Carbon Rough)

EXECUTIVE SUMMARY In 1997, Kyoto Protocol, a voluntary treaty was signed by 141 countries to reduce the emissions of Global House Gases by 5.2% below 1990 levels by 2012. Certified Emissions Reductions (CER) or Carbon credits are certificates issued certifying reduction in emissions. The developing countries have been exempted from any such restrictions. These certificates can be traded in the market and purchased by firms which find purchasing emission credits to offset its emissions lower in cost. Thus an opportunity has emerged for firms in developing countries like India, Brazil and China to boost their earnings by complying with norms. However not all projects are eligible for registration under the Clean Development Mechanism under the Kyoto Protocol. As a result a large number of advisory firms have spawned. In addition an entire market has been developed around the same. The key participants apart from the project developers are, including not limited to, verification, certification and financing institutions. In India this opportunity has manifold implications affecting not only industry but also government, financial institutions and civil society at large. Most importantly this has opened up a new source of cash flow in project financing making unviable projects viable by exceeding the hurdle rate for investment returns. Industry will need to adapt to the changing opportunity that it brings along i.e. higher return on investments along with risks that are inherent in carbon credit project financing. In my opinion, it will be pragmatic on part of firms to consider this mode of cash flows in project financing. Further this provides a strategic role for the countries to benefit from the cash flows that can be invested in cleaner technologies for sustainable development.

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ABSTRACT We are in debt to Carbon Dioxide (CO2) and other green house gases for our presence on earth. As they help in stabilizing temperatures to levels sustainable for organic life – by what is known as green house effect. In modern times burning of fossil fuels like coal, oil, and natural gas combined with fast deforestation has led to unprecedented level of green house gas emission. Here came in to existence the concept of Carbon Emission Trading developed during the Kyoto Protocol in 1997. The Kyoto Protocol sets limits on total emissions by world’s developed economies. The protocol allows countries that have emission units to spare, to sell this excess capacity to countries that are over their targets. This research paper discusses what is Carbon Credit, its requirement, and its status in India and how India is gaining through Carbon Credit. Currently India holds second position behind China in the global CDM market.

INTRODUCTION Climate change and global warming is happening all around us. Soon it will start to shape every aspect of our lives in ways that we might not comprehend: from how we travel and what products we buy, to where we live and how we work. Hence, there is a concern that the use of non-renewable fuels and other human activities are increasing greenhouse gases in the atmosphere, contributing to global warming. To avoid this a new currency is emerging in world markets. Unlike the dollars, Euros and Yen that trade for tangible goods and human services, this new money exchanges for pollution--particularly emissions of carbon dioxide, which are caused by burning fossil fuels and are the leading cause of global climate change. Carbon credits, as they are called, are poised to transform the world energy system and thus the world economy. Carbon credits as currency allow companies and individuals to compensate for their carbon emissions by either reducing carbon dioxide output directly or offsetting their own output. Carbon Credits originate from The United Nation’s Clean Development Mechanism (under the Kyoto Protocol) that allows a finite -2-

number of carbon credits to be bought and sold. It is vitally important for people to limit their personal impact on the environment and buy carbon credits to offset what they can't reduce. The primary goal is to reduce emission of green house gases. By permitting allowances to be bought and sold, an operator can seek out the most cost-effective way of reducing its emissions, either by investing in cleaner machinery and practices or by purchasing emissions from another operator who already has excess capacity. Carbon trading under the Clean Development Mechanism (CDM) is big business on the open market. Projects such as developing renewable energy, improving polluting industries, and planting carbon sinks are being funded by carbon credits. Companies and individuals are becoming carbon neutral by reducing their emissions and offsetting. Many types of activities can generate carbon offsets. Renewable energy such as the wind farms, installations of solar panels, small hydro turbines, geothermal energy, and biomass energy can all create carbon offsets by displacing fossil fuels. Developed countries have to spend nearly $300-500 for every ton reduction in CO2, against $10-$25 by developing countries. India’s GHG emission is below the target and so, it is entitled to sell surplus credits to developed countries. India is considered to claim about 31% of the total world carbon trade, which can give $25billion by 2010.This is what makes trading in carbon credits such a great business opportunity. India has emerged as the dark horse in this race as more than 200 Indian entities have applied for registering their CDM Project for availing carbon credits. Indian companies can have higher incomes more from carbon credits than their core business. The carbon credit market $25 billion last year and is growing at tremendous space, and there is a demand to reduce 1 billion ton of carbon emissions in the world, so that threats like global warming could be dealt with. Wal-Mart, Dell, GE are all going GREEN & reducing GHG & also purchasing carbon credits. These companies are bolstering their brand name and consumer confidence in their products. -3-

“If these companies can see the benefits, you should be thinking going GREEN as well”.

