This paper examines how two of the Kyoto Protocol mechanisms- Clean Development Mechanism (CDM) and emissions trading have been applied to two water related renewable power generation projects.

Traditional concerns related to hydropower developments are examined and discussed in the light of assessments carried out for a SMEC International promoted hydropower project in Nepal which intends to sell power to India. SMEC International is promoting the idea of viewing the hydropower development under the Clean Development Mechanism to the Nepalese and Indian governments, so that potential emission credits generated can be of mutual benefit to all three parties.

SMEC International has been assisting the Government of Gujarat, India in assessing various environmental issues related to the bold and imaginative proposal- KALPASAR, which intends to dam a gulf and harness the high tidal variations to generate nearly 5,000MW of renewable power. The Government of Gujarat is proposing to seek national/international private sector involvement, thereby providing opportunities for developed country commercial entities to invest in a large scale renewable energy project which can be considered under CDM, enabling emission credits generated to be of mutual benefit to relevant parties.

The Kyoto Protocol of the United Nations Convention on Climate Change was formally adopted in December 1997. It sets legally binding greenhouse gases (GHGs) emission limits for the developed countries listed in its Annexure B. These countries are obliged to reduce the emissions of six green house gases to at least 5 percent below their 1990 levels. This is to be achieved by the years 2008-2012. The six green house gases covered by the agreement are carbon dioxide, methane, nitrous oxide, perfluorocarbons, hydrofluorocarbons and sulphur hexafluoride.

The percentage reduction agreed by the Annexure B countries were not uniform. The EU, USA, Canada and Japan were to reduce by slightly more than 5 percent; Norway, Australia and Iceland were allowed increases of 1, 8 and 10% respectively. What is most significant is the fact that developing countries did not agree to any commitments.

Despite the adoption of the protocol there is no certainty that the treaty and the GHG limits will become international law. To become legally binding, the protocol must be ratified by at least 55 of the signatory countries, accounting for at least 55 % of the total output of world emission in 1990.

The most innovative aspects of the Kyoto Protocol are the flexible mechanisms created to enable the reduction to be achieved according to the time frame. Two of the important mechanisms discussed in this paper are the Clean Development Mechanism (CDM) and GHG emissions trading.

Under the CDM, the developed countries (Annexure B countries) can invest in sustainable and renewable energy development projects in developing countries (non-annexure B countries). Certified emission reductions achieved in these projects between 2000 and 2008 can be used by the developed countries to offset part of their GHG target by 2008-2012.

The provisions for emissions trading as a means of helping the Annexure B countries to reach their GHG targets is also part of the protocol. However, the principles and guidelines of governing the operation of such an emission trading system is yet to be agreed upon.

Thus, the CDM paves the way for the developing countries that did not ratify the Kyoto Protocol as they did not accept the binding targets, to be included in the GHG reduction program and also benefit from it by achieving sustainable development.

Most CDM projects are anticipated to be international investments in emission reduction projects, with private entities being the principal investors. CDM investments are expected to be ‘adders’ to existing or planned projects rather than the sole medium for basic project financing. Thus, an investor would expect to earn a higher return from an investment through emission reduction credits than without them. Investors may use these credits to meet their own commitments or sell the earned credits on the international market if there is a profit to be made from such activity.

Even though the CDM principles have been established several important criteria that should be satisfied for a project to be approved under the protocol have not been agreed upon.

Some of the important considerations yet to be worked out deal with the overlapping technical, financial, regulatory and administrative arrangements. The establishment of a system for the sharing of the benefits in the form of certified emission reductions (CER) or carbon credits is to be established.

Even though it is fairly clear that a number of important steps are yet to be concluded towards establishing the carbon credit market under the CDM mechanism, there are compelling economic reasons why a successful conclusion will be reached. For instance, it has been agreed that CDM based reduction of GHG are less costly than domestic action based reduction within the OECD (Lanza, A, 1999).

Further, it is also fairly certain that the CDM related property and emission trading mechanisms will make certain forms of energy production more attractive than others.

The most significant greenhouse gas (GHG) resulting from fossil fuel combustion is carbon dioxide. The IEA (http://www.iea.org/statist/keyworld/keystats.htm) has estimated fuel shares of the world total primary energy supply (TPES)* between 1971 and 1976 (see Table 1).

Table 2 provides IEA’s (http://www.iea.org/statist/keyworld/keystats.htm) estimates for 1973 and 1996 regional shares of TPES.

Table 3 outlines IEA’s (http://www.iea.org/statist/keyworld/keystats.htm) estimates of 1973 and 1996 fuel shares of carbon dioxide emissions, while Table 4 provides regional shares.

Tables 1 and 2 suggest that coal and oil were and still are the primary sources of fuel for energy generation, with the OECD generating and consuming more than half of the total primary energy supply (TPES). Tables 3 and 4 suggest that oil, coal and gas combustion are the largest emitters of carbon dioxide, with the OECD contributing more than half of the total emissions. It is also worthwhile noting that China, Asia, Africa and the Middle East more than doubled their emissions between 1973 and 1996. China and Asia are quite significant, in the light of industrial development and the need for energy to fuel growth..

