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The emission reduction scheme is based on ‘cap and trade’ wherein the total annual emissions are capped and the market allocates a monetary value to any shortfall through trading. Businesses can exchange, buy or sell carbon credits in international markets at the prevailing market price. Over the years, it has become a source of earning revenue in developing countries. And how? Companies in this part of the world are typically less polluting (as they’re less ‘producing’) and the extra credits are sold to firms in developed countries. But strangely, in the future, it would surely be the more polluting companies that would stand to gain from this system of carbon trading.
But first, some more facts. This market is continuously growing and has been attracting huge investments. Investment banks (like Morgan Stanley, Merrill Lynch et al) have been active players and many carbon funds have been set up, with investors in those funds either planning to use the carbon credits that result from those investments for compliance purposes directly (e.g. with the EU-ETS), or simply as investments to sell. The ICECAP fund run by Natsource is an example of this. China (thanks to its large size, economies of scale in originations, favourable investment climate), which has quadrupled its number of projects in the pipeline from January 2007 to March 2008, dominates the global carbon market with 73% share in terms of transacted volume followed by India.
It is also a fact that India has gained a considerable share in the carbon trading market and companies have reaped in huge profits. Torrent Power, which recently switched over from a coal-fired power plant to natural gas (in a bid to reduce GHGs) earned 3.2 million carbon credits (this translates to whopping earnings of €54.14 million). In 2007, two projects of JSW Steel were awarded 5.4 million carbon credits (out of which one project was issued 4 million carbon credits). Examples like these will make it easy to understand why companies try hard to grab a part of the carbon credit market. It’s easy million dollar earning. As a matter of fact, India Inc. can exploit numerous business opportunities in developing low carbon technologies, an area which is expected to grow to $3 trillion per year by 2050.
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Source : IIPM Editorial, 2008
An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).
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