A decline in industrial production in the European economies has led to a fall in carbon credit prices by more than 58 per cent in the last eight months.
Despite traders’ persistent absence from participation, carbon credit for delivery in June 2009 on the National Commodity and Derivatives Exchange (NCDEX) declined dramatically to Rs 712.20 a tonne on March 12, from a high of Rs 1,698.40 a tonne on July 11, 2008, one month before the Lehman Brothers’ collapse.
Price on the Multi Commodity Exchange (MCX), where the carbon emission reduction (CER or carbon credit) contract was introduced on November 26 last year, the contract, expiring on May 22, 2009, declined 23.16 per cent to close at Rs 700 a tonne on Thursday, compared to Rs 911 a tonne at the launch.
“The decline in industrial production in the European economies has led to a fall in demand for carbon credit, resulting in price reduction,” said an industry executive. The prices of carbon credits halved to ¤10 a tonne in the over-the-counter (OTC) market, from its peak in September 2008 when a CER was being traded at slightly above €20 a tonne in the European market. Industrial production has declined in the range of 10-15 per cent in the euro zone economies such as France, Germany, Spain, the Netherlands.
The two active environment sensitive products i.e. European Allowances (EA) and CER on the European Climate Exchange (ECX) recorded phenomenal decline of 45.51 per cent and 36 per cent respectively. The near-month EA contract on the ECX settled on Thursday at $ 11.65 a tonne, compared to $21.38 a tonne on August 1, 2008, while the CER contract closed at $11.16 a tonne, against $17.44 a tonne.
CERs and EAs form a part of the clean development mechanism for those projects that are undertaken in developing countries and earn carbon credits under the Kyoto Protocal. Each CER represents a reduction of one tonne of carbon dioxide emission from manufacturing or processing plants by installing most-modern technological equipment or upgrading the existing ones.
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CDM is an arrangement under the Kyoto Protocol that allows developed countries with greenhouse gas reduction commitments to invest in projects that reduce emissions in developing countries and claim carbon credits for doing so. Indian companies were made qualified for carbon credit early this decade. So far, 141 countries, including India, have signed the Kyoto Protocol and pledged to reduce carbon emission at least by 10 per cent by 2012, from the benchmark level of 1990.
Manufacturing units in European countries are reportedly selling carbon credits to meet the working capital requirements, raising the prospect of surge in carbon credit price by 2012. Industrial production has declined in the range of 10-15 per cent in the euro zone economies such as France, Germany, the Netherlands, Spain. Consequently, the demand for carbon credit has declined substantially.
Industrialised nations, mainly the United States and the European Union, are the two major buyers of the environment-sensitive products from developing nations, including India and China — the two major sellers.
An estimate reveals that the potential for pipeline CERs and EAs is huge in Europe — to the tune of over 4 billion tonnes and 2.1 billion tonnes respectively through 2012. Thus, Indian companies have a huge opportunity to sell their credits to European buyers but a drastic slowdown in economic activities coupled with stricter UN norms may debar companies from the immense growth benefits.
About 1,000 Indian units are registered with the host country, of which 400 projects have either availed the credit or are in the process of obtaining approval.
“India needs to avail upgraded technology for the projects like effluent treatment, chemical, paper etc from European companies at a premium, which needs to be compensated in some form or the other. Otherwise, the plant will become unviable,” said Sanjay Tapriya, director, Finance, The Simbhaoli Sugar Mills, a company registered with UN for credits in its co-generation facility.
In India, sugar companies have been big generator of carbon credit but, of late the sugar production is on decline and so is the by-product, including bagasse and electricity. Additionally, as the fund allocated to buy credit by European and American companies till 2012 has been gradually exhausting with past remittances to Chinese, Taiwanese, Brazilian and Indian companies, the norms are becoming stricter. Therefore, chances are little for Indian sugar companies to get carbon credit now, an analyst said.
However, prices of CERs and EAs are unlikely to rise significantly unless global economies return to revival path and the manufacturing activities increase, he added.