GHG covered by the Kyoto Protocol include, carbon dioxide, methane, nitrous oxide, perfluorocarbons, hydrofluorocarbons and sulphur hexafluoride. All these gases potentially affect the ozone layer with varying potencies, which in turn has global climatic implications. GHG emissions, for example in Europe, has the potential to affect global climate with severe ramifications for areas thousands of kilometers away.

Emissions from thermal and oil combustion plants, contain parameters other than carbon dioxide which are detrimental to public health. Urban air quality in China and Asian countries is causing increasing concerns about implications on public health, incidences of respiratory diseases and loss of productivity.

For countries to grow, albeit with reduced emissions limits (with some countries signatories to the Kyoto Protocol), it is necessary to seek alternative and renewable power sources. Despite being endowed with abundant fossil fuel reserves, it is imperative for China and countries in Asia, Africa and the Middle East to seek better technologies for fossil fuel combustion, or turn their attention to harnessing renewable energy sources.

Climate change related to GHG emissions knows no geographical boundaries. Tuvalu, a small Pacific island state stands the risk of being submerged due to climate change induced rising ocean levels. Tuvalu, emits negligible GHG, but could suffer due to international emissions, over which it has no control.

With energy generation being a significant GHG contributor, it is logical to assume that changes in technology and focus on renewable and environmentally sustainable energy sources could result in significant reductions in GHG. The issue of GHG reduction needs a cultural shift from examining and assessing location specific energy project impacts to cross boundary and international implications. Current practices of assessing impacts of, for example, a large hydropower project, will focus generally on social (inundation, displacement and resettlement of affected people), upstream and downstream environmental impacts. It is accepted that in the past hydropower projects have had significant social and environmental effects, sometimes even disastrous long term implications. But in this day and age of advanced technology, a greater understanding of short-, medium- and long-term impacts, it is possible to search for sites for locating such projects, where the potential for social and environmental impacts is minimal. For example, the Banbina Dam in Brazil, built on the Utama River has submerged 900 square kilometers of jungle with its reservoir, while generating 250MW of electricity. The recently completed Samuel Dam on the Jamari River near Porto Velho, is rather more efficient, with its 200 square kilometers reservoir and 217MW generating capacity. Hilly and mountainous countries and those with abundant water resources are prime locations for siting such projects, with the potential for cross-boundary sale of power and water.

This calls for cooperation and dialogue between nations, related private sector entities and non-governmental organisations. There also needs to be an acknowledgment that energy is essential for growth and providing the community with a service that is necessary for comfortable existence. Replacing GHG emitting energy producing sources with and/or building renewable and environmentally sustainable ones, is essential for minimising global impacts.

SMEC is promoting the West Seti Hydropower Project in Nepal (see Figure 1), located in the far western region, located in the Karnali River Basin. The project will comprise an impoundment, a 750MW hydroelectric power station with a capacity to generate 3,300GWh per annum of energy.

The project objective is to generate renewable energy for supply to meet demand shortfalls in the northern Indian states. Official reports indicate that energy shortfall in northern India increased from 11% in 1991 to 24% in 1997, with more shortfalls since then. Increased utilisation of Himalayan hydropower potential (including Nepal) will become more and more attractive to Indian power purchasers. Nepalese hydropower potential currently exceeds 80,000MW, and given the Indian GDP growth pattern of 2% average in the northern Indian states, it is estimated that between the years 2010-2020, there will be a constant demand shortfall of between 8 to 10%.

SMEC has been involved in undertaking detailed environmental and social assessments for the last three years. Major issues have included social, heritage, ecology, and water quality issues. Social assessments have included detailed surveys and close consultation with affected communities. Some 13,000 people will be impacted by the project. Assessments indicate that around 7,870 people will resettle outside the project area, 1,200 would relocate locally, while 4,000 would remain where they are. Discussions have suggested that providing households with replacement land is by far the most popular. As appropriate productive land is not available in the hilly terrain of the project affected area, most households have preferred land in the fertile Kailali District (Terai) as an adequate compensation. Some households will resettle upslope of the rservoir, thereby remaining within their local community. There are a host of other compensation packages proposed for project affected community services and facilities.

The environmental and social assessment studies are currently under review by the Nepalese Government and clearance expected by May,2000.

The West Seti Hydroelectric Project will produce 3,300 GWh per annum that will be distributed to northern Indian states where power is generated by thermal plants.

To calculate quantities of greenhouse gases reductions, it is assumed that the 3,300 GWh of power supplied by the West Seti Project would be generated by thermal plants in India.

The following values have been used:

C has been derived from A and B.

D has been derived from B and C.

The West Seti Project will create a reservoir that will submerge a certain land area. Various land uses in the submergence area are given in F. Land use types where various types of vegetation will be submerged are also indicated. To calculate methane (CH₄) production by vegetation submergence in the West Seti Reservoir, data for lakes from Sellmann and Crutzen, 1989 was used. This was derived from Table 5.13 on p.5 of "Land Use Change and Forestry" – Vol 3 – PCC Guidelines for National Greenhouse Gas Inventory Manual, 1996. The methane emission value for lakes adopted for the current exercise is given below.

