CARBON EMISSIONS REDUCTION TRADING AT MCX!!

Following is some handy information about the newly launched CARBON CREDIT FUTURES contract. The contents give the basic comparisons and the highlights of the contracts available on MCX and the corresponding Reference Market.

1. REFERENCE MARKET
European Climate Exchange – ICE ECX

2. MARKET TIMINGS - ECX
12:30 p.m. IST – 22:30 p.m. IST

3. PRICE QUOTE IN INTERNATIONAL MARKET
Euro per Ton

4. LIVE / HISTORICAL PRICES AVAILABLE AT
a. Reuters –
b. Bloomberg –

5. NEWS OR MARKET INFORMATION AVAILABLE AT
a. DowJones
b. Bloomberg
c. Point Carbon

6. CONTRACTS AVAILABLE ON MCX
a. 15th Dec 08
b. 15th Dec 09

7. CONTRACT SIZE
200 tons
CONTRACT VALUE: 200 * (23 Euros * 57 INR) = Rs. 262,200
(Assumption: current Price per ton is 23 Euros and current exchange rate is
INR 57 per Euro)

8. PRICE QUOTE
Rs. per Ton

9. TICK SIZE
50 paise per ton

10. PROFIT / LOSS PER TICK FOR A CONTRACT
Rs 100

11. DAILY PRICE LIMIT
5%

12. MARGIN
6% (Approx. Rs. 15897 per Ton)

13. AVERAGE DAILY VOLATILITY
3.5% (for the year 2007) i.e. Re. 1 on an average

14. DELIVERY
Both Option

15. DUE DATE RATE
DDR would be the settlement price of ECX CFI near month contract on the last day (expiry date) of the MCX CFI contract. The ECX CFI settlement price will be converted at the Rupee – Euro rates as notified by RBI on that particular day.

16. ECX Price movement
EXC (Euro) MCX (Rupees)
0.01 0.57
0.10 5.7
0.50 28.5
0.75 42.75
1.00 57

Assuming EURO – INR exchange rate is Rs. 57 per 1 Euro.

17. Comparison Table:
Exchange Timings Contract Size Tick Size
MCX 10:00 P.M. TO 11:30 P.M.(IST) 200 tons 0.50 Rupees
ECX (-ICE) 12:30 P.M. TO 10:30 P.M. (IST) 1000 tons 1 Cent

18. Important Historical Figures at the Reference Market

Price Movement EXC (Euro) MCX (Rupees)
Average Price movement in a day (For 2007) 0.39 Euro 38
Maximum Price movement in a day (For 2007) 4.00 Euros 228
All Time High (2007) (per ton) 26.00 1482
All Time Low (2007) (per ton) 11.80 672.60

CARBON MARKET IN INDIA

Carbon Credits--A Business Oppurtunity

• Carbon credits – A new revenue source
• Kyoto Protocol came into force on February 16, 2005
• UNFCCC has designed CDM, under the Kyoto Protocol

The Kyoto Protocol is a legally binding agreement under which industrialized nations will reduce their collective emissions of greenhouse gases by 5.2% compared to the year 1990.

The goal is to lower overall emissions from six greenhouse gases – carbon dioxide, methane, nitrous oxide, sulfur Hexafluoride, HFCs and PFCs –calculated at an average over the five-year period of 2008-12.

Kyoto Protocol & The Three Mechanisms to reduce emissions
• Joint Implementation (JI)
• Clean Development Mechanism (CDM)
• Emission Trading

What is Emission Trading?
Emissions trading (ET) is a mechanism that enables countries with legally binding
emissions targets to buy and sell emissions allowances among themselves.

Risk Elements in CDM
Delivery risk
- Project risk
- Regulatory risk
• • • Risk of certification
• • • Cap in European National Allocation Plan
• • • Implementation of ITL
- Risk of contract fulfillment

Market price risk (Fuel prices, weather, economic growth, EUA, etc.)

CDM Project Developer Common Concerns
• What is the real worth of my CERs?
• What are the various options to trade my CERs?
• What will it cost them to market CERs?
• Who is a reliable buyer?
• What is the time line involved?

