LIST OF BOXES, FIGURES, AND TABLES

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Ministry of the Environment, Japan

1-2-2, Kasumigaseki, Chiyoda-ku, Tokyo, 100-8975 Japan Telephone: +81-(0)3-5521-8330 Fax: +81-(0)3-3580-1382 http://www.env.go.jp

Institute for Global Environmental Strategies (IGES)

2108-11 Kamiyamaguchi, Hayama, Kanagawa 240-0115, Japan Telephone: +81-(0)46-855-3700 Fax: +81-(0)46-855-3709 http://www.iges.or.jp

Winrok International India

1, Navjeevan Vihar, New Delhi 110017, India Telephone: +91-11-2669-3868 Fax: +91-11-2669-3881 http://www.winrockindia.org

Electronic edition published 2005

All rights reserved. Inquiries regarding this publication copyright should be addressed to IGES in writing. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage and retrieval system, without permission in writing from Ministry of the Environment, Japan through IGES.

Printed in Japan ISBN: 4-88788-013-8

This book is made as part of the Integrated Capacity Strengthening for the Clean Development Mechanism/Joint Implementation (ICS-CDM/JI) programme and published by the Institute for Global Environmental Strategies.

Photo credits – cover page photos courtesy of Winrock International India.

Whilst advice and information in this book is believed to be true and accurate at the date of going to press, neither the authors nor publisher can accept any legal responsibility or liability for any errors or omissions that may be made of.

Copyedited by Greg Helten

Printed and bound by Sato Printing Co., Ltd.

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FOREWORD

The Kyoto Protocol, signed in 1997, finally entered into force on February 16, 2005. Since the signing of the Marrakesh Accords in 2001, which set out the fundamental rules for the Kyoto mechanisms—the Clean Development Mechanism (CDM), joint implementation (JI), and emissions trading (ET). The CDM was designed to assist Annex I countries in meeting their greenhouse gas emissions reduction targets by implementing reduction/sequestration activities in non-Annex I countries and counting the reduced/sequestered amounts as purchasable

“credits.” Before the protocol came into effect, investors and project developers were hesitant to move into the CDM field. Since it came into force in February, there has been a steep increase in the number of projects submitted for validation and registration, and this upward trend is expected to continue in the next few years.

Despite the high demand to utilize the CDM and the continuing improvement in CDM rules, many investors and developers still find it difficult to implement projects. There are many factors acting as impediments, including inherent, country-specific problems in attracting foreign investment. One problem directly related to the effectiveness of the CDM, however, is the unpreparedness of developing countries to host projects. The reasons for this include premature institutional development, the existing highly complicated system for endorsing projects, a lack of experience among government officials, and lack of coordination among ministries and relevant governmental institutions—just to name a few. Therefore, it is imperative to ameliorate the situation in host countries in order to foster CDM activities and contribute to the global efforts to combat global warming.

Two key strategies available to enhance the ability of host countries to utilize the CDM are information collection/rearrangement/dissemination and capacity building. In most host countries, some relevant information already exists, but often in disparate pieces or it is not considered in terms of the CDM—and it has never been put together before in a comprehensive form. This is the main reason for publishing this series of guidebooks, which feature information on specific countries in Asia. By making the guidebooks as user-friendly as possible, they provide essential information that project developers and investors will need for most effective CDM project preparation and implementation in each country.

This guidebook is part of a series prepared as a core component of the information dissemination and awareness-raising activities under the Japanese Ministry of the Environment’s Integrated Capacity Strengthening for the Clean Development Mechanism/Joint Implementation (ICS-CDM/JI) programme.

Akio Morishima

Chair, IGES Board of Directors

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ACKNOWLEDGEMENTS

This guidebook was produced by the Institute for Global Environmental Strategies (IGES) as part of the Integrated Capacity Strengthening for the Clean Development Mechanism and Joint Implementation (ICS-CDM/JI) programme.

We would like to express our sincere gratitude to Ministry of the Environment, Japan for their invaluable support in making this project a reality.

Ms. Yukimi Shimura, both a country officer for India and a chief IGES editor of the CDM country guidebook series, took main responsibility for editing the guide for India as well as its contents, under the supervision of Mr. Shinichi Iioka, IGES programme manager. Ms. Aditi Dass, Mr. Dhirendra Kumar and Dr. Kalipada Chatterjee of Winrock International India (WII) were the main authors of the manuscript, with Mr. Akshay Jaitly and Mr. Satyadeep Misra of Trilegal as lead authors of chapter 7 and significant contributors to chapter 8 on the section of the taxation issue of CERs. Dr. Suman Majumdar of the Confederation of Indian Industries (CII) was the lead author of chapter 8 and a contributor to chapter 7.

Mr. Greg Helten proofread all the manuscripts and contributed extensive editing work. Dr.

Kayo Ikeda, Mr. Keisuke Iyadomi, Mr. Kazuhisa Koakutsu, Ms. Sakae Seki, and Ms. Akiko Sato of IGES, and Mr. Sumit Barat and Ms. Tanusree Talukdar of WII provided extensive support throughout the project. Also special thanks to Mr. Kiyoto Tanabe of the Intergovernmental Panel on Climate Change National Greenhouse Gas Inventories Programme (IPCC NGGIP) for his valuable input. This guidebook is jointly developed by the IGES and WII.

Finally, IGES would like to extend special thanks to Mr. R. K. Sethi of the Ministry of Environment and Forests, India, for his feedback in making this guidebook truly practical and up to date.

