Carbon finance fund: potential and benefits

Written by Rajeev Singh | Updated: Dec 31 2008, 06:34am hrs
Climate change is being described as the most important environmental challenge before humankind today. The mitigation of climate change, by drastically reducing GHG emissions and stabilising the carbon dioxide concentration in the atmosphere has become a prerequisite to avoid a strong alteration of the climate system. With its vibrant economy and a growing population, India has become a major energy consumer. Access to reliable, affordable electricity is a prerequisite for socio-economic development. In terms of GHG emissions, the trends are rising rapidly as well. The historical share in cumulative emissions, measured over the period 1900-2005, amounted 2% for India. This pattern changes radically during the period 1900-2030, when the emissions rise to 4%. Nonetheless, per capita emissions in India still represent a fraction of those of industrialised countries.

The Kyoto Protocol, which was adopted in 1997 pursuant to the UN Framework Convention on Climate Change, represents an agreement that international efforts are required to reduce anthropogenic GHG emissions that contribute to global climate change. In accordance with the principle of common but differentiated responsibilities, the industrialised countries, which are responsible for the vast majority of historic GHG emissions, agreed to collectively reduce GHGs by an average of 5.2% as compared to the 1990 levels between 2008 and 2012.

The market mechanism available to developing countries is the Clean Development Mechanism (CDM), which allows entities that have an emission reduction targets to purchase emission reduction from projects in developing countries. As a developing country, India does not have any emissions reduction target, but it is able to sell certified emission reductions (CERs) pursuant to the CDM, to large emitting countries that have emission reduction targets under the Kyoto Protocol.

The number of projects from India is substantial; however, in terms of the certified emission reductions (CERs) available for trade, it is far less. In 2006, Indias market share, measured in signed Emission Reduction Purchase Agreements (ERPA) was at 12%, second only to China, which supplied 61% of ERPAs. The Indian carbon market is largely driven by small & medium enterprises (SMEs), which is largely disadvantaged in the current carbon market. The proposed Carbon Finance Fund seeks to address the issue of upscaling the carbon finance operations in India. The first cycle of the Kyoto Protocol is between 2008 and 2012. While India has a relatively well-developed financial system, it seems project proponents have been unable to access carbon finance due to lack of suitable project finance instruments for this purpose and a conducive policy framework for project entities to optimise utilisation of this window.

There is a potential for the market share to go up through market-based initiatives such as developing the Carbon Finance Fund (CFF) and integrating it with the ongoing efforts. The CFF would act as a platform for financial resource management, carbon trade, information collection & dissemination, and technical support through extensive domestic and international cooperation. The CFF would introduce a holistic approach to enable project entities to explore the carbon finance window for earning resources for the project on a sustainable basis. CFF would thereby help significantly upscale new investments with carbon finance as an additional source. It will also help in replication of successful projects.

Government of India (GoI) should establish the CFF as a permanent, sustainable financing mechanism which could be a unique partnership between the government of India, International Financial Institutions (IFIs), bilateral donors and public and private sector financial institutions to coordinate and implement a carbon finance programme in order to maximise the number of projects, which can be registered with CDM EB. This would complement and reinforce the ongoing efforts currently in operation.

CFF will blend resources grants and loans, both domestic and external for the purposes of determining the overall cost of its funds. CFF would potentially raise resources through a number of ways including the following: World Bank Group loan or IDA credit channeled through GoI (by way of corpus contribution); GOI budgetary contributions as loans/grants to the CFF corpus; bilateral donors; market borrowings by CFF with/without GOI guarantees; public sector institutions contributions as corpus funds; and private sector (equity) contributions, loans, and co-financing under the public-private sector initiatives.

To conclude, India acceded to the Kyoto protocol in 2002, although it does not have GHG emissions commitments, it has taken steps to address the issue of climate change, notably by encouraging projects under the CDM. The potential under CDM is enormous and the key initiatives that India needs to focus is on a strategic overview of CDM opportunities available and the international demand for emission offsets; identification of CDM projects for key sectors; key institutional, legal, financial and regulatory prerequisites to facilitate CDM project development and implementation, implement and process CDM projects in India; human and institutional capacity building to identify, develop and capacity to exploit global opportunities. The Carbon Finance Fund seeks to address these issues.

The writer is a civil servant and the views expressed in this article are personal