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Status and potential of energy and carbon trading in india


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Emission Trading in India: Inception to present status with future scope beyond KYOTO (2012)

Emission Trading in India: Inception to present status with future scope beyond KYOTO (2012)

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  • 1. Carbon Finance Faculty: Ashwani Kumar (Asst. Prof, CEPT, Ahmadabad-9) 2011Status and Potential of Energy and Carbon Trading in India ABHIK TUSHAR DAS, AJAY CECIL, ANAND SINGH Executive MBA 2010 11/21/2011 Monday, 21 November 2011 Page 1
  • 2. Status and Potential of Energy and Carbon Trading in IndiaSchool Of Petroleum Management, Gandhinagar, Gujarat, IndiaTable of contents:S No Topic Page Number 1 Executive Summary, Timeline of major Climate Change Events 3 to 5 2 Why Carbon Markets? 5 to 8 3 KYOTO plan and its implications 8 to 11 4 Indian Energy scenario 11 to 14 5 Fuel substitution 14 to 16 6 Renewable Energy 16 to 17 7 Technology Transfer 18 to 19 8 Project Sustainability 19 to 20 9 CDM Projects in India 21 to 24 10 The Trading Mechanism 24 to 29 11 Carbon Trading Participants & Platform 30 to 32 12 Post KYOTO? 32 to 33 13 Conclusion 2 Executive MBA 2010
  • 3. Status and Potential of Energy and Carbon Trading in IndiaSchool Of Petroleum Management, Gandhinagar, Gujarat, IndiaExecutive Summary:Carbon is the major constituent of all GHG which are the root cause of Global Warming. Asthe GHGs are transparent to incoming solar radiation, but opaque to outgoing long-waveradiation, an increase in the levels of GHGs could lead to greater warming, which, in turn,could have an impact on the worlds climate, leading to the phenomenon known as climatechange.Important greenhouse gases are;S No. GHG constituent GWP % change* Atmospheric Impact between 1750 Life (Years) (%) and 20001 Carbon dioxide (CO2) 1 31% 5-200 70-72%2 Methane (CH4) 21 151% 12 20%3 Nitrous oxide (N2O) 310 17% 114 6-7%4 Hydro-fluorocarbons 140-11700 - 1.4-260 - (HFC)5 Per-fluoro-carbons 7000-9200 - 10,000 to - (PFC) 50,000+6 Sulphur hexafluoride 23900 - 3200 - (SF6)*Intergovernmental Panel on Climate Change, IPCC 2001- Miniscule contribution, not measuredGWP: Global Warming Potential (amount of heat retention ability of the gas as CO2equivalent)Atmospheric life: The time the gas stays in the atmosphereScientific evidence linking chlorofluorocarbons (CFCs) and other Ozone DepletingSubstances (ODSs) to global ozone depletion led to the initial control of chemicals under the1987 Montreal Protocol. Emissions of the fluorinated gases (F-gases) (hydro fluorocarbons(HFCs), per fluorocarbons (PFCs) and SF6) controlled under the Kyoto Protocol grew rapidly(primarily HFCs) during the 1990s as they replaced ODS. Atmospheric CO2 concentrationshave increased by almost 100 parts-per-million since their pre-industrial level, reaching 379parts-per-million in 2005, with mean annual growth rates in the 2000-2005 periods higherthan in the 1990s. The total CO2-equivalent (CO2-eq) concentration of all long-lived GHGs isnow about 455 parts-per-million CO2-equivalent.The World Meteorological Organization (WMO) together with United Nations EnvironmentProgram set up an international multidisciplinary collaborative effort to ensure involvementof policymakers, general public and environmental scientists towards resolving 3 Executive MBA 2010
  • 4. Status and Potential of Energy and Carbon Trading in IndiaSchool Of Petroleum Management, Gandhinagar, Gujarat, Indiacontentious issue of Global temperature rise. The Intergovernmental Panel on ClimateChange (IPCC) was divided into three working groups dealing with; 1. Dynamics of climate change 2. Potential impacts of climate change 3. Response to threat of climate change, including adaptation (reduce the vulnerability of natural and human systems)The growing pressure on countries to address climate change has given rise to a multi-million dollar international market for buying and selling emissions of greenhouse gases.Timeline:  1979/ 85/ 87: World Climate Conferences  1988: WMO + UNEP establish IPCC  1990: FAR (First Assessment Report)  1992: UNFCC adopted – Earth Summit @ Rio-de-Janerio  1995: COP-1 (Berlin)  1995: SAR (Second Assessment Report)  1996: COP-2 (Switzerland)  1997: COP-3: Kyoto Protocol  1998: COP-4 (Argentina)  1999: Cop-5 (Germany)  2000: COP-6 (Netherland)  2001: TAR (Third Assessment Report)  2001: COP-7 Marrakesh Accord (Morocco)  2002: COP-8 (India)  2003: COP-9 (Italy)  2004: COP-10 (Argentina)  2005: COP-11/ MOP-1 (Canada)  2006: COP-12/ MOP-2 (Kenya)  2007: COP-13/ MOP-3 (Indonesia)  2008: COP-14/ MOP-4 (Poland)  2009: COP-15/ MOP-5 (Denmark)  2010: COP-16/ MOP-6 (Mexico)  2011: COP-17/ MOP-7 (South Africa)COP: Conference of PartiesMOP: Meeting of the 4 Executive MBA 2010
  • 5. Status and Potential of Energy and Carbon Trading in IndiaSchool Of Petroleum Management, Gandhinagar, Gujarat, IndiaThe Greenhouse Effect: The greenhouse effect is a process by which thermal radiation froma planetary surface is absorbed by atmospheric greenhouse gases, and is re-radiated in alldirections. Since part of this re-radiation is back towards the surface, energy is transferredto the surface and the lower atmosphere. As a result, the temperature there is higher thanit would be if direct heating by solar radiation were the only warming mechanism. Withoutthe natural Greenhouse Effect, the average temperature of the earth would be around -18deg Celsius (-0.4 deg Fahrenheit).Earth’s natural greenhouse effect makes life as we know it possible, however, humanactivities, primarily the burning of fossil fuels and clearing of forests, have greatly intensifiedthe natural greenhouse effect, causing global warming.Impacts of Climate Change: 1. Temperature rise (5-10 deg F in next 100 years) 2. Rise in sea levels (SLR), coastal flooding 3. Melting of Glaciers 4. Frequent and intense Heat waves, Wildfires 5. Droughts 6. Extinction of certain species 7. Enhanced evaporation from seas leading to heavy (intense) downpours 8. Melting of Perma-frost in Arctic threatening ecosystemsWhy Carbon Markets?Post KYOTO Protocol, businesses in ANNEX-1/ ANNEX-2 countries need to alter theirbusiness decisions to align with regulations imposed on them in a cost effective way. Theseregulations can be mitigated either by investing in cleaner business practices or bypurchasing credits (equivalent to 1 metric tonne of CO2 emission) from another operatorwith spare emission allowance. Under International Emissions Trading (IET), countries cantrade in the international carbon credit market to cover their shortfalls in allowances bythree Market based methods; 1. Joint Implementation (article 6 of KYOTO Protocol): A system under which advanced countries jointly implement a project and the countries that invest in the project can use the number of emissions reduced by the project to achieve their targets. 2. Clean Development Mechanism (article 12 of KYOTO Protocol): A system under which a advanced country and a developing country jointly implement a project, 5 Executive MBA 2010
  • 6. Status and Potential of Energy and Carbon Trading in IndiaSchool Of Petroleum Management, Gandhinagar, Gujarat, India country investing in the project can use the amount of emissions reduced by the project to achieve its target. 3. Emission trading (article 17 of KYOTO Protocol): A system under which advanced countries sell and buy emissions to achieve their respective targets. Joint ERU Implementation Project Based CDM CER Carbon Market Allowance Emission AAU/ RMU Based Trading Voluntary Based VEROther greenhouse gasses can also be traded, but are quoted as standard multiples of carbondioxide with respect to their global warming potentialThe cost of implementing a carbon cap in an Annex-1/ 2 (Developed) countries issignificantly higher than that in a Non-Annex (Developing) country. This is the primary driverfor implementation of Carbon Credit trading mechanism wherein the carbon cap can beoffset by reducing the carbon output of the countries where redundant technology can bereplaced by highly efficient greener technologies with less capital expenditure and negativeimpact to the economy.Carbon Trading Exchanges:There are six emission trading exchanges which serve to connect the emitter with the Creditgenerator 1. Chicago Climate Exchange: The now defunct Chicago Climate Exchange (CCX) was North America’s only voluntary, legally binding greenhouse gas (GHG) reduction and trading system for emission sources and offset projects in North America and Brazil. Trading reached zero monthly volume in February 2010 and remained at zero for the next 9 months when the decision to close the exchange was announced due to inactivity in the U.S. carbon markets. 2. European Climate Exchange: ECX / ICE Futures is the most liquid, pan-European platform for carbon emissions trading, with its futures contract based on the underlying EU Allowances (EUAs) and Certified Emissions Allowances (CERs) attracting over 80% of the exchange-traded volume in the European market. ECX contracts (EUA and CER Futures, options and spot contracts) are standardised exchange-traded 6 Executive MBA 2010
