The Financial Connection

Taking Climate Change Mitigation to the Market As climate change threatens humanity with dire consequences like global warming and fluctuating rainfall patterns, world policy makers at the United Nations adopt a remedial approach that the common man would appreciate- providing monetary incentives. 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.

The Kyoto Protocol imposes national caps on the emissions of Annex I countries (those that have accepted greenhouse gas emission reduction responsibility). In practice most countries devolve their emission targets to individual industrial entities. Companies in countries with emission levels below their limitations may trade the difference with 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 crores by 2012 through emissions 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.

The surge in domestic companies entering the domain of emissions trading is expected to continue. Favourable financial prospects exist in the setting up of a futures market allowing Indian companies to enter into contracts to sell their Credits at pre-determined rates at a future date. This would assist in better price discovery for Indian firms. The Multi-Commodities Exchange of India (MCX) is negotiating with the Chicago Climate Exchange to introduce a futures emission 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.