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Coping with Climate Change

In its Fourth Assessment Report, the Intergovernmental Panel on Climate Change has confirmed that climate change is real, has quantified its magnitude and future evolution, and has assessed its impact. The 2006 Stern report concluded that the economic costs of climate change are significant. There are many ways to mitigate climate change, and results of action undertaken through the Kyoto Protocol are now visible. This paper examines alternative policies for mitigating and adapting to climate change, beyond the year 2012 horizon of Kyoto, and how India can play an important role in this effort.

Special articles

Coping with Climate Change

In its Fourth Assessment Report, the Intergovernmental Panel on Climate Change has confirmed that climate change is real, has quantified its magnitude and future evolution, and has assessed its impact. The 2006 Stern report concluded that the economic costs of climate change are significant. There are many ways to mitigate climate change, and results of action undertaken through the Kyoto Protocol are now visible. This paper examines alternative policies for mitigating and adapting to climate change, beyond the year 2012 horizon of Kyoto, and how India can play an important role in this effort.

GAUTAM DUTT, FABIAN GAIOLI

M
ost of the sunlight and other invisible solar radiation reaching the earth passes through its atmosphere to reach the earth’s surface. A significant part of the solar radiation is reflected back to space, especially from light-coloured surfaces. The rest is absorbed by the surface, which is heated. The earth’s surface in turn radiates heat through the atmosphere in the form of infrared radiation.

The greenhouse effect is a natural atmospheric process caused by the presence of certain gases in the atmosphere that prevent the infrared radiation emitted from escaping from the earth’s surface to space. As a result, the temperature of the atmosphere increases, until a new equilibrium between ingoing solar radiation and outgoing infrared radiation is reached. The process is analogous to the way in which a greenhouse increases the temperature inside. The gases that absorb outgoing infrared radiation are called greenhouse gases (GHGs).

Some GHGs that exist naturally are: carbon dioxide (CO2) and small quantities of methane (CH4). Thus, the greenhouse effect has always been with us. In its absence, the earth’s mean temperature would be 30ºC lower than it is, which would mean the end of life on the planet, an ice covered place.

The progressive gradual rise of the earth’s average surface temperature, thought to be caused in part by increased con centrations of GHGs in the atmosphere, is called global warming, which is commonly described as climate change, although global warming is only one of the changes that affect the global climate.

How Serious Is Climate Change?

Our main concern is that since the industrial revolution there has been a considerable increase in the emissions of GHGs resulting in considerable increase in their concentrations in the earth’s atmosphere. The natural balance of the greenhouse effect is currently lost.

Emissions of GHGs through human activities are sometimes called anthropogenic emissions. These emissions also include certain GHGs that do not exist in nature. The main anthro pogenic emissions of concern are three natural GHGs (carbon dioxide, methane and nitrous oxide) and several “man-made” gases including chlorofluorocarbons (CFCs), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulphur hexafluoride (SF6).

Atmospheric concentrations of the natural GHGs can be determined for thousands of years in the past, from ice-core samples in Antarctica. Figure 1 shows these data together with more recent data based on measurements.

The concentration of these gases in the atmosphere has been increasing because of a variety of reasons. Carbon dioxide in the atmosphere is increasing as a result of the burning of fossil fuels such as coal, oil and, to a lesser extent, natural gas. Certain industrial processes such as cement manufacture also emit carbon dioxide. Another source of carbon dioxide is deforestation, e g, from the conversion of forests to farmland, since trees absorb carbon dioxide through photosynthesis. Methane is emitted from solid waste, wastewater, and from certain agricultural activities such as rice cultivation. Certain industrial processes as well as from agriculture and solid waste also emit nitrous oxide. The remaining principal GHGs are emitted by industrial processes and from products that contain these gases. For instance, CFCs and HFCs are used in refrigerators and air conditioners, and these gases leak out over time, especially when the equipment is discarded.

The serious nature of climate change and its consequences were widely recognised in 1988, and the Intergovernmental Panel on Climate Change (IPCC) was set up the same year. IPCC has been studying different aspects of climate change. The IPCC includes three working groups: (i) Working Group 1 (WG 1) assesses the scientific aspects of the climate system and climate change;

(ii) Working Group 2 (WG 2) assesses the vulnerability of socio-economic and natural systems to climate change, negative and positive consequences of climate change, and options for adapting to it; (iii) Working Group 3 (WG 3) assesses options for limiting GHG emissions and otherwise mitigating climate change.

Every few years, each working group publishes an Assessment Report. The Fourth of these reports (called AR4) was published this year.

Working Group 1 has already issued its part of AR4 [IPCC 2007a]. Some of their key findings are:

(i) Global atmospheric concentrations of carbon dioxide, methane and nitrous oxide have increased markedly as a result of human activities since 1750 and now far exceed pre-industrial values determined from ice cores spanning many thousands of years. The global increases in carbon dioxide concentration are due

Figure 1: Atmospheric Concentrations of Carbon Dioxide, Methane and Nitrous Oxide over the Last 10,000 Years (Large Panels) and since 1750 (Inset Panels)

10000 5000 0

350

precipitation amounts, ocean salinity, wind patterns and aspects of extreme weather including droughts, heavy precipitation, heat waves and the intensity of tropical cyclones.

(iv) Paleoclimate information supports the interpretation that the warmth of the last half century is unusual in at least the previous 1,300 years. The last time the polar regions were significantly warmer than present for an extended period (about 1,25,000 years ago),

10000 5000 0

reductions in polar ice volume led to 4 to 6 metres of sea level rise. (v) Most of the observed increase in globally averaged temperatures since the mid-20th century is very likely due to the observed

increase in anthropogenic GHG concentrations… Discernible human influences now extend to other aspects of climate, including ocean warming, continental-average temperatures, temperature extremes and wind patterns.

(vi) For the next two decades a warming of about 0.2°C per de-

Radiative Forcing (W m-2) Radiative Forcing (W m-2) Radiative Forcing (W m-2)

Nitrous Oxide (ppb) Methane (ppb) Carbon Dioxide (ppm)

1

0

300

cade is projected for a range of emission scenarios. Even if the concentrations of all GHGs and aerosols had been kept constant

250

at year 2000 levels, a further warming of about 0.1°C per decade would be expected.

2000

(vii) Anthropogenic warming and sea level rise would continue for centuries due to the timescales associated with climate processes and feedbacks, even if GHG concentrations were to be stabilised.

Changes, which earlier took millions of years, are now taking place

in decades without allowing ecosystems sufficient time to adapt. As a result, many species of flora and fauna could become extinct.

As noted above, the IPCC has two other working groups.

Working Group 2 published an update of their work in April 2007.

IPCC WG 2 reviewed the impact of climate change [IPCC 2007b]. For each area they classify statements according to the level of confidence: very high, high and medium. Only those are where impacts could be determined with a “very high” level of

0.4

1500

0.2

1000

0

500

confidence are listed: (i) Fresh water resources and their management; (ii) Food, fibre and forest products; (iii) Coastal systems and low-lying areas; (iv) Health.

