Faced with oversupply in the global carbon credit market, resulting in a drastic fall in realisation, India’s leading corporate houses have kept the sale of around Rs 1,000 crore worth of these credits on hold.
They plan to sell the certified emission reduction (CER) certificates, popularly known as carbon credits, on revival of economic sentiment in Europe, the major buyer from India. With Europe’s economic troubles, the prices of CER plunged to euro 9-10 early this year but recovered a bit to trade on Monday at euro 12 each, as against euro 14.07 each about a year before.
Similarly, European Union carbon allowances for delivery in December have lost almost 16 per cent this year because of an oversupply amid a recession, concerns about economic growth and a sovereign debt crisis. The contract rose three cents to euro 11.94 a tonne on the ICE Futures Europe exchange. One allowance carries the right to emit one tonne of carbon dioxide.
Henry Derwent, president and CEO of the Geneva-based International Emissions Trading Association (IETA), has suggested Indian companies look beyond the US and European markets for selling CER. Japan and the EU are finalising specifications on what kind of carbon credits they seek while the next round of Clean Development Mechanism (CDM) guidelines are drawn up, as the existing ones end in 2012. Experts, however, do not rule out an extension in the CDM, mainly because of an unfavourable global economic environment.
“CER (demand) is a function of manufacturing activity, which depends upon the health of the overall economic environment. The price of CER fell to a nadir post the economic debacle in 2008 and it’s repeating now. Hence, we advise Indian corporates to hold CERs they have generated after an investment worth crores and years of effort, and wait for a revival in the market for sale,” said an economist with a leading Indian corporate house.
According to the latest report by research firm Crisil, Indian projects are estimated to receive 246 million CERs by December 2012, a three-fold rise from 72 million in November 2009. This will cement India’s second position in the global CER market. But industrial houses in the country are discouraged due to a drastic decline in demand from European countries.
Each tonne of obnoxious gases saved from being released into the environment amount to one CER. Developing countries generate CERs by installing emission-cutting machinery and developed countries, mainly from Europe, buy CERs for releasing more of the gases than they are permitted to.
The Indian government has approved 1,400 projects as part of the CDM, that could attract around $6 billion (Rs 28,000 crore) into the country by 2012, through sale of CER certificates. The National CDM Authority (NCDMA) in India has accorded Host Country Approval to 1,455 projects. These projects have seen an investment of $33.7 billion (Rs 1.6 lakh crore). If all these get registered at the CDM executive board, it will earn developers 600 million CERs by 2012. At a conservative $10 per CER, the figure works out to a little over $6 billion.
European countries expect a deficit of 1.97 billion permits (CERs) from 2008 to 2020 to be partly met by imports of international carbon credits, resulting in a net shortage of around 300 million tonnes. The system is likely to have a deficit of around 170 mt in 2013, rising to 380 mt in 2020 and 660 mt in 2028. As access to low-cost emission-reduction measures starts to run out, regulators may curb the allowed use of international credits, pushing the carbon price to euro 100 per tonne by 2024 without any access to international credits and euro 65 a tonne with access to offsets.
Meanwhile, big companies across the world have started hedging their risk on the futures platform. Consequently, ICE Futures reported a 93.8 per cent rise in CER volume to 34,761 contracts in August this year. as compared to 17,941 contracts in the same month last year.