The Hindu Business Line : Carbon crash: Fixed price contracts may cushion impact

Grim picture
Those companies in variable pricing contracts linked to European CER prices will be affected.
Credits due for delivery during 2006 worst hit as they were ruling at the highest rates.
EU Commission may tighten emission norms for post-2007 period.

New Delhi , May 3

Indian companies, with interest in carbon trading, that have already entered into long-term contracts with a fixed price, might have a cushion and not get badly hit by the crash in carbon credit prices in Europe.

The extent to which Indian companies get hit by the crash would depend on whether they have already entered into valid contracts, whether the contracts are based on fixed or floating prices, and when the credits are to be delivered to the buyers

In withdrawal mode

However, at present, most of the European buyers are withdrawing from the clean development mechanism (CDM) market in the backdrop of high volatility, several carbon market intermediaries told Business Line.

CDM allows companies from developed countries to buy carbon credits from companies in developing countries.

One has to wait till May 15, by when the UK, Italy and Germany would submit their green house gas (GHG) emission level reports after which the prices are likely to stabilise, they add.

The crash was on account of several countries reporting that their GHG emission levels were within the mandated limits in 2005.

Fixed term contracts

"Those sellers (Indian companies) that have entered into fixed, long term contracts with quality buyers are unlikely to be affected.

However, several Indian sellers were purposely not signing contracts as the prices were moving up," said Dr Ram Babu, Associate Director, PricewaterhouseCoopers, adding that given the recent highs that CER (certified emission reduction) prices had touched, a correction was expected. CER is unit for carbon credit and stands for one tonne equivalent of carbon dioxide emission reduction.

Some companies have entered into contracts with a mix of fixed and variable pricing.

Those who have entered into variable pricing contracts linked to European CER prices would get affected, he said.

Time of delivery

Moreover, the price volatilities are also linked to the time of delivery of carbon credits. Those credits that were due for delivery during 2006 have been worst hit as they were trading at the highest rates.

However, prices for credits that are to be delivered after 2007 were not ruling very high and thus have not been as badly hit, explained Dr Ram Babu.

Some smart buyers may also buy at these prices, said another company that acts as an intermediary between buyers and sellers.

Moreover, the European Union Commission may fix more stringent emission norms for post-2007 period, which may keep the market alive, said an expert.

But the Indian CDM market has to wait for the confusion to end.

"Several buyers with whom we were in advanced stages of negotiation at high prices are not responding.

"We have to see when they enter the market," said another major intermediary.