330

IPCC WG 2 also evaluated how the world is adapting to climate change, and what adaptation measures are available.

What Is Economic Impact of Climate Change?

Governments in many developing countries and at least two industrialised countries (the United States and Australia) have, over the years, made statements to the following effect: “Yes, we know that climate change is happening, but economic growth is more important to us because this helps us reduce poverty, create employment, etc”. Statements of this type involve the implicit assumption that climate change is a nuisance, that it has little or no economic costs, while doing something about climate change would have a serious negative impact on the economy.

0.1

300

270

0

Is this assumption valid?

Time (before 2005)

Source: IPCC 2007a, Fig SPM-1.

primarily to fossil fuel use and land-use change, while those of methane and nitrous oxide are primarily due to agriculture.

(ii) Warming of the climate system is unequivocal, as is now evident from observations of increases in global average air and ocean temperatures, widespread melting of snow and ice, and rising global mean sea level.

(iii) At continental, regional, and ocean basin scales, numerous long-term changes in climate have been observed. These include changes in arctic temperatures and ice, widespread changes in

In October 2006, Nicholas Stern, head of the United Kingdom’s Government Economics Service presented his report on the Economics of Climate Change to the British government [Stern 2007]. The Stern Report estimates that “if we don’t act, the overall costs and risks of climate change will be equivalent to losing at least 5 per cent of global gross domestic product (GDP) each year, now and forever. If a wider range of risks and impacts is taken into account, the estimates of damage could rise to 20 per cent of GDP or more.

“In contrast, the costs of action – reducing GHG emissions to avoid the worst impacts of climate change – can be limited to around 1 per cent of global GDP each year”.

These conclusions are in sharp contrast to the implicit assumptions in public statements on climate change. The Stern Report finds that climate change is not just a nuisance, but can significantly reduce economic growth. And that mitigating climate change is not all that expensive. The Stern Report concludes: “the benefits of strong, early action considerably outweigh the costs”.

The economics of climate change can be formulated as three questions: (1) What are the economic costs of the impact of climate change? (2) What are the costs of adapting to the consequences of climate change? (3) What are the costs of mitigating climate change?

The conclusions from the Stern Report address the first and third questions at a global or world level. The key conclusions of the Stern Report are: (i) “The scientific evidence points to increasing risks of serious, irreversible impacts from climate change associated with business-as-usual (BAU) paths for emissions”; (ii) “Climate change threatens the basic elements of life for people around the world – access to water, food production, health, and use of land and the environment”; (iii) “The damages from climate change will accelerate as the world gets warmer”. Such changes could include “sudden shifts in regional weather patterns such as the monsoon rains in south Asia…” Moreover, sea level rise from “melting or collapse of ice sheets would eventually threaten land which today is home to 1 in every 20 people”; (iv) “The impacts of climate change are not evenly distributed – the poorest countries and people will suffer earliest and most. And if and when the damages appear it will be too late to reverse the process. Thus we are forced to look a long way ahead.” This is because our countries have less resources to counter the impact of climate change and also because developing countries are often “heavily dependent on agriculture, the most climate-sensitive of economic sectors…”

The Stern Report is not all bad news. For instance, it finds that while “emissions have been, and continue to be, driven by economic growth; yet stabilisation of GHG concentrations in the atmosphere is feasible and consistent with continued growth”. The report recognises that achieving large emissions reductions will have a cost. They estimate “annual costs of stabilisation at 500-550ppm CO2e to be around 1 per cent of GDP by 2050 – a level that is significant but manageable”.

“Stabilisation” means bringing the atmospheric concentration of CO2 to a certain level and maintaining it at that level. The stabilisation level depends on how much temperature increase we are willing to accept. Stabilisation may be achieved along different pathways, but invariably involves increased emissions for some time (since emissions are currently increasing and we cannot stop this increase overnight) but eventual decrease in total emissions to levels considerably below current levels [Meinshausen 2006].

The second half of the Stern Report considers policies to bring about emissions reductions, i e, mitigation options for climate change. Mitigation is considered below.

Can Climate Change Be Mitigated, and If So How?

Two very important conclusions of the IPCC WG 2 2007 report are: (1) Many impacts can be avoided, reduced or delayed by mitigation. (2) A portfolio of adaptation and mitigation measures can diminish the risks associated with climate change.

IPCC has a third working group analysing technologies and policies for mitigating climate change and their contribution to the Fourth Assessment Report was also published this year [IPCC 2007c]. Mitigation options have not changed over the years, though more options appear as technologies mature. Thus, an excellent review may be found in earlier IPCC reports [IPCC 1995; IPCC 1996a].

Climate change mitigation normally involves reducing GHG emissions. Some examples are given in Table 1.

Mitigation can also involve removing carbon dioxide from the atmosphere, usually through afforestation and reforestation; such activities are called CO2 sinks.

Carbon dioxide is the principal GHG, produced mainly from the combustion of fossil fuels and from deforestation. Improved efficiency in the use of fossil fuels and increased use of renewable energy sources are among the most promising options for reducing CO2 emissions. Insofar as non-renewable use of biomass fuels is one factor leading to deforestation, more efficient use of such biomass fuels would also reduce CO2 emissions. Not coincidentally, more efficient use of fossil and biomass fuels and increased use of renewable energy also provide other benefits, such as

Table 1: Some Options for Mitigating Climate Change

Greenhouse Gas Mitigation Category Specific Option and Their GWP1

Carbon dioxide Renewable energy Small hydro power
(GWP = 1) Biomass electricity
Biomass fuels (ethanol from
sugar cane, methyl ester from
vegetable oil)
Wind energy
Solar water heaters
Energy efficiency Buildings, lighting and household
appliances
Industrial motors
Power generation (high efficiency
coal or combined cycle natural
gas)
Power transmission/distribution
Vehicles
Cogeneration Combined heat and power
Switching to lower Electricity generation (e g, to
carbon fuel natural gas)
Industrial fuel use
Vehicle fleet conversion to use
compressed natural gas (CNG);
ethanol blends in gasoline and
diesel; methyl ester in diesel
Process CO2 emissions Modify raw material for cement
manufacture
Methane (21) Landfill gas Gas recovery and use
Alternative solid waste Separation, recycling, and
management composting or biomethanation of
organic fraction
Waste water Anaerobic treatment
Reducing natural Gas distribution networks
gas losses
Methane and N2O Animal waste Treatment to reduce emissions
(310)
N2O Manufacture of adipic Catalysers to eliminate N2O
acid and nitric acid emissions

HFC 23 (11,700) Manufacture of HCFC 22 Capture and destruction of HFC

23 PFC: CF4 (6,500); Manufacture of aluminium Process changes to reduce C2F6 (9,200) PFC emissions SF6 (23,900) Manufacture of Replacement of SF6 by other

magnesium cover gas.