  • 7. Status and Potential of Energy and Carbon Trading in IndiaSchool Of Petroleum Management, Gandhinagar, Gujarat, India 3. NASDAQ OMX Commodities Europe (Nord Pool): Nord Pool was the largest power derivatives exchange and the second largest exchange in European Union emission allowances (EUAs) and global certified emission reductions (CERs) trading. 4. POWERNEXT: POWERNEXT is a regulated investment firm based in Paris and operating under the multilateral trading facility status. POWERNEXT designs and operates electronic trading platforms for spot and derivatives markets in the European energy sector. 5. Commodity Exchange Bratislava: Formerly BMKB, then BCE, now CEB is a European commodity exchange made for organising market with commodities according to adjudication of Ministry of Economy of the Slovak Republic. It is the first exchange that has started non-stop online trading and clearing. 6. European Energy Exchange: EEX operates market platforms for trading in electric energy, natural gas, CO2 emission allowances and coal.Cap-and-trade (originating from the Acid Rain crisis of the US in the 1980s) has beencredited with not only allowing the US to successfully overcome it, but is also finding favourin addressing the issue of global warming. The offsets created through a baseline and creditapproach, and a carbon tax are all market-based approaches that put a price on carbon andother greenhouse gases and provide an economic incentive to reduce emissions, beginningwith the lowest-cost opportunities.The two main types of schemes are; 1. cap and trade scheme: polluter purchases credits 2. baseline and credit scheme: polluter sells creditsThe emissions trading program can be called a "cap-and-trade" approach in which anaggregate cap on all sources is established and these sources are then allowed to tradeamongst themselves to determine which sources actually emit the total pollution load. Analternative approach with important differences is a baseline and credit program whereinpolluters that are not under an aggregate cap can create credits, usually called offsets, byreducing their emissions below a baseline level of emissions. Such credits can be purchasedby polluters that do have a regulatory limit.Emergence of the Carbon Market:In the late 1990’s and early 2000’s, some American and Canadian companies had startedundertaking voluntary commitments to limit Greenhouse Gas emissions. Post KYOTO, aPrototype Carbon Fund (PCF) with participation of 6 Governments and 15 private companieswas formed to pool resources (US$180 million) to purchase emission reduction creditsunder the JI and CDM mechanisms. The fund which was established in 1999, was managedby the World Bank signed the first emission reduction purchase agreement for a CDMProject in Chile in 2002. The adoption of the Marrakech Accord (2001) led to more 7 Executive MBA 2010
  • 8. Status and Potential of Energy and Carbon Trading in IndiaSchool Of Petroleum Management, Gandhinagar, Gujarat, Indiaof players in the carbon market, with the Government of the Netherlands floating the firstcarbon tender for CDM and JI. Lately Banks and Financial institutions have started investingin the carbon markets foreseeing huge potential demand from the regulated economies.The rapid growth in the Carbon Market can directly be attributed to the EU-ETS (emissiontrading system) and the KYOTO Protocol.KYOTO plan and its implications:The convention established the Conference of Parties (COP) as its supreme body with theresponsibility to oversee the progress towards the aim of the Convention. The protocol alsoallows these countries the option of deciding which of the six gases will form part of theirnational emission reduction strategy. Some activities in the Land use- Land use change-Forestry (LULUCF) sector such as a-forestation and reforestation that absorb CO2 from theatmosphere are also covered.KYOTO Parties in Carbon Market: 1. ANNEX-1 (41 countries): countries agreed to reduce their collective greenhouse gas emissions by 5.2% from the 1990 level 2. ANNEX-2 (23 countries): these countries are expected to provide financial resources to assist developing countries to comply with their obligations, such as preparing national reports. Annex II countries are also expected to promote the transfer of environmentally sound technologies to developing countries. 3. Non-Annex-1: Parties are mostly developing countries, especially vulnerable to the adverse impacts of climate change and that rely heavily on income from fossil fuel production and commerce.Emission Credits (allowance based): 1. AAU: Assigned Amount Units are the emission allowances assigned to the various countries in the KYOTO Protocol for a commitment period. These allowances depend upon the emission targets which the countries have to meet during the KYOTO window period of 2008-12. Total amount of AAU’s of an Annex-1 party is calculated from its base year emissions and emission reduction targets. 2. RMU: Removal Units are emission allowances which are generated in addition to AAU’s as a result of an increase in the National Sink Performance. As sinks do not contribute to the sustainable CO2 limitations, RMU’s expire at the end of the commitment period. Total RMU’s of an Annex-1 party is calculated from the net removal of GHG’s by Afforestation and Reforestation (A/R). 3. ERU: Emission Certificates derive from completion of JI projects between two industrialized countries are called Emission Reduction Units. 4. CER: Emission Certificates derived from the successful completion of CDM Projects traded or used by the Project 8 Executive MBA 2010
  • 9. Status and Potential of Energy and Carbon Trading in IndiaSchool Of Petroleum Management, Gandhinagar, Gujarat, India  T-CER: A temporary CER certificate issued for CDM projects associated with a- forestation and reforestation projects of CDM. Such CER’s expire at the end of commitment period and can be renewed if carbon sequestration is done by defined methodologies.  L-CER: A long term CER certificate issued for CDM projects associated with a- forestation and reforestation projects of CDM. L-CERs therefore differ from temporary certified emission reductions (t-CER’s) in that L-CER’s expire at the end of the crediting period of the project, while t-CER’s expire at the end of the commitment period in which they were issued. Project participants in a-forestation and reforestation (A/R) may choose whether to receive t-CERs or L-CERs for emission reductions attributable to the project. 5. EUA: European Union Allowance are the emission allowances assigned to companies participating in the European emission trading scheme. These allowances are assigned to individual companies by each EU Member State. AAU’s RMU’s ERU+CER Emission Trading Units + + +/- Emission Cap of Annex-1 PartyIf an Emission cap of an Annex-1 Party is more than its GHG Emissions during the 1 stcommitment period, the surplus can be carried over to the subsequent commitment period.Conversely, if the GHG emission during the 1st commitment period of an Annex-1 Party ismore than its emission cap, the Annex-1 party will be deemed to be non-compliance of theKYOTO Protocol and would be levied a penalty in the form of deduction of allowance fromthe 2nd commitment period for an amount equal to 1.3 times the number of tonnes ofexcess 9 Executive MBA 2010
  • 10. Status and Potential of Energy and Carbon Trading in IndiaSchool Of Petroleum Management, Gandhinagar, Gujarat, IndiaInternational Emission Trading Schematic: With EMISSION TRADING Party-X Party-Y Total Emission Cap (Before Trading) (units) 10 8 18 Trading of Units (units) 1 -1 0 Emission Cap (After Trading) (units) 11 7 18 GHG Emissions (units) 12 10 22 Required emission reductions (units) 1 3 4 Unit Cost of reduction (US$) 200 100 - Total Cost of Reduction (US$) 200 300 500 Trading Cost (US$) 150 -150 0 Total Cost of compliance (US$) 350 150 500Unit: 1 Metric Tonne of CO2 equivalentUnit cost = US$150 WITHOUT EMISSION TRADING Party-X Party-Y Total Emission Cap (Before Trading) (units) 10 8 18 Trading of Units (units) NA NA NA Emission Cap (After Trading) (units) 10 8 18 GHG Emissions (units) 12 10 22 Required emission reductions (units) 2 2 4 Unit Cost of reduction (US$) 200 100 - Total Cost of Reduction (US$) 400 200 600 Trading Cost (US$) NA NA NA Total Cost of compliance (US$) 400 200 600Unit: 1 Metric Tonne of CO2 equivalentEmission Credits (voluntary based):Emission offset mechanism outside the KYOTO Protocol is known as the VER (VoluntaryEmission Reduction) which are not standardized commodity and hence fetch a discountedprice as compared to the allowance based units. The VER market is characterized by thefollowing set of objectives;  To make a quantifiable contribution towards reducing emissions  Enhance public relations  Generate goodwill by entering the Carbon Market  Manage Corporate Social Responsibilities (CSR)  Become Carbon neutralVER can vary largely with their quality (actual emission reduction achieved for each unit ofstandard value 1 Metric Tonne of CO2 claimed) depending on the supplier and buyer.Parties involved in such transactions should make proper due diligence before 10 Executive MBA 2010