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CONCEPT OF CARBON CREDITS Carbon credits have emerged as an important instrument in the financial markets. The primary goal is to reduce emission of green house gases. By permitting allowances to be bought and sold, an operator can seek out the most cost-effective way of reducing its emissions, either by investing in cleaner machinery and practices or by purchasing emissions from another operator who already has excess capacity. Carbon credits are a key component of national and international emissions trading schemes that have been implemented to mitigate global warming. They provide a way to reduce greenhouse effect emissions on an industrial scale by capping total annual emissions and letting the market assign a monetary value to any shortfall through trading. Credits can be exchanged between businesses or bought and sold in international markets at the prevailing market price. Credits can be used to finance carbon reduction schemes between trading partners and around the world. There are also many companies that sell carbon credits to commercial and individual customers who are interested in lowering their carbon footprint on a voluntary basis. These carbon offsetters purchase the credits from an investment fund or a carbon development company that has aggregated the credits from individual projects. The quality of the credits is based in part on the validation process and sophistication of the fund or development company that acted as the sponsor to the carbon project. This is reflected in their price; voluntary units typically have less value than the units sold through the rigorously-validated Clean Development Mechanism.

CARBON CREDIT - Meaning Carbon credit as defined by Kyoto Protocol, is one metric ton of carbon emitted by burning of fossil fuel. To bring the buyers and sellers of carbon trading on one platform and to augment the process of carbon trading, carbon credits are traded at CO2E exchange in Britain, CDM (Clean Development Mechanism) exchange in Europe. -5-

TABLE 1 : Example of Carbon Credit

So both the companies pollution account will be matched and the environment is able to digest a certain scientifically fixed amount of pollutants. This transfer from “A” to “B” will be for some monetary consideration and hence it is referred as carbon trading.

NEED FOR CARBON CREDITS Global warming is an observed increase in the average temperature of the earth’s atmosphere and oceans. Part of this increase may be due to natural processes, and would have occurred independently of human activity. The remainder is due to a human induced intensification of the greenhouse effect. The various after effects of global warming are given below:

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FOOD SHORTAGE AND DISEASES

RISING SEA LEVEL (Sea level will rise by 45 cmby

(290 million people could be exposed to malaria by 2080)

2009)

GLOBAL WARMING SEVERE WATER SHORTAGE

LOSS OF TROPICAL FOREST

(Northern Africa, the Middle East and the subcontinent will be worst affected)

(By 2070, large parts of Brazil and Central Southern Africa could lose tropical forest)

FIG 1 : Need for Carbon Credit

BIRTH OF CARBON CREDITS - KYOTO PROTOCOL The issue of climate change and global warming became the topic of International concern in the 1980s and since then has been subject to debate and several agreements on scientific issues, voluntary actions, legally binding greenhouse gas emission targets, rules for implementation and mechanisms. At the 1997 Climate Change Convention in Kyoto, the primary topic of discussion was the reduction of greenhouse gases (GHG), which are believed to be the principal cause of global warming. Kyoto Protocol is a voluntary treaty signed by 141 countries, including the European Union, Japan and Canada for reducing GHG emission by 5.2% below 1990 levels by 2012.The preliminary phase of the Kyoto Protocol ends in 2007 while the second phase starts from 2008. The penalty for non-compliance in the first phase is Euro 40 per ton of carbon dioxide (CO2) equivalent. In the second phase, the penalty is hiked to Euro 100 per ton of CO2. Carbon credits are certificates issued to countries that reduce their emission of GHG (greenhouse gases) which causes global warming. Carbon credits or Certified Emissions Reductions (CER) are a "certificate" just like a stock. A CER is given by -7-

the CDM Executive Board to projects in developing countries to certify they have reduced green house gas emissions by one ton of carbon dioxide per year. For example, if a project generates energy using wind power instead of burning coal, it can save 50 tons of carbon dioxide per year. There it can claim 50 CERs (one CER is equivalent to one ton of carbon dioxide reduced).

