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Carbon Credit in India

Meaning:

The concept of carbon credits evolved from the Kyoto Protocol Treaty under the UNFCCC (United Nations Framework Convention on Climate Change). The Kyoto Protocol has created a mechanism under which countries that have been emitting more carbon and other gases (greenhouse gases include ozone, carbon dioxide, methane, nitrous oxide and even water vapor) have voluntarily decided that they will bring down the level of carbon they are emitting to the levels of early 1990s. The treaty requires the industrialized countries to reduce their collective emissions of greenhouse gases by 5.2 percent (compared to the year 1990) by 2012. The treaty was negotiated in Kyoto, Japan, in December 1997, and the agreement came into force on February 16, 2005. Developed countries, mostly European, had said that they will bring down the level in the period from 2008 to 2012. In 2008, these developed countries have decided on different norms to bring down the level of emission fixed for their companies and factories. India, China and some other Asian countries have the advantage because they are developing countries. Any company, factories or farm owner in India can get linked to United Nations Framework Convention on Climate Change and know the ‘standard’ level of carbon emission allowed for its outfit or activity. The extent to which I am emitting less carbon (as per standard fixed by UNFCCC) I get credited in a developing country. This is called carbon credit. A carbon credit is a tradable certificate or permit representing the right to emit one ton of carbon dioxide or carbon dioxide equivalent (CO2-e).

Three Flexibility Mechanisms:

As part of the agreement, three flexibility mechanisms were developed to help developed countries meet their emission reduction targets namely, Clean Development Mechanism (CDM), Joint Implementation (JI) and International Emission Trading (IET). Of these, JI and IET are executable amongst developed countries while CDM is between developed and developing countries. It is a mechanism allowing industrialized countries with a greenhouse gas reduction commitment to invest in emission-reducing projects in developing countries.[1]

Clean Development Mechanism Explained:

The Clean Development Mechanism (CDM), defined in Article 12 of the Protocol, allows a country with an emission-reduction or emission-limitation commitment under the Kyoto Protocol (Annex B Party) to implement an emission-reduction project in developing countries.

Carbon Trading in India:

Indian industries were able to cash in on the sudden boom in the carbon market making it a preferred location for carbon credit buyers. It is expected that India will gain at least $5 billion to $10 billion from carbon trading (Rs 22,500 crore to Rs 45,000 crore) over a period of time. Also India is one of the largest beneficiaries of the total world carbon trade through the Clean Development Mechanism claiming about 31 per cent (CDM).

India’s carbon market is one of the fastest growing markets in the world and has already generated approximately 30 million carbon credits, the second highest transacted volumes in the world. The carbon trading market in India is growing faster than even information technology, bio technology and BPO sectors. Nearly 850 projects with an investment of Rs 650,000 million are in the pipeline. Carbon is also now being traded on India’s Multi Commodity Exchange. It is the first exchange in Asia to trade carbon credits. India being a developing country has no emission targets to be followed. However, she can enter into CDM projects.[2] The Indian government has not fixed any norms nor has it made it compulsory to reduce carbon emissions to a certain level. So, people who are coming to buy from Indians are actually financial investors. They are thinking that if the Europeans are unable to meet their target of reducing the emission levels by 2009 or 2010 or 2012, then the demand for the carbon will increase and then they may make more money.[3]

Legal aspect of Carbon Trading in India:

The Multi Commodity exchange started future trading on January 2008 after Government of India recognized carbon credit as commodities on 4th January. The National Commodity and Derivative Exchange by a notification and with due approval from Forward Market Commission (FMC) launched Carbon Credit future contact whose aim was to provide transparency to markets and help the producers to earn remuneration out of the environment projects.

Carbon credit in India is traded on NCDEX only as a future contract. Futures contract is a standardized contract between two parties to buy or sell a specified asset of standardized quantity and quality at a specified future date at a price agreed today (the futures price). The contracts are traded on a future exchange. These types of contracts are only applicable to goods which are in the form of movable property other than actionable claims, money and securities. . Forward contracts in India are governed by the Indian Contract Act, 1872.

