Wednesday, February 27, 2008

MCX starts carbon trading

In January 2008, the Mumbai based Multi Commodity Exchange (MCX), in a tie-up with the Chicago Climate Exchange, became the first commodity exchange in Asia to launch futures trading in carbon credit contracts. Hitherto such contracts were traded only in the European Climate Exchange (ECX).

This comes in the aftermath of the Delhi Metro Railway Corporation (DMRC) recently becoming the first rail project in the world to qualify for carbon credits. The DMRC can claim 400,000 CERs for a 10-year crediting period beginning Dec 2007, which translates to Rs 1.2 crore per year for 10 years. The money from sale of CERs will be used to offset the additional investment and operation costs.

The international market for trading in carbon emissions is estimated to be in the range of $ 60-70 billion annually. India is among the global leaders having generated close to 30 million carbon credits and roughly another 140 million in the pipeline for sale. One-third of the total Clean Development Mechanism (CDM) projects registered with the United Nations under the Kyoto Protocol are from India. According to the World Bank, India is expected to rake in at least $100 million annually by trading in carbon credits. By ’12, Indian companies are expected to generate at least $8.5 billion at an average rate of $10 per tonne of CER.

As per the United Nations Framework Convention on Climate Change (UNFCC), a company is awarded a carbon emission reduction (CER) certificate for each reduced tonne of CO2 or its equivalent emission. This can be traded either immediately as an over the counter (OTC) product, or as a futures contract, like any other commodity derivative instrument. These credits are bought by companies in developed countries which exceed their permissible emission limits.

The trade is part of the Kyoto Protocol, which establishes a flexible mechanism of ‘cap and trade system’, where companies in industrialised countries (mostly in Europe and Japan) are allowed to meet their GHG emissions limits by purchasing GHG emission reductions from elsewhere. Companies which have reduced their emissions below their allowances, will be able to trade some part of their surplus allowances with other industrialised parties. Under the protocol, carbon credits or CER certificates are issued by the Clean Development Mechanism (CDM) Executive Board, the highest international body to register projects and issue credits.

The trading unit would be 200 tonnes, where each tonne of carbon credit being an entitlement to emit one tonne of carbon dioxide equivalent gases. A total of five contracts of carbon credits are available on its platform with expiry in December 2008, December 2009, December 2010, December 2011 and December 2012.

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