Corner House Comments on Bujagali Large Hydro (Uganda)

Sunday, September 1, 2002

Comments on the CDM Project Design Document for the
Bujagali Large Hydro, Uganda

The Bujagali Dam project is ineligible to receive credits under the Kyoto Protocol. Claims to the contrary are likely not only ultimately to rebound unfavorably on any firm making them but also to contribute to the disintegration of the carbon offset market from which many hope to profit.

Even under the most generous definitions, and excluding technical questions about the level of carbon emissions from the project itself, its construction, its effects, and the abuses connected therewith, Bujagali cannot be interpreted as a project whose implementation is dependent (as a whole or in any quantifiable part) on registration with the CDM. AES and the Government of Uganda signed a Memorandum of Understanding to develop the project in 1994, long before the Kyoto Protocol. AES and the Government have already signed an Implementation Agreement and a Power Purchase Agreement committing them to developing the project. IDA, IFC and various export credit agencies have already approved funding for Bujagali. According to MIGA, "AES has informed all members of the World Bank Group that it remains committed to the Bujagali Hydropower project, in which it has already invested more than $40 million." The claim that carbon credits could subsidize increased returns for wealthy private investors, even if it could be substantiated, is irrelevant to the question of whether the project will go forward. Nor has any increment of uncertainty about project viability been identified which CDM registration could quantifiably remedy. Hence there is no conceivable way the contribution of CDM registration to project realization could be assigned a numerical fraction greater than zero, even if a single counterfactual non–project scenario could be isolated. The project is accordingly non–additional under any reasonable interpretation of the Article 12 definitions set out in Decision 17/CP.7, paragraph 43: "a CDM project activity is additional if anthropogenic emissions of greenhouse gases by sources are reduced below those that would have occurred in the absence of the registered CDM project activity".

It is an axiom of the baseline–credit system that a single counterfactual without–project scenario must be isolated. (If more than one possible alternative future emissions scenario is specified, quantitative comparisons with the relevant effects of each story line will have to be made, the number of credits will be indeterminate, and the accounting system will break down.) This is impossible in principle; but the selection of a baseline for Bujagali has followed a process which is open to particularly devastating criticism for being unrealistic. To take just one example, a geothermal option has been disregarded despite being the the least–cost option for the expansion of power generation in Uganda (it is cheaper per megawatt than Bujagali), one based on technology at a similar stage of readiness, and one likely associated with less GHG release.

By undermining the integrity of the Framework Convention on Climate Change as a whole, and indeed indirectly subsidizing climate change, the granting of carbon credits to Bujagali would have a damaging effect as well on business opportunities for firms, such as PriceWaterhouseCoopers, which hope to gain validation contracts in the long term. One would expect it to be a critical matter of self–interest for PWC and other validation firms to tread cautiously at this stage with respect to CDM and the