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LIST OF BOXES, FIGURES, AND TABLES

Box 3.1. The six greenhouse gases addressed under the Kyoto Protocol ... 25

Box 3.2. How to determine if a project can be considered debundled... 29

Box 3.3. Designated operational entities... 38

Box 6.1. Major features of the interim approval criteria ... 83

Box 7.1 Process for incorporating a new company in an existing one ... 92

Figure 2.1. Percentage decadal growth rate in India ... 6

Figure 2.2. Population density in person per square kilometre... 7

Figure 2.3. Rural-urban population profile in India... 8

Figure 2.4. Contribution of FDI, by country (1991–2002)... 12

Figure 2.5. Sectoral distribution of FDI approvals since 1991 (in %)... 13

Figure 2.6. Contribution to GDP at factor cost, by sector ... 14

Figure 2.7. Organization of India’s energy sector ... 15

Figure 2.8. Growth of energy, electricity, and the Indian economy... 16

Figure 2.9. Decadal trend in total primary energy supply (Mtoe)... 17

Figure 2.10. Installed generation capacity (MW) ... 18

Figure 2.11. Per capita consumption of electricity ... 19

Figure 2.12. Percentage of households with access to electricity ... 20

Figure 2.13. Power supply scenario in India ... 21

Figure 3.1. Diagram of how the CDM functions ... 26

Figure 3.2. Classification of sub-categories of CDM project activities ... 27

Figure 3.3. Overview of the CDM project cycle... 32

Figure 3.4. Baseline scenario... 33

Figure 3.5. Baseline scenario and the net GHG removals by sinks ... 34

Figure 3.6. Calculation of net GHG removals by sinks ... 35

Figure 3.7. Project assessment using the additionality tools ... 36

Figure 4.1. Estimated CDM potential in India, in million tonnes of CO2 equivalent per annum.. 43

Figure 5.1. Schematic view of national-level operational entities in India... 76

Figure 6.1. Assessment and approval process of the India’s National CDM Authority ... 85

Figure 6.2. Breakdown of projects approved by the NCA, by sector (78 as of May 2005)... 86

Figure 6.3. Distribution of CDM projects, by state ... 87

Table 1.1. Greenhouse gas types and sectors/source categories... 2

Table 2.1. National socioeconomic indicators, 2001... 10

Table 2.2. Total FDI approved and actual FDI inflows (amounts in Rs. 10 million)... 11

Table 2.3. The percentage contribution and the amount contributed by countries to India’s FDI inflows in 2002 ... 12

Table 2.4. Trends in primary energy production ... 17

Table 2.5. Renewable energy potential and achievements (as of Decmeber 31, 2004) ... 22

Table 3.1. List of project categories eligible under the CDM ... 27

Table 3.2. Credits and crediting period for CDM project activities... 30

Table 3.3. Criteria for justifying additonality for a small-scale CDM project activity... 37

Table 3.4. Registration fees for CDM projects ... 39

Table 4.1. GHG inventory estimates for India... 41

Table 4.2. Per capita CO2 emissions... 42

Table 4.3. GHG emission by sector and estimated projections (%) ... 42

Table 4.4. Possible technological options in India’s power sector... 45

Table 4.5. Comparison o fspecific energy use in select industries between 1990 and 1999 ( in million kilocalories/tonne) ... 45

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Table 4.6. Summary of the economic energy-efficiency potential

in major energy-intensive industries in India... 46

Table 4.7. Brick kilns in India (2001) ... 52

Table 4.8. Cogeneration potential in India... 54

Table 4.9. State-wise wind power installed capacity in MW (as of February 28, 2004)... 59

Table 4.10. India’s national GHG inventory by the agriculure sector, 1994, in million tonnes/year ... 62

Table 4.11. India’s natioanl GHG inventory of the land use, land-use change, and forestry sector fo r1994, I million tonnes per year ... 65

Table 4.12. CDM potential of different interventions in various sectors in India ... 66

Table 5.1. Composition of the National Clean Development Mechanism Authority (NCA) ... 71

Table 6.1. Millennium development goals and related Indian plan targets ... 80

Table 6.2. Methodologies submitted to the CDM Executive Board by India ... 87

Table 8.1. Functions and modalities of FIIA ... 113

Table 8.2. Additional costs involved in CDM projects as compared to conventional project costs ... 119

Table 8.3. Comparative analysis of buisness models ... 128

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ABBREVIATIONS

AD authorized dealer

ADB Asian Development Bank AIJ activities implemented jointly ALGAS Asia Least-cost GHG Strategy

ASSOCHAM Associated Chambers of Commerce and Industry of India

BCF Bio Carbon fund

BoB Bank of Baroda

BOD bio-chemical oxygen demand

BSE Mumbai Stock Exchange

BU billion units

CCEA Cabinet Committee on Economic Affairs CDCF Community Development Carbon Fund CDM Clean Development Mechanism

CER certified emission reduction

CERUPT Certified Emissions Reduction Procurement Tender

CH4 methane

CII Confederation of Indian Industry CNG compressed natural gas

CO2 carbon dioxide

COP Conference of Parties CST Act Central Sales Tax, 1956

DNA designated national authority DSCL DCM Shriram Consolidated Limited DTAA Double Taxation Avoidance Agreement

ECB external commercial borrowings EHTP Electronic Hardware Technology Park EOU export oriented units

EPA Environment Protection Act, 1986 EPZ export processing zone

ERC Expenditure Reforms Commission

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ERPA emission reduction purchase agreement ESCO Energy Services Co. Ltd.

