Clean Development Mechanism in the Building Sector


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Malathy Madathilezham writes that there would be significant local, economic and sustainable development benefits to India with an effective implementation of Clean Development Mechanism

Clean Development Mechanism (CDM) is one of the four flexibility mechanisms that can be utilized by the industrialized nations under the Kyoto Protocol. Under the clean development mechanism (CDM) adopted in 2001, private players and governments from developing countries can earn carbon credits by adopting environment-friendly practices like growing trees on degraded land or adoption of cleaner energy sources like hydroelectricity.

These carbon credits can then be sold to polluters in developed countries to help them meet their targets of emission cut. This race to earn carbon credits has resulted in the rise of artificial forests with fast-growing varieties of trees. Such trees, however, are only good for storing carbon. This is basically to encourage the participation of the developing nations in emission reduction process and is often touted as the only link between Kyoto protocol and of the developing countries’ willingness to participate in a future global emissions regime. The problem with the approach of transferring CERs based on CDM projects is that the aspect of sustainable development has been trivialised and the major focus is on the reduction of emissions.

In the Seventh Conference of Parties (COP-7) to the UNFCCC it was decided that a National Authority for CDM should be designated by the participating Parties and a written approval of voluntary participation from the Designated National Authority should be included in the project proposal confirming that the project activity would help the host country in achieving sustainable development. In accordance to this the National Clean Development Authority was constituted.

Clean Development Mechanism and the Building Sector

More than one-third of the total energy use and greenhouse gas emissions, both in developed and developing countries can be traced to buildings and most of it is during its use for heating, cooling, lighting, ventilation etc. Materials manufacturing, construction etc consumes a much smaller percentage. There is a great potential and need to reduce energy consumption in buildings.

According to the fourth report of the International Panel on Climate Change, the building sector not only has the largest potential for significantly reducing greenhouse gas emissions, but also that this potential is relatively independent of the cost per ton of CO achieved. This is because of the fact that the increase in investment costs is offset by reduced energy costs over time which is a result of the measures aimed at reduction of greenhouse gas emissions.

But the fact remains that this potential remains mostly untapped in most countries. Only six of the 3000 CDM projects in the pipeline seek to reduce energy demand in the buildings. Out of these six, only one is generating Certified Emission Reduction Credits (CERs). Thus even though this sector is identified as offering the greatest potential for GHG emission reduction, CDM is not having much of an impact here.

The Indian Scenario

In terms of energy demand, India stands sixth in the world and accounts of 3.5 % of the world’s commercial energy demand in 2001. In spite of this the annual per capita consumption of energy is low compared to other developing countries. In the last five decades, there has been an increase in the total energy use along with a shift from non commercial to commercial sources of energy.

It can be observed that the building sector plays an important role in the increase of energy use mentioned above. About 11% of the world’s energy consumption in residential sector can be accounted to India.

The Union Government of India along with many international agencies has taken steps towards efficient and optimized energy utilization and simultaneously employed various means to check financial as well as environmental losses due to wastage of energy. But most measures bypassed the building sector till CDM came to be proposed. Using marginal costs of abatement in different countries to estimate the flow of CDM funds it is estimated that India would collect between 7%-12% of the total global market for CDM-led investment (Jotzo and Michaelowa 2002)

SWOT analysis of CDM in Building Sector

Strengths

  1. It can be seen that CDM is a good complementary mechanism for financing EEB projects mainly in the following ways

a) Reducing various financial risks inherent in EEB projects;

b) Making life cycle-based financing more acceptable to investors;

  1. Providing complementary financing to offset increased investment and transaction costs
  2. The project based approach of CDM provides a good platform to promote energy efficiency in the building sector
  3. The rules and procedures of CDM contain measures aimed at ensuring “real,measurable and verifiable” emission reductions (COP 1, Decision 5).
  4. The flexibility to allow ‘bundling’ of several small projects (which are located close to each other and implemented at the same time) helps to reduce CDM related transaction costs to small projects.

Weaknesses

  1. The CDM was created for two purposes: to   combat climate change through GHG emission reductions and to support sustainable development in developing countries. In its current form, the CDM only assigns monetary value to GHG emission reductions, and not to project contributions towards sustainable development. The CDM has been heavily criticized for not sufficiently fulfilling its sustainable development mandate, which is one of its most challenging tasks (Schneider, 2007)

Opportunities

  1. With the buzzword of sustainability becoming increasingly popular and the importance of an environment friendly brand image, CDM project approvals are of added value and are especially attractive to business stakeholders, including builders, owners, tenants, and even banks.
  2. The relationship between CDM and policy implementation of the government which complement each other in various terms

Threats / Challenges

  1. There are characteristics of the building sector which make the managing of the projects comparatively difficult and costly. These include small savings per technology improvement, large numbers of buildings, widespread locations, many technologies used to achieve efficiency improvements, various specifications for dispersed end use requirements, varying end-user knowledge levels and decentralized energy use decision making.
  2. Fragmentation and complexity of the construction sector
  3. Risks – Business risks and perceived risks
  4. Diverse Stakeholder interests
  5. Lack of Information, misinformation or asymmetrical information
  6. Lack of experts
  7. Costs
  1. Investment and Transaction
  2. Management

Conclusions

There would be definitely be significant local, economic and sustainable development benefits to India with an effective implementation of CDM. There should be increased cooperation with potential investors and stakeholders (both public and private). Also the issues of risk management and project financing should be addressed by establishing adequate facilities for the same. This could take the form of a national CDM fund that supports the development of good-quality and relevant CDM projects.

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