In a significant development, India's National Commodity & Derivatives Exchange Limited on Thursday launched its futures contract for Certified Emission Reduction.
Forward Markets Commission, chairman, B. C. Khatua inaugurated the launch at NCDEX Exchange Platform. The CER contract of NCDEX will be traded in multiples of one lot of 500 CERs each.
India is the first developing country to offer a hedging tool for CERs, a Kyoto protocol compliant emissions instrument under the Clean Development Mechanism of the United Nations Framework Convention on Climate Change.
Globally, CER futures are traded on exchanges such as Nordpool, European Climate Exchange - ICE, European Energy Exchange - Eurex, and NYMEX's Green Exchange.
Government of India's notification dated January 4, 2008 paved the way for futures trading in CERs by bringing carbon credits under the ambit of tradable commodities.
The tick size is Re 0.20 and the Final Settlement Price will pertain to guaranteed deliverable CERs. The client-wise position limit has been kept at 11,000 lots whereas the member-wise position limit is 66,000 lots.
Initially only one contract expiring in December 2008 had been launched and further contracts will be added in the near future.
The carbon market is one of the fastest growing and most volatile. India is fast emerging as a leading net seller of CERs in the world. It is the largest supplier of CERs after China.
India has not made any emission reduction commitments under any international forum. Indian entities are eligible for holding and trading in carbon credits and Voluntary Emission Reductions.
Indian companies generate CERs from emission-offset projects, which are purchased by international entities to meet their emission reduction commitments under the Kyoto Protocol and other regional emission trading schemes such as European Union Emission Trading Scheme.
India accounts for about 15 per cent of CERs from registered projects under the Clean Development Mechanism of the United Nations Framework Convention on Climate Change.
Currently, CERs are traded bilaterally in India. Such bilateral trades suffer from certain drawbacks. They tend to be highly customized and opaque. They entail high transaction costs and are often fraught with counterparty risks. In the absence of a price discovery mechanism, sellers are not able to get the fair value for their CERs.
The NCDEX initiative serves to address these inefficiencies in the carbon market by providing a price discovery and hedging platform to the buyers and sellers of CERs, under the Clean Development Mechanism of the United Nations Framework Convention on Climate Change.