Stabilisation fund and carbon market

  • December 22, 2022
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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Stabilisation fund and carbon market

Subject :Economy

Context:

India plans to set up a stabilisation fund  to make carbon credits attractive.

Details:

  • A stabilisation fund will be set up to keep prices of credits in its planned carbon market above a certain threshold.
  • It will ensure that the credit prices remain attractive for investors and that the market succeeds in cutting emissions.
  • Money in the fund would be used by a market regulator to buy carbon credits if prices fell too low.

Why?

In the European Union, a credit worth 1 tonne of carbon dioxide was reduced to 5 euros in 2012 from around 30 euros in 2008, but creation of a market stability reserve in 2019 led to a price rise between 75 and 95 euros per tonne.

Carbon markets: 

  • These are essentially a tool for putting a price on carbon emissions— they establish trading systems where carbon credits or allowances can be bought and sold.
    • A carbon credit is a kind of tradable permit that, per United Nations standards, equals one tonne of carbon dioxide removed, reduced, or sequestered from the atmosphere.
    • Carbon allowances or caps, meanwhile, are determined by countries or governments according to their emission reduction targets.

Types of carbon markets?

There are broadly two types of carbon markets that exist today— compliance markets and voluntary markets.

  • Voluntary markets are those in which emitters— corporations, private individuals, and others— buy carbon credits to offset the emission of one tonne of CO 2 or equivalent greenhouse gases.
    • Such carbon credits are created by activities which reduce CO 2 from the air, such as afforestation.
    • In a voluntary market, a corporation looking to compensate for its unavoidable GHG emissions purchases carbon credits from an entity engaged in projects that reduce, remove, capture, or avoid emissions.
      • For Instance, in the aviation sector, airlines may purchase carbon credits to offset the carbon footprints of the flights they operate.
    • In voluntary markets, credits are verified by private firms as per popular standards. There are also traders and online registries where climate projects are listed and certified credits can be bought.
  • Compliance markets— set up by policies at the national, regional, and/or international level— are officially regulated.
    • Today, compliance markets mostly operate under a principle called ‘cap-and-trade”, most popular in the European Union (EU).
    • Entities in this sector are issued annual allowances or permits by governments equal to the emissions they can generate. If companies produce emissions beyond the capped amount, they have to purchase additional permits, either through official auctions or from companies which kept their emissions below the limit, leaving them with surplus allowances.This makes up the ‘trade’ part of cap-and-trade.
    • The market price of carbon gets determined by market forces when purchasers and sellers trade in emissions allowances.
    • These markets may promote the reduction of energy use and encourage the shift to cleaner fuels.

How does the Carbon Market work?

  • A country sets a limit on emissions and then allocates a corresponding quantity of tradable permits, or credits, to emitters.
  • The quantity reduces over time.
  • If a company wants to emit more, it can buy more credits at the market price, but it will also consider whether constraining or even cutting its emissions might be more profitable.
  • The Indian market would cover emissions of carbon dioxide and also five other greenhouse gasses valued in terms of their carbon dioxide equivalence
  • The Central Electricity Regulatory Commission would probably be the market regulator.
  • In the compliance market- participation would be obligatory for entities in a dozen sectors, such as oil refining, steel, aluminium and cement
  • The voluntary market would be open to other entities.

India Carbon Market?

  • India’s carbon market is being set up in two phases. In the first phase, between 2023 and 2025, the existing energy-savings certificates will be converted to carbon credits.
  • Energy Conservation (Amendment) Bill, 2022  empowers the Centre to specify a carbon credits trading scheme.
    • Under the Bill, the central government or an authorised agency will issue carbon credit certificates to companies or even individuals registered and compliant with the scheme. These carbon credit certificates will be tradeable in nature. Other persons would be able to buycarbon credit certificates on a voluntary basis.
  • Notably, two types of tradable certificates are already issued in India—
    • Renewable Energy Certificates (RECs) and
    • Energy Savings Certificates (ESCs).
      • These are issued when companies use renewable energy or save energy, which are also activities which reduce carbon emissions.

Derivatives trade: Sebi extends suspension in seven agri commodities

Context: The Securities and Exchange Board of India (Sebi) has extended the suspension on derivatives trading of seven commodities for one more year till December 20, 2023. The ban was on paddy (non-basmati), wheat, chana, mustard seeds, soyabean, crude palm oil and moong

Capital and commodity markets regulator Securities and Exchange Board of India (SEBI) has suspended futures and options trading for one year in a host of agricultural commodities including chana, mustardseed, crude palm oil, moong, paddy (Basmati), wheat and soyabean and its derivatives.

Derivatives on several commodities have been banned/suspended as many as 19 times in the last two decades, with some facing multiple suspensions. The latest was the year-long futures tradingbanon7agri-commoditiesonDecember20,2021. A September report by NCDEX said the suspension of futures contracts in the past have not resulted in the desired impact of controlling the prices. At best, there have been minor corrections in the short term. The extension will hit the NCDEX as these commodities contributed nearly 54 percent of the total deposits between April 2021 and July 2021

Concept –

  • Derivative is a product whose value is derived from the value of one or more basic variables, called bases (underlying asset, index, or reference rate), in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset.
  • A derivative can trade on an exchange or over-the-counter.
  • Common derivatives include futures contracts, forwards, options, and swaps.

Options

  • An option gives the buyer the right, but not the obligation, to buy (or sell) an asset at a specific price at any time during the life of the contract.
  • They tend to be fairly complex, options contracts tend to be risky. Both call and put options generally come with the same degree of risk. When an investor buys a stock option, the only financial liability is the cost of the premium at the time the contract is purchased.
  • Options are based on the value of an underlying security such as a stock. As noted above, an options contract gives an investor the opportunity, but not the obligation, to buy or sell the asset at a specific price while the contract is still in effect. Investors don’t have to buy or sell the asset if they decide not to do so.

Futures

  • A futures contract gives the buyer the obligation to purchase a specific asset, and the seller to sell and deliver that asset at a specific future date unless the holder’s position is closed prior to expiration.
  • Options may be risky, but futures are riskier for the individual investor. Futures contracts involve maximum liability to both the buyer and the seller
  • A futures contract requires a buyer to purchase shares—and a seller to sell them—on a specific future date, unless the holder’s position is closed before the expiration date.
  • Futures contracts tend to be for large amounts of money. The obligation to sell or buy at a given price makes futures riskier by their nature.
  • They are preferred by speculators.

Swaps

  • Swaps are private agreements between two parties to exchange cash flows in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts. The two commonly used swaps are:
    • Interest rate swaps: These entail swapping only the interest related cash flows between the parties in the same currency and
    • Currency swaps: These entail swapping both principal and interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite direction.

Forwards

  • Forward contracts or forwards are similar to futures, but they do not trade on an exchange.
  • These contracts only trade over-the-counter.
economy Stabilisation fund and carbon market