By Chatura Rodrigo
IPS Researcher
Background: Introducing the CDM
As defined by Article 12 in the Kyoto Protocol under the United Nation Frameworks Convention on Climate Change (UNFCCC), the Clean Development Mechanisms (CDMs) are one of three flexible mechanisms established with the purpose of assisting Annex I countries of the UNFCC to archive their committed amount of emission reduction in cost effective ways. It also allows contributions for the sustainable development of Non Annex I countries such as Sri Lanka.
The CDM is one of the Protocol's "project-based" mechanisms; in that the CDM is designed to promote projects that reduce emissions. The CDM is based on the idea of emission reduction "production". These reductions are "produced" and then subtracted against a hypothetical "baseline" of emissions. The emissions baselines are the emissions that are predicted to occur in the absence of a particular CDM project. CDM projects are "credited" against this baseline, in the sense that developing countries gain credit for producing these emission cuts.
Since 2001, the CDM projects have issued 1 billion Certified Emission Reduction (CER) units. Approximately, 63% of all CERs had been issued for projects based on destroying either Hydrofluorocarbons (42%) or Nitrous Oxide (21%), which is a conventional way of creating CERs. However, at the moment, the European Commission is proposing a full ban on CER’s from industrial gas projects. More than 1,000 CDM projects have qualified for carbon credits. Most of these are large-scale activities in the energy sector; in the waste sector, subsidized technologies include landfill gas, incineration, and cement kilns. India and China are the biggest takers, with a combined share of more than 50% of the projects. With some 3000 more projects awaiting registration, the CDM expects to generate nearly 3 billion CERs by 2012. Trade in CERs currently runs to an estimated US$ 10 bn a year. This has fueled a gigantic, global carbon trading market that is raking in huge profits for financing companies, consulting firms, brokers, and other market players. Currently there are five exchanges trading in carbon allowances: the European Climate Exchange, NASDAQ OMX Commodities Europe, PowerNext, Commodity Exchange Bratislava, and the European Energy Exchange.
The economic basis for including developing countries in efforts to reduce emissions is that the emission cuts are thought to be less expensive in developing countries than developed countries. The main official condition for a developing nation to be a part of this is: (1) developing countries have ratified the Kyoto Protocol, and (2) developing countries have established the Designated National Authority (DNA). There are some unofficial conditions also: holds the minimum annual Carbon dioxide emissions, exultance of baseline data, local capacity as a condition for effective CDM market participation, capacity of the DNA and possess a strong network of all the stakeholders. Among the developing nations, only 67% are able to satisfy both the official conditions. Therefore, despite the cost benefits, the official and unofficial conditions create limitations for developing countries to take part in CDM initiatives. Sri Lanka in this respect is no exception, and a sound CDM policy and a well-established DNA is absolutely essential if it is to take full advantage of CDM initiatives.
Sri Lankan Context
In February 2009, the Ministry of Environment and Natural Resources as the focal point, or the DNA, to the UNFCC and Kyoto protocol, developed the draft national policy on CDM and published it for public comments. After several amendments, the national CDM policy was developed as an interim policy. The objective of the national CDM policy is to “contribute to sustainable development through developing and establishing the institutional, financial, human resources, and legislative framework necessary to participate in Clean Development Mechanism (CDM) activities under the Kyoto Protocol while developing a mechanism for trading “Certified Emissions Reductions” (CER) and “Removal Units” (RMU) earned through CDM activities”. How far these objectives are close to being achieved remains to be evaluated.
For Sri Lanka, the projects suitable for emission trading opportunities fall in to the power, agriculture, waste, and transport sectors. Among these, the energy sector has been identified as having the highest potential. The current electricity consumption in Sri Lanka stands at 9.268 billion kWh. There is a potential for some of this energy requirement to be produced as CDM projects. Studies have suggested that the abatement cost of greenhouse gasses under CDM projects in Sri Lanka is very high for the options of solar and wind as energy alternatives; therefore making them impractical options for CDM projects. However, other renewable energy options such as hydro power and bio mass power projects have proven to be viable as CDM projects. There is a possibility that the 1.7 million hectares of scrub and chena lands of the country could be used for reforestation and energy plantations, making them ideal for CDM projects. Research suggests that Sri Lanka could earn Rs. 5740 per ton of carbon, by using only 10% of the 1.7 million hectares of the above mentioned land for reforestation.
Up to now, several initiatives have already been taken up by Sri Lanka to implement CDM projects. There are seven CDM projects in Sri Lanka that have been registered at UNFCCC as of September 2011. The Table below summarizes the details of the CDM projects, in addition to those already registered, in Sri Lanka at the moment.
