Companies holding carbon credits stare at 'real loss'

MUMBAI: Indian companies, which had invested in clean development mechanism (CDM) projects under the Kyoto Protocol to claim certified emission reduction units (CER) or carbon credits, now stand to face a "real loss" on unsold credits, as opposed to a notional loss which was earlier being talked about, with prices falling below one euro. Industry estimates peg the notional loss at Rs 10,500 crore.
A carbon credit is a type of a tradable greenhouse gas emission reduction unit issued to projects under the Kyoto Protocol. One carbon credit is equivalent to one tonne of carbon dioxide (CO2) mitigated. The setting up of CDM projects served the purpose of controlling the rise in global temperature resulting in global warming. However, following the economic downturn, CER prices fell unexpectedly and there are still several companies which have failed to monetize on these credits even when prices were ruling around euro 10 in 2011.
"We would assume for credits to be issued between 2013 and 2019, an estimated notional loss of around Rs 10,500 crore. This with an assumption of 65% issuance success over a 7 year crediting period with assumed value of euro 10 per credit," said Birjendra Sangwaiya, principal consultant, carbon advisory business, Emergent Ventures India (EVI).
Companies which have accumulated CERs too are perturbed. R S Jalan, managing director, GHCL, said: "Although termed as 'notional' loss in the realm of finance, but we see this as 'real loss' (to the overall industry)." GHCL has accumulated around 20,000 CERs since May 2011, following the slump in prices, which it is still accounting for.
"Indian CER holders have long been struggling to sell their CERs to countries with maximum emission of greenhouse gases and are under binding to abate them. The developed countries which used to ratify these CERs under Kyoto protocol have stepped back. This has reduced over-the-counter value of CERs as well. Huge supply and no demand is the reason for such a slump in price," said Jalan.
Industries which made the most use of CER transactions at 3-4 euros were the hydro fluorocarbons-emanating industries and industries with wind projects to generate power for captive use, said Jalan
Indian CER holders are now looking forward to sell their CERs through validation and subsequent verification in certain other voluntary schemes. "Anyone still holding CERs is at considerable loss, both notional and real. Most banks, trading companies and funds have closed their carbon desks, especially related to CER origination. There are limited options available to Indian CDM project developers but to sell at prevailing prices," said Sangwaiya of Emergent Ventures India (EVI), which has made proposals to select European government buyers and funds to support vulnerable CDM project by supporting them with stronger than market prices for CERs.
Indian-registered projects are expected to generate 815 million CERs by 2020. Out of this, 189 million CERs are already issued. Thus, some 626 million CERs are expected to be issued to Indian-registered companies by 2020.Unissued CERs too are at a risk although most companies do not account for unsold/unissued CERs in their balance sheet.
Only after the sale of CERs are these accounted as capital receipts. "However, analysts and financial markets may have rewarded these companies anticipating carbon revenue. Accordingly, markets may have re-evaluated these companies by now, after the fall of CER prices," said Ram Babu, CEO, RSM GC Advisory.
CER prices, said Ram Babu, may go up in case a legally binding Kyoto Protocol phase II is agreed in 2015 with the announcement of deeper cuts and various restrictions on industrial CERs. Till that time, only select projects with select buyers could see actual value.