World Bank terms its first carbon auction a 'success'

If you say ‘ignorance is bliss’ to S Chandrasekhar, he will nod in agreement. The Managing Director of Bhoruka Power Corporation, one of India’s leading renewable energy companies, says he looks back at his lack of knowledge of the nuances of the carbon market with satisfaction, because it was the ‘fear of unknown’ that caused him to strike a long-term deal with a buyer of carbon credits for a price of Euro 13 in 2006-07. At that time, spot prices were ruling at Euro 17 a credit.

In the next seven years, Bhoruka would sell over 100,000 credits for 13 euros apiece, well insulated from the crash of the carbon markets. Today, carbon credits are going for a few euro cents. In June, an Indian climate advisory firm, EnKing International, advertised that it 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 dioxide emissions have been given trade-able instruments called ‘certified emission reductions’ (CERs, or ‘carbon credits’). Reliance Power’s website, for instance, proudly declares that the company is one of the largest generators of carbon credits and has 60 million CERs on hand. Almost all renewable energy companies have some carbon credits.

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

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

World Bank auction

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’ at a strike price of $2.40 per credit. The World Bank has termed the exercise a “success”.

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

By delivering a price guarantee, the World Bank has sought to revive methane emission reduction projects.

The significance of the auction is that they pave the 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 certified emission reductions (CERs) by 2020. At present, Indian companies are sitting with about 200 million CERs.

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

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