CERs are part of the Clean Development Mechanism (CDM) initiated by the United Nations Framework Convention on Climate Change (UNFCCC), which allows emission-reduction projects in developing countries to earn CER credits, each equivalent to one tonne of carbon dioxide. These CERs can be traded and sold, and used by industrialised countries to meet a part of their emission reduction targets under the Kyoto Protocol. Under the CDM, emission-reduction (or emission removal) projects in developing countries can earn certified emission reduction credits. Countries listed in Annex I (developed) of the UNFCCC can purchase CDM credits. Non Annex-I countries (developing) can host CDM projects. And that's not all. While investors profit from CDM projects by obtaining reductions at costs lower than in their own countries, the gains to the developing country host parties are in the form of finance, technology, and sustainable development benefits. Projects are related to energy efficiency, transport and methane recovery, among others.

India on the green path

With Indian firms evidently entering the domain in a big way, carbon trading seems to be the way forward for India Inc to contribute to a reduction in GDP emission intensity by 20 per cent by the year 2020. The sector is estimated to be over Rs. 1,000 crore in size. India currently has 15 per cent share in the global CER space, while China has 54 per cent. By 2012, this is expected to rise to 16 per cent with 444 million CERs for India. But given that China has bagged more than a lion's share, India still has a lot of catching up to do.

However, on the flip side, India still has a lot of potential in a sector that is now beginning to be taken really seriously by businesses. Not only businesses, but governments too are looking at carbon credits as an exciting opportunity. Himachal Pradesh has already taken a lead by signing a pact with the World Bank for harnessing carbon credits to generate carbon revenue amounting to Rs. 20 crore for 20 years under ‘Bio Carbon Projects’ in 10 districts of the state.

As Arvind Sharma, director, advisory-climate change and sustainability, KPMG, explains, ‘If you consider the price of one CER to be 12-15 euros, it means till date India has already earned over $1,200 million through carbon credits. The CDM has been a great success to build up the institutional framework for a carbon market in developing countries, including monitoring, reporting and verification and provide a carbon signal in these countries. It has also leveraged considerable investment in developing countries.”

The importance of carbon credits for a developing economy, and especially India, is evident from the fact that those in the policy circles, as well as experts on the issue of climate change, are of the view that carbon needs to be ‘priced’ in order to reduce emissions.

On the eve of the inauguration of the recently held Delhi Sustainable Development Summit (DSDS) 2012 in New Delhi, The Energy and Resources Institute (TERI) director general and noted climate change expert Dr. R.K. Pachauri said, "Place a price on carbon if you want to reduce emission of carbon dioxide. There are a number of issues to be covered, as it raises institutional issues and issues of equity and ethics.”

In India, the oil and gas sector has the highest number of carbon credits, followed by infrastructure, biomass, among others. For instance, construction and power company Lanco earned two lakh CERs in 2010 and sold all of them to European carbon traders and intends for another 1.8 lakh CERs this year. Same is the case with Jindal Steel and Power, which also had some CERs in the past and is also looking at getting its 24 mw wind power plant in Maharashtra registered for CDM.

With 1,600 projects registered for CERs in India, most of these projects come from the biomass and energy efficiency sectors. India has 622 CDM projects registered with the UNFCCC.

India has two commodity exchanges trading in carbon credits. Multi Commodity Exchange (MCX) engages in futures trading in carbon credits. The National Commodity and Derivatives Exchange (NCDEX) also started futures contract in carbon trading for delivery in 2008.

Reports say 40 per cent of the CDM projects get dropped at the UN level, 30 per cent at the government level and 10-20 per cent at the validation levels itself.

A sagging global market

However, there have been concerns over a sagging carbon credit market over the past few months, given the confusion and lack of clarity over the future of global policies and frameworks for the mitigation of climate change. Despite a last-minute deal worked out at the Durban climate talks in December 2011, CER prices have been lingering around rock bottom.

Indian companies dealing in CERs have been looking at climate change dialogues shaping up with bated breath, as there is complete uncertainty over future commitments, especially by the developed nations, over the future of the Kyoto Protocol. The economic crisis in Europe has also added fuel to fire as Europe is a prominent market for CERs, given the US's own woes and its lack of commitment to the Kyoto Protocol, as it never even got ratified in that country. But hope was still renewed in Durban as the Conference of Parties salvaged the talks and bestowed a new lease of life to CDM.

As per the UNFCCC, the rate of technology transfer from developed to developing nations has declined over the years, affecting CDMs. The decline has been steeper than the overall average in Brazil, China and India. Initially, China had a rate of technology transfer higher than the average for all countries, but the rate is now substantially lower. India has consistently had a rate of technology transfer lower than the average for all countries. The rate of technology transfer for other host countries has been much higher than the overall average and has declined only slightly.

Several factors contribute to these results. First, as more projects of a given type are implemented in a country, the rate of new technology transfer declines, since local technology access has been created through previous projects. Second, the transfer of technologies used by CDM projects appears to have been happening through other channels as well, for example via licensing, foreign direct investment, R and D networks, mergers, acquisitions and the recruitment of foreign experts.

Finally, changes in the mix of registered projects may affect the rate of technology transfer, since each project type has a different frequency of technology transfer.