The Hindu Business Line : Carbon credit to ride high on crude oil prices, China earthquake

Mumbai, July 13 Carbon credit or certified emission reduction (CER) prices are expected to trade on the higher side in NCDEX (National Commodities and Derivatives Exchange Ltd) and MCX (Multi Commodity Exchange) due to the steep rise in crude oil prices and the fear of supplies from China being hit by the recent earthquake.

China is expected to generate 44 per cent of the global carbon credit requirement by 2012, through about 101 projects registered with Clean Development Mechanism (CDM) executive board, the highest authority under the Kyoto Protocol for registering projects and issue credits.

Major damage

According to the United Nations Framework Convention for Climate Change CDM project database, the devastated China’s Sichuan region, hosts some 125 hydropower projects at various stages of the CDM pipeline. The projects have the potential to generate up to 96.6 million UN-regulated carbon credits over the 2008-12 Kyoto protocol period. The earthquake has caused major damage to dams supporting hydropower projects in the Sichuan region.

Carbon credits are tradeable credits earned for investing in projects aimed at reducing greenhouse gas emissions.

One carbon credit is equivalent to one tonne of carbon dioxide reduced. Under the Kyoto Protocol, governments and companies in the European Union can use these credits to offset their carbon emissions and meet part of their reduction targets. Carbon credits are generated mainly in the developing countries because of the lower project cost.

Apart from the China factor, the steep rise in crude oil prices has also supported carbon credit rally. Since most of the emissions are caused by burning of fossil fuels such as crude, natural gas and coal, prices of carbon credit are directly influenced by the fuel prices.

The coal-fired plants roughly emit twice as much carbon dioxide compared to the gas-based plants. Hence when coal prices are lesser than that of gas and the demand for carbon credits is high.

The delay in getting validation of projects for generating CERs is also one of the reasons for rise in price. According to a UN estimate, CER supply by 2012 is expected to fall to 1.5-1.6 billion against the previous forecast of 1.8 billion.

In June, the CDM executive board has demanded a report from third-party validators — designated operational entities — to submit an update on projects delay for six months or more at the validation stage.

The most active CERs contract on Inter Continental Exchange advanced to a life time high of €25.85 as higher crude oil prices had potentially made use of natural gas less profitable for power utilities.