The fate of carbon credits with Indian companies, worth thousands of crores of rupees, is hanging fire, caught in the maw of a debate where both sides are right.

If things go the other way at the Conference of Parties meeting currently underway in Madrid, the value of these credits could well become zero.

When the world evolved the ‘clean development mechanism’ (CDM) after the Kyoto Protocol agreement of 1997, companies in the developing world could put up projects — such as renewable energy or afforestation — that helped reduce carbon dioxide emissions, and earn ‘credits’ that could be sold in the market. It was expected that these credits would be bought by the developed countries that had committed to emissions cuts under the Protocol.

Thus emerged the CDM market, aka ‘compliance market’. Alongside, environmentally conscious entities also started buying these carbon credits (or offsets) — the ‘voluntary market’.

Impressive gains

Indian companies have registered 1,669 projects under CDM and earned 246.6 million credits; another 526 projects were registered under the ‘voluntary’ market and these have earned 89 million credits. Thus, in all, Indian companies got roughly 350 million credits.

These credits go by different names under different dispensations. Under CDM, they are called ‘certified emission reductions’, or CERs.

What are they worth? Like shares, it depends on the market price. At the best of times, they were selling for $25 a CER. Indo Wind, a Chennai-based wind energy company, sold some for $15 apiece. Those were the days when experts estimated that India could gain even as much as ₹45,000 crore by selling the credits. Jindal Vijayangar Steel had said that it would get richer by $225 million selling offsets.

Then the market fell. Today, a CER sells for 25 cents in the CDM market and a dollar in the voluntary market. An estimated 85 per cent of India’s CDM credits and about 30 per cent of voluntary credits remain unsold.

Ironically, the market crash comes at a time when carbon ought to be priced far higher than its historical peak. The IMF, for instance, has said that a price of $75 would be consistent with climate action ambitions.

Face-off in Madrid

Currently, the world has congregated in Madrid for the annual climate talks, called COP — for Conference of Parties to the UN Framework Convention on Climate Change. This is the 25 COP meet.

High on the agenda is the development of an international market for carbon — the only aspect of the Paris Agreement for which implementation rules are yet to be framed.

As global climate action shifts epochs — from the Kyoto Protocol regime, where only developed countries (excluding the US, which opted out) undertook emission reduction commitments, to the Paris Agreement regime, where all countries are bound by their own voluntary commitments, called the Nationally Determined Contributions, or NDCs — the horns of the dilemma are whether or not to allow the offsets accumulated under the Kyoto regime to continue into the Paris regime.

Two arguments

A group that calls itself ‘Like-minded developing countries’, of which India is part, insists that it would be unfair to let the offsets, earned in good faith, under the Kyoto regime to lapse.

On the other hand, developed countries, mainly the EU, supported by a group of African nations and small island nations, oppose this. Their view is, if you let the carbon offsets accumulated thus far (such as India’s 350 million) be, you will swamp the carbon markets and dilute climate action. Those who ought to be implementing emission reduction projects will just buy the offsets, probably dead cheap, and throw up their hands.

Interestingly, the US, Canada, Australia and Russia are indifferent to this. “They don’t participate much in the carbon markets,” observes Manish Dabkara, Managing Director of Indore-based EnKing International, which assists in the securing and trading of carbon offsets.

Who will prevail in Madrid is an open question. By the looks of it, the odds are against the developing countries.