Bhutan and India have agreed to have equal share to the revenue that the former’s hydropower projects would earn through carbon credits under Clean Development Mechanism (CDM) project of the United Nations Framework Convention on Climate Change (UNFCCC).
CDM allows emission reduction projects in developing countries to earn a Certified Emission Reduction (CER) credit. The CERs can be traded and sold to industrialized countries which would help them meet their emission reduction targets.
Bhutan is working on getting all 10 of its hydropower projects (three under construction) recognized as CDM projects. At the moment, two hydropower projects – 112 MW Dagachhu and Chendebji – have been certified to receive carbon credits. This means they are CDM projects.
However, some experts familiar with the negotiations between India and Bhutan sharing equal benefits of carbon credits say it is not a fair deal. They say it is a bad bargain, especially when the loan component from India to construct hydropower projects has been increasing and the grant component decreasing.
The experts say the deal between the two countries to have equal shares in cashing carbon credits sold at the carbon market from bilateral projects is not justified at any costs.
However, the secretary of economic affairs ministry, Dasho Sonam Tshering, said the understanding [50/50 deal] was based on the fact that Bhutan’s benefits from CDM will not materialize without the cooperation of India. “It is fair to share the benefits of CDM by using someone else’s opportunity,” he said.
On the increasing loan and decreasing grant from India to construct hydropower projects, the secretary said there is no relationship between the CDM and equity financing.
He said he is skeptical if all the hydropower projects would qualify as CDM projects. Since the hydropower projects are commercially viable, the secretary said he has been raising concerns if Bhutan was just wasting time trying for CDM project status.
Recently, Bhutan has approved the Project Design Document (PDD) to certify Punatsangchhu Hydropower Project (PHPA) – I as a CDM project.
The managing director of PHPA, R. N. Khazanchi, said after verifications by an independent body, the PDD was sent to the UNFCCC for registration.
On the equal share of Bhutan and India in carbon credits, he said, nothing is certain at the moment as it will entirely depend on the market rate. Market rate refers to the calculation of carbon credits as replacement for fossil fuel.
A source, however, said the calculation is easier for small projects as bigger projects have to pass through a lot of tedious procedures.
The calculation of carbon credits is done in such a way that, for example, if PHPA-I generates 5,600 million units of energy, it will earn that many million units of carbon credits, meaning one unit of energy earns a unit of carbon credit.
Explaining the rationale of equal share of carbon credits between Bhutan and India, the source said Bhutan on its own would face difficulties in qualifying its hydropower projects as CDM ones. He said the country does not have carbon emission baseline as it has negative emission.
“We are allowed to use the baseline of India with the approval from it’s environment ministry,” he said. “It is a fair deal.”
However, an environmentalist questioned if it is ethical for a country to claim for carbon credits based on another country’s projects. Why did Bhutan make it 50/50? He asked.
He said the loan percentage from India for hydropower projects has increased over the years. For example, PHPA-I construction is on 60% loan and 40% grant, while PHPA-II and Mangdechu has gone up to 70% loan and only 30% grant.
He argued Bhutan has the burden to pay back 70% of the loan and any benefit from CDM should be at least be based on the loan and grant components.
Meanwhile, Dagachhu and Chendebji hydropower projects have started to earn carbon credits. Credits are owned by the individual projects. However, 26% of the credits Dagachhu earns goes to an Indian company (TATA) which has equivalent equity share in the project.