The price expectation among Indian companies on carbon credits is very high compared with that of other countries in the region, such as China, Indonesia and Thailand, say brokers, who act as intermediaries for carbon credit deals.
As a result, some Indian companies pulled out of such deals recently. On the other hand, buyers of these credits, predominantly European companies, are striking cheaper deals with firms in China and other Asian countries.
A carbon credit, or certified emissions reductions (CER) licenses the owner to emit one tonne of carbon dioxide a year. CERs are awarded by the CDM (clean development mechanism) executive board, an arm of the United Nations, to projects in developing countries.
CERs certify reduced green house gas emissions because international treaties such as the Kyoto Protocol has set quotas for emissions.
CDM allows developed countries to meet their emission reductions by paying green house gas reduction efforts in developing countries such as India. Thus, carbon credits are traded like stocks in the international market,because companies with excess quota sells remaining CERs to companies in developed countries that are in need of the permit.
“In India, the price expectation on one CER is about ?€10 (Rs556) to €14, while that in other developing countries in Asia is significantly lower,” said Rajesh Srivastava, managing director and head of corporate and commercial banking, at Rabo India Finance Pvt. Ltd, a 100% subsidiary of Rabobank International, a Dutch banking major. “As a result, transactions with Indian companies in this sector is reducing.”
It is true that many deals have fallen off because of the high price expectation in India, added N. Yuvaraj Dinesh Babu, director of carbon trading at Singapore-based Asia Carbon Pvt. Ltd, who agreed with Srivatava. “The price expectation among some Indian companies is even higher than €10 to €15, while in China there is a uniform floor-price for carbon credits, around €8 to €9, enforced and regulated by the government,” he said.
The major reason for this price variation is that Indian firms take up unilateral projects by engaging local expertise or consultants during the project development stage, added Babu. “On the other hand, companies in China and other markets mostly do bilateral projects by joining hands with Western companies. As a result, Indian companies stand better poised to bargain price with various buyers.”
Asia Carbon has more than 40 clients in India, mostly at the project development stage. The firm provides consultancy services to two companies in China and few others in Malaysia, Indonesia and Vietnam.
“Another reason for the price difference is that for many large Indian companies, carbon credits do fall under the core-business,” Babu said. “They are willing to wait and watch the market, till such time that the global demand rises pushing up the prices.”
However, the CDM industry in India is set to expand, once non-conglomerates wake up to the potential and revenue stream, said an executive at a global environment financing company, who did not wish to be named. “This could bring models such as buyer taking on the project risks and entering into forward purchase contracts,” the executive said. “So far, the CDM market in India involved few large companies who were willing to take risk and hold their carbon credit until they find higher prices.”
Indian companies, which recently pulled out from carbon credit deals because of pricing issues, include listed Gujarat Flourochemicals Ltd, said one broker, who did not want to be identified.