Notes: (1) GWP: Global Warming Potential. Values shown are for 100-year time horizon, as published in IPCC (1996b). Although these values have since been slightly revised by the IPCC, these are the values applicable for the Kyoto Protocol until 2012.

Figure 2: Implications of Holding CO2 Emissions at Current Levels

Developed Countries Developing Countries

Current trend Constant global

8 emissions

Carbon Emissions (billion tonnes a year)4 Cut
8 4 Cut
0 0
2002 2052 2002 2052
Year Year

Notes: To hold global CO2 emissions flat at current level of about 7 gigatonnes of carbon (= 25.7 gigatonnes CO2) per year, developed countries (left) must reduce their total CO2 emissions while developing countries (right) will need to emit more to meet development objectives, the growth of emissions needs

to be less than current trends. Source: Socolow and Pakala 2006.

reduced air pollution and reduced risks from fossil fuel extraction and processing, besides providing improved energy service to rural areas of developing countries.

The lowest cost mitigation options generally involve energy efficiency improvement. If the cost of mitigation is measured in Rs per tCO2 abated, many efficiency options have in fact negative costs, since energy savings alone pays for the cost of the measure. Energy savings opportunities are often higher in developing countries, and are especially large for buildings and in transport [Enqvist, Naucler and Rosander 2007].

The electric power sector is one of the main emitters of CO2, and policy options involving energy efficiency and renewable energy can substantially reduce future emissions compared to a BAU scenario, as shown by Volpi, Jannuzzi and Gomes (2006) as part of a study involving many countries sponsored by the Worldwide Fund for Nature [WWF 2006].

The other good news is that with existing technologies it is possible to stabilise CO2 concentrations at say 500 ppm [Socolow and Pakala 2006]. However, even if we wish to stabilise concentrations at three times the pre-industrial level, at 850 ppm, the world as a whole would need to reduce its CO2 emissions substantially below current levels of about 25.7 gigatonnes per year. The responsibilities for industrialised and developing countries would be quite different, as shown in Figure 2.

While the Socolow and Pakala analyses are limited to CO2 emissions, there are many opportunities for reduced emissions of other GHGs, though realistic options for sequestration of these gases (i e, their removal from the atmosphere) are not believed to exist.

World Response to Climate Change

Climate change first gained significant attention in 1988. Not long afterwards, the United Nations Framework Convention on Climate Change (UNFCCC) was adopted by various government representatives in May 1992, and came into force in 1994 [UNFCCC 1994]. Today, the UNFCCC is one of the most widely supported international environmental agreements ratified by 188 states and the European Community (EC).

The ultimate objective of the UNFCCC is to achieve stabilisation of GHG concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system. Such a level should be achieved within a timeframe sufficient to allow ecosystems to adapt naturally to climate change, to ensure that food production is not threatened and to enable economic development to proceed in a sustainable manner. Countries that are parties to the UNFCCC are classified into two categories, giving rise to a third category including those countries that do not belong to the first two categories. They have different commitments imposed on them. These three categories are defined below:

The Annex I countries consist of the industrialised countries that were members of the OECD in 1992 and the countries with Economies in Transition (the EIT parties). The Annex II countries consist of the OECD members of Annex I excluding the EIT parties. They are required to provide financial resources to developing countries to undertake emission reduction activities as also develop and transfer environment-friendly technologies to the developing countries as well as EIT parties. The non-Annex I countries are mostly developing countries, including India. Some of the countries that are least developed and especially vulnerable to the effects of climate change are given special consideration under the UNFCCC.

The decision-making authority of the UNFCCC is the Conference of the Parties (CoP), which is established as the supreme body of the convention. The CoP meets annually. One major agreement that was reached at the Third Conference of the Parties (CoP3) at Kyoto, Japan in 1997 is now called the Kyoto Protocol (KP).

According to the KP, Annex I countries agreed to control the emissions of the following six sets of GHGs, not controlled by the Montreal Protocol: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulphur hexafluoride (SF6). Basically, Annex I countries agreed to reduce the total emissions of these gases, in terms of carbon dioxide equivalent, by at least 5.2 per cent compared to 1990 levels, by the period 2008-12 (called the first commitment period) [Kyoto Protocol 1997].

The Kyoto Protocol came into force in February 2005. Most countries have ratified the protocol, important exceptions being the US and Australia. The US is the single largest emitter of GHGs.

The geographical location of GHG emissions or the reduction of those emissions is not relevant to climate change, since these gases mix in the atmosphere. Moreover, some countries may find it more expensive to achieve emission reductions than others. Therefore, the Kyoto Protocol included three flexibility mechanisms to allow Annex I countries to undertake climate change mitigation outside their frontiers. The three flexibility mechanisms under the Kyoto Protocol are: Joint Implementation (JI), Clean Development Mechanism (CDM), and Emissions Trading (ET). The first and third only involve Annex I countries, while the CDM also involves developing countries, and will be the only one discussed here.

Under the CDM, established in Article 12 of the Kyoto Protocol, Annex I countries can participate in the implementation of projects that reduce GHG emissions in non-Annex I countries. The emission reductions achieved by implementation of such projects as compared with the emissions under a baseline scenario, duly certified, are treated as Certified Emission Reductions (CERs), which can be bought and used by the Annex I countries to comply with their emission reduction commitments.

Clean Development Mechanism

The CDM is supervised by an executive board, supported by a number of panels. The project participant, sponsor or developer is the public or private organisation that proposes to initiate the CDM project. The host country is the non-Annex I country where the CDM project is to be implemented. Each party to the Kyoto Protocol has a governmental authority called the designated national authority (DNA). Each CDM project must be approved by the DNA of the host country as well as by that of any other country involving the project participants. The CDM project cycle starts with an evaluation of whether a given concept would qualify as a CDM project, based both on meeting requirements to qualify under the CDM as well as commercial considerations.

Each CDM project needs to demonstrate so-called additionality, i e, that the emission reductions would not have occurred in the absence of the certified project activity. The baseline for a CDM project activity is the scenario that reasonably represents the anthropogenic emissions by sources of greenhouse gases that would occur in the absence of the proposed project activity. Additionality is a very complex issue. Basically, one needs to demonstrate that a proposed CDM project activity would not have happened anyway, if the CDM did not exist. Demonstration of additionality is often very controversial. Many proposed CDM projects are questioned and may be rejected on this issue.

With non-Annex 1 countries under no quantitative commitments to future emissions so far, emissions reductions achieved through the CDM can contribute to the emissions targets of the Annex 1 countries only if CDM projects are additional. Therefore, responsible project developers do not accept projects where the additionality is questionable, and responsible governments should discourage the submission of projects of questionable additionality.