From this, decreasing values of methane generated have been assumed reflecting lower biomass levels in areas with poorer vegetation as compared to forest with 50-100% cover density. Values assumed are given in F. Estimated annual methane releases from submerged vegetation in the West Seti reservoir are shown in F.

For the purposes of deriving an estimate of greenhouse gases reduced by generating 3,300 GWh hydroelectricity as compared to thermal combustion, it is assumed that the 333.6 tons of methane produced by vegetation submergence in the West Seti reservoir is a constant throughout the project life. This is a conservative approach as vegetation would decay over a few years and stop releasing methane.

Comparison of greenhouse gases reduced (from E) against produced (from F) on an annual is given in G.

As can be seen from G, only methane (CH₄) gas is produced in quantities larger than those reduced. Around 21.84 tons of CH₄ would be produced by thermal combustion as against 1 tons by hydroelectricity generation by the West Seti Project over one year.

A further factor needs to be considered in analysing the consequences of greenhouse gases reduced and produced. This factor is the Global Warming Potential (GWP). GWP compares the effect over time, on global warming of a unit mass of gas, compared with the effect of a unit mass of carbon dioxide.

H shows the global warming potential balance of greenhouse gases produced and reduced annually by the West Seti project.

*Derived from ‘Electricity Supply Business Greenhouse Challenge Workbook’, p. 9, Table 1

In GWP terms, the West Seti project will reduce 3,455,966 tons of carbon dioxide when all gases produced and reduced are compared in GWP terms.

It can thus be established, the hydroelectricity from the West Seti Project is an environmentally sound and renewable power source, with minimal greenhouse gas emissions.

SMEC International is lobbying the Nepalese and Indian Governments to accept the West Seti Project under the CDM. SMEC International is an Australian private entity promoting an environmentally sustainable hydropower project in Nepal, proposing to sell the generated electricity to India. Under the requirements of the CDM, endorsement by Nepal as the host country and India as the recipient of the power is essential for West Seti to be considered under CDM. This would also allow emission reductions to be accrued. A further CDM requirement is that benefits need to be shared. When India and Nepal agree to accept West Seti under CDM, negotiations would also need to be undertaken as to the sharing of the emission reduction credits.

The West Seti Project is an excellent example of how hydropower projects can be located, planned and assessed so that there are minimal local social and environmental impacts. At the same time, the project harnesses the large hydropower potential of Nepal and provides sorely needed foreign exchange (around US$66 million will be injected into the Nepalese economy, without accounting for emission reduction credits). India would receive renewable power, thereby avoiding the need to build or enhance thermal power plants (and associated GHG gases).

A partnership between an Australian private entity, Nepalese and Indian governments has the potential to minimise GHG (albeit at a small scale) and global climatic effects and sets an example for similar projects to be implemented in other parts of the world.

KALPASAR- in local dialect, means the lake that fulfills all wishes. The Government of the State of Gujarat, India (see Figure 2) is currently undertaking a pre-feasibility study for a bold and imaginative project that involves impounding the Gulf of Khambhatt. There are five major rivers flowing into the gulf, and the region around and along the gulf is highly industrialised and urbanised. Climatically, the region can be classified as semi-arid, and is solely dependent on monsoonal rains to replenish rivers, reservoirs and groundwater. The heavy industrialisation/urbanisation places a great demand on electricity to fuel growth. Local power generation is thermal based and is not adequate to sustain heavy growth desired by the State government. The matter is further compounded by paucity of drinking, agricultural and industrial water.

The KALPASAR project envisages a main reservoir wall, which will stretch across the gulf. The reservoir would constitute two segments separated by walls. One will be used as a reservoir for fresh water and the other for harnessing the high tidal variations in the gulf for power generation. Initial studies suggest that over a period of time, the five major rivers flowing into the gulf would manage to convert the marine environment into a fresh water one in the relevant reservoir. Tidal generators would be installed along the main reservoir wall, which are expected to generate up to 5,000MW of renewable power.

The State Government has undertaken detailed pre-feasibility studies for the project, which looked at environmental issues and the potential, costs and engineering implications of building the reservoir and the tidal generation facilities. Given the large capital cost of the project (estimated to be around US$10 billion), the State Government is planning on inviting national/international private sector entities to participate in the project on a Build, Own, Operate and Transfer (BOOT) basis, or nay other suitable mechanism.

Using the same methodology and logic utilised to calculate GHG emissions for West Seti, it is estimated that in generating up to 5,000MW of power by thermal combustion, around 22,660,000 tons of carbon dioxide would be emitted by plants in Gujarat. KALPASAR would provide a renewable and environmentally sustainable power source that would spear head growth in the region, without emitting GHG. It is needless to say that a project of this magnitude will have associated adverse environmental and social impacts. A detailed environmental assessment is planned to be undertaken during the next phase of investigations.

The project offers opportunities for international private sector entities to invest in this project, which apart from normal financial returns, also offers the potential to generate emission reduction credits, thereby offering a higher return on investment. It is needless to say that for the project to be considered under CDM, the Government of India would need to endorse it and negotiations undertaken about sharing the benefits.