ESI Act Employees State Insurance Act, 1948 ETS EU Emission Trading Scheme

FDI foreign direct investment

FICCI Federation of Indian Chambers of Commerce and Industry FEMA Foreign Exchange Management Act, 1999

FERA Foreign Exchange Regulation Act, 1973 FIIA Foreign Investment Implementation Authority FIIs foreign institutional investors

FIPB Foreign Investment Promotion Board FI financial institution

FTC Fast Track Committee

GDP gross domestic product

GHG greenhouse gas

GoI Government of India GTR gross tax revenue

GTZ German Agency for Technical Cooperation

GW gigawatt

HDFC Housing Development Financial Corporation HFCs housing finance companies

HFCs hydrofluorocarbons

HSD high-speed diesel

HSS Horizontal Stud Soderberg

ID Act Industrial Disputes Act, 1947

IDFC Infrastructure Development Finance Corporation IGCC integrated gasification combined cycle

IMR infant mortality rate

IRDA Insurance Regulatory and Development Authority IREDA Indian Renewable Energy Development Agency

IUCN International Union for the Conservation of Nature and Natural Resources

“World Conservation Union”

JI joint implementation

km² square kilometre

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KP Kyoto Protocol

LIC Life Insurance Corporation of India LULUCF land use, land use change and forestry

M&V monitoring and verification

MNES Ministry of Non-Conventional Energy Sources MoC Ministry of Coal

MoCI Ministry of Commerce and Industry MoE Ministry of Environment

MoEF Ministry of Environment and Forests MoF Ministry of Finance

MoP Ministry of Power

MoPNG Ministry of Petroleum and Natural Gas MSW municipal solid waste

MT million tonnes

Mtoe million tonnes oil equivalent

N2O nitrous oxide

NATCOM national communication

NBFC non-bank finance company

NCA National Clean Development Mechanism Authority NCCBM National Council for Cement and Building Materials

NCEPC National Committee on Environmental Planning and Coordination NGO non-governmental organizations

NSE National Stock Exchange

NTPC National Thermal Power Corporation

ODA overseas development assistance

PAB Project Approval Board PBF point break feeders PCB Pollution Control Board

PCF World Bank Prototype Carbon Fund PCN project concept note

PD project developers

PFCs perfluorocarbons

PIS portfolio investment scheme

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PLF plant load factor

PPA power purchase agreement PSB public sector bank

P-S-I-R pressure, state, impact, response PTC Power Trading Corporation

PV solar photovoltaic

RBI Reserve Bank of India

RE renewable energy

RET renewable energy technology ROC Registrar of Companies

SD sustainable development

SDIs sustainable development indicators SEB State Electricity Board

SEBI Securities and Exchange Board of India SF6 sulphur hexafluoride

SIDBI Small Industries Development Bank of India SMEs small and medium enterprises

SPCB State Pollution Control Board SPV special purpose vehicle STP software technology park SWERF solid waste and energy recycling facility

TERI The Energy Research Institute TFR total fertility rate

TPP thermal power plants

TRIPS Trade Related Intellectual Property Rights Convention

UNDP United Nations Development Programme

UNFCCC United Nations Framework Convention on Climate Change

VRM vertical roller mills

WTO World Trade Organization

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EXECUTIVE SUMMARY

The Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC) came into force on February 16, 2005, and is now fully operational. Most of the industrialized countries have committed to reducing their aggregate emissions by 5.2 percent below 1990 levels during the first commitment period (2008–12); the United States and Australia have so far declined ratifying the protocol. To make the process cost-effective, the protocol established the following three flexible mechanisms:

• Joint implementation (JI) among Annex I countries

• The Clean Development Mechanism (CDM) for use between non-Annex I (developing) and Annex I (developed) countries

• Carbon trading among Annex I countries

The CDM provides opportunities for emission reductions as well as sustainable development in developing countries.

India’s economic growth is mainly based on energy from fossil fuels like coal and therefore has considerable potential in reducing its greenhouse gas (GHG) emissions as well in CDM participation. CDM projects starting after January 1, 2000, are eligible to earn certified emission reductions (CERs). However the modalities and procedures of the CDM may be too complex to exploit its full benefit. This guidebook will provide a roadmap to the project developers and investors for realizing the full benefit of CDM within the allotted time frame.

The report has been organized into the following chapters:

Country profile

This chapter deals with India’s demography, households, governance of people, environmental governance, economic profile, gross domestic product (GDP), and the structure of its budget. This chapter also deals with India’s energy profile. India is the second most populated country in the world. The high rate of economic development puts a high demand on energy.

Major energy–intensive sectors such as power generation, steel, cement, fertilizer, and transport have resulted in high energy consumptions and GHG emissions with respect to GDP, resulting in a high consumption of fossil fuels. Coal meets most (63 percent) of India’s energy demand, followed by petroleum products, and natural gas.

Access to electricity is vital for the economic development of any country. The growth in India’s installed power generation capacity from 1,362 megawatts (MW) to over 100,000 MW since independence (1947), and the electrification of more than 500,000 of its villages is an impressive achievement. However India’s per capita consumption is among the lowest in the world (about 355 KWh). Many households in a large number of villages have no access to electricity. Providing energy security to all is essential for sustainable development and providing a better quality of life.

This chapter also deals with the power supply scenario in India, the role of renewable energy in meeting energy needs, and the reform of the energy sector.

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The CDM project cycle

The CDM has specific procedures and modalities for different types of projects and project sizes. There are two main project types: mitigations and sequestration, with each type having simplified rules for small-scale projects. This chapter covers those basic rules and qualification requirements as well as the steps necessary to register projects and issue carbon credits.

Possible CDM projects in India

There are a variety of possible CDM projects in India encompassing about 300 million tonnes of CO2–equivalent, including 90 million tonnes from renewable energy sources alone.

Potential CDM projects cover various sectors including: industrial energy efficiency; power;

transport; renewable energy; agriculture and livestock; municipal and solid waste; and changes in land use.

The ongoing and future efforts on GHG emission mitigation in India clearly indicate a substantial potential to achieve emission reductions through the CDM.