If the initial evaluation demonstrates that the proposed project is additional and commercially viable, project developers draft the project design document (PDD). Each PDD must have a baseline scenario of emissions against which project emissions need to be compared in order to determine emissions reductions, as well as a monitoring plan to accurately measure emissions reductions. Each PDD must use an approved baseline and monitoring methodology, or propose a new one, pending approval from the CDM Methodologies Panel and Executive Board.

Each PDD must be approved by a duly accredited Designated Operational Entity (DOE) in a process known as validation prior to be submitted for registration under the CDM. Once implemented, a registered CDM project would accumulate emissions reductions, which need to be monitored. The monitoring results need to be verified by a DOE, who then submit a certification of the emissions reductions actually achieved by the project over the period in question. If the CDM Executive Board is satisfied with the verification and certification, CERs are issued.

CERs generated through CDM projects can be utilised mainly in three different ways: (i) CER purchase/sale options: In this case a buyer from an Annex 1 country signs a purchase/sale agreement with the organisation implementing the CDM project to buy/sell the CERs. (ii) Direct investment to acquire CERs: In this case a buyer from an Annex 1 country invests in the CDM project activity and keeps the CERs generated by the project.

(iii) CERs for own use: This applies to multinational companies in Annex 1 countries. Such companies may implement CDM projects in their subsidiaries in non-Annex 1 countries and retain the CERs for their own use, to be credited to their (Annex 1) country.

Expectations and Reality

When the flexibility mechanisms for the Kyoto Protocol were being designed, the CDM was expected to fulfil certain development and technological objectives, while helping to mitigate climate change. Thus, CDM was expected to promote renewable energy, energy efficiency and low-carbon or renewable fuels, all involving CO2 emissions.

However, the CDM is a market mechanism whereby different project ideas compete with one another on the basis of cost and other aspects. Figure 3 shows the types of projects that have been presented to the CDM, and quantifies emission reductions expected from these projects. Most of the emission reductions are concentrated in relatively few projects, all involving gases other than CO2 – specifically hydrofluorocarbons (HFCs), nitrous oxide (N2O) and methane (CH4), all gases with global warming potential (GWP) much higher than CO2. The greatest number of projects presented, however, does involve CO2 emission reductions, through power generation using biomass, hydro and wind resources.

Besides projects that promote sustainable development through CO2 emissions reductions in energy projects, another initial objective of the CDM was technology transfer from industrialised to developing countries. However, the reality is that sponsors within the developing countries themselves propose most CDM projects, without any technology transfer or investment financing from Annex 1 countries. They involve technologies already

Figure 3: CDM Pipeline Showing Number of Projects and CERs Expected by 2012

Energy efficiency (commerical)

-

PFCs

-

Tidal

-

Solar

-

Energy distribution

-

Transport A/R

-Geothermal -Biogas -Coal bed methane -Fossil fuel switch -Cement

-

Agriculture

-

Fugitive

-

Hydro

-

Wind

-

Biomass energy

-

Energy efficiency (industry)

-

N2O

-

Landfill gas

-

HFCs

-

Energy efficiency (residential) Energy efficiency (commerical) PFCs Tidal Solar Energy distribution Transport A/R ---------0 | 2 | 4 | 6 | 8 | 10 ||
No of projects CERs by 2012

393...

-

-

-

-

-

-

0 50

Million CERs expected by 2012 Source: Bailis 2006.

available within the developing countries, and in some cases, e g, alcohol and other biomass energy, technology is in fact more advanced in developing countries. All the projects involving the high-GWP gases do involve significant technology transfer, and most projects involving methane emission reductions provide substantial local environmental benefits as well. Curiously, the fact that the market “discovered” that some of the lowest cost opportunities for GHG emissions reductions are in gases other than CO2 has been seen as a major defect by Wara (2006) in his review of the CDM. Some of Wara’s criticisms of the CDM are patently false, e g, that “the price paid is between 10 and 100 times greater than the cost of most of these reductions”. Except possibly for the HFC projects, which are already exploited, there is no project category where the revenues exceed costs by more than a small factor. In fact, the availability of these lucrative projects has depressed the CER prices so that in mitigation projects involving energy and CO2, the contribution of CDM revenues is relatively small. It is believed that many of the energy/CO2 CDM projects would have been implemented in any case for other reasons, e g, to meet increasing energy demand, to reduce investment requirements (energy efficiency), to move away from fossil fuels, and government policies promoting renewable energy. In other words, many of these projects are not strictly “additional”, according to the CDM rules. Since the promotion of these projects was among the original objectives of the CDM, the CDM executive board had to relax the requirements for additionality in order not to leave them out altogether.

Today, as opportunities for significant mitigation involving gases other than CO2 (and methane) are practically exhausted, one has to turn back to see how energy/CO2 projects may be promoted in the future. Specific proposals have recently been

100 150 200 250

No of projects (June 2006)

made so to facilitate energy efficiency projects within the CDM [Arquit Niederberger and Spalding-Fecher 2006].

European Union Emission Trading Scheme and the Clean Development Mechanism

In an effort to ensure collective compliance with the Kyoto Protocol by all European Union (EU) member states, the EU created its own cap-and-trade emission reduction system, the EU Emissions Trading Scheme (EU-ETS) in 2003 (Directive 2003/87/EC).

The EU ETS commenced operations in January 2005. The scheme is based on the allocation of GHG emission allowances (EUAs), which may be traded, to specific industrial sectors through national allocation plans (NAPs) with oversight by the European Commission (EC). NAPs set out the overall emissions cap for the country and the allowances that each sector and individual installation covered under the directive receives. The allowances will be distributed to energy installations with a rated input greater than 20 MW, plus installations greater than a certain size in the steel, minerals and paper industries. The first phase of the EU ETS covers the period 2005-2007, while the second phase coincides with the Kyoto Protocol’s first commitment period, from 2008 to 2012. The first phase of the EU ETS applies to some 7,300 companies and 12,000 installations in six major industrial sectors across the enlarged EU. These industrial sectors include: utility combustion plants; oil refineries; coke oven iron and steel plants; energy-intensive industry, such as cement, glass, lime, brick and ceramics. The EU Emissions Trading Scheme (EU ETS) is expected to cover 45 per cent to 50 per cent of the EU’s total carbon dioxide emissions and is

Figure 4: Prices of EUA 2007 and EUA 2008 Compared to that projects. This delay caused shortages and caused CER prices to of CERs

increase. The increase in prices was primarily due to the fear

All values in Euros per tonne CO2 equiv

that regulatory inefficiencies – inherent of a bureaucratic process at its infancy – would not be easily resolved in the short term and

x
x x x x x x
x
x x x x x x x x x EUA 2008
x CER Price x x x x
x x x
EUA 2007x x x xx x x

could result in a lower supply of project-based emission reduc

tions. CER prices by early 2006 reached a maximum of €12.

