CDM-Process, Progress and challenges Indian Perspective

CLEAN DEVELOPMENT MECHANISM (CDM): PROCESS, PROGRESS & CHALLENGES INDIAN PERSPECTIVE

Nirav ModhHimanshu Khatri

School of Petroleum Management, Gandhinagar

INTRODUCTION

The Clean Development Mechanism (CDM), allows emission-reduction projects in developing countries to earn certified emission reduction (CER) credits, each equivalent to one tonne of CO2. These CERs can be traded and sold, and used by industrialized countries to a meet a part of their emission reduction targets under the Kyoto Protocol.

The mechanism stimulates sustainable development and emission reductions, while giving industrialized countries some flexibility in how they meet their emission reduction limitation targets.

The CDM, provided for under Article 12 of the Kyoto Protocol, enables developing countries to participate in joint greenhouse gas (GHG) mitigation projects. Under this Protocol, Annex I countries (developed countries and economies in transition) are required to reduce GHG emissions to below their 1990 levels.

The CDM enables these countries to meet their reduction commitments in a flexible and cost effective manner. It allows public or private sector entities in Annex I countries to invest in GHG mitigation projects in developing countries. In return the investing parties receive credits or certified emission reductions (CERs) which they can use to meet their targets under the Kyoto Protocol.

While investors profit from CDM projects by obtaining reductions at costs lower than in their own countries, the gains to the developing country host parties are in the form of finance, technology, and sustainable development benefits.

India signed Kyoto protocol in December 1997 and ratified in august, 2002. In October, 2002, COP 8 hosted by India and in December, 2003 National CDM authority was established. In March, 2005 first project from India registered while in October 2005 first project received CER.

Out of the total CDM project for registration under Kyoto Protocol across globe more than 32% are from India. If India meets one fifth of carbon emission demand, it work out to be 200 million tons of carbon emission reduction. With this the Indians entities can earn more than 2 million euro.

There are lot of scope in adopting CDM projects in full pledge but at the same time Indian industries faces various challenges like lack in process driven development, low awareness level among industries, resistance in integrating CDM business with main business, lack of policies and last but not the least lack of investment.

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LITERATURE REVIEW

The basic rules for the functioning of the CDM were agreed on at the seventh Conference of Parties (COP-7) to the UNFCCC held in Marrakesh, Morocco in October-November 2001. Projects starting in the year 2000 are eligible to earn CERs if they lead to "real, measurable, and long-term" GHG reductions, which are additional to any that would occur in the absence of the CDM project. This includes afforestation and reforestation projects, which lead to the sequestration of carbon dioxide.

At COP-7, it was decided that the following types of projects would qualify for fast-track approval procedures:

Renewable energy projects with output capacity up to 15 MW.

Energy efficiency improvement projects which reduce energy consumption on the supply and/or demand side by up to 15 GWh annually.

Other project activities that both reduce emissions by sources and directly emit less than 15 kt CO2 equivalent annually.

The CDM will be supervised by an executive board, and a share of the proceeds from project activities will be used to assist developing countries in meeting the costs of adaptation to climate change.

India has the second largest population and forth largest emitter of CO2 after China, US and European Union. It is estimated

that the rate of growth of GHG in India is 4.6% compare to 2% world average.

1. Purpose The purpose of the clean development mechanism (CDM) is defined in Article 12 of the Kyoto Protocol to the United Nations Framework Convention on Climate Change. The CDM has a two-fold purpose: (a) to assist developing country Parties in achieving sustainable development, thereby contributing to the ultimate objective of the Convention, and (b) to assist developed country Parties in achieving compliance with part of their quantified emission limitation and reduction commitments under Article 3. Each CDM project activity should meet the above two-fold purpose. 2. Eligibility: The project proposal should establish the following in order to qualify for consideration as CDM project activity:

Additionalities

Emission Additionality: The project should lead to real, measurable and long term GHG mitigation. The additional GHG reductions are to be calculated with reference to a baseline.

Financial Additionality: The funding for CDM project activity should not lead to diversion of official development assistance. The project participants may demonstrate how this is being achieved.

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Technological Additionality: The CDM project activities should lead to transfer of environmentally safe and sound technologies and know how.

3. Sustainable Development Indicators: It is the prerogative of the host Party to confirm whether a clean development mechanism project activity assists it in achieving sustainable development. The CDM should also be oriented towards improving the quality of life of the very poor from the environmental standpoint. Following aspects should be considered while designing CDM project activity:

1. Social well being: The CDM project activity should lead to alleviation of poverty by generating additional employment, removal of social disparities and contribution to provision of basic amenities to people leading to improvement in quality of life of people.

