The price of carbon credits is likely to double this year, due to a recovery in demand from the European Union.
A recent report by Barclays Capital, the global consultancy firm, forecast the Certified Emission Reduction (CER) price to surge 92 per cent in the first half of this year. Indian analysts estimate it would almost double before the end of 2012. Currently, a CER unit for near-month delivery on the European Energy Exchange is quoted at 3.55 euros.
The Clean Development Mechanism (CDM) of the United Nations allows a country with an emission-reduction or emission-limitation commitment under the Kyoto Protocol to implement an emission-reduction project in developing countries. In such projects, emission so reduced is converted to saleable credits known as CERs. Each CER certificate is equivalent to a tonne of carbon dioxide, which can be counted towards meeting Kyoto Protocol targets. Emerging markets like India and China are among the largest credit generators. The users are industrialised countries where companies, rather than reducing emissions, will buy such credits and meet their emission reduction targets.
The development assumes significance as CDM projects in India and other developing countries have been holding their CER certificates in anticipation of a recovery in prices. In fact, most projects in West Asia have categorically denied selling CERs below 7.91 euros.
Most projects in India are also holding CERs, as prices have fallen sharply in the past three quarters. They expect CER demand to come back in the European region. Europe is the largest consumer of CERs in the world. Manufacturing sectors are entitled to CDM registry.
Trevor Sikorski, head of carbon research at Barclays Capital, forecast the CER price to average at 6.64 euros in the first half of the current calendar year.
“The only upside for the carbon market rests with utility hedging. German dark spreads remain strong, which will drive hedging of future power spreads,” he added.
JSW Steel, the Sajjan Jindal group company, says it has been holding a major part of CERs generated during the past two financial years, as prices have been falling. As against Rs 60 crore worth of CERs sold in 2009-10, total revenue through carbon credits was recorded at Rs 38 crore and Rs 13 crore during 2010-11 and 2011-12, respectively.
V K Gulati, former executive director of Gujarat Alkalies and Chemicals Ltd, a leading Baroda-based company aggressively engaged in CER generation, forecasts the carbon credit price to rise to €6 before March 2013.
Gulati, who has monitored the CER industry closely since its inception in India in 2006, said, “Electricity generation in Europe has come to the lowest in several years, which is set to rebound. Also, most manufacturing units in the region that have been using naphtha or natural gas as fuel for the past several years have to shift to coal to avoid frequent price volatility in these raw materials. Since naphtha and natural gas prices move in line with crude oil, the price of these fuels remains uncertain, affecting future planning by companies. As against that, a long-term contract with coal mining companies helps them do future planning comfortably. Hence, they are now considering using coal as a fuel. Since burning of coal also discharges a huge amount of CO2, they require more carbon credits to compensate their emission discharge level. As a consequence, the demand for credits is set to rise by the end of the current month.”
The United Nations has so far issued 938 million CER certificates to 4,150 CDM-registered projects since the Kyoto Protocol’s signing in 2003.
Additionally, 82 projects have sought registration. Since these projects keep upgrading their plants through installing pollution control equipment frequently, their CER generations are continuously going up. Con-sequently, the UN forecasts around 1,800 million new CERs to be issued by the end of this year. It is estimated to have issued a record of about 320 million CER credits in 2011, up from 132 million the year before, despite a 62 per cent drop in prices.