Government authorities

India is a party to the UNFCCC as well as the Kyoto Protocol. India ratified the Kyoto Protocol in August 2002, thereby strengthening global efforts and fulfilling the participation requirement for CDM projects. India has also established a designated national authority (DNA), which is designated as the “National Clean Development Mechanism Authority (NCA)” and consists of nine members. The Ministry of Environment and Forests (MoEF) is the nodal ministry for climate change and the CDM, and is chaired by the secretary. Climate change is an important consideration in India’s national plan and millennium development goals. India’s development priority envisages: doubling per capita income by 2012, reducing poverty levels by 10 percent, providing gainful employment to all, thereby ensuring food, energy, and economic security for the country. The Indian government has targeted an 8 percent GDP growth rate per annum for 2002–2007.

CDM projects: approving procedures and requirements

CDM endorsement criteria, national priorities, sustainable development indicators, the Kyoto Protocol requirements on CDM, as well as the approval process for issuance of host country endorsement of CDM projects are covered in this chapter. The NCA has accorded host country approval to 93 CDM projects under various sectors submitted by project developers in India. Out of these, 51 projects belong to the renewable energy sector. The others stem from energy efficiency, fuel switching, industrial processes, and solid waste sectors. Projects from the small-scale sectors and other small projects would need bundling (with other projects) to minimize transaction costs. A number of facilitating institutions called designated operational entities (DOEs) can assist project developers in the preparation of project idea note (PIN) and project design document (PDD), and also facilitate the validation, verification, monitoring, and certification of CDM projects.

Laws and regulations

This chapter discusses the laws and regulations relevant to investors in CDM projects. It discusses in detail the procedures for establishing a business presence in India, foreign direct investment (FDI), foreign technology transfer issues related to CDM, and relevant environmental

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laws. This chapter also discusses trade–related intellectual property rights and laws related to employment and labour in India. Finally, property issues such as: nature of CERs; title to CERs;

contractual issues in carbon trading contracts, and Indian law as a governing law of contract are discussed.

Fiscal and financing issues

India’s stable economy and great potential in offering CDM projects to industrialized countries are made apparent in this chapter. An overview of India’s financial services sector is presented, covering issues such as banking, capital markets, mutual funds, foreign institutional investors, insurance companies, non–banking financial institutions, and FDI. This chapter further discusses the financial aspects of CDM and CDM project financing, taxation treatment on transaction involvement, CERs, and various risks involved in CDM project implementation.

Government incentives

The concluding chapter of this guidebook explains the various incentives from the government of India (MoEF) and from the state level that are available in order to establish an enabling environment for CDM initiatives. The chapter further discusses methods and incentives for establishing renewable energy power projects in India, as well specific fiscal incentives for biomass/cogeneration projects and windpower projects.

It can truly be said that India is the most favoured destination of CDM globally.

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1. INTRODUCTION

The United Nation Framework Convention on Climate Change (UNFCCC), adopted by most of the world’s governments in Rio de Janeiro in June 1992, recognized that it could be a launching pad for stronger action in the future towards achieving the objective of the convention.¹ The first review of the adequacy of developed country commitments was taken up by the Parties at the first session of the Conference of the Parties (COP 1) in Berlin in 1995, and the main theme was the adequacy of the UNFCCC by the Annex I Parties. Some 10,000 delegates, observers (NGOs), and media personnel participated in this high profile event hosted by Japan in December 1997. The conference resulted in a conscious decision to adopt a new protocol, the Kyoto Protocol, under which industrialized countries (ratifying the protocol) are required to reduce their combined greenhouse gas (GHG) emissions by at least 5.2 percent compared to 1990 levels by the first commitment period (2008–2012. This legally binding commitment promises to produce an historic reversal of the upward trend in emissions that started in the developed countries some 150 years ago.

The Clean Development Mechanism (CDM) is one of the innovative features of the Kyoto Protocol to the UNFCCC. It encourages investments in projects that provide sustainable development in developing countries, while at the same time limiting GHG emissions. The CDM was introduced in Article 12 of the Kyoto Protocol. Under this mechanism, legal entities in developed countries can invest in projects in developing countries that reduce GHG emissions.

Once certified, these emission reductions can be used to meet the commitments made by the developed countries under the protocol. Although there are no immediate targets for the developing countries, it can be seen as an additional source of foreign direct investment into national mitigation projects, which would contribute to sustainable development and a decrease in worldwide GHG emission levels.

According to the Kyoto Protocol, project activities that qualify for the CDM are those related to specific GHG types and to the sources and sectors responsible for the majority of emissions, as established in Annex A of the Kyoto Protocol (table 1.1).

As per the UNFCCC, the Kyoto Protocol is to enter into force on the ninetieth day after the date on which at least 55 countries ratify the treaty, provided they account for at least 55 percent of the total Annex I countries’ 1990 emission levels. With the Russian Federation’s instrument of ratification by the United Nations Secretary-General on November 18, 2004, the Kyoto Protocol entered into force on February 16, 2005, and is now fully operational.

1. For more information, please visit the UNFCCC official website (http://cdm.unfccc.int/).

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Table 1.1. Greenhouse gas types and sectors/source categories.

Greenhouse gases • Carbon dioxide (CO2)

• Methane (CH4)

• Nitrous oxide (N2O)

• Hydrofluorocarbons (HFCs)

• Perfluorocarbons (PFCs)

• Sulphur hexafluoride (SF6)

Energy • Fuel combustion

• Energy industries

• Manufacturing industries and construction

• Transport

• Other sectors

• Fugitive emissions from fuels

• Solid fuels

• Oil and natural gas

• Others

Industrial processes • Mineral products

• Chemical industry

• Metal production

• Production of halocarbons and SF6

• Consumption of halocarbons and SF6

• Others Solvents and other products

Agriculture • Enteric fermentation

• Manure management

• Rice cultivation

• Agricultural soils

• Prescribed burning of savannas (field)

• Field burning of agricultural residues

• Others

Waste • Solid waste disposal on land

• Wastewater handling

• Waste incineration

• Others

Source: Annex A of the Kyoto Protocol to the Convention on Climate Change.

