Newest Biggest Deal

In Kyoto, in 1997, nations of the world agreed the Clean Development Mechanism (cdm) was a competent way to combat climate change. The process would assist developed countries in lightening their burden of excessive greenhouse gas emissions. It would help developing countries on to a less polluting growth trajectory.

Says the 2003 National Action Plan to operationalise Clean Development Mechanism in India: "it is important the country should gear up and get take the maximum advantage of the CDM, which will not only benefit the industries, the farmers and project promoters, but will also achieving the objectives of Sustainable Development, reducing pollution and promoting environmental protection."

What has unfolded in India since then? How has cdm operationalised here? ritu gupta, shams kazi and julian cheatle investigate

Published: Tuesday 15 November 2005

Newest Biggest Deal

-- Ground truths
Wheeling-dealing for CDM benefits

Close to Godhra town in Gujarat is a factory of the Gujarat Fluorochemicals Limited (gfl). The mammoth factory has a unique claim to national, and global, fame: it is India's first project to be approved under the Clean Development Mechanism (cdm). It has successfully met the complicated demands of the clearance procedure of the international cdm Board based in Bonn, Germany. What's the world-saving deal gfl has clinched? According to information on the website of the United Nations Framework Convention on Climate Change -- unfccc, the secretariat that overlooks the global environmental treaty on climate change -- gfl can sell 3 million Certified Carbon Reduction Units (cers) each year. As the cdm mechanism provides, nations that must reduce their greenhouse gas emissions can buy these units, each a tonne of carbon dioxide equivalent. A buyer already exists for gfl: the Netherlands government, assisted by Rabobank. The project is truly global. The British government has allowed Ineos Fluor Limited -- a company that, among other things, manufactures and supplies refrigerants -- to provide gfl the requisite technology. The Japanese government has allowed Sumitomo Corporation to assist in maintaining and operating the plant; by so doing, they will pick up cers for the Japanese government.

What's gfl earning by selling 3 million cers every year? Down To Earth's efforts to discover prices were not successful. "As a bank policy, we do not give names of our clients," informed Genneke Segers, head of the carbon procurement department, Rabobank. "But since information regarding our transaction with gfl is available on the unfccc website, we can merely state we will buy cers from them. The price and volume are confidential information," added Segers. When contacted, Ineos Fluor Limited clarified they are not buyers, but that they own a part of the cer s. But "information regarding the volume of cers we own is between gfl and us," explained Louise Calviou, business development manager, Ineos Fluor. "Putting it in the public domain would mean a breach of contract."

In other words, the market for cers is completely non-transparent. During discussions with various cdm stakeholders Down To Earth found that the cheapest carbon credits can be sold for is us $5 per cer; the price can go up to us $10 per cer. Thus, if we assume the lowest rate, gfl will get Rs 68 crore each year. Since the deal is expected to last for 10 years, gfl -- at the least -- will make Rs 680 crore.

Also meet SRF
srf Fluorochemicals, a factory based in village Jhiwana, Alwar district, Rajasthan, is also in the cer business. As the company informs, it could sell up to 3.8 million cers every year. Their deal, too, is a 10-year one, making it 38.3 million cers. Here, too, the company was secretive about revealing the cer price to the public. When asked about it at an investors and analysts conference, Ashish Bharat Ram, srf's president and executive director, said: "We cannot share the price of the cers due to confidentiality reasons."

Assuming the least price per cer -- as above -- srf will annually make Rs 86 crore (Rs 860 crore over 10 years). srf's project has been validated by Det Norske Veritas (dnv) -- a project validating concern. It will shortly be listed for clearance at the cdm board. srf has signed contracts with uk -based icecap Trading (set up to trade in carbon) and multinational oil-major Shell International Trading Group for an initial 500,000 cers. P urchase agreements for cers have also been signed with two carbon trading funds: kfw Germany and edf Trading, uk.

