Professional Documents
Culture Documents
Anuradha Sen*
Abstract
Protecting the global climate is an important issue in todays world. Heavy industrialization, on one hand, is considered as something absolutely essential to keep up the pace of economic development, and on the other, the aforesaid development is not at all a sustainable development as far as the environmental issues are concerned. It is true that the majority of the pollutants are contributed by the highly industrialized nations of the world, the lead position being enjoyed by the United States. However, situations are slowly changing, where some of the developing countries are performing pretty well in the development scale, thereby emitting a large amount of pollutants in the form of Green House Gasses (GHGs). Efforts are being taken up for mitigating the harmful impact upon the environment at the national as well as at the international level. The Kyoto Protocol was introduced in 1997 as a means of assisting the countries in protecting the global climate. Clean Development Mechanism was one of the principles discussed in the Kyoto Protocol. The paper that follows tries to throw some light on the status of the CDM that presently exists in todays developing and developed countries. The scope of CDM and its flaws are also brought in the discussion. The inequality in project allocation among the developing countries is stressed. The present situation of the CDM in China and India are discussed, as they are the two most popular destinations for the CDM projects. Within the limited scope of the paper, attempts have also been made at analyzing the future scopes of the CDM in todays world.
Section-I INTRODUCTION
The issue of climate change is the most important issue of concern today throughout the globe. Such a change is sure to affect each and every aspect of the rich natural resources in this world. The presence of all living species upon the earth is also being endangered by this. In short, it is destined to destroy the perfect balance and harmony that exists under the sun. This provides the basic ground behind the efforts taken by the world today to minimize the effects of the global climatic changes. However there is no reason to believe that such erratic changes are caused by some external factors or some unearthly effects, that is beyond our control. On the contrary this is an indirect effect of the acts of this highly civilized society. That is to say, the Green House Gas (GHG) 1 emitted by various activities is the major factor affecting the global climate changes. Although the environment surrounding this planet has already been affected to a large extent and the damage seems to be irreparable, it is better that one should be late than never. Climate consciousness has penetrated a long way in the present world, which led to the formation of the United Nations Framework Convention on Climate Change (UNFCCC) in the year 1992. The objective of the organization is to unite the world community to fight for a common cause and its strict implementation by all countries in the world. To nurture its objectives strictly, the Kyoto Protocol of 1997 was formed, whose aim was to define some concrete steps towards reducing the GHG that contribute to global warming and hence to climate change. One of the key issues defined by the Kyoto Protocol is the Clean Development Mechanism, the other two being Emissions Trading and Joint Implementation.
The Kyoto Protocol lists six greenhouse gases (GHGs)- Carbon dioxide (CO2), Methane (CH4), Nitrous Oxide (N2O), Hydro fluorocarbons (HFCs), Per fluorocarbons (PFCs) and Sulphur hexafluoride (SF6).
The Kyoto Protocol has brought in the clean development mechanism (CDM) to enable Annex I Parties (listed in Annex B of the Kyoto Protocol) to invest in emission-reduction projects in the countries of non-Annex I Parties2 . These Annex I Parties in return of their investment will receive certified emission reductions (CERs) and can go on producing more of their own product. However the certificates are issued in such a manner that the total amount of emission allowed is lower than what initially was before implementation of the project. This process in turn succeeds in reducing the total global emissions and thus the process appears to be effective and efficient. Thus the two most important goals of the CDM are: (1) to assist non-Annex I Parties in achieving sustainable development and (2) to assist Annex I Parties in meeting their emission targets. The Annex-I parties are the highly industrialized and developed economies that demand higher ranks in terms of per capita income, but also contribute large additions to the global emissions of pollutants. Whereas the non-Annex-I parties mainly refer to the non-industrialized developing countries. In this context the study that follows has explored the importance and role of Clean Development Mechanism (CDM) in todays world.
Annex - I Countries : These refer to Developed countries and countries with economies in transition (EIT). The industrialized countries listed in this Annex have accepted emission targets for the period 2008 - 2012 as per Article 3 and Annex B of the Kyoto Protocol. They include the 24 original OECD members, the EU, and 14 countries with economies in transition.
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The countries are: Australia**, Austria, Belgium, Bulgaria*, Canada, Croatia*, Czech Republic*, Denmark, Estonia*, Finland, France, Germany, Greece, Hungary*, Iceland, Ireland, Italy, Japan, Latvia*, Liechenstein, Lithuania*, Luxembourg, Monaco, Netherlands, New Zealand, Norway, Poland*, Portugal, Romania*, Russian Federation*, Slovakia*, Slovenia*, Spain, Sweden, Switzerland, Ukraine*, United Kingdom, United States of America** *Countries that are undergoing the process of transition to a market economy **The US and Australia have declared their intention not to ratify the Kyoto Protocol, and therefore will not adopt Kyoto emission reduction targets Annex - II Countries : 24 original OECD members plus the EU. The countries listed in this Annex to the convention have a special obligation to help developing countries with financial and technological resources. Annex B: Countries with assigned emission reduction commitments. OECD: The organization for Economic Cooperation and Development.
