Technology transfer energy efficiency and renewable energy

Induced technological change through the use of CDM or JI is often presented as the opportunity for Annex I countries to engage developing countries in climate-change policy and at the same time transfer energy-efficient and renewable-energy technology to participating non-Annex I countries. The prospect for such a transfer of technology almost completely diverts attention from business-as-usual in the developed world. For instance, the World Business Council on Sustainable Development outlines key areas for future action on climate change, including efficiency, nuclear energy, government support for energy research and development, and technology transfer to the South, but neglects to mention any measures for phasing out fossil fuels in industrialized countries. The International Emissions Trading Association — a corporate lobby group established through the cooperation of UNCTAD and the World Business Council for Sustainable Development — obviously has adopted this approach and lists as its members BP and Shell, but also Chevron Texaco, Conoco Philips, and Statoil.25 The IETA in its review of the EU ETS reports its position on the carbon market and promotes a global carbon market in which opportunities for linking CDM and JI to emissions trading are viewed as major trading components and beneficial in technology transfer and engagement of developing countries.26 The report notes that the CDM has shown a tremendous growth over the last few years and that CER transactions increased over 420 per cent between 2004 and 2006.27

In the conclusion of the report there is no mention of any benefit for reducing CO2 emissions in the atmosphere or any intention of replacing the fossil-fuel-based infrastructure with renewable energy. Could it be that this is not considered an issue since most simulation models predict that induced technological change — including innovation and diffusion of new technologies at home and abroad — will occur with the implementation of emissions trading under the Kyoto Protocol? In fact, most models suggest that carbon constraints stimulate new technology as a side effect of internalizing the costs of CO2 abatement and that these technologies will be diffused through the spillover of emissions trading to non-Annex I countries.28 For example, the wind power industry, which has grown rapidly, notably in industrialized countries such as Denmark, Germany, the Netherlands and Spain, has also been adopted by India and China and some other non-Annex I countries that have experimented with new energy-saving technology through CDM projects. Models suggest that the costs of wind power will decline steadily due to the accumulation of knowledge and experience resulting in a diffusion of technology and adoption of new energy systems in various locations around the world. Governments can encourage this process by promoting R&D investments in new technologies and stimulating their deployment through subsidies and by implementing climate change policies that raise the costs of carbon permits. As a result, these technologies will become relatively cheap, which means that they may diffuse to other Annex I countries, and potentially to non-Annex I countries, through CDM or other emissions trading schemes or direct investment. Similarly, climate-change policy could also lead to technological innovation in the biomass and bio-energy industry and benefit non-Annex I countries, and thereby lead to a global reduction in CO2 emissions.29

Since the mid-1990s, the energy and climate policy framework has been favourable for stimulating the development and transfer of biomass and bio-energy technologies, at least in some European countries (for example the Netherlands). Special programmes were developed to encourage R&D of biomass and bio-energy technologies, and fiscal instruments to lower the costs of renewable energy projects were implemented. In some cases (e.g. the Netherlands since mid-2003) production subsidies were in effect to stimulate electricity generation from renewable resources, and an energy tax on the use of electricity generated from fossil fuels was imposed in most European countries.

The same countries that attract CDM project developers are also major recipients of FDI and often receive funding from ODA.30 It stands to reason that there is a mutual reinforcing relationship between these finance flows, and that FDI and ODA flows are attractive enabling conditions for CDM investment.31 Funds available for CDM financing as of 2004 were approximately US$800 million.32 One way to facilitate funding for energy efficiency and alternative energy projects is through the World Bank's Global Environmental Facility (GEF) for climate change investments. While the total budget is rather limited, it sometimes exercises significant leveraging power through co-financing with other private and public entities so that the implementation of climate change mitigation projects is feasible.33 The relationship also works the other way round. CDM and GEF project figure 6.2

THE CLEAN DEVELOPMENT MECHANiSM ODA and FDI, 2002

$ billion

THE CLEAN DEVELOPMENT MECHANiSM ODA and FDI, 2002

$ billion

www.sciencedirect.com/science/journal/03014215."/>
Source: Jane Ellis et al., 'CDM: Taking Stock and Looking Forward', Energy Policy 35(1), January 2007: 1, Figure 3, www.sciencedirect.com/science/journal/03014215.

