GAO EXPLORES INDIA'S EXPERIENCE WITH THE CDM

UNCLAS SECTION 01 OF 03 NEW DELHI 001935 SENSITIVE SIPDIS STATE FOR OES/PCI, OES/EGC, AND SCA/INS DEPT OF ENERGY FOR TCUTLER, CGILLESPIE, MGINZBERG USDOC FOR A/S BOHIGIAN E.O. 12958: N/A TAGS: SENV ENRG ECON TSPL TRGY KSCA KGHG IN SUBJECT: GAO EXPLORES INDIA'S EXPERIENCE WITH THE CDM NEW DELHI 00001935 001.2 OF 003 ¶1. (U) SUMMARY: Analysts from the Government Accountability Office (GAO) visited New Delhi June 30 and July 1 to review India's experience with the Kyoto Protocol's Clean Development Mechanism (CDM). The GAO interviewed a wide range of public, private, and NGO stakeholders who were consistent in their support for the CDM and believed that it was enabling reductions in greenhouse gas (GHG) emissions that would not have occurred otherwise. Criticisms of the CDM's Executive Board (EB) were rampant and directed at the EB's slow review process and lack of transparency while all interviewees commended India's Designated National Authority (DNA) for a streamlined and efficient process. Interviewees also expressed concern regarding the CDM's uncertain post-2012 future and stated U.S. participation in the CDM would not only stabilize and grow the carbon market, but also lead to enhanced technology transfer. The GAO will incorporate comments from their interviews, as well as similar interviews conducted in China, into a report to Congress expected to be released in November 2008. END SUMMARY. ¶2. (U) EmbOffs accompanied senior analyst Kate Cardamone and analyst Jessica Lemke from the GAO Natural Resources and Environment Team to a series of meetings designed to explore India's experience with the CDM for a report to Congress. The delegation interviewed the following CDM stakeholders: --Mr. Rajani Ranjan Rashmi, Joint Secretary, Ministry of Environment and Forests (MoEF); --Dr. Prodipto Ghosh, Senior Fellow, The Energy and Resources Institute and former Secretary, MoEF; --Mr. Ajay Mathur, Director General, Bureau of Energy Efficiency (BEE),Ministry of Power; --Mr. Charles Cormier, Team Leader, Environment and Water Resources, World Bank; --Dr. G. C. Dutta Roy, Chief Executive, Energy Business, DSCL Energy Services Ltd; --Mr. Ashutosh Pandey, Emerging Ventures India; --Mr. Chandra Bhushan, Associate Director, Industry and Environment, Centre for Science and Environment. -------------- -------------- LOTS OF PROJECTS, LITTLE COOPERATION, FEW CREDITS -------------- -------------- ¶3. (U) As of July 11, there were 1115 CDM projects registered worldwide with the CDM Executive Board. India accounts for the largest number of projects with 31.75 percent of the total but only accounts for 14.17 percent of the expected annual average CER credits. In contrast, China has 21.43 percent of the total projects but accounts for 51.62 percent of the total expected CERs. Charles Cormier of the World Bank, which is the largest buyer of CERs with a holding worth over 2 billion USD, explained the discrepancy by noting India's CDM projects, like its economy, is driven by small and medium sized enterprises (SMEs) that cannot sustain the very large projects undertaken by state supported industry in China. He also stated financial institutions in India are unwilling to finance CDM projects proposed by collateral-poor SMEs who tend to hide what collateral they have in order to avoid taxes. Considering the Indian CDM market is primarily driven by the private sector with very few public sector projects, Cormier stated it was no surprise Indian projects were smaller in scale, though greater in number, as compared to China. Cormier also noted that while Indian players in the CDM tout the number of Indian projects as a success, he sees the large numbers yet low revenue stream as a failing of the Indian experience with the CDM. ¶4. (U) When asked why so many Indian projects were unilateral with little to no international cooperation, BEE Director General Ajay Mathur stated Indian businessmen were highly independent and tend to see everyone else as a competitor. He used the cement industry as an example where Indian companies were unwilling to partner with European cement companies because they feared foreign meddling by potential competitors and instead achieved impressive energy efficiencies by purchasing European technology off the shelf. In many cases, the same technology had been offered (and refused) as part of a joint-CDM project. The approximately 300 CDM projects in India support emissions reductions mainly in renewable energy, energy efficiency, industrial efficiency, and biomass power generation. MoEF Joint Secretary Rashmi said that although India has a lot of projects, it is not reaching its potential and that Indian industry needs more "hand-holding" to get project proposals approved. -------------- -------------- NEW DELHI 00001935 002.2 OF 003 INDIA'S DNA PRAISED, CDM EXECUTIVE BOARD PILLORIED -------------- -------------- ¶5. (SBU) In regard to the process of registering a CDM project, stakeholders, both private and public, praised the performance of India's Designated National Authority, the GOI inter-ministerial panel headed by the MoEF that screens each application to ensure they meet a minimum set of environmental regulations before recommending them to the UNFCCC CDM Executive Board for final review and registration. Joint Secretary Rashmi explained the DNA consisted of a panel chaired by MoEF with the Ministries of Coal, Steel, and New and Renewable Energy as permanent members and with ad hoc members added depending on the type of project under consideration. He noted the DNA based its decisions on whether to forward a project to the EB on whether the project met Indian environmental regulations and was sustainable. He stated there was no need to impose a more stringent standard. This approach received consistent praise by private sector stakeholders who's only complaint was that the DNA was slow to issue decisions. Mr. Ashutosh Pandey of the consultancy Emerging Ventures India, summed up the general feeling well when he stated he was "frustrated by delay, not by decisions." Former