India's carbon offsets firm getting 'future-ready'

The market price of carbon offsets value is now in question and as doubt grows, EKI’s shares have fallen 48% from their peak. – Bloomberg

MUMBAI: EKI Energy Services, a prosaic-sounding firm in a niche corner of the energy market, was looking to raise just a couple of million dollars in its initial public offering (IPO) on the Bombay Stock Exchange last year.

But soon after the IPO, the company’s shares shot up 10,000%, taking the valuation of EKI from about US$10mil (RM45.13mil) to US$1bil (RM4.51bil).

By December, it was the year’s best-performing stock in India’s broadest index, making its founder a millionaire hundreds of times over.

That kind of moonshot market performance is rare but not entirely unheard of in India, particularly among small, thinly traded companies.

For EKI, there was something else at work. It’s the first listed carbon offsets company, and the market price of those offsets, which comprise most of the firm’s assets, was soaring.

Their value is now in question and as doubt grows, EKI’s shares have fallen 48% from their peak. The worth of a carbon offset hinges on its usefulness in cutting worldwide emissions and not all are equally helpful.

On the lightly regulated voluntary carbon market, the majority, including most of those developed by EKI, may not help the fight against global warming at all.

These are offsets tied to renewable energy schemes, wind and solar farms mostly, developed by well-resourced entities like the Adani Group in India, according to data compiled by the Berkeley Carbon Trading Project.

Renewable energy used to be a risky investment. Carbon offsets gave developers an extra revenue stream, designed to make the difference between an unattractive project and a profitable one.

In theory, the carbon payments were necessary to get more renewable energy into the mix, providing an additional environmental benefit.

But now renewable energy is in high demand. In most countries, projects can be profitable on their own and the world’s largest certification bodies, Verra and Gold Standard, only accept them from least-developed countries.

The credits aren’t critical to financial viability, they’re just icing on the cake. Most fail to meet the standard of “additionality,” according to a 2016 study for the European Commission, which means companies shouldn’t be able to use them to cancel out their own pollution. Absent that, there’s no other reason to buy them.

“We are very bearish on renewable energy carbon credits,” said Kyle Harrison, a carbon markets analyst at BNEF, pointing out that they no longer get a seal of approval from the top independent verification bodies.

“They are still in high demand today, but in the coming years and the long term there’s a big risk to buying or selling them.”

This has posed an existential challenge to EKI’s business model, as well as the voluntary carbon markets and the companies that have been using these kinds of credits to make their net-zero claims.

Though EKI founder Manish Dabkara disagrees with most of the criticism, he conceded that his company must adjust.

It sees its salvation in a different kind of credit, tied to natural carbon sinks like mangrove forests.

In 2021, EKI entered into a joint venture with Shell Plc to develop those kinds of “nature-based” projects in India, a tie-up worth US$1.6bil (RM7.2bil), according to local media reports.

“We are trying to get ourselves future-ready,” Dabkara said. “So that we’ll not go out of our leadership role.”

Dabkara’s background is in engineering and energy management. He founded EKI in 2008, offering energy audits and, eventually, consulting services.

At the time, the market for carbon offsets was much smaller. Dabkara didn’t think it would stay that way, and EKI started building its inventory. When demand spiked, the firm found it was sitting on a gold mine.

Today, EKI buys and sells credits and helps developers get their projects certified. After the IPO, the company opened an office in Turkiye, boosted staff to more than 250 people, and added the World Bank and the Adani Group to a client list with over 3,000 names.

EKI has captured almost all the business in India, Dabkara said. India generates more credits than the US and China, its closest competitors.

EKI is debt-light and has continued to expand into countries like Ghana, where renewables credits are less controversial.

Dabkara is confident that’s plenty of time. For many organisations, buying credits on the voluntary market is the easiest, cheapest way to meet their climate goals.

And as long as EKI can find an organisation to certify its projects, it can sell them.

In his opinion, he said, “it’s a win-win situation for everyone.” — Bloomberg