IMPLEMENTATION ROADMAP In 1990, UNO (United Nations Organization) feeling an immediate need to decrease the emission of greenhouse gases into the atmosphere released the Kyoto Protocol. As a result under the UNFCC (United Nations Framework Convention on Climatic Change) industrialized nations entered into a legally binding agreement to reduce the collective emissions of greenhouse gases (GHG) by 5.2% compared to the 1990 level; calculated at an average over the five year period of 2008-12. Separate national targets have been given to US (7%), European Union (8%), Japan (6%) and Russia (0%). The reduction is to be done on six greenhouse gases – carbon dioxide, methane, nitrous oxide, sulphur hexafluoride, HFCs and PFCs. Further the protocol reaffirms the principle that industrialized countries have to pay and supply technology to other countries for climate related studies and projects. The Protocol came into force in February 2005 giving GHG emission limits for each developed (Annex I) country included in the protocol. In order to facilitate reaching emission limits, three additional mechanisms were agreed upon. These are :

1. JI (Joint Implementation) Developed countries can implement projects that reduce emissions or remove carbon from the atmosphere in other developed countries in lieu of ERUs (Emission Reduction Units). These ERUs can be used to meet the emission reduction targets. JI projects must have the approval of all parties involved and must lead to emission reductions or removals that are additional to any that would have occurred without the project. ERUs can only be issued from periods onwards of year 2008 although JI projects can be started from year 2000 onwards.

2. CDM (Clean Development Mechanism)

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Developed countries can implement projects that reduce emissions or remove carbon from the atmosphere in other developing countries in lieu of CERs (Certified Emission Reductions). These CERs can be used to meet the emission targets. The protocol stresses that such projects are to assist the developing countries host parties in achieving sustainable development. Further the protocol refrains developed countries from using CERs generated out of nuclear facilities to meet the targets.

3. Emissions Trading The protocol provides that developed countries can acquire units from other developing parties and use them towards meeting their emissions targets, but must be prepared to transfer the units when they do not require them for compliance. This enables developed countries to make use of low cost opportunities to reduce emissions. Only some developed countries with emission limitation and reduction commitments specified in the protocol can engage in such an activity.

CDM - ELIGIBILITY CRITERIA CDM project activities must result in reducing or absorbing (sequestering) GHGs that are real and measurable and would not have occurred in the absence of the proposed project activity (additionality) (UNFCCC 2001b, 20). In other words, to qualify for credits, a project activity must demonstrate that GHG emissions were reduced against the "baseline scenario," a representation of GHG emissions under normal circumstances. Another important aspect of the CDM is that proposed CDM project activities must demonstrate their contributions to environmental integrity and the host country's sustainable development goals (UNFCCC 2001b, 20). Reducing GHG emissions alone may not suffice to meet this requirement. Many host country governments provide information on their prerequisites, often referred to as "sustainable development criteria"

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BASELINE CRITERIA 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 project proponent could develop a new methodology for its project activity or could use one of the approved methodologies by the CDM Executive Board. For small scale CDM projects, the simplified procedures can be used by the project proponent. The project proposal should indicate the formulae used for calculating GHG offsets in the project and baseline scenario. Leakage, if any, within or outside the project boundary, should be clearly described. Determination of alternative project, which would have come up in absence of proposed CDM project activity should also be described in the project proposal.

SUSTAINABLE DEVELOPMENT CRITERIA 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 projects should also be oriented towards improving the quality of life of the poor from

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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 that are comparable to best practices in order to assist in upgradation of the technological base. The transfer of technology can be within the country as well from other developing countries also.

INDUSTRIES ELIGIBLE A Transaction in CER involves buying of GHG emissions credits by entities from  companies or governments involved in projects related to carbon emission reduction  in developing countries. For example, a company in India can prove it has prevented  emission of  x­tons of  carbon  and can sell this  much  amount of  points or  carbon  credits to a company in the Germany which has been emitting carbon. The industries  which qualify for CDM projects are as follows: 

RENEWABLE ENERGY Wind

power,

Solar

energy,

Biomass

Geothermal Tidal power

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power,

Hydel

power,

Fuel switching from fossil fuel to green fuel like biomass, rice husk etc. Energy efficiency measures related to Boiler, Pumps, Turbines, Installation of various speed drives, Efficient cooling systems, Back Pressure turbines

COGENERATION

IN

INDUSTRIES

HAVING

BOTH

STEAM AND

POWER

REQUIREMENTS Waste Management Capturing of landfill methane emission to generate power, Utilization of waste and waste water emissions for generation of energy for captive use of power generation

Transport Fuel switch from gasoline and diesel to natural gas, Modal shift from air to train, road to train at macro level, Replacement of shipment of certain raw materials through road to pipelines

INDIA CDM METHODOLOGY India comes under Non – Annex I countries. In India, the Designated National Authority (DNA) is hosted by the Ministry of Environment and Forests (MoEF). In addition to the DNA, India has many state-level nodal agencies promoting and facilitating CDM-projects in their area. These organizations can be of assistance in setting up contacts with public organizations to arrange CDM projects, or in approaching a larger number of small-scale possible project proponents. They can act also as bundling agencies, i.e. combine a number of small-scale CDM projects and handle financial management for bundled projects.

