Cop26. Carbon prices go through the roof

If someone told you that there is a company that intends to distribute about 400 cookstoves worth Rs 1,600 apiece, you would think that either it is philanthropy or the company’s management is crazy, right?

Well, it is neither. GHG Reduction Technologies Pvt Ltd is putting up a factory at Nashik, Maharashtra, to manufacture cookstoves that are to be distributed to the rural poor (over several years) free of cost — with a solid business plan behind it.

The company aims to get carbon credits for each cookstove given away, which, it reckons, would more than pay for the cost of manufacture of the cookstove.

All this may sound odd, but the company’s promoters are no strangers to carbon markets. GHG Reduction Technologies has been promoted by Manish Dabkara, who has also promoted EKI Energy, a company that facilitates carbon trading and has several big names such as ReNew Power, Indian Oil Corporation and Indian Railways as its customers. EKI Energy came out with its IPO last year for a price of Rs 102 a share; on Wednesday the EKI share closed at Rs 4,536.25!

Dabkara calculates that each cookstove would earn the company four carbon credits a year, because they save a lot on fuelwood. And the prices of carbon credits (or offsets) are already going through the roof, even as negotiators are underway for making rules under Article 6 of the Paris Agreement. Today, certain types of carbon offsets sell for as much as Euro 60.

When(ever) the rules are made, governments of (mostly developed) countries would start buying the offsets (called in the Paris Agreement as ‘internationally traded mitigation outcomes’ or ITMOs). They would form the ‘compliance market’, where offsets are purchased to meet a commitment.

But the markets are not waiting for the Article 6 rules or the governments’ providing demand. The voluntary market, comprising companies such as Google and Apple that have avowed to reduce their carbon footprint, in order to meet their ‘net-zero’ commitments. These companies are taking steps to de-carbonise their operations but there will always be residual emissions which would need to be offset, points out Sandeep Roy Choudhury, Head-Origination, at the Singapore-headquartered VNV Advisory.

But even corporate buying does not complete the story.

Today, investors are buying the offsets with the hope of selling for a profit to entities that shall be obliged under various agreements to reduce their carbon footprint—meaning that speculation has entered the carbon markets. Many banks are buying offsets, observes Roy Choudhury.

Carbon investors speculate that the demand for offsets will increase in the next few years because many entities are obliged to buy the offsets. For example, airlines operating international flights shall have to offset any carbon emissions from the new aircraft they would press into service, by buying carbon credits, under ‘Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). (They could alternatively use biofuels for flying aircraft but buying offsets are easier.) Other potential buyers are oil and gas companies.

In future, several such entities will enter the carbon market—speculators have caught a whiff of things to come.

So, what are the carbon prices today? They vary widely, depending upon the nature of the underlying project, but the credits generated in Europe, ‘European Union Allowance’ or EAU, are now quoting at over Euro 60, more than twice the pre-pandemic levels.

Earlier this month, the California, US-based carbon exchange, CBL, announced that its carbon credit volume so far this year had crossed 100 million, a growth of 384 per cent over the same period last year, which “reflects increasing demand from companies implementing net-zero programs to attain Paris Agreement goals, as well as an influx of corporates, financial institutions, offset project developers, and fund managers drawn to the exchange’s transparent order book, robust price discovery, and deep liquidity.”

Dabkara believes that the market would only grow, with more and more entities providing the demand for offsets. That is why he is investing in the manufacture and give-away of cookstoves.

However, there are voices noting that companies like GHG Reduction Technologies could be taking a punt. Roy Choudhury fears that over time the supply of carbon offsets might outstrip the demand.

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