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New York. Vibhav Nuwal was once an enthusiastic supporter of the global carbon market.

The 32-year-old Indian-born banker started in September 2009 developing carbon credits to target investors in Europe and Japan for Mumbai-based private-equity fund Managing Emissions. Less than a year later, he quit his job, convinced that the United Nations’ failure to broker a global agreement to reduce greenhouse-gas emissions meant the carbon credit market was effectively dead.

Now, Nuwal has set up a business helping companies that earn incentives from renewable-energy projects under a new Indian government program. Nuwal says that in the absence of a global consensus, investors are more likely to channel funds into incentive programs in local markets such as India, where they can make three times as much as they do selling credits under the global, UN-sponsored plan.

“There is a base being built for a really strong local economy around this,” says Nuwal, a former JPMorgan Chase investment banker. “Carbon is getting more and more difficult. A significant amount of the business that is done in the carbon space should shift.”

Nuwal’s decision is one more sign that the consensus eventually reached 14 years ago by 193 nations and the European Union in Kyoto, Japan, may have cracked beyond repair. The plan, which introduced greenhouse-gas restrictions to support the development of a global carbon market, is breaking down as the United States and China grapple over how, when and to what extent they can reduce pollution.

Today, the price of carbon languishes at less than half the level Deutsche Bank says is needed to meet the UN’s aims for controlling global warming. Officials and investors say local initiatives like Nuwal’s may offer the best chance of both slowing emissions and making money from the process.

“People are moving on to Plan B,” says John O. Niles, director of Tropical Forest Group. “That means taking what we can get wherever we can get it.”

The latest casualties of the death of the Kyoto plan may be the companies and executives who bet their careers and their capital that credits to release carbon into the environment would become a globally traded commodity to rival the $21 trillion market in crude oil. So far, the carbon market is a comparative blip on the landscape. Banks and brokers traded $128 billion of carbon credits last year.

“Ten years ago, you would have said by 2010 carbon will be a global commodity just like all the other commodities, fungible across different regimes,” says Jon Anda, vice chairman of UBS’s securities unit in Connecticut, who runs the firm’s environmental business. “We didn’t get any of that.”

India’s renewable-energy-trading program offers investors a way to engage with the problem while multiplying the returns they would make on carbon. Under the plan, power distributors have to source up to 14 percent of their energy from renewable sources or buy Renewable Energy Certificates, known as RECs, from wind farm and solar park operators to cover the shortfall. If they don’t, state energy regulators will purchase the certificates and bill the companies.

The Indian government has imposed a minimum price of 1.5 rupees ($0.03) per kilowatt-hour for the RECs to guarantee a certain return for investors. That’s almost three times what developers earn from UN credits, Nuwal says. He expects companies to be able to register, earn and sell RECs in about five months compared with delays of as much as three years in the UN program.

Nuwal planned to set up a business to steer companies and investors through the process. His company, REConnect Energy Solutions, is already helping clients produce credits for the market that began trading in March. Nuwal and his partner project that revenue at the company will rise to $3 million by 2013, up from a projected $750,000 this year.

It’s local policy makers in India rather than UN diplomats who are providing the outlet for Nuwal’s entrepreneurial spirit.

“The carbon market has metastasized into a huge range of climate finance initiatives around the world,” says Marc Stuart, co-founder of EcoSecurities, the carbon credit developer bought by JPMorgan Chase in 2009. “These things don’t lead to tradable securities.”
Bloomberg