These are simply market based instruments targeted at controlling and reducing environmental permits. Instead of forcing all firms and production units to reduce emission of pollutants, firms are allowed certain amount of pollution generation by virtue of these TPPs. Trading of these permits is also allowed among these firms. Practically the process works as follows. Initially, an acceptable level of pollution is arrived at after mutual discussion among the environmental policy analysts. Say, for example they decide that 100 tonnes of CO 2 will be emitted by all production units taken together. Permits for pollution are then issued equaling the same i.e. say, 10 permits, each allowing for 10 tonnes of CO 2 emission. The permits are then distributed either by the method of auctioning of permits or are freely distributed by the government. The firms are warned that pollution must not exceed the limit allowed by the permits with them.
However, if a firm (Firm 1) is successful in reducing its emissions at a cost much lower than the total cost at which it has to buy the permits, the firm ends up not buying the permits, or will not make use of these permits already bought. Again, another firm (Firm 2) will prefer buying these permits rather than investing in its own means of pollution abatement, if the former involves a lower cost than the latter. But in the presence of an efficient market system, these two firms can enter into a trading relation in terms of permit. Both the firms are expected to be in a position where they are better off after the trade of permits between them. As far as Firm 1 is concerned, trade in permits will take it to a favorable position as it is cheaper for it to sell the permits and invest the money in increasing efficiency. Here the price of permits is more than the costs of avoiding the pollution. But for Firm 2, costs of avoiding pollution exceeds the price of permits, hence it will gain by trading in permits. In short, if the marginal abatement cost is more than the price of permits, cost effective decision will be to buy the permits,
and in the reverse situation, it will be cost effective to sell the permits. Figure- 1 below illustrates the entire trading process.
Figure -1: PERMIT TRADING AMONG COMPANIES
Company A low cost energy savings makes savings buy few permits
Subsequent trading
Source: http://www.dcmnr.gov.ie/ The price of the permits is determined by the market forces of demand and supply. If cost involved in reduction of emissions is much larger than that of permits, then firms agree to pay higher prices for permits and accordingly, the market price is higher and vice versa. The supply of these permits is already prefixed by the government. This is revealed in Figure 2 below.
Demand with low cost savings Permit price with few low cost savings Permit price with numerous low cost savings Demand with more numerous low cost savings
Emissions reduction
Source: http://www.dcmnr.gov.ie/
An important achievement in the direction of global climate change was arrived at COP-6 (the session of the 6th Conference of the Parties to the UNFCC), held at Bonn, Germany during 16th July to 27th July 2001. To facilitate the adoption of the Kyoto Protocol, the conference arrived at a political agreement on the core elements of the Buenos Aires Plan of Action. It attempted at bringing several issues into the limelight, which were ignored till then. The decisions taken up by the conference were agreed upon by the ministers and senior government officials. On the basis of the Bonn Agreement, the environmental policy analysts worked out the policy plan to be followed in respect of international climate change. This later paved the way for the Marrakesh Agreement at COP-7(the 7th Conference of the members held at Marrakesh, Morocco, in the week 29th 9
October to 10th November, 2001. Although the United States and Australia withdrew itself from the conference, the conference made a significant positive forward step towards the international climate change policies. This also represented compromises made by the European Union and other developing countries upon specific elements of the Marrakesh Accords. It also paved the way towards ratification of the Kyoto Protocol.
Finally on October 13, 2003, the European council adopted a directive that supported the trading in the emissions certificates by 1st January 2005. By virtue of this directive CDM achieved a new dimension in the formation of environmental policies. However, the practical implementation of the theoretical perspective of CDM is to be monitored and practiced for deriving entire benefits from the process.
However the CDM gained momentum from the year 2005 after the countries were forced to implement the Kyoto Protocol. The developed countries can use these to fulfill their emissions reduction commitments within the first period of commitment i.e. 2008 to 2012. The developing countries accepted the CDM in spite of having several reservations only with the view that such a mechanism would surely enhance the process of sustainable development that have already been started in these regions.
