29 August 2013

Business of Greening The World: India and China need to take the lead in international climate talks

clean energy entrepreneur Assaad W Razzouk says the prevalent climate change discourse needs a serious over-haul before there is any real impact. Group Chief Executive and Co-Founder of Sindicatum Sustainable Resources, Razzouk believes Asia — India and China specifically, need to take the lead in international climate talks and create demand instead of waiting for the west to do it. Recently in Delhi, he shared his views on the environment, carbon trading and Asia’s future with BW.

Razzouk started out his career in 1988 at Price Waterhouse, New York City where he spent 5 years and left as the Manager of International Capital Markets. Born in 1964, Razzouk was an investment banker at Nomura International plc in London from 1993 to 2002. Co-founder of Sindicatum — a global sustainable resources company headquartered in Singapore, he is passionate about the environment and the private sector’s role and often writes for international publications. Razzouk says carbon markets are just a tool and the focus needs to be on the larger problem of climate change. Emphasizing the need for each sector, enterprise, institution and authority to take action, he is confident the current slump in international carbon markets should not worry investors.

Started in 2005, Sindicatum owns and operates clean energy projects located in China, India, Indonesia, Malaysia, Thailand, the Philippines and the United States. At present, it has 18 investment projects — 15 operational and an additional 14 projects, where the it advises others on greenhouse gas abatement and sustainability. So far, it has committed more than $250 million to greenhouse gas reduction and sustainability projects. It is a project development company which finances its own projects, works in joint venture with asset owners. In India, Sindicatum’s projects are focussed on the sugar industry and the use of bagasse technology to generate power from the waste from these factories.

Excerpts from the interview:

What do you think of the collapse of the international carbon market created by UNFCCC?
Yes, there was a collapse in the European carbon markets — one cannot have a market without the ability to adjust supply and demand. Europe determined some projections for itself in 2005 and then it got hit by a financial crisis, production fell and as a result its emissions were nowhere near what they thought they were going to be. But the market had already been given a supply of carbon credits and it had no legislative mechanism to take it back. So the prices went down. Personally I don’t think there is a 3 to 5 year scenario where you are not going to see them go back up because at 4 Euros or 5 Euros the European carbon credits are useless and can drive no policy goal/ achieve no policy goal.

Global carbon markets are really an effort — a whimper of an effort — to have some coordination between the nations on a problem that is global by nature. The carbon trading markets are a symptom and tool, while climate change is the disease we all need to address through all available provisions. At the end of the day these carbon credits are a subsidy. Currently there is no demand and thus the collapse. We just need demand because without demand we have thousands of projects that are stranded today. In some cases we are longer abating any green house gasses.

Where is that demand going to come from? We can no longer just count on the west. We have to own our climate change issues because we are suffering from it. The demand should come from the aviation industry, the shipping industry worldwide and self regulating initiatives in countries like India and China – so that they are not forced by … say like in the current international carbon market the EU commission.

China is doing its bit. At present it has 7 pilot schemes in carbon trading markets. By 2016 they will have a nation-wide cap in trade similar to the EU ETS scheme. This will allow offsets from Chinese projects that will help ultimately reduce climate change impact.

Here, I feel the need to go into the background on the carbon markets because I believe that the solution to meet the 2050 goals requires both the government as well as the private sector intervention. The latter is mobilized principally through the carbon market. The governments alone simply cannot afford to tackle the problem. The money is in the private sector.

What are your views on climate change?
We have a lot of issues in terms of the emissions and the environment, which by definition are all of a global nature. Since, what you emit from a coal fired power plant in India in effect affects the whole world. There already exists a consensus – we have to reduce emissions to 20 billion tonnes by 2050.

Today, global emissions are around 30 billion tonnes per year and they are growing fast – growing fastest probably in Asia. By Asia I mean principally India and China followed by the high population countries of south East-Asia. The solution to control these emissions is coming together of different tools – legislation of laws and regulations, performance standards and then the market. The former two are government driven while the latter is driven by the private sector.

Taking the various segments of an economy and the tools available, which I have just listed, in effect you can safely conclude that 50 per cent of the emissions goal can be treated via the market as opposed to via government.

So, if you are a government committed to reducing emissions – an I don’t know any in Asia – you will legislate for some industries (buildings and cars beings a perfect example) you will introduce performance standards for other industries, you will introduce carbon tax and you will phase out fossil fuel subsidies without riots in the street. It is very easy to do because the point is that principal recipients of fossil fuel subsidies are not the poorest members of society. And finally you will introduce a carbon trade. The renewable energy credits, to me, are more a part of legislative action.

What are the biggest hurdles in this path?
Within the market are fossil fuel subsidies – at present around $2 trillion per year. You have to think about the number for a bit – 2 TRILLION DOLLARS PER YEAR! The US is $500 billion. China is $300 billion and India is just a bit less than $200 billion. Imagine how big that number is compared to the economy. Fossil fuel subsidies are skewing the market and in effect renewable energy is at a disadvantage because of all these fossil fuel subsidies.

There is some grassroots or entrepreneurial efforts to react to the introduction of renewable energy or feed-in tariffs by setting up solar plants, wind plants etc but it pales in comparison to fossil fuel subsidy. There are approximately 1000 coal fired power plants on the drawing boards in Asia – bulk located in China and India, 76 per cent of the total. The 2 countries have 760 coal fired power plants on  the board… those coal fired power plants can only be built if the coal pricing makes sense. The fact that coal prices do not include pollution it causes only causes more disconnect between what is needed and what exists. It is a major policy failure.

And the solution is a long drawn process with planning needed for a minimum of 20 years. So, if you are focused on a 4 to 5 year political cycle you will never focus on the issue properly. That is why the problem is not being addressed in a forceful manner.