1.1. Significance of the Kyoto Protocol

Signals of climate change are already visible around the world. Some of the projected impacts, which can adversely affect life, economy and ecosystem, are its impacts on the Asian monsoon (the main source of fresh water), agriculture, and other life-saving systems such as rivers, etc. Climate change will increase vector-borne diseases, extreme weather events, their intensity and frequency, and cause an unprecedented loss of life and property, etc. The Kyoto Protocol is an important step towards stabilization of the concentration of GHGs in the atmosphere to prevent dangerous anthropogenic interference with the Earth’s climate system.

The Kyoto Protocol introduced the following three flexibility mechanisms to supplement the domestic activities of the developed (Annex I) countries. The three flexibility mechanisms are:

• Joint implementation (JI)

• Clean Development Mechanism (CDM)

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• International carbon trading

Of these three, only the CDM is applicable between developed and developing countries that have ratified the protocol. The certified emission reductions (CERs) that result from CDM project activities have considerable economic use to both the host (developing) and investor (developed) countries. During the last few years the mechanisms have aroused worldwide interest in carbon investment and the carbon market, which is growing as companies and governments have started purchasing emissions credits through voluntary trading schemes, carbon investment funds, and government procurement tenders. It is heartening to note that of the twelve CDM projects registered by the CDM Executive Board (as of July 19, 2005), three are located in India, as follows:

• GHG emissions reduction by thermal oxidation of HFC-23 in Gujarat

• Electricity generation from mustard crop residues in Rajasthan

• 5-MW Dehar grid-connected small hydropower in Himachal Pradesh

Under the Kyoto Protocol, the developing countries ratifying the protocol are eligible to participate in the CDM. India signed the protocol before COP 8 in 2002, which was hosted by the government of India in New Delhi. India offers a large potential for utilizing the CDM because of its inherent dependence on fossil fuels for development, its proactive government, and the enabling environment in place. Indeed, India is the most favoured destination for the CDM.

India is a competitive supplier for cost-effective GHG offset projects. Recognizing the possible benefits derived from such investment flows to India, the government has placed the CDM at the top of its climate change agenda. The designated national authority (DNA) for CDM projects from India has been set up in the Ministry of Environment and Forests (MoEF).

This guidebook is aimed at providing CDM project developers and investors interested in host country information—which is vital when making decision on investment and the procurement of CDM benefits, rules, and regulations of the India’s DNA—and reliable, updated information regarding CDM opportunities in India in various end-use sectors. The information in this guide is based on the UNFCCC guidelines, the Kyoto Protocol, the Marrakesh Accords, and the decisions agreed upon during the subsequent Conferences of Parties (COP 8, COP 9 and COP 10, held in India, Italy, and Argentina, respectively).

This report is organized into chapters and various appendices, which broadly cover the following:

• Country profile – India

• The CDM project cycle

• An analysis of the potential and priorities for CDM projects in India

• An overview of the institutional infrastructure for climate change/Kyoto Protocol activities and CDM-related government authorities

• CDM project approving procedure and requirements of the National CDM Authority

• Laws and regulations regarding CDM projects in India

• Fiscal and financing issues in CDM projects

• Government incentives in potential sectors where CDM projects can be developed

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• The current state of CDM project development in India, types of projects, location, status of development, etc.

• A list of institutions/organizations involved with climate change and CDM activities in the country, which could be a useful source of information and contacts for CDM project investors and developers in India.

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2. COUNTRY PROFILE

India is a large country, covering an area of 3.28 million square kilometres (km²) and situated north of the equator between 66ôE to 98ôE longitude and 8ôN to 36ôN latitude. It is bordered by Nepal, China, and Bhutan to the north, Bangladesh and Myanmar to the east, and Pakistan to the northwest. It has seas on three sides: the Bay of Bengal to the southeast, the Indian Ocean to the south, and the Arabian Sea to the west. India consists of diverse physio-geographical features that may be classified into (a) the Great Mountain Wall (the Himalayan range) in the north, (b) the Northern Plains, (c) the Great Peninsular Plateau, (d) the Coastal Plains, and (e) the Islands. India is endowed with varied soils, climate, biodiversity, and ecological regions.

Under such diverse natural conditions, over a billion people who speak different languages, follow different religions, and inhabit rural and urban areas, live in relative harmony under the world’s largest democratic system.

2.1 Demography

India is the second most populous country in the world. Its population crossed the one billion mark in 2000 and has been increasing annually by about 15 million since then. Population levels and growth rates drive national consumption of energy and other resources and, therefore, GHG emissions. The decadal population growth rate has, however, steadily declined from 24.8 percent between 1961–1971 to 21.3 percent between 1991–2001, and it is targeted to further decline to 16.2 percent between 2001–2011, due to the various policies of the government of India on family welfare, education, health, and the empowerment of women (figure 2.1) (MoEF 2004).

India has a high population density. It was 264 persons/km² in 1991, and it increased to 324 persons/km² in 2001 (figure 2.2). Almost all the coastal districts are very densely populated (above 500 persons/km²), with over a 100 million people inhabiting them.

Some main features of Indian population density are:

• 95 percent of India’s districts have more than 50 persons/km²

• 80 percent have above 100 persons/km²

This high population density, coupled with low per capita income and the low adaptive capacity of the majority of the population, renders them vulnerable to the impacts of climate change, especially in coastal areas and fisheries.

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Figure 2.1. Percentage decadal growth rate in India

Source: Office of the Register General, India 2001.

