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.

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LOTS OF PROJECTS, LITTLE COOPERATION, FEW CREDITS
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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.

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INDIA'S DNA PRAISED, CDM EXECUTIVE BOARD PILLORIED
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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."

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LOWERED EMISSIONS, MORE JOBS, BUT LIMITED TECH TRANSFER
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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

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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.

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AN UNCERTAIN FUTURE SLOWS CDM GROWTH
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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