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The method of CDM involves various steps such as Project Designing, National Approval, Validation/ Registration, Monitoring, Verification/ certification and ultimately issuance. Any project under CDM should be such designed so that it aims at reduction of GHG and maintain sustainable development in the host country as this is the criteria followed in case of the selection of such projects. The approval of the same by the Designated National Authority (DNA) in the host country is necessary after taking into account selective development criteria. In the next stage, the project is reviewed by a third party, usually some standard auditing enterprises, for validation of the project. Monitoring of the project is also an important phase of CDM, where emission calculations are made within the area of the CDM project and a monitoring report is submitted. Based on this report, verification is done by the DOE whether the project is successful in reducing the emissions of CO2 . If the same is confirmed then a written certification is issued included within which there exists a request to the Executive
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Board of the CDM to issue the Certified Emissions Reductions. Within a short span of 15 days, the issuance is finalized. Figure- 3 below shows the rate of participation in the CDM projects by the Annex I countries (i.e. the industrialized or, the developed countries).The maximum number of projects is presently in Netherlands (48 as on July, 2006) followed by United Kingdom jointly with Northern Ireland (32 as on 12.07.2006) and Japan {Refer Table -2 in Appendix 1}. Countries with smallest number of CDM projects are Brazil and Denmark. India has not yet started off with CDM projects. These countries like to select some host countries, where the rules and regulations regarding emissions are not so stringent and where the cost of setting up of CDM projects is also the minimum. From this point of view , there has emerged an upcoming inequality in the distribution of the CDM projects in the host countries by the industrialized economies. Figure: 3 - Registered projects by Annex-I parties
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In todays world, the industrialized countries have already started imposing their CDM projects upon the developing countries as a part of initializing the
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Protocol. The processes involved in initiating the CDM projects have already been discussed earlier. A close monitoring of the global trend of CDM projects reveal an inequality in its distribution in the developing countries. The maximum number of CDM projects is found to exist in India (62, as on July, 2006) followed by Brazil (57) as shown in the Table -2 in Appendix-1. The investors have discovered a paradise in these economies as because the rules and regulations are neither very strict nor proper monitoring mechanisms are found. The costs involved in setting up of the CDM projects here are comparatively low. As far as economies like those mentioned above are concerned, the CDM projects provide a source of earning and employment for their exploding population.
Figure -4 depicts the distribution of the CDM projects in the developing countries. The figure shows that majority of the CDM projects till 2006 are allocated to India (30 %), followed by Brazil (23.75%), Mexico (7.5%), Chile (5.42%), China (5.42%) etc. Figure: 4 Registered projects activities by host parties
The classification of the CDM projects according to different varieties has been discussed earlier. The figure that follows gives a description of the different types of CDM projects implemented in select developing countries. 14
Figure -5 below, reveals the variation in the CDM project portfolios in different host countries. This also highlights the relative importance of the various projects in each of these countries. Say, for example, India exhibits a majority of the F-gas reduction and electricity projects, whereas, Korea project portfolio is dominated by one project that of F-gas reduction. Chinas portfolio is dominated by single project, that of heating and efficiency, as shown in the figure below. The selection of a particular host country for a particular project depends not only on the existing emissions law existing in the country, but also on several other factors, such as the status quo of the country in the infrastructural facilities, cost of implementation, cheap availability of labor etc. Figure: 5 - CDM Barometer: Top 10 Countries
Figure-6 gives a description of the CDM projects registered by the countries from all over the world. The majority of the projects are registered from the Latin American and Caribbean Regions (51.25%), followed by Asia and Pacific Regions (45.00%). This indicates that the countries participating in CDM are also not equitable as far as all the countries in the world are concerned.
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The developing countries are the dumping grounds of the developed countries. Among several countries, again India and China offer attractive alternatives before the developed countries for launching their CDM projects. India ranks fifth while China is the second largest emitter of Carbon-dioxide in the world. Within the short span of the paper, attempt is being made to visualize the current situation in these two economies. India In a developing country like India, CDM project development has started only after the enforcement of the Kyoto Protocol. The present situation in the country with respect to CDM is somewhat like this till February 14, 2006, the number of projects registered with the CDM Executive Board is 93, and 62 are awaiting for registration. The Designated National Authority (DNA) responsible for the CDM projects in renewable energy, rural energy and energy efficiency is taken up by the Union Environment and Forests Ministry, which in turn is actively supported by the United Nations Development Programme (UNDP). The states, where
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CDM have already been started are Andhra Pradesh, Karnataka, Maharashtra, Punjab, Rajasthan and Tamil Nadu. Tamil Nadu Energy Development Agency (TEDA) is the state-level agency for developing the small-scale projects, which receives the UNDP grants. Since the process of CDM involves huge expertise and costs like registration charges, adaptation fees etc, which appears to be sufficiently high for small size projects generating low volumes of Certified emissions Reductions (CERs). In these special cases, CDM Executive Board had simplified the rules and regulations and the registration fee for the same is also low. Japan Carbon Finance Ltd (JCF) has signed an agreement (ERPA) with a major wind power generator manufacturer, the Enercon India Ltd (EIL), to reduce the GHG emitted from its Bundled Wind Power Project. JCF aims at purchasing GHG emission reductions equivalent to about 2 million tons of Carbon dioxide generated from the project by 2012. JCF has also signed a similar agreement with Indian farmers Fertilizer Co-operative Ltd (IFFCO), the largest fertilizer producer in the country. Apart from those mentioned above, some other current CDM projects in the country relate to:
Fuel switching technologies to be adopted by the Transport sector in India Evaluation of the CDM mechanism for Coal bed Methane Projects Techniques involving Energy Efficiency and Renewable energy Projects involve technology Transfer to developing countries Exploring rural energy efficiency programmes Mitigation of emission of GHG in India in industrial as well as transport sectors Promoting the scope and usage of Bio-fuels in the country Exploring the afforestation /reforestation programme in enhancing carbon mitigation
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China CDM initiatives in China dated back to the year 1992, when the country signed the UNFCC. Embedded within the basic principles of UNFCC are the ideas of removal of poverty and bringing about a sustainable development in the developing countries. Hence China, a growing developing country, has registered itself with UNFCC with a view to deriving the benefits as well as combating global climate changes. The country expected to derive benefits from the totally new approaches in energy efficiency and renewable energies. The Chinese Government passed the Regulations for CDM in June 2004, after which the country became the global destination for foreign direct investment.
