Preface Climate change over the years has gained a wide recognition in scientific community and is now considered an imminent threat. To help deal with this, the international community created the Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC), under which emission-reduction targets were set for developed countries (so-called Annex-1 countries) and policy mechanisms devised to help countries to meet these targets through carbon sequestration in different sectors. The CDM is one such mechanism of Kyoto protocol that took shape in 2005 and allows various kinds of emission reduction projects, of which afforestation and reforestation (A/R) projects are of interest to the forest sector. India with its myriad opportunities for afforestation/ reforestation at both National and local scale holds a special prospect in this context. As a developing country, India possesses a huge market for investments by the developed economies in order to fulfill their emission targets. The Kyoto Protocol may provide an opportunity for rural community to uplift their livelihoods by carbon forestry and by linking to carbon trading markets. Clean Development Mechanism (CDM) projects in India needs to focus on small holders, who do sequester carbon and also reduce emissions through their plantations, individually as well as collectively, and hence should qualify for the minimum tradable carbon. The economic value of forestry carbon needs to be assessed with consideration for both onsite and offsite effects. Further the priority focus need to shift policies which can facilitate financial incentives for net carbon sequestration at the local scale. Fostering linkages between carbon trading markets and the local carbon sequestration efforts is an essentiality in streamlining the entire mechanism in economic terms. In India, since beginning Government has treated CDM as a mechanism targeted mostly at the private sector, and facilitated its growth through capacity building initiatives and the issuance of clear and transparent rules for project approval. India was the second largest supplier of emission reductions in 2006 (by volume of emission reduction sold) at 12% of all CDM transactions, behind China at 61%. It is thus evident that India is being outperformed by China with the main reasons being the average project size (China has twice the average size than India), and notable absence of both the public sector and the financial players from India. There is a significant knowledge gap in understanding the potential of A/R projects in the Indian scenario. Moreover, it is essential for project developers to get full access to relevant for the design of project activities.

1.1 Policy Background Human activities have resulted in the alteration of the composition of our atmosphere triggering change in the Earth’s climate. The world’s population has grown at an alarming rate with a corresponding increase in demand for natural resources, energy, food, and goods. As a consequence of increase in consumption, vast quantities of gases and effluents are discharged that change the composition of the atmosphere and its capacity to regulate its temperature. The rise in the global temperature is caused by the accumulation of the so-called “greenhouse gases”, namely, carbon dioxide (CO2), methane, nitrous oxide, and chlorofluorocarbons. Energy received from the sun is absorbed as short wavelength radiation and is eventually returned to space as long wavelength infrared radiation. Greenhouse gases absorb the infrared radiation, trapping it in the atmosphere in the form of heat energy.

2.1 Overview of the CDM Project Cycle The ultimate governing body of the CDM is the Conference of the Parties/Meeting of the Parties to the Kyoto Protocol (COP/MOP). The COP/MOP is the annual meeting of the signatories to the Kyoto Protocol and is responsible for managing the CDM Executive Board and for overseeing its work. The Executive Board supervises the CDM process under the authority and guidance of the COP/MOP; it is fully accountable to the COP/MOP. The Board decides on rules for the implementation of the CDM, as well as making the final decisions about acceptance of methodologies, registration of projects and issuance of CERs. The Board is composed of 10 members and 10 alternates. The CDM Executive Board created an A/R Working Group to specifically oversee LULUCF under the CDM. The A/R Working Group provides guidance to LULUCF project developers and, using expert reviewers, makes recommendations on acceptance or rejection of LULUCF methodologies.

3.1 Overview of the Global Carbon Market in Pre-Kyoto Protocol Phase At the First COP in Berlin in 1995, the UNFCCC launched a pilot phase of projects to build experience and “learning by doing”. The pilot phase was termed Activities Implemented Jointly (http://unfccc.int/program/coop/aij/aij_np.html). Under the Activities Implemented Jointly, Annex I Parties could implement projects in other countries that reduced emission of greenhouse gases or enhanced removals of sinks. The number of projects registered under Activities Implemented Jointly has been growing since its launch and as of 2002 (the latest report available) there were 157 projects – 45 percent of which are in developing countries. The total amount of money invested by private sector companies as of 2000 was about $160 million. Because of the expectations that sink projects would be included as a mechanism for achieving targets, several pilot projects were voluntarily implemented involving mostly private sector entities (e.g., electric utility companies, oil companies and environmental non-governmental organisations). Between the beginning of 1996 and the end of 2003, 76 transactions involving carbon sequestration in the LULUCF sector were signed, representing 40 million tCO2-e. Relative to all of the carbon transactions that took place over the same period, sink projects accounted for 21 percent of the total number and 23 percent of the total volume. In volume terms, carbon sequestration projects were the single largest project category, and more than three-quarters of this volume was transacted between 1996 and 1999.

As a developing country, India does not have any emission reduction target, but it is able to sell CERs pursuant to the CDM, to large emitters covered by the EU ETS, countries that have emission reduction targets under the Kyoto Protocol, or any other entity that wishes to purchase such CERs for compliance purposes. It can also supply ERs and VERs for the growing voluntary markets. 4.1 Status and Trends India’s participation in the carbon markets has contributed to the recognition that it is a useful tool in attracting climate friendly investments. India was an early player in the market, and it used the hosting of the Eighth Conference of Parties to the UNFCCC in Delhi in October 2002 to sensitize the business community about the opportunity provided by carbon finance and the modalities of the emerging CDM. In 2004, the growth in the Indian carbon market was fostered by a healthy number of indigenous management and technical consultants, which began to offer services to potential sellers of emission reductions, and the response from primarily the private sector to capacity building initiatives concerning the nascent market. In its capacity as the Designated National Authority (DNA) for the CDM, the Ministry of Environment and Forests (MOEF) also had the foresight to develop simple and transparent rules, whereby project developers can obtain a Letter of Approval (LOA) theoretically within sixty days, which is a key step required for project registration. By the end of 2004, India was the market leader in the forward sale of emission reductions, with 50 % of the supply market. Early successes included the registration of two projects which consisted of the thermal oxidation of HFC-23 generated as a buy-product during the manufacturing of the refrigerant HCFC-22, but also a number of small scale co-generation projects using bagasse, rice husk and mustard crop residues as a source of biomass, and small scale hydropower projects.

There is widespread belief now that forests can be used to reduce the costs of slowing climate change. While the role of forests in the global carbon cycle has long been acknowledged, recent discussions within the context of the United Nations Framework Convention on Climate Change, as well as efforts to write climate change legislation in the United States, have emphasized the role forests might play. The most recent policy efforts have focused on near-term actions to reduce deforestation in tropical countries. The rationale for considering forests at all in the policy mix stems partly from the physical components of the issue. The world’s forest estate is exceedingly large:

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