Carbon Trading: Is it right time for India to be aggressive on Carbon Trading?

Introduction
“In 1997, YOY increase in emissions accelerated from 1.5% to 3%, this was just after countries signed the Kyoto accord”. It seems that some developed nations were able to reduce carbon emissions. However, a closer analysis reveals that though the developed nations reduced oil consumption to control gas price, fuel was burnt at other places (China, South East Asia) and goods were shipped to meet the developed nations’ requirement. Did it give us a cleaner world? No, actually it worsened the climate and trade balance.

Was Kyoto accord, step to protect environment, a failure? And is Copenhagen another recipe for disaster? Why did Brazil and South Africa pull back their support to US soon after the summit? Why India is aggressive on Carbon trading? What stand should India as a nation take on this sensitive issue?

India along with China leads the world trade in carbon credits. According to government statistics1, around 35% of 819 projects registered under CDM, are from India. Due to high number of transaction and interface with international community, India needs to reconsider its policies and commitment before moving forward.
Let’s ponder over some of the steps taken world over and their impact on us.

Carbon Trading Industry - Origin

Carbon credits are a key component of national and international attempts to mitigate the growth of greenhouse gases (GHG). In 1997 Kyoto protocol, attempt was made to penalize irresponsible developed nations and to reward cleaner developing countries.

The idea was to allow market mechanisms to drive industrial and commercial processes in the direction of low emissions or less ‘carbon-intensive’ approaches. In 2000, the scheme was christened ‘Clean Development Mechanism - CDM’.

CDM validates and measures projects to ensure that they produce authentic benefits and are genuinely ‘additional’ activities that would not otherwise have been undertaken. Majority of carbon trading is driven by ‘Cap and Trade’ mechanism, which is ridden with flaws and needs makeover to avoid imbalance in world trade. Though treaty was a bold step but it overlooked issues such as one-way market, arbitrage and moral hazard.

Challenges from Cap and Trade Mechanism

As global carbon market stabilizes, existing trading margin will erode and hence developing countries are trying to sell maximum Carbon credits by 2012. Due to arbitrage opportunities in ‘Cap and Trade’ model, danger of another Lehman in making is hovering over, this time trading in futures and spots of carbon trading. EU recently lost more money to carousel fraud than they spent on Common Agricultural policy. These are some of reasons that raise questions on aggressive pace of carbon trading proposed in India, which was also reflected in Copenhagen.

Moral Hazard

Brussels and other part of Europe were infected by corruption in carbon credit market as corporate were forced to bribe to buy carbon credits. The way market is shaping up in India with lack of policies, its imperative that moral hazard and corruption could fail the cause.

Cap & Trade creates a sink-reservoir flow between pollutant and cleaner countries. It is most advantageous for energy companies with strong lobbyist and for government officials who can dole out kickbacks, from proceeds of pollution certificates, to favored industries. Unless ‘Cap and Trade’ model is replaced with a responsible and equi-distributive scheme, India will loose more on social capital than what it will gain from carbon trading.

India needs to take a balanced approach and tread carefully on carbon trading, lest nation burns its hands as EU did. We are more susceptible to the fragilities of ‘green gold’ market dynamics as genuine claims involve control and monitoring. These two aspects are in turn core drivers of one of biggest corruption syndicate in world.


"....Not publishing the complete article for now. Article has been written for publication in Indian Infrastructure Report 2010. Will publish complete article once Report is published in flesh and blood...."

Just found this article on economist today: China holds world hostage to its power