Environmental Finance

India Mulls Clean Development Mechanism (CDM) Possibilities

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Courtesy of Environmental Finance

The Clean Development Mechanism could attract huge financial flows to developing economies. But many are sceptical – and some are looking to the US instead. Tom Whitehouse reports from India
In theory, the appeal and potential of the Clean Development Mechanism (CDM) in India are considerable. As one of the world’s fastest-growing and most energy-intensive economies, India’s need for clean energy and its record on renewables can be matched by few developing countries.

“We made a commitment to sustainable energy development a long time before the West,” said Shakuntala Gamlin, director at India’s Ministry of Non-Conventional Energy Sources.“India is choosing an environmentally benign development path and as CDM markets develop they should help us continue in this direction.”

One of the Kyoto Protocol’s ‘flexible mechanisms’, the CDM is intended to promote sustainable development in developing countries. Investors in greenhouse gas (GHG) reducing CDM projects earn ‘carbon credits’ that they can count towards emissions targets under the Protocol, which will take effect from 2008. 
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But too much hope may be riding on how big a role the CDM might play in shifting India to a “smart growth” trajectory, say analysts. Though it is the world’s fifth largest producer of wind energy and has an abundance of other renewable sources to tap such as the sun, biomass and hydropower, India’s economy is still highly dependent on cheap domestic and imported coal.Wind accounts for 1% of generating capacity, while hydropower accounts for 25% and coal for 59%.

The big question is whether the CDM can fulfil its sustainable development promise by helping India either reduce its dependence on coal or limit the carbon emissions from coalfired power. Few in India are predicting a bright future for the CDM.

Industrialists complain that it requires too much bureaucracy for too little financial gain. Environmentalists worry that the eligibility of energy efficiency projects and ‘clean’ coal technologies will actually entrench dirty technologies.

The current scepticism among industrialists and environmentalists contrasts starkly with the optimism expressed by Indian politicians before the US rejection of Kyoto in 2001, when the CDM was seen as a promising source of financing for renewables.

“Since the beginning of our civilization we have recognised Agni [fire] and Vayu [wind] as sources of energy,” said Prime Minister Atal Behari Vajpayee, in a landmark speech at the official opening of a 15 MW wind farm in Tamil Nadu in July 2001, developed by Vestas RRB, an Indo-Danish joint-venture. Urging state governments and the private sector to match the central government’s financial commitment to renewables, the prime minister gave the CDM his blessing.

The renewables target set by India’s government – 10% of new power capacity by 2012 – remains. Since the prime minister’s speech, however, doubts have grown about the contribution CDM can make towards reaching that target. Although India ratified the Kyoto Protocol in August, its rejection by the US has dampened demand for credits, reducing the price of carbon and weakening the CDM’s financial muscle.

“With Indian carbon [dioxide] currently priced at around $3 per tonne, we calculate that the CDM will add only 1–3% to internal rates of return, so it may not play a decisive role in leveraging renewable energy projects,” says Yuvaraj Dinesh Babu of the Tata Energy Research Institute, which is conducting baseline studies for a range of Indian CDM projects. “But this is not to be dismissed. 1–3% could make all the difference to some projects.”

“CDM is not the icing on the cake. It’s not even the cherry on the cake,” says one of Babu’s colleagues, Pratul Gupta. “I would describe it as flavour to the gravy.” Some industrialists take a starker view.

“The CDM is a failed business model,” said Vaidyanathan Raghuraman, senior energy and technology advisor to the Confederation of Indian Industry.“If carbon was $10 a tonne, fine. But at $3 per tonne,why should we bother with the paperwork? It makes no business sense. And anyway, what’s going to happen after 2012? If [carbon-absorbing] sinks [such as forestry projects] are going to qualify for CDM, they’ll be much cheaper for everyone.”

Though many criticise the US for failing to ratify the Kyoto Protocol and thereby diminishing India’s potential earnings from the sale of CDM credits to the west, its championing of alternatives to Kyoto nevertheless gets a sympathetic hearing from many industrialists and politicians in Delhi. Indian and US policies on climate change have two things in common: neither wants to commit themselves to caps on GHG emissions and both have domestic lobbies keen to secure continued business for their large coal industries.

At the October COP 8 meeting in Delhi, the US supported India in its resistance to European, Canadian and Japanese pressure to accept GHG targets.Though developing countries such as India have a role to play in fighting climate change, the US maintains that each nation should take measures according to its abilities.

With the CDM unlikely to provide significant resources for switching to cleaner energy, the reality for India is that coal will remain its dominant fuel. Under such circumstances, US overtures have an obvious appeal, particularly when it offers financial support for a coal-fired future.

To the anger of some Indian climate campaigners, the US Agency for International Development has funded a pilot integrated gasification combined cycle (IGCC) coal-fired power plant near Delhi.Though IGCC power plants hold the promise of coal-fired power with greatly reduced carbon dioxide emissions – the ultimate ‘clean coal’ technology – some see them as a PR trick.

“A perfumed pig is still a pig”, said Rakesh Bakshi, director of Vestas RRB, whose second Tamil Nadu wind farm is one of six Indian projects selling CDM credits to the Dutch government, under its Cerupt programme.“Why look for excuses to prolong our dependence on coal when we could leap-frog to renewables instead?”

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