EUAs Price Influencing Factors
• Policy issues
• CO2 emissions
• Weather/Fuel prices
• CERs
• Foreign exchange fluctuations

Pricing of CERs is based on
• Fixed contract
• Index linked contract - to get high prices of EU market

Price Influencing Factors
§ Supply-demand mismatch
§ Policy issues
§ Crude oil prices
§ Coal prices
§ CO2 emissions
§ Weather/Fuel prices
§ European Union Allowances (EUAs) prices
§ Foreign exchange fluctuations
§ Global economic growth

Correlation between various Energy Commodities and Carbon Credits
• Correlation between Brent Crude Oil and EUAs –78.05 % (2007)
• Correlation between Electricity and EUAs – 49 %(2007)
• Correlation between Electricity and Brent Crude Oil – 66.5 % (2007)
• Price Volatility of EUAs – 4.04 % (from inception on ECX platform to 14th November 2007)

Note: Brent crude oil and Electricity prices were from Intercontinental Exchange, while EUA prices are from ECX traded on ICE platform. Latest period considered in all the above cases for analysis was till 14th November 2007.

Emission Market Participants
• Hedgers
• Producers
• Intermediaries in Spot Markets
• Ultimate Consumers

Investors
• Arbitragers
• Speculators
• Portfolio Managers

Diverse participants with wide participation objectives
• Commodity Financers
• Funding agencies
• Corporates having risk exposure in energy products

Global Exchanges Trading Carbon Credits
• Nord Pool Exchange – Electricity & CERs
• European Energy Exchange (EEX) – Electricity, Coal, Natural Gas & EUAs
• European Climate Exchange (ECX) – EUAs& CERs
• Chicago Climate Exchange (CCX) – VERs
• Host of New Exchanges coming up

Why MCX in India?
• MCX alliance with the Chicago Climate Exchange (CCX)
• MCX can launch mini-sized versions of ECX CFI
• First exchange traded environment product in the Indian Subcontinent
• Designed to offer an advanced, standardized and financially guaranteed tool
• Timeline matches with Western markets
• Compliment natural gas and crude oil contracts
• No forex risk

Commodity Futures:India

Commodity Futures is an agreement to buy or sell a set amount of a commodity at a predetermined price and date Buyers use these to avoid the risks associated with the price fluctuations of the product or raw material, while sellers try to lock in a price for their products. Like in all financial markets, others use such contracts to gamble on price movements. Futures trading performs two important functions of price discovery and price risk management with reference to the given commodity. It is useful to all the segments of the economy. It is useful to the producer because he can get an idea of the price likely to prevail at a future point of time and therefore can decide between various competing commodities, the best that suits him. Farmers can get assured prices and there is transparency. It is useful for the consumer because he gets an idea of the price at which the commodity would be available at a future point of time. He can do proper costing and also cover his purchases by making forward contracts. Predictable pricing & transparency.

Futures trading is very useful to the exporters as it provides an advance indication of the price likely to prevail and thereby help the exporter in quoting a realistic price and thereby secure export contract in a competitive market. The other advantages being Improved Product Quality, Credit Accessibility.

Importance of Commodity Futures Market
Commodities market essentially represents another kind of organised market just like the stock market and the debt market. However, commodities market, because of its unique nature lends to the benefits of a wide spectrum of people like investors, importers, exporters, producers, corporate. Saturation in Financial Markets and the short term investment opportunities with high reward in the Commodity Future Markets offer wide potential for broadening, deepening,widening and strengthening of the commodity markets. The Markets need to tap the immense opportunities made possible by huge population and increasing per capita income.

Commodities Market Structure in India
All the Commodity Exchanges in India operate under FMC and function within the ambit of Forward Contracts Regulation Act (FCRA), 1952.The Commodity Market in India consists of 3 National Exchanges and 21 Regional Exchanges. Multi Commodity Exchange Of India Ltd.(MCX), Mumbai, National Commodity and Derivative Exchange Ltd (NCDEX), Mumbai, The National Multi Commodity Exchange of India Ltd (NMCE). Ahemedabad, are the 3 national exchanges, MCX being the largest of all in terms of volumes traded.National Board of Trade, Indore is the largest of all regional exchanges.The Indian market is regulated by the three-tier regulatory structure, comprising the Central government represented by the Ministry of Consumer Affairs, Food and Public distribution; the FMC and the Exchanges themselves which serve as self-regulatory organizations.

Participants in Futures’ Market:
The market participants include, Farmers/Producers, Merchandisers/Traders, Importers & Exporters, Consumers/Industry, Commodity Financiers, Agriculture Credit Providing Agencies, and Corporates having Price Risk Exposure in Commodities.

However there are challenges. The futures volumes vis-à-vis the physical volumes are relatively lower than markets like the US, UK, China etc. due to lack of awareness among the investors. Growth of futures market itself poses a challenge to the regulatory role of FMC. There is an obvious knowledge gap in the academic and general community about the market. Over dependency of a few commodities and their futures on global markets, poses a challenge.