Getting paid for being green: SRF plant in Bhiwadi (above) and SRF's CEO & President Roop Salotra

About 60 kilometres south-west of Bangalore, Anandi Sharan Meili keeps a keen eye on the thousands of mango trees that are growing in the farms of Gudibanda taluka of Kolar district. About four years old, the mango trees are more than just that. In fact, they represent the new face of a global trade that has sprung up around controlling emission of greenhouse gases (GHG). The trees were planted by local farmers but paid for by the British rock band Coldplay in 2002. Why are rockers, of all, planting trees in Karnataka? Here's the story: When Coldplay got around to releasing its second album A Rush of Blood to the Head that year, a UK firm by the name Future Forests (now called The CarbonNeutral Company) got in touch with the band's frontman Chris Martin (he's Gwyneth Paltrow's husband) and asked him if he would like to do something about the carbon emission that would be involved in production of CDs for the album. Martin, as it turned out, said yes and for about $30,000 (Rs 13,50,000 now), agreed to fund planting of 10,000 mango saplings that would grow to suck in carbon dioxide (co2) and release pure oxygen back into the atmosphere (now you know why Future Forests renamed itself CarbonNeutral). And Meili, who runs related NGOs in Karnataka, was the one CarbonNeutral got in touch with for the tree planting. (The British NGO also got Pink Floyd to do the same, but that's another story.) What did the farmers get? Rs 10,000 per tree, besides an annual supply of marketable mangoes for 30 years. A remarkable example of how innovative business ideas are not just helping save the environment but also enrich a poorer part of the world. The good news? "Coldplay is not the best example today. We have gone far beyond it," exclaims Meili, who runs Carbon India and Women for Social Development.

She isn't exaggerating. From being individual acts of guilt ablution, emission control has turned into a booming and well-organised global trade. Thanks, of course, is due to the Kyoto Protocol on climate control, which makes it mandatory for signatory countries to meet their emission control targets. Those that are unable to do so can simply buy carbon credits from countries that help lower co2 emissions (See What Are Carbon Credits?) to meet their targets. Some of the global buyers include energy companies such as Shell Group, EDF, Solvay Fluor, banks such as Barclays and specialised carbon funds of the World Bank and European governments.

This has resulted in a spate of Indian companies wanting to set up environmentally-friendly projects with an eye on earning carbon credits. The list includes just about every sort of organisation: private sector, public sector, cooperatives, and even self-help groups. For instance, ONGC recently became the first PSU to get an approval for carbon trading; Meili herself, who's even got FIFA interested in a Green Goal initiative in the run up to the World Cup Games in Germany, is helping 5,500 families in Kolar build individual biogas plants of 2 cubic metres each; and Shree Pandurang Sahakari Sakhar Karkhana, a cooperative sugar mill, has also sought approval for carbon trading. Private sector companies are, of course, way ahead in the game. Pioneering companies such as Gujarat Fluorochemicals Ltd (GFL) and SRF have been joined by big guns like Reliance Industries, Gujarat Ambuja, and JSW Steel. Their collective sight is set on the at least $7.5-10 billion (Rs 33,750 crore-45,000 crore) opportunity that emission trading may throw up globally by 2012.

Green Bucks

Under the Kyoto Protocol, first adopted in 1997 but not ratified until February of 2005, there are three broad methods of tackling greenhouse gas (GHG) emissions: A joint implementation mechanism is aimed at encouraging joint projects among developed countries; carbon emissions trading allows countries with surplus credits to sell the same to countries with quantified reduction commitments, while clean development mechanism (CDM) is about setting up projects that reduce GHG emissions in developing countries. The CDM can either be in collaboration with project promoters or done unilaterally by entities in the developing world. Carbon credits so earned can then be sold.

CDM, which is the only mechanism available to developing countries, has evoked a tremendous amount of interest in India. In fact, the first project to seek the mandatory registration with the United Nations Framework Convention on Climate Change (UNFCCC) under CDM in 2004 was an Indian project-GFL's project for thermal oxidation of hfc23, a key waste produced in the manufacture of refrigerant gas. Since then, several other Indian companies have followed suit (See Companies With...). So much so that of the 153 projects registered with the unfccc as on April 13, 2006, 28 are from India. "There are more than 500 CDM projects in the pipeline over the next six months and we expect a third of these projects to emanate from India," says Richard Kinley, officer-in-charge of UNFCCC. The most popular CDM project types include energy efficiency, renewable energy use, refinement in industrial processes, switchover to cleaner fuels, and even solid waste management. Says Deepak Asher, Group Head (Corporate Finance), GFL: "CDM is a winwin for all concerned. The developed nations are able to out-source environmental compliance cost-effectively, developing nations get the advantage of technology, funding and sustainable development, and most importantly, the environment benefits by reductions in GHG emissions."