Issues in the CDM Sector
In Sri Lanka, complexities in the processes and methodologies combined with insufficient guidance have created constraints for the DNA when attempting to bundle small projects as well as when identifying the bundling sizes. This has also led to an inability to use donor funds efficiently. Sri Lanka lacks baseline data and this has limited the validation capacities of the CDM projects. It is important that Sri Lanka attracts investors of CDM projects through the effective communication of the potential. However, Sri Lanka has limited strengths in this aspect.
Large hydro power and energy efficiency projects are a good prospect for Sri Lanka, but they have been constrained by high investment costs. This is fueled by the limited availability of public and private sector organizations that have suitable investment and financial frameworks, with associated incentives and fiscal instruments. Even though the Sri Lanka Carbon Fund (SLCF) was established to assist the developed of CDM projects through technical and financial interventions, the implementation of the SLCF is constrained by the lack of financial resources and man power. While commercial banks are keen on financing CDM projects, the use of traditional evaluation methods lacks the ability to account for the high risks associate with CDM projects.
Sri Lanka is also comprised of relatively small CDM projects, and is therefore, less attractive to the global carbon market. Even though most of the time these projects have many environmental and social benefits compared to larger projects, high transaction costs against small returns from CERs are a major limitation. The attraction of potential developers could be hindered by the rejection of projects, especially from countries that have less than 10 projects.
Suggestions to Improve the CDM Sector
Over the past several years, many suggestions have surfaced that could potentially eliminate majority of the issues related to CDM initiatives. However, the practicality of these suggestions needs to be evaluated carefully. Among the many, following are some of the suggestions that proved to be viable:
The programmatic CDM projects are extremely beneficial for the sustainable development of the country. A programmatic CDM project activity is one where the emission reductions are achieved by multiple actions executed over time, as a result of a government measure or a private sector initiative. Examples include grants or soft loan programmes to promote energy efficiency; such as, fuel switching activities or the use of renewable energies by private households, in the transportation sector or by small enterprises; as well as voluntary or mandatory efficiency standards for equipment or facilities. Additionally, the capacities of the DNA staff needs to be developed in the methodologies and procedures of CDM, and both China and India have very strong resource pools to support this. In the end, both capacity development and programmatic CDM projects can address the issue of the high transaction costs faced by Sri Lanka.
A clear understanding of the sector is essential for a CDM project to be initiated; therefore baseline studies are essential. Additionally, information is required on the priority areas of the country as well as on the non-eligible activities. Even though the Environment Impact Assessments (EIAs) and Social Impact Assessments (SIAs) are done where necessary, it is essential to conduct on-going and post assessments of the social, environmental, and economic impacts of the CDM interventions. Additionally, the DNA should establish CDM catalogues and investor guides. Therefore, a strong research component is needed within the DNA. Project developers should be encouraged to link with initiatives such as the CDM Bazaar. These initiatives can play an important role in matching the parties with regards to establishing insurance schemes for financial institutions that fund CDM projects.
It is of the utmost importance that the approval procedures of the DNA are clear and transparent and there ought to be a well-established mechanism for the monitoring of the project approval process. Documenting successful projects and the dissemination of this information also then becomes an important way of attracting more developers of CDM projects.
Conclusion
Sri Lanka has a high potential to implement CDM projects. Being a developing country with many opportunities for CDM projects in many areas, Sri Lanka is under the careful watch of the CDM project implementers. Sri Lanka has a sound CDM policy, developed through public participation and several careful amendments. In accordance with the key policy statement of the incumbent government, “The Mahinda Chinthana”, the necessary institutional background is formed for CDM operations and one would expect more CDM projects to have been implemented in the country by now. As discussed here, many of the constraints were only discovered once the operations began, with the establishment of the DNA and formulation of the policy. Therefore, Sri Lanka needs technical support and guidance, more capacity building and sound ways of attracting potential investors in order for the CDM sector to grow.
The UNFCC Doha conventions of December 2012 possess more challenges for the CDM sector globally. Latest findings have shown that larger scale hydro and coal power projects are not efficient in a CDM context. Additionally, potentially expanding sectors like rubber industries were heavily discouraged. At the same time, among several others, suggestions to enhance the contribution of the CDM projects towards sustainable development were also rejected during the discussion. However, agreements were made to carefully review the modalities and procedures of the CDM during 2013. The CDM sector of Sri Lanka will also definitely be affected by these decisions; therefore, it is essential that a fruitful dialogue is developed with all the stakeholders, to address the local as well as global issues related to CDM projects.
References
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