  • 11. Status and Potential of Energy and Carbon Trading in IndiaSchool Of Petroleum Management, Gandhinagar, Gujarat, Indiapurchasing decisions. VCS (Voluntary Carbon Standard) are being recognized to promotesustainable development alongside greenhouse gas emission reduction objectives. VER’s ifstandardized and generated through UN approved processes and issued through ainternationally recognized body, would demand a similar price as compared to the CER/AAU.Gold Standard VER’s:The rigorous Gold Standard certification (backed by World Wide Fund for Nature- WWF)process ensures genuine quality, and like all high end products, Gold Standard carbonoffsets carry a price premium. The Gold Standard approach delivers not only better qualityprojects but also more commercially viable investments. 1. The Gold Standard is the benchmark global carbon standard 2. Gold Standard certified carbon credits sell at a price premium due to their high quality, robustness and sustainable development benefits 3. The Gold Standard has nearly a decade of expertise and great market recognition 4. There is high end-buyer demand 5. Projects are more likely to be eligible for future compliance schemes 6. Reduced reputational risk, endorsed and supported by more than 80 NGOs worldwide 7. UN accredited auditors, supplemented by GS in-house expertsIndian Energy scenario:The GOI (Government of India) plans to achieve a GDP (gross domestic product) growth rateof 10% in the Eleventh Five Year Plan and maintain an average growth rate of about 8% inthe next 15 years (Planning Commission 2002). Given the plans for rapid economic growth,it is evident that the country’s requirements for energy and supporting infrastructure wouldincrease rapidly as well.Total Energy consumption % in India; 1. Combustible Renewable and Waste: 27.2% 2. Hydro: 1.8% 3. Oil: 23.7% 4. Nuclear: 0.8% 5. Coal/Peat: 40.8% 6. Natural gas: 5.6% 7. Other Renewable: 11 Executive MBA 2010
  • 12. Status and Potential of Energy and Carbon Trading in IndiaSchool Of Petroleum Management, Gandhinagar, Gujarat, IndiaAs is evident, the primary energy source fir India is dominated by Coal consumption whichdrives the economy. Coal has high carbon content (Commercial coal has a carbon content ofat least 70%) and hence is a major pollutant in terms of GHG emissions. Because the atomicweight of carbon is 12 and that of oxygen is 16, the atomic weight of carbon dioxide is 44.Based on that ratio, and assuming complete combustion, 1 pound of carbon combines with2.667 pounds of oxygen to produce 3.667 pounds of carbon dioxide. For example, coal witha carbon content of 78 percent and a heating value of 14,000 Btu per pound emits about204.3 pounds of carbon dioxide per million Btu when completely 12 Executive MBA 2010
  • 13. Status and Potential of Energy and Carbon Trading in IndiaSchool Of Petroleum Management, Gandhinagar, Gujarat, IndiaIndia set a voluntary target to cut its carbon intensity, or the amount of carbon dioxidereleased per unit of GDP, by as much as 25 percent by 2020 from 2005 levels. No additionalmeasures will be offered to reduce CO2, the main greenhouse gas scientists blame forclimate change. If India has to reduce its carbon emissions, it would mean a majorreorientation of her energy strategy, especially if that warranted a shift from its currentcoal-based to a oil and gas based energy system. A 30% CO2 reduction over a period of 30years using annual emissions reduction targets leads to a fall in GDP of 4% and raises thenumber of poor by 17.5% in the 30th year.It can be seen that the bottom 50% of rural people emitted in 1990 a mere 54 kg of carbonper person per year. The richest 10% of urban people emitted 12 times as much at 656 kg ofCarbon per person per year, which is still way below the world average of 1.1 tonne andmuch below the average emission in developed countries.Government initiatives in reducing Carbon Emissions:  Emphasis on energy conservation: Promotion of use of CFL lamps, mandatory BEE certification  Promotion of renewable energy sources: JNNSM,  Abatement of air pollution:  Afforestation and wasteland development.  Economic reforms, subsidy removal and joint ventures in capital goods.  Fuel substitution 13 Executive MBA 2010
  • 14. Status and Potential of Energy and Carbon Trading in IndiaSchool Of Petroleum Management, Gandhinagar, Gujarat, India Population Carbon Energy intensity intensity of GDP GDP per Capita CARBON EMISSIONSThe Carbon Emission basket can be reduced by controlling one of the four parameters; 1. Carbon intensity: The amount of carbon by weight emitted per unit of energy consumed. 2. Energy intensity of GDP: Energy intensity is a measure of the energy efficiency of a nations economy (energy per unit of GDP). 3. GDP per capita: A measure of the total output of a country that takes the gross domestic product (GDP) and divides it by the number of people in the country. 4. Population: The entire pool of people contributing to the GDP of a country.Fuel substitution:Coal was initially the mainstay of commercial energy and use of oil and gas was not allowedfor some sectors. More recently, many sectors have switched to the use of fuels other thancoal. For example, the power sector is permitted to use natural gas. Coal-based fertilizerplants no longer function and coal use in railways is almost phased out. Consumers’preferences for clean and easily available fuel, oil is preferred in part because thedistribution infrastructure for petroleum is better. Natural gas emits 60% less carbon dioxidethan coal and 42% less than oil for a comparable unit of consumption, although it does emitother non-carbon greenhouse gases. Gas is an efficient fuel and saves up to 30% of energyin most applications. Unlike nuclear energy, natural gas do not pose waste disposal or safetyproblems. And it is available in abundance. If any single factor can substantially 14 Executive MBA 2010
  • 15. Status and Potential of Energy and Carbon Trading in IndiaSchool Of Petroleum Management, Gandhinagar, Gujarat, Indiacarbon intensity in the global economy, it is inter-fuel substitution or replacement ofconventional fuels such as coal and oil by natural gas.Gas is regarded as a regional resource, more than two-thirds of proven gas reserves in theworld are clustered in and around two oil-rich regions; Russia and the Persian Gulf, notablyIran and Saudi Arabia-and significant gas reserves are found in Algeria, Indonesia, Trinidadand Tobago and Turkmenistan. China and India, which together account for a third of globalincremental energy demand, have only modest gas deposits. Other major energy importerssuch as the United States, Europe, Japan and South Korea have either modest gas depositsor none at all. Technological breakthroughs in combined cycle gas turbines have renderedgas-fuelled generation highly efficient. Plants with such turbines can be set up in a shorttime and require much less initial capital investment than hydroelectricity or coal firedpower generation plants. India, with its focus on food security, consumes 40% of its gas inthe fertilizer sector. The UNFCC and Kyoto Protocol are perceived to have key roles infacilitating the switch to cleaner gas.According to the National Communication submitted by India to the Kyoto Secretariat, coalbased power generation contributes to half of the country’s carbon emissions.Transportation accounted for 10% of carbon emissions a decade ago, but considering thegrowth of cars on Indian roads, that figure must have gone up substantially since then. Fromthe perspective of a cleaner environment, inter-fuel substitution should ideally targetsectors with maximum emissions, namely, power generation and transportation.Inter-fuel substitution away from polluting coal/ oil and towards clean gas is seriouslyconstrained by the prevailing price of gas, availability of transport fuel substitutes likesubsidised diesel and the poor distribution infrastructure.For countries committed to Kyoto commitments to reduce carbon, nuclear energy willprovide an attractive alternative to gas. Among the technologies which could deliver acontribution to emission reduction, nuclear power generation plays a crucial role. Howeverthere are a lot of alternative energy sources, the costs of renewable sources are fallingrapidly: in the last 10 years the cost per kWh of electricity from wind turbines fell by 50%,and that from photovoltaic cells fell by 30%. The costs of nuclear power are rising, despitethe fact that nuclear power has been hugely subsidized over the last half century and manyserious problems associated with nuclear power that have existed since its introduction 15 Executive MBA 2010