2. Economic well being: The CDM project activity should bring in additional investment consistent with the needs of the people.

3. Environmental well being: This should include a discussion of impact of the project activity on resource sustainability and resource degradation, if any, due to proposed activity; bio-diversity friendliness; impact on human health; reduction of levels of pollution in general;

4. Technological well being: The CDM project activity should lead to transfer of

environmentally safe and sound technologies with a priority to the renewables sector or energy efficiency projects that are comparable to best practices in order to assist in upgradation of technological base.

4. Baselines: The project proposal must clearly and transparently describe methodology of determination of baseline. It should confirm to following:

Baselines should be precise, transparent, comparable and workable;

Should avoid overestimation;

The methodology for determination of baseline should be homogeneous and reliable;

Potential errors should be indicated;

System boundaries of baselines should be established;

Interval between updates of baselines should be clearly described;

Role of externalities should be brought out (social, economic and environmental);

Should include historic emission data-sets wherever available;

Lifetime of project cycle should be clearly mentioned;

The baseline should be on project by project basis except for those categories that qualify for simplified procedures. The project proposal should indicate the formulae used for calculating GHG offsets in the project and baseline scenario.

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Leakage, if any, should be described. For the purpose of Project Idea Notes (PIN), default values may be used with justification. Determination of base project which would have come up in absence of proposed project should be clearly described in the project proposal. 4. Financial Indicators: The project participants should bring out the following aspects:

Flow of additional investment

Cost effectiveness of energy saving

Internal Rate of Return (IRR) without accounting for CERs

IRR with CERs

Liquidity, N.P.V., cost/benefit analysis, cash flow etc establishing that the project has good probability of eventually being implemented

Agreements reached with the Stakeholders, if any, including power purchase agreements, Memorandum of Understanding etc.

Inclusion of indicative costs related to validation, approval, registration, monitoring and verification, certification, share of proceeds

Proposal should indicate funding available, financing agency and also describe as to how financial closure is sought to be achieved

5. Technological Feasibility:

The proposal should include following elements:

The proposed technology/process

Product/technology/material supply chain

Technical complexities, if any

Preliminary designs, schematics for all major equipment needed, design requirement, manufacturers name and details, capital cost estimate

Technological reliability

Organizational and management plan for implementation, including timetable, personnel requirements, staff training, project engineering, CPM/PERT-Chart etc.

6. Risk Analysis The project proposal should clearly state risks associated with a project including apportionment of risks and liabilities; insurance and guarantees, if any. 7. Credentials:

The credentials of the project participants must be clearly described.

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CDM Project cycle

1) Project Design

Project participant prepares project design document, making use of approved emissions baseline and monitoring methodology.

Project Design Steps

Project Design Document (CDM-PDD): The project design document form was developed by the Executive Board on the basis of Appendix B of the CDM modalities and procedures. Project participants shall submit information on their proposed CDM project using the CDM-PDD form.

Proposal of a new baseline and/or monitoring methodology: The proposed new baseline methodology shall be submitted by the designated operational entity to the Executive Board for review and approval, prior to validation and submission for registration of the project.

Use of an approved methodology: An approved methodology is a methodology previously approved by the Executive Board and made publicly available along with any relevant guidance. When an approved methodology is used, the designated operational entity may proceed with the validation of the CDM project activity and submit the CDM-PDD with a request for registration.

2) National Approval

Project participant secures letter of approval from Party.

The Designated National Authority (DNA) of a Party involved in a proposed CDM project activity shall submit a letter indicating the following:

That the country has ratified the Kyoto Protocol.

That participation is voluntary.

And, from host parties, a statement that the proposed CDM project activity contributes to sustainable development

3) Validation

Project design document is validated by accredited designated operational entity, private third-party certifier.

Validation is the process of independent evaluation of a project activity by a designated operational entity against the requirements of the CDM as set out in CDM modalities and procedures and relevant decisions of the Kyoto Protocol Parties and the CDM Executive Board, on the basis of the project design document.

4) Registration

Valid project submitted by DOE to CDM Executive Board with request for registration.

Registration is the formal acceptance by the Executive Board of a validated project

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as a CDM project activity. Registration is the prerequisite for the verification, certification and issuance ofCERs related to that project activity.

