The net-zero approach of major exchanges to trade in carbon credits

With the Centre laying down the initial framework for a domestic-regulated carbon credit trading market, some of the major exchanges have started exploring the possibility of trading in carbon credits.

Sources in the know said that the National Commodity and Deriva­tives Exchange (NCDEX), which is one of the foremost exchanges in agriculture commodities, recently initiated preliminary talks on such a futures contract and was looking to commission studies to understand the nuances and viability of such futures.

Also, the National Stock Exchange is exploring opportunities in the voluntary carbon credit (VCC) market and electricity derivatives to deepen its product portfolio, its Chief Business Development Officer Sriram Krishnan told PTI. The news agency said that another bourse, the Indian Energy Exchange, has also announced plans to explore business opportunities in the VCC market and has established a wholly-owned arm for this purpose.

“We need to figure out how to build a market for these voluntary carbon credits so that they can find their values. You need to monetise them, and of course, we also need to create a healthy market because India is producing such carbon credits every year. It is difficult to quantify, but it is estimated to be worth $150 million,” said Krishnan.

Meanwhile, on the NCDEX, sources said once the broad struc­ture of the futures contract in carbon credit is formed, the exchange could approach the capital markets regulator — Securities and Excha­nge Board of India — for approval, as is the norm. “The discussions are in a very nascent state because, first and foremost, the domestic carbon credit market has to develop and mature before it can be expanded further,” said a senior official.

A carbon credit can be issued by any project or entity that saves on emissions. These are usually energy efficiency, renewable energy, and sustainable agriculture projects. These credits can be bought by an entity that is a carbon emitter.

A carbon credit allows its owner to emit a certain amount of carbon dioxide (CO2) or other greenhouse gases. One credit is equivalent to 1 tonne of CO2 or the equivalent of other greenhouse gases.

A futures contract is a kind of derivative wherein two parties agree to trade an underlying asset at a specific date for a specific price. The assets, in this case, are the carbon credits.

Companies can mitigate their risk when such assets are added to their portfolio as carbon prices fluctuate. Some studies show that, globally, carbon credit futures are used by financial market participants to hedge their risks.

The involvement of institutional investors, such as hedge funds, pension funds, etc, has given further depth to the market. The Intercontinental Exchange has one of the most thriving carbon credit portfolios, said sources. However, there are lots of challenges in launching carbon credit futures.

“Currently, there is hardly any platform that offers futures contracts, as the price discovery mechanism has not evolved. Whatever futures contracts are there are between two parties, say a manufacturing giant and a renewable energy company. There is currently no platform for forward contracts in the carbon credit trading market. There are ongoing efforts, but in a voluntary market, it is difficult to have futures contracts,” said a senior sector expert.

A few days ago, the Centre approved the formation of India’s first domestically regulated carbon market. The Carbon Credit Trading Scheme, 2023, was first announced under the Energy Conservation Act, which aimed at setting up a carbon credit trading market in the country.

Drafted by the Bureau of Energy Efficiency (BEE), a wholly-owned subsidiary of the Ministry of Power, the scheme entails the formation of a national steering committee, a technical committee, an accredited carbon verification agency, and the Central Electricity Regulatory Commission as the carbon market regulator.

The Grid Controller of India will be the registry for the Indian carbon market.

The steering committee will be responsible for making the regulations, procedures, and guidelines for the functioning of the carbon market. The technical committee will be responsible for compliance with the said rules and regulations.

The BEE has entrusted the existing power exchanges with carbon credit certificate trading. The notification, however, has not specified the activities that will be eligible under the carbon trading scheme.

(With inputs from PTI)