- Under the Kyoto Protocol, by 2012, developed nations have to reduce greenhouse emission levels by 5%; these nations complained it implied huge costs and investments
- The treaty introduced carbon trading, whereby firms in developing nations, which had no reduction limits, could earn credits for any voluntary decrease in emissions
- Such credits could be sold to firms in developed nations that were under the Kyoto compulsions
- India, China, Brazil, South Korea and Russia have become the leaders in earning carbon credits and selling them
- Since February 2005, trading in carbon credits has reached $5 bn, and could touch $100 bn by 2050
Moreover, although India lags behind China, its potential in carbon trading is greater. Already, 420 projects—the largest in any country—that envisage reduction in emissions have been approved by the country's ministry of environment and forests. Of these, 120 have been cleared by the UN Framework Convention for Climate Change, which issues the carbon credits. According to Nahar, the 420 projects cumulatively represent 350 million CERS annually. This will further go up once other polluting coal and methane-based units and those in power and fertiliser sectors get into the act of reducing emission levels.
However, Indian firms, worried by the falling prices of carbon credits, have decided to sit on their CERS and not sell them in the open market. Ever since the Kyoto Protocol was inked, India has only sold 60 million credits to the developed world; in comparison, China accounted for 60 per cent of the credits traded in the first nine months of this year and 73 per cent in the same period the previous year. Given the current low global prices, many Indian firms have also postponed planned investments to reduce emission levels.
Even those which are active in the carbon trade are shifting to the futures market, rather than spot trading. Explains Jotdeep Singh, director and head (renewable energy and carbon credits), Rabo India Finance, which acts as one of the intermediaries between buyers and sellers, "Most Indian deals are now being done in the forwards market, which can guarantee better returns. The advantage of this is that carbon credit prices are being gauged in the context of trends and changes in 2008, and that can get Indian companies a better price."
The year 2008 is an important one. As per the Kyoto Protocol, it marks the beginning of the commitment period that ends in 2012, to reduce emissions. It'll not be surprising if developed nations become more serious about buying carbon credits in 2008, and push up demand. As we approach 2012, there may be greater demand as nations and companies scramble to fulfil the Kyoto Protocol's emission limits. There's also a chance that more countries—apart from the 160-odd now—will sign the agreement, leading to a clamour to buy carbon credits. Several developed countries, like the US and Australia, are yet to sign the treaty.
On the flip side, more developing nations may realise the benefits of earning carbon credits, and encashing them at huge profits with low investments. They may join the trade and boost supplies. Already, Russia has become a serious player. In India itself, more firms are likely to join the fray. Along with hoarded credits, the extra supply may plummet prices further. At the end of the day, suppliers will have to smarten up to the fact that carbon trading will be like any other commodity, where prices can swing wildly.
Whatever happens to the global carbon credits, the biggest advantage that will accrue to India is in highly reduced pollution levels. As companies scramble to rush into the global race to earn credits and trade in them, it will automatically reduce emission levels to unprecedented lows, an area where past Indian governments had limited success. (For example, in Delhi, it's the courts that enabled a reduction in pollution.) And this is something that the billion-plus Indian population is sure to welcome.