CDM PROCESS The CDM also allows an industrial actor in the non­Annex I country to reduce its  Green House Gas emissions and to sell the reduction units to a party in the Annex I 

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countries. The GHG reductions and the way to reduce them have to be approved by  the CDM Board. The GHG reduction achieved through a CDM project is quantified  as a Certified Emission Reduction (CER), one CER corresponding to one tonne of  CO2 equivalent. A methodology is a description detailing the new way of operating  with the result of generating less GHG emissions than in a business­as­usual case.  The   business­as­usual   case   is   referred   to   as   the   baseline   in   the   methodology  description.

Project Planning Phase

STEPSIN PROJECT CYCLE

ENTITIES RESPONSIBLE

6 – 8 weeks

Project Identification

Project Owner + CDM Consultants

4– 12 weeks

Project Design

CDM Consultants

6– 8 weeks

Host Country Approval

Designated National Authority

8– 13 weeks

Validation

DOE+CDM Methodology Panel

6– 12 weeks

Registration

CDM Executive Board

S H IG N A L T C JE O R P

TYPICAL DURATION

FIG 2 : CDM Process (Project Planning Phase)

Project Execution and Realization Phase

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N O T IS L A E R

TYPICAL DURATION

STEPSIN PROJECT CYCLE

ENTITIES RESPONSIBLE

Project Specific

Monitoring

Project Owner

Verification and Certification

Designated Operational Entity

Issuance of CERs

CDM Executive Board

N IO T U C X E

1 – 4 weeks

6 weeks

FIG 3 : CDM Process (Project Realisation and Execution Phase)

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DISTRIBUTION BASED ON PROJECT STATUS (180 SAMPLES)

2%

2%

1%

1%

VALIDATION

1% 1% REGISTERED

3%

REQUESTREGISTRATION REVIEWREQUEST 20%

REJECTED CORRECTION

69%

CORRECTION(FOLLOWING REVIEW) WITHDRAWN MINORCORRECTION UNDERREVIEW

FIG 4 : Distribution Based on Project Status (180 Samples)

FIG 4 – INFERENCE : “Out   of   180   projects,   only   36   are   registered   and   started  functioning. The large amount (out of 180) ,i.e., 124 is still under validation and has  to wait for more days to get it registered which will reduce the earnings that can be  made if the projects are approved for functioning earlier.”

CDM POTENTIAL IN INDIA India is a competitive supplier for cost-effective GHG offset projects. Recognizing the possible benefits derived from such investment flows to India, the government has placed the CDM at the top of its climate change agenda. The designated national authority (DNA) for CDM projects from India has been set up in the Ministry of Environment and Forests (MoEF). India offers a large potential for the (CDM) because of its inherent dependence on fossil fuels for development, as well as its -15-

proactive government. Indeed, India is the most favoured destination for CDM projects globally. India qualifies to be a host country for the CDM projects. The total CO2 reduction potential through CDM projects in India is estimated to be around 300 million tonnes. The largest potential is in the renewable energy sector with 90 million tonnes CO2 equivalents. The total expected average annual CER’s from registered projects by India are about 22 million (21,239,372 CERs) having a 15% world share.

EXPECTED CER’S FROM REGISTERED PROJECT (TOTAL –

) % n i ( E R A H S

135,257,131)

45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

43% 15%

9%

5%

11%

6%

3%

COUNTRY

FIG 5 : Expected Average Annual CER’s from Registered Projects by Host Party (Source : www.ficci.com/press/287/FICCI_CDM_Delegation_to_UK.doc) -16-

FIG 5 – INFERENCE : “Out of the total projects registered at UNFCCC, only China is ahead of India in generating CERs and got the highest share of 43% followed by India (15% ; 21,239,372 CERs).” Out of the total 633 projects registered at the UNFCCC, 220 projects (34.76%) are from India that are expected to generate an annual volume of 21,239,372 CERs.

