New dawn for the carbon market

The role of carbon markets in pricing and controlling emissions is likely to undergo a period of uncertainty, but for players willing to battle that risk, rewards will be significant


The world has realised the importance of a low carbon economy and the need to curtail green house gas emissions. Emission caps and carbon trading have become a reality because of the Kyoto Protocol, regional programmes and voluntary commitments by conscientious corporations. In some cases, governments and private companies in developed nations have already committed billions of dollars for emission reductions.

The global carbon markets have grown significantly over the years. According to the World Bank, the monetary value of the market tripled from $10bn in 2005 to $30bn in 2006 and by the end of 2009 the market stood at $144bn. The largest segment of the carbon market is the European Union Allowance, which is the European Union’s primary tool to set emission limits for industry. The second largest segment of the carbon market consists of the Certified Emission Reductions (CERs). CERs are the largest carbon offset or carbon credit mechanism currently in place, administered by the Clean Development Mechanism executive board of the United Nations Framework Convention on Climate Change. The secondary market for CERs was in excess of $17bn in 2010.

The players in the carbon market were eager for a positive outcome from the recent global climate negotiations at Cancun. However, given the state of the financial markets and domestic challenges faced by key participants like the United States and European Union, the overall feeling within the industry is one of uncertainty.

Although Cancun did not result in the legally binding emission reduction treaty that optimists had hoped for, many still maintain their confidence in the industry and predict that carbon markets will evolve and grow. The carbon market is likely to undergo multiple transitions before a global deal is in place.

The lack of visible success in 2009 at Copenhagen and 2010 at Cancun has caused most market players to revisit their business plans. Many banks and traders had expanded their carbon teams, assuming that the emissions trading markets were here to stay. Regulatory requirements drove European industries and utilities to evaluate the cost of in-house emission reduction projects compared with buying carbon offsets (carbon credits) from projects in developing countries. However, post Copenhagen and Cancun, doubts on the future of the market had swelled and driven European industries and utilities to view their emission reduction commitments over the short term rather than consider capital-intensive long term projects. Supply of carbon finance for long terms projects has almost disappeared as most financial institutions are unclear of future regulatory requirements.

Although the concern for combating climate change is common, the constituents differ in their geographic, economic and developmental realities. Hence the path to action on combating climate change is fraught with long drawn negotiations. A new framework is required to get the world to commit to the deeper emission cuts necessary to prevent irreversible changes to the global climate. At Cancun, progress was made on developing a long term framework on the one side, while others talked about the demise of the Kyoto Protocol, which has been the driver of the carbon market so far.

Origins of General Carbon
Established in 2009, General Carbon is currently one of the fastest growing carbon market players in South Asia and Africa. Steered by founders Dr Ram Babu and Satish Kashyap, the team of 20 professionals has briskly built a portfolio of more than 100 carbon offset projects across South Asia and Africa, with a potential of 200m tonnes of carbon offsets. With operations spread across Singapore, India, Thailand, Philippines, Indonesia, South Africa, Kenya and Nigeria, General Carbon is a name to reckon with in the region.

General Carbon develops a range of carbon offset projects covering renewable energy, clean energy, energy efficiency, gas abetment, bio-fuel and forestry. Forestry is one offset development opportunity which has witnessed significant interest in recent international negotiations. The team at General Carbon developed some of the earliest forestry projects. Reduced Emissions from Deforestation and Degradation, or REDD, is a methodology for avoiding the release of carbon dioxide by using forests as carbon sinks. It is estimated that 20% of the man-made carbon emissions come from deforestation and it contributes significantly to global climate change. At the Cancun meet, there were discussions to explore financing options for implementation of forestry projects, countries were urged to support the process through multi-lateral and bilateral channels.
Carbon offset projects with strong sustainable development benefits attract much greater interest and are an area of focus. Rural household biogas plants, efficient stoves and solar lighting will have a significant impact on the sustainable development of villages, while helping to reduce carbon emissions in parallel. For instance, a few social entrepreneurs in Africa and Asia have designed and distributed efficient cook stoves in villages, leading to a reduction in carbon emissions of 30-50 percent, besides reducing indoor air pollution significantly. Replacing kerosene or fuel oil lamps with solar lamps or CFLs is another socially and economically beneficial activity that is being trialled in various locations. General Carbon works with leading financial institutions to develop such projects, which not only produce robust carbon offsets but also participate in the development of local communities. A stronger carbon market will help fund such projects on a larger scale, helping society fight the global battle against climate change.

“Our team members have participated in the creation of the carbon market and were involved in developing some of the first carbon offset projects in the world,” says Dr Ram Babu, CEO of General Carbon. “This gives us the edge to move quickly in a dynamic industry. Also, building a strong presence in South Asia is starting to pay off. We think like a small company and have the flexibility to create tailor-made solutions for our customers. While some clients look for long term sustainable development projects, others view carbon offsets as another commodity.”

Project planning
“There is very little clarity on the regulatory framework in the coming years,” Dr Babu continues. “The recent climate talks at Cancun have offered very little and the market continues to be largely bearish. In spite of this ambiguity, we are optimistic that carbon offsets will continue to be bought and sold.” The need for deeper and wider action to meet the emission targets will require active participation from private players. Dr Babu feels that emission trading markets post-2012 will be large, widespread, and different from the one we have today. He envisages a number of domestic markets, with a portion of the domestically traded carbon credits having international linkage.

“Bilateral frameworks are already on the drawing table,” says co-founder and Director, Satish Kashyap. “These will move the market from a standardised structure to one which will involve numerous qualitative parameters.

“One can surely say that we are passing through interesting times,” he says. “The volatility is a bit disconcerting, but that is precisely where the opportunities lie. We have an extremely lean operating structure, and we are tuned to move fast if the situation changes drastically. Within the team, knowledge sharing is strongly encouraged and individual experiences are leveraged so that the organisation can gain from it.”

While Dr Babu is an experienced hand in sustainability and emission reduction, Mr Kashyap brings expertise from the private equity and capital markets. The rest of the team has diverse experience, encompassing areas as diverse as not-for-profit to consumer marketing to industrial engineering.

General Carbon’s portfolio consists of over 1,500 MW of wind power projects, 500 MW of hydro power projects, 150 MW of biomass power projects apart from innovative projects in modal shift and gas abetment.

The company is enthusiastic about exploring the as yet under-tapped market in Africa. “We will continue to focus on sustainable development projects that have a strong emission reduction potential,” says Mr Kashyap: “Other environmental assets like water offsets, renewable energy certificates and energy-efficiency certificates will be focus areas for future growth.”