UNCLAS SECTION 01 OF 06 MUMBAI 000340

SENSITIVE
SIPDIS

STATE FOR G, OES/FO, OES/PCI, OES/EGC, AND SCA/INS
DEPT OF ENERGY FOR TCUTLER, CGILLESPIE, MGINZBERG
USDOC FOR A/S BOHIGIAN
NSC FOR DAN PRICE AND ROBERT DIXON
CEQ FOR JAMES CONNAUGHTON

E.O. 12958: N/A
TAGS: SENV ENRG ECON TSPL TRGY KSCA IN
SUBJECT: CARBON CREDITS SUFFICIENT BUT NOT NECESSARY FOR SUSTAINING
CLEAN ENERGY PROJECTS OF MAJOR INDIAN BUSINESS GROUPS

REF: A. A) Mumbai 302

B. B) New Delhi 1935

C. C) Kolkata 194

MUMBAI 00000340 001.2 OF 006



1. Summary. (SBU) Despite the risk and uncertainty of
qualifying for carbon credits (see ref A), Indian businesses
have pumped USD 25 billion into unilaterally developing Clean
Development Mechanism (CDM) projects to generate carbon credits.
In discussions with ConGenoff and visiting analysts from the
Government Accountability Office (GAO), executives of major
Indian companies outlined their plans to earn carbon credits.
All admitted that the adoption of clean technology is aimed at
promoting sustainable development and that the search for energy
efficient solutions is driven by high energy prices. Carbon
credit boosters in Mumbai denounced the carbon credit validation
and registration process as bureaucratic, lengthy and arbitrary,
similar to what GAO heard during meetings in Delhi (see ref B).
However, they conceded that no Indian project could meet the
"additionality in investment criteria" to be eligible for carbon
credits. Notwithstanding their own self-imposed motto of
promoting sustainable development through clean technology, our
interlocutors called for slackening the qualification
requirements for carbon credits to "reward" all processes
resulting in increased energy efficiency and lower direct or
indirect carbon emissions. End Summary.

-------------- --------------
Indian Investors Pump in USD 25 Billion to Develop CDM Projects
-------------- --------------


2. (U) The National CDM Authority (India's designated national
authority) has given host country approval to 969 Clean
Development Mechanism (CDM) projects in India. Of this, 346
projects have been registered with the CDM Executive Board, the

CDM supervisory arm of the U. N. Framework Convention on Climate
Change (UNFCCC). (Note: The CDM allows a country with an
emission-reduction or emission-limitation commitment under the
Kyoto Protocol to implement an emission-reduction project in
developing countries where it is cheaper and more
cost-effective. Such projects can earn certified emission
reductions (CERs) credits or carbon credits which count towards
meeting Kyoto targets. Each credit is equal to one ton of
carbon dioxide that would otherwise have been emitted if the
project was not in place. After the CDM project receives host
country approval, it is validated by an accredited international
organization and then submitted to the CDM Executive Board for
registration. The carbon credits generated by the registered
CDM project are verified by one of the accredited validation
organizations after which they are available for sale in the
primary or secondary market. End Note.) These approved Indian
projects, mainly in the areas of renewable energy and energy
efficiency, could potentially generate 492 million CERs by 2012,
assuming that they are successfully registered with the CDM
Executive Board. However, India leads other countries in the
number of projects rejected by the board. Twenty nine out of
the 66 projects rejected by the CDM Executive Board are Indian
projects. (Note: If more than three members of the CDM
Executive Board object to the project, then it is returned for
review. End Note.)


3. (SBU) India grants host country approval to a CDM project
based on the sustainability criteria following a presentation by
the project developer to demonstrate that the project promotes
economic, social, environmental and technological well-being.
In contrast, the CDM Executive Board checks whether the project
is "additional" in technology and investment. (Note: The
project has to prove that it does not use commonly-available
technology and that it is unviable without carbon credit
revenue. End Note.) At a seminar on CDM in Mumbai, R K Sethi,
Member Secretary of the National CDM Authority and the present
Chairman of the CDM Executive Board, publicly admitted that the
National CDM Authority takes the "project developer at his word"
for clearing the "additionality" barriers. Mathsy Kutty of Det
Norske Veritas (DNV), a CDM Executive Board-accredited
validation and verification organization for CDM projects, told
ConGenoff that the designated authorities of host countries

MUMBAI 00000340 002.2 OF 006


approve projects in a cursory manner and do not check to see
whether the project meets all the requirements laid down by the
CDM Executive Board. CDM projects in India do not have to be
validated or verified to get host country approval while both
processes are mandatory to get the project registered with the
UNFCCC, she continued. For this reason, she pointed out, Indian
projects account for 44 percent of the total projects rejected
by the CDM Executive Board.