Many critical demographic indicators have steadily improved in India. The average life expectancy at birth has gone up from 32 years to over 60 years between 1951 and today. The total fertility rate declined between 1982 to 1992, resulting in the reduction of almost one child per woman. The infant mortality rate, a sensitive indicator of health status as well as of human development, has also declined considerably for both males and females. The average literacy rate has gone up from less than 20 percent in 1951 to more than 65 percent in 2001.

The progress of urbanization has been relatively slow in India compared to other developing countries. The share of urban population was about 18 percent of the total population in 1961 and had increased to about 28 percent in 2001 (figure 2.3). Thus, the number of people living in urban areas increased from 79 million in 1961 to 285 million in 2001. In 2001, nearly two-thirds of the urban population was concentrated in 317 class-I cities (population of over 100,000), half of which lived in 23 metropolitan areas with populations exceeding one million each. The number of urban agglomerations/cities with populations of over a million has increased from five in 1951 to 23 in 1991 and to 37 in 2001. There has been unplanned urban development, and this increase of urban population has resulted in changed consumption patterns and increased demands for transport, energy, and other infrastructure, which in turn have resulted in high levels of energy consumption and emissions (Office of the Register General, India 2001).

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Figure 2.2. Population density in person per square kilometre

With 28 percent of the population living in urban areas, the rest, which is around 72 percent of the population, live in rural areas in about 0.63 million villages (Office of the Register General, India 2001). However, many of them suffer from poor communications and transport facilities, lack of adequate clean drinking water, and sanitation and basic health facilities. Reproductive health and basic health infrastructure require considerable strengthening, despite commendable achievements in the last 50 years. Nearly 100 million people live in urban slums, with limited access to clean, potable water, sanitation facilities, and health care services. In addition, there is the ongoing issue of a large-scale migration of people from rural to urban areas.

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Figure 2.3. Rural-urban population profile in India

2.2 Households

India had more than 160 million households in 1994. Nearly three-fourths of these households lived in rural areas accounting for one-third of the total national energy consumption (NSSO 1993/1994; Office of the Register General, India 2001). Demographic changes have led to an appreciable rise in the total number of households in India, with the urban share increasing faster than the rural one. There is also an increase in energy-consuming appliances at all levels.

Nonetheless, this is an expected and desirable trend for a developing country where appliance/possession levels per 1,000 households are still abysmally low in comparison to the developed and even many developing countries; it increased to 2.7 per cent in 2000. However, the immediate national development target of doubling the per capita income by 2012 and continued 8 percent and above GDP growth rates into the medium term will result in increasing possession of durable goods and, therefore, increasing energy consumption and greenhouse gas emissions.

2.3 Governance

India is the world’s largest democracy, which is constituted of the legislature, the executive, and the judiciary. Laws are enacted by the legislature, implemented by the executive, and upheld by the judiciary. India’s parliament consists of two houses, the Rajya Sabha (upper house) and the Lok Sabha (lower house). The spheres and activities of the union and the states are clearly demarcated. Some sectors like environment and energy are listed in the concurrent list, wherein both the union and the state have concurrent jurisdiction to enact laws. The Constitution also devolves powers to the lower levels—“lower to the people”—through the institutions of

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panchayats (local governments) and nagar palikas (local municipal bodies), with a view to ensure administrative efficiency in concordance with the broader concept of good governance.

India has a strong and independent judiciary. Environmental issues are of high importance and often dealt with through judicial processes, which protects the citizen’s right to a clean environment. Further, matters of public interest are also taken up by the powerful media and the active NGO community.

The government itself accords high priority to the environment. The Ministry of Environment and Forests (MoEF) is responsible for planning, promoting, coordinating, and overseeing the implementation of environmental and forestry policies and programmes. It is also the nodal agency for international cooperation in the area of the environment, including the issue of climate change. Environment ministries/departments at the state level deal with state-specific environmental issues and concerns.

2.4 Environmental governance

Environmental governance is integral to the governance of India. The government of India established the National Committee on Environmental Planning and Coordination (NCEPC), under the aegis of the Department of Science and Technology, prior to the United Nations Conference on the Human Environment at Stockholm. Through this commitment, India amended its constitution to incorporate provisions for protecting its environment. More than two dozen laws, acts, rules, and notifications support the constitutional provisions and are enacted to protect and safeguard India’s environment. All aspects of the environment—like air and water pollution, conservation, deforestation, nuclear waste disposal, etc.—are covered by these laws. Some important acts related to the protection of environment are the Animal Welfare Act (1960), the Indian Wildlife (Protection) Act (1972), the Water Prevention and Control of Pollution Act (1974), the Forest (Conservation) Act (1980), the Air (Prevention and Control of Pollution) Act (1981), the Environment (Protection) Act (1986), the Public Liability Insurance Act (1991), and the Biological Diversity Act (2002).

In India, different agencies are involved in resource management. The Planning Commission directs the allocation of resources to various sectors within the framework of its five-year plans.

Environmental management is dealt with by the MoEF at the central level and by the departments of environment at the state level. Natural resources (like water, forests, and oceans) are managed by separate ministries and departments. Inter-ministerial coordination committees and working groups deal with cooperation and conflict-of-interest issues. Resource allocation and project implementation is coordinated by the administrative units at the central and state levels. Implementation of all programmes is done at the field level under the overall supervision of the district collector. Local bodies such as the panchayats and city councils also have a stake in implementing various schemes in accordance with the laws. At the local level, several participatory management schemes dealing with environmental issues have been successfully carried out (MoEF 2004).

2.5 Economic profile

After the 1990s, the annual average growth rate of the gross domestic product (GDP) in India was about 6.6 percent, making it one of the ten fastest-growing economies in the world.

