02 March 2016 15:00:05 IST

Carbon goes under the hammer

The World Bank is all set to auction carbon credit for the second time, on May 12

The hammer has been brought down on a number of goods in the history of mankind, including, in literature, wives. In more recent times, cricket players have been auctioned off (which, as you know, has made them very rich.)

But on May 12, another odd auction will happen under the aegis of none other than the World Bank, which will auction options to sell carbon credits.

Just in case you didn’t know, ‘carbon credits’ are what you’d get if you spent money on something which has the effect of reducing carbon dioxide (or other greenhouse gas) emissions, and got it (the emission reductions) verified by certain expert agencies. You can then sell these ‘carbon credits’, which are financial instruments, like shares and bonds.

So if you are putting up a coal-fired power plant, and you add a machine that will, say, suck up the carbon dioxide from the chimneys and bury it underground, you’ll get — apart from the ‘good boy/girl’ badge — some carbon credits that you can sell in the market and make money. This dough will enable you to earn back the extra money you spent on the CO 2 sucking machine, and also make some surplus.

Now, the World Bank is saying it will auction carbon credits. And by the way, this is the second time it hosting the auction. The first was in July last year.

Tale of carbon credits

You might wonder why the World Bank, which is meant to lend sacks of money for big, big developmental projects, concerns itself with this teeny-weeny carbon credits. You’ll wonder even more when you learn that the auction is expected to fetch teenier-weenier $20 million.

But on that peg hangs the sad tale of carbon credits.

The carbon credits system was devised in the mid-1990s under the auspices of the Kyoto Protocol as a means to transfer funds from the polluting rich countries to the can’t-help-polluting poor countries. At that time, the carbon prices were quite high. You could get €17 for a ‘certified emission reduction’.

There are many companies that have put up emission-reducing projects thinking they could earn a bit by acquiring carbon credits and selling them. India’s Reliance Power, for instance, boasts of having 60 million carbon credits on hand. Only, today they are worth zilch.

The crash

The carbon markets crashed mainly because those who were expected to buy the credits and meet their obligations, didn’t do so. This meant there was an oversupply of carbon credits, and what used to sell at $17 is now going abegging for 35 cents. In such a situation, who will invest projects that reduce greenhouse gas emissions?

In steps the World Bank!

It wants to revive the carbon market, somewhat like getting a sozzled and flat man up on his feet. But the World Bank has come up with a clever plan. It said it would auction the right, but not the obligation, to sell carbon credits at a floor price. In the first auction held in July 2015, the floor price was $2.40 — called the ‘strike price’.

If you are putting up a project that would incidentally generate carbon credits, you could buy the put-option from World Bank. Then you sleep well in the knowledge that even if the market for carbon credit collapses, you have the right to sell your credits to World Bank at the strike price.

The bank will pay for them out of a special fund of $100 million, formed by contributions from a few developed countries for this purpose. The idea is to pull the carbon market up, and thereby, create a means of finding funds to fight climate change.

The first auction was termed a ‘success’, as 12 companies bought the options to sell their carbon credits. Only, the World Bank had said that only the carbon credits earned from ‘methane emission reduction projects’ could be sold (Methane is another greenhouse gas, 25 times more harmful than CO 2 ).

For the second auction, to be held on May 12, the Bank has fixed a floor price of $3.50 per credit. It is going to be interesting to see how it goes on, as it is the first auction after the Paris Agreement. For more information, click here .