(b) Market realignment: By April 2006, information released

from European installations revealed a severe over-allocation of

“allowances” which caused EUA prices for the first commitment

period1 to plummet. EUA prices dropped from an average of

around €30 to about €13 in a couple of days, a clear demonstra-

Euro per TCO2e

tion of the volatile characteristics and overreactions that are inherent of an infant market.

It is worth noting that CERs carry more flexibility than EUAs as they are attractive to all buyers, not restricted to the EU ETS and in addition are bankable, meaning that CERs accumulated in any year can be used to offset emissions commitments in any year from 2008-12. As a result, CER prices tend to be referenced to those of the 2008 EUAs. Figure 4 illustrates how, by end of 2006, EUA prices for 2007 had lost most of its value because installations held an excess of non-bankable EUAs.

(c) Post realignment period and the flight to quality: Between mid-2006 and early 2007 EUA (2008) prices averaged €15. The volatility levels however, increased substantially as the market continued to react to news announcements relating to the Phase II National Allocation Plans (NAPs) in Europe, indecisions in Canada and strong Japanese procurement needs.

Also during this time, institutional inefficiencies related to the CDM and JI slowly began to improve and the supply of projectbased emission reductions increased as projects reached implementation and issuance stages.

The combination of the two events described above, resulted in the realisation that the carbon market was deepening, maturing, becoming more competitive and what is probably more important for sellers, more selective.

Today, buyers in the carbon market are looking not necessarily for “access” but for quality and diversification when analysing project-based emission reduction alternatives. There is abundant supply of project-based emission reductions from China and eastern Europe – primarily Russia – so it is delivery assurance that is turning into a major concern.

CER prices are averaging around €8-€10 for standard transactions involving payment on delivery with no guarantees, and €12 for transactions carrying a guaranteed delivery. Guaranteed delivery in this type of transactions involves either (a) a full-balance sheet guarantee from the project owner, i e, the project owner’s balance sheet to guarantee the full amount of the transaction in case of a delivery failure, or (b) a secondary market transaction where an entity that has already purchased a primary market CER on delivery re-sells the CER now backed up by a full balance sheet guarantee or EUAs delivered in replacement. Guaranteed project-based emission reductions transact at 75 per cent to 85 per cent of EUA (2008) depending on the firmness of the guarantee.

Voluntary Markets for Emissions Trading

Many countries have policies and programmes that help reduce or avoid GHG emissions. Some are undertaken specifically to address climate change; others are driven principally by economic, energy, or development objectives, but at the same time contribute to

10/1/20067/2/20067/3/20064/4/20062/5/200630/5/200627/6/200625/7/200622/8/200619/9/200617/10/200614/11/200612/12/20069/1/20076/2/20076/3/20073/4/2007

Source: Point Carbon web site (www.pointcarbon.com)

set to create the world’s largest mandatory greenhouse gas emissions trading scheme [ECLAC 2006].

Failure by participants to meet their caps will result in a fine of euro 40 per tonne of CO2 in excess during Phase I (2005-07), rising to euro100 ($120) per tonne (equivalent) in Phase II (200812). And paying the fine does not remove the obligation to retire the missing certificates. The scheme allows for future extension to other greenhouse gases as well as to other sectors such as transport. It also allows for links to other national emissions trading schemes from non-EU states [EU ETS 2007].

The EU’s “Linking Directive” (Directive 2004/101/EC) creates the conditions to use credits generated by emission reduction projects certified by the Kyoto Protocol, CERs and Emission Reduction Units (ERUs), originating from Joint Implementation projects, within the EU ETS market. It allows member states who obtain such credits to convert them into allowances and use or trade them within the EU ETS. CERs from the Clean Development Mechanism could be used in Phase I and Phase II, while ERUs (credits from Joint Implementation) only in Phase II.

One major market analyst notes that the “global carbon markets were worth €22.5 billion in 2006. The market saw transactions for 1.6 billion tonnes of CO2e. The EU ETS accounted for 62 per cent of the volume and over 80 per cent of the value. EU ETS saw 1 billion tonnes of CO2 transacted, worth €18.1 billion. This was 2.5 times higher than in 2005. The CDM saw transactions for 523 Mt CO2e in 2006, with a secondary market adding 40 Mt and a combined value of €3.9 billion” [Point Carbon 2007b].

Below we look at how the EU ETS and the CDM have acted in determining prices for emissions reductions.

(a) 2005-early 2006: As the Kyoto Protocol was ratified in February 2005 and the emissions trading scheme of the European Union (EUETS) began its first phase of operations at about the same time, a couple of factors were instrumental in creating a feeling of shortage in the market.

On the one hand, an overestimation of the “allowance” needs of European “installations” set off fears of shortages during their first commitment period and as a consequence industries in Europe increased the demand for emissions allowances (EUAs) of the EU, also denominated in tonnes CO2 equivalent), pushing prices sharply up. The price of EUAs during early 2005 was €8 and it increased to €30 by early 2006.

On the other hand, there was a perceived delay in the registration and implementation of CDM (and other flexibility mechanism) climate efforts. Several voluntary GHG emissions reduction schemes are running parallel to the Kyoto Protocol. Among them those implemented in US and Australia are worth mentioning, since these two countries are the only developed countries that have not ratified the Kyoto Protocol.

US Position

The Bush administration continues to encourage companies from energy intensive industries to take voluntary action to reduce their GHG emissions and has declared no intention to either ratify the Kyoto Protocol or regulate GHG in the country. While there is no national mandatory carbon offset programme in the US, various regional, state and regional programmes have taken the lead. California has enacted GHG standards for cars and light trucks and a mandatory target to reduce statewide emissions from all sources to 1990 levels by 2020 (a 25 per cent reduction compared to “business as usual” projections). Twentytwo states and the district of Columbia require that a significant percentage of their electric power come from renewable sources. At the federal level, the US has a number of voluntary programmes and bills have been proposed in Congress to establish mandatory economy-wide GHG limits.

Many states have made commitments to reduce future GHG emissions, of which the most important maybe the Regional Greenhouse Gas Initiative (RGGI) and the California Global Warming Bill. Other activities of note include the Chicago Climate Exchange, the California Climate Action Registry and the Climate Trust.

The RGGI is a cooperative effort by 11 north-eastern and mid-Atlantic states to develop a regional strategy for reducing carbon dioxide emissions by using a multi-state “cap-and-trade programme” with a market-based “emissions trading system”. The Chicago Climate Exchange is a member-based exchange for voluntary GHG reductions, trading and registry for the US. Carbon credits called Carbon Financial Instruments or CFIs, are registered under the Chicago Climate Exchange and traded amongst its registered member companies in the US. Companies that fail to reduce their own emissions can purchase credits from those who make extra emission cuts, or from verified offset projects.

The California Climate Action Registry is a voluntary programme to help companies and organisations in California to register an inventory of their GHG emissions. The purpose of the Registry is to establish GHG emission baselines against which any future GHG emission reduction requirements may be applied.

