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The National Commodity & Derivatives Exchange Limited (NCDEX) launched its futures contract for Certified Emission Reduction (CERs) today. Shri B. C. Khatua, Chairman of the Forward Markets Commission (FMC) launched the contract in Mumbai.
Speaking after the launch, Shri Khatua said “I am happy that NCDEX is launching a futures contract for CERs (Carbon Emission Reduction) on its Exchange Platform. India is the first developing country to offer a hedging tool for CERs, a Kyoto protocol compliant emissions instrument under the Clean Development Mechanism of the United Nations Framework Convention on Climate Change. Together with a carbon related product already launched on the platform of another commodity exchange, this will mark the introduction of environmental products in the Indian commodity futures market. I hope that project developers and other potential investors will actively participate in this market.”
“Launching of the CER futures contract marks an important milestone for the Exchange and the contract launched today will help establish India as the benchmark price in CER market”, said Mr. P. H. Ravikumar, Managing Director and Chief Executive Officer of NCDEX. “The Exchange has taken care to ensure that the design of the contract is relevant to Indian participants to trade and hedge their stream of CERs”, he observed.
It may be noted that the Government of India’s notification dated January 4, 2008 paved the way for futures trading in CERs by bringing carbon credits under the ambit of tradable commodities. Globally, CER futures are traded on exchanges such as Nordpool, European Climate Exchange - ICE, European Energy Exchange - Eurex, and NYMEX’s Green Exchange.
The CER contract of NCDEX will be traded in multiples of one lot of 500 CERs each. The tick size is Re. 0.20 and the Final Settlement Price will pertain to guaranteed deliverable CERs. The client-wise position limit has been kept at 11,000 lots whereas the member-wise position limit is 66,000 lots. Initially only one contract expiring in December 2008 had been launched and further contracts will be added in the near future.
Globally, the carbon market is one of the fastest growing and most volatile. India is fast emerging as a leading net seller of CERs in the world. It is the largest supplier of CERs after China. India has not made any emission reduction commitments under any international forum. Nevertheless, Indian entities are eligible for holding and trading in carbon credits - CERs and VERs (Voluntary Emission Reductions). Indian companies generate CERs from emission offset projects which are purchased by international entities to meet their emission reduction commitments under the Kyoto Protocol and other regional emission trading schemes such as European Union Emission Trading Scheme (EU-ETS).
India accounts for about 15 per cent of CERs from registered projects under the Clean Development Mechanism (CDM) of the United Nations Framework Convention on Climate Change (UNFCCC). Out of the 988 projects that have been registered under the CDM, 324 projects are from India. Another approximately 550 projects are in the pipeline at various stage of validation or registration. By 2012, projects from India are expected to yield around 400 million CERs.
Currently, CERs are traded bilaterally in India. Such bilateral trades suffer from certain drawbacks. They tend to be highly customized and opaque. They entail high transaction costs and are often fraught with counterparty risks. In the absence of a price discovery mechanism, sellers are not able to get the fair value for their CERs.
International investors in offset projects in OTC markets (bilateral trades) discount CERs coming from various sectors, regions and companies in India on the basis of the perceived risk of default in the actual delivery of CERs, their access to alternate markets, project size, the holding capacity of the seller, and the quality of source of CERs. The bargaining power of small and medium enterprises (SME) sellers is poor vis-à-vis volume buyers.
Also, Indian project proponents in these OTC markets develop their independent projects without prior Emission Reduction Purchase Agreements with parties from developed countries. They sell CERs as and when prices are favourable. However, in doing so, they are vulnerable to international price movements.
The NCDEX initiative serves to address these inefficiencies in the carbon market by providing a price discovery and hedging platform to the buyers and sellers of CERs, under the Clean Development Mechanism of the United Nations Framework Convention on Climate Change.
The delivery mechanism would be of the intentional matching process whereby the Exchange will match buyers and sellers for the physical delivery of CERs.
