By Charles Cormier Chief Environmental Specialist The World Bank, New Delhi
Oped Special to Mint, India
December 7, 2007 The growing pressure on countries to address climate change has given rise to a multi-million dollar international market for buying and selling emissions of greenhouse gases. Under the Kyoto Protocol which came into force in February 2005, industrialized countries agreed to collectively reduce emissions of greenhouse gases by 5 percent by 2012 compared to 1990 levels. They can reduce emissions by investing in cleaner technologies at home, trading in emissions rights, or buying carbon credits from projects in developing countries such as India. Carbon credits are thus bought and sold in the international carbon market - much like any other commodity. Ever since it was established in 2001, the carbon market has captured the imagination of Indian entrepreneurs. The majority of projects that have sold carbon credits so far include renewable energy (such as wind power, biomass cogeneration and hydropower); energy efficiency measures in several sectors ( such as cement, petro-chemicals and power generation); as well as the reduction of industrial gases that contribute to climate change. The carbon market is already the fastest growing market in the world. Between 2003 and 2004, the volume of carbon credits sold by developing countries doubled, and then tripled between 2004 and 2005. In 2006 alone, carbon transactions worth $30 billion were conducted globally, transferring some $5 billion from the countries of the global north to the global south. Of the total number of carbon contracts signed in the world so far, India has the second largest portfolio with a market share of 12 percent, behind China which had a market share of 61percent. This is, however, just the tip of the proverbial iceberg. The Kyoto Protocol expires in 2012, and international talks have already begun to decide the shape of a new treaty that will succeed it. After 2012, the carbon market is expected to expand exponentially. Some say that it could grow to $100 billion annually, becoming a significant source of foreign capital flows from the developed to the developing world, on par with levels of Official Development Assistance. But, despite the enormous potential of carbon financing for Indian enterprises, the benefits have so far largely been availed of by small and medium enterprises (SMEs). Public Sector Units (PSUs) have mostly remained away, in large part due to lack of knowledge. For India to cash in on the vast potential of the carbon market, a government strategy needs to be devised to derive the maximum benefits from it and address current market failures. The country also needs to build the capacity of its Public Sector Units (PSUs) to avail of carbon finance. This can be done by systematically screening massive infrastructure and urban development projects to see if they are eligible for such finance. In many cases, domestic agencies will have to take the lead to develop projects and obtain approval from the international regulator – the Executive Board of the Clean Development Mechanism. For instance, there needs to be a pilot project to demonstrate how the carbon market can catalyze investments in renewable energy to benefit the 400 million people in India’s rural areas. It is also difficult for sellers of carbon credits from India to know how to access buyers from industrialized countries, as the majority of transactions are done on a bilateral basis. Although there is an interest from many players in India to launch a carbon trading platform – which would enable sellers to obtain bids on their carbon credits through public trading, much like the stock market – they have been unable to do so due to a lack of regulatory clarity. India should also consider the establishment of a carbon fund, aimed at accelerating the capacity to develop carbon finance opportunities along the lines of the China Clean Development Mechanism Fund. The private sector has a significant role to play as well. Many of the Indian projects are currently driven by SMEs and stand disadvantaged because each project generates a small quantity of carbon credits. In contrast, a buyer wishing to purchase a large volume of carbon credits can often buy the required amount from a single project in China. In India, the same quantity of carbon credits would have to be purchased from ten or more projects. Hence, the private sector needs to build its expertise to club small projects together in order to improve their market access. In the end, the growth of the carbon market will largely depend on the realization that the market can assist India in achieving low carbon growth, and the consequent development of a strategy to cash in on the opportunities this offers. |
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