World Bank’s first price auction lends hope for carbon market revival

Say ‘ignorance is bliss’ to S Chandrasekhar and he would probably nod in agreement.

The Managing Director of Bhoruka Power Corporation, one of India’s leading renewable energy companies, says that his lack of deep knowledge of the carbon markets back in 2006-07 stood his company in good stead – it was the ‘fear of the unknown’ that bade him on to strike a long-term deal with a buyer of carbon credits then, for a price of €13. At that time, spot prices stood at €17 a credit.

In the next seven years, Bhoruka would sell over 1,00,000 credits at €13 apiece, well insulated from the carbon market crash.

Today, carbon credits are going for a few cents. In June, Indian climate advisory firm EnKing International advertised that was willing to buy 20,000 carbon credits for 35 (dollar) cents each. Not many companies are so lucky. Many Indian projects that have features that reduce carbon emissions have been given tradable instruments called ‘certified emission reductions’ (CERs, or ‘carbon credits’). Reliance Power’s website, for instance, proudly declares that the company is the world’s largest generators of carbon credits and has 60 million CERs on hand.

Almost all renewable energy companies possess some carbon credits.

The carbon market has since collapsed, due to a number of reasons, the biggest of which is the over-supply of credits at a time when the world went into recession in 2008.

For years, world leaders have been splitting hairs over how to ginger up the carbon market, which is a significant means of gathering funds for greenhouse gases emission mitigation projects.

Small but significant Last week, the World Bank took a few baby steps in the direction. On July 15, it auctioned rights, but not obligation, to sell CERs from methane emission reducing projects, at a guaranteed floor price. Twelve companies won the ‘put’ options for a strike price of $2.40 per credit. The World Bank has termed the exercise a “success”.

If the market prices of carbon credits go up beyond $2.40, the companies that bid and won the options are free to sell them in the market. If the prices remain low (as they are now), then they can sell the credits at the World Bank’s ‘Pilot Auction Facility’ for methane and climate change mitigation, at the floor price.

By delivering a price guarantee, the World Bank sought to revive methane emission reduction projects. The significance of the auction is that they pave way for more in the coming years.

This is important to India, where projects registered under the ‘clean development mechanism’ will earn over 800 million CERs by 2020. Currently, Indian companies possess about 200 million CERs.

The success of subsequent auctions could evolve a mechanism to fund green projects, such as ‘carbon capture and sequestration’, or CCS, which is important for coal-rich India.

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