Carbon Risk Management & Financial Implications

The unprecedented concern of global stakeholders towards climate change has resulted in a multitude of activities in the direction of mitigation and adaption of climate change. To enlighten the members on this front and carbon asset management IAIP organised a Speaker Event with Partha Chaudhuri is the Managing Director at First Climate (India) Private Limited. The event held in Kolkata on August 11, 2012 was received well by the members.

Climate change takes place from the release of anthropogenic greenhouse gases (GHG) due to current and previous generations’ rapid industrialisation activities and poses threat to future generation’s sustenance.  First international report, to confirm the causes and impacts of climate change, was published in 1990 (IPCC) and this lead to several international initiatives out of which the UNFCCC is the most prominent.  UNFCCC, headquartered in Bonn, Germany, is an international association of global nations – both developed and developing. As per UNFCCC, developed nations are responsible for climate change and shall take responsibility for mitigation of climate change, by reducing their emissions levels of six GHGs: carbon dioxide, methane, sulphur hexafluoride, hydro fluorocarbon, per fluorocarbon and nitrous oxide. Members of UNFCCC signed first such deal in 1997 at Kyoto in Japan and the same has come to be known as the Kyoto Protocol. Kyoto Protocol introduced a restriction on the GHG emissions level of signatory developed countries and introduced three flexibility mechanisms:  JI, CDM and Emissions trading. Signatory countries agreed to reduce their emission level by 5.2% as compared to 1990 levels. The target was required to be achieved in 5 years span of 2008 – 2012. As a result of introduction of these flexibility mechanisms, companies could meet a portion of their targets by buying emission reduction credits generated from environmental friendly projects, thereby creating a new market of “cap and trade” that provided a business angle/earnings opportunity to companies by trading a new commodity called carbon credits.

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CDM (Clean Development Mechanism) is of particular importance to India because it provided an opportunity to developing countries like India to participate in the carbon credit market. Under CDM, a developed country company can implement an emission reduction project in developing countries like India, get these emission reductions certified with UNFCCC (known as Certified Emission Reduction – CER or commonly carbon credit) and use these credits to meet their emission reduction targets. It was a win-win situation for both the developing and the developed world because it reduced the emission reduction cost to the already technically advanced developed countries companies and provided an earning and development opportunity to developing country through environmental friendly advanced technology implementation and consequent sale of carbon credits.  Each tonne of carbon dioxide equivalent saved entitles the project owner to earn 1 credit. Example of CDM project includes installation of renewable power generation projects (biomass/biogas/wing/hydro/solar) that supplies GHG emissions free electricity to grid.

India remained a market leader for a number of years in the CDM market until China overtook India in terms of number of registered CDM projects. Currently, China has the maximum number of registered projects and maximum number of CERs issued, followed second by India. Several companies in India generated significant revenue from CER sale. Carbon credit prices saw a fair share of movement within the short span of 8 – 10 years since its inception. Credit prices started from 15 – 16 Euro per CER and peaked up to 25 Euro per CER, remained stable for a long period at around 10 and finally dipping to 3 – 4 Euro in the current market. The current market dip is due to uncertainty about future market scenario of CER post Dec 2012 and because of the demand supply imbalance.

Post 2012, the CDM market is expected to change towards a more stable and mature value. The first commitment period is ending in December 2012.

GoI has adopted the National Action Plan on Climate Change, with the aim of reducing its emissions load on the environment, greening its operations and preserving its ecology. As part of the 8 points mission, REC, PAT and JNSM schemes have already been introduced. REC – Renewable energy certificate scheme involves promotion of renewable fuel based electricity generation in India by mandating a 5% renewable energy obligation on electricity producers in India. The target can be met either through self implementation of projects or by buying credits from open market. REC is available to any investor who implements a biomass/wind/solar/hydro based power generation project in India (provided it meets certain other mandatory requirements of REC).,  REC scheme converts 1 MWH of electricity generated into 1 REC having a floor value of around INR 1500 and a ceiling value of around INR 3300. A separate category called the solar REC (generated from solar energy based power generation projects) has a floor value of INR 9300 and a ceiling value of 13400. PAT – Perform Achieve and Trade scheme involves benchmarking of specific energy consumption of highly energy intensive products (such as steel, cement, chlor-alkali, pulp & paper etc.). Selected companies have been allocated targets have been given a three years time frame to achieve those targets. If the companies are unable to meet those targets through self improvement, they can buy ESCerts from companies that have over achieved their targetsJNSM – Jawaharlal Nehru Solar Mission scheme involves promotion of solar power production in India through capital subsidy, preferential tariff and other fiscal benefits such as accelerated depreciation, tax holidays etc.

Overall, climate change and associated corporate responsibility cannot be neglected. Stakeholders are expecting responsible greener operations and products. Several national and international policies are being implemented and each and every corporate has exposure to these policies either directly or indirectly. Accordingly,  it is suggested that appropriate actions are taken timely by these corporate.

About the speaker:

Partha Chaudhuri is the Managing Director at First Climate (India) Private Limited. Partha has a decade of work experience in the climate change and carbon asset management sector through his various senior level positions in climate change advisory companies in India. He is an early mover in the global carbon asset management industry and has played an active role in establishing and developing the strong business case of climate change and carbon management in India. He introduced the concept of carbon credits among a large portion of the Indian Corporate and also represented several of these corporate from the early period carbon trading negotiations. Partha is an expert in the policy and financial aspects of the International Carbon space.  He has more than 15 years of experience in sectors as diverse as carbon assets, renewable energy, international certifications and corporate training. A strong believer of low carbon operation, he is currently involved in establishing sustainable fuel alternatives that would replace conventional fossil fuels as energy source. He has also taken up the responsibility to promote solar energy solutions to the SME sector and real estate sector of India. He is also playing an active role in the climate change adaptation and mitigation in some of the least developed countries (LDCs).

Contributions by: Sumit Mittal and Abhishek Shah, IAIP Volunteers

Photographs by: Volunteers

About IAIP

India Association of Investment Professionals (IAIP), which is established April 2005 and located in Mumbai, is an association of local investment professionals. As one of the 136 CFA Institute member societies, IAIP connects members to a global network of investment professionals. Consisting of portfolio managers, security analysts, investment advisors, and other financial professionals, IAIP promotes ethical and professional standards within the investment industry, facilitates the exchange of information and opinions among people within the local investment community and beyond, and works to further the public’s understanding of the CFA designation and investment industry.
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