India looks to tap carbon market
By Siddharth Srivastava
NEW DELHI - It is a market expected to grow to US$100 billion in the near
future, and Indian firms want to reap some of the benefits.
The Clean Development Mechanism (CDM) under the Kyoto Protocol allows richer
countries to trade their emission-reduction targets with developing countries
by buying carbon credits earned by the latter for projects reducing emission of
greenhouse gases, those suspected of accumulating in the Earth's atmosphere and
trapping the sun's heat, contributing to global warming.
Recent estimates predict that uncontrolled carbon emissions could cost the
global economy more than $200 billion annually by
2030 unless the pollution levels are controlled. Environmental group Greenpeace
has said that shifting to renewable energy and reducing carbon emissions could
save Southeast Asia $80 billion annually.
Indeed, with the Western world (read Europe and Canada, not the United States
yet) looking at the CDM seriously, Indian firms do not want to lose out on the
business opportunity due to investments in clean technology.
Recently, an Indian firm won the single largest issuance of carbon credits by
the United Nations Framework Convention on Climate Change, which awarded 5.4
million carbon credits to two projects owned by India's JSW Steel. One project
was issued 4 million carbon credits, the single biggest credit.
The Federation of Indian Chambers of Commerce and Industry has said that Indian
companies may earn almost $4 billion through carbon-credit sales in the near
future.
Institutional mechanism
Indeed, an institutional mechanism is quickly emerging in India to take
advantage of CDM. This is critical. Given the vast country that is India, it is
essential that an organized framework reaches the grassroots level where
numerous green projects could be eligible under CDM.
This month, the country's largest lender and oldest bank, the State Bank of
India (SBI), tied up with three entities to provide a comprehensive framework
for industries to take advantage of CDM projects. State-owned SBI has the
largest rural network in the world and exists in places where no private Indian
or foreign bank will reach for some time to come. The entities that the bank
has tied up with are Pune-based MITCON Consultancy Services, Ecosecurities
India Pvt Ltd, and Cantor CO2E India Pvt Ltd.
"SBI proposes to provide a single-point delivery of services related to carbon
credits/CDM under the Kyoto Protocol to its customers,'' SBI chairman O P Bhatt
said. These would include advisory services and value-added products such as
securitization of carbon-credit receivables, delivery guarantees and escrow
mechanism for carbon credits, apart from finance to implement CDM projects, he
said.
"With so many potential buyers and sellers in this market, counter-party risk
can become a key area in carbon-credits trading, and SBI, with its wide Indian
and international presence, can play a major role here," he said.
London-based EcoSecurities is a global leader in developing and trading carbon
credits and has been expanding its presence in India. It structures and guides
projects for reduction of greenhouse-gas emission, acting as the principal
intermediary between the projects and the buyers of carbon credits.
CDM consultancy is already a big business in India, with revenues rising
substantially over the past couple of years. Following in the footsteps of SBI,
India's largest private-sector bank, ICICI Bank Ltd, too announced that it has
signed a memorandum of understanding with MITCON to service firms engaged in
the CDM business.
"With global warming becoming a concern worldwide and the industry sensing the
need to move on to CDM and green projects, this memorandum will be our platform
to facilitate SMEs [small and medium-sized enterprises] to make this movement
toward such projects," Sanjeev Mantri, general manager of ICICI Bank, said in a
statement.
Last December, the Industrial Development Bank of India Ltd (IDBI) entered a
non-exclusive memorandum with Washington-headquartered International Finance
Corp, the private-sector arm of the World Bank, to assist Indian companies
jointly in CDM projects.
The two financial intermediaries have also been seeking to help companies
realize the value of the carbon credits by selling them in global markets.
IDBI has a pool of industrial clients that can seek advice. However, it does
not have the kind of exhaustive bridge SBI could be capable of extending. Last
October, IDBI entered a similar non-exclusive memo with MITCON and later
Germany-based KfW Bankengruppe.
Apart from the banking system, other forums are likely to emerge to help the
growth of CDM projects in India.
Prime Minister Manmohan Singh has spoken about the need for India to tap the
CDM potential. The federal government has constituted the National CDM
Authority to evaluate, review and encourage projects. Many government projects
such as the Delhi Metro are looking at the green option to earn carbon
revenues.
India's federal Parliament should be looking to legislate within this year
whether to permit the Multi-Commodities Exchange (MCX) to trade carbon credits,
the bourse's joint managing director Lamon Rutten said in an interview
recently. "We hope to get the approval," Rutten said.
The permission to trade carbon credits would enable Mumbai-based MCX to proceed
with establishing a platform to buy and sell certified emission reductions
(CERs). Countries such as China, Australia, Singapore and New Zealand are
looking at various options related to a carbon exchange. Trade in voluntary
emission-reduction credits is spreading with new exchange-based initiatives in
these countries.
Expectations high
Since carbon trading took off in India two years ago, domestic companies have
earned about $500 million from carbon-credit sales, according to consulting
firm Ernst & Young. India has cornered nearly 43% of CERs issued so far by
the CDM executive board, the highest under the Kyoto Protocol. Seventeen
percent of the CERs have been issued to China.
But the expected average annual income from registered projects through 2012
has China (44%) far ahead of India (15%), although India, with 259 projects,
leads China (101) in the number of registered projects.
Indian expectations continue to be high. Recently, New Delhi has asked industry
to bunch up CDM projects that can be traded in the current $30 billion global
carbon-credit market. Because of the small size of CDM projects, Indian
companies are unable to cash in the carbon credits, because of procedural
costs.
SBI has said analysts peg the global carbon-trading market at $100 billion by
2010, and the Indian carbon market has the potential to supply 30-50% of the
projected global market of 700 million CERs by 2012.
According to the director of the Environment and Forest Planning Commission, S
K Panigrahi, Orissa, West Bengal and Jharkhand together can earn CERs of Rs10
billion ($244 million) by 2012 if they take to CDM. Orissa alone is capable of
earning Rs2.5 billion in the way of CERs, he said. A number of coal-based as
well as steel and aluminum units are being set up in eastern India.
Siddharth Srivastava is a New Delhi-based journalist.
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