Contents I II III IV V VI VII VIII IX

Reason of Climate change and its effect

Carbon Credit & Its Trading

Factor contribution to Co2 What is Carbon trading UNFCCC & Kyoto Protocol Kyoto Mechanism Type of Carbon Trading Carbon trading process Development in India Opportunity for Indian companies EPGDIB 2010-12 - Group VI Meharban Singh - 25 Praveen Nambiar - 35 Sanjay Chowdhury - 54 Sheikh Abdul Hamid - 59 Suhita Singh - 64 Viranchi Rastogi - 70

Commodity Price Risk Management

What are Reasons for Climate change & Its effects

CPRM

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Contribution to Co2 ! Source

CPRM

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Carbon Credit

CPRM

Carbon credits is an element used to aid in regulation of the amount of gases that are being released into the air. This is part of a larger international plan which has been created in an effort to reduce global warming and its effects. The plan works by capping the amount of total emissions that can be released by one company or business. If there is a shortfall in the amount of gases that are used, there is a monetary value assigned to this shortfall and it may be traded. These credits are often traded between businesses. However, they also are bought and sold in international markets at whatever market value is determined for them. Sometimes these credits are used to fund carbon reduction plans between trading partners
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What is Carbon Credit

1 ton of CO2 or its equivalent greenhouse gas

CPRM

1 Carbon Credit
S. No Greenhouse Gas 1 2 3 4 5 6 Carbon Dioxide Methane Nitrous oxide Hydrofluoro Carbons Perfluoro carbons Sulphur Hexafluoride

(GHG) which is an entitled certificate by UNFCCC.

Global Warming Potential (GWP) 1 21 310 140-1170 6500-9200 23900
UNFCC : United Nations Framework Convention on Climate Change

There are two types of market in carbon credit: - Compliance Market (Annexure I countries) - Voluntary Market (Non- Annexure countries)
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Types Of Market In Carbon Credit

CPRM

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What is UNFCCC

CPRM

United Nations Framework Convention on Climate Change

Act signed by 165 nations in 1992 at Rio de Janeiro. Annex 1 & Non-Annex 1 countries. Annex 1 (developed countries) agreed to reduce their GHGs by 5.2% below 1990 levels in 1st commitment period 2008 2012.

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CPRM The Kyoto Protocol is a legally binding agreement that arose out of the UNFCCC to tackle climate change through a reduction of green house gas emissions Commits industrialized countries to reduce their GHG emissions by, on average of 5.2% below 1990 levels in 2008-12 Individual, quantified emission targets for each industrialized/developed country called the Annex 1 countries It was adopted in Kyoto, Japan, on 11th December 1997 In force since 16 Feb 2005 As of Oct 2010, 195 states have signed and ratified Kyoto Protocol Objective: Stabilisation of greenhouse gas concentrations in the atmosphere at a level that would prevent air pollution interference with the climate system
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KYOTO PROTOCOL

INDIA AND KYOTO PROTOCOL

India signed and ratified the Protocol in August, 2002

CPRM

Since India is exempted from the framework of the treaty, it is expected to gain from the protocol in terms of transfer of technology and related foreign investments India maintains that the major responsibility of curbing

emission rests with the developed countries, which have accumulated emissions over a long period of time.

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KYOTO Protocol
Annex I Austria Belgium Monaco Canada Netherland New Zealand United Kingdom Germany Spain Switzerland Greece Annex I Non-Annex -B Not ratified India

CPRM
Non -Annex-B

Bangladesh Brazil China Afghanistan Algeria Nepal Argentina Bolivia Sri Lanka Pakistan Malaysia Mauritius

Participation in the Kyoto Protocol, where green indicates countries that have signed and ratified the treaty (Annex I are in dark green), grey is not yet decided, and brown is no intention of ratifying.

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KYOTO /EMISSION REDUCTION MECHANISM

CPRM

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CDM PROCESS
IDENTIFICATION OF PROJECT AND DEVELOPMENT OF PROJECT CONCEPT NOTE

CPRM

DEVELOPMENT OF PROJECT DESIGN DOCUMENT APPROVAL BY NATIONAL CDM AUTHORITY OF HOST COUNTRY

VALIDATION

REGISTRATION

VERIFICATION

CERTICATION

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Typical CDM Projects

CPRM

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CARBON TRADING

CPRM

A carbon trading system allows the development of a market through which carbon dioxide or carbon equivalents can be traded between participants, whether countries or companies. Each carbon credit is equal to 1 metric tons of carbon dioxide, which can be traded or exchanged in market.

There are two kinds of carbon trading Emission trading and trading in Project-based Credits. The two categories are put together as Hybrid trading System

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TYPES OF CARBON TRADING

1. EMISSION TRADING:

CPRM

A company can reduce its emission by half the cost of allowance bought from other company On the other hand, a company with higher expenditure for reduction of its emissions buys the required allowance from other company to save its emission cost

2. PROJECT-BASED TRADING:
Government & World Bank subsidized credit for project-based trading to the companies calculating how much carbon dioxide equivalent they save/reduces Project-based Credit offset trading trading includes baseline-and-credit trading and

3. HYBRID TRADING SYSTEM:

In Hybrid trading system, both emission trading and offset trading are used and try to make allowance exchangeable for project-based credits. Hybrid trading system is enormously complex as it is not only difficult to try to create credible credit and make them equivalent to allowance
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Carbon Network
Seller Exchange
Banks Individuals Trading exchange Banks NGO & Govt. Consultants Annex 2 & 3 countries Others Brokers & Traders Intermediary service providers Consultants

