Durban: The carbon trading market may be headed for a crash if negotiations at the climate change conference are any indication, according to experts. This is likely to impact China and India the most, as the two make up almost three-fourths of the trade on carbon exchanges.
"India is likely to be most affected if the second round of Kyoto Protocol is not signed. China is already taking steps to tackle the issue; India is not," said Axel Michaelowa, who advises corporates on carbon trading.
"The carbon markets will crash if Durban fails to send a strong signal that the next round of Kyoto Protocol negotiations are on track," concurred Remi Gruet of the European Wind Energy Association, an industry body.
Wind energy projects are major contributors to the carbon trading regime known as the Clean Development Mechanism (CDM) under the Kyoto Protocol with wind projects worth $75 billion expected to be set up next year.
The protocol, signed and ratified by most developed countries, legally binds them to cut human-induced carbon dioxide emissions, which are said by the UN`s Intergovernmental Panel on Climate Change (IPCC) to be responsible for global warming.
Under the Protocol, each developed country is given a quota on how much emission it can produce -- in turn, the countries limit the emissions of each company or project. But such companies can offset their obligation of cutting emissions by buying Certified Emission Reductions or CERs on carbon exchanges.
CERs are sold by companies and institutions in third world countries who have taken steps to go green or set up environmental friendly projects. The CERs are awarded to them by the CDM`s executive board.
This is a way to bring in market mechanism and the incentive system to overall reduce emissions.
According to Arun Bharat Ram, chairman of SRF, one of the leading companies in India benefiting from CERs, said as an industry, they have told the government that it should take steps to negotiate the continuation of carbon trading with the European Union, even if the Kyoto Protocol is not extended.
The price of CERs in Europe has slipped sharply to Euro 6.18 now, from its peak of Euro 30 in 2008. India has been the second highest beneficiary of the CDM, touching 60.5 million CERs in 2010. China touched 346 million.
The leading companies in India dealing in the certificates, apart from SRF, are Torrent Power, Gujarat Fluro Chemicals, Navin Flourine International and Rashtriya Chemicals and Fertiliser.
According to a recent report by research firm Crisil, Indian projects are estimated to receive 246 million CERs by December 2012, an almost four-fold increase. But with the Kyoto Protocol doubtful, companies dealing with the certificates, or those who want to get into this, would be looking very nervously at Durban.
According to Margaret Mukhanana-Sangarwe, chair of the Ad-hoc working group on long-term cooperation, a companion body to the working group on Kyoto Protocol, the slow pace of negotiations at Durban are worrying. She said that an agreement on the principles of setting up a second protocol were "farfetched in light of the position taken by major countries".
The strongest votary of the protocol was the European Union. But it too is speaking in different voices, having been battered by the recession back home, and officials are blaming the developing world and some developed countries.
Another threat on the horizon is that under UN rules, after December 2012, new CDM projects would be approved only for the least developed countries (which do not include either India or China), although projects already awarded carbon certificates can keep on trading them on the exchanges. The market may be headed for further slide, even though experts say some amount of discounting on what is expected in Durban is already discernible.