Deepak Asher, Group Head, Corporate Finance, GFL "CDM is a win-win for all concerned"

Advantage India

What explains India's first-mover advantage on this front? "India already had stringent environment laws in place for several years by the time the Kyoto Protocol came into force," says Roop Salotra, President & CEO of SRF, "so it was natural for India to be ahead of the pack in CDM implementation." A couple of other factors seem to be helping Indian corporates. Unlike those elsewhere, companies in India were forced to keep their capacities small due to licensing and restrictions. But when industry was deregulated in the early 90s and companies scrambled to add capacities, they found that shifting to newer and cleaner technologies was not just easier but more viable. And now, high energy prices have ensured that energy efficiency becomes the No. 1 concern across boardrooms in India. But most of all, companies have discovered that going green and being able to trade in carbon credits can actually boost profitability of their new projects.

M.K. Singhi, Executive Director, Shree Cements "With carbon revenues, the IRR (internal rate of return) is enhanced upto 30 per cent, and we are looking at about 150,000 credits annually from three different projects"

Consider Triveni Engineering and Industries, which has set up two bagasse-based power plants that will get UNFCCC approval anytime now. The company estimates that these plants will generate 160,000-200,000 certified emission reductions (CERs), or carbon credits, annually. Even assuming a sale price of m15, or Rs 825, per CER (every one tonne of co2 reduced fetches one CER), the plants will fetch at least m2.4 million annually. "We are looking at annual revenues of around Rs 16 crore from the two plants alone," says the company's Vice President of corporate planning, Sameer Sinha. No wonder, Triveni is setting up a third plant by September 2006. Although Sinha is wary of giving out investment figures for the projects, he does say that carbon credits improve the viability of their projects. "They can boost the internal rate of return for such projects by 3-4 per cent," he says. Rajasthan-based Shree Cements' Executive Director, M.K. Singhi, agrees with the assessment. "With carbon revenues, the IRR is enhanced by up to 30 per cent,' he reveals. Shree has three projects in the pipeline that could qualify for carbon credits. It is looking at generating 100,000 CERs every year from its first two projects and expects to pocket around Rs 10 crore from its first CDM project alone. Another project related to waste-heat-recovery-based power generation is expected to yield 50,000 CERs.

But the best example of the CDM potential is SRF. This chemicals company took a call in July 2004 (seven months before the Kyoto Protocol was ratified) to invest Rs 12 crore in building a plant to reduce emissions of hfc23. Its oxidation plant was commissioned end of August 2005 and started generating CERs rightaway. In March this year, SRF booked a business income of Rs 95 crore from the sale of 1.4 million CERs-that's 144 per cent of SRF's annualised net profit for 2005-06. And SRF has an annual capacity to generate a maximum of 3.8 million CERs. For companies like SRF and GFL, which have refrigeration gas businesses, CDM projects make even more sense. HFC23, a byproduct, is one of the most potent greenhouse gases and destruction of one tonne of hfc23 is equivalent to reduction in emission by 11,700 tonnes of CO2. GFL is looking at a best-case estimate of 7 million CERs per annum, which means between GFL and SRF alone, there will be about 10 million CERs generated annually.

COMPANIES WITH CARBON CREDIT TRADING PLANS

GFL GREEN PROJECT: Destruction of waste product HFC23 through incineration. HFC23 is a potent greenhouse gas that is formed during the manufacture of refrigerant HCFC22. One tonne of HFC23 has warming potential of 11,700 tonnes of CO2. TECHNOLOGY: Installation of thermal oxidation equipment via technology partner UK-based Ineos Technology. PROJECT STATUS: CER registration done SCALE OF EMISSION: 33.9 lakh CERs, or carbon credits EXPECTED ANNUAL INFLOW: Rs 88.1 crore SRF PLANT IN BHIWADI SRF GREEN PROJECT: Thermal oxidation of HFC23. TECHNOLOGY: Thermal oxidation (technology vendor is Solvay Fluor) PROJECT STATUS: Approved. Has already sold some CERs that accrued during 2005-06. SCALE OF EMISSION: 38 lakh CERs a year. EXPECTED ANNUAL INFLOW: In excess of Rs 95 crore. SHREE CEMENTS GREEN PROJECT: Three projects, actually, involving biofuels for pyro-processing in cement plant; Reduction in clinker content by increased fly ash content; waste heat recovery based power plant. TECHNOLOGY: Developed largely in-house PROJECT STATUS: At various stages, but the biomass one is already registered. SCALE OF EMISSION: 1 lakh CERs per year. EXPECTED ANNUAL INFLOW: Rs 10 crore per annum TRIVENI ENGINEERING GREEN PROJECT: Bagasse-based power generation plants. TECHNOLOGY: Developed largely in-house PROJECT STATUS: Validation Stage SCALE OF EMISSION: 160,000-200,000 CERs. EXPECTED ANNUAL INFLOW: Has been revised upwards from Rs 4.2 crore to Rs 16 crore BALRAMPUR CHINI GREEN PROJECT: Bagasse-based power generation plants. TECHNOLOGY: Developed largely in-house PROJECT STATUS: Validation process is currently on, but Balrampur has sold a small fraction of its CERs to IFC. SCALE OF EMISSION: 1.8 lakh CERs. EXPECTED ANNUAL INFLOW: Around Rs 5 crore. Source: Sharekhan, BT

