Institutional setting

4.1 Institutional setting

This sub-section examines how the institutional arrangements in domestic domain promote the strategic behaviour of implementing the industrial gas reduction projects in China and India.

4.1.1 The Chinese situation

China’s preference for the CDM is aligned with its national strategy in energy and climate change and sustainable development. The priority areas cover three dimensions including energy efficiency improvement, development and utilization of new and renewable energy, methane recovery and utilization. Currently, there are not many comprehensive financial incentive tools in place to support these sectors. However, the development of CDM projects in such areas is encouraged by the government through taxation generated from CER sales.

The CDM projects related to the reduction in the emissions of GHGs-N₂O, HFC-23, PFCs, and SF6 are discouraged because reducing their emission involves end-of-pipe treatment and other simple technologies. As a result, the industrial gas reduction projects only offer quite limited social, environmental, and economic benefits. Such projects generate large amount of CERs at low costs, thus they may drag down the prices of CERs and negatively affect other projects’ contribution to sustainable development. Therefore, Chinese government heavily taxes these CDM projects (table 5). For projects identified belongs to the priority areas, forestry and small-scale projects, China has a 2% levy on the CERs originated from CDM projects. While for ‘low-hanging fruits’ projects (such as HFC-23s) that generate CERs at low cost, the levy is 65%; for N2O emission reduction projects, it is 30%. The levy collected then managed and utilized in a CDM fund under the Ministry of Finance for supporting other activities, promoting sustainable development and CDM development. Specifically, to fund CDM administration and approval activities, climate change-related capacity-building

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activities, sponsoring the preparation of PDD and other pre-phase CDM expenses from poor regions and those with high sustainable development contributions (NCCC, 2005).

Table 5: Taxation of CERs from different types of CDM projects in China (Source: NCCC)

Project type HFC-23s PFCs SF6 N₂O Priority Areas Forestation Small-scale projects Tax rate in %

(of the CER price)

65% 65% 65% 30% 2% 2% 2%

However, the “measures for operation and management of CDM in China” (2005) also demonstrated that “the revenue obtained by CDM projects shall belong to the Chinese govern-ment and Chinese enterprises implegovern-menting the project. As discussed earlier in the paper, the high economic value of these type of projects (i.e., HFC-23s and N2O) due to the calculation methods (destruction of one ton HFC-23 is equivalent to 11,700 CERs) strongly motivates the project proponents to implement and to trade these projects while widely ignore the limited contribution of these projects on achieving SD goals. The special regulation on revenue distribution as the Chinese government sharing the revenue with enterprises contributes to the high pass rate of HFC-23 (100%) and N₂O (65%) projects.

107 Table 6. Basic situation of CDM in China

Types of

Issued projects Expected average annual CERs from Source: calculated from China CDM database: http://cdm.ccchina.gov.cn Data time: updated on 1st August, 2012

As illustrated in Table 6, the number of issued renewable energy projects accounts for 79.43%

of the total ratified projects, much higher than that of HFC-23 (1.31%) and N2O (1.78%) projects. However, among all expected average annual CERs, issued renewable energy is expected to contribute 39.24% of it, mere slightly more than HFC-23 and N₂O projects (in total 36.51%), and the approval rate of HFC-23 projects reaches 100%, that of N2O projects (65%) is also high compare with other project types. The average annual CERs of HFC-23 and N₂O projects are greater, thus providing huge economic incentives to both project producers and government though has limited contribution to regional environment protection and social sustainability (Yang et al., 2011).

4.1.2 The Indian Situation

The sustainable development goals and priority areas for Indian situation are also similar to the China’s priorities. Though, the expected benefits from the CDM projects are same in all the host nations, India has developed specific sustainable development goals. But, in contrast to China, India did not develop a special levy tax on CERs generated from the industrial gas reduction CDM projects. This encourages local industries to participate in the CDM (Sukumar and Liu, 2008). India does not specify priority areas for CDM projects, instead, it illustrates explicit sustainable development indicators for policy design including social wellbeing, economic wellbeing, environmental wellbeing, technological wellbeing (Sukumar and Liu, 2008). India’s approach towards sustainable development includes the enrichment of quality

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of life of the poor in addition to protecting the environment. The main sustainable development indicators, which should be considered in developing the CDM projects in India are

Social wellbeing: In addition to the environmental protection, the CDM projects should generate more income, additional employment to support the removal of the social disparities and improve the quality of life of the local communities.

Economic wellbeing: The CDM projects should attract additional investments.

Environmental wellbeing: The main focus is to reduce the pollution levels, but the CDM projects should also consider the impact of project activity on resource sustainability, resource degradation, bio-diversity protection, impact on human health.

Technical wellbeing: The transfer of the technology with in the country and from other nations should lead to environmentally safe and sound technologies to assist in up gradation of the projects elsewhere in the country.

Among the above-discussed sections, the social wellbeing is well institutionalized by contributing 2% of CERs from each CDM project for the local villages’ development. These activities on how the project proponent intends to spend the money from the 2% CERs must be clearly mentioned in a prescribed form during the PDD. The implication of the 2% CERs utilization in India is not well studied due to the dearth of information. The baselines for each kind of CDM projects developed by the NCDMA are to be followed by the project proponents during the development of the PDD. These baselines are provided to increase the transparency in the process and monitoring. The methodology to monitor the projects is prescribed by the NCDMA to facilitate the calculation of emission reductions.

The Government of India plays a crucial role in approving the HFC-23 and N2O projects.

Though the number of projects involves HFC-23 is less in number compare to China, the available projects have applied for the CDM process to obtain the low-cost CERs. On the other hand, the HFC-23 involved industries were developed rapidly because of the high economic profits involved in these projects. The CDM watch argues that, the number of HFC-23 projects has increased in India because of the CDM benefits. Since, the technological changes in these projects are not costly compare to other CDM projects, the projects proponents established new refrigerator manufacturing units after learning the benefits. But, the number of coolant gas industrial units has been reduced after the inclusion of these products into the Montreal protocol. Moreover, because of the CDM projects benefits, the industrial units which produce HFC-23 are not putting any efforts to upgrade the technology to reduce the emissions, in spite of the available technologies. The industrial units are demanding more financial support either in the form of incentives or relaxed CDM procedures for HFC-23projects (www.eia-itnernational.org). Since the destruction of HFC-23 is the cheapest ways of climate mitigation, the CERs from these projects are considered as scandalous and hence banned from the marketing in various Carbon markets.