Registered Project Activities by Host Party (Total - 633) Republic of Korea 2% Malaysia 2%

Others 20%

India 35%

Chile 3%

China 11%

India Brazil Mexico China

Mexico 12%

Brazil 15%

Chile Malaysia Republic of Korea Others

FIG 6 : Registered Project Activities by Host Party (Source : www.ficci.com/press/287/FICCI_CDM_Delegation_to_UK.doc)

FIG 6 – INFERENCE : “India tops the chart in registering its Projects at the global level. Out of 633 projects, India’s share include 221 projects followed by Brazil (94 projects) which is far behind India. The closest rival ,i.e., China has got only 70 projects registered.”

FIG 5 and 6 – INFERENCE : “From the above figures, we can say that China is able to generate more of CERs ,i.e., 43% of the total with just 70 projects registered and India with highest registered projects numbering more than 220 is able to generate only 15% of the total CERs ,i.e., 22 million as against of 58 million of China. If we analyses it, we can say that India has registered thrice the projects as of China but receiving less than one – third of CERs as compared to China.”

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ESTIMATED

100

CDM

POTENTIAL

65

80 60

35

24

40

) m u n a r p ( e 2 O C t

INDIA

90

78.175

20

IN

1.2

15

0

SECTORS *LULUCF– Land Use; Land Use Change; and Forestry

*MSW – Municipal Solid Waste

FIG 7 : Estimated Potential of CDM Projects of tCO2e per annum in different sectors. (Source : http://www.ficci-cdm.biz/potential.asp)

FIG 7 – INFERENCE : “In India, Renewable Energy sector has got the highest potential of generating tonnes of carbon dioxide equivalent gases followed by Land Use; Land Use Change; and Forestry.The lowest is amongst Municipal Solid Waste.”

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SECTOR – WISE BREAKUP OF PROJECTS SECTOR

NUMBER OF PROJECTS

CERs

Renewable (Biomass)

197

61836018

Energy Efficiency

166

113377354

Renewable Energy

151

52634698

Fuel Switching

39

53435205

Industrial Process

34

97362058

MSW

9

4155341

Forestry

3

960051

Total

599

383760725

TABLE 2 : Sector Wise Breakup of Projects

CER Unit is equivalent to one tone of CO2 (Source : www.ficci.com/press/287/FICCI_CDM_Delegation_to_UK.doc)

TABLE 2 – INFERENCE : “Out of the total 599 projects, Renewable (Biomass) has got the highest preference. It is followed by Energy Efficiency and then Renewable Energy (having the maximum potential of generating CERs).If the maximum

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projects were in Renewable Energy, then India would have secured good credits and earnings.”

SECTOR – WISE BREAKUP OF PROJECTS APPROVED BY NCDMA

151

39 RENEWABLE (BIOMASS) ENERGYEFFICIENCY 34 166

9 3

RENEWABLE ENERGY FUELSWITCHING INDUSTRIALPROCESS MSW FORESTRY

197

F IG 8 : Sector Wise Breakup of Projects Approved by NCDMA

WHY INDIA IS BEHIND CHINA?

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India lacks somewhere as China is able to generate more of CERs ,i.e., 43% of the total with just 70 projects registered and India with highest registered projects numbering more than 220 is able to generate only 15% of the total CERs ,i.e., 22 million as against of 58 million of China. If we analyses it, we can say that India has registered thrice the projects as of China but receiving less than one – third of CERs as compared to China. What’s the reason? The answer is – India is unable to properly allocate the most productive projects. India is unable to foresee the future. The proof is above figures and tables. The reason why India is behind China can be drawn from the table and figure above. India’s potential to generate more of CERs lies in Renewable Energy Sector but most of the projects are under Renewable Biomass (197) followed by Energy Efficiency (166). Then comes the most CER generating sector ,i.e., Renewable Energy with 151 projects. If India has made the wise decisions and allocated the projects appropriately then earnings would have increased with more generation of CERs.

STATE WISE CDM PROJECTS S. No.

State Wise

No. of Projects

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Andhra Pradesh Assam Bihar Chhattisgarh Delhi Goa Gujarat Haryana Himachal Pradesh Jharkhand Karnataka Madhya Pradesh Maharashtra Meghalaya Multi State Orissa Punjab Rajasthan Sikkim Tamil Nadu

68 3 1 40 3 2 43 1 21 8 67 16 68 1 17 13 25 46 1 50 -21-

21 22 23

TABLE

Uttaranchal Uttar Pradesh West Bengal Total 3 :

11 69 25 599

State

Wise

CDM

Projects

(Source : http://www.ficci.com/press/287/FICCI_CDM_Delegation_to_UK.doc)

TABLE 3 – INFERENCE : “Considering the geographical distribution of CDM projects in India, UP has the maximum number of projects (69) followed by Andhra Pradesh (68), Maharashtra (68) and Karnataka (67). It is interesting to note that the geographical profile of CDM projects has enlarged with projects coming from even small states such as Sikkim and Meghalaya.”