  • 16. Status and Potential of Energy and Carbon Trading in IndiaSchool Of Petroleum Management, Gandhinagar, Gujarat, Indiaare still not resolved (decay time of nuclear waste, concerns over safety, health risks due toexposure to radiation). One of the by-products of most nuclear reactors is plutonium-239,which can be used in nuclear weapons. Nuclear installations could also become targets forterrorist attacks and radioactive material could be used by terrorists to make "dirty bombs".Renewable energy sources have multiple benefits. They are free from greenhouse gasemissions and can also increase diversity in the energy market. They can provide long-termsustainability of our energy supply and can be used in rural areas of less developedcountries that are not connected to gas and electricity networks.Renewable Energy:Renewable energy source to meet growing energy needs can be capitalised to acquirecarbon credits. These carbon credits are sold on international markets generating incomefor the owner of the credits. Carbon credits, which are issued to organizations based ontheir efforts to limit climate change, and renewable energy projects are intricately linked inIndia.A carbon credit represents the removal of one ton of carbon dioxide or its green-house gas(GHG) equivalent from the environment. Firms in the European Union and the OECDmember countries are buying carbon credits called CER (Certified Emission Reductions) fromfirms in India. CER are registered and issued by the Executive Board of the CleanDevelopment Mechanism (CDM) of United Nations Framework Convention on ClimateChange. CER are used to meet a part of the obligations in the EU and OECD countries toreduce GHG emissions; obligations that were agreed upon in the Kyoto Protocol and arenow mandated by national governments.The World Bank estimates that in 2006 approximately US $5 billion worth of CER were sold.The European Climate Exchange added CER Futures for trading in March 2008, followed byCER Options in May 2008. The CER for December 2008 delivery was trading at about US $30(EU €21) on September 1 on the European Climate Exchange.Financing of renewable energy projects via carbon credits is a relatively new activity in India.It requires simple and innovative models that are easy to implement, manage and finance.Renewable energy firms like C-TRADE are working to help develop renewable energyprojects through carbon financing. C-TRADE develops renewable energy projects indeveloping countries and finances them partly by having the rights to the carbon creditsthat the project will generate. Its biogas renewable energy projects turn waste manure fromfarms into electricity that the farmers use. The projects are completed on a Build-Operate-Transfer (BOT) basis, transferring the asset to the farmer at the end of the agreementperiod. C-Trade finances the entire operation. Because many of the renewable energyprojects in India tend to be on the smaller scale, innovative business models have madeaggregation of investments possible in these projects. Developers of these projects arestarting to use the growing market for carbon credits to finance a part of their project 16 Executive MBA 2010
  • 17. Status and Potential of Energy and Carbon Trading in IndiaSchool Of Petroleum Management, Gandhinagar, Gujarat, IndiaIn recent years, the wind energy market has grown significantly and much of this growth canbe attributed to supportive governmental policies and innovations in management andfinancing. A 6.5-megawatt (MW) wind energy project in the state of Madhya Pradesh wasissued 10,413 CER for offsetting green house gas emissions over a 13-month period. With 5wind turbines, the wind farm is owned by a consortium of 5 companies but operated andmaintained by the supplier.Wind turbines in another 9.6-MW project being developed by a hotel firm are also operatedand maintained by their supplier. This project is expected to generate 15,245 CER annuallyfor 10 years. At the CER price of US $30, the project could generate about US $457,000annually, which is equivalent to about US $47 worth of CER per KW of installed capacity.In India, an additional 70,000 MW of electricity generation capacity is expected to be builtbetween 2007 and 2012 and about 21% of this addition is expected to come fromrenewable sources. Small Hydro potential in India is estimated to be 15,000 MW and as ofMarch 2008 about 2,000 MW projects have already been installed. Small hydro electricprojects of various sizes are taking advantage of carbon credit financing.The mountainous state of UTTARAKHAND has an active list of hydro electric projects ofvarious sizes under development and at the proposal stage. Many potential project siteshave been identified in the state for development of hydro-electric projects. These include alarge number of run-of-river projects ranging from 0.4 MW to 230 MW, and also a few largeprojects (between 25 and 100 MW) based on water storage. The four small hydro projectsfor which project design documents have been prepared for CDM are expected to generate160,000 carbon credits valued at US $1.6 million per yearNote: This is based on a CER priced at US $10, not the current price of US $30 — the value atcurrent CER price will be three times this amount.In the past sugar mills in India have been able to generate energy for their use from bagasse(sugarcane pulp) however, the mills were unable to supply the surplus power to the grid,and had little incentive to use efficient technologies. Some of the CDM projects are changingthis. One bagasse based renewable energy project at a sugar factory in India is expected tooffset 42,446 tons of carbon dioxide annually for ten years. This 9-MW biomass renewableproject was issued 33,434 CER between May 2006 and March 2007. It supplies electricity tothe state electricity grid, replacing the need to build more fossil-fuel based power plants.In the past few years a large number of renewable energy projects have benefited fromcarbon financing, meeting the energy security needs, and preventing the release of greenhouse gases into the atmosphere. Still, many dispersed and disaggregated renewableenergy activities have not yet been able to tap markets for carbon credits. With thedevelopment of the carbon credit market and new approaches to renewable energybusinesses and policy this may change in the 17 Executive MBA 2010
  • 18. Status and Potential of Energy and Carbon Trading in IndiaSchool Of Petroleum Management, Gandhinagar, Gujarat, IndiaTechnology Transfer:The role of technology is critical in achieving any carbon targets and there is a need forcomplementary policies and cooperation to support technology development and diffusion.In part, a sufficiently long horizon for the price of carbon should provide a stimulus, but theCopenhagen discussions will also consider the extent to which multilateral co-operation canbe effective in transferring technology to developing countries and how this should link withother areas such as foreign assistance programs and trade policyIndia has announced that it will endeavor to reduce emissions intensity of GDP by 20 to 25percent in comparison to the 2005 level by 2020. Government has launched National ActionPlan on Climate Change that includes National Solar Mission and National Mission onEnhanced Energy Efficiency which aim at reducing emissions intensity of GDP.The Indian Government follows the policy of sustainable development through a range ofprograms aimed at; Energy Conservation  Improved Energy Efficiency in various sectors  Promoting use of Renewable Energy  Power Sector Reforms  Use of Cleaner and Lesser Carbon Intensive fuel for transport  Fuel Switching to Cleaner Energy  Forestation and Conservation of Forests  Promotion of Clean Coal Technologies  Encouraging Mass Rapid Transport systemsThe centrality of the technology question comes from the realisation that a reduction ofemissions consistent with the objective of the European Union, which is to keep globalwarming under 2 °C higher than pre-industrial levels, would entail developed countrieshaving to reduce their emissions in the range of 25–40% by 2020 and 80–95% by 2050,whereas developing countries would need to limit the rise in their greenhouse gas emissions(GHG) by 15–30% below those of 1990 by 2020. To reach such an ambitious goal asignificant scale-up of public and private research and development (R&D) programs as wellas enhanced deployment and diffusion programs, together with private-sector investmentflows for mitigation technologies are necessary in both developed and developing countries.As developing countries often lack the capacity to develop and finance critical climatetechnologies, developed countries will have to increase the pace and extent of the currenttechnology transfer. This process involves not only the supply and shipment of hardware butalso requires developing processes covering the flows of know-how, experience andequipment and the capacity of developing countries to understand, utilize and replicate 18 Executive MBA 2010
