Spot and Future Prices of Carbon Emission Reduction Trading of NCDEX India: An Econometric Study

Abstract

With growing concerns among nations to curb pollution levels while maintaining the growth in their economic activities, the emission trading (ET) industry has become active. As per Multi-Commodity Exchange of India, with the increasing ratification of Kyoto Protocol (KP) by countries and rising social accountability of polluting industries in the developed nations, the carbon emissions trading is likely to emerge as a multibillion-dollar market in global emissions trading. Carbon credits are a tradeable permit scheme. They provide a way to reduce greenhouse gas emissions by giving them a monetary value. Carbon Emission Reduction (CER) is treated in the derivative trading market as a commodity. In India this is new commodity to be traded in Indian derivative market. It started trading in National Commodity and Derivatives Exchange Ltd (NCDEX), India from the month of April, 2008. Background and objective of the study: The trading of Carbon credit started in NCDEX commodity market from April 2008. NCDEX is a public limited company incorporated on April 23, 2003 under the Companies Act, 1956. It obtained its Certificate for Commencement of Business on May 9, 2003. It commenced its operations on December 15, 2003 regulated by forward market commission. Since the CER trading started in the NCDEX spot and future market, it was attempted to find out a causal link between the two and also to study whether the two are co integrated. Motivation for the Study: It was also observed as per my knowledge, no study has been made in Carbon trading derivative market in India which motivated me to undertake this research work. Objective of the Study: 1. Study whether causality exists between CER spot market and CER future market and vice versa. 2. Study whether CER spot and future market are cointegrated. Research Methodology: The daily closing data of NCDEX CER spot index and NCDEX CER future index from April 10th, 2008 till March 31st, 2009 was taken. A unit route test through Phillips-Perron test was conducted at level which again showed that the data are non stationary. Granger Causality test was conducted after converting the non stationary data as stationary at first difference. Also, a Johansen co-integration test was conducted to test whether co integration exists between the two.