CPRM

Buyers
Annex 1 country

Banks
Individuals Consultants Others NGO & Government

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Parties Involved in Carbon Trading

are set up specifically to undertake the project SPONSOR:

CPRM

PROJECT ENTITY : Joint venture company or a limited partnership that Individuals/companies/entities that support a project who

have a direct or indirect interest in the project. LENDER: If the project is financed through debt, one or more banks may be lenders. EQUITY PROVIDER: Equity may be provided by project sponsors or third party investors who ensure that the project produces a ROI as set out in the business plan. CONSTRUCTOR: Who have responsibility for the completion of the works, & often have to assume liability for finishing construction on time and to budget. OPERATOR: Person responsible for the operation and maintenance of the project facilities once completed
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Parties Involved in Carbon Trading

SUPPLIER BUYER

CPRM

INSURER: If a risk is to be mitigated by purchasing insurance, the lender will need to be satisfied as to the track record and credit-worthiness of the insurer. RATING AGENCIES: The rating agencies may be involved if the financing of the project involves the issue of securities EXPERTS: Experts are individuals who give advise on key technical, engineering, environmental and risk aspects of a project. HOST GOVERNMENT: The role of the host government varies but may involve economic, social, environmental guidelines & issuance of relevant consents, permits & licenses

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Advantages of Carbon Trading

CPRM

New cash source to companies who are able to maintain their emission levels well within the permissible limits. The overall ecological balance is preserved The company or country gets rewarded for applying clean technology in its production process. A much better corporate and social image which wins public approval Encourages activities like tree plantings which would help reduce soil salinity, improve water quality and enhance biodiversity

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Price Influencing Factors

Supply-demand mismatch Crude oil prices CO2 emissions Foreign exchange fluctuations Policy issues Coal prices

CPRM

European Union Allowances (EUAs) prices Global economic growth

Key Risks and Uncertainties

The extent to which implemented & followed the Kyoto Protocol guidelines are

The attitude of US which is the biggest polluter and had refused to sign the treaty The final rules and decisions relating to an emissions trading market
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Position of India

CPRM India is considered as the largest beneficiary, claiming about 31 % of the total world carbon trade through CDM It is expected to rake in at least Rs 22,500 crore to Rs 45,000 crore over a period of time and Indian companies are expected to corner at least 10 per cent of the global market in the initial year If India can capture a 10% share of the global CDM market, annual CER revenues to the country could range from US$ 10 million to 300 million

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Carbon Trading at MCX

CPRM

The Multi Commodity Exchange of India Ltd entered into an alliance with the Chicago Climate Exchange in 2005 to introduce carbon credit trading in India MCX is the futures exchange. People here are getting price signals for the carbon for the delivery in next five years. The exchange is only for Indians and Indian companies 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 are actually financial investors Trading Benefits
Sellers and intermediaries can hedge against price risk Advance selling could help project to generate liquidity and thereby reducing its cost of implementation There is no counter party risk as exchange guarantee the trade The price discovery on the exchange platform ensure the fair price for both the sellers and buyers Bring players to a single platform 22 IIFT - EPGDIB -2010-12 / Group- VI ( Academic purpose only )

Carbon Credit Traders in India

Andhyodaya Green Energy Grasim Industries Ltd. Indo Gulf Fertilizers Indus Technical & Financial Consultants Ltd Madhya Pradesh Rural Livelihoods Project Rajasthan Renewable Energy Corporation Reliance Energy Ltd. Tata Motors Limited Tata Steel Limited Bajaj Finserv Limited Dhariwal Industries Ltd

CPRM

Tata Power Company Limited BlueStar Energy Services Inc. Valera Global Inc.

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Outlook For India & Companies : Taking Advantage CPRM

India is one of the exempted from this protocol as they are stated as developing countries, but overseas companies can buy carbon credits from these countries. Now companies in India can use Carbon credits to get liberal loans, incentives by multinationals in their countries and benefits like better social and ecological visibility Examples Gujarat Fluoro Chemicals is amongst first companies worldwide to get its carbon emission reduction project certified. It is set to reap rewards from the sale of CER credits from this year itself Tata Steel is believed to have signed a MoU with the Japanese government agency NEDO for sale of credits accruing to it from carbon reduction following the implementation of an over Rs 250 crore modernization and upgradation project
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Indian Companies : Taking Advantage

CPRM

NTPC and several state electricity boards have also applied for carbon credit benefits. Most of them are replacing coal-based technologies with more environment-friendly processes Of the 15 projects approved by the UNFCCC so far, four are Indian. These four are:
Gujarat Flurochemicals, Kalpataru Power Transmission Ltd, The Clarion power project in Rajasthan and The Dehar power project in Himachal Pradesh

The country accounted for 283 CDM projects out of the 819 registered by the CDM Executive Board, the environment ministry, the World Bank and the International Emissions Trading Association

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Conclusion

CPRM

There is a great opportunity awaiting for India in carbon trading which is estimated to go up to $100 billion by 2010 In the new regime, the country could emerge as one of the largest beneficiaries accounting for 25 % of the total world carbon trade, says a recent World Bank report Analysts claim if more companies absorb clean technologies, total CERs with India could touch 500 million. Of the 391 projects sanctioned, the UNFCCC has registered 114 from India, the highest for any country. There are projects range from cement, steel, biomass power, biogases co-generation and municipal solid waste to energy, municipal water pumping and natural gas power. The ministry has given the host-country clearance, the CDM projects will have to be approved by the executive board of the UNFCCC
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Exchange Rates

CPRM

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Carbon fund

CPRM

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Summary .

CPRM

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Action toward saving Earth .