  • 19. Status and Potential of Energy and Carbon Trading in IndiaSchool Of Petroleum Management, Gandhinagar, Gujarat, Indiatechnology, to adapt it to local conditions and integrate it with indigenous technologies. Thelatter is critical as only the acquisition of domestic capacities to master the receivedknowledge and to innovate from it will allow developing countries to sustain a low-carbonpath.In response to increasing awareness of the pressing need to boost technology transfer, in2001 the COP set up a comprehensive technology transfer framework, which led to theestablishment of a web-based portal for technology-related information, the conduct ofcapacity building programs and the elaboration of so called technology needs assessments(TNAs). The COP moreover supported efforts to improve policy and market conditions withthe aim of accelerating the uptake of technologies by developing countries. Finally, itcreated an Expert Group on Technology Transfer (EGTT) whose function is to identify waysto facilitate the development and transfer of technology activities.Project Sustainability:A range of activities can generate greenhouse gas reductions while advancing sustainabledevelopment. The carbon offsets market holds substantial promise as a source of catalyticfunding, but barriers often impede market access for small and medium sized enterprises,local government bodies, and development organizations. Green Markets carbon marketinformation program provides information and links to resources to increase knowledgeabout the greenhouse gas reduction market so that it can become more broadly inclusive,with the goal of helping to enable carbon market access for small-scale activities and forinitiatives conceived and implemented by stakeholders who might otherwise be left out.Sustainable Energy Acceleration:Under the sustainable energy acceleration program, Green Markets has worked to enhanceunderstanding about the climate protection attributes of renewable energy and energyefficiency applications, and to build knowledge about innovative financial mechanisms forsmall-scale sustainable energy technologies. Areas of focus have included:Solar Water HeatingWith support from the Renewable Energy and Energy Efficiency Partnership, Blue MoonFund, and Oak Foundation, Green Markets worked to boost the use of solar water heatingsystems for climate protection and economic development through the Innovative Financing to Accelerate Solar Water Heating initiative. Solar water heaters are often cost effective, locally manufactured in many countries, and can contribute substantially to climate protection and economic development. Yet solar water heater markets have remained small in many locations, even where conditions for market growth appear quite promising. Barriers related to the lack of available arrangements to address the 19 Executive MBA 2010
  • 20. Status and Potential of Energy and Carbon Trading in IndiaSchool Of Petroleum Management, Gandhinagar, Gujarat, Indiaup-front cost of the technology are commonly among the main impediments to marketgrowth for solar water heating. Innovative business structures such as fee-for-service andESCO operations and financial mechanisms such as carbon trading can help to surmountfinancial barriers and support growth in solar water heating markets.PV Solar Home Systems Photovoltaic solar home systems (SHS) have proven their ability to supply modern energy to rural areas of the developing world while directly reducing greenhouse gas emissions by replacing kerosene lamps and candles with solar powered electric lights. Carbon abatement per system is very small, yet PV SHS installations achieve perhaps the highest level of carbon abatement per Watt peak of PV. SHS projects also typically have substantial social benefits, increasingthe quality of life for rural households.Building on prior work examining the role for SHS in climate protection and development,developing standardized procedures for baseline setting and other aspects of carbon marketparticipation, and helping to create and support rural PV energy enterprises and consumerfinancing programs, Green Markets has worked to accelerate PV SHS dissemination byfacilitating access to carbon finance and through other strategies.Renewable Hybrid Mini-GridsDiesel generators commonly supply power for isolated communities and productiveapplications in off-grid areas across much of the world. Revenue from the sale of verified orcertified emission reductions can improve project economics and potentially catalyze diesel fuel replacement with renewable energy in mini-grid systems. Green Markets has worked to build knowledge about renewable energy options and carbon finance for diesel replacement in mini- grids, and to facilitate access to carbon finance and other environmental market programs for diesel replacement 20 Executive MBA 2010
  • 21. Status and Potential of Energy and Carbon Trading in IndiaSchool Of Petroleum Management, Gandhinagar, Gujarat, IndiaCDM Projects in India:Under the Clean Development Mechanism (CDM) of the United Nations FrameworkConvention on Climate Change (UNFCCC), carbon credits are earned by project proponentsthat develop and implement projects as per CDM modalities and procedures and areregistered by the CDM Executive Board. National Governments recommend such CDMprojects for registration with the Executive Board as contribute to sustainable development.As on Aug 2010, India has 520 registered CDM projects, out of the total 2313 projectsregistered by the CDM Executive Board of the UNFCCC, Ministry of State for Environmentand Forests. These projects have the potential to generate 43 million Certified EmissionReduction Units (CERs) per annum which amount to approximately 12% of the total annualCERs generated by registered CDM projects globally.As on date 79 million CERs have been issued to Indian projects and assuming a conservativeprice of $10 per CER, the value of actual CER issued to Indian projects amounts to US$ 790millionAnnex I countries that have ratified the Kyoto Protocol can invest in projects that bothreduce GHGs and contribute to sustainable development in non-Annex I countries. A CDMproject provides certified emissions reductions (CERs) to Annex I countries, which they canuse to meet their GHG reduction commitments under the Kyoto Protocol. Article 12 of theKyoto Protocol sets out three goals for the CDM: 1. To help mitigate climate change 2. To assist Annex I countries attain their emission reduction commitments 3. To assist developing countries in achieving sustainable developmentAs stated below the Clean Development Mechanism was introduced to combine theinterests of the Annex I and non-Annex I countries. In addition to this there are clearbenefits for Project Developers in using the CDM as it can be a driver for gettingenvironmentally benign technologies more economically viable and overcome barriers thatwould otherwise prevent the project from being realized. Thus the CDM can widen themarket opportunity for suppliers of equipment. For project developers in developingcountries, the CDM can be used to modify planned or projected investments into projectswith lower emissions of greenhouse gasses. Together this makes a win-win situation for allparties. An important facet of the CDM is that a project activity starting as of the year 2000shall be eligible for validation and registration as a CDM project, if registered before 31December 2005. This means that CERs are bankable from the inception of the CDM and canthus be generated prior to 2008, which is a significant difference from ERUs generated fromJoint Implementation projects. This might create a strong incentive for those in a position toact now to engage in CDM projects as early as 21 Executive MBA 2010