financing may exercise sufficient leverage for other FDI investments to become attractive, and thus, whereas the objective is to transfer energy-efficient and renewable technology, CDM may also be the enabling mechanism by which FDI in energy-intensive manufacturing is facilitated. This perverse relationship is the concern of many environmental groups and activists who see in CDM a scheme for gaming and misuse.34 The World Bank estimates that CDM financing used as leverage for other financing amounts to about 1 : 6 or 1 : 8 of total project costs. CDM-leveraged finance for the entire Kyoto period is estimated at just over 1 o per cent of FDI and ODA funds going annually to developing countries. GEF funding for climate change investments totalled about US$1.4 billion from 1990 to 2002. Using the estimates developed by the IEA (2003) with respect to projected investment in the energy sector in developing countries for the period 2001—30, CDM-leveraged financing could become an important part of the energy investment portfolio, if we take US$1 billion as an estimate of the amount of financing available for CDM in the coming years.

FDI to developing countries has the potential to assist with critical technology transfer and could be a means of improving environmental performance provided the proper environmental regulatory frameworks are in place. But FDI is also selective and occurs most often in countries and locations where relatively strong enabling conditions for investment already exist and where market conditions promise profitable enterprise. Very important for successful FDI is the development of infrastructure (electricity, transportation, access to energy, etc.), and thus ODA investment and investment from public—private partnerships are crucial. During the 1990s, ODA funding for improvements of the economic infrastructure more than doubled worldwide, of which investment in energy, transportation and distribution/storage contributed over 90 per cent of the total ODA investment.35 Figure 6.2 shows the flows of investment from FDI and ODA sources for ten developing countries where large numbers of CDM credits are expected to be generated.

Many developing countries see in CDM projects opportunities to build further investment capacity. CDM institutions have grown very rapidly since the Kyoto Protocol initiated opportunities to engage developing (non-Annex I) countries in project development, and by December 2004, 68 countries had Designated National Authorities (DNAs). DNAs can help formulate national CDM policy and develop criteria to judge proposed projects and reject projects deemed undesirable for sustainable development. For example, China has indicated that priority will be given to energy-sector and CH4-capture project activities that will bring about GHG emissions reductions, financial investment and technology transfer.36 As discussed in the previous chapter, the National 11th Five-Year Plan (2006—io)37 aims to ensure that energy consumption per unit of GDP will decrease by 20 per cent within five years. China is interested in alternatives to coal production and to that end the country is pursuing an energy mix of gas supplies that includes domestic production, international pipelines and imported liquefied natural gas. In 2004 it completed the east—west pipeline to bring gas to coastal markets, and the first of several planned LNG terminals came online. In addition, the country actively pursues access to foreign oil and gas fields through equity investments. In all these cases, technology transfers through CDM investments in energy efficiency are helpful. To prompt these CDM activities, China issued a document 'Measures for the Operation and Management of CDM Projects'.38 As of 2007, with thirty-seven registered projects and more than 40 million tonnes of CO2 reduction per year, China has become the biggest CERs supplier in the world.39 Many business groups and climate change institutes welcome China's move to improve its energy efficiency and express their support; these include Carbon Trust, Climate Strategies, the Netherlands Research Programme on Climate Change, and the Joint Implementation Network.40 More critical are some environmental groups and NGOs like Climate Action Network Europe and Green Peace International, as well as various academic and research institutes.41 Some see in emissions trading a scheme to put the atmosphere up for sale through climate shopping and view corporate activities in developing countries as exploitation.42 Their position is that the EU ETS and the Kyoto Protocol are substantially weakened by loopholes that allow polluters to buy cheap 'offset' credits abroad.43 A paper mill or power company lacking enough EU permits to cover its emissions can offset the shortfall by buying credits from a windfarm in India, a HFC23 extraction project in China or Korea, or a landfill gas-burning plant to generate electricity in Brazil.44 While such projects achieve in situ reductions in GHG emissions, they should not replace a commitment to reduce CO2 emissions from installations in Annex I countries, as some argue.45