Under the present provision of the Forward Contracts Regulation Act, the trading of forward contracts will be considered as void as no physical delivery is issued against these contracts. To rectify this The Forward Contracts (Regulation) Amendment Bill 2006 was introduced in the Indian Parliament. The Union Cabinet on January 25, 2008 approved the ordinance for amending the Forward Contracts (Regulation) Act, 1952. This ordinance has to be passed by the Parliament and is expected to come up for consideration this year. This Bill also amends the definition of ‘forward contract’ to include ‘commodity derivatives’. Currently the definition only covers ‘goods’ that are physically deliverable. However a government notification on January 4th paved the way for future trading in CER by bringing carbon credit under the tradable commodities.

Value Added Tax:

The government of Delhi in a recent notification has declared that the Certified Emission Reductions (or 'Carbon Credits' as we know) are to be considered as goods and thus their sale is liable to value added tax in the State. The Commissioner of Trade and Taxes has declared that the nature and aspects of Carbon credits have to be examined and tested against the definition of goods to arrive at the conclusion that carbon credit are no different from ordinary commodities bought and sold in the market and thus a sale transaction of carbon credit would attract value added tax on sale.

Trading of CERS:

As a welcome scenario, India now has two Commodity exchanges trading in Carbon Credits. This means that Indian Companies can now get a better trading platform and price for CERs generated.

• Multi Commodity Exchange (MCX), India’s largest commodity exchange, has launched futures trading in carbon credits. The initiative makes it Asia's 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.
• 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 the delivery in next five years. The exchange is only for Indians and Indian companies. Every year, in the month of December, the contract expires and at that time people who have bought or sold carbon will have to give or take delivery. They can fulfill the deal prior to December too, but most people will wait until December because that is the time to meet the norms in Europe. If the Indian buyer thinks that the current price is low for him he will wait before selling his credits. The Indian government has not fixed any norms nor has it made it compulsory to reduce carbon emissions to a certain level. So, people who are coming to buy from Indians who are actually financial investors. They are thinking that if the Europeans are unable to meet their target of reducing the emission levels by 2009, 2010 or 2012, 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 carbon credits in Europe before 2012. Only those Indian companies that meet the UNFCCC norms and take up new technologies will be entitled to sell carbon credits. There are parameters set and detailed audit is done before you get the entitlement to sell the credit.

How does MCX trade carbon credits?[4]

Many companies did not apply to get credit even though they had new technologies. Some companies used management consultancies to make their plan greener to emit less GHG. These management consultancies then scouted for buyers to sell carbon credits. It was a bilateral deal.

However, the price to sell carbon credits at was not available on a public platform. The price range people were getting used to was about Euro 15 or maybe less per tonne of carbon. Today, one tonne of carbon credit fetches around Euro 22. It is traded on the European Climate Exchange. Therefore, you emit one tonne less and you get Euro 22. Emit less and increase/add to your profit.

We at the MCX decided to trade carbon credits because we are in to futures trading. Let people judge if they want to hold on to their accumulated carbon credits or sell them now.MCX is the futures exchange. People here are getting price signals for the carbon for the delivery in next five years. Our exchange is only for Indians and Indian companies. Every year, in the month of December, the contract expires and at that time people who have bought or sold carbon will have to give or take delivery. They can fulfill the deal prior to December too, but most people will wait until December because that is the time to meet the norms in Europe. Say, if the Indian buyer thinks that the current price is low for him he will wait before selling his credits. The Indian government has not fixed any norms nor has it made it compulsory to reduce carbon emissions to a certain level. So, people who are coming to buy from Indians are actually financial investors. They are thinking that if the Europeans are unable to meet their target of reducing the emission levels by 2009 or 2010 or 2012, 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 carbon credits in Europe before 2012. Only those Indian companies that meet the UNFCCC norms and take up new technologies will be entitled to sell carbon credits. There are parameters set and detailed audit is done before you get the entitlement to sell the credit. In India, already 300 to 400 companies have carbon credits after meeting UNFCCC norms. Till MCX came along, these companies were not getting best-suited price. Some were getting Euro 15 and some were getting Euro 18 through bilateral agreements. When the contract expires in December, it is expected that prices will be firm up then.

