How does it work in real life?
Assume that British Petroleum is running
a plant in the United Kingdom. Say, that
it is emitting more gases than the
accepted norms of the UNFCCC. It can tie
up with its own subsidiary in, say,
India or China under the Clean
Development Mechanism. It can buy the
'carbon credit' by making Indian or
Chinese plant more eco-savvy with the
help of technology transfer. It can tie
up with any other company like Indian
Oil or anybody else, in the open market.
In December 2008, an audit will be done
of their efforts to reduce gases and
their actual level of emission. China
and India are ensuring that new
technologies for energy savings are
adopted so that they become entitled for
more carbon credits. They are selling
their credits to their counterparts in
Europe. This is how a market for carbon
credit is created.
Every year European companies are
required to meet certain norms,
beginning 2008. By 2012, they will
achieve the required standard of carbon
emission. So, in the coming five years
there will be a lot of carbon credit
What is Clean Development Mechanism?
Under the CDM you can cut the deal for
carbon credit. Under the UNFCCC, charter
any company from the developed world can
tie up with a company in the developing
country that is a signatory to the Kyoto
Protocol. These companies in developing
countries must adopt newer technologies,
emitting lesser gases, and save energy.
Only a portion of the total earnings of
carbon credits of the company can be
transferred to the company of the
developed countries under CDM. There is
a fixed quota on buying of credit by
companies in Europe.
How does MCX trade carbon credits?
This entire process was not understood
well by many. Those who knew about the
possibility of earning profits, adopted
new technologies, saved credits and sold
it to improve their bottomline.
Many companies did not apply to get
credit even though they had new
technologies. Some companies used
management consultancies to make their
plan greener to emit less GHG. These
management consultancies then scouted
for buyers to sell carbon credits. It
was a bilateral deal.
However, the price to sell carbon
credits at was not available on a public
platform. The price range people were
getting used to was about Euro 15 or
maybe less per tonne of carbon. Today,
one tonne of carbon credit fetches
around Euro 22. It is traded on the
European Climate Exchange. Therefore,
you emit one tonne less and you get Euro
22. Emit less and increase/add to your
We at the MCX decided to trade carbon
credits because we are in to futures
trading. Let people judge if they want
to hold on to their accumulated carbon
credits or sell them now.
MCX is the futures exchange. People here
are getting price signals for the carbon
for the delivery in next five years. Our
exchange is only for Indians and Indian
companies. Every year, in the month of
December, the contract expires and at
that time people who have bought or sold
carbon will have to give or take
delivery. They can fulfill the deal
prior to December too, but most people
will wait until December because that is
the time to meet the norms in Europe.
Say, if the Indian buyer thinks that the
current price is low for him he will
wait before selling his credits. The
Indian government has not fixed any
norms nor has it made it compulsory to
reduce carbon emissions to a certain
level. So, people who are coming to buy
from Indians are actually financial
investors. They are thinking that if the
Europeans are unable to meet their
target of reducing the emission levels
by 2009 or 2010 or 2012, then the demand
for the carbon will increase and then
they may make more money.
So investors are willing to buy now to
sell later. There is a huge requirement
of carbon credits in Europe before 2012.
Only those Indian companies that meet
the UNFCCC norms and take up new
technologies will be entitled to sell
There are parameters set and detailed
audit is done before you get the
entitlement to sell the credit. In
India, already 300 to 400 companies have
carbon credits after meeting UNFCCC
norms. Till MCX came along, these
companies were not getting best-suited
price. Some were getting Euro 15 and
some were getting Euro 18 through
bilateral agreements. When the contract
expires in December, it is expected that
prices will be firm up then.
On MCX we already have power, energy and
metal companies who are trading. These
companies are high-energy consuming
companies. They need better technology
to emit less carbon.
Is this market also good for the small
These carbon credits are with the large
manufacturing companies who are adopting
UNFCCC norms. Retail investors can come
in the market and buy the contract if
they think the market of carbon is going
to firm up. Like any other asset they
can buy these too. It is kept in the
form of an electronic certificate.
We are keeping the registry and the
ownership will travel from the original
owner to the next buyer. In the
short-term, large investors are likely
to come and later we expect banks to get
into the market too. This business is a
function of money, and someone will have
to hold on to these big transactions to
sell at the appropriate time.