SIZE OF CDM PROJECTS SIZE

OF

CDM NUMBER OF PROJECTS

PROJECTS

NUMBER

PERCENTAGE

0 – 10

8

33.33

10 – 20

4

16.67

20 – 30

3

12.5

30 – 40

1

0.04

40 – 50

3

12.5

50 – above

4

16.67

EXPECTED MONEY GENERATION The total market size for the carbon trading worldwide is about $10 billion. Indian businesses are on an investment spree of GHG reduction projects. The Government of India has already approved

227 projects, which could translate into

approximately 250 million certified carbon emission reduction (CER) units with a potential revenue generating capacity of around USD 1.25 billion, assuming an average selling price of USD 5 per CER. India, in the initial years, will garner 10 percent market share globally.

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CDM PROJECTS – FINANCING CDM projects can be considered as any other projects with the exception that CDM projects deliver CERs as additional by-products. Usually a CDM project requires investment in more costly technology and has to cover CDM related transaction costs. The CERs generated by the CDM project are sold to a CER buyer, thus generating an additional source of income for the project making the additional costs possible. When purchasing CERs an emission reduction purchase agreement (ERPA) is made which covers the details of the transaction. CDM projects can be divided to three groups according to the type of cooperation with financiers: unilateral, bilateral, and multilateral projects. The industrial actor in the non-Annex I country can execute the project activity all by itself, in which case the project activity is called unilateral. If a party from the Annex I country takes part in the project through funding, a project is called bilateral. Multilateral projects can be seen as bilateral projects where a third party takes care of the finance. The share of bilateral projects is estimated to be around 10% and will decrease in the future.

FINANCING SOURCES The financing patterns of CDM projects in India vary widely. Central and state government financing institutions give financing support to CDM projects. So far there have not been CDM projects totally financed by Indian banks, but they are starting to show an interest. The State Bank of India, ICICI, IDBI and Yes bank are to name a few. Banks do not act as outright CER buyers but have began to offer specific financing for CDM projects. In return for a certain share of CERs, they offer lower interest rates on the project financing. Future developments might include loan schemes including carbon (future CER) collaterals. Financial institutions such as IREDA, IDFC and PFC/REC have been active in renewable energy financing and might become increasingly active in CDM project financing. CDM FINANCING INSTRUMENTS

PROJECT FINANCE

EQUITY FINANCIN G -23-

VENTUR E CAPITAL

CORPORAT E FINANCE

MERCHANT FINANCING – LEASE and EQUIPMENT FINANCE

LENDIN G

FIG 9 : CDM Financing Instruments

CER PURCHASERS CER purchasers can be divided into two groups: public and private CER purchasers. The private CER purchasers can be further divided into traders and endusers, while the public purchasers can be divided into governmental and multinational

organizations.

The

public

CER

purchasers

are

the

various

governmental purchasing organizations, the most active ones being Japanese, Canadian and German organizations. In the private sector, British broker companies have been active, and they have organized tours with several potential purchasers visiting different areas to find suitable projects.

ORGANISATION EXAMPLE TYPE Japan Carbon Fund, UK DEFRA’s CCPO, Italy, Governmental

Purchase Spain, Netherlands, Canada, Austria, Portugal,

Organisations

Germany, France, Belgium, Sweden World Bank

Multinational Organisations Ecosecurities, Brokers / Traders

CO2.com,

Natsource,

Morgan&Stanley, Akzo Nobel, Barclays, HSBC, Pointcarbon, Rabo Bank Endesa, EDF, E.ON, Mitsubishi, Sony, Reco,

End – Users

Kyoto Electric, Kepco, Depco, Shell

TABLE 4 : CER Purchasers

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INDIAN COMPANIES GENERATE EARNINGS THROUGH CDM With the CDM in place, a host of Indian companies are enjoying additional earnings by  adopting   projects   that   reduce   the   emission   of   greenhouse   gases   (GHGs).Having  concerned more than half of the global total in tradable  CERs, India’s dominance in  carbon trading under the CDM of the UN Convention on Climate Change (UNFCCC) is  beginning to influence business dynamics in the country.

