risk, political risk; also CDM risk.
These risks are what determine the price of carbon credits. That's why a promise to deliver CERs is different from buying allowances in the spot market. They are totally different contracts with
totally different price structures.

What has been the response globally to CDM?

The response to CDM has been tremendous. The number of projects formulated worldwide is large. More than 1,000 potential projects have emerged but not all of them will fulfil the
requirements of the United Nation's CDM regulations. So far, 93 projects have been registered with the CDM Executive Board.

Where does India stand in the offering of these credits and what is the interest towards Indian credits?

Carbon credit is a carbon credit irrespective of where it comes from. Of course, entities would like to deal with trustworthy counter parties or with developers or sellers in a country that is
dynamic in expediting the approval of these projects. Which is the case in India. So in that respect, there is interest in working with Indian businesses because the Government has been pretty
proactive.

For the carbon credits business, is such interest the equivalent of paper quality as normally asked of financial instruments?

You apply the same relative discount between countries, which you apply to commercial paper and it would reflect the price that is paid for credit from different countries. So in that respect
there is a differential. For example a project in Afghanistan is not going to get a lot in comparison to the baseline price for one in India.

You have cited the need for better quality projects. Could you explain?

Basically, projects that fulfil the requirements of Kyoto Protocol. In India, gates have just opened for CDM projects, so there is a bit of euphoria. The reality is that a lot of initiatives and ideas
were pushed into the CDM arena. All of these may not be eligible and may not get registered. By `quality project' the first criteria we are referring to is that we look for projects that are serious
and fulfil the requirements, objectives and rules of CDM. Second, there are other attributes you expect from any investment. We need counter parties with experience who are serious and
committed to reducing emissions and who take social and environmental obligations seriously.

If and when the US signs the Protocol, how much would the demand for credits go up?
The US accounts for 25-30 per cent of global emissions. If it joins, you have a lot more demand for CERs. But then it may not join.

Carbon credits are a key component of national and international emissions trading schemes. They
provide a way to reduce greenhouse gas emissions on an industrial scale by capping total annual
emissions and letting the market assign a monetary value to any shortfall. Credits can be exchanged
between businesses or bought and sold in international markets at the prevailing market price.

There are also many companies that sell carbon credits to commercial and individual customers who are
interested in lowering their carbon footprint on a voluntary basis. These carbon offsetters purchase the
credits from an investment fund or a carbon development company that has aggregated the credits
from individual projects. The quality of the credits is based in part on the validation process and
sophistication of the fund or development company that acted as the sponsor to the carbon project