Market Dynamics

The overall size of the market in terms of the number of co2 equivalents that need to be reduced during the first commitment period of 2008-2012 is fairly capped at around 1.5-2.0 billion, according to Sameer Singh, IFC's environmental and social specialist for South Asia. However, the CER prices show no signs of being capped. "The benefits are likely to be in excess of $3 billion (Rs 13,500 crore) over 10 years from the 200-odd projects already approved," says Naresh Dayal, Additional Secretary, Union Ministry of Environment and Forest. The ministry's estimates are based on extremely conservative prices of $5-6 per CER, which is far lower than the prevailing market prices. Last year, the price of a CER was between m11 and 15. This year already some companies are sewing up deals at over m20 for a CER. "By next year, the price could easily be m30 per CER," says Meili of Carbon India.

Triveni plant, Deoband As per its own estimates, CERs could fetch the company as much as Rs 16 crore a year

A close surrogate of the CER is the carbon reduction unit prevalent in the European Union, and that is currently trading at m30. However, higher risk perception associated with developing economies results in the CERs trading at a discount. The formation of an international transaction log (ITL) by April 2007 is expected to remove such discrepancies. The absence of ITL, for example, prevents Shell, SRF's partner in the DMD project, to cash in on its share of carbon credits. "The absence of an international transaction log is one the key factors determining CER prices at present," notes Sudipta Das, Partner (Environment & Sustainability Sevices), Ernst&Young.

There Are Risks, Though

While carbon trading promises almost free money and lots of it, there are some risks involved in the mechanism. Part of the uncertainty in the market is due to the US, the largest producer of GHG, which hasn't yet ratified the Kyoto Protocol and doesn't seem to plan on doing it either. There's also some uncertainty as to what will happen after the first phase of commitment gets over in 2012. Going forward, "the demand-supply equation in the carbon market is going to be dictated by politics and policy," says GFL's Asher. GFL is trying to hedge by entering into forward contracts for part of its annual CER production, and indexed prices for yet another part of its portfolio. It will retain the balance for the spot market, thereby keeping a small window open for potential increases in CER prices.

Anandi Sharan Meili, Carbon India "There are a number of renewable energy programmes that we are implementing as fully CER-funded projects"

In CDM projects where technology partners from developed countries are involved, the credits are usually shared in proportion to the risks shared. Several projects, such as Meili's biogas initiative in Kolar, however, are now planning to take on the entire risk themselves as they see merit in retaining CERs for trading later. Happily for her, these are risks that financiers are willing to share as is evident from ICICI Bank's advance funding of the biogas project. In a bid to encourage more CDM projects, intermediaries such as the World Bank and other specialised carbon funds chip in at early stages (mostly pre-registration) by taking over substantial risk. Of course, such funds then end up with CERs at significant discount to market rates.

There are other efforts on to make carbon trading easier. IFC, for instance, is working on sophisticated financial instruments such as carbon futures, indexed pricing and carbon insurance. In fact, the first session of an Ad Hoc Working Group on post-2012 commitments is slated for May in Bonn, Germany. It is expected to clarify many of these grey areas. Dayal of the Ministry of Forest and Environment believes that a relaxatio n in the pace of commitments for the US might make the Protocol more palatable to it.

UNFCCC's Kinley agrees, albeit a little obliquely. "Longer commitment periods may make the agreements more interesting for certain countries," he says diplomatically.

If the US agrees to ratify the Kyoto Protocol, the carbon trading market may simply explode. Going green for India Inc., then, won't just make a lot of sense, but also truckloads of money.