  • 22. Status and Potential of Energy and Carbon Trading in IndiaSchool Of Petroleum Management, Gandhinagar, Gujarat, IndiaType of projects, which are being applied for CDM and which can be of valuable potential,are: 1. Energy efficiency projects:  Increasing building efficiency (Concept of Green Building/LEED Rating), eg. TECHNOPOLIS Building Kolkata  Increasing commercial/industrial energy efficiency (Renovation & Modernization of old power plants)  Fuel switching from more carbon intensive fuels to less carbon intensive fuels  Also includes re-powering, upgrading instrumentation, controls, and/or equipment 2. Transport:  Improvements in vehicle fuel efficiency by the introduction of new technologies  Changes in vehicles and/or fuel type, for example, switch to electric cars or fuel cell vehicles (CNG/Bio fuels)  Switch of transport mode, e.g. changing to less carbon intensive means of transport like trains (Metro in Delhi)  Reducing the frequency of the transport activity 3. Methane recovery:  Animal waste methane recovery & utilization  Installing an anaerobic digester & utilizing methane to produce energy  Coal mine methane recovery  Collection & utilization of fugitive methane from coal mining  Capture of biogas  Landfill methane recovery and utilization  Capture & utilization of fugitive gas from gas pipelines  Methane collection and utilization from sewage/industrial waste treatment facilities 4. Industrial process changes  Any industrial process change resulting in the reduction of any category greenhouse gas emissions 5. Cogeneration:  Use of waste heat from electric generation, such as exhaust from gas turbines, for industrial purposes or heating (e.g. Distillery-Molasses/ bagasse) 6. Agricultural sector:  Energy efficiency improvements or switching to less carbon intensive energy sources for water pumps (irrigation)  Methane reductions in rice cultivation  Reducing animal waste or using produced animal waste for energy generation (see also under methane recovery) and  Any other changes in an agricultural practices resulting in reduction of any category of greenhouse gas 22 Executive MBA 2010
  • 23. Status and Potential of Energy and Carbon Trading in IndiaSchool Of Petroleum Management, Gandhinagar, Gujarat, IndiaExample of CDM project in India:M/s. SIDDHESHWARI PAPER UDYOG LTD (hereafter referred to as SPUL) is into the businessof paper manufacturing. Currently SPUL is importing the electricity from the grid andgenerating steam using the in-house coal1 based boiler. However, the grid electricity is notcontinuous and of good quality, SPUL has planned to install a rice husk based captivecogeneration unit (6 MW Biomass Cogeneration plant).Purpose of captive power plant: The purpose of the project activity is to utilize rice huskavailable in the region for effective generation of electricity and steam for in-houseconsumption. The project activity is the 6 MW rice husk based cogeneration power plantgenerating electricity (extraction condensing turbine set) and steam for captiveconsumption. The project activity is helping in conservation of natural resources like coal.Present (pre- project) ScenarioPresently the electricity is imported from the electricity grid and no user of project activitysteam exists (the steam will be used in proposed chemical recovery plant). The existingcontract demand of the project activity is 2500 KVA which is expected to grow to 3200 KVA.Project ScenarioThe project activity, which is a ‘carbon neutral fuel’ based cogeneration plant, generateselectricity in addition to steam to meet SPUL’s captive electricity requirement. Te additionalelectricity from the project activity will be exported to adjacent sister paper plant i.e.SIDDHARTH papers limited. Therefore project activity displaces the use of fossil fuels likecoal which would have been used in absence of the project 23 Executive MBA 2010
  • 24. Status and Potential of Energy and Carbon Trading in IndiaSchool Of Petroleum Management, Gandhinagar, Gujarat, IndiaCDM timeline:The CDM established a way in which countries can meet their emissions reduction targetsby investing in low-emitting projects, whilst at the same time contributing to sustainabledevelopment in the host country. In practice, there are three different trading models underwhich CERs from a CDM project can be developed.These include:1. Unilateral trading model – This represents a project that is designed, financed andimplemented without an investor from an Annex-I Party. In this scenario the non-Annex Ihost Party bears all risks associated with the preparation and sale of CERs. On the otherhand, it allows CDM host Parties and/or project proponents to sell CERs at a premium whenthe demand is higher, and enables countries to use the proceeds for development purposes,in line with the objectives of the CDM. The permission to carry out unilateral CDM projectswas granted at the COP-6 in The Hague, which allowed developing economies to implementCDM projects without a partner from an Annex-I country. Unilateral CERs are also subject tothe requirements set by the CDM Executive Board and the COP. The unilateral model hasalready been applied in Costa Rica;2. Bilateral trading model – under this model a project proponent develops a project in anon-Annex-I country in partnership with a country subjected to GHG emission reductionobligations (an Annex-I Party). The goal of such a partnership for the Annex-I country is toreceive the credits realized from the project, either via an emission reduction purchaseagreement (ERPA), or as a result of some other form of financial consideration. Under mostERPA agreements, credits purchases are committed in advance of issuance but not paiduntil the CERs are delivered.3. Multilateral model - a variation of the bilateral model is the multilateral model. Underthis model CERs are sold to a fund, which oversees a portfolio of projects. The fund istraditionally made up of investors of Annex-I countries. The advantage of this model is thata fund spreads the risk of investment and issuance across a range of projects. Furthermore,the investor country spreads their risk by investing in several different funds. An example ofa multilateral fund is the Prototype Carbon Fund from the World Bank (see section 2.4.1below). To date, the majority of the buyers of credits are relying on the multilateral model.The Trading Mechanism:Entities with potential GHG liabilities can reduce such liabilities by either implementinginternal emissions reductions programs, or by participating in international emissionstrading markets“Emissions trading” is an administrative approach used to control pollution by providingeconomic incentives for achieving reductions in the emissions of pollutants. 24 Executive MBA 2010
  • 25. Status and Potential of Energy and Carbon Trading in IndiaSchool Of Petroleum Management, Gandhinagar, Gujarat, Indiadevelopment of a carbon project that provides a reduction in Greenhouse Gas emissions is away by which participating entities may generate tradable carbon credits. Say a company inIndia can prove it has prevented the emission of x-Metric Tonnes of carbon, it can sell thismuch amount of points (or carbon credits) to a company in say, the US which has beenemitting carbons. The World Bank has built itself a role in this market as a referee, brokerand macro-manager of international fund flows.A central authority (in our case CDM India, an authority under the Ministry of Environmentand Forests) sets a limit or cap on the amount of a pollutant that can be emitted in acountry. Companies or other groups that emit the pollutant are given credits (CERs –Certified Emission Reductions) or allowances which represent the right to emit a specificamount. The total amount of credits cannot exceed the cap, limiting total emissions to thatlevel. Companies that pollute beyond their allowances must buy credits from those whopollute less than their allowances or face heavy penalties. This transfer is referred to as atrade. In effect, the buyer is being fined for polluting, while the seller is being rewarded forhaving reduced emissions. Thus companies that can easily reduce emissions will do so andthose for which it is harder will buy credits which reduce greenhouse gasses at the lowestpossible cost to society. Countries which have companies having higher credits will enablethem to sell the credits in the international market.There are a number of international markets most notably the EU, with its European UnionGreenhouse Gas Emission Trading Scheme (EU ETS) that began its operations on 1 January2005. Companies which accumulate CERs sell them there in this market to interestedbuyers. The international market for CERs has crossed the US$30 billion mark in 2006,largely driven by the trading of EUA (European Union Allowances). EUA are the equivalent ofCERs (Certified Emission Reductions).Background - The objectives of Buyers:There are different buyers in the marketplace with a variety of diverse objectives. Ingeneral, these objectives can be summarized as follows: 1. Purchase of low-cost emission reductions: Most of the buyers in the market have a degree of sensitivity to the cost of emission reductions. Current market prices for emission reductions are quite low in comparison to forecasted prices under many market studies. Buyers who purchase at a low cost today can also potentially sell at a much higher price in the future. 2. Minimization of future risk is a primary determinant of buyer behavior. Buyers are concerned about the potentially large liabilities associated with not being compliant in the future. 3. Risk-diversification. Many buyers are purchasing different types of credits under all of the trading mechanism so that they can spread their risk among a portfolio. 4. Learning by doing. Buyers are willing to undergo early-stage ‘learning-by doing’ by engaging in comprehensive project documentation, external verification and 25 Executive MBA 2010
