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National Commodity and Derivatives Exchange Ltd. will launch futures contract for Certified Emission Reduction (CERs) on April 10th 2008. NCDEX is the first exchange in any of the developing countries of the world to launch a futures contract for carbon credit issued under United Nations Framework Convention on Climate Change on its Exchange Platform. Buyers and sellers of CERs will now be able to do price discovery and hedge their price risk on NCDEX. Physical delivery of CERs will also be facilitated where specific delivery requirements of the buyers and sellers will be matched by the Exchange for guaranteed deliverable CERs.
Currently, the carbon market in India is limited to bilateral trading where Indians are net sellers to international buyers. Bilateral trades in carbon tend to be opaque; are highly customized; entail high transaction cost; and are marred with counter party risks. In the absence of a price discovery mechanism, sellers neither have information on the optimal value of their CERs nor are able to get desired value for their CERs.
Carbon market is not just the fastest growing market but also one of the most volatile markets. International investors in offset projects discount CERs coming from various sectors, regions and companies in India on the basis of perceived risk of default in actual delivery of CERs under the CDM process, access of the seller to alternate markets, size of the project, level of desperation and holding capacity of the seller, the quality of source of CERs etc. This is particularly true for Small and Medium Enterprises (SMEs) which are subjected to due diligence required by volume buyers. Now, there is an increasing tendency in Indian project proponents to develop their independent projects without prior Emission Reduction Purchase Agreements with parties from the developed countries and sell CERs as and when prices are favorable. However, in doing so, they are exposed to the international price movement for which they need to hedge their positions. NCDEX contract will aim to remove these inefficiencies in the carbon market.
Government of India notified “Carbon Credits” as a tradable commodity on commodity exchanges in its notification dated 4th January 2008. Indian companies generate CERs from emission offset projects which can be used by the international entities to meet their emission reduction commitment under Kyoto Protocol or any regional emission trading scheme such as European Union Emission Trading Scheme (EU-ETS).
Since India has not taken any commitment for emission reduction under any international forum Indian entities are eligible for holding and trading only in CERs and VERs (Voluntary Emission Reduction) as carbon credits. After China, India is the largest supplier of CERs. India will account for 14.69 percent of the expected annual number of CERs from the registered projects under Clean Development Mechanism (CDM) of the United Nations Framework Convention on Climate Change (UNFCCC). Out of the 978 projects that have been registered under CDM, 332 projects are from India. 543 projects are in pipeline at various stage of validation or registration. By 2012 all these projects from India are expected to yield around 400 million CERs.
In the developed world futures contract of CERs are traded on Nordpool, European Climate Exchange - ICE , European Energy Exchange - Eurex, and NYMEX’s Green Exchange.
