Time to step up carbon trading

The US coming back into the Paris Agreement under its new president is expected to bring in its own psychological heft into global climate action.

But one is uncertain about its practical value — for two reasons. First, the Paris Agreement itself is going nowhere, with emissions falling far short of what they ought to be to meet the 2 degree C target. Second, even during the three years when the US government was absent, many corporate and sub-national entities in the country were always climate-active.

Still, the psychological heft is not without value. The presence of the superpower is likely to matter in completing the negotiations for framing rules to operationalise the agreement. A critical unfinished agenda is setting of rules under Article 6, which would establish a global market for carbon offsets. (You do something climate-smart, you get ‘credits’ in the form of market-tradeable instruments that you can sell to someone who couldn’t do something climate-smart.)

Now is the time for Indian companies to start looking to benefit from carbon offsets keenly, say experts. “Prepare to engage internationally,” says Mahua Acharya, an expert in green finance and carbon markets, now the head of Convergence Energy Service Ltd, a wholly-owned subsidiary of public sector company EESL.

India has had a not-so-good experience with carbon offsets in the past. Indian entities were issued 1.95 billion ‘certified emission reductions’, or CERs, under the Clean Development Mechanism of the Kyoto Protocol, and still have about 750 million unsold. These financial instruments were issued to renewable energy or energy saving projects and were to be purchased by developed countries (called Annexure-I countries under the Kyoto Protocol). But very little purchase happened. With no buyers (due to lack of enforcement), the price of carbon collapsed (from a peak of around $25 to a few cents). Indian companies, who expected a bounce-back in prices, have been left holding worthless paper.

And now, there is a debate as to whether or not these Kyoto Protocol CERs should be transitioned into the Paris Agreement, which would give fresh life to the instruments. By the looks of it, it won’t.

Carbon markets of today

So, if you forget the past CERs as a bad dream, there is an emerging market for carbon offsets. There are three types of carbon markets that a proponent of a green project could avail itself of.

First is the ‘compliance market’, comprising largely sovereign entities that have committed themselves to reducing carbon dioxide emissions from their soil. They buy carbon offsets because it is cheaper to achieve the same mitigation effect than reducing their own emissions.

The second market is the ‘voluntary market’ comprising, largely, companies that have committed themselves to net zero emissions by a certain year. This is a vibrant market today, with more than 420 corporate buyers, and the number is growing.

The third is the ‘pre-compliance market’, which are again governments that want to buy up offsets speculatively, reasoning that when it becomes mandatory for governments to buy offsets, the prices would shoot up — it is cheaper to buy today. Switzerland, Sweden and Germany are examples.

Today, the most active is the ‘voluntary market’. The volumes are record-high. Indore-based EnKing International, a company that trades in Indian offsets, sold more offsets in the last six months than it did in the previous ten years, the company’s MD & CEO, Manish Dabkara, told BusinessLine . It sold 30 million tonnes worth of CO2. EnKing’s turnover just crossed the ₹100-crore mark; the company is mulling an IPO.

Now, all this may sound heartening, but really things are not great in the carbon markets today. Indian offsets sell for very little even today — something like 50-60 US cents a tonne of carbon. Indian entities are making money, but not much, for example, the ₹50 lakh that Indore Municipal Corporation earned by selling the offsets it received by avoiding 1.7 lakh tonnes of CO2.

A matter of time

Offsets generated by European projects earn around $25 per tonne of carbon. Korea market pays higher, around $35, but again the projects have to be located in Korea or should have Korean investments. Because of the local project preference, the market looks good on the surface — in 2019, the global carbon market grew 34 per cent to $214 billion. But there is not much on the table for Indian companies.

However, experts say it is only a matter of time before a thriving carbon market is established — simply because the world cannot do without it. There has to be an incentive for reducing greenhouse gas emissions; and a strong dis-incentive for producing them, either by way of a carbon tax (which is fixed, but sure-shot effective) or a mechanism for trading in carbon offsets (where the value of carbon is flexible.)

When Article 6 rules are framed, governments will become market participants. The ‘compliance market’, where the prices are good, will pick up. There is a universal agreement among experts that carbon prices should reach $100 per tonne of carbon for the world to reach its Paris climate goals. That is the market that India should prepare itself for.

COMMENT NOW