The Climate Trust was organised in 1997 in response to Oregon legislation that required new power plants built in Oregon to offset part of their emissions of CO2. The Oregon Standard allows power plants to comply by paying mitigation funds to a nonprofit organisation such as the Climate Trust. In turn, the Climate Trust uses these funds to purchase greenhouse gas offsets that are generated by projects that avoid, sequester, or displace carbon dioxide on behalf of the power plant owners.

Kyoto Protocol beyond 2012

The Kyoto Protocol set emissions targets for the first commitment period, 2008-2012. The protocol established that parties are obliged to negotiate emissions targets for the following commitment periods and that such negotiations should commence seven years prior to the end of the first commitment period. So far negotiations have been postponed, while there has been some discussion on new targets for Annex I countries and new non-Annex I parties (e.g. China, India, Brazil, and Mexico) as well as a dialogue for long-term cooperative action that includes countries that have not ratified the Kyoto Protocol yet (e g, US and Australia).

Parties have submitted their views regarding articles 3.9 and 9 of the Kyoto Protocol. There is a divergent position between Annex I countries and non-Annex I countries (represented by the negotiating group G77 and China) regarding emissions targets by non-Annex I parties. While Annex I parties are asking for targets from non-Annex I parties, the latter only support strong commitments for Annex I parties.

The current concern about climate change impacts and consequences has motivated the international community to claim for the achievement of a powerful post-2012 regime.

One survey indicates a 72 per cent likelihood that the next US president will support strong climate policy. US re-engagement in climate negotiations would increase the likelihood of a new Protocol for the immediate period after 2012. Seventy-one per cent of the survey respondents expect there to be an international climate agreement post-2012, with only 9 per cent not expecting any agreement at all. US and Australia are both seen as likely (60 per cent) to join the new agreement, and China (36 per cent) is seen as a more likely candidate than India (30 per cent) [Point Carbon 2007b].

Point Carbon has also estimated a likely political scenario for the 2013-2032 period, in which (i) a new Kyoto-like Protocol will be signed by 2010 for the period 2013-2017; (ii) the US will not ratify in time for 2013, but will begin by linking to the global trading system and become a full member from 2018; and

(iii) China will join around 2018 with targets, probably along with a few other rapidly industrialising developing countries [Point Carbon 2007a].

The EU has been leading the strongest actions to deal with climate change issues. In 1997 they proposed common targets set out in the EC white paper, which foresee a doubling of the share of renewables in total energy consumption by the year 2010. Individual targets for each sector were also set out in this document.

The EU also launched discussions on its future long-term strategy to fight global warming. Reducing GHG emissions from transport and making continued use of market-based mechanisms such as emissions trading were among the main elements of the proposed strategy. But the first and biggest challenge will be to draw all major world emitters –including the US and China – into a binding emission-cutting scheme.

On February 9, 2005, the commission proposed a strategy for the EU’s future climate change policy after 2012 entitled ‘Wining the Battle against Climate Change’ [EU 2005]. The strategy suggests focusing on the following core elements: (i) Persuading all major world emitters to commit to a binding scheme, including the US and rapidly emerging economies such as China and India, (ii) including more sectors in emissions reductions, including transport (aviation, maritime) as well as tackling the deforestation that increases global warming in some regions,

(iii) promoting climate-friendly technologies, (iv) market-based instruments such as the EU Emissions Trading Scheme, and

(v) adaptation policies in Europe and globally to deal with the inescapable impacts of climate change.

However, the commission preferred not to define precise targets for reducing GHG emissions in its draft, arguing that the paper was only designed to “structure the future negotiations of the EU with its global partners”.

The summit of EU leaders on March 22-23, 2005 only agreed to flexible targets for 2020 [EU 2005]. The summit conclusions stated that a 15-30 per cent cut in GHG emissions should be considered for 2020, but only in the light of future work on how the objective can be achieved, including the cost-benefit aspect. The 2007 Spring European Council demonstrated the EU leadership in the fight against global warming. EU heads of state and government adopted an energy policy for Europe, which does not simply aim to boost competitiveness and secure energy supply, but also aspires to save energy and promote climate-friendly energy sources.

EU leaders set a firm target of cutting 20 per cent of the EU’s GHG emissions by 2020. The EU would be willing to put this goal up to 30 per cent if the US, China and India make similar commitments. EU leaders also set a binding overall goal of 20 per cent for renewable energy sources by 2020, compared to the present 6.5 per cent. This will require a massive growth in all three renewable energy sectors: electricity, biofuels and heating and cooling. This renewables target will be supplemented by a minimum target for biofuels of 10 per cent in overall transport petrol and diesel consumption by 2020.

If successful, this would mean that by 2020 the EU would use approximately 13 per cent less energy than today, saving 100 billion euro and around 780 million tonnes of CO2 each year. The commission proposed that the use of fuel efficient vehicles for transport is accelerated; tougher standards and better labelling on appliances; improved energy performance of the EU’s existing buildings and improved efficiency of heat and electricity generation, transmission and distribution. Commission chief José Manuel Barroso said it was time for a “post-industrial revolution”, which would see Europe slash GHG emissions by 20 per cent by 2020.

The comprehensive package of measures to establish a new energy policy for Europe to combat climate change and boost the EU’s energy security and competitiveness contains however a series of ambitious targets on GHG emissions and renewable energy while it also aims to create an internal market for energy, strengthening effective regulation.

The Pew Centre on Global Climate Change has conducted a survey of approaches on the international climate efforts beyond 2012 [Pew 2004]. Following with commitments established through multilateral negotiations, two approaches were considered: continuing the legally-binding approach of the Kyoto Protocol,

defining commitments in an ad hoc basis, in terms of incremental

6

changes from the reference levels, or designing a rational ap

proach according to long-term stabilisation objectives, such as

5

the “Contraction and Convergence” proposal (see the box). Few approaches propose assuming a binding emission target or sub

4

mitting a list of policies and measures aimed at achieving a non

3

binding target. Some approaches propose that states define their

commitments themselves, according to domestic emissions tar-2

gets, efficiency standards, carbon taxes, etc. Mixed approaches were

1

also considered.

developed, they “graduate” and join those countries that have already made quantitative emissions targets, while the latter countries agree to further reduce their emissions: “deepening”. This would help reduce emissions reductions, while sparing the poorer countries. Under the proposal, India would not graduate for some time to come. In other aspects it would be a continuation of the Kyoto Protocol regime, i e, no major changes in the rules would be needed.

Regarding the kind of commitments, two cases were analysed: emission targets and policies and measures. The first ones represent obligations in terms of results at the final stage of the commitment period while the second ones are obligations in terms of conducting actions as time goes on.

