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Corporate Dec 3, 2011

Carbon credits may be buried in Durban; India, China to lose

By Hardev Sanotra

Durban: The much-heralded carbon trading system may be headed for a dead end, if discussions underway over the last few days at the United Nations-organised global conference on climate change are any indication. This will have a major impact on India and China, the leaders in such trading.

"The carbon markets will crash if Durban fails to send a strong signal that the next round of Kyoto Protocol negotiations are on track," says Remi Gruet, senior regulatory affairs advisor on climate and environment with the European Wind Energy Association, an industry body.

"Indeed", says Steve Sawyer, secretary-general of the Global Wind Energy Council, "the signals that we are getting are mixed and confused."

The Kyoto Protocol, signed and ratified by most developed countries, legally binds them to cut human-induced carbon dioxide emissions. Reuters

Wind energy projects are major contributors to the carbon trading regime known as the Clean Development Mechanism (CDM) under the Kyoto Protocol. Wind projects worth $75 billion are expected to be set up next year.

The Kyoto Protocol, signed and ratified by most developed countries, legally binds them to cut human-induced carbon dioxide emissions, which are said by the UN's Intergovernmental Panel on Climate Change (IPCC) to be responsible for global warming. Without steps to control such emissions, the world is headed towards a disaster by the end of the century, the IPCC says, a statement not agreed to by many scientists.

However, under the Protocol, developed nations can offset their responsibility to cut emissions by buying Certified Emission Reductions, or CERs, on carbon exchanges. The CERs are sold by companies and institutions in third world countries who have taken steps to go green or set up environment-friendly projects. The CERs are awarded to them by the CDM's executive board. This is a way to bring in the market mechanism and create an incentive system to reduce overall emissions. Each country is given a quota, and it, in turn, limits the emissions of each company or project.

The price of CERs in Europe has slipped sharply to euro 6.70 now, from its peak of euro 30 in 2008. India has been the second highest beneficiary of CDM, touching 60.5 million CERs in 2010, according to figures released by the UN Framework Convention on Climate Change, which has overall responsibility on CDMs. China touched 346 million. These two make up almost three-fourths of the whole market with India's share being around 12 percent.

In 2010, India had 520 projects registered with the United Nations. The leading companies in India dealing in the certificates are SRF, Torrent Power, Gujarat Fluro Chemicals, Navin Flourine International and Rashtriya Chemicals and Fertilizers. In India, the CERs are traded on the National Commodity and Derivatives Exchange Ltd (NCDEX), both in the spot and futures segments. The average price of CER in India is around Rs 470.

According to the latest report by research firm Crisil, Indian projects are estimated to receive 246 million CERs by December 2012, an almost four-fold increase.

The only problem is that the Kyoto Protocol is set to expire at the midnight 31 December 2012, and no agreement is in sight for the second tranche of the protocol. Since it takes almost a year to get the CERs, the companies dealing with the certificates, or those who want to get into this, would be looking very nervously at Durban.

But Durban may become a "graveyard for the Kyoto Protocol," as Climate Action Network puts it. According to Margaret Mukhanana-Sangarwe, chair of the ad-hoc working group on long-term cooperation, a companion body to the working group on the Kyoto Protocol, the slow pace of negotiations at Durban is worrisome. In response to a question from this correspondent, she said that an agreement on the principles of setting up a second protocol were "far-fetched in the light of the positions taken by major countries."

The United States never ratified the protocol, and Canada, Russia and Japan have already made it clear that they will not sign the extension. The strongest votary of the protocol was the European Union. But it too is speaking in different voices, having been battered by the recession back home, and officials are blaming the developing world and some developed countries.

"The second Kyoto Protocol was to have had a legal outcome in Copenhagen. It did not happen. Nor in Cancun. And no legal outcome is likely in Durban. So who's shifting the goalposts? Not the EU," said Artur Runge-Metzger, EU's chief negotiator on climate change, who wanted developing nations to do more than just "business as usual." But he said that they will work to extend the CDM in some form. "The CDM will continue no matter what type of decision is taken in Durban."

Another threat on the horizon is that under UN rules, after December 2012 new projects under CDM would be approved only for the least developed countries (which do not include either India or China), although projects already awarded carbon certificates can keep on trading them on the exchanges. This is likely to put a brake on the growth in such certificates seen in these two countries.

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