MoEF Secretary Dr. Prodipto Ghosh, the architect of the Indian DNA, recognized the DNA's problems which he put down to an overburdened bureaucracy focused primarily on other tasks. He stated that if he were to do it over again, he would have created an independent body with its own staff and budget. ¶6. (SBU) Stakeholders were less sanguine about the performance of the CDM Executive Board which has rejected more projects from India than any other country. According to Mr. Pandey, the EB does not judge projects consistently and will approve one project while rejecting a similar one. Dr. Ghosh observed the same and accused the EB of letting politics influence their decisions. Dr. Roy of DSCL Energy Services accused the EB of being prejudiced against India and had personally considered the possibility of legal recourse against the EB for rejecting one of his company's projects. Mr. Cormier also recognized inconsistencies in the EB's decision-making and said that case law needs to be developed to ensure that similar projects from different countries are approved. All interviewees complained the EB lacks transparency, takes too long and in some cases refuses to reply to inquiries, and provided no avenue to appeal an EB decision. Dr. Ghosh stated that the lengthy and complex process of moving a project through the EB resulted in high operational costs and discouraged many SMEs from participating in the CDM. ¶7. (U) Exploring means to enhance the working of the EB sparked lively discussion among all those interviewed who shared several ideas on how to improve the EB. Recommendations included hiring more staff, developing a list of pre-certified projects, and doing away with the additionality requirement for CDM projects. While all interviewees complained about additionality, which requires a project to establish that the planned emission reductions would not occur without the additional incentive provided by CER credits, Dr. Ghosh provided the most nuanced analysis of the problem by noting environmental additionality, whether a product provided additional emission reductions, should be kept while financial additionality should be eliminated as it requires the EB to "guess investor motivations." -------------- -------------- LOWERED EMISSIONS, MORE JOBS, BUT LIMITED TECH TRANSFER -------------- -------------- ¶8. (U) The stakeholders generally agreed that the CDM has resulted in real GHG emission reductions that would not have otherwise occurred. According to Dr. Roy, the CDM program enabled cogeneration factories to install new technologies to reduce emissions and helped develop new wind power and biogas plants. The CDM also encourages other aspects of sustainable development. Dr. Roy said at least 150,000 jobs were tied to their CDM projects. Mr. Pandey said that developer's interest in sustainable development has increased substantially since the CDM was introduced four years ago. However, Mr. Chandra Bhushan of the NGO Centre for Science and Environment, said they are watching biogas projects closely to ensure they don't raise the price of commodities important to poor people's livelihoods. Mr. Cormier said that the CDM process is a great way to make companies aware of the impacts of climate change and as a system the CDM has exceeded his expectations. ¶9. (U) The stakeholders disagreed, however, on the quantity and NEW DELHI 00001935 003.2 OF 003 quality of new-technology transfer promoted by the CDM. Dr. Ghosh opined that the CDM could shorten the period for widespread adoption of new technology from 25 years to 8 years, but also noted the CDM had not led to substantial FDI or technology transfer in India. Dr. Ghosh mentioned that only the low hanging fruits had been plucked through the CDM and that increased tech transfer will be required to achieve emission reductions in the future. Mr. Bhushan expressed the same thought in virtually the same language while other interlocutors stated they felt that technology transfer was not occurring as quickly as they had hoped. -------------- AN UNCERTAIN FUTURE SLOWS CDM GROWTH -------------- ¶10. (U) As the future of the CDM is currently being negotiated as part of a successor agreement to the Kyoto Protocol's compliance period which ends in 2012, uncertainty has begun to impact the carbon market. Mr. Cormier noted a recent World Bank study indicated that CER credit prices would fall as the world gets closer to 2012. Joint Secretary Rashmi stated the CDM market was shrinking and that a commitment to CDM's future post-2012 was needed to remove uncertainties. Mr. Pandey stated no business was willing to invest in long-term CDM project due to the post-2012 uncertainty. All interviewees agreed U.S. participation in the CDM would be a positive and stabilizing force that would increase the demand for CER credits, expand the carbon market, and expose CDM projects to U.S. financing and technology. ¶11. (SBU) COMMENT: While praise for the CDM came as no surprise considering India is a net beneficiary and many of the persons interviewed had a direct stake in the success of the CDM, there appeared to be a genuine belief that the CDM was contributing to lowered GHG emissions. Chandra Bhushan, an outspoken environmentalist with no financial stake in the CDM, said he supported the CDM because it did work and there was currently no other alternative. On the other hand, praise for India's Designated National Authority seemed self-serving as the DNA appears to be little more than a rubber stamp approval process. On the day of the interview, Joint Secretary Rashmi stated he had come from a DNA panel meeting where 25 projects had been approved. Due to scheduling conflicts Rashmi conveyed to EmbOffs and the retirement reception for MoEF Secretary Meena Gupta held the same day, it appeared the DNA convened for a relatively short period and approved the 25 projects without a great deal of contemplation. There is very little doubt this is one reason India has the highest project rejection rate from the Executive Board which is the main source of India's rancor towards the EB. END COMMENT. MULFORD