India’s GDP (at factor cost and constant prices) grew by about 8 percent in the 2004/05 financial

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year (GoI Ministry of Finance 2005). The key socioeconomic indicators for 2001 are presented in table 2.1. Despite this rapid economic growth, the per capita GDP is one of the lowest in the world. One-fourth of its population of over one billion is still below the poverty line, and 44 percent of India’s population has an income below $US1/day. Its human development index is only 0.59, compared to China (0.745) and to developed countries such as Germany (0.925), Japan (0.938), and the United States (0.939) (UNDP 2004).

The production of coal—a resource for most industries and indicator of economic development—reached a record 350 million tonnes in 2004. Eleven infrastructure sectors, including telecommunications, transportation, and energy, posted higher growth during the first ten months of the current financial year (2004/05) compared with the corresponding period in the previous year. Telecommunications, civil aviation, roads, and shipping registered double-digit growth.

Table 2.1. National socioeconomic indicators, 2001

Criteria Number

Population (millions [M]) 1,019

Area (Mkm2) 3.28

GDP at factor cost 1994/95 Rs. Billion 12,679

GDP per capita (purchasing power parity in US$), 2002 2,670

Share of industry in GDP (%) 24.41

Share of services in GDP (%) 49.3

Share of agriculture in GDP (%) 26.29

Land area used for agricultural purposes (Mkm2) (net area sown) 1.42 Urban population as percentage of total population 27.8

Livestock population excluding poultry (M) 485

Forest area (Mkm2) 0.67

Percentage of population below poverty line (national poverty line) for 1990–2001 28.6

Life expectancy at birth of males (years) 63.87

Life expectancy at birth of females (years) 66.91

Literacy rate (%) 65.38

Exchange rate in US$ 47.69

Source: GoI Ministry of Finance 2005, Office of the Register General, India 2001, UNDP 2004.

Social development depends to a great extent on economic development. For many decades, India followed a mixed economy model, where central planning co-existed with private enterprise. Agricultural activities, however, have rested almost entirely with private farmers. Until 1991, industrial investment was sought to be controlled through industrial licensing. In the same year, a major programme of reforms was initiated under which industrial licensing was abolished, trade constraints were relaxed, protection was reduced, and a greater emphasis was laid on the private sector.

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2.6 Foreign direct investment

India is now on an upswing with its booming economy and growing attractiveness as an investment destination. Investments by foreign institutional investors (FIIs)² in the country exceeded $9 billion in 2004—the highest in the history of Indian capital markets. The total foreign exchange reserves of India went up to $140 billion in March 2005. The total FDI approved and the actual FDI inflows during the last decade, along with the percentage realisation rate of approvals, are shown in table 2.2. Exports have revived remarkably; starting with 8.7 percent growth in January 2004, they maintained a steady rise of over 20 percent for the rest of 2004.

They are expected to exceed $100 billion in 2004/05. Rural consumption has grown; it has exceeded consumption in urban India by 50 percent in the past two years. The year 2004 closed with a bang on the Mumbai Stock Exchange with nine sectors of industry recording over 100 percent gains in a single calendar year.

Table 2.2. Total FDI approved and actual FDI inflows (amounts in Rs. 10 million)

Year (Jan–Dec) FDI approved FDI inflows % realisation of FDI approved

1991 534.11 351.43 65.80

1992 3,887.54 675.18 17.36

1993 8,859.33 1,786.71 20.17

1994 14,187.19 3,289.28 23.18 1995 32,071.72 6820.03 21.26

1996 36,146.81 10,389.20 28.74

1997 54,891.35 16,425.33 29.92

1998 30,813.50 13,339.84 43.29

1999 28,366.53 16,867.79 59.46

2000 37,039.45 19,341.74 52.22

2001 26,874.73 19,265.10 71.68

2002 11,139.79 21,285.97 191.08

Total (1991–2002) 284,812.05 129,837.60 45.59

Source: GoI MoCI 2003.

As evident from table 2.2, the average rate of realisation (FDI approval to approval ratio) for the total period 1991–2002 in terms of rupees works out to be 45.59 percent.

2.6.1 Share in approvals, by country

Figure 2.4 shows a breakdown of FDI approvals by country during the period April 1991 to December 2002. The United States and Mauritius contributed the most to the country’s aggregate FDI inflows, followed by the United Kingdom, Japan, and South Korea.

During the year 2002, Mauritius contributed the maximum to FDI inflows into India, followed by Japan, United Kingdom, United States, Netherlands, and Germany. The percentage contribution and the amount contributed by these countries to India’s FDI inflows in 2002 are provided in table 2.3.

2 See 8.3 for further details on FIIs.

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Table 2.3. The percentage contribution and the amount contributed by countries to India’s FDI inflows in 2002

Country FDI contributed (in billions Rs.) % contribution

Mauritius 72.80 45.18

Japan 19.18 17.36

United Kingdom 17.00 10.54

United States 13.60 8.42

The Netherlands 7.50 4.64

Germany 6.60 4.11

Source: GoI MoCI 2003.

Figure 2.4. Contribution of FDI, by country (1991–2002)

Sectoral distribution of approvals since 1991

Figure 2.5 depicts the share of various industries in the total FDI that the country has received (up to 2003). Telecommunications, power, and oil refining attracted maximum attention and investments from FIIs. The presently low penetration levels in the Indian telecom industry, the power restructuring initiatives undertaken by the government, and heightened business activity in the oil and gas industry have collectively resulted in attention being received from investors globally.

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Figure 2.5. Sectoral distribution of FDI approvals since 1991 (in %)

The latest major sectors to get the government’s approval for 100 percent FDI are the housing, construction, and real estate sectors, as per a notice issued in February 2005.

