Even as analysts peg the global carbon trading market at $100 billion by 2010, a steep fall in the price of carbon credits over the last five months is changing the way that countries like India look at the industry. From a commanding height of 30 euros in early 2006, the price of each credit has halved to 15-16 euros, prompting Indian companies (eligible for generating carbon credits) to hoard their supply.

According to experts like D.G. Prasad, economist with the Multi Commodity Exchange of India, it was the lack of a precedent that resulted in the initial high prices of carbon credits. “The only operational Emission Trading System opened carbon trading on the back of a perceived healthy demand by European countries. However, in reality, the EU countries had overestimated their requirement for carbon credits and could meet most of their targets internally. Hence the fall in prices,” he says, adding that a correction was inevitable given the infancy of the industry.

Thus, when the EU allowances were declared in April this year, most industrialised countries realised they had over-allocated their allowances. According to Pranab Nahar, director of Ecosecurities India, a leading player in the carbon market, the price of carbon was highly exaggerated due to speculative forces and hence a crash was imminent.

Another reason that prompted the crash was the limit that certain European countries imposed on the purchase of CERs. “While Germany has already put such a cap in place, a number of other European countries are slated to do the same, putting a downward pressure on the price,” feels Nahar. Besides, with credits fast flowing in from China, Russia and the East European countries, the supply of carbon is likely to outstrip demand at a much faster pace.

In India so far, 242 projects have been identified for generating CERs while a total of 318 projects have received clearance by the Ministry of Forestry and Environment. For the Indian carbon market — which has the potential to supply 30-50% of the projected global market of 700 million CERs by 2012 — the low prices have resulted in hoarding of credits, in the expectation that prices would rise in the future.

As general manager of Maharashtra Energy Development Authority (MEDA), S.R. Choudhary says, “Our 3.7 MW wind energy project in Satara has been allocated 8,000 credits per annum and so far we have already sold 20,000 credits. But that was four months back, when the prices were much higher. At the current rate, we would much rather hold on to our credits and sell them in the future, when the returns are more attractive.’’

Meanwhile, the industry is expecting the ruling price line (12 to 16 euros) to stay and even dip in the future. “Moreover, the absence of international transaction laws and proper regulatory mechanisms in India can also be a deterrent as far as sales of CERs from India go,” feels Nahar, who says that India has contributed barely 30 million CERs of the 2 billion credits traded globally so far.

But every bear phase is followed by a bull run and the global carbon credit market is likely to stabilise once the commitiment period of 2008 approaches.