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China is depressing carbon credit market with low futures quotes

China is depressing the carbon credit business by only proposing projects under the clean development mechanism (CDM) and not implementing them in a hurry, and trading the credits in the futures market.

As a result, India, despite having the world’s highest number of projects registered under the CDM, is getting less for its carbon credits. While India has 333 of the world’s total of 1108 CDM projects, China has 234.

Sudipta Das, partner for Risk Advisory Services at Ernst & Young, said many Chinese companies are indulging in carbon futures and selling CER at a much lower price without even registering a project with the designated authority. This is happening because of a loophole in the norms for transacting carbon credits. While the spot market prices for a CER or certified emission reduction is at above euro 20, the future prices are quoted at around euro 10-12.

The European market, which is the largest market for carbon credits, is more inclined towards carbon futures from China than spot purchase from India as future prices are nearly half than that of the spot prices.

The European market for carbon credit runs according to the European Union Emission Trading Scheme (EUETS).

Das said although the European market sets the global trend for carbon trading, wrong notions guide the market. The European market feels that buying a primary CER or a CER originating from a CDM project involves higher risk than buying a secondary CER or from an agency.

“This actually has no logic but only sets a higher price for secondary CER,” Das said.

“We want that the gap between the price of a primary CER and secondary CER is lessened and project developers enjoy more benefit,” Das said.

Observers feel that with the emergence of carbon as an asset class for hedge funds, clean-tech venture capital and private equity investors, segmenting carbon bonds into primary and secondary CERs has become important, as it would give rise to a broker class.

Future trading in carbon at present is more sensible as it is being considered as an asset class, observers said.

According to European market projections, by 2012, CER prices are expected to go up to euro 22.96 from around euro 20.88 at present.

Das said that this projection is likely to go wrong, as the growth so far of the carbon market has been dramatic.

The international carbon trading market took off in 2004 with only 94 million tonne of carbon traded in that year. In 2005, CO2 trade reached 800 million tonne, according to United Nations Framework Convention on Climate Change (UNFCCC).

Source: Financial Express

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