Is The Euphoria Over CDM Unwarranted?

Notwithstanding the controversies related to the uncertainty in predicting climate change, let alone the ratification of the Kyoto Protocol to the UN Framework Convention on Climate Change (UNFCCC), the new and emerging issue insofar as the developing country context is concerned is the access to additional funds and technology through the Clean Development Mechanism (CDM). Will CDM actually live up to the expectations of developing countries? The CDM, as described in the Kyoto Protocol, is ostensibly to help developing countries in ?achieving sustainable development and in contributing to the ultimate objective of the Convention? as also developed countries to meet their emissions reduction targets. This will be effected through projects sponsored by developed countries in developing countries and resulting in certified emission reductions to be used by the former in complying with their commitments. As things stand now, the Kyoto Protocol will enter into force if it is ratified by 55 countries including Annex I (synonymous with developed country Parties) countries accounting for 55% of the reduction commitment of the developed countries. The status at the moment is that 101 countries (including only 30 from developed world) have ratified the Protocol but these account for only 43.9% of the emission reduction commitments of developed countries. This has significant implications for the size of the market for the CDM. According to the Kyoto Protocol, the total emission reductions that need to be undertaken by the first commitment period i.e. 2008-12, is about 620 Mt C. With the withdrawal of the US, the emission reduction requirement has reduced the international requirement to only 196 Mt C. Further, with recent vociferous bargaining by developed countries which enables them to use forest management to sequester carbon to meet their carbon commitments, it further reduces the requirement to 125 MtC. Another detractor from the pie is the provision in the Protocol for emissions trading (Article 17) of the protocol. This allows countries such as Russia and the CIS states who, due to unforeseen circumstances such as economic slowdown, have fortuitously managed to reduce their emissions to be able to sell their excess quota to buyers in the market. These countries were given targets that are likely to be above what their emissions will be even if no conscious measures are taken to reduce emissions. It is estimated that supplies from these countries could be be of the order of 92 MtC, which aggravates the situation further, leaving a paltry 33 MtC. The market size at the moment is thus about 33 MtC, and these reductions could be met by three alternative pathways ? domestic action in developed countries or by jointly implementing projects in other developed countries or through the CDM, the much-touted mechanism for sustainable development in developing countries. Even if one were to discount recourse to ?hot air? of 92 MtC, and assume optimistically that all of 125 MtC would be met through the CDM, it would amount to a flow of funds of only $2 billion at the current expected price of Certified Emission Reduction (CER) to be $18/t-C (or $ 5/t of CO2). On the other hand, inflows through the FDI to developing countries is as high as $200 billion. So why the euphoria for CDM? And it is strange that many have jumped into the fray, for developing CDM projects. At the moment the Prototype Carbon Fund of the World Bank, and some European governments are taking the lead, and some consultancies such as Price Waterhouse Coopers are gearing up to play a role as operational entities for validating and verifying CDM projects. How much business would it generate for them? Or are these plans contingent on imponderables such as the return of the US to the fold, or development of a parallel market? Decisions of this kind are remarkable, as the rules of the game are yet to be evolved, and CDM may turn out to be relatively unattractive in that part of the proceeds from sales of CERs would be taken away to meet the administrative expenses of the CDM Executive Board, compounded by 2% of the proceeds going toward a vulnerability and adaptation fund. Also, there is a likelihood of a fees to register a project with the CDM Executive Board. Also, validation of projects and verification of CERs by independent entities imply a drain on the project economics, implying that CDM may not be the preferred avenue for meeting commitments. What are the implications of the above for India? With China as the preferred destination, and much of the experimentation on the subject being undertaken with bilateral money or multilateral funds, would a true market develop, internationally? Ostensibly, the small scale CDM projects (including renewables of about 15 MW size), for which the international rules and procedures are likely to be simplified, are the way out, and India may like to pursue this option vigorously on two accounts-one to corner as much market as it can and also to garner experience for developing projects in the event and hope that a large market does materialise. To this extent the Ministry of Environment & Forests has come up with some interim criteria for approving projects under CDM and in fact of the 18 projects forwarded by the MoEF for the Certified Emission Reduction Procurement Tender of the Dutch Government, six small scale projects have been shortlisted for further screening. But would this be enough to attract investors to the country? Or does the answer lie in project proponents in India developing unilateral projects, with ample expression of interest and support from the Government of India, to enable initial creation of a portfolio of projects? This would imply that the government would have to play a more proactive role in facilitating a supply menu rather than wait for the demand to grow. Are we geared for that? The international rules for CDM are evolving gradually. At the eighth session of the Conference of the Parties (CoP-8), the rules of procedure for the Executive Board of the CDM, and the methodology panel appointed by the CDM Executive Board were adopted. The international process may be moving slowly but surely in formalising the framework within which CDM could function, but the process in India is yet to gather momentum. For India to benefit from the CDM process, it is imperative that appropriate institutional mechanisms and modalities are established, and clear signals are provided to project proponents on national priorities.