Carbon trading: A huge opportunity for Indian companies

MANY COMPANIES in cities and even in smaller towns of India are now doing a new form of business. The business of these firms are somewhat related to trading but it is a departure from usual commodity or stock trading. It is the trade of ‘polluting gases’. Firms involved in such a business are then said to be involved in carbon trading. Usually banks come into the picture in this kind of trading as they keep the records of debit and credit of ‘polluting account’. Many companies are using carbon credit to boost the bottom line of their balance sheet.

What is carbon credit?

Carbon trading is basically a commercialised activity that originates from protecting the earth from harmful emission of gases from industries. The concept of carbon credit is that of incentivising the units which pollute less and disincentivising the units that pollute more. The most dangerous gases thrown out by the industrial units are six in number - carbon dioxide, methane, nitrous oxide, hydroflourocarbons, perflurocarbons and sulphur hexafluoride. The group of such gases, which are responsible for removing greenery from our planet, are called greenhouse gases.

On the initiative of UNO (United Nations Organisation), Kyoto protocol was signed in 11 December 1997 and it came into force from 16 December 2005. The Kyoto protocol aims to tackle global warming by setting target levels for nations to reduce greenhouse gas emission worldwide. The Kyoto protocol is an agreement by which the ratifying countries have agreed to reduce their emission of greenhouse gases. Under the protocol, initial target is to reduce greenhouse gas emission to 5.2 per cent below 1990 base level. 172 countries have signed the Kyoto Protocol. Australia has also recently ratified the protocol. These countries and their companies are the only ones allowed to engage in carbon trading.

How it works?

A central authority fixes the limit of the amount of a pollutant that can be emitted into the environment. Now this limit becomes the permit of pollutants allowed into the environment. This permit is devised into several smaller units and distributed to several companies in the form of permit or credit or allowance. This permit or credit or allowances gives licenses to emit a fix amount of pollutant into the environment.

Now if a company, say SRF, is able to emit only eight units of greenhouse gases out of 10 units allotted to it, then SRF will be having two units of emission as ‘credit outstanding’ in its ‘pollution’ account. On the other side, if a company say MRF emits 12 units instead of 10 units allotted to it then MRF will be having two units of ‘debit balance’ in its pollution account. Now SRF will be able to transfer its two ‘credit balance’ to two debit balance account of MRF. So both the companies’ pollution account will be matched and the environment also is able to digest a certain scientifically fixed amount of pollutants. This transfer from SRF to MRF will be for some monetary consideration and hence it is referred as carbon trading.

Carbon credit, as defined by Kyoto protocol, is one metric tonne of carbon emitted by burning of fossil fuels. The GWP (Global Warming Potential) factors are used to convert each of the five gases (like methane, for example) that are not CO₂ into tonnes of CO₂ equivalent (CO₂E), which is the standard of trading. To bring the buyers and sellers of carbon trading on one platform and to augment the process of carbon trading, carbon credits are traded at CO₂E exchange in Britain, CDM (Clean Development Mechanism) exchange in Europe. In India recently, MCE (Multi Commodity Exchange) has announced carbon trading exchange with license agreement from Chicago climate exchange. Like the usual stock exchange, carbon credits have all spot transactions, forward settlement and options of trading.

Prices of credit trading vary and some time back was in the range of Euro six to Euro 12 per tonne of CO₂. An estimate suggests that in 2004, 107 million tonnes of CO₂ were exchanged through carbon trading worldwide. There is a steep penalty to the tune of Euro 40 per tonne to the companies emitting more than their quota. So companies that are having huge carbon credit can sell these to companies that are deficient in carbon credit or that have exhausted their quota for huge prices.

Big opportunity for Indian companies

Almost all industrialised countries are huge buyer of carbon credit and all developing countries, where industrialisation has not reached its peak, are supplier of carbon credit. Japan is the largest buyer of carbon credit while India and Brazil are amongst the largest suppliers of carbon credit. Being a developing country, India is exempted from the requirement of adherence to Kyoto protocol. India, however can sell the carbon credits to the developed countries.

Most of the beneficiaries of the carbon trading are those companies that are investing in windmills, Biodiesel, Biogas. Actually by investing in such an alternative non-polluting source of energy, these companies will earn carbon credit in the form of CERs (Certified Emissions Reductions) to the tune they have not polluted the environment. These CERs will be sold by the Indian companies to companies, say in Japan, at market prevailing rate of CERs and make profit. Companies like Torrent Power have started projects, which enhance energy efficiency and in turn have earned CERs points. These CERs will be sold by Torrent Power to companies in developed countries and is expected to earn approximately Rs 200 crores. Several Indian companies are adopting such processes in their production units, which result in earning of CERs. Similarly, companies like Chennai Petroleum,

Jaypee Associates, Grasim Industries, and Gujarat Fluro Chemicals are going to make huge profits through carbon trading.

Carbon trading has brought a huge opportunity for Indian companies. Companies can earn CERs by adopting energy saving and environment protecting methods and in turn can earn huge incomes by selling them. This opportunity will not exist forever for Indian companies. Once India is accepted as an industrialised country, she would have to adopt strict emission norms like other industrialised countries of the world and India may turn into a net buyer of carbon credit from other developing countries when that happens.