Emission targets could be absolute (fixed targets with respect to the baseline represented by the projection of the businessas-usual emissions during the commitment period), dynamic (targets indexed to other variable, such as GDP, to address uncertainties), conditional (developing country targets subject to the assistance of developed countries), and sectoral (sector-based

Box: Contraction and Convergence

If total emissions need to be reduced, the question that immediately follows is: how would the reduction in emissions be distributed among countries? There are of course many answers, but one reasonable approach is called “Contraction and Convergence” (C&C) [GCI 2007]. We have already seen the “Contraction” part, whereby total emissions must be reduced if we are to stabilise CO2 emissions at an acceptable, reasonable level by a given year. The “Convergence” part implies that by a certain future year, the per capita emissions of all countries converge to a common value. This is entirely consistent with the idea expressed by India’s Environment Minister at the First Conference of the Parties (COP1) to the UNFCCC: “This means devising and implementing a programme for convergence at equitable and sustainable par values for consumption of fossil fuel on a per capita basis globally”. The Global Commons Institute, that has promoted C&C since the early 1990s, provides a model by which scenarios for the future evolution of emissions may be determined by country or region. These scenarios depend on the stabilisation level of CO2 desired, the years by which C&C are to be attained The C&C option is of course resisted by industrialised countries that have considerably higher per capital emissions compared to the developing countries. Nevertheless, even in the C&C scenarios, we note that developing countries will also eventually need to reduce emissions if we are to stabilise the world’s climate.

Figure 5: Carbon Dioxide Emissions from Fossil Fuel Burning from 1860 to 2000, and Projections according to the Contraction and Convergence Scenario, for the Case Where Co2 Concentrations Are To Be Stabilised at 450 ppm by 2045

8

7

billion tonnes carbon from fossilfuel burning Rest of OECD India China US RoW

186018801900192019401960

One interesting proposal for the post-2012 period, from 0 Michaelowa et al (2003), called Graduation and Deepening, deserves mention. The idea is that as countries become more

1980200020202040206020802100

targets defining, for example, long-term zero emission targets for particular sectors).

Among the policies and measures the survey includes technology and performance standards (promotion of energy efficiency standards at the production process level and the development of new cleaner technologies), domestic carbon taxes (fixed taxes could be more expensive than targets that give rise to trading schemes), emission trading (specific schemes designed to reach a global target based on caps and trade systems), and removal of subsidies (facilitation of competitiveness of options not favoured by subsidies).

In order to differentiate the variety of proposed commitments the following criteria (many of them applied to developing countries) were considered: per capita GDP, per capita emissions, emissions per unit GDP, population, historical emissions, total current emissions. These criteria are important since they can give rise to very different responsibilities and corresponding assumption of commitments. For example, China has very low emissions per capita but it is one of the most important emitters in terms of their total current emissions.

The Pew Survey is now several years old. There have been many post-2012 proposals since then, and indeed new proposals are published every week these days. Even if the post-Kyoto regime were not agreed several industrialised countries are considering innovative schemes to commit themselves to curve the GHG concentration pattern. These schemes are mainly part of voluntary actions giving rise to a voluntary carbon market that runs parallel to the Kyoto mechanisms-based carbon market.

The World Bank has taken a leading position announcing its willingness to buy emission reductions to be generated after 2012. The World Bank’s strategy considers an anticipated transaction where potential CERs are bought as voluntary carbon units (VCUs) if the project fails in getting CDM executive board approval or as CERs on delivery if the project if registered. This strategy lies in the diversification of project activities and the lower prices the World Bank is offering to sellers of potential CERs. It goes back to the same structure of the transaction scheme developed at the beginning of the carbon market, when no CDM projects had been registered and the Kyoto Protocol had not been ratified.

Carbon Tax versus Emissions Trading

Several analysts have criticised emissions trading in favour of a so-called “carbon tax”. See, e g, Cooper (2004 and 2005) and Nordhaus (2005). Let us first explain briefly how carbon tax is supposed to work. Imagine a world where there are no countries and there are relatively small economic differences within the society. Next imagine that this world was facing the same climate change problem that our world is facing. Obviously, in that world, there is no space for emissions trading. The government could still provide a market-based incentive to reduce the emissions of greenhouse gases in the following way. All fuel consumed would be taxed at a rate that was proportion to the carbon content of the fuel. This would encourage use of solar energy and low-carbon fuels, and discourage the use of coal and other high carbon fuels. If the tax were set at the right level, the appropriate reductions of CO2 emissions from fuel combustion would be achieved. As Cooper (2005) points out, the carbon tax could be easily extended to process CO2 emissions, such as from chemical reactions in cement production, but would be harder to apply to other GHGs. As we have shown, many of the most cost effective opportunities for GHG emissions are precisely in gases other than CO2, and the carbon tax would miss these opportunities.

But of course we do not live in the imaginary one world of the previous paragraph.

While recognising that the currently developed countries have contributed much more to past GHG emissions and therefore to the current state of the climate, both Cooper and Nordhaus call for a uniform carbon tax across all countries. They argue that a non-uniform rate would cause emission-producing activities to shift to low carbon tax countries. However, a uniform carbon tax where developed countries do not make a greater economic contribution to mitigate climate change should never be acceptable to India and other developing countries. It would be tantamount to making us pay to clean up a mess most of which we did not create.

The ineffectiveness of a carbon tax for non-CO2 gases and the economic distributional aspects of mitigation are strong arguments against the carbon tax approach. Emissions trading does not suffer from these problems.

A third problem with the carbon-tax approach is that, in some ways, it is the opposite of emissions trading. The latter can be seen as perverse in the sense that the greatest emitters benefit the most. It is a reversal of the more traditional approach whereby the “polluter pays”. Here the “polluter charges”. Thus a very large landfill emitting large amounts of methane to the atmosphere could get large revenues for reducing methane emissions than a landfill that is already capturing and burning methane. A country that already has very large use of renewable energy in power generation (e g, Brazil) earns much less CERs from each additional kWh from renewable energy projects than the same project would earn in China or India, which are heavily dependent on coal fired power plants.

We propose that the advantages of emissions trading and carbon tax can be combined in a system whereby emissions trading applies to transactions between industrialised and developing countries, as in the current Kyoto Protocol, or the Michaelowa proposal beyond 2012, but that within the developing countries a carbon tax would be applied to favour low-emission projects and discourage high-emission activities. For instance, India and many other developing countries promote renewable energy projects through subsidies. These subsidies could be paid for through a tax on coal and other fossil fuels. The additional tax revenue would allow the subsidies to renewable energy and other low energy technologies to be increased. Incidentally, this will have no effect on additionality under the CDM, unless the subsidies are so large that the renewable energy options become profitable without the CER revenues, which is unlikely.

What Should India Do?