  • 26. Status and Potential of Energy and Carbon Trading in IndiaSchool Of Petroleum Management, Gandhinagar, Gujarat, IndiaCurrent emission buyers:The carbon credit market, which includes the CDM, is currently characterized by havingrelatively few buyers, who have a range of motives for participation. The vast majority ofthe publicly known capital for purchasing emission reductions comes from various funds andmultilateral buyers. As of March 2003, the major institutional buyers include; 1. The World Bank Prototype Carbon Fund (US$180M) 2., Dutch ERUPT/CERUPT (US$250M) 3. The Netherlands Carbon Development Fund (US$140M) 4. International Finance Corporation (US$40M) 5. The Andean Development Bank (US$40M) 6. Community Development Carbon Fund (US$100M - target) 7. World Bank Bio-Carbon Fund (US$100M - target) 8. The Asian Development Bank (US$60M - unconfirmed) 9. The Finnish small scale tender (US$3M) 10. CDC IXIS Carbon Fund (US$30M –under development)Market pricing of Carbon emission reduction units:CER prices are quoted in EUROS (€) or U.S. dollars (US$) for sale on the global market.Pricing structures offered are typically Fixed, Floating, or a combination of the two:  Fixed price: This is an agreed price per CERs which will not change if the EUA allowance market moves against the Seller. This structure is often preferred by those requiring more certainty of the revenue stream for future budgeting plans, rather than being exposed to market fluctuations. A fixed price may also be preferable to lock-in current market conditions if perceived to be advantageous to both parties. Usually a fixed price will be lower than the equivalent Floating price, because the Buyer is taking all market risk.  Floating price: This is a percentage of the average EUA price over an agreed number of days. A floating price allows Sellers exposure to potential gains in the EUA market, but also to potential loses should the market fall. This structure generally only works for European Buyers who have an exposure to the EUA market – Japanese Buyers who are not involved in the EU ETS tend not to link CER prices to the EUA market.  Combination of Fixed and Floating: Buyers and Sellers may choose to specify a price based on fixed and floating components, in order to reduce exposure to either structure. For example, 50% of the agreed CERs may be at a fixed price, while the other 50% may be at a floating price. Or, a Fixed minimum price may be agreed, with an additional Floating 26 Executive MBA 2010
  • 27. Status and Potential of Energy and Carbon Trading in IndiaSchool Of Petroleum Management, Gandhinagar, Gujarat, IndiaFactors affecting CER prices include:  EUA market price: For many Buyers, the value of CERs is benchmarked to the EUA price, the most established trading system for emissions.  Volatility in EUA prices is typically reflected in the CER market. It is therefore important to have a strong understanding of the underlying market dynamics of EUAs.Other Market pricing 27 Executive MBA 2010
  • 28. Status and Potential of Energy and Carbon Trading in IndiaSchool Of Petroleum Management, Gandhinagar, Gujarat, IndiaMajor international exchanges trading 28 Executive MBA 2010
  • 29. Status and Potential of Energy and Carbon Trading in IndiaSchool Of Petroleum Management, Gandhinagar, Gujarat, IndiaSoftware’s for carbon trading:  POMAX is a seasoned carbon trading software  CARBONFLOW’s architecture is cloud-based, featuring highly scalableContract Specification for CER on 29 Executive MBA 2010
  • 30. Status and Potential of Energy and Carbon Trading in IndiaSchool Of Petroleum Management, Gandhinagar, Gujarat, IndiaCarbon Trading Participants & Platform:India now has two Commodity exchanges trading in Carbon Credits. This means that IndianCompanies can now get a better trading platform and price for CERs generated. 1. Multi Commodity Exchange (MCX), India’s largest commodity exchange, has launched futures trading in carbon credits. The initiative makes it Asias first-ever commodity exchange and among the select few along with the Chicago Climate Exchange (CCE) and the European Climate Exchange to offer trades in carbon credits. The Indian exchange also expects its tie-up with CCX which will enable Indian firms to get better prices for their carbon credits and better integrate the Indian market with the global markets to foster best practices in emissions trading. 2. On 11th April 2008, National Commodity and Derivatives Exchange (NCDEX) also has started futures contract in Carbon Trading for delivery in December 2008.MCX is the futures exchange. People here are getting price signals for the carbon for thedelivery in next five years. The exchange is only for Indians and Indian companies. Everyyear, in the month of December, the contract expires and at that time people who havebought or sold carbon will have to give or take delivery. They can fulfill the deal prior toDecember too, but most people will wait until December because that is the time to meetthe norms in Europe. If the Indian buyer thinks that the current price is low for him he willwait before selling his credits. The Indian government has not fixed any norms nor has itmade it compulsory to reduce carbon emissions to a certain level. So, people who arecoming to buy from Indians who are actually financial investors. They are thinking that if theEuropeans are unable to meet their target of reducing the emission levels by 2009, 2010 or2012, then the demand for the carbon will increase and then they may make more money.So investors are willing to buy now to sell later. There is a huge requirement of carboncredits in Europe before 2012. Only those Indian companies that meet the UNFCCC normsand take up new technologies will be entitled to sell carbon credits. There are parametersset and detailed audit is done before you get the entitlement to sell the credit.MCX keen to play a major role on the emission front by extending its platform to add carboncredits to its existing basket of commodities with regard to commodities futures trading, theexisting and potential suppliers of carbon credits in India have geared up to generate morecarbon credits from their existing and ongoing projects to be sold in the internationalmarkets. With India supposed to be a major supplier of carbon credits, the tie-up betweenthe two exchanges is expected to ensure better price discovery of carbon credits, besidescovering risks associated with buying and 30 Executive MBA 2010
  • 31. Status and Potential of Energy and Carbon Trading in IndiaSchool Of Petroleum Management, Gandhinagar, Gujarat, IndiaWith growing concerns among nations to curb pollution levels while maintaining the growthin their economic activities, the emission trading (ET) industry has come to life. And, withthe increasing ratification of Kyoto Protocol (KP) by countries and rising social accountabilityof polluting industries in the developed nations, the carbon emissions trading is likely toemerge as a multibillion-dollar market in global emissions trading. The recent surge incarbon credits trading activities in Europe is an indication of how the emissions tradingindustry is going to pan out in the years to come.Potential participants in carbon credits trading are as below:  Hedgers: 1. Producers: Reliance Energy, Tata Steel, Dwarikesh Sugar, DLF ltd 2. Intermediaries in spot markets 3. Green land carbon trading, Verve consulting, X-change carbon,  Ultimate buyers:  Investors: 1. Arbitragers 2. Portfolio managers  Diverse participants with wide participation objectives: 1. Commodity financers 2. Funding agencies 3. Corporate having risk exposure in energy products Advantages of an MCX carbon contract: In India, currently only bilateral deals and trading through intermediaries are widely prevalent leading to sellers being denied fair prices for their carbon credits. Advantages that the MCX platform offers are: 1. Sellers and intermediaries can hedge against price risk 2. Advance selling could help projects generate liquidity and thereby, reduce costs of implementation 3. There is no counterparty risk as the Exchange guarantees the trade 4. The price discovery on the Exchange platform ensures a fair price for both the buyer and the seller 5. Players are brought to a single platform, thus, eliminating the laborious process of identifying either buyers or sellers with enough credibility 6. The MCX futures floor gives an immediate reference price. At present, there is no transparency related to prices in the Indian carbon credit market, which has kept sellers at the receiving end with no bargaining 31 Executive MBA 2010