4. (SBU) CDM projects are developed unilaterally in India, with
the project developer financing the project and seeking a buyer
for CERs or carbon credits after the project is registered and
begins to earn carbon credits. According to Pamposh Bhat,
Director for Climate Change of GTZ, Indian investors have
invested around USD 25 billion to develop CDM projects in India.
On the plus side, the CERs generated by these
independently-initiated CDM projects are traded internationally
and command a higher price as compared to CERs of bilateral
projects that are funded by investors in EU nations to meet
their emission-reduction commitments. The downside of
initiating CDM projects without foreign backing is that the
local project developer has to self-finance the project and
bears the risk that the project does not qualify for carbon
credits. For this reason, Santonu Kashyap of Asia Carbon
maintains that Indian projects can never fulfill the
additionality requirement as no developer will risk investing in
a project unless he is certain of a revenue stream independent
of the CDM incentive. In a separate discussion with GAO
analysts and ConGenoff, Jamshed Irani, Director of Tata Sons and
the Chairman of the Tata group's Steering Committee on
Sustainability, agreed that no Indian company is brave enough to
rely entirely on a CDM-driven revenue stream.

-------------- --------------
Major Indian Business Houses Forge Ahead to Earn Carbon
Credits...
-------------- --------------


5. (U) Irani admitted that the Tata group is a late entrant to
the cause of environment sustainability in its business
operations. He noted, however, that some companies within the
Tata group had developed innovative clean technologies to
improve energy efficiency even before the Kyoto Protocol. For
example, Tata Steel consumes less than one percent of liquid
fuel to produce steel as compared to 20 years ago. Irani
informed ConGenoff that a sponge iron plant, which re-circulates
hot gases to generate power, has been earning carbon credits for
the last three years. This project will earn enough carbon
credits in the next 7-8 years to pay for the cost of
constructing the plant, he continued.


6. (SBU) Dr. Avinash Patkar, Chief Sustainability Officer for
Tata Power, said that the ultra mega power (UMPP) project at
Mundra in Gujarat is awaiting registration with the CDM
Executive Board. This project is based on supercritical
technology which results in lower carbon emissions. DNV's Kutty
is concerned that UMPPs will be rejected by the CDM Executive
Board, as the use of supercritical technology in all UMPPs is a
mandatory requirement stipulated by the Indian government. As
this technology is the norm for all UMPPs, it has to be put in
place by the project developer with or without the CDM benefit.
Proving additionality is therefore difficult, she continued.
(Comment: Ironically, DNV acted as the validator for the Mundra
UMPP and, as per Patkar, has already validated the project. End
Comment.) Pratap Melampati, who works with the Reliance ADAG
group which is at different stages in getting two of its UMPPs
qualified to earn carbon credits, argued that a project
developer can always develop an independent power project of the
same scale as the UMPP using sub-critical technology instead of
bidding for a UMPP. Although not mandatory, the company is
using supercritical technology in its 1,980 MW planned facility
in Chhattisgarh and will seek CDM registration for this as well,
he stated. Melampati maintained that the revenue from carbon
credits has been factored into constructing the competitive
tariff (based on the lowest bid) charged by each UMPP. However,

MUMBAI 00000340 003.2 OF 006


he admitted that a "moderate" carbon credit revenue stream was
considered while evaluating project viability, taking into
account the possibility that the UMPP does not qualify for CDM
benefits. Melampati agreed that future power projects based on
supercritical technology may fail to qualify under CDM as the
technology becomes "commonly used" in India.


7. (SBU) Shishir Tamotia, CEO of Ispat Energy which is owned by
the brother of steel magnate Lakshmi Mittal, stated that the
objective of his company is to add 7,000 MW of power over the
next five years with the least amount of carbon emissions. He
said he would like to draw on the CDM incentive while achieving
this target, but overcoming the additionality barrier may prove
difficult. High energy prices and the cheap supply of equipment
from China are making CDM projects viable without the CDM
credit, he said. Ispat Energy is operating seven potential CDM
projects, each at different stages of the approvals process.
The project consultant is not optimistic about getting them
registered with the CDM Executive Board, he admitted. If the
projects fail to qualify for carbon credits, Tamotia continued,
he will be forced to source sub-standard equipment from China
rather than high-quality energy efficient technology from Europe
and the U.S. It is difficult to justify the added cost of using
green technology without a carbon credit revenue stream, he
maintained.


