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Lamon Rutten

Tuesday, June 1st, 2010
lamon rutten

Q: Could you tell us little bit about MC X?

A: MCX stands for Multi Commodity Exchange of India. We are a quite young company; we started trading in November 2003. We take commodity futures. We are the largest in India. We have market share of more than 80 percnt. We take contracts in products like gold, silver, crude oil, a number of agricultural products. We have grown fast. We are one of the fastest growing exchanges. We are the sixth largest commodity futures exchange in markets. Our trading value of last year was $1.24 trillion.

Q: So your company is the largest in India, and second largest in Asia?

A: In Asia, no. There are three exchanges in China. All three of them are larger, so we are the largest outside of China.

Q: Could you tell us the portion of carbon emission trading of total revenue of MC X?

A: Carbon trading is still very small. The problem is the complexity of markets. There are not yet domestic markets in India. So the all of exchange would be only the capture point on export change that calling industry still poorly organized. There are not many exporters -- only a couple of the largest Indian companies has learned how to reduce carbon. Those companies are normally so large that they can export directly using services of own focuses. In order to properly develop the market, we need to develop the local market. For that we have to create an additional market for support exchanges on which we’re working. China is the largest exporter of carbon trades right now. India is the second largest, but we expect that India will be the largest in carbon trades.

Q: Before starting talking about carbon emission trading itself I want to briefly review about the carbon emissions. According to United Nations Convention on Contracts for the International Sale of Goods, gas is subject to U.N. Convention. Do you see carbon as simple goods just like gas or financial products?

A: We see it as goods. But frankl,y I would like to see it as service, purely financial product so is it. The fact of matter it is you can package it like a product. You can trade it like a ton of coffee and a ton of rice. You can trade a ton of CO2. You can trade it like a commodity. It works like a product. So you can trade it like commodity exchange.

Q: In Korea, right now two exchanges try to be a carbon exchange. One is the Korea electricity exchange and the other is the Korea Exchange. Who do you think should deal with carbon emission credits?

A: For example, in India renewable energy certificate, they are part of the electricity sector. They follow the electricity ministry regulation. Therefore, it can be traded only by electricity exchange. We (MCX) have no possibility there. This is the largest power company in India, so it’s fine. So the regulation makes the value where you see the products. For commercial perspective, you trade it where you have the best usage. There is nothing to stop the financial market platform reaching people who trade in goods. We trade products like copper; there are many copper companies in India that trade in other platform. Similarly if we trade in carbon emissions, we know how we can reach people who generate also. At the same time we are financial players, investors, speculators. It’s not a problem. It helps market liquidity. It makes easy for people who want to sell to find buyer, it is easier for buyer to find seller. So I would think for commercial perspective, you should put a place which has the best reach.

Q: So many people just jump into the carbon emission market. Do you see the carbon market rosy? If you do believe so, what are the reasons and how big will the market be?

A: Starting with the last question, experts’ opinions on how big the market will be ranges very very widely. For 2015, which is only 5 years away, the range is between $95 billion to $1.1 trillion. My feeling is still the higher side. For a very simple reason, this is such a big problem and the whole world is not doing enough about it. Once they do more, the market will be a very valuable instrument; the markets allow you to reach a certain target of objective at a low cost. If we agree that the targets will reduce the initial greenhouse gases and empowering markets will be the most efficient way and the cheapest way to reach that goal. I believe government will see this and will provide more for this market globally in many countries. Therefore, we will see how this estimate would be realized.

Q: There are some arguments that carbon emission trading market is just a political creation. Also, there are arguments that I heard that emissions trading does not help reduce pollution problems overall, since groups that do not pollute sell their conservation to the highest bidder.

A: That’s incorrect. You can say it doesn’t help enough. The whole logic of this system is scientists set a maximum permissible pollution level. Government entities then allocate that as a right to pollute to companies in the country. If the scientific process has been done properly, you’ve got to be realistic and you’ve got the proper level of maximum pollution. The only way that you pollute more than you are supposed to do as a company is buying free carbon from someone else, another entity which produces less. Now everyone less at a limit some companies are not doing anything to reduce the pollution they will find very very high price in the market for carbon emission. So this market is extremely effective. People see immediately how much it will cost them. Not to do anything, they would need to buy in a market and see the market price. They will actually act. They will see the value of action.

