Carbon KARMA

The conceptualisation and growth of the �carbon economy� is one of the most significant outcomes of the concern over climate change. The Clean Development Mechanism (CDM), a �market-based� flexible mechanism under the Kyoto Protocol (KP), claims to have the potential to compensate India �monetarily� for taking a greener path, thereby making India part of the exponentially growing global carbon market valued at $64.03 billion. The CDM operates by providing an incentive for developing countries to adopt sustainable practices and green technologies, while enabling countries under KP emission targets, the chance to buy the much vaunted �Certified Emission Reductions� (CERs), or carbon credits from developing countries. These are released on the completion of successful CDM projects. CDMs form 21% of the global carbon market, and India and China are world leaders. Despite the potential CDMs offer, it is not a simple win-win strategy. The outcome of the CDM�s teething problems, such as high transaction, information and delay costs, is that most of the Indian projects are unilateral. CERs are also difficult to sell on the international market.  Most European Union countries (the largest spot carbon market) have a cap on the percentage of CDM CERs they can import. Further, they would demand excess CERs only if they are unable to offset their own targets. As of now carbon credits are not scarce, because emission targets are too lenient or are not being taken seriously by KP signatories. Carbon emissions are increasing annually and the US hasn�t even signed the KP.  There is clearly a demand supply mismatch in the carbon market. This results in many primary producers, like India selling CERs at low prices. The average price of an Indian CER is ?5 while in the EU it is traded at ?20. It is true that Indian CERs will sell at higher prices closer to project maturity, but often the opportunity cost of waiting is too high. Cheap and abundant CERs, may even allow polluters to continue with �business as usual� as they can buy CERs easily. The future of the carbon market is uncertain, given KP obligations will expire in 2012. But CDMs and carbon trading is here to stay. Hopefully, as emission targets become more stringent, CERs will become more valuable and easier to sell.
To help this, emerging carbon funds, like the World Bank�s should become more proactive, by buying up CERs and reducing the number available to trade. India should continue to explore untapped sectors such as building construction, reforestation, transport etc. They must also attempt to bundle small-scale CDM projects or use them as pilots. The CDM Executive Board�s Methodology Panel also needs to become more liberal to accommodate such activities. The government must also continue to facilitate the CDM process, for example by forming public private partnerships, especially for converting utilities into CDMs. However for now, given all the uncertainty, a rational conservative position is to view earning CERs or carbon credits not as the ultimate goal; but as bonus revenue for taking on a green project. This perhaps hints that the incentive the CDM alone offers is not yet powerful enough.