Where does Clean Development Mechanism (CDM) and its subsequent carbon trading market fit in?
Carbon Credits generated under CDM are important because it is a symptom of what’s going on around it. They are needed to incentivise the private sector to reduce their emissions.

Where do you see India in the larger context of clean energy and emission reduction – the main points of entry into the climate change discourse?  
In my view an important country like India needs to be shouting and banging on the table at the UNFCCC meetings… but they are quite.

China and India are probably the most vulnerable to climate change. The Indian parliament will find it very difficult to mobilize $ 50 billion of aid within 2 weeks like the US congress did for the hurricane victims. The people who are dying or at the risk of dying due to climate change are predominantly here in asia not in the united states.

In the UNFCCC meetings historically there has been the debate is anchored around responsibility, where developing countries like India say – ‘you the developed countries created this problem, you are much wealthier so you go solve it and we expect some really big cheques while you are at it’. The wealthy countries – don’t have these big cheques because their wealth is with the private sector not with the government; and/ or don’t want to give the big cheques; and/ or they are not at the frontline of the suffering.

Next step – you can either complain for the next 20 years and try to get them to pay for their past sins, but in the meantime you are going to degrade and they are going to be fine. Or you can take leadership and effectively run ahead of the west. I think, India and China I think in particular have historical responsibility to take leadership – because everybody listens to them. If they talk.

So India and China could solve the current credit problem, if they decided to enact caps on their emissions and took on binding commitments.

But there is a huge disconnect between some of the rhetoric and the action on the ground. I am not impressed by how much solar capacity or wind capacity is being installed by India or China because of the 760 coal fired power plants mentioned earlier. These coal fired power plants lock in coal infrastructure for 50 years. The consequences of what is going on is well documented by international forums like the world bank or Indian institutes themselves like TERI. The estimates of what will be in 20 to 30 years in India, Bangladesh, China and South East Asia – where you already have Jakarta, Bangkok at the risk of being flooded within 30 years.

Could you briefly explain the business model of Sindicatum?

We are a company that is focused on Green House Gas (GHG) mitigation. We finance, build and operate clean energy projects mostly in Asia that reduce GHG. We work with the 3 primary sectors – the agricultural sector, utilities like cement and steel and mining. The agricultural sector which generates an enormous amount of waste, in India close to 30% to 40 % onions do not even get to the market. Most agricultural products it is the same story. So we focus on waste from agriculture, waste from coal mining industry, municipal and industrial waste.

We go to asset owners who produce this waste and effectively buy from them this waste/ pollution, subsequently build a power plant and sell clean energy, which is fuelled with that waste.

In the process we generate environmental commodities like carbon credits, electricity or bio-diesel or biogas. And we sell these having taken risk of building, designing and operating the plants. In each country our projects/ approach is tailored to environmental legislative and kind of political conditions.

How did Sindicatum zero in on India and the sugar industry for the clean energy projects?
Trial and error. In India we have struggled for many years to settle down on a specific specialty – at the moment almost our entire focus is on sugar industry. Bagasse co-generation – that is generating fuel, heat, electricity from the waste products of the sugar industry.

The company felt it is an area which is extremely important – of the 10,000 to 12,000 mw potential that can be generated out of bagasse barely 3500 mw is being generated. There is about 8500 mw capacity, which can be added. The second feature is that the Indian sugar industry needs foreign capital and foreign equity coming to sector. Third is the fact that there is no technology risk because the technology is indigenous and only needs to be upgraded. It is all boilers and turbines that India has been working with for many years now.

On a macro level India is a bottom-up company. This is oversimplifying it, but for example China is a top-to-down country and India is a bottom-to-up country. Chinese government says do X and everybody does, while in India the government says do X and everybody does not do it. Instead the private sector takes the initiative – moving from bottom to top. Within the Indian private sector we picked based on the scale of emissions of the sector and diversification of risks and investment, which fits India with its different weather patterns, perfectly. There are a lot of actors in this sector – no one company that owns half the sugar industry.

For me personally another important aspect of the Indian sugar sector is very appealing – the number of people involved. There are the sugar cane farmers and sugar mill employees – thus making it electorally safe. It is an industry with a large number of people dependent on it and is not going anywhere.

If we take a look at the whole packaging – we want to work with a private sector that is important in India, we want it to be in multiple states, with multiple counter parties and dependent on multiple sources for its revenue and the sugar industry fits all our criteria.

It is true that we all need to eat less sugar, but that is different story altogether (he jokes).

Are all your projects registered with different carbon trading markets?
Not necessarily. They are registered where ever you need to be registered, for example US projects by definition cannot be registered with CDM but you could register it with Californian carbon market, of course only if it qualifies for carbon off-sets. In effect we take a project and we maximize its impact depending on its location and its type.

Basically we adjust – you do not need to register with CDM if carbon credits are not fundamental to the project’s well being. And we adjust the pricing with our partner company accordingly – for example when a carbon credit was priced 15 Euros, we priced the project where we put more money on the table compared to the Indian partner because we are counting on these carbon credits to come in the next 10 years.

Are the Asian projects registered with the international CDM board?

No. Neither the existing nor the projects in the pipeline are intended to be registered with CDM. But if we can earn Renewable Energy Certificates (REC) within India we look forward to them.

But the Indian REC market is yet to become popular…
Yes very true. But how we see it is that REC market is legislative – implying that your project qualifies or does not qualify by definition. It is not like we are doing anything special for the renewable energy certificates. REC is a renewable energy subsidy similar to fossil fuel subsidies – either you have a subsidy or you don’t. If you don’t the price of producing renewable energy goes up and projects become uneconomic, so you do lesser number of projects.

This article first appeared on Business World India