Opportunity Areas in Carbon Consulting in India

Project Report

Carbon Finance (A)

Submitted to:
Prof. Amit Garg
Prof. P R Shukla

Team Participants
Alok Gautam
Charlotte Axelsson
Ravi Yadav
Sébastien FRANCOIS

Date: 22nd October, 2010

1
Table of Contents
1. Scope........................................................................................................................................3

2. Methodology............................................................................................................................3

3. Opportunity Areas Identified....................................................................................................3

a. Perform-Achieve-Trade........................................................................................................3

b. Insurance market...................................................................................................................5

c. Carbon footprint....................................................................................................................6

d. Renewable Energy................................................................................................................6

4. Conclusion................................................................................................................................7

2
 Opportunity Areas in Carbon Consulting in India
 

1. Scope

In this project we have tried to study the different carbon finance and consulting related areas
with the aim of identifying few niche and upcoming areas with maximum potential from an
entrepreneur's perspective. The opportunity assessment is primarily from an India perspective.

2. Methodology

Primary source of information is course instructors, some case studies, research databases and
internet. After discussion with the instructors, four areas with substantial potential were
identified and due diligence done on them. A lot of insights are drawn from internet and carbon
consulting firms.

3. Opportunity Areas Identified

a. Perform-Achieve-Trade
A new blueprint is being prepared that is aimed at creation of a market based mechanism of
using energy certifications to reduce emissions of some carbon intensive industries. This new
scheme is called Perform-Achieve-Trade or PAT. The Bureau of Energy Efficiency (BEE) is
coordinating and developing the proposal. We see a lot of opportunity in this scheme from an
entrepreneur’s perspective. There is a lot of information asymmetry in the market and early
players who are able to collect resources and knowledge regarding such new schemes will be
able to make an impact in the market.

Perform-Achieve-Trade (PAT) is a market-based mechanism to enhance energy efficiency in

large energy-intensive industries and facilities. As of now, 714 units in 9 energy intensive sectors

3
have been identified1. These sectors are - Aluminum, Cement, Iron & Steel, Chlor Alkali,
Thermal Power Plants, Fertilizer, Pulp & Paper, Textiles and Railways 1. The identified units
will be called ‘Designated Consumers’. Though there are doubts whether a full fledged scheme
can be launched by April 2011, as envisaged. It is highly likely that targets may get released for a
few very energy intensive industries like power plants and fertilizers. Implementation of PAT
will require and amendment in acts like Energy Conservation Act and is being carried out.  

The scheme has a potential to cut down 5% of the national energy consumption by 2015 and lead
to savings of 10 million tonnes of oil equivalent over a 3 year period 2. There is a target of
achieving 5% savings in electricity consumption by 2012 or avoided capacity addition of 10,000
MW2. It is to be noted that capacity addition of power is a very capital intensive process and
hence savings in this aspect would be quite beneficial.

The scheme will also introduce the concept of ‘white certificates’ or Energy saving certificates
(ESCerts) in India2. An industry unit achieving more than the targeted reduction will receive
energy saving certificates. Industry units which are unable to achieve targeted reductions will
need to buy them from the market. Thus a big trading market will arise with a lot of
opportunities. Fungibility of energy saving certificates with renewable energy certificates is also
being planned with the aim of integrating the entire market for trading1. This market mechanism
is better and more efficient than the concept of fixing mandatory meeting of emission targets by
the units themselves or emission tax. This is because in the market, few players face lower cost
per unit of emission reduction as compared to other players. The market mechanism provides a
flexibility where in firms with lower emission reduction costs reduce their emissions more and
sell them in the market. Thus the overall cost of meeting a combined emission target is met at
lower cost thereby leading to a more efficient market mechanism. But a critical thing in a market
based mechanism is the importance of a market where searching costs are low, there is sufficient
liquidity as well as depth. Thus a challenging task facing Government of India would be setting
up of trading exchanges. This could be a big opportunity area for a potential entrepreneur
especially management graduates with an understanding of financial markets as well as carbon
1
National Mission for Enhanced Energy Efficiency, presentation by Dr. Ajay Mathur, 17 th February 2010, retrieved
10th October 2010
2
Retrieved 12th October 2010, website:
http://www.thehindubusinessline.com/2010/01/26/stories/2010012653000100.htm

4
finance. Roles could be like giving consultancy to the government, setting up trading exchanges
for interested private investors, market creation, and brokerage business as well as giving
consultancies to the industrial units.