As part of its formal commitments, India published its First National Communication to the UNFCCC in 2004 [India 2004]. This very detailed and scientific report is required reading for anyone interested in climate change in India. According to this report, in 1994, India emitted 1,228,540 Gg of CO2-eq of anthropogenic GHGs, i e, per capita emissions of about 1.3 tonnes. As in most other countries, CO2 is the dominant GHG with a 65 per cent contribution, followed by methane with 31 per cent. Similarly, energy was the major sector responsible for 60 per cent of total emissions. The report notes that India’s per capita CO2 emission (0.87 tonnes in 1994) was amongst the lowest in the world, and only 23 per cent of world average.

The most immediate effects of climate change are increases in the frequency and intensity of so-called extreme events, i e, increased floods, cyclones, droughts (and forest fires), heat waves, etc. According to one of the major reinsurance companies, Munich Re, there has been a massive increase in major weatherrelated natural catastrophes from 1950-2005. The process has been accelerating in recent years. Between 1994 and 2005, there have been almost three times as many weather-related natural catastrophes as in the 1960s, and economic losses increased by a factor of 5.3 in this period (Source: www.munichre.com).

Climate-related consequences of climate change have already been felt in India, and their impact, including future projections, has been documented in the national communication cited above. The report however falls short of assigning an economic value of the damage from these events, above historical levels. Such estimates would not only quantify the impact of climate change on the Indian economy, but also how much the country should be willing to invest to avoid the consequences of climate change. Of course, even before climate change, these climate-related phenomena had an impact, and measures could be justified to reduce the impact of floods, droughts, etc.

Some of these measures are as old as India. Our sacred books prohibit the cutting of Shiva’s hair for they are the forests of India. According to our myths, only Shiva’s hair could withstand the force of the Ganges falling from the skies. When Ganga Ma falls to Earth from heavens above, Shiva’s hair – India’s forests

– gently stops the huge mass of water, which is then absorbed by the vegetation and soil little by little.

Today, we use such foreign terms as “watershed management” and use Greek letters to interpret and model natural phenomena. Ancient wisdom was codified in myths. The myths were never taken literally, but as a metaphor for what needed to be done, the encoded knowledge being quite clear [Piacquadio Losada 1994].

We propose that India should invest at least 5 per cent or 10 per cent of the annual damage from climate change each year in order to adapt to the consequences, and mitigate the causes, of climate change.

The national communication provides great detail on the impact of climate change and ways to adapt to it. It would be a folly to try to summarise it in a few words. But many ways of adapting to climate change also provide other benefits, e g, improved crop yields, diversified agriculture, better water availability, etc, as well as increased employment opportunities. These synergistic solutions should be sought whenever possible.

The fundamental cause of climate change is the increased concentration of greenhouse gases in the atmosphere. As long as the concentration of GHGs keep increasing, so will the impact of climate change. Many studies have demonstrated increased damage from climate change, and project this trend would continue even if GHG concentrations can be stabilised. Many mitigation options provide other benefits, and often the action can be justified in terms of these co-benefits alone. The following list is illustrative: (i) Energy efficiency saves money, natural resources, and often benefits the local environment, (ii) Many renewable energy options are suitable for rural areas and can be an instrument for promoting rural development. India already has been promoting renewable energy for many years. It is probably the only country to have a ministry for non-conventional energy sources or to have a development bank to promote renewable energy investments: the Indian Renewable Energy Development Authority (IREDA), (iii) Large-scale wind power can supply clean electricity to the grid. Though India is not gifted with excellent wind resources, the country has identified windy areas and already has one of the highest installed capacities in wind power, (iv) Switching fuels can reduce GHGs while reducing local air pollution. Again, India has taken major steps to convert urban vehicles to natural gas. While the main motivator was reducing local air pollution, natural gas combustion produces far less CO2 emissions than petrol or diesel. Integrated transport design can reduce energy use, local air pollution, congestion, and damage from traffic accidents, and (v) Improved agricultural practices can reduce methane emissions from cattle and rice culti vation, at least per unit of output.

There are a number of international sources of financing for climate change mitigation activities. We have already mentioned the CDM. The government has strongly supported CDM and approved a large numbers of CDM projects.

While India still leads the world in terms of number of CDM projects, it has fallen to second place compared to China in CERs of the projects. This is because China has focused on large projects, whereas most Indian projects (except HFCs) individually produce few CERs. However, the number of CERs that Indian projects could generate is still substantial. Even so, its role in the carbon market will depend on the quality of its projects and the ability of the project promoters to understand the carbon market trends and close deals quickly.

India was quick to seize the HFC opportunities. However, it has been slow in taking up projects involving other high GWP greenhouse gases. Notably, there are no projects involving the recovery of methane from landfills. This is an excellent opportunity to reduce GHG emissions at low cost, but the process is often hindered since municipal governments are involved in decision-making and projects are delayed in many large cities in other countries as well.

Recovery of methane from coal mines could present opportunities but Indian coal mining organisations are reluctant because of preconceived ideas and lack of knowledge. China has generated all the coal mine methane CDM projects so far, and has taken the lead in the subject.

CDM requires projects to be additional, in other words projects that would not be viable without the CDM. Earlier, we have mentioned that many mitigation opportunities can be justified without the CDM. By definition these would not qualify under the CDM. Thus CDM provides revenues for projects that would not otherwise be worth doing. One example is the elimination of HFC 23 from the manufacture of HCFC 22. HFC 23 is not toxic and there would be no local or economic benefit from removing it, except that it is a powerful GHG, and reduced emissions have value within the CDM. The same holds for nitrous oxide emissions in nitric acid manufacture, and often also for perfluorocarbon emissions in aluminium production.

The Global Environment Facility (http://www.gefweb.org/) is another source of financial assistance for climate change mitigation. The GEF tends to favour projects involving capacity building, and programmes to promote dispersed energy efficiency and decentralised renewable energy production. Since the CDM structure strongly favours large, localised sources of GHGs and tends to favour projects rather than programmes, the GEF often is a complement to the CDM.

The CDM and GEF are complemented by voluntary programmes that promote climate change mitigation. As noted above, some states of the US have taken on emissions reductions targets, often beyond the commitments of the Kyoto Protocol. These commitments may allow a part of their emissions reductions commitments to be purchased from mitigation projects outside their geographical boundaries. The rules for obtaining these VERs are less rigid than for CERs under the CDM, and as a result the price per tCO2 equivalent is also lower.

There have been few registered CDM projects involving afforestation and reforestation within it [Bailis 2006]. Such projects, as well as improved management of existing forests (which does not qualify under the CDM), not only can mitigate climate change by absorbing CO2 from the atmosphere, the mitigation level can be multiplied through biomass energy programmes. Moreover, as we have noted above, forestry and improved forest management can also reduce flooding. Thus, properly designed activities involving forestry can be both a mitigation and an adaptation measure for climate change.

EPW

Email: gdutt@fibertel.com.ar

Note

1 The first comitment period ends in 2007 and actual commitments need to be submitted to the EU by April 2008.

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