Declining prices of carbon credits along with the lower probability of Annex 1 or developed countries agreeing to binding commitments after the expiry of first commitment period of the Kyoto Protocol in 2012 may hit the revenues of companies like SRF, ONGC, Navin Fluorine and Chemplast Sanmar, among others, which have registered their projects for the UN's clean development mechanism (CDM).
With prices of carbon permits having declined to a record low of 70 cents per unit, down from the peak of 17 euros, Indian firms — which sell about 90% of their total credits to Europe — might feel the tremors in the next few months.
Compared with firms like ITC and ONGC, which have large projects up for certified emission reduction (CERs), the impact will be greater on chemical manufacturers such as SRF, Gujarat Fluorochemicals, Chemplast Sanmar and Navin Fluorine International, which have used these revenues to fund their capital expenditure for expansion and diversification into new business activities. They get their revenues from CERs by reducing hydrofluorocarbon (HFC) gases and may see a hit of more than 5% on every project registered under the CDM.
For instance, a major chunk of revenues for SRF used to come from selling CERs on its HFC destruction project but after the European Union decided to stop recognising these credits starting 2013, SRF’s chemicals segment faced the biggest stress with revenues falling 38% to R206.3 crore and segmental profits dropping 77% to R42.1 crore.
According to SRF, its thermal oxidation plant had a 10-year lifetime and is set to expire in 2014 and the company was “ready for it and not alarmed at the falling prices”.
“The impact will be lesser for companies which went for forward transactions. However, more than 60% of the total carbon credits go to HFC producing companies and these will be hit the most,” said Chaitanya Kalia, partner, climate change and sustainability services, at E&Y.
The fact is corroborated by Fitch Ratings, which says that CER prices have fallen recently due to several factors – the ongoing euro-zone debt crisis, potentially lower acceptance of CERs after 2012 and the lower probability of industrialised countries agreeing to binding commitments after the first commitment period of the Kyoto Protocol ending December 2012, which has led to an oversupply of such CERs with no buyers. The Kyoto Protocol came into effect in 2005.
Under the Kyoto Protocol, companies from developing countries earn CER or a carbon credit for each tonne of carbon dioxide emission they avoid. These carbon credits can be sold to companies or governments in developed countries that are under mandatory obligation to reduce carbon gas emissions. The buyers can then offset their own targets against the CERs they purchase from companies in developing countries under the CDM.
Interestingly, the environment ministry said that carbon credits earned via the clean development projects in India are set to generate Rs 4,775 crore, up 20% from Rs 3,950 crore last year. With 795 registered projects, of the 3,930 projects registered with UN Framework Convention on Climate Change, India ranks second in CERs after China.