On MCX we already have power, energy and metal companies who are trading. These companies are high-energy consuming companies. They need better technology to emit less carbon.

Financing Support in India:

• Carbon Credits projects requires huge capital investment. Realizing the importance of carbon credits in India,
• 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.
• 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.
• 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.
• 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.

Conclusion
Even though India is the largest beneficiary of carbon trading and carbon credits are traded on the MCX, it still does not have a proper policy for trading of carbons in the market. As a result the Centre has been asked by The National Commodity and Derivatives Exchange Limited (NCDEX) to put in place a proper policy framework for allowing trading of certified emission reductions (CERs), carbon credit, in the market. Also, India has huge number of carbon credits sellers but under the present Indian law, the buyers based in European market are not permitted to enter the market. To increase the market for carbon trading Forward Contracts (Regulation) Amendment Bill has been introduced in the Parliament. This amendment would also help the traders and farmers to utilize NCDEX as a platform for trading of carbon credits. However, to unleash the true potential of carbon trading in India, it is important that a special statue be created for this purpose as the Indian Contracts Act is not enough to govern the contractual issues relating to carbon credits. The carbon credits market will grow to as much as $5 trillion if major countries such as the United States sign up for binding cap emissions. India should be ready to take advantage of this growing global market.

Post-2012 policies are expected to open many new gates for India to leverage the growing carbon market. The government bodies are also planning for a domestic energy efficiency cap-and-trade scheme.

The Indian economy strictly needs a regulator for the carbon market. The forward Contracts (Regulation) Amendment Bill, which would define the regulation on carbon credits trading and introduce options based on them, is the need of the hour. This will build confidence in the market, and trade volumes will be back on track for the Indian commodity exchanges.

Examples of Carbon trading in India:

Jindal Vijaynagar Steel:

The Jindal Vijaynagar Steel has recently declared that by the next ten years it will be ready to sell $225 million worth of saved carbon. This was made possible since their steel plant uses the Corex furnace technology which prevents 15 million tonnes of carbon from being discharged into the atmosphere.

Powerguda in Andhra Pradesh:

The village in Andhra Pradesh was selling 147 tonnes equivalent of saved carbon dioxide credits. The company has made a claim of having saved 147 MT of CO2. This was done by extracting bio-diesel from 4500 Pongamia trees in their village.

Handia Forest in Madhya Pradesh:

In Madhya Pradesh, it is estimated that 95 very poor rural villages would jointly earn at least US$300,000 every year from carbon payments by restoring 10,000 hectares of degraded community forests.

Delhi Metro Rail Corporation (Dmrc):

A must mention project is The Delhi Metro Rail Corporation (DMRC): It has become the first rail project in the world to earn carbon credits because of using regenerative braking system in its rolling stock. DMRC has earned the carbon credits by using regenerative braking system in its trains that reduces 30% electricity consumption.
Whenever a train applies regenerative braking system, the released kinetic energy starts a machine known as converter-inverter that acts as an electricity generator, which supplies electrical energy back to the Over Head Electricity (OHE) lines. This regenerated electrical energy that is supplied back to the OHE that is used by other accelerating trains in the same service line. DMRC can now claim 400,000 CERs for a 10-year crediting period beginning December 2007 when the project was registered by the UNFCCC. This translates to Rs 1.2 crore per year for 10 years. India has the highest number of CDM projects registered and supplies the second highest number of Certified Emission Reduction units. Hence, India is already a strong supplier of Carbon Credits and can improve on it.

The Union government has approved 550 projects complying the Kyoto Protocol to earn carbon credits, and 330 more are awaiting the government's approval, according to Det Norske Veritas (DNV) AS sources. The Designated National Authority (DNA) has registered the approved projects with the United Nations Framework Convention on Climate Change (UNFCC). The other 330 projects are at the design document stage. DNV is an Oslo-based consultancy firm, accredited to the UNFCCC for conducting the third party verification of projects, which have adopted the clean development mechanism (CDM) to comply with the Kyoto Protocol.[5]