Environment

The Clean Development Mechanism in India – is it working?

  • Blog Post Date 01 October, 2012
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Johannes Urpelainen

Johns Hopkins University

JohannesU@jhu.edu

The Clean Development Mechanism of the Kyoto Protocol allows developing countries to profit from climate friendly projects, and India is second only to China in using the mechanism to help reduce its carbon emissions. But, unlike China, India does not have a national policy. This column argues that as a result the profits are not going to the states that need them most.

As one of the Kyoto Protocol´s ‘flexibility mechanisms’, the Clean Development Mechanism (CDM) allows industrialised countries that have, as Kyoto parties, committed to reducing their national carbon emissions to instead support climate mitigation projects in developing countries, such as renovating power plants or installing solar panels. Since the cost of carbon abatement is often lower in developing than in industrialised countries, the CDM allows industrialised countries to cost-effectively reduce their greenhouse gas emissions while promoting sustainable development in countries that host CDM projects (Grubb 2003).

India is one of the world´s largest hosts of such clean development projects. From 2003 to 2011, a total of 2,295 projects – around one-quarter of the global total – had been registered with India´s Designated National Authority for the Clean Development Mechanism. Only China hosts more such projects than India. India´s approach to governing the CDM is best characterised as a ‘laissez faire’ system whereby the Indian government neither actively promotes nor discourages CDM project implementation in different states (Benecke 2009, Sirohi 2007). This stands in stark contrast to China´s national policy, which steers CDM investment toward the country´s policy priorities, such as renewable energy, and economically backward provinces (Schroeder 2009).

The consequences of India´s liberal approach to the CDM for sustainable development remain unclear. In recent research with colleagues (Bayer et al. 2012a, 2012b), I have conducted a statistical analysis of CDM project implementation in India between 2003 and 2011. The data analysis reveals that in India, CDM projects are concentrated in states that are more industrialised, such as Gujarat and Maharashtra. In contrast, poorer and less industrialised states generally implement fewer CDM projects.

See http://cdmpipeline.org/ for data on CDM projects.

Econometric analysis of the Clean Development Mechanism in Indian states, 2003-2011

In our analysis, we counted the number of CDM projects that were registered for implementation in each Indian state during the 2003-2011 period, creating a sample of 2,295 projects in total. The state-level correlation between the project count and expected emissions reductions by 2020 was 0.81, so the project count serves as a good indicator of the potential to reduce emissions. We then collected data on various political and economic factors, such as whether it was an election year, from official Indian sources, including the National Planning Commission and the Central Electricity Authority.

In the analysis, we considered several hypotheses:

  • Since many climate mitigation projects focus on decarbonising electricity generation (reducing the use of fossil fuels), we examined the effects of private and public electricity generation.
  • Given that industrial production may lend itself to decarbonisation, we examined the effects of fixed industrial capital.
  • Given that wealthier states may require less decarbonisation due to superior efficiency, we examined the effects of per capita income.
  • To examine whether democratic elections create uncertainty surrounding state policy, we examined the effects of election years.

Our results show that the amount of fixed industrial capital plays an important role in CDM project activity. The average Indian state has fixed industrial capital worth around 80 billion rupees. If the base of industrial capital increased (by one standard deviation) to around 850 billion rupees, the state would implement around seven additional CDM projects every year. Compared to the mean number of annual CDM projects in our dataset, around 10, this would be a 70% increase.

We also find that he expected number of CDM projects decreases by around two during election years, suggesting political uncertainty also reduces investment in the CDM. The effects of public and private electricity generation are not statistically significant, and the effect of per capita income is also not statistically distinguishable from zero.

Implications for clean development in India

The concentration of CDM projects in the more industrialised states is understandable, given that the industrial sector is particularly amenable to mitigation. However, the lacklustre performance of the CDM in the less industrialised states also means that the Indian government is not fully capitalising on the CDM´s potential to contribute to sustainable development. In contrast to China, where the central and provincial governments offer institutional support to CDM project developers, India´s liberal approach to the CDM prevents the less industrialised states from benefiting from the investment opportunities that the CDM creates.

To improve the CDM´s contribution to sustainable development in India, the Government of India should consider investing in capacity building in those less developed states that are implementing few CDM projects relative to their population, such as Bihar and Uttar Pradesh. For example, the government could establish information centres that help investors identify profitable opportunities for project implementation and advise them with legal and regulatory affairs. The capacity building initiative could be hosted by the Ministry of Environment and Forests, for example. India´s vast economy offers many opportunities for cost-effective carbon abatement, but identifying and exploiting these opportunities is often difficult under the current mechanism. This is a result of a lack of information and the high costs of implementing any projects, and this combination is particularly severe in those less developed states that have little experience with such projects. By facilitating investments in the Clean Development Mechanism in the areas that need them the most, the Indian government could reap the double benefit of climate mitigation and economic development.

The author thanks Michaël Aklin, SP Harish, Patrick Bayer, and Alice Xu for helpful comments on a previous draft.

Further Reading

  • Bayer, P; J Urpelainen, and J Wallace (2012a), “Who Uses the Clean Development Mechanism? An Empirical Analysis of Projects in Chinese Provinces,” Working paper, Columbia University.
  • Bayer, P; J Urpelainen, J Wallace, A Xu (2012b), “Laissez Faire and the Clean Development Mechanism: Determinants of Project Implementation in Indian States, 2003-2011”, Working paper, Columbia University.
  • Benecke, G (2009), “Varieties of Carbon Governance: Taking Stock of the Local Carbon Market in India”, Journal of Environment and Development, 18(4):346-370.
  • Grubb, M (2003), “The Economics of the Kyoto Protocol”, World Economics, 4(3):143-189.
  • Schroeder, M (2009), “Varieties of Carbon Governance: Utilizing the Clean Development Mechanism for Chinese Priorities”, Journal of Environment and Development, 18(4):371-394.
  • Sirohi, Smita (2007), “CDM: Is It a ‘Win-Win’ Strategy for Rural Poverty Alleviation in India?”, Climatic Change, 84(1):91-110.
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