Carbon credit fraud: How big firms faked green to mint gold

A global attempt to arrest climate change by providing firms with incentives to invest in green technology is being manipulated in India for profit. Instead of reducing carbon emissions, the Clean Development Mechanism, or CDM, has helped firms, mostly private corporations, raise huge sums virtually out of thin air.

Worse, as this three-part series will show, the manipulation and subsequent failure of CDM in India may have led to thousands of tonnes of greenhouse gases (GHGs) being released into the atmosphere.

DNA has found that several projects in the country that are earning huge sums through the sale of carbon credits are, in fact, ineligible for the CDM scheme. Promoters of these projects have manipulated and backdated documents to meet requirements as prescribed by the CDM executive board. Climate change disproportionately impacts developing countries and the poor in all countries. A majority of Indians dependent on agriculture are likely to  get affected most by climate change due to their reliance on natural factors like the monsoon.

UNFCCC (United Nations Framework Convention on Climate Change) requires member countries to limit or reduce GHG emissions. CDM is a UN-run international GHG offsetting scheme that allows developing countries to earn credits by implementing projects that prevent the creation of, or that remove, greenhouse gases from the atmosphere. These credits, called carbon credits, can be sold to governments, businesses or individuals to offset excess emissions they generate.

The first carbon credit was issued in October 2005. The market price of one carbon credit (each credit is equal to one tonne of carbon dioxide) today is about €6 (Rs400). In 2008, it was nearly €24 (Rs1,500).

The National Clean Development Mechanism Authority (NCDMA) that functions under the Ministry of Environment and Forests (MoEF) approves projects for CDM status at the national level. According to the ministry, until March 2012, the NCDMA approved 2,195 projects for CDM status. The CDM executive board, a supervisory arm of UNFCCC, registered only 827 of these projects. A conservative estimate of the total revenue generated by the sale of carbon credits from these projects is around Rs10,000 crore.

Among others, big names such as Tata, ITC, Reliance, Jindal Steel, Bajaj, GFL, Adani have earned good returns under CDM.

THE FLAWED PROCEDURE
After the CDM project receives the consent of the respective government, it is validated by an accredited international organisation and then submitted to the CDM executive board that vets and registers it.

At all stages, authorities concerned have to validate and certify that: A) the project uses efficient and clean technology that is resulting in reduction of carbon emission (sustainability), and B) that it will be unviable to implement the project without carbon credit revenue. This key requirement is also known as the additionality clause.

When the project clears both tests, the carbon credits generated from the project are verified by accredited validation organisations after which they are available for sale.

An examination of several CDM projects in India shows that many neither fulfill the additionality clause nor are they sustainable; they are ineligible for CDM status.

The first problem is that validators tend to rely on the project developer’s claims of sustainability and additionality without verifying them independently. For instance, a captive power project of Jai Balaji Sponge Ltd in Burdwan district of West Bengal was granted CDM status in 2006. However, it has been subject to several penal actions by the West Bengal Pollution Control Board for violating environment laws. The unit has also faced closure on previous occasions for the same reason.

The NCDMA approves CDM proposals without conducting field inspections to verify whether the project fulfils the eligibility criteria. “It is taken for granted that a project applying for CDM status is automatically clean and sustainable,” says a Mumbai-based carbon consultant, who did not want to be named. No wonder then that 44% of the projects rejected by the CDM executive board until 2008 belonged to India.  

An American consulate cable released by WikiLeaks makes the same point. No Indian project can meet the “additionality in investment criteria” to be eligible for carbon credits, says the cable. It quotes RK Sethi, former member secretary of the NCDMA, saying that the national authority responsible for evaluation and approval of Indian projects that reduce GHG emissions to earn credits in the global carbon market, i.e. NCDMA, simply takes the “project developer at his word” for clearing the additionality clause.
The CDM board has also warned validators on several occasions for their biased opinion while certifying projects. In 2010, the executive board suspended TÜV SÜD, a German validation company. “TÜV SÜD has been giving positive validation opinion even though there were concerns about additionality,” said the minutes of the board’s meeting. In November 2008, a Norwegian CDM project validation company, DNV, was also suspended. This company verified several CDM projects in India.

An example of DNV’s carelessness is Tata’s ultra-mega power projects (UMPPs) at Mundra. Even though Mathsy Kutty of DNV agreed that UMPPs in India would not qualify as CDM projects, it validated Tata’s UMPP that was later rejected by the CDM board because it didn’t fulfill the additionality clause.

However, the CDM board approved Anil Ambani’s UMPP at Sasan.
As per a WikiLeaks cable, Pratap Melampati, who works with the Reliance ADAG group, agreed that future power projects based on supercritical technology may fail to qualify under CDM as the technology becomes “commonly used” in India. This is because the government’s latest regulation says that use of supercritical technology is compulsory, not optional, for new power projects in India. Yet, Reliance was successful in claiming that the project would not have used supercritical technology — a clean and efficient but expensive technology — without CDM support, thus fulfilling the additionality clause and bagging CDM status.

In its 2009-10 annual report, Anil Ambani’s Reliance Power goes so far as to state that CDM is a “new revenue stream for the company” and claimed it would earn a minimum of Rs3,100 crore by selling carbon credits from its ultra-mega coal power project at Sasan and Krishnapatnam. This raises a question over the need for carbon credits revenue to finance the project.

Many more dubious projects have escaped the CDM executive board’s scrutiny. This is partly because of conflicts of interest within the executive board, says Katy Yan of International Rivers, a non-profit, environmental organisation. A report by International Rivers says that one glaring indication that most projects do not qualify under the additionality clause is that three-quarters of projects were already up and running at the time they were approved by the CDM.

“CDM may have helped people think about air pollution but it has not resulted in any significant technology transfer or sustainable development. It has ended up as a capitalistic tool to take care of some of the immediate problems at minimal costs,” says Amar Mody, an independent consultant and carbon market specialist based in Mumbai who has represented various carbon funds and international brokerage firms in India for more than seven years.
“Of the 60 CDM projects that I have evaluated, there appeared not to be one that actually reduced emissions,” admitted Soumitra Ghosh of North Eastern Society for Preservation of Nature and Wildlife.