Program will attempt to develop an intensity-based indicator- Specific Energy Consumption

(SEC) and normalize it across different industries. Specific energy consumption is the energy use
per unit of output. Normalization and sector specific target setting is essential as different sectors
have different energy intensity needs. The target setting for a unit will be done taking into
account what the SEC of the best unit in that sector is and the mix of fuels used by the unit.
Without keeping such practical considerations into account the scheme may create substantial
difficulties for units. Targets would be percentage reduction of current Specific Energy
Consumption (SEC) of the industry. Target setting will be done modestly and would take into
account payback periods. Percentage reduction requirement will be based on current SEC as a
ratio of the best in the sector and the mix of fuels used. SEC measurement and verification will
be done by BEE through accredited auditors. This is again a big opportunity for entrepreneurs,
preferably with a core engineering and management background. Such candidates will be
uniquely placed to understand the industrial aspects and the financial aspects with an ability to
relate between the two. Such holistic understanding along with a study of the best practices in the
developed economies could lead to a lot of consulting opportunities. A lot of industrial units are
family run businesses lacking professional insights. Such units can be prime targets for an
entrepreneur to enter the market, gain a toehold and then gradually expand.

Another opportunity lies in the energy auditing field as a lot of professionals will be required by
the targeted industries to measure reductions. The auditing will be done by auditors accredited by
BEE. Thus energy auditing can be a huge opportunity in itself where a specialized firm can
create a huge market for itself.

b. Insurance market
Due to the imposing threat of climate change there is growing demand for an insurance market
that can manage these risks. In earlier years the development within this market has mostly been
taken place in the developed countries. However, now experts see large benefits from insurance
issuance to businesses and individuals in the developing world, for example India.

5
Carbon risk management and products such as weather derivatives, catastrophe (Cat) bonds, and
CERs have expanded to a great extent the last few years. Furthermore, even if some if the
instruments mentioned above were deeply affected by the financial crises, there is no apparent
signs of a major slow-down in the growth. In fact, as India expands and develops we see great
opportunities in this field, even though there are also some risks involved, and weaknesses
among the instruments.

c. Carbon footprint accounting

Implementation of Carbon taxes and projects of carbon taxes are increasingly growing. Even if
there are usually many exceptions, the possibility of general carbon taxation is an opportunity to
study. Other forms of taxation, like carbon import tax, are also projected. Carbon labels and
carbon footprint written on products begin to exist. These kinds of information also need to be
controlled and require knowing the carbon emission of each product. Because of all these issues,
carbon taxation will probably become a huge market which will need to be better regulated and
will probably looks like the current accounting system.

The creation of real carbon taxation is still something unsure. But the probability is very high, as
show the growing number of countries where a carbon tax does exist, the political speeches and
the multiplication of rapports about carbon taxation.

For example, the study from the Centre for European Policy Studies supported the idea of a
carbon import tax and concluded:

“1. A CO2 border tax or import tariff would increase global welfare.
2. Such a carbon import tariff can be made to be compatible with WTO rules.
3. There are no insurmountable practical obstacles to introducing such a tariff.
4. The equity concerns of the UNFCCC could be taken into account by rebating the proceeds of
the tariff to those countries manifestly unable to shoulder the burden themselves.”3

Thus carbon taxation is a real and imminent opportunity for consulting firms.