8. (SBU) Ambuja Cements, a leading cement manufacturer in
India, has two registered CDM projects. A 24 MW bio-gas power
plant fuelled by rice husks to power the company's cement
facility in Punjab earned 18,098 CERs in 2005. A blended cement
project is awaiting verification and is estimated to generate
500,000 CERs per year. The company's cement operations across
India were aggregated to create this project, which reduces
carbon emissions by using less clinker and more additives like
fly ash and slag. A company representative told us that the
company expended 0.9 tons of carbon dioxide emissions per ton of
cement manufactured five years ago. Carbon emissions have now
reduced to 0.6 ton per ton of cement manufactured as a result of
blending additives with clinker. He also said that the company
is planning to use industrial waste as a fuel substitute to
manufacture cement, which will result in lower carbon emissions
as this waste would have otherwise been incinerated in a
commercial waste disposal facility. He acknowledged, however,
that this project will not qualify for CDM benefits, as the
reductions in carbon emissions are not direct and measurable.
Kishore Kavadia, Advisor (Sustainability) of Ambuja Cements,
claimed that the company's business is based on sustainable
development and the CDM incentive is a "bonus" but not the
"driver" of business operations. Most of the sustainable
operations of the company were in place even before the CDM was
conceptualized, he said. Nevertheless, Kavadia continued,
carbon credit revenue improves the company's internal rate of
return by 0.5-1 percent.


9. (SBU) Beroz Gazder, Vice President of Infrastructure
Development of Mahindra & Mahindra, said that the company has
obtained host country approval for several heat recovery
projects to reduce carbon emissions. However, these projects
are still stuck in the validation process due to the
"additionality" and "business as usual" barriers. She asserted
that the company will continue to focus on environmental
sustainability even if the projects do not qualify for carbon
credits. The group is looking at carbon credit revenue as a
"by-product" of business and not as a "business opportunity",
she added. Arun Jaura, the Chief Technology Officer of the
Mahindra group, cited moral responsibility, customer's
consciousness of the environment, regulatory requirements,
long-term sustainability, and the desire to be an international
player as reasons for initiating clean technology solutions.

-------------- --------------
...But Lash Out At the CDM Registration Process and Suggest
Improvements
-------------- --------------


MUMBAI 00000340 004.2 OF 006



10. (SBU) Ram Babu, the Managing Director of CantorCO2e's
operations in India (a global project and emission trading
consultant), believes that the CDM Executive Board's
institutional mechanism and its modalities and procedures cannot
address the potential opportunities of emission reduction. For
example, he pointed out that avoiding de-forestation that
potentially saves millions of tons of carbon emissions does not
qualify for carbon credits. Babu also drew attention to the
direct, real and measurable emission reduction requirement that
ignores a number of initiatives that indirectly reduce carbon
emissions. The Bandra-Worli sea-link which uses blended cement
(clinker with additives like fly-ash) instead of ordinary
portland cement cannot qualify as a CDM project, he noted.
Establishing measurability increases project costs and accounts
for 50 percent of the CDM benefit, Babu claimed. He complained
that the CDM Executive Board is too "restrictive" in its
thinking and implements the Kyoto Protocol with "blinkers". It
is plagued with extreme bureaucracy and its decisions are
arbitrary and ad-hoc in nature, he argued. The Board gives a
one-line explanation for rejecting projects and does not justify
its decision. There is no appeal mechanism and the Board's
decision is final, he continued.


11. (SBU) DNV's Kutty admitted that there is no uniformity in
the CDM Executive Board's decisions to qualify some projects and
reject others. She also warned project developers to be more
"conservative" when estimating carbon credits that can be
generated by the project, as projects which fall short of the
projected number of credits approved by the Board can later be
rejected. Bhat of GTZ CDM urged companies to think of
"innovative" ways to qualify CDM projects. She also emphasized
that the time differential between implementing a project and
submitting the project for validation should be kept to a
minimum. Otherwise, the CDM Executive Board could rule that the
project, already operating without the benefit of CERs, is
sustainable without the CDM incentive, she warned.


12. (SBU) Tamotia complained of increased registration delays
due to the shortage of staff and increased scrutiny of projects
both by the CDM Executive Board and by validators. He suggests
de-centralizing the Board's oversight by establishing more
offices could avoid delays. He also pointed out that validators
"overdo it and raise unnecessary objections to try and make
things perfect". (Note: Validation and verification agencies
are penalized if projects validated by them are rejected by the
CDM Executive Board and may even get disqualified. End Note.)
Kutty of DNV acknowledged that the actual validation process
currently takes a minimum of 5-18 months now as compared to 2-3
months earlier. Registration with the CDM Executive Board takes
another 2 months. Kashyap of Asia Carbon suggests that carbon
credits generated during the validation and registration period
can be sold in the voluntary emissions market which is outside
the oversight of the U. N.


13. (SBU) Babu believes that the additionality test should be
implemented with practical, commercial considerations. He
echoed the view of Asia Carbon's Kashyap that the uncertainty of
CDM revenue due to the risk of rejection makes it difficult to
justify additionality in investment for even a single project.
He said that CDM benefit is a bonus and noted that most of the
projects are implemented even before being registered to earn
carbon credits. Ambuja Cement's representative agreed and
pointed out that CDM on its own does not generate enough carbon
credit revenue to justify the project. Excluding "business as
usual" projects from qualifying is "killing" Indian projects, he
added.


