Climate Change : The Financial Connection

climate_change.jpgAs Climate Change threatens humanity with dire consequences like Global Warming and haphazard rainfall patterns, world policy makers at the United Nations adopt a remedial approach that the common man would honour: monetary gain.The Kyoto Protocol, an amendment to the United Nations Framework Convention on Climate Change, aims at trimming Greenhouse Gas Emissions to sub-1990 levels in signatory nations over the period of 2008-2012. Companies in countries with present emission levels below their limitations may trade the difference to those in nations exceeding theirs in return for monetary benefits.

With India well under its prescribed limits, a unique financial opportunity presents itself before Indian industrialists. Indian corporations can sell their remaining Allowances in the form of Carbon Credits, each equalling one metric tonne of Carbon Dioxide equivalent of emission, to international companies for whom Emission reduction is expensive. Moreover, by further reducing their emissions, the companies may earn more credits. Present estimates assess a possible influx of Rs. 15,000 crore by 2012 through Carbon Trading, should the Clean Development Mechanism (CDM) projects be approved by the concerned international authority, the CDM Executive Board. This comes at a time when carbon trading is still gaining ground in India Inc. and the surge in domestic companies entering into it is expected to be sustained.

Better financial prospects exist in the setting up of a futures market whereby Indian companies can enter into contracts to sell their Credits at pre-determined rates at a future date. This can assist in better price discovery for Indian firms. The Multi-Commodities Exchange of India (MCX) is in advanced talks with the Chicago Climate Exchange to introduce a futures Carbon exchange in India and awaits clearance from the Forward Markets Commission. Presently, companies sell their Carbon credits to EU nations through intermediaries that don’t always fetch them the right price.

Over 599 Indian projects, spanning in sectors of Biogas, Energy Efficiency and Renewable energy are currently on the cards, of which 220 have been registered by the CDM Executive Board, accounting for 35% of the world’s total. According to Ernst&Young, India has in the past 2 years earned Rs. 2000 crore already. The Carbon Credit market will soon open up to banks, brokers, funds, arbitrageurs and private traders. Indian banks such as Canara Bank and State Bank of India have offered to negotiate for Carbon Credits on behalf of Indian industries. IDBI has entered into an agreement with German Bank KfW to mediate the flow of Carbon Credits between the two nations.

The benefits of Carbon trading are not restricted to the corporate world. Manufacturers of Solar Powered Appliances may use income from Emission Reduction to subsidize the cost of their products and research. End consumers, in turn, benefit from Price subsidy as well as in their reduced electricity consumption. Anthyodaya, a Kerala-based NGO has involved 20,000 rural households in using biogas for cooking, converting Methane to less harmful CarbonDioxide, thereby earning credits, the profits of which it passes on to the farmers in the form of an annual income of Rs.1000/-
As a result, financial gain; the factor that fuelled the Industrial Revolution pre-1990 and hence Climate Change, is being employed to amend its consequences.