Under the Kyoto Protocol, legal entities such as corporations are encouraged to participate in Clean Development and Joint Implementation projects even if they do not operate under shared emissions caps. This makes CDM projects particularly problematic in the context of globalization as the impact of a transnational corporation's total emissions portfolio is largely ignored, and by extension the climate impacts of investments by TNCs headquartered in Annex I countries in the developing world are essentially overlooked. This allows for the capture of transnational emissions-reduction credits while ignoring carbon emissions engendered through other transnational investment activities. Under the current Kyoto Protocol framework a corporation can invest in a HFC- or methane-capture project under CDM rules, while simultaneously making investments in other carbon-producing projects in other or the same parts of the world. Shell's investment in tar-sand oil extraction in Canada (Annex I) is a good example.46

Shell installations in different Annex I countries (Canada, EU and Japan) own about 65 million tonnes of CO2 per year in total. At the same time, Shell generates CERs and ERUs at its installations around the world in various CDM and JI projects, including an energy-efficiency project (CO2 removal in an ammonia plant) in India; three HFC decomposition projects in Ulsan, South Korea; two projects involving thermal oxidation of HFC23 at manufacturing facilities in India; a landfill gas-management project in Brazil, a biomass electricity generation plant in Rajasthan, India; and a small hydroelectric project in Honduras. The total number of CERs issued between October 2005 and March 2006 from these projects was around 2.5 million.47 One of the projects in India was registered to a nylon plant (SRF, located in Jhiwana, Rajashtan), which emits a large amount of HFC23. By investing in a special process applying thermal oxidation, Shell is entitled to 500,000 tonnes extra CO2 emissions rights, which it needs in order to derive oil from tar-sand at its installation in Canada. Extracting oil from tar-sand is energy-intensive, and thus Shell predicts that it will not be able to reduce its CO2 emissions in Canada sufficiently without the extra carbon credits to meet its agreed target.48 Meanwhile, Shell is rapidly expanding its fossil-fuel infrastructure in developing countries, including India, where it is not subject to CO2 emissions reductions.

Shell is in fact one of the largest foreign investors in the fossil-fuel industry in India. Its presence in India dates back to 1928, when it established an oil distribution company by the name of Burmah Shell. Shell has joint ventures with several other companies in India: Bharat Shell Ltd in the marketing of lubricants; Hazira LNG Terminal and Port Project in the liquefied natural gas (LNG) market; Shell India Marketing Private Limited (government licence granted in July 2004) to set up a network of up to 2,000 fuel retail stations in India; Shell Gas (LPG) India Private Limited for marketing and distributing of 'Shell Gas' (LPG), which is used in the chemical, food-processing, textile, metal, ceramics, plastics, glass, and automobile industries in India; Pennzoil—Quaker State India

Limited for marketing a range of lubricants; and Shell Technology India (STI), based in Bangalore as a Shell Centre for Technology, which will conduct technical services for Shell across the globe as well as supporting activities in India. The services will span upstream exploration and production activities as well as downstream refinery and chemical operations. Shell has made the largest foreign direct investment in India among all integrated oil companies (around US$1 billion) and is the only global oil company to have a retail licence in India similar to BP's interests in China.49

Thus, countries expected to generate the most credits from CDM projects are also the countries that are targeted by and major recipients of FDI. In fact, some of the first CDM projects were clearly linked to FDI investments, in which cases CDM investment was considered leverage or subsidy for new technology implementation.50 In 2003, the private sector accounted for 45 per cent of the total volume of emissions reductions contracted for in developing countries. This was double the share in 2002. This suggests that international investors, including TNCs, see opportunities in investing in CDM projects.51 At the same time, the financial services industry is also engaged in strategic asset-seeking FDI (i.e. merger and acquisition activity or joint ventures). Financial institutions like Carbon Trust and Price Waterhouse Coopers are the elite troops in carbon trading, which raises the question of conflict of interest.52 Price Waterhouse Coopers has a network of more than 150 climate-change specialists around the world helping organizations and businesses with strategic development in emissions trading and carbon offsets and CDM projects. Carbon Trust is a UK government-funded independent company which helps businesses and the public sector to cut carbon emissions and to exploit the financial potential of emissions trading and flexible projects.53 Financial advisers from these firms offer consulting and accounting services and at the same time function as verifiers on emissions-reduction projects, while all along representing the interests of large corporate investors. These conflicts of interest were among the scandals revealed during the court proceedings of Enron and Arthur Andersen, both pioneers in emissions trading.

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