Pig manure and hot air...

India has the world’s largest number of Clean Development Mechanism (CDM) projects that have been approved by the government,” says Prodipto Ghosh, secretary environment and forests, explaining that the country is off to a good start while chasing the opportunity that’s come about now that the Kyoto Protocol is going to come into force just over a month from today (on February 16).

While most experts believe China will get the lion’s share of the trade in carbon emissions — experts in the Massachusetts Institute of Technology believe China will supply 47 per cent of total carbons traded and India will get to do just 11 per cent — Indian officials say India’s closest rival is Chile, which has a third the number of projects India has, and China is number five in the global list as of today.

So far, it would appear, the government has been quick to move on the opportunity. Under the Kyoto Protocol that came to life after Russia finally ratified it on November 5, every country has to nominate a Designated National Authority (DNA) that has to formally validate each CDM project that hopes to sell carbon credits to other countries (like the EU and Japan).

Once the DNA clears projects, they are validated by the executive board set up for the Kyoto Protocol

Only after a project is validated in this fashion is it free to sell its credits.

To qualify for a ratification by the DNA, and then the executive board, a project has to be a new carbon-emission saving one (like a hydro-power project to replace a coal-fired one) and one that would not have been set up in the ordinary course of business by a company.

For instance, if NTPC decides to convert a naphtha-based power plant to a natural gas-based one, it will have to show it wouldn’t have done this in the normal course of its expansion.

India’s DNA meets on a fixed date once a month, and has cleared 44 projects worth Rs 1,800 crore in exactly a year’s time. According to officials, there are another 200 or so projects that are under various stages of preparation in the country.

Apart from getting validated by the DNA that certifies how many carbon units the project will help save (it is these carbon units that get “sold”), each project needs to be certified annually by accredited agencies — right now, however, no Indian firms have been accredited by the executive board and all such certificates have to be obtained from foreign firms.

The government is also readying the Indian Council for Forestry Research and Education (ICFRE), an autonomous body under the environment ministry, to get such a certifying licence since forestry projects are likely to be a big source of carbon credits — since any certifying agency has to indemnify buyers who buy credits from projects that may eventually fail, the government will stand guarantor for the ICFRE’s certifications.

Though the EU proposes to fix individual carbon-emission limits for 12,000 installations, which account for nearly half of Europe’s carbon dioxide emissions and to fine each company $58 a tonne of extra emissions, experts believe prices could settle in the $10 to $11 range a tonne.

“While there’s money to be made from carbon trading,” says R K Pachauri, Director General of The Energy and Resources Institute (TERI), “it’s not large enough to make a project viable in itself.”

At most, Pachauri explains, it could improve a project’s viability by a couple of percentage points. In other words, you can’t set up a windmill just to make money from carbon trading, but if the project’s just a little short of being financially viable, the money from Kyoto may make it viable.

Estimates of the total size of the market that opens up post-Kyoto, of course, vary widely from less than a billion dollars to around $11 billion by 2010.
e Estimates of its value vary widely
2010 market($ bn)
i) MIT experts' estimates
11
ii) Gruetter (2002)
0.8
iii) Margaree Consultants for World Bank
2.8
e India has managed to get off the block fast (Fig in numbers)
Projects cleared by government of India of which,
44
Biogeneration/cogeneration in sugar mills
16
Energy efficiency in industry
15
Municipal solid waste
1
Fuel switching (naphtha to natural gas)
2
Renewable energy (small hydro/wind power)
10
Source: Ministry of Environment and ForestsOne of the biggest uncertainties arises out of what’s appropriately called “hot air”. The Kyoto Protocol uses 1990 level of emissions as the base level from which countries have to lower emission levels by the end of the decade — generally around 5 per cent for all countries. But since production levels collapsed in the former Soviet Union after 1990, Russia/ Ukraine have a lot of “credits” or “hot air” they can trade — in other words, a coal-based power plant in Germany can simply buy some “hot air” from Russia to escape paying a penalty in Germany for exceeding its emission limits, but there is no fresh reduction in carbon emissions that is taking place.

While it is uncertain whether Russia or Ukraine would like to trade all their hot air or keep it in reserve to use when they set up more polluting factories of their own, the EU has its misgivings about buying hot air since it doesn’t really help clean the environment.

In which case the Russian hot air may not become a rival source of carbon credits, at least as far as trading in Europe or Japan are concerned.

Then there is considerable uncertainty as to whether the US, which accounts for 36 per cent of the developed world’s emissions, can be brought under the Kyoto Protocol’s ambit.

If US products are to be judged as environment-unfriendly, US firms may also wish to take part in the trading of carbon emissions. In which case, the prices for carbon units would rise.

Indeed, studies like the one by Jurg Gruetter in 2002, which estimated prices would be in the $9 to $36 range a tonne of carbon, believe the price could range from zero to $7 in a market without the US.

Much, of course, would depend upon how many suppliers of carbon credits there are in the market. According to MIT consultants A Denny Ellerman, Henry D Jacoby and Annelene Decaux, if there were no trading of emissions, it would cost Japan $584 a tonne of carbon reduction at the margin and the EU $273.

If, however, trading is allowed by the former Soviet Union and the eastern economies in transition like Azerbaijan and Uzbekistan costs would come down to $127 a tonne and to a much lower $24 in a free-trade scenario, involving countries like China and India.

According to Margaree Consultants who have done a lot of work on the subject for the World Bank, China’s CDM potential is comparable to that of all of Latin America, Africa and West Asia — so the scale of Chinese activity would affect the price for carbon emissions.

Margaree also estimates that reducing emissions by 400 million tonnes of carbon by 2010 would require annual investments of around $10 billion in developing countries.

Considering that average foreign direct investment in such countries averaged $140 billion annually during 1997-2002, it is unlikely Kyoto will make a huge difference to financial flows in developing countries.

One country where it has already made a difference, though, is Chile. The Canadian TransAlta and Japan’s Tokyo Electric Power Company have joined hands to buy credits from a Chilean company called AgroSuper, which installed $30 million of technology to handle the waste of 100,000 pigs and to prevent the formation of methane by using it to power generators — each tonne of methane avoided, The Wall Street Journal reported, is equivalent to 20 tonnes of carbon dioxide, or credits which the firm sells to the Japanese and Canadian firms.

Given all the cows in India, this opens up an entirely new line of business for enterprising dairy farmers in the country. As some might say, No s**t!