Carbon Credits

Introduction
 What are GHG’s?
 What is Carbon Trading?
 Why are GHG’s traded?
 What are UNFCCC and Kyoto Protocol?
 What is CDM?
 What is CER?
 What are Emission Allowances?
GHG’s regulated by KP
 Carbon dioxide Equivalents (CO2e)

 Global Warming Potential

(GWP)

 What is one unit of GWP?

Participants
 Annex I Parties: OECD countries+ EIT
countries, including the Russian Federation, the
Baltic states and several Central and Eastern
European States.
 Annex II Parties: OECD members of Annex I
excluding the EIT parties.
 required to provide financial resources to enable
developing countries to undertake emission reduction
activities and to help them adapt to adverse effects of
climate change
 Non – Annex I: Developing countries – India
and China is a part of non-Annex I.
 They are usually the net sellers of emission offsets.
International Carbon Map

Highlights:
USA: Biggest Emitter
Australia changed position
The EU and Japan ratified it: Biggest Buyers
Kyoto Mechanism
 The Clean Development Mechanism (CDM)
 Earn and Trade
 Covers developing countries
 CERs

 The Joint Implementation (JI)

 Earn and Trade
 Covers developed countries
 ERUs

 International Emissions Trading

 Cap and Trade
 Only for developed countries
 AAUs
Types of Transactions
 Allowance Based
 AAUs, EUAs prevalent under a cap and trade
system

 Project Based
 Projects are funded, conceptualized by
companies in developed countries and
implemented in developing countries or
financially more viable countries
 Is covered by CDM and JI.
Trading in Theory
Tradable products under
UNFCCC
Comparison between EUA, ERU
and CER
Allowances v/s Credits
Contd…

 Only 10% of excess emissions can be covered under EU ETS

Fungibility
The Process (Allowances)
 Cap and Trade
 Cap = Limit on emissions
 Trade = trade for deficit/surplus and ensure you are
under Cap
 Trading Options:
 Buy from fellow compliance participants having surplus
 Buy from offset projects (ie CDM)
 Penalty
 In EU fine of Euro 100 per tonne of CO2e that is above
the cap
 In addition to this the exceeded emissions need to be
covered up in the subsequent year.
The Process (Credits)
 Earn and trade
 Earn = Reduce carbon emissions through more
efficient projects and get it certified by
UNFCCC

 Trade = Sell these certified reductions with

buyers in need.
Principle of Additionality
Around the World
Who is Selling?

Sub Saharan Afr

By Volume (ktCO2e 2012) Source: Point Carbon
Expected annual CERs from
registered Projects (By
Country)

Source:
www.unfccc.int
No. of Projects (By country)
Inferences
 India has 32.42% of total projects but
generates 14.37% of total CERs

 Korea which is No. 4 in terms of total CERs

generated, lies at No.7 in terms of total
number of registered projects.

 Chinese projects are the most efficient.

198 projects generate 107,128,288 CERs.
Top Buyers
 RWE, ENEL and EDF Trading
are compliance buyers

 Rest of the buyers are Carbon

Credits intermediaries/
aggregators
Composition of Buyers (By
Country)

Source: State of the Carbon Market

Macroeconomic Price
Determinants
 Upward Price Pressures
 Japanese buying from 07 to 08
 EU demand
 Australian demand post ratification

 Downward Price Pressures

 Canadian govt. rejection
 Increased registration of CER projects
 Major non CO2 mega projects (e.g $1 bn Chinese
HFC projects)
 Corporations with excess allocations not trading
yet
Price Signals
 Demand Side Signals
 Gas – Coal Price Spread
 Oil Prices (Weak correlation)
 Weather Conditions
 Regulatory Conditions (case of EU)
 Economic Growth Rate

 Supply Side Signals

 CER Supply
Long Term Indicators
 Potential supply of surplus AAUs from EIT
countries
 AAU prices in turn affects CER prices

 EU allocation issues will be the biggest driver

(Compliance levels from 10% to 5%)
 EUA already a benchmark for domestic prices
Contd…
 Prices influenced by COP
 Provides positive or negative signals through
their decision

 Development of internal ETS akin to EU ETS

 Prices of CERs at different stages of the

project life cycle.
Indian Markets
 Introduced on the two leading commodity exchanges
 MCX
 NCDEX

 MCX CFI Futures Contract was introduced in the Indian

markets on Jan 21, 2008

 The NCDEX CER Futures Contract (CERNCDEX) in

carbon credits was introduced on Apr 10, 2008.
Contract Specifications
 1 MCX EUA Futures Contract = 200 tonnes of
CO2e = 200 EUAs
 Underlying asset: EUAs

 1 NCDEX contract = 500 tonnes of CO2e = 500

CERs
 Underlying asset: CERs
Prices and Volume (Before Apr
2008)
Prices and Volumes (NCDEX
Contract)
Prices and Volumes (after
Apr 2008)
Notes
 Only Dec contract has been considered
because:

 Only Dec contracts have significant liquidity.

 Both on the Indian as well as international markets

 CERs traded only on the NCDEX.

 No contract for EUA
Conclusions
 MCX drives volumes upto 76000 tonnes of CO2e
or 76000 EUAs

 NCDEX although a late starter managed to drive

up the same volume in just 2 days.

 After the launch of the NCDEX contract, MCX

managed to trade just 5600 tonnes of carbon
offsets from 10th April to 5th May.

 During the same period NCDEX oversaw trading of

2,370,200 tonnes of carbon credits
Contd…
 Low volumes implies low volatility.

 Unable to fulfill aim

 Difference due to different underlying

assets

 EUA cannot be used, produced or held by

Indians
 Basis Risk, Hedging and Arbitrage
opportunities
Risks
 Over-allocation of Allowances
 Excess allowances meant target easily
achieved
 Volatility lead to speculation and profit trading

 Regulatory impediments and hurdles

 Lack of liquidity

 Post 2012 uncertainty