Futures in carbon trading may soon become a reality.
The Multi Commodities Exchange of India (MCX) is in discussions with the Chicago Climate Exchange (CCX) on launching a futures carbon-trading exchange in India.
MCX provides a marketplace for futures contracts in commodities such as bullion, pulses and steel.
“We have had several rounds of talks with CCX and some sort of contract is already ready. We are now waiting for a clearance from the Forward Markets Commission,” said Joseph Massey, deputy managing director of MCX.
The commission is the regulator for commodities exchan-ges. As of now, futures trading in carbon credit is not allowed. Officials in the commission couldn’t immediately be reached for comment.
Currently, only the European Climate Exchange allows trading in carbon futures, whereas the CCX, despite doing spot trades in carbon, deals in futures only for sulphur and nitrogen emissions.
India doesn’t have a spot market yet, but market watchers say that it makes sense to start preparing for the futures market before first establishing a futures exchange. This, experts believe, would help in price discovery.
According to Massey, there is currently little awareness about carbon trading in India. “Besides, Indian companies sell carbon credits in the European markets through intermediaries, which sometimes may not fetch Indian companies the right price,” he said.
Future trading through the exchange will help Indian companies sell their carbon credit at a predetermined rate on a future date.
“This will help Indian companies benefit from price discovery and decide when to sell,” said Massey.
Amit Anand, environmental consultant at Deloitte Touche Tohmatsu India, said most of the project developers in India, being small players, could find it far more economical to invest in a futures market.
“All the existing exchanges have had an experience in emissions trading for over a decade but since we don’t have anything of the sort in India, and the future could involve a market with Indian buyers of credits, it makes sense to plan for a futures scenario,” says Anand.
In the Chicago exchange, members commit to reduce a certain amount of their greenhouse gas emissions every year. Those who cannot meet their targets must buy carbon credits from members who have exceeded their targets, or from certified projects, dubbed Offset Projects, which employ greener technologies or methods. It’s these Offset Projects that have recently started catching the attention of Indian organizations.
Organizations such as Anthyodaya, a Kerala-based non-governmental organization (NGO) that has recently become the first Indian member of the Chicago exchange. The NGO’s project involves 20,000 rural households in using biogas for cooking. The methane captured and burnt would earn Anthyodaya allowances that it can sell through the Chicago exchange to American entities. The rate at which allowances are sold is fixed by the exchange at $4 (about Rs164) per allowance.
“Once the project is in place and running, every farmer would get an average of Rs1,000 annually,” claims Anthyodaya executive director Peter Thettayil.
Meanwhile, an increasing awareness about global warming, climate change and increasing pressure on the US, China and India, the world’s leading polluters, to set an em-ission reduction target, and recent overtures by the Bush administration towards considering “a global strategy” towards emissions reductions, has, in a sense, triggered actions to establish a base towards developing a futures market.
Recently, the Carbon Disclosure Project—a UK-based charity organization, and the largest corporate registry of greenhouse gas emissions in the world—had approached 100 firms in India. This is the first time they did so since the project began four years ago.
Says Paul Simpson, the carbon project’s chief operating officer: “We’ve got a good response (about disclosing greenhouse gas emissions) and hope Indian companies will be forthcoming.”
Over 1,000 large corporations across the world, including Swiss Re and IBM Corp., have responded since the project’s launch in 2000. “Once we know the emissions by companies, it will help evolving strategies to deal with climate change,” Simpson added.
Michael Walsh, executive vice-president of the Chicago exchange, who was in India last week, confirmed discussions with potential market partners for this kind of market mechanism. “A full-fledged futures exchange will help Indian projects smoothly transact their emission credits, and ensure greater transparency,” he said. He, however, emphasized that it is too early to determine the real level of interest.
Trading in the Chicago exchange is gaining acceptance as it falls outside the purview of the Kyoto Protocol, under which Clean Development Mechanism projects employ far stricter regulations and clearance procedures. As of now, the Chicago exchange has over 300 members in the US, which includes companies such as DuPont and Motorola, and some governments such as the city of Berkeley, California, and the state of New Mexico.
According to Massey, tying up with the Chicago exchange will help get technological know-how to the Indian commodities exchange.
Prior to the initiative on carbon futures trading, the MCX got into a pilot project with the Chicago exchange, under which mini-sized versions of the Chicago exchange’s carbon financial instruments, which monetize the value of carbon credits, were listed on an MCX’s trading platform. This gave MCX an idea as to what is happening in carbon credit trading.