Q: You said the price could be quite high; carbon futures for delivery this December traded on London’s European Climate Exchange at 14.66 euros ($19.64) a ton on the 19th April. How much would the price rise by 2012?

A: We don’t make predictions. Prices are flexible on demand and particularly the demand side is politically driven and the buy side is also politically driven, but more stable and more predictable, because it sets many years in advance. Frankly I don’t want to guess what the market price will be except that the market will be larger.

Q: You just said emission trading is a very effective way to reduce carbon emissions. What about a carbon tax? Do you think we should use both to reduce carbon emissions?

A: The big disadvantage of trading is that you have to give people initial permits. The way it is normally done is that giving away. So compared to this, the tax would be better. However, you can do it different. You can have superior system you can auction your permit. My opinion of auction system of permit is superior to tax system. It is equivalent that people pay for the right of pollution but they pay what is necessary to reach a certain scientific goal in terms of pollution. If you have a government body setting a tax level, it’s very very difficult to see appropriate tax level, and if you put it too high, there will be unnecessary cost for economy. If you put it too low people will pollute too much and frankly that is a big risk for our world. So markets are much better that setting deadlines.

Q: So you’re not really agreeing with the tax.

A: I believe auctioning is a much better system. I think in the international context you will see taxes unless more countries take different measures to reduce carbon emissions.

Q: What do you think would be the things Korea should consider to establish a carbon exchange?

A: I am not in the place to advise the Korean government. I think there need be a lot of foresight in every expressed policy. A carbon tax, some level of carbon tax, lets say an optimal level of tax is $10, but you really don’t know.

Q: It seems to be easier for big companies to reduce carbon emissions on its own by developing the necessary facilities, but not for small companies who lack technological and financial capability to do so. In this sense, what do you think is the feasible technical solution for small companies?

A: It is a very interesting question and indeed this is a global problem. Large companies’ normally have diversity of technologies, even if they can’t do in one; they can do it in another part of the company. Small companies are not necessarily diversified. So I think they have to deliver government policies for small and medium enterprises with two components. One would be advisory; it helps the company and identify what they can do and provide financing facilities to enable this company to invest. They may not have cash flow otherwise. The other component that government should think about is dedicated to work technologies. Technologies that you can use that one company can’t afford, but as government body can do feasible.

Q: As more carbon emissions related projects are launched, disputes over carbon emissions projects are also growing. Recently, there was the first arbitration case about carbon emissions trade in Korea. Are there many disputes over emission trading?

A: There are not many, but they happen. They are mostly related to the weakness of a verification system. They have some problems of double selling carbon emissions, which is only possible if you have a weak registry system. The other problem is the reality of emission deduction in offset projects. There are definitely some scandals in some countries.

Q: Do you have a plan or idea to reach the Korean market in emission trading like subsidiaries?

A: No, we don’t. But MCX group are looking at the Asian market and we are looking at building links. We are definitely open for discussions.

Q: In order to foster the carbon emission trading market, it is important to enhance liquidity on the part of investors who join the market. Do you have any specific measures for such liquidity management? In relation to the investment, do you think it is necessary to offer tax benefits such as VAT , capital gain taxes?

A: The No. 1 factor is some credibility and stability of government policy. People are very much afraid to do trades if there’s no certain policy. After that, exchanges do best if they have, so you should link utility companies, shipping companies, and also banks and brokers. So for the exchange, you have to set up diversified links to industries.

Q: Before closing the interview, I want to ask a personal question: Some people argue that carbon emissions are totally exaggerated and it’s not critical for humankind. What do you think about this opinion?

A: Keep in mind that CO2 is a term for many other pollutants like methane, which is produced by sheep production, it’s not just CO2, but there are many other pollutants out there. The level is higher than ever before. The science indicates the link between those high levels and global warming. We are now talking about disappearing glaciers, shrinking species.

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