Lowering greenhouse gas emissions is not only good for environment, but it also may benefit an entity’s bottom line. India has a huge potential for carbon financing, which is an emerging business opportunity for Indian companies. In recent years a small, albeit fragmented, market for carbon has started to emerge, and the institutional superstructure for clean development mechanism (CDM) is being set up both internationally and nationally.
The two distinct mechanisms of CDM, a market-based instrument and a grant-based instrument (the global environment facility or GEF), have their own special roles to play as financing options. GEF works closely and integrates with the government’s institutional framework while CDM is more private-sector-driven. The GEF provides upfront grant and also seeks to leverage support from other sources, while CDM generates revenue over the years. Globally, there are more than 4,000 projects under various stages of CDM. More than 1,000 projects are already registered as CDM projects, out of which about one-third is from India. These projects are likely to have a share of about 19% of the total global CERs supply. It is important to note that projects should meet with additionality and sustainable development indicators. The project should lead to real, measurable and long-term greenhouse gas mitigation. CDM projects have inherent risks for buyers, which need to be noted and require devising appropriate guarantee instruments with assistance from the private sector.
It is estimated that 60-70% of emission of greenhouse gases (like hydro fluorocarbons, methane and nitrous oxide) is through fuel combustion in industries like cement, steel, textiles and fertilisers. They are released as by products of certain industrial processes, which adversely affect the ozone layer, leading to global warming. Carbon credits seek to reduce these emissions by giving them a monetary value. One credit gives the owner the right to emit one ton of carbon dioxide. Such a credit can be sold in the international market at the prevailing market price. This means that carbon becomes a cost of business and is seen like other inputs such as raw materials or labour.
The carbon market is expected to grow to $100 billion in the near future, and Indian firms want to reap some of the benefits. The CDM under the Kyoto Protocol allows richer countries to trade their emission-reduction targets with developing countries by buying carbon credits earned by the latter for projects reducing emission of greenhouse gases.
Recent estimates predict that uncontrolled carbon emissions could cost the global economy more than $200 billion annually by 2030 unless the pollution levels are controlled. Environmental group Greenpeace has said that shifting to renewable energy and reducing carbon emissions could save Southeast Asia $80 billion annually.
As far as India is concerned, emission trading holds enormous potential with it already being one of the leading generators of certified emission reductions (CERs) through CDM. The potential for generation and sales of CERs should be harnessed on a sustained basis. India has a great scope of earning and trading carbon credits through its diversified and potential sources of developing technologies.
Trading in CERs provides benefits including
Sellers and intermediaries can hedge against price risks.
Forward selling can help projects in generating liquidity and thereby reducing the cost of implementation.
No counter-party risks as the exchange guarantees the trade.
Price discovery on the futures exchange platform ensures fair prices for both buyers and sellers.
Buyers and sellers come on a single platform, which ensures credibility among them.
It gives an immediate reference price, which is good for the sellers.
Many Indian companies have been re-rated on the stock markets on the basis of carbon trading opportunity. SRF Ltd and Shell Trading International have entered into sale and purchase CERs. Suzlon Energy and Shriram EPC have business in wind energy, which is eligible for carbon credit benefits. Shree Renuka Sugars is also expected to benefit from carbon credits. Gujarat Fluorochemicals was among the early companies to register for a CDM project.
India has emerged as the dark horse in this race as more than 200 Indian entities have applied for registering their CDM project for availing carbon credits. Currently, one carbon credit is worth 13 euros. Indian companies can have higher incomes more from carbon credits than their core business. The carbon credit market was worth $25 billion last year and is growing at tremendous space, and there is a demand to reduce 1 billion tonnes of carbon emissions in the world, so that threats like global warming could be dealt with.
Indian companies are fast realising that there is money to be made by becoming eco-friendly. With new core sector projects like power and steel coming up in India, the carbon credit market will rise once again. The 800 million farming community in India has also a unique opportunity where they can sell carbon credits to developed nations.
Recently, an Indian firm won the single largest issuance of carbon credits by the United Nations Framework Convention on Climate Change, which awarded 5.4 million carbon credits to two projects owned by India’s JSW Steel.
Ficci has said that Indian companies may earn almost $4 billion through carbon-credit sales in the near future. Indeed, an institutional mechanism is quickly emerging in India to take advantage of CDM. This is critical. Given the vast country that is India, it is essential that an organised framework reaches the grassroots level where numerous green projects could be eligible under CDM.
Being one of the largest growing economies of the world, India has a large potential for emission reduction and can thus assist developed nations secure compliance and purchase CERs at competitive prices. The revenues from carbon trade provide an additional revenue stream of up to 10% or even higher in select cases that can enhance the return on investment. CDM holds the key to reduction of greenhouse gas emission and improving financial performance of the companies. The environmental norms are bound to get stricter as time goes by. This is the right time do research, develop and implement cleaner and more sustainable technologies.
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