Registration Steps

Completeness check by secretariat

Vetting by secretariat Vetting by Executive Board If a Party or three members of Executive

Board request review, project undergoes review, otherwise proceeds to registration

5) Monitoring

Project participant responsible for monitoring actual emissions according to approved methodology.

6) Verification

Designated operational entity verifies that emission reductions took place, in the amount claimed, according to approved monitoring plan.

Verification is the independent review and ex post determination by the designated operational entity of the monitored reductions in anthropogenic emissions by sources of greenhouse gases that have occurred as a result of a registered CDM project activity during the verification period.

Certification is the written assurance by the designated operational entity that, during the specified period, the project activity achieved the emission reductions as verified.

7) CER Issue

Designated operational entity submits verification report with request for issuance to CDM Executive Board.

CER Issuing Steps

Completeness check by secretariat Vetting by secretariat Vetting by Executive Board If a Party or three members of Executive

Board request review, issuance request undergoes review, otherwise proceeds to issuance

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Challenges in Indian environment

Issue -1 PDD Development

1) Need for better quality, transparent & comprehensive documentation of the projects for CDM approval

2) Removal of deficiencies in the existing PDD development scenario to reduce the risk of approval processes at DOE/ EB level

3) Encourage in house capacity building of larger corporates, PSUs, institutions, chamber of commerce, industry associations

Issue 2 – Low Awareness Level

1) PSU (GAIL, SAIL, IOCL, etc) are yet to take off with CDM business plan, lack of knowledge of CDM Opportunities

2) SME and bundling potential yet to be tapped

3) Bridging the gap at management and working level

Issue 3– Challenges to integrate CDM with main business

1) Requirement of in-house capacity building programmes with international assistance

2) Training & development of specialized human resource for CDM for reaching out to all Indian industry sectors

3) Integrating CDM into mandatory energy audits under the Energy Conservation Act of GoI

Issue 4 – Policy Issue

1) Government's role critical as a facilitator with different bilateral /multilateral organizations in organizing Carbon trade fairs or expos

2) To bring transparency in buyer/seller market

3) To create a equal platform for small, medium and large seller

Issue 5 – Imbalance in CERs Demand & Supply

1) To prevent opportunistic buying of cheap CERs from India

2) More dedicated Annex I capacity building funds need to be allocated for creating awareness & disseminate information about CDM opportunities among industry sectors

3) Carbon asset financing is not attractive any more as cheap bait for sourcing projects, since the number of informed Indian CDM developers increases fast

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CONCLUSION

The concentration of CDM projects in the more industrialised states is understandable, given that the industrial sector is particularly amenable to mitigation. However, the lacklustre performance of the CDM in the less industrialised states also means that the Indian government is not fully capitalising on the CDM's potential to contribute to sustainable development. In contrast to China, where the central and provincial governments offer institutional support to CDM project developers, India's liberal approach to the CDM prevents the less industrialised states from benefiting from the investment opportunities that the CDM creates.

To improve the CDM's contribution to sustainable development in India, the Government of India should consider investing in capacity building in those less developed states that are implementing few CDM projects relative to their population, such as Bihar and Uttar Pradesh. For example, the government could establish information centres that help investors identify profitable opportunities for project implementation and advise them with legal and regulatory affairs. The capacity building initiative could be hosted by the Ministry of Environment and Forests, for example. India's vast economy offers many opportunities for cost-effective carbon abatement, but identifying and exploiting these opportunities is often difficult under the current mechanism. This is a result of a lack of information and the high costs of implementing any projects, and this

combination is particularly severe in those less developed states that have little experience with such projects. By facilitating investments in the Clean Development Mechanism in the areas that need them the most, the Indian government could reap the double benefit of climate mitigation and economic development.

REFERENCES

http://cdm.unfccc.int

http://moef.nic.in

http://www.oecd.org/env/cc/36349462.pdf

http://www.ideasforindia.in/article.aspx?article_id=58

http://envfor.nic.in/division/clean-development-mechanism-interim-approval-criteria

http://www.cdmindia.gov.in/

http://www.academia.edu/242302/Implementing_CDM_in_India_Some_CaseStudies

Carbon and Clean Energy Markets – the Potential in India; by Ms. Bharti GuptaRamola and Mr. Prashant Vikram Singh

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http://www.oecd.org/env/cc/36349462.pdf

http://cdm.unfccc.int/about/index.html

CDM-Process, Progress and challenges Indian Perspective

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