Economic motivations

International buyers’ motivation towards CERs trading plays an important role in the behaviour of firms to adopt the CDM projects. Existing research shows that global buyers prefer projects generating higher volume of CERs (CERs >100 kt CO₂eq./year) with less uncertainty in delivering CERs (GIZ, 2008). HFC-23s and N2O projects fit well with this

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demand by generating large volumes of CERs with limited investment. The huge potential to generate the CERs through destruction of HFC-23 is attracting many project proponents.

Another reason for the prosperity of larger projects such as HFC-23 and N2O projects is the transaction cost involved in the project, which have “in some cases, been significant enough to prevent projects from proceeding (UNDP, 2006)”. The transactions costs involved in the projects become a hurdle for the small scale projects, which would have considerable social and economical impacts at local level by reducing the carbon emissions (Krey, 2005;

Chadwick, 2006). The transaction costs here are mainly the costs directly contributes to CDM project cycle, including the project design, validation, registration, verification, and contracting with potential purchasers. The costs vary among projects from US$40,000 to US$200,000 (excluding registration fees), especially for small-scale projects in which transaction cost are likely to account for 20-40 % of its carbon revenues (UNDP, 2006).

Taken into consideration the transaction cost and the long crediting period, small-scale projects are less attractive for investors from the economic perspective. The uncertainties arising in the process of CDM approvals are crucial due to the transactions costs and can influence the type of projects approved for development in the nation (Sukumar and Liu, 2008). The projects which can contribute to the SD goals, are constrained due to the high transactions costs involved in developing the methodologies and approval mechanisms and due to the less economic profits for the proponents (Paryavarnamitra, 2012).

In addition, the usage of HFC-23 was not included in the regulated substances of Montreal Protocol until 2005 (UNEP, 2012). This particular exemption from the other HFC products is a clear evidence for the international level lobbying which is expected to generate huge profits by claiming the CERs from the HFC-23 reduction projects (Carbontradewatch.org). There is a strong debate on whether the HFC-23 should be included in Montreal Protocol, so that the ratified parties automatically reduce the production of HFC-23. However, due to the high political and economic sensitivity the issue took considerable time. This sensitivity was evident by the decision of EB to postpone the decisions of the Korean CDM projects of HFC further to 2012 and waiting for the UNFCCC post Kyoto approaches (UNEP, 2012). The nations involved in industrial gas reduction are mainly China, India, Japan, United Kingdom, Norway and Italy (UNEP). The lobbying from these groups is trying to influence the decision of the EB and UNFCCC on the industrial gases reduction CDM projects (CDM watch, 2012).

5. Discussion

It is very clear from the project process description that the DOEs and consultants play very important role in the approval process of CDM projects. Because of the increasing demand of the consultants to approve the projects, the competition between DOEs has increased and the quality of CDM projects is in danger (Schneider, 2007). The DOEs have come up with innovative methods to attract project proponents by reducing the price and time of approval.

In the process of the profit maximizing, the private DOEs are possibly compromising in the verification process (Schneider, 2010; 2011). Schneider (2007) has pointed out the informal arrangements evolved between DOEs and project proponents to acquire the fast approvals with success related payments. To overcome this problem, EB has made several changes in the administration by increasing members in the boards, innovative screening methods for the approval of projects. Since the buyers of CERs and sellers and producers of CERs are not directly incentivized through the Kyoto Protocol, the EB has to overcome the regulatory bottlenecks (Lecocq and Ambrosi, 2007). Another strong institutional drawback behind

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approval of the industrial gas reduction projects is the weak baseline methodology to prove the additionality of these projects (Schneider 2010; 2011; Sukumar and Liu, 2008). In addition, the international level concept for the SD for each CDM project is missing and creating scope for the national DNAs to modify the baseline methodologies according to the demand of the CDM market. The power to develop methodology for establishing the baselines rests with the DNAs which are therefore instrumental in affecting the desirable change in industrial gas reduction projects or otherwise .

Generally, the CDM has made the abatement of HFC-23 too profitable (Ostrom, 2012; Wara, 2007). Therefore, the sale of CERs generated from HFC-23 project is far more valuable than production of the refrigerant gas that leads to its creation in the first place. It strongly challenges the goal of carbon emission reduction as the high market demand for CERs incentivized the manufacturers of HFC-23 to produce it in order to offset it, instead of dealing with the threat of climate change. “There is a strong incentive (of HFC-23 projects) to ... not improve the efficiency of the plant ... during any refurbishment because of the CDM benefits.” (CDM methodology panel report, 2010). Moreover, under such circumstance the buyers’ increased emissions may not be fully offset because of the excess of carbon credits received by such projects (Wara and Victor, 2008). It causes a major distortion of the market.

The calculation done by Wara (2007) shows that payments to refrigerant manufacturers and carbon market investors by governments and compliance buyers for HFC-23 credits, will be approximately 4.7 billion euro while the cost of abatement would have been less than 100 million euro if refrigerant producers would be compensated the extra cost of installing the simple technology needed to capture and destroy HFC-23.

Moreover, the domestic governance in terms of administrative structures of designated national authority (DNA), types of rules, and actors involved playing essential role in influencing CDM implementation. The administration of DNA in China is well organised in terms of the CDM approaches while the Indian DNA is still struggling to develop a strong approach towards industrial gas reduction projects. Although, both nations adopted similar approach towards technology transfer through CDM projects, it was proved that China is well advanced in this process than India due to the difference in the political setting and the fundamental approach. The review system on the proposed CDM projects by experts gives total command to the already strong DNA in China. In contrast, Indian DNA is depending on the Environmental Ministry which lacks the system of reviewing the CDM proposals before approval (Sukumar and Liu, 2008). In India, important representatives from the ministries such as Ministry of Coal, Ministry of Petroleum and Natural gas are missing in the DNA board (Michaelowa, 2003; Sukumar and Liu, 2008). At the same time, the industrial organizations such as Confederation of Indian Industry (CII), the Federation of Indian Chambers of Commerce and Industry and Cement Manufacturer’s Association and research organizations such as The Energy Research Institute and NGOs like Centre for Science and Environment are involved in the deliberations of the CDM process in India while their counterparts are absent in the case of China.

6. Conclusion

The CERs produced from the industrial gas reduction projects are criticized. The main critiques about these projects are, the profits from these emission reductions are not matching with the sustainable development goals. The destruction of the HFC-23 is the cheapest

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technological option available among all GHGs emissions. In spite of these critiques, the CERs generated from the industrial gas reduction projects are taking major proportion in India and China until 2013. Although, there are certain steps taken at international level to eliminate the industrial gas reduction projects from the CDM list and addition of HFC-23 in Montreal Protocol, there is an urgent need to strengthen the national level institutions to enhance the quality of CERs in both China and India. The feedback from the China indicates that China is trying to enhance quality of the CERs to get profits in the carbon market. On the other hand, the Indian administration is attracting investments from international market and more collaboration in the local CDM projects. There is a possibility that the close relations between industrial association and department of Industrial policy may form lobby groups to influence the decisions of DNA to approve less sustainable CDM projects such as HFC-23 and N2O. To overcome such kind of problems and to learn more about the sustainability impacts of the CDM projects at local level, there is an urgent need to strengthen and to develop the networks, and to encourage the participation of the civil society and NGO in the CDM process.

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Justice in environmental institutions - How do

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