Project background

Due to its vast market potential for both urban and small-scale renewable energy projects, and a relatively well-developed industrial, financing and business infrastructure, India is perceived as an excellent country for developing CDM projects. A smooth implementation of the CDM in India, however, requires mobilising and establishing a strong capacity initiative in the financial sector. In order that a large number of high-quality CDM projects are developed and result in Certified Emission Reductions as specified by the CDM Executive Board, the institutional set-up in the Indian finance sector has to be suitably geared up.

Although CDM awareness in the financial sector has grown in the recent past due to major outreach programmes run by bilateral agencies, the level of awareness of CDM opportunities in the Indian financial and insurance sector, in general, remains low and is concentrated in a few financial institutions.  The element of risk involved in investments in CDM projects, consequently, is of serious concern to investors and lenders considering giving credit for CDM projects. The typical risk components include issues related to uncertain revenues due to volatile CER markets, uncertain costs for CDM project development, unreliable crediting lifetime for the project, and a variable discount rate.

There is a vital need to develop easy-to-use tools and support materials which play an important role in increasing the confidence of financial institutions. In particular, it is necessary to include carbon finance within project investment appraisals so that financial institutions can better understand and integrate the CDM related aspects of a project into their own project evaluation process. It is imperative to address and resolve the current issues confronting financial institutions considering funding of CDM projects as it would pave the way to greater comprehension and support toward CDM related aspects of a project in the Indian finance and insurance sector.