Indian firms reluctant to trade carbon credits

Although India is the second largest generator of environment-friendly projects, domestic firms, public and private, are shying away from maximising the monetary benefits derived from such carbon emission reductions.

The country, which is second only to China in terms of generating of carbon credits through the introduction of low polluting technologies, ranks very low when it comes to encashing of these credits through carbon trading. Over 90 per cent of such credits generated are being held back by Indian firms, amid growing uncertainties in the global carbon trade market.

If the certified emission reduction (CER) applications cleared by the host country (India) are any indication, Indian companies are expected to invest around Rs 150,000 crore ($30 billion) in 1,470 projects to generate 610 million CERs by 2012.

"Indian companies are holding on to their CERs because they feel they would fetch them better prices later. The lack of interest in future contracts is also primarily due to the small size of most projects," said an Environment Mministry official.

"Since the carbon revenues from small projects are comparatively low, companies are not really depending upon that incentive to upgrade themselves. In future, we are expecting domestic firms to come up with bigger projects and the situation could change," he added.

"Perhaps Indian sellers believe the price always goes up, which was not the case last year. They have tended to hold their CERs and sell them on the spot market or not sell them at all," Josh Carmody, an expert with Asian Development Bank said.

The hesitation among Indian companies to engage in forward transactions or sell their entire carbon credits in global carbon trading markets has made Indian companies more vulnerable to price fluctuations, experts note.

"It is difficult to predict the impact of holding back CER transactions. In recent times, the price for carbon credit has gone down for multiple reasons, the major ones being the recession linked production cuts in the developed nations and less dependency on coal due to relatively lower oil prices," said Dipankar Ghosh, a climate change expert with Ernst & Young.

However, he added, the impact of deferring CER sale is unpredictable; it depends on direction of market movement. If the prices fall further, there could be additional losses due to waiting. "Even if prices increase, the question is, would the increase be enough to compensate for the delay in carbon revenue earning?" he said. 

Of the 68 Indian projects that have been cleared for carbon credit during the year by an international committee set up under United Nations Framework Convention on Climate Change, only eight have a foreign partner. In other words, only eight of them have entered into forward transaction contracts with foreign carbon trading partners to sell off the carbon credits that will be generated in the future.  Of the 82 projects that turned eligible for CER generation in 2008, only 22 had futures contracts.

China, on the other hand mandates a foreign partner for all its projects.

Experts are not very confident of a demand push in the carbon market in near future. The current carbon trading mechanism will continue only till 2012 and will be reviewed during the forthcoming United Nations meet on climate change at Copenhagen. This has led to a decline in project sanctions. Competition from former Soviet bloc countries has also widened options for carbon trading, Charles Cormier, team leader environment & water resources, World Bank, Delhi office observed.