There is an old, rather sorry joke that goes like this. A person is in the habit of walking to and back from his office. One day, he returns home panting and out of breath. His wife asks him why he is in this state. He replies, "I ran behind a bus from the office and saved five rupees". His wife is not impressed, and replies, "Why didn't you run behind a taxi, and save fifty?"

This joke rarely brought out any laughs. But now, the same logic seems to be playing out in the Clean Development Mechanism (CDM), one of the most important instruments created to fight what is among humanity's biggest threats - climate change. The result is the same - fanciful cuts in the world's Green House Gas (GHG) emissions.

CDM, CERs and other jargon

The Kyoto Protocol adopted on 11 December 1997 was the first major global collective effort at addressing climate change. It recognised that anthropogenic emissions of Greenhouse Gases (GHG) are leading to global warming and climate change, with potentially disastrous consequences for the entire planet. Thus, reducing these emissions was at the centre of the Kyoto agreement. Eventually, it was agreed, based on an understanding that addressing climate change was a shared but differentiated responsibility, that the developed countries were required to reduce their GHG emissions to specified levels, while the developing countries were not required to subject themselves to any cuts.

One of the key mechanisms set up by the Protocol was the market based CDM with its tradable credits. The concept is very simple. It was argued that projects leading to a decrease in GHG emissions would be cheaper to implement in developing countries than in developed countries. So, developed countries could pay the developing countries to implement projects to reduce emissions, and the cut back in emissions achieved would count towards the reduction quota of the developed countries.

It was argued that this market based mechanism would be one of the most efficient means of reducing emissions. However, others argued that all this did was to allow the developed countries to avoid politically difficult decisions - of changing lifestyles, of changing economic growth patterns - that would have been required if they had to cut emissions in their own countries. Now, they can purchase the right to emit GHG and pollute as they want.

In practice, a simplified description of the way CDM is implemented is this. A project claiming to reduce emissions has to apply to the Designated National Authority (in India, the Ministry of Environment). If the DNA approves the project, it is submitted to the International CDM Executive Board (EB). The EB has appointed certain consultants as Designated Operational Entities (DOE), who are to validate this claim. Based on their validation, the EB will Register (the technical word for approving) the project. Once registered, the project will be issued Certified Emission Reduction (CERs) or carbon credits but only when it starts operation and after verification of its claims of reduction by a DOE other than the one that did the validation.

One CER is equivalent to one ton of carbon-dioxide emission saved. These CERs are bought by developed countries who can then claim that they have met their reduction target by the amount of CERs they have purchased. The CERs can be purchased directly from the project, or from the several international carbon trading markets that have come up. The entire business of managing these emissions is now running into billions of dollars.

One can pause and ask a question - what is meant by 'a project that will reduce emissions'? For example, India could claim that every person not using a car is preventing carbon emissions - and so should earn CERs. To avoid the kind of situation created by this argument, CDM allows credits only for projects that are 'Additional'. That is, projects - and emission cuts - that would not have come up without the support of the money that CDM brought to them. If this condition was not put, then any regular activity that cut emissions - which should anyway be taken up as a part of good policy - would be eligible for carbon credits and the developed countries would be allowed to continue to emit equivalent GHG. This would actually be a disincentive to long term global reductions.

However, this is precisely the effect that the CDM is having. While a larger critique of the functioning of the CDM is out of the scope of this article, I take the case of one of the grossest distortions in the CDM to illustrate this point - how large dam hydropower projects and their owners are claiming millions of dollars in carbon credits without any effective emission cuts.

Hydropower and CDM

According to Barbara Haya of International Rivers, a California-based international NGO that has been monitoring CDM for over five years, "Hydro is now the most common technology in the CDM, making up a quarter of all projects applying for approval, or already approved, by the mechanism's Executive Board (EB). Very few, if any, of these hydro projects can realistically be assumed to require carbon credits to be built. More than a third of the hydros approved ("registered") by the EB were already completed at the time of registration and almost all were already under construction."

A large number of big hydropower plants (and a number of smaller ones) are aiming to get carbon credits. From India, a project like the 192 MW Allain Duhangan has already been registered, and more than 10 others including the 1000 MW Karcham Wangtoo, the 450 MW Baghliar, the 600 MW Loharinagpala have been submitted to the UNFCCC or have been approved by India's Designated National Agency. Many of the proposed projects are also planning to get CDM carbon credits.