Two companies. A global mechanism to combat climate change. It is a grave public concern that such a mechanism is riddled with lack of transparency. The process adopted should not become a precedent. No doubt it is a lucrative business. The stock prices of these companies have increased but this is not a matter of money, but of public global interest.

A gas called HFC-23
These companies manufacture hcfc-22, a gas used in refrigeration. It generates a by-product called hfc -23. The global warming potential of carbon dioxide is 1, hfc-23's potential is 11,700: it is that potent. Thus all srf and gfl have to do is to capture and destroy hfc-23 before it melts into the atmosphere. For this, the companies need 'thermal oxidation' (incineration) technology. srf says it needs Rs 13 crore for it; gfl didn't disclose the amount, but the cost will be comparable. And on this technology is predicated what could be called the cdm windfall the companies are looking to.

A windfall called HFC-23
hfc-23's destruction is globally the most popular cdm scheme. Projects promising to do this were the first the cdm board approved in India. The unfccc secretariat estimates that if 30-odd plants manufacturing hcfc -22 -- in the process incinerating hfc -23 -- already set up in developing countries apply for cdm benefits, more than 100 million cer s per year could be generated by 2012 (the time by which developed countries must meet their first set of commitments to reduce global warming). This is a large slice in the cdm market, which is 50-180 million tonnes of carbon equivalent, or 50-180 million cer s, per year, as per a 2005 study commissioned by the Union ministry of environment and forests (moef).

Now, this slice is just the thing developed nations want. And, as matters stand, burning hfc -23 is about the cheapest, easiest and most reliable way to cash in on cdm benefits. It is a very sweet deal. All it requires is incinerate the gas.

No wonder then, in terms of the projects registered and under unfccc validation, hfc -23 accounts for almost 12 million cers a year, roughly 24 per cent of all cer s being sold. No wonder, srf and gfl are dreaming of a rosy future.

Complicated global process
Is it easy to get a cdm project cleared? Project proponents develop a project design document (pdd), for which they usually hire a consultant (see chart: Worthy of credit). gfl and srf hired PricewaterhouseCoopers. The two companies then had to hire a set of auditors to independently check the project report and validate their projects -- the cdm board calls these auditors 'designated operational entities', does. If these entities give the green signal, it means the project meets unfccc criteria; the process is dominated by inputs from private validators and the cdm executive board seems to player a lesser role.

11 such does operate globally today, five in India. After the Board clears a project -- like it did gfl -- a second entity (one of the 11) is called in to certify in writing that the project indeed reduces greenhouse gas emissions. In srf's case dnv was the first-order validator; the company now has hired uk -based sgs to monitor its compliance.

Certification: true or false
Down To Earth has reviewed project design documents and made visits to the field to verify the existing situation. What it found should make governments question and revamp procedures urgently. Why?

Reason 1: The Marrakesh Accords (that lay down the cdm procedures) make it clear that cdm benefits cannot accrue to a project unless its environmental impacts are studied. If these impacts are "significant", an environment impact assessment (eia) must be done in accordance to rules laid down by a "host nation". The sgs -validator report for gfl says "existence of the [eia] report has been verified during site visit". However, despite repeated requests Down To Earth couldn't get the eia document from gfl and PricewaterhouseCoopers. The latter's representatives maintain eia has been done, but could not produce a copy of it for us.

Reason 2: srf and gfl are located, respectively, in Rajasthan and Gujarat. The project design documents for both projects say that the companies identified key stakeholders -- trade unions, villages -- and invited them for a consultation. srf says it called both together; gfl says it met them separately. But Down To Earth found something bizarre. For both gfl and srf, the same questions are asked during consultations. The answers are also verbatim, with even spelling mistakes being repeated in the documents (see box: Cut and paste stakeholders). Thus, even if the consultations were held, their record in the documents does not seem credible.