Japan has already selected China and India for imposing its CDM projects. Recently, Japan Carbon Finance Ltd (JCF) has entered into agreement with the Emission Reduction Purchase Agreement (ERPA) with a major coal-mine development company in the country, to reduce the GHG emissions from its Coal Mine Methane Power Generation Project. By this agreement, JCF obtained the right of purchasing emissions certificates equivalent to about 2 million tons of carbon dioxide emitted by the project. Following this, Chinas first large scale CDM project involving the recovery and decomposition of the HFC gas, received the consent of the Chinese Government. Its objective was to acquire GHG credits equivalent to a total of 40 million tons of Carbon Dioxide over a period of 7 years.
The Asian Development Bank in co-operation with the Canadian International Development Agency (CIDA), technical arm of a German Development Agency (GTZ), the Netherlands, Italy, the World Bank and the United Nations Development Programme (UNDP) have engaged itself in several CDM projects in China, especially small-scale CDM projects. Till date around $750,000 has
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flown into China from the Canada Trust Fund in regard to small-scale projects, which have been used by the ADB and CIDA jointly.
Apart f rom those mentioned above, some other current CDM projects in the country relate to: Projects aiming at reducing GHG emitted by the coal mines of the country Projects promoting Sustainable Energy Planning in Provisional and Local regions of the country Designing Energy Efficient Building in Western China Carrying out of Market Transformation Programme in the country Till April 2006, 25 projects have been approved, 4 projects are in the pipeline, no objection has been issued for 8 and 100 projects are in the development stage.
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The CDM needs to be started on a large scale throughout the globe, in order to reduce the global pollution level, in spite of the repeated protests by the environmentalists. The global climate as it is today, needs careful attention for protection. Hence CDM can be looked upon as an effective mechanism to this end.
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References
1. http://www.dcmnr.gov.ie/ 2. http://cdm.unfccc.int 3. http://www.cdmindia.com 4. http://www.oecd.org/env 5. The Clean Development Mechanism: A Users Guide, Energy & Environment Group Bureau for Development Policy, United Nations Development Programme 6. Barbara Buchner and Marzio Galeotti, September 2003, Climate Policy and Economic Growth in Developing Countries 7. Cdric Philibert , March , 1999, How Could Emissions Trading Benefit Developing Countries. 8. Thomas C. Heller , P.R. Shukla, July 2003, Development And Climate: Engaging Developing Countries . 9. Clean Development Mechanism Project Opportunities in India, TERI Report 10. Wei Zhihong, Global Climate Change Institute, Tsinghua University Beijing, China , 2002, Clean Development Mechanism Project Opportunities in China,
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Appendix-1 Table 1 *
Table 2*
Country Number Of Projects 4 1
Country
Austria Brazil Canada Denmark Finland France Germany Italy Japan Netherlands Spain Sweden United Kingdom of Great Britain and Northern Ireland
Number Of Projects
3 1
2 1 1 57 13 11 3 2 3 2 1 3 9 72 2 1 1 5 18 3 2 2 3 1 2 5 3 2 3 2
7 1 6 6 2 4 21 48 7
Brazil Chile China Colombia Costa Rica Ecuador El Salvador Fiji Guatemala Honduras India
Indonesia Israel
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Table 3*
Region Africa Asia and the Pacific Other Latin America and the Caribbean Number of projects 5 108 4
Morocco Nepal Nicaragua Panama Papua New Guinea Peru Republic of Korea 123 Republic of Moldova South Africa Sri Lanka Viet Nam
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