What is the problem, one might ask, with this? Wouldn't these projects have much lesser emissions than say a coal based power station?

The key issue is that if these dams (or other types of projects) provide the same benefit of power generation without associated GHG emissions, then they should be undertaken in their own right as a correct policy measure. In other words, if it is saving emissions, it should anyway be the choice. That is good policy. Giving such projects credits under CDM means that developed countries can continue to release equivalent emissions. Thus, the global reduction is zero, and the only thing that has happened is that money from taxpayers in developed countries has moved into the pockets of hydropower developers.

It is precisely to avoid such a situation that CDM insists on 'Additionality'. This means, a hydropower project cannot be considered under CDM unless it can be shown that it could not have been built without the CDM benefit. Then, one can truly say that the CDM money reduced emissions somewhere in the globe, reductions that otherwise would not have taken place. It is in this context that the CDM appears to have been grossly abused. Most of the big hydropower plants do not meet the additionality criteria and try to do so by leaps of imagination and logic.

Let us look at the Allain Duhangan project (ADP), now registered with the CDM and slated to get about 4.94 million CERs. At around 16 US dollars per CER, this comes to almost $75 million, or Rs.315 crores. Was the project really additional? Himanshu Thakkar of South Asia Network on Dams Rivers and People, who has been following the project for many years, says:

"The developer applied for and got the in principle and final Techno Economic clearances [in 2002], without mention of necessity of CDM credits for making the project viable. Such projects are taken up in India (as elsewhere) without CDM credits. The ADP developer himself had taken up the Malana HEP in the nearby area without the CDM credits, completed it and declared that it was a very profitable project.

It is an extreme absurdity that a project already completed applies for CDM credit, claiming that it cannot be built without CDM.

 •  Furore over carbon tax plan
 •  Pricing carbon correctly

Moreover, in the Environment and Social Impact Assessment for the project done in May 2003, it is stated "The project would be one of the cheapest sources of power generation in the Northern Region as compared to alternative of thermal and nuclear generation." Why should a project that is supposed to be the cheapest source of power, be even considered for CDM credits that are supposed to help make relatively unviable projects viable?

It is an extreme absurdity that a project already completed applies for CDM credit, claiming additionality, that is, it cannot be built without CDM. The 1020 MW Tala project, fully commissioned last year, and now in the CDM pipeline waiting for approval, is an example. Numerous other projects - already completed or under construction since many years, claim similar "additionality".

Indeed, many projects see CDM credits as the icing on the cake, and in some cases it can be the cake itself! In documents other than CDM applications, developers blatantly project CDM credits as the bonus, with not even a pretence that the project cannot be built without CDM. For example, Reliance Power, which has been allotted or likely to be allotted the Siyom (1000 MW), Tato II (700 MW) and Kalai II (1200 MW) projects in Arunachal Pradesh and the 400 MW Urthing Sobla project in Uttarkhand has declared its intention to register some of its projects with the CDM and has signed an MoU with consultants for this purpose. The Red Herring Prospectus issued by the company for its IPO earlier this year lists 55 internal and 11 external risks to its business. None of these diverse risks even mention the risk that the aim of getting CDM credits may fall through and jeopardise the projects. Indeed, the Company's plans of getting CDM credits are listed under "Other Opportunities"!

This is the reality. Most hydropower projects don't need the CDM credits to be built. The projects are not additional, and hence they really don't cut emissions. Thus, a gross mockery is being made of the basic principles and understanding of the Kyoto Protocol, with no real cuts in emissions.

A discredited mechanism

As a result of such distortions, a mechanism that is in any case fundamentally flawed is being further discredited with blatant misuse and abuse. A huge carbon credit business has emerged, with specialised consulting firms, financiers, and brokers making millions of dollars. Huge amounts of taxpayer money are lining the pockets of developers of big projects including dams, in the process diverting money from projects that really need them - small decentralised projects, genuinely sustainable, experimenting with new technologies, hence needing support. Meanwhile, there are no emission cuts, as these dams would have been built anyway.

The person who anyway always walked, is asking to be paid saying he walked behind the bus and saved money.