CLEAN DEVELOPMENT MECHANISM :

The Clean Development Mechanism (CDM) is an arrangement under the Kyoto Protocol allowing industrialised countries with a GREEN HOUSE GAS (GHG) reduction commitment (so-called Annex 1 countries) to invest in emission reducing projects in developing countries as an alternative to what is generally considered more costly emission reductions in their own countries.

In principle, the CDM allows for a drastic reduction of costs for the industrialised countries, while achieving the same amount of emission reductions as without the CDM. In practise, however the emission reductions may be less with CDM than without it and may lead to unsustainable practises.

The CDM is supervised by the CDM Executive Board (CDM EB) and is under the guidance of the Conference of the Parties (COP/MOP) of the United Nations Framework Convention on Climate Change (UNFCCC).

History and Purpose

The CDM arose out of the negotiations of the Kyoto Protocol in 1997. The United States government desired that there be as much flexibility in achieving emission reductions as possible and desired a possibility of international emissions trading to achieve the emission reductions where it could be done at least cost. During the time it was considered a controversial element and was opposed throughout by environmental NGOs and initially by developing countries who felt that industrialised countries should put their own house in order first and feared the environmental integrity of the mechanism would be too hard to guarantee . Eventually, and largely on US insistence, CDM and two other flexible mechanisms were written into the Kyoto protocol. The purpose of the CDM was defined under Article 12 of the Kyoto Protocol. Apart from helping Annex 1 countries comply with their emission reduction commitments, it must assist developing countries in achieving sustainable development, while also contributing to stabilization of greenhouse gas concentrations in the atmosphere.

To ensure that industrial countries from making unlimited use of CDM, Article 12 has a provision that use of CDM be ‘supplemental’ to domestic actions to reduce emissions.

The CDM gained momentum in 2005 after the entry into force of the Kyoto Protocol which was a key risk factor for investors. Nevertheless, the throughput has been less than expected due to understaffing and lack of resources at the EB.

Outline of the project process

An industrialised country who wishes to get credits from a CDM project must obtain the consent of the developing country hosting the project that it will contribute to sustainable development. Then, using methodologies approved by the CDM Executive Board (EB), the applicant (the industrialised country in our case) must make the case that the project would not have happened anyway (establishing additionality), and must establish a baseline estimating the future emissions in absence of the registered project. The case is then verified by a third party agency, a so-called Designated Operational Entity to ensure the project results in real, measurable, and long-term emission reductions. Upon final approval by the Executive Board a number of Certified Emission Reductions, ( CERs ), are awarded to the applicant based on the difference between the baseline and the actual emissions.

Establishing a baseline

The amount of emission reduction, obviously, depends on the emissions that would have occurred without the project. The construction of such a hypothetical scenario is known as the baseline of the project. The baseline may be estimated through reference to emissions from similar activities and technologies in the same country or other countries, or to actual emissions prior to project implementation. However, the partners involved in the project have a clear interest in establishing a baseline with high emissions and this brings the risk of awarding spurious credits if insufficiently strict independent review is absent.

Financial issues

With costs of emission reduction typically much lower in developing countries than in industrialised countries, industrialised countries can comply with their emission reduction targets at much lower cost by being receiving credits for emissions reduced in developing countries as long as administration costs are low.

The award of CERs varies from project to project and also depends on the Type of Renewable Energy Source. Normally, the CERs’ awrded to a Hydel Project will be more than that of a Bio Mass based project.

Our Existing 6 MW Bio Mass Based power project at Mancherial, Andhra Pradesh has so far accumulated about 1,33,000 CERs’ and every year we expect to get 18000 CERs’ @ 3000 CERs’ per MW.

The Financial Benefit which we will be getting by trading the above 1,33,000 CERs’ @ 10 Euros per CER or Rs. 525/- per CER will be about Rs. 698 lakhs only from the exiting plant.

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