The Indian companies are expected to make substantial financial gains in the following ways : (1)

Ne w pro ject bei ng set up to red uce GH G emi ssi ons als o add to tota -25-

l out put of the fir m, con trib uti ng to its tur nov er. (2)

Ne w equ ip me nts inst alle d to red uce GH G emi

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ssi ons , lea ds to inc rea sed am oun t of dep reci atio n in the boo ks that act as tax shi eld of the co mp any .

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(3)

Us e of ene rgy effi cie nt equ ip me nts red uce s the tota l ene rgy bill of the co mp ani es, con trib uti

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ng dir ectl y to its bot to m line . (4)

Av aila bili ty of Go ver nm ent inc enti ves on im por ts or on use of

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ene rgy – effi cie nt equ ip me nts hel ps to red uce cos t of pro duc tio n and ma kes thei r pro duc t glo ball y

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co mp etit ive. (5)

I ndi a ma y hav e to red uce its ow n GH G emi ssi ons so met ime s in the fut ure . So, if

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the tas k is co mp lete d no w, Ind ian co mp ani es wil l not hav e to spe nd any mo ney in the fut ure to ach iev

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e the tar get.

(6)

At last , sal e of CE Rs thr oug h the Cli mat e Ex cha nge s hel p co mp ani es to ear -33-

n ext ra pro fits ove r and abo ve the y ear n fro m thei r reg ula r ope rati ons .

RESULT : •

India Inc pocketed Rs 1,500 crore last year just by selling carbon credits to developed-country clients. This is a fraction of the Rs 18,000 crore experts estimate will be India’s share in global carbon trading by 2012.

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•

In the pipeline are projects that would create upto 306 million tradable CERs. Analysts claims if more companies absorb clean technologies, total CERs with India could touch 500 million.

•

The Indian CDM portfolio today boasts of 599 host country approved projects, out of which the UNFCCC has registered 220 projects.

•

Over the next two months, about 37 Indian projects including a host belonging to big corporates such as Reliance Industries, Birla Corporation, Tata Sponge Iron, ACC, Gujarat Ambuja and JSW Steel are likely to be registered at the United Nations as projects that can potentially trade Carbon Credits.

•

JSW Steel’s Karnataka – based project, involving electricity generation through waste gas combustion, may earn about Rs 58.16 to 74.8 crore per annum.

•

Gujarat Ambuja Cements Ltd, with its fly ash blend project at sic of its units, earned between Rs 41.82 to 53.8 crore per year till 2007.

•

ACC, through its blended cement projects at six units, could earn Rs 30.72 to 39.51 crore annually.

•

Shree Cements could earn between Rs 8.11 to 10.43 crore by using biomass as an alternative fuel at its Rajasthan unit.

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ARGUMENTS ABOUT CDM PROCESS ADVANTAGES •

Better technologies for the company which is benefiting from generation of CERs .

•

Technology transfer from developed to developing countries (Due to low cost structure in developing countries).

•

Additional source of Foreign investment in developing countries which act as a catalyst in developing cleaner technologies.

•

Channel CDM funds to investment priorities – The CDM funds can be channelized into building or improving projects, thus reinvesting it for higher growth.

•

Development of cleaner technologies leading to sustainable development where countries have a strategic advantage from now in terms of pollution.

•

Environmental benefits due to lesser GHG emissions.

DISADVANTAGES •

Provision of cheapest way of purchasing climate destroying right.

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•

Due to nature and process of complexity involved, foreign players may dominate domestic industries for the incentive.

•

CDM investment could affect national development strategies, possibly adversely

affecting

national

decision-making

processes.

Until

future

commitment periods are agreed, the CDM may not provide incentives for financing long-term development projects and strategies.

•

No opportunity for less developed countries under this framework.

•

Still the mechanism leads to developed countries emitting more GHG inspite of their KYOTO caps. Historically they are the culprits for GHG emissions. The developed countries purchase CERs rather than finding new ways of reducing emissions by technological development.

•

Pressure to accept technologies which have adverse local impacts - CDM may attract unfavorable or unwanted technologies which adversely impact local people. The technologies should allow for sustainable development in social as well as economic and environmental terms.