Clean plants: true or false?
Down To Earth then visited both plants and met stakeholders.

gfl: According to gfl 's project design document, prepared in 2003 and updated in 2004 after validation, the plan to build a 'thermal oxidation facility' was to be completed by September 2005. Yet Down To Earth , visiting the plant, found construction still under way. Further, gfl's management refused to allow Down To Earth access to the existing vent site, stating "proprietary information" rights.

Also, the gfl management refused access to the 'solar oxidation pond' in which effluents are treated before discharge. D K Sachdeva, vice president, operations, told Down To Earth the company was not producing any kind of pollution at all; any such talk was politically motivated. "As we are the only factory in this area, people make allegations to make money," he asserted. But some neighbouring villagers complained of air pollution, of crops being affected, especially during the rainy season. They also believed water pollution in their villages was on the increase, and this was because of leaching from the pond.

srf: Some neighbouring villagers claimed the water the factory used was depleting their aquifers. On a second visit Down To Earth made to the site, 10 days after the first foray, work had begun on a new effluent discharge channel.

Inside a local school, the handpump was painted red, warning children that the water was contaminated. Just outside, a yellow pond of industrial effluent explained why. The pond is fed by a yellow stream flowing through the village. People recount allergies, rashes, crop failures and no safe drinking water. The stream has two sources. One is the Bhiwadi Industrial Area. The other is srf . The company has an effluent treatment plant that meets the specifications of the Rajasthan Pollution Control Board (rpcb). However, some of the villagers insist that srf is polluting their water, as the groundwater around the plant is polluted.

Whose privilege?
Bargaining for cer prices, and selling them, is completely the privilege of the two parties involved. Where the national government comes in -- crucially -- is in deciding if a project meets the country's sustainable development criteria, fixed by a national cdm authority set up under unfccc obligations. In India, moef has set up such an authority (gazette notification dated April 16, 2004). It has the following criteria: "Social well being; Eeconomic well being; Environmental well-being and technological well-being". Although these are further defined, there are no parameters specified by which it would be possible to empirically find out if the criteria are being satisfied or not. Moreover, is the national cdm authority merely functioning like a clearing house? According to its member secretary R K Sethi, it meets once a month to clear anything between 10-40 projects: the project proponents submit the project design documents and make a short presentation, which are then reviewed by representatives from different ministries. When Down To Earth contacted Sethi, he clarified project rejection was usually not the norm in such meetings. Why? "Consultants like PricewaterhouseCoopers give good project design documents."

This is not surprising for Down To Earth . Industrialised country buyers require 'certified' assurance the 'emission reduction' they pay for is reliable. They only trust their own. But what is surprising is that moef's eligibility criteria for cdm simply mentions "sustainable development criteria" will be a basis to evaluate projects. In this spirit, moef's letter of approval for gfl states it "contributes to sustainable development in India". But how? It does not clarify. One could argue: the company's burning hfc-23. But the Union government has no regulations on hfc-23. It is imperative that the full impact, local or otherwise, must be subjected to careful scrutiny. The present process is unsatisfactory.

gfl 's project design document defines the company's contribution to sustainable development as "including empowering...rural communities in the vicinity...; indirectly increasing income security of vulnerable sections...through redistribution benefits on account of the economic activities associated with the project; and...mitigation of water and natural resource scarcity in and around the project area." But Down To Earth itself saw no evidence of any credible sustainable development. Moreover, project validator sgs accepts there are no monitoring guidelines to benchmark work done on sustainable development. It seems sustainable development is not an important enough goal.

The same disinterest was visible in Alwar. srf's validation report by dnv states that it is not responsible for whetting sustainable development criteria. The srf project design document talks about a massive 7,000 hectares afforestation project, in the waste land and hilly areas in the region, prominently advertised in the project design document. But when asked by Down To Earth, several srf officials seemed to be unaware of these afforestation plans.

Thus, if the ground reality is that projects with slated global benefits have nothing to contribute to national sustainable development objectives, however defined, they need to be reviewed carefully. cdm cannot become an industry hobby-horse made for industry, by industry. To permit this to happen subverts the objectives of cdm; and damages India's international reputation.

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