The dynamics of commodity risk mitigation assumes new dimensions in the face of growing concerns of climate change.

Climate change is predicted to have serious implications on the economy and livelihood of millions of people across continents and countries.

The agriculture sector, and consequently food security, will be seriously affected by climate change. Floods and droughts will affect food production both in terms of quantities and in terms of relative composition of the food basket. Major negative impact is expected in the production of rice, wheat, maize and soya, all major consumption items globally.

This will push up their prices, change relative prices drastically and probably induce greater volatility. This necessitates tools for cushioning such impact, apart from the real sector issue of sufficiency of food production itself.

Certain derivative products are trying to delineate the risk and uncertainty components of climate change and promote contracts for risk mitigation. Like the futures and options contracts in carbon and sulfur traded in the Chicago Climate Exchange and its sister the European Climate Exchange.

However, to take care of the new concerns on commodities, the entire spectrum of their derivatives will have to assume new shape, as climate change will have major implications on the global and inter-regional commodity mix in future.

New contract designs in commodity futures and options incorporating the parameters on climate change are the first step.

Then, there will be a combination of environmental products linked to the underlying affected commodities as well as to weather and pollution levels.

The carbon products and weather indices etc that are being currently traded in the derivatives exchanges will assume new meanings as the contours of their benchmarking gets shifted to major changes in agricultural production and food and energy consumption pattern form just being 'dummies' as of now.

Convergence of these products to the real sector and integrating environmental and financial markets will make such exotic contracts the largest segment of derivative markets in future.

The newly set up national level commodity exchanges in India woke up to the possibilities of introducing some new derivatives products at an early stage itself though it was not prompted by concerns on climate change. Both the National Commodities and Derivatives Exchange and the Multi-Commodity Exchange floated the idea of weather derivatives and pollution based products.

But such initiatives had to cope up with the statutory position- no futures in 'non-goods' as " goods means every kind of movable property, other than actionable claims, money and securities"- as per the provisions of the enabling Act, the Forward Contract (Regulation) Act, 1952, in its current dispensation.

However, a proposed amendment in the FCRA Amendment Bill will make a huge difference to this position.

Once the amendment is passed by the Parliament, a "commodity derivative" will mean either "a contract for delivery of goods, which is not a ready delivery contract; or a contract for differences which derives its value from prices or indices of prices of underlying goods or activities, services, rights, interests and events, as may be notified in consultation with the (Forward Markets) Commission by the Central Government, but does not include securities."

That would make possible the launch of all kinds of exotic products, deliverables and non-deliverables; with cash settlement in the latter. So derivative products based on commodities, weather and pollution etc incorporating 'expectations' on climate change could become available in Indian exchanges as market based risk mitigation tools.

One should hasten to add that addressing climate change impact through the derivatives market is but a small step-the issues are too serious and need multi-pronged global and country-specific approaches.

C K G Nair is a Civil Servant associated with institutional restructuring for the development of commodity futures markets. Views expressed here are strictly personal.