Choppy certified emission reductions market to hit India most

February 20, 2008 (Economic Times) – Politics and jittery equity indices are making the global carbon credit markets nervous. Carbon credit prices have plunged in the last few weeks. This could be troubling for major supplier India, which sold 20 million carbon credits in 2007, and has a larger number in the pipeline. The bad news is there is little likelihood of things settling down any time soon.

India is already in danger of getting outpriced in the global carbon credit market, with China and Vietnam offering certified emission reductions (CER) at lower, more fixed prices. The price of carbon credits, or CERs, fell to e14 last week, down from e17 in December. Though they are now at e15.50, it not certain how soon they would claw back another e2.

“We had seen the price crash coming and warned our customers, but nobody listened. In the short term, we expect prices to go down further. It does not look a rosy picture,” said Dr Ram Babu, managing director of CantorCO2e India, local arm of the US-based carbon markets brokerage and consultancy company.

Three factors are affecting sentiment right now. One, the likelihood that the European Union may get tough and reduce the number of CERs it would allow in Phase III of the Kyoto Protocol. “If the demand for CERs goes down after 2012, obviously companies supplying them will be in trouble. Indian companies will have to watch out,” a market watcher said.

However, market watchers believe the EU’s stance may well be a way of indirectly compelling developing countries such as India and China, along with the US, to agree to some emission reduction targets of their own.

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“By clamping down on CER demand, EU can rather quickly bring China and India to heel, given their investment in creating supply. Though eventually the EU may not cut CER levels, the political uncertainty over the issue will continue over the next two years. That will act as a dark cloud over the market undeniably. Politics will override market supply-and-demand balance-sheet,” a Mumbai-based broker said.

Two, the crash in the financial and equity markets has had a roll-on effect on carbon credit markets as well. “When we talked to traders they said it was because of algorithmic trading. Basically, the same investors are in both markets. So when they needed more cash, they had to reduce holdings in carbon markets,” Dr Ram Babu said.

Three, the carbon markets are inextricably linked with the global energy markets, particularly the relative prices of gas and coal and price of electricity. Since the market shake-out in mid-January, the carbon market has followed the price of oil more closely. So when oil goes up or down, carbon prices have followed.

Since traders view oil as a indicator of global economic outlook, when oil prices fall traders worry about a rather gloomy global economic outlook. In case there is a slowdown, it would mean fewer carbon emissions resulting in less demand for emission allowances and credits.

The silver lining is that carbon credits cannot be taken forward to Phase III, while European Union Allowances can be. “So European players are more likely to buy maximum number of carbon credits because they are cheaper till 2012. That way they can carry forward the more expensive EUAs to Phase III,” said a broker.

Indian companies who have contracted fixed prices up to 2012 are unlikely to be much affected by the sudden downturn in carbon credit prices. But those on a floating price could see a sudden erosion in projected profits.

Meanwhile, Indian sellers may have to price their products more in line with the market. According to Singapore-based Asia Carbon Exchange, Indian project developers continue to ask up to e25 per tonne. On the other hand, China is following a fixed-price approach, where deals are struck at e9-10. The market in Vietnam is evolving along the lines of the Chinese model at similar prices.

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