  • 32. Status and Potential of Energy and Carbon Trading in IndiaSchool Of Petroleum Management, Gandhinagar, Gujarat, IndiaOther participants and initiatives: 1. Carbon Credits projects requires huge capital investment. Realizing the importance of carbon credits in India 2. The World Bank has entered into an agreement with Infrastructure Development Finance Company (IDFC), wherein IDFC will handle carbon finance operations in the country for various carbon finance facilities 3. The agreement initially earmarks a $10-million aid in World Bank-managed carbon finance to IDFC-financed projects that meet all the required eligibility and due diligence standards 4. IDBI has set up a dedicated Carbon Credit desk, which provides all the services in the area of Clean Development Mechanism/Carbon Credit (CDM). In order to achieve this objective, IDBI has entered into formal arrangements with multi-lateral agencies and buyers of carbon credits like IFC, Washington, KFW, Germany and Sumitomo Corporation, Japan and reputed domestic technical experts like MITCON 5. HDFC Bank has signed an agreement with Cantor CO2E India Pvt Ltd and MITCON Consultancy Services Limited (MITCON) for providing carbon credit services. As part of the agreement, HDFC Bank will work with the two companies on awareness building, identifying and registering Clean Development Mechanism (CDM) and facilitating the buy or sell of carbon credits in the global market.Post KYOTO:The existing accord to reduce carbon emissions is up for review in 2012, beyond which it isuncertain. The last global conference on the subject, at Copenhagen, was not able toprovide any clarity on the post-2012 period. Finding buyers for post-2012/Post-Kyotocarbon credits has been a challenge. POINTCARBON reported that carbon brokers said thatsuch deal would likely reflect a price of 6-9 EUROS per ton CO2e. The current price forCERs under the Clean Development Mechanism would be about 14 EUROS. The discount forpost-Kyoto credits would thus be 5-8 EUROS, a significant reduction reflecting theuncertainty of the negotiations at Copenhagen and at UNFCC meetings thereafter. If atreaty is not finalized until next December, these low prices may continue until then.Under Kyoto, developed countries are allowed to establish domestic and internationallylinked emissions trading schemes and purchase emissions reductions in developingcountries and count them as their own. But on December 31 next year (eight months beforethe next federal election) Kyoto will expire without a successor agreement. Since the 2007Bali summit countries have been in a negotiating deadlock over different paths for a post-Kyoto agreement. Developing countries want a second Kyoto emissions reduction periodbecause it puts the entire onus on developed 32 Executive MBA 2010
  • 33. Status and Potential of Energy and Carbon Trading in IndiaSchool Of Petroleum Management, Gandhinagar, Gujarat, IndiaNon-European developed countries want a new non-binding agreement that brings all theleading emitters into the tent. European countries want a mix of both. The failure to agreeover what was being negotiated, let alone the detail, led to the eruption at the 2009Copenhagen summit, modestly repeated in Cancun last December. To have an unbrokenperiod between Kyoto and a successor, agreement countries would need to concludenegotiations at this years Durban summit which is extremely unlikely.A recent survey by the World Banks Carbon Finance Unit found that less than 20 per cent ofcarbon market participants questioned was optimistic that a new Kyoto-style, legally bindingemissions reduction framework would be negotiated by 2020. Optimism dropped further toa few per cent when they were offered a 2015 deadline. There is no global carbon market;there is only a European one.According to the same World Bank report, 84 per cent of the US$142 billion global carbonmarket is made up of emissions permits sourced from within the European Union. Europesreach extends to 97 per cent when its purchased emission reductions in developingcountries are included. With the government allowing half of all permits to be purchasedoffshore, Australias floating carbon price could be heavily influenced by European policy.Europes dominance is set to be the status quo until a post-Kyoto framework is establishedthat could possibly bring China, India and the US into the fold.Australias scheme, covering the emissions of 22 million people, is also likely to be eclipsedby the size of a scheme for hundreds of millions Europeans and their centralized decision-making based on European policy and economic priorities and interests. While Australiagoes headfirst to introduce a market-based scheme, other countries arent following ourlead: Japan and South Korea have effectively shelved their trading schemes until a post-Kyoto framework is established; New Zealand is watering down its scheme; participantstates in regional US emissions trading schemes are withdrawing; and China has flagged thepossibility of trialing a scheme, but to date its carbon pricing experience has been to profit,having secured 42 per cent of Europes offshore emissions reduction projectsThe World Bank has launched a €68m (£57m) pot of funding aimed at enabling carbon-cutting projects to keep selling UN-backed offsets after the first phase of the Kyoto Protocolexpires in 2012.The absence of a global framework undermines the political and policy case for prioritizingemissions cuts. Its a message that has not been lost on international carbon 33 Executive MBA 2010
  • 34. Status and Potential of Energy and Carbon Trading in IndiaSchool Of Petroleum Management, Gandhinagar, Gujarat, IndiaConclusion:Carbon trading is a nascent concept which is a strong tool for mitigating the emission risksthe globe is facing. Though some major pollutants are signatories to the KYOTO Protocol, itwould take efforts of other nations in building up a mechanism that ensures thetemperature rise due to the GHG emissions being restricted to the envisaged 2 deg level.Though the KYOTO Protocol was mandated for a window of 2008 to 2012, the Durban talksas scheduled in December 2011 is expected to come up with concrete plans to makesustainable developments in the field of Emission Trading. The flow of investments/technology from developed countries to developing ones is aided by the unprecedentedeconomic growth as witnessed in Asia. Such rapid growth at the cost of the environmentwould put the future generations in jeopardy. Hence developing nations like India and Chinaare better off accepting Voluntary Emission cuts which would ensure their readiness to facecompulsory cuts as and when they are imposed on them.Carbon emissions’ trading has been steadily increasing in recent years. According to theWorld Banks Carbon Finance Unit, 374 million metric tonnes of carbon dioxide equivalent(tCO2e) were exchanged through projects in 2005, a 240% increase relative to 2004 (110mtCO2e)[26] which was itself a 41% increase relative to 2003 (78 mtCO2e).One criticism of carbon trading is that it is a form of colonialism, where rich countriesmaintain their levels of consumption while getting credit for carbon savings in inefficientindustrial projects. Nations that have fewer financial resources may find that they cannotafford the permits necessary for developing an industrial infrastructure, thus inhibitingthese countries economic development. Most developing nations feel that instead ofadjusting their lifestyle and energy efficiency, developed nations are passing the buck ofGlobal Warming on developing nations who have very low per capita energy consumption.Thus Emission Trading can be seen as a powerful tool in the hands of powerful nations tomaintain economic superiority and make poor countries accountable for their inefficiencieswhich leads to a disparity in the concept of Emission 34 Executive MBA 2010
  • 35. Status and Potential of Energy and Carbon Trading in IndiaSchool Of Petroleum Management, Gandhinagar, Gujarat, IndiaBibliography:Internet Sources 1) AEXTN/0,,contentMDK:21608534~pagePK:1497618~piPK:217854~theSitePK:295584, 00.html 2) 3) 4) 5) 9/Session%201/Sceneario%20of%20renewable%20energy%20in%20india%28R.B.%2 9.pdf 6) 7) _2008/energy/fakten_prognosen.htm 8) Renewable-Energy-Scenario-of-India.pdf 9) 10) 11) 12) 13) 14) 15) 16) 17) 18) 19) 20) www.pointcarbon.comLiterature Sources: 1. Understanding Carbon Credits (ISBN:81-85353-61-1), Aditya Books Pvt Ltd, 2009: GURMIT SINGH 2. Energy in Emission Markets (ISBN:04-70821-58-2), Wiley Publication, TOM J and PETER 35 Executive MBA 2010