A stock market crash that went unnoticed

Parallel to the crash in the Mumbai stock market, a steep fall in prices marked the end of the first year of the existence of a green stock market under the European Union's emission trading scheme.

Futures, forwards, bulls and bears ...all of them are here. But the trade is between polluters and non-polluters. The shares are mostly carbon credits, that is points earned by refraining from pollution or by investing in low emission technology.

Non-polluting firms get brownies, which are called carbon emission reduction or CERs (equivalent to shares), while the polluters who have to meet the emission targets buy these shares to compensate for their failure to remain clean.

The polluters are mostly companies in the First World, while the non-polluters and sellers of CERs are companies in the Third World countries like India which have CDMs or clean development mechanism.

A CDM could be a windmill project started by a company. The company gets approval from the designated authority in the environment ministry and then gets registered in the CDM Executive Board in Bonn.

The crash is reported by a recent report of the World Bank and the International Emissions Trading Association - 'State and Trends of The Carbon Market, 2006', released last month.

The crash happened in the end of April after companies found through the report that they had met targets of emission given by their countries and did not require additional CERs.

Ajay Mathur, head of the climate change division of the World Bank, said the prices which had gone up to 25 to 30 Euros per emission reduction, came down to a mere 12 Euros after the report.

He, however, said that Indian companies being sellers had not lost much. "European companies which must have bought overpriced Indian CERs are the losers," he says.

Though the ETS has been legally in operation only since January 2005 when the Kyoto Protocol came into being, it was very much in existence. "Deals were being signed between companies in anticipation and trade was happening in 'futures'," Mathur said.

"Only 18 Indian companies have managed to get registered in Bonn after going through a long and expensive procedure followed for validation by agencies hired by the ETS," Mathur said. Some of them are SRF, Gujarat Flourochemicals and Kalpataru Power.

The brightest part of the trade is that investment which would have gone into buying diesel gensets is now shifted to emission-free projects which are mostly unviable financially. "Trading helps make these projects more viable," Mathur said.