2.7 GDP and its structure

Signs of the tremendous improvements in India’s economy since independence in 1947 include its achieving self-sufficiency in food for its rising population, increasing per capita GDP by over threefold, reducing illiteracy and fertility rates, creating a strong and diversified industrial base, building up infrastructure, developing technological capabilities in sophisticated areas, and establishing growing linkages with an integrated world economy.

The primary sector (particularly agriculture) has been the major contributor to India’s GDP, although its share has declined from over 50 percent in the early 1950s to about 23 percent in 2002/03. The shares of the manufacturing, transportation, banking, and service sectors have doubled during this period (figure 2.6).

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Figure 2.6. Contribution to GDP at factor cost, by sector

Source: Ministry of Finance 2005, Office of the Register General, India 2001, UNDP 2004.

2.8 Budget

National expenditures can be divided into two broad categories of “plan” and “non-plan,” as well as “developmental” and “non-developmental.” The plan expenditure generally considers the planned outlays of the central government and concerns with growth and investment in the economy, whereas the non-plan expenditure encompasses the recurring expenditures of the government and the economy. Furthermore, these are split into capital and revenue expenditures.

During the past few years there has been a 22 percent increase in the total expenditure, contributed to by an increase of about 30 percent in the plan expenditure and a 19 percent increase in the non-plan expenditure. There has been an increase in the non-plan expenditure due to a significant rise in the share of defence expenditure and also a rise in interest payments, which is roughly about 15 percent. The plan expenditure shows a gradual increase attributed to an increase in capital plan expenditure and central assistance to the states and union territories (UTs), among others. However, the total expenditure as a percentage of GDP has shown a gradual decrease since 1980. This may be due to the active participation of stakeholder organizations and the initiatives of NGOs.

Regarding revenue receipts, it can broadly be divided into two parts: (a) part A-revenue receipts and b) part B-capital receipts. Part A includes two components, namely, (a) tax revenue and (b) non-tax revenue. Part B deals with capital receipts, which includes market loans, external assistance, small savings, government provident funds, special deposits, and others. Gross tax revenue (GTR) for the year 2004/05 is 3,060 billion rupees compared to 1,983 billion rupees during 2000/01. This substantial rise in GTR can be attributed to the growth of the GDP, larger revenue generated from union excise duties, corporate taxes, and income tax. Similarly, the

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capital receipts have also shown an increased trend of 6,252 billion rupees in 2003/04 from 1,294 billion rupees for the year 2000/01. The maximum gain is from short-, medium- and long-term loans. The total receipts account for 9,643 billion rupees for the year 2003/04, compared to 3,355 billion rupees for the year 2000/01 (Economic Survey of India 2004/05).

2.9 Energy profile

The energy sector has emerged as one of the important pillars of the modern economy since independence, and especially after the oil crisis of 1973. Since then, energy policy became inseparable from the national development strategy. A large number of ministries and organizations are responsible for various functions concerning energy development. The organization of the energy sector in India is given in figure 2.7 (WII 2004).

Figure 2.7. Organization of India’s energy sector

Source: TERI 2004b.

Note: BPCL = Bharat Petroleum Corporation Limited; BRPL= Bongaigaon Refinery and Petrochemicals Limited; CEA = Central Electricity Authority; CIL = Coal India Limited; CRL = Cochin Refineries Limited; DAE = Department of Atomic Energy; EMC = Energy Management Centre; GAIL = Gas Authority of India Limited; GoI = Government of India; HPCL = Hindustan Petroleum Corporation Limited; IOC = Indian Oil Corporation Limited; IREDA = Indian Renewable Energy Development Agency; IBP = Indo-Burma Petroleum Company Limited; MRL = Madras Refineries Limited; MRPL = Mangalore Refineries and Petrochemicals Limited; MoEF = Ministry of Environment and Forests; MNES = Ministry of Non-conventional Energy Sources; NHPC = National Hydro-electric Power Corporation; NTPC = National Thermal Power Corporation; OCC = Oil Coordination Committee; OIL = Oil India Limited; ONGC = Oil and Natural Gas Corporation; PFC = Power Finance Corporation.

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Energy and environment-related concerns in India include the growing gap between the demand and supply of energy and the environmental externalities associated with energy use.

High growth in the major energy-intensive sectors—such as power generation, steel, cement, refineries, chemicals, fertiliser, and transport—has resulted in a high elasticity of energy consumption and environmental emissions with respect to GDP (figure 2.8).

Figure 2.8. Growth of energy, electricity, and the Indian economy

Sources: GoI Ministry of Finance 2005; Energy Information Administration 2004.

2.9.1 Commercial energy demand and supply scenario

The consumption of commercial fuels (coal, oil, natural gas, and power) has been steadily rising over the years, with coal continuing to be the dominant source. Coal meets 63 percent of India’s total energy requirement, followed by petroleum products (30%) and natural gas. The total coal reserve in India is 211 billion tonnes, and by current estimates the reserves are enough to meet India’s power needs for at least another 100 years (GoI MoC 2000). The agriculture, industry, transport, domestic, and other sectors are the major consumers of commercial energy/power in India. India imports around 70 percent of its total crude oil requirements. In regards to natural gas, the Hydrocarbon Vision 2025 indicates that India’s total gas reserves will decline by 16 billion m³ by 2011/12, based on its consumption of 22.5 billion m³ in 1998/99.

Total energy use in India has increased substantially during the past five decades, with a shift from non-commercial to commercial sources of energy. Accordingly, the production of commercial sources of energy has also increased significantly. Table 2.4 indicates the production trends of various primary energy resources, including renewable energy sources.

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LIST OF BOXES, FIGURES, AND TABLES

FOREWORD

ACKNOWLEDGEMENTS

CONTENTS

LIST OF BOXES, FIGURES, AND TABLES

ABBREVIATIONS

EXECUTIVE SUMMARY

1. INTRODUCTION

2. COUNTRY PROFILE

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