New Delhi: India and China, both dominant players in the global carbon market, could find the European market for these almost halved should a draft proposal of the European Commission on energy and climate be approved by the European Parliament and member states.
The proposal seeks to limit the number of carbon credits European countries can buy from developing countries such as India to meet their targets for emission reductions from 2012 onwards.
Emission concerns: A 2005 picture shows smoke emanating from a chimney at the Suedzucker factory in Gross-Gerau, near Mannheim, Germany.
“This is something India and China will not be able to avoid. Even at the last climate change talks in Bali, there were enough bilateral talks focused on limiting India’s and China’s participation in the carbon market,” said Ram Babu, managing director, CantorCO2e India, a London-based finance firm that operates in the environmental and energy markets.
Currently, around 10% of carbon credits purchased by companies in the European Union (EU) are through so-called Clean Development Mechanism (CDM) or Joint Implementation (JI) credits. While, under CDM, developed countries buy these carbon emission reductions (CERs or carbon credits) from projects/companies in developing countries, under JI, companies in developed nations invest in projects in other developed nations and then get the credit for the carbon reduction. The remaining 90% comes from carbon credit transactions within the respective countries in the EU.
The EU now wants to limit these purchases to 5-6%.
If the proposal goes through, it could result in a crash in carbon credit prices. The EU is the biggest buyer of credits from India and the CDM market in general. For instance, in 2006, 86% of CDM carbon credits were bought by the private sector in European countries, of which India had a share of 12% (60 million CERs). Japanese firms do buy carbon credits from India, but analysts claim that much of this is speculative.
According to Ashutosh Pandey, a consultant with Emergent Ventures Pvt. Ltd, a company that helps develop projects that generate carbon credits, the EU could also be considering mandating that all carbon credit trade by European companies in certain sectors only be with other Eurpean companies.
Analysts say that the proposal could be the result of a growing feeling that India and China have been reaping the benefit of the carbon market without taking up any mandatory commitment to reduce carbon emissions themselves. “The fear for Indian companies largely revolves around climate change negotiations and the market. For most part, there is strong talk of excluding Indian and Chinese projects from not only the regulatory markets but voluntary carbon market as well,” added Babu. He explained that some of this has to do with the fact that India and China are better off than several poorer nations that could reap the benefits of the carbon market. To date China and India have swamped the carbon market, making it unable for smaller carbon reduction projects or project from African countries to enter the market. At present, India accounts for 33.5% (304) of total registered projects with the United Nations executive board, China accounts for 17% (152 projects), while Uganda and Tanzania have one each and South Africa has 12.
The EU proposal also links the future of the CDM market to the outcome of global climate change negotiations. It says the EU will reduce carbon emissions by 20% by 2020, which will go up to 30% if other nations sign up for mandatory carbon cuts. Analysts say this might incentivize countries such as India and China to sign up as the 30% cut would mean a bigger carbon market than a 20% cut. The EU move has brought uncertainty to an already weak market. Secondary prices for December ’08 CER have slid from €17 (Rs989.4) to €15, this month.