Tuesday, October 17, 2006

India Inc nets US$ 330.5 million in carbon trading

India Inc nets US$ 330.5 million in carbon trading

Green planet in the long run. Greener balance sheets in the short term. If the initial momentum of revenues netted from carbon trading projects is anything to go by, India Inc could net some serious money from it.

This momentum is expected to increase with large PSUs like ONGC, IOC, SAIL now getting ready to launch large projects in this area. “PSUs with their scale should provide a significant impetus to this movement in India,” says Sudipta Das, partner, Ernst & Young India.

Over the last one year, Indian companies have already netted Rs 1,500 crore in carbon trading revenues, according to estimates available with accounting firm Ernst & Young. The value of the accumulated stock of carbon emission reduction (CER) units in India is estimated at approximately Rs 4,500 crore. Only China and Brazil are ahead of India at this point of time in accumulating CERs.

A CER is just like a dollar as far as carbon trading markets are concerned, the basic unit of trading. Each time a company, through its actions like using lesser or cleaner fuel, reduces the emission of one tonne of carbon dioxide, it accumulates a CER. It can then sell this CER for a price — e12 per CER at the moment — to another company in another part of the world that might want to reduce the emissions, but is unable to do so for some reason.

In India, companies like Tamilnadu Newsprint and Paper Ltd and Gujarat Flurochemicals have taken a lead in developing projects to reduce emissions and accumulate CERs. A project — called a clean development mechanism (CDM) project in enviro-speak — in this context can be something as simple as planting more trees to something more complex such as adopting a new manufacturing process or a waste-disposal process.

The trouble is that such projects are not easy to set up. “The process of getting the approvals, registration and then implementation is a very rigorous one,” says Mr Das. Getting the senior management to back such projects is also quite difficult.

On an average a project can cost anywhere from Rs 10 lakh to Rs 40 lakh. To get approvals, such projects should at least deliver more than what it costs the company to raise funds for its own use. “With the CDM benefits becoming apparent and significant, we are witnessing a large number of companies undertaking investments in emission reduction projects,” says Bharti Gupta Ramola, executive director, PriceWaterhouseCoopers.

Consider the case of ONGC. In another week or so it should get necessary approvals to launch 14 projects that will bring it a sackful of CERs in the future. “These projects will do away with the gas flaring, increase energy efficiency and increase waste heat recovery,” says AB Chakraborty, GM, alternate energy & carbon credit, ONGC. Now, ONGC believes it will be able to generate a return of 12% as these projects start functioning through cost savings, not counting any money that comes through selling the CERs that these projects will generate. But ONGC’s cost of funds is 14.5%. So, on the face of it the project delivers less return than ONGC needs.

Things begin to look better once the CDM revenues get factored in. “We expect to generate close to six million CERs over a period of 10 years once the projects are implemented,” says Mr Chakraborty. Using the prevailing price of Rs 720 per CER, ONGC stands to make Rs 432 crore over 10 years.

Once this cash inflow gets factored in, the project return clears the target rate of return and becomes easy for the company to justify it to the shareholders. No wonder then that ONGC has already identified 18 more projects to start once the first 14 get underway. IOC too has identified five to six projects to kickstart its programme. SAIL is said to be in the process of identifying projects that it can start.

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