Bharat Entrepreneurs

What the heck is this?
It is an administrative approach used to control increasing CO2 by providing incentives in order to reduce the emission of pollutant.
Think about it for a minute - trading polluting gases!!

Still did not get it?
Let me try to describe this form of trading in simple terms. It aims to reduce pollution from harmful gases by regulating emission of carbon dioxide in air( another way to earn big bucks). A central authority fixes an upper limit on the amount of pollutant that can be emitted. If a firm pollutes less than the limit, it earns credit and can exchange this for cash. A firm which pollutes more than the limit can earn those credit by paying an equivalent amount of money in some exchange(market). This way it regulates the emission of CO2.
Suppose cap is 100 units. A firm X which pollutes equivalent to 90 unit of pollutant, earns 10 credit points. Another firm Y which consumes 110 units will need 10 units. It will enter into a trade (in presence of third party) where it will exchange 10 units with some cash. This form of trading is called carbon trading.

Background
On the initiative of UNO (United Nations Organisation), Kyoto protocol was signed in 11 December 1997 and it came into force from 16 December 2005. The Kyoto protocol aims to tackle global warming by setting target levels for nations to reduce greenhouse gas emission worldwide. The Kyoto protocol is an agreement by which the ratifying countries have agreed to reduce their emission of greenhouse gases. Under the protocol, initial target is to reduce greenhouse gas emission to 5.2 per cent below 1990 base level. 172 countries have signed the Kyoto Protocol. Australia has also recently ratified the protocol. These countries and their companies are the only ones allowed to engage in carbon trading.

Show me the money!
Carbon emissions trading has been steadily increasing in recent years. According to the World Bank’s Carbon Finance Unit, 374 million metric tonnes of carbon dioxide equivalent (tCO₂e) were exchanged through projects in 2005, a 240% increase relative to 2004 (110 mtCO₂e) which was itself a 41% increase relative to 2003 (78 mtCO₂e).In terms of dollars, the World Bank has estimated that the size of the carbon market was 11 billion USD in 2005, 30 billion USD in 2006, and 64 billion in 2007^. (source: wiki)
The value of the carbon trading market was around $30 billion in 2006 as per the estimates of the International Emissions Trading Association. Since 2002, a cumulative 920 tonnes of carbon dioxide equivalents have been transacted through CDM project activities. European buyers dominate the market, with 86 per cent market share as of 2006. On the selling side, India leads the race with 288 CDM projects registered followed by China with 129 projects as of November 2007 ( source: the hindu business line)

Opportunity
Lets come to the point now. India being a developing nation enjoys some freedom over the protocol. Companies can boost up their balance sheet by earning profit. They can sell a large number of CO2 credits to developed countries like US, UK. Once India is realized as a major pollutant, the opportunity to trade on large scale will seize. Even some Indian villages have realized the opportunity and trading carbon credits for a pretty good amount. A small village named Powerguda in Adilabad district, Andhra Pradesh has earned $645 by selling 147 tonnes equivalent of carbon dioxide credits. This was achieved by extracting bio diesel from trees.

Ms. K. Subadrabai, President of the village’s Jangubai Self-Help Group, signed an agreement October 16, 2003 to sell the equivalent of 147 tons of carbon dioxide in emission reduction over 10 years and collected a check for $645 from Mr B. Nagnath, Additional Project Director, of the World Bank-funded DPIP project. Mr. Kevin Cleaver, Sector Manager, Agriculture and Rural Development, had earlier signed the papers in Washington, DC, on behalf of the World Bank. The CO2 emission reduction comes from the substitution of about 51 tonnes of diesel oil by bio fuel produced from Pongamia pinnata, a native tree species found in the local forest. The people of Powerguda had planted 4,500 pongamia trees in 2002 on the edges of their agricultural land. Oil from the pongamia seeds is extracted in the village’s oil mill installed by a local government agency.(source: goodnewindia)

I hope you all are not thinking of switching to CNG from petrol to earn some credit
BTW its not a bad idea to escape rising oil price

Read this funny cartoon strip

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The article aims at delivering the basics of the commodities market and how the commodities traded on the exchange. It helps us to understand the market from Indian point of view and its developing scope opens up a new set of opportunities and risk management mechanisms for the developing (Rural)India.

