Till June 2012, as many as 2,355 CDM projects of Indian companies (projects that are eligible for tradable certified emission reduction credits under the ‘clean development mechanism’) were approved. Yet, only 860 of them got registered.
A recent study of the Federation of Indian Chambers of Commerce and Industry (FICCI), which did a survey on why only a third of the approved projects got registered, found out that too much of procedure and financing issues were key hurdles.
The poor registration of the approved CDM projects signifies “the slow pace of acceptance at the international registration level and therefore dampens sentiment of the project developers.”
(Under the CDM mechanism as defined under Article 12 of the Kyoto protocol, projects that result in reduction of greenhouse gas emissions below a specified benchmark level, are eligible for ‘certified emission reduction’ credits—one credit per tonne of carbon-dioxide not emitted. These credits can be traded. These instruments will be bought by companies that are unable to bring down emissions from their own plants. By doing this, the companies effectively pay for and enable emission reductions elsewhere.
The CDM regime was to come to an end in 2012. FICCI’s study assumes significance because of the fact that recently the parties to the Kyoto protocol have agreed there will be a second commitment period under the Protocol, starting on 1 January 2013 and ending on 31 December 2017 or 31 December 2020. As a mechanism under the Kyoto Protocol, the CDM will continue through that second commitment period.)
FICCI says that the entire CDM process is too clerically-oriented with excessive focus on documentation, completeness checks and other irrelevant parameters. The process over-emphasizes the need for near perfect documentation instead of the overall objective of climate change mitigation.
Moreover, transaction costs of CDM are significantly high. There is a need to make the process simpler and economical, says FICCI.
One of the financial barriers requires the project developers to show that proposed project activity is less attractive (financially) without CDM. The designated bodies that validate and monitor emission reductions always require the Internal Rate of Return (IRR) to be around 9%-11% to pass this barrier, ie., any project with IRR above this is taken to be attractive even without CDM.
“This is an anomaly because financial institutions do not accept projects with IRR below 16%. This problem of contradictions mainly arises because financial institutions of every country have criteria and requirement which differs from that of the UNFCCC,” says FICCI.
It feels that if at all a financial barrier has to be there, it should be made country specific because interest rates and inflation are country specific.