3
Centre for European Policy Studies, Climate Change and Trade: Taxing carbon at the border?
http://www.ceps.eu/ceps/download/3403

6
The current accounting value chain can be summed up as the chart below4. The carbon
accounting opportunity for each part has been details below the action:

Norm choosing
Opportunity for consulting firm. There are many norm in carbon taxation and no real convergence yet. Thus the norm issue is
really a huge opportunity

Choice of data to collect

After choosing a norm, the implementation is a critical issue. There are opportunies for consulting firm, either specialised in
implementation or able to do the two first steps

Organization and tools choice to collect data

The data collecting is already complicated for classic accounting and could be even harder in carbon accounting. Consulting firm specialised in
such field have a huge opportunity to grow.Consulting firm specialized in ERP implementation are already trying to go on this market

Data collecting
The data collecting itself is not an opportunity for consulting firm. It is a opportunity for employment

Data stocking
The data stocking company will probably be the same than the current data company, because the data in carbon taxation are
not so different from the data in current accounting

Data processing
Data processing can requiered accounting software. Implementation of such software are a huge opportunity for consulting
firms.

Certification
Carbon finance certification is currently done by the same companies than the rest of the value chain. But certification will
probably be separated in some countries as it is the case in current accounting.

Publication
Publication will probably follow the same path than current accounting

Thus the main opportunities for consulting firms are in norm chosing, choice of data to collect,
organization and tools choice to collect data and data processing. Specialized firms in these
fields will probably emerge in a few years but there is currently a market lack which allows new
firms to play a big role in these emerging markets.

4
The chart was created after an interview with a French diary accountant.

7
To conclude, carbon tax will probably not be the only one involved. Other taxes, like water tax
or biodiversity tax could be created soon as emphasized the Seminar on the Vulnerability of
International Trade to the Carbon Footprint5.

d. Renewable Energy
Due to the pressing demand for larger share of clean energy, increasing investment in Renewable
Energy generation is inevitable. Government of India has targeted to have installed capacity of
200 gigawatts in Renewable energy by 2030. This would need investment of the level of about
US$ 600 million. Recently, Central Electricity Regulatory Commission (CERC) made it clear
that Power Companies need to buy a minimum 6% of their total installed capacity from
Renewable Energy sources. This percentage is definitely going to increase in future. Apparently,
there is huge business opportunity in consulting as per setting up of Renewable Energy
generation plants. EPC (Engineering, Procurement and Construction) contracting is another area
which has ample scope.

Electricity Act, 2003 introduced a new domain, inter-state power trading in India. Setting of a
federal level agency to issue RECs (Renewable Energy Certificates) and an Energy Exchange
further facilitates trading in power. It is a multi-billion dollar business world-wide but in India,
Power-Trading still is in infancy stage. Volume of exchanges in India is very low, about 2.5% of
total energy generation. This volume is destined to increase sharply in coming years. In this
scenario, Consulting in the field of Power-Trading has got ample opportunity. Consulting firms
like Feedback Ventures has already forayed into this business.

4. Conclusion

Our brief exposure to the few opportunity areas studied by us has been very insightful from the
future positioning of our careers. Carbon finance and carbon consulting has a huge potential in
future. What is constraining the market is the unpredictability of rules, regulations, support
mechanisms and various schemes. Even developed countries like United States are not making
clear frameworks. But clearly Climate Change is a serious issue and would sooner or later be

5
Summary of the Seminar on the Vulnerability of International Trade to the Carbon Footprint (2-3 September
2010): http://www.iisd.ca/larc/pdf/larc0201e.pdf

8
confronted by the developed world. A firm commitment in any conferences like Copenhagen can
lead to an instant push in the market. At such opportune times, professionals who understand the
market well would be uniquely positioned to exploit the enormous opportunities.

We believe that all the areas studied by us have a lot of potential in themselves. An entrepreneur
can enter one area and gradually expand one’s services. Understanding one area in depth would
help a lot in replicating the services to other areas easily as there are a lot of similarities in
concepts. Capturing the entire carbon chain through consulting services will help a firm in
reaping a lot of backward and forward integration benefits as carbon opportunities are all very
well connected. Carbon education in India and emerging countries could also be an attractive
proposition in itself as eventually a lot of corporate and students are getting interested in
understanding the carbon dynamics. The whole carbon finance area definitely offers immense
opportunities in a lot of areas for entrepreneurs to explore.