14. (SBU) Somak Ghosh, President of Corporate Finance &
Development Banking at Yes Bank, admitted that the bank does not
consider the potential revenue stream from carbon credits while
financing clean energy projects. The bank looks at clean energy
projects which are viable independent of the CDM benefit. He
pointed out that no bank would finance a project which is viable
only with carbon revenues because of the uncertainty of the
registration process, unclear guidelines on qualifying CDM

MUMBAI 00000340 005.2 OF 006


projects and because carbon revenue is only a by-product revenue
stream of the main operations of the company. He admitted that
project developers prepare two balance sheets to secure funding:
one showing the viability of the project without the CDM benefit
(which is what the bank looks at) and another demonstrating the
non-viability of the project without the CDM benefit. He
complained that the investment additionality requirement is
"designed to favor developed countries, create an income stream
for consultants and keep good projects out of the market."
Tamotia also recommends that the "additionality in investment"
barrier be removed but believes that the "additionality in
technology" requirement for CDM projects spurs innovation and
encourages the use of the most energy efficient equipment.


15. (SBU) B Agarwalla, the Executive Director of Tata Power,
argued that all measures resulting in improved energy efficiency
should be eligible for carbon credits, even if they are adopted
to enhance profitability. This will encourage more people to
use energy efficient equipment to squeeze out every bit of
energy from the process, he continued. Irani concurred and
pointed out that enlightened people will go ahead and use energy
efficient solutions even if the cost is 10-15 percent higher.
Others however, need an incentive "to tip in favor of clean
technology." Agarwalla pointed out that India has abundant coal
resources and therefore coal will continue to dominate in the
country's energy portfolio. Recognizing this, processes that
are developed to make the most efficient use of coal should be
encouraged and should earn carbon credits, he maintained.

--------------
CDM Scenario Going Forward..
--------------


16. (U) Bhat claimed that countries are putting pressure on the
CDM Executive Board to improve the modalities and procedures to
qualify CDM projects. Some of the recommendations include
immediate top-down guidance on programmatic CDM, automatic
approval of projects below the sectoral baseline, simplified
procedures for determining additionality for small-scale solar,
wind, and hydro power projects, and transparent, consistent and
non-discretionary decision-making by the CDM Executive Board.
If all these are achieved then venture capital can flow to areas
where CDM projects are scarce, she continued. Sethi said that
the CDM Executive Board had discussed withdrawing the common use
barrier for renewable energy projects but was not able to come
to a uniform consensus.


17. (SBU) Separately, Bhat and Babu both theorized that the
Kyoto Protocol would continue post-2012, albeit with a modified
integrated arrangement, with emission reduction commitments from
both countries and multinational corporations of major emitters
in developed and developing countries. Babu noted that this new
framework will address U. S. concerns as it ropes in major
emitters from China and India. Tata Group's Agarwalla also
believes that industries that emit the most should contribute
the maximum to carbon reduction. Tamotia of Ispat believes that
bilateral agreements between countries on emission reductions
should be the way forward. He pointed out that setting sectoral
emission standards, although desirable, will be difficult to
implement, especially in the steel industry, as most of the
steel plants in developed countries are old and less energy
efficient. The investment to upgrade and modernize this
equipment is considerable, so these companies will resist any
move towards imposing sectoral emission caps, he said. The
Indian government will also oppose sectoral emission caps in the
steel industries, as state-owned Steel Authority of India is one
of the least energy efficient steel companies in the country and
uses outdated Russian technology, he claimed. (Note: However,
it is important to note that a SAIL representative in Kolkata
had said that the company had 70 potential CDM projects and
voiced his approval for sectoral standards for the steel
industry (see ref C). End Note.)


18. (SBU) Comment: All Indian executives with whom we spoke
maintained that the CDM has "positively" benefited India but

MUMBAI 00000340 006.2 OF 006


that the derived benefit could be much greater if the
registration process is streamlined and qualification
requirements relaxed. Amidst complaints about the "arbitrary"
decisions of the CDM Executive Board, all interlocutors conceded
that all Indian projects fail to meet the additionality in
investment criteria and none should qualify for carbon credits.
By their own admission, all of their clean energy projects are
aimed at achieving sustainable development and will continue
with or without the CDM benefit. The march towards "business as
usual" clean technologies appears to be a logical step towards
India's ascendancy to global competitiveness. Irrespective, all
interlocutors emphasized that any process that uses cleaner
technology or energy more efficiently should be "rewarded",
especially given the high cost and finite availability of gas
and fossil fuels. End Comment.
KEISER