EXAMPLE OF A COMPANY: SRF LIMITED It is an industrial group engaged in the manufacturing of industrial synthetics, fluorochemicals, industrial fabrics, packaging films and pharma chemicals. It operates a swing plant at Rajasthan, India since 1989 that produces HFC 22, CFC 11 and CFC 12 alternately on campaign basis. The main objective of the CDM project -37-

was to reduce the GHG emission through destruction of HFC 23 gases, in a proposed thermal oxidation system. The project cost was Rs. 13 crores and the benefits are expected in next ten years. SRF has been releasing this gas into the atmosphere before identification of this project as a CDM project under the Kyoto Protocol. Since April 2004, SRF has been storing HFC 23 waste gas. Thus, with the implementation and operation of the thermal oxidation system, the project will reduce GHG emission (in CO2 equivalent terms) that otherwise would have continued to occur in absence of the project. The annual sale is expected to be of 3.83 million CERs or 3.83 million tons of CO2 equivalent gases. The after tax cash flows from the project are in table Description

After tax cash flow (Rs. Crores)

Initial Investment

-13

FY06

59.362

FY07

59.362

FY08E

59.362

FY09E

59.362

FY10E

59.362

FY11E

59.362

FY12E

59.362

FY13E

59.362

FY14E

59.362

FY15E

59.362

TABLE 5 : After tax cash-flows of SRF The CER rate is taken to be a 5 USD. The Re/USD rate has been taken as 41 and tax rate @ 33%. The IRR in this case is calculated on the incremental expenditure needed for meeting CDM requirements. -38-

INTERPRETATION OF ANALYSIS Carbon credits emanating from CDM projects can be considered as enhancers of equity returns rather than as a reliable long term source of cash flows for projects. The benchmark of SRF Limited is to get 15% IRR (Internal Rate of Return). Before using CDM they were getting only 12%. But after using CDM the IRR has been increased to 16% ,i.e., an increase of 4%. The additional return so obtained can be used to finance the other projects or can be used to distribute as dividend to shareholders. Both ways the company is gaining as retaining will lead to less raising of funds from the market and distributing will help in retaining and attracting more and more investors. Both ways money will come.

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CDM

CASH

18%

FLOW

INCREASES

IRR

OF

THE

PROJECT

CDM CASH FLOW

GAPBETWEENTHE PROJECTRETURN ANDHURDLE RATE

16% 14%

4%

12% 10%

) G A T N C E (P IR

8% 6%

12%

12%

ExcludingCDM

IncludingCDM

4% 2% 0% PROJECTRETURN

The CDM Cash Flow increasesthe IRR of the Project makingit more interestingfor investors

IRRBENCHMARKOF15%

FIG 10 : Impact of Using Carbon Credit on IRR

CONCLUSION : The basic idea behind the carbon credit was to create a system in which companies would be able to buy and sell pollution permits, giving them a financial incentive to cut their carbon dioxide emissions. It is seen by many as the glue that will hold the -40-

system together by reducing the greenhouse gas production while generating funds to develop clean technology and help poor countries adapt to environmental changes such as rising sea levels. Countries that agree to reduction targets are given permits for an amount of allowable carbon dioxide emissions which are passed on to businesses. Companies can chose to cut their emissions by retrofitting a factory and selling their permits for a profit or continuing to pollute and buying additional units of carbon dioxide in the open market. A major attraction of the carbon markets is their ability to generate money to be put toward cutting emissions and helping countries adapt to the effects of climate change. But carbon credits has plenty of critics, many of whom argue that it does little or nothing to cut greenhouse gases. It is also opposed over concerns that it would allow companies to keep polluting. The system has also been criticized for leaving out sectors like transport and focusing on less profitable companies like cement or make major investments to reduce emissions. Carbon Credits has provided a new avenue for investors to earn and yet save the environment. It’s an upcoming trade and has a huge potential for growth. A new industry has been created with very few players. So companies willing to invest will get a first mover advantage. Due to growing concerns across the globe and governments omitting to make a change, the industry has a very good potential. More and more companies are coming to India only for this trade and industry. This upcoming industry gives a good career option and is going to be huge employment generator in the near future. Though it has both positive and negative influences how people take the positive aspects in principle and follow them so as to be able to reduce the effect of global warming on our precious planet.

RECOMMENDATIONS : •

The process is very lengthy. It should be reviewed again to make it shorter so that more and more companies will be interested in CDM Projects.

•

More and more financers should join the market as 2 or 3 are not sufficient. -41-

•

Proper education, to all the companies indulged in manufacturing and emitting carbon dioxide, should be given.

•

Proper market (like BSE) should be regulated in India for trading of carbon credits.

•

Focus should be on balanced development. Each State Government should motivate companies to go for CDM Projects to earn through Carbon Credits.

•

Government must announce incentives for adopting cleaner technologies and also offer some incentives to financers so that more and more banks and financial institutions come up to finance the projects.

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