Wednesday, April 27, 2005

More on the Kyoto Windfall

The Kyoto Protocol introduced us to the concept of Carbon Trading. In the current phase of the Protocol, only the developed countries have to reduce emission of polluting gases. But since reducing pollution in the developed countries is more expensive they can invest in pollution reducing projects in the developing world. This is being widely seen as a boon for developing countries. But not necessarily for the most obvious reason.

Carbon Trading is actually an incomplete (and informal) term. The correct phrase is Clean Development Mechanism (CDM), which targets the removal of a total of 6 greenhouse gases (GhGs) like CO2, N2O and hydrofluorocarbons. Further if the emissions are traded between the developed nations, then it is called Joint Implementation (JI). CDM is naturally the more exciting option.

CDM mechanisms are currently still evolving. Projects go through the following phases before they can claim carbon credits (or the actual moolah):

  • Approval by a national authority.
  • Approval by the global CDM methodology committee.
  • Approval by the global CDM executive committee. Only two projects (from Brazil and Honduras respectively) have crossed this phase

India meanwhile has developed more CDM methodologies and project proposals than any other country.

Lets take a look at some of the Indian projects that have been approved at the national level (the link requires free registration):

TN-based Thiru Arooran Sugars proposes to use bagasse as a fuel for not just powering its operations but also to generate power to sell to the grid. Bagasse is generally industrial waste and the bulk of TA Sugar's supply will come from its own "waste".

Among other projects is a project proposed by IDFC to obtain methane gas from municipal waste. I think this project is in Orissa (no links at this time!). There are other similar projects though.

From trading carbon credits, these companies can hope to earn anywhere between $2 to $5 per tonne of emission that they reduce. TERI estimates that the earning for India Inc could be in the range of $5 - $100 million per year by 2010. But that is nothing compared to the real potential that lies in achieving production efficiencies. If TA Sugars' project is successful they will not need to spend a pie on fuel or electricity and earn by selling electricity. The efficiencies will force other mills to follow the example, and the cascading effect would make the entire industry more competitive (and reduce our oil import bill too perhaps!).

Steel and cement are some of the biggest polluters. One of the major methodologies for steel to reduce emissions is control of fly-ash emissions. Fly-ash can be used to make cement. So it is a mutually beneficial deal for both - plus they get paid for it! The steel and cement sectors in India need to get more efficient. Except for Tata Steel, companies in these sectors are not globally competitive. This could be just the opportunity to drive that.

The only catch is in the power sector. Since the power companies would have to pass on any savings to customers, there isnt a direct incentive for them to reduce emissions and/or become more efficient.