As the 2012 deadline for limiting carbon emissions under the Kyoto Protocol draws near, and with the overall market sentiment perking up, the demand for carbon emission reduction (CER), popularly called carbon credit and European allowances (EUA), have seen a sudden spurt. As a consequence, prices of such derivative products jumped 5 - 11 per cent in May.

On European Climate Exchange (ECX), prices of EUA for delivery in December 2009 settled at €14.63, a rise of 4.5 per cent while CER contract for the year-end delivery surged 10.7 per cent to close at €12.73 during the last month.

Although, CER is hardly traded on domestic commodity futures trading platform, prices continue to move up due to a similar guidance from abroad. CER contract for delivery in August 2009 perked up a healthy 16.33 per cent to close at Rs 855 per unit (each unit equivalent to a reduction of one tonne of carbon dioxide released into the atmosphere) on the Multi Commodity Exchange (MCX) while the same for delivery in September settled 12 per cent higher at Rs 852.60 per unit on the National Commodity & Derivatives Exchange (NCDEX). The prices had fallen below the 600 levels three months ago as there was a fall in demand due to the global slump.

Sanjay Tapriya, director-finance of the Simbhaoli Sugar Mills Ltd,, a company which recently completed the audit of 44,000 — 45,000 units and is hopeful of getting approval of the UN Framework Convention on Climate Change (UNFCC), attributed the price rise to the recovery in the global economy.

Clean Development Mechanism (CDM) is an arrangement under the Kyoto Protocol that allows developed countries with greenhouse gas reduction commitments to invest in projects that reduce emissions in developing countries and claim carbon credits for doing so. Indian companies qualified for carbon credit early this decade. So far, 141 countries, including India have signed the Kyoto Protocol and have pledged to reduce their carbon emissions by 10 per cent by 2012, from the benchmark level of 1990.

“Since, the global economy is directly proportional to weather sensitivity, any positive signal in the former will have an impact on the latter. UNFCC, which is responsible for CER approval has made the project norms more stringent which will result in fewer companies getting clearances,” Tapriya said.

Trade sources are speculating that the Obama administration will join the global forces to fight global warming in the near future. Since, all developed economies have surpassed the UNFCC-defined limit of carbon emissions, the US would also require to reduce carbon emission levels significantly to meet UN norms. Therefore, the demand for CER will jump by leaps and bounds, said a trader.

Most CERs generated in India are traded on over-the-counter (OTC) market, and most transactions are executed on a bilateral basis.

Other weather-sensitive products including EUA, NOx and SO2 which are popular in developed countries.

On the ECX, volumes grew a strong 203 per cent in May at 430,583 contracts compared to 142,008 contracts traded during May last year. The total EUA and CER open interest rose to over 608,000 contracts (608 million tonnes) representing a yearly increase of 104 per cent.

CER prices had surged a hefty Rs 1,710 per unit in July last year on huge demand but crashed to Rs 650 per unit in April 2009

An estimate reveals that the potential for pipeline CERs and EUAs is huge in Europe - to the tune of over 4 billion tonnes and 2.1 billion tonnes respectively through 2012. Thus, Indian companies have a huge opportunity to sell their credits to European buyers. Dwarikesh Sugar Industries have already obtained approval for 6,947 units. The company is also in the process of applying for another 12,000 - 15,000 units for second of its project in Uttar Pradesh.