A commodity is a physical substance, such as food, grains, and metals, which is interchangeable with another product of the same type. It can be classified as every kind of movable property, except Actionable Claims, Money and Securities. Commodities are raw materials that are used in the production of manufactured goods and foods for industrial and consumer uses. Generally, these are basic resources and agricultural products such as iron ore, crude oil, coal, ethanol, sugar, soybeans, aluminum, rice, wheat, gold and silver.

Investors buy or sell commodities through futures contracts(just like stocks in a stock exchange market), agreeing to buy specific quantities of a commodity at a specified price with delivery set at a specified time in the future. Commodity prices fluctuate according to supply and demand, and futures are traded on a variety of international commodity exchanges. Futures trading helps in the risk management for producers of raw materials. For example a farmer, who must risk the cost of producing agricultural goods without knowing the price they will earn on the market several months later, can sell his goods in the future market there by locking his future prices and not by getting exposed to the fluctuations in the future market.

All the retail investors who have well understood(hopefully) the equity markets say that it is impossible to come to understand the nature of the commodity market. But the commodities follow the fundamental rules of demand and supply and are easy to predict. Historically the prices of the commodities futures are more stabilized than the stock exchange futures, making the commodity market a more reliable market. Until the 1970s this commodity market has flourished as a major means of risk management(called as hedging) in Indian Commodity market. But due to a large number of restrictions by the Govt. of India, it experienced an exponential decline over the last three decades. A large number of those restrictions being removed these days, the market is set to set a revolution in the Indian market.

Just like there is a stock exchange, there also exists commodity exchange. A commodity exchange is a regulatory body for commodity trade.The commodity exchange sets and enforces rules pertaining to commodity and commodity derivative trade. Now, the word commodity exchange also refers to the physical location where the actual trading of commodities takes place. One of the most famous Commodity exchanges is the CBOT - Chicago Board of Trade. The London Metal exchange is another big commodity exchange dealing with precious metals such as palladium and platinum as well as base metals .
In India we have Multi Commodity Exchange (MCX) located at Mumbai, National Commodity and Derivatives Exchange Ltd (NCDEX) located at Mumbai, National Board of Trade (NBOT) located at Indore, National Multi Commodity Exchange (NMCE) located at Ahmedabad.

Futures Contracts are the primary instruments that traders use while trading on such exchanges.Individuals can trade on a commodity exchange too, as long as they conform to the regulations of the exchange and have the money to invest. However, a large portion of the trading on these exchanges is done by professional traders(often part of investment banks) , by hedge funds and large associations of commodity producers to hedge against risk.

Some of the benefits of to industry from the futures trading are as follows:

-Distribution of purchases of commodities equally among the markets avoiding large purchases and storage. The FCI(Food Corporation of India) does the job of storing the goods that the government purchases from the producers of the goods. But it is a tedious task involving a lot of maintenance costs and other hidden costs. The commodity market helps in liquidizing the goods based on the arbitration of demand and supply.

-The process of price discovery(of a commodity) becomes efficient over a period of time and would eventually result in the prevention of seasonal price volatility. With the help of fluctuation of commodity prices the producers of the goods will be able to predict the price of a good at particular period of time. This adds as an important factor to the list of factors that would effect the price of a good at any given instance.

-The lending for agricultural sector becomes easy for the banks leading to a greater transparency in the rate of interests.

-Commodity exchanges can act as a medium of communication between the financial market and the rural India.

The commodity market in India is still under developed though our country gets one of the major portions of revenue from the agricultural sector. This has been because of the heavy intervention of the government trying to fix the prices, decide the storage issues and implement the import and export restrictions. Many economists feel that Indian economy can benefit a lot from the liberalization of the agricultural sector. This liberalization secures the producer of raw goods from price fluctuations in the market(I specifically refer to the plight of cotton farmers in Andhra Pradesh. The farmers spend a lot of money in the fertilizers and other inputs to raise the crop and when the crop comes to hand, the market prices might have got reduced resulting in losses. When we are being a part of any Industry and share their profits and losses through stock exchange, why can’t we be the part of our farmers’ profits and losses).

Commodity markets provide an inbuilt mechanism for the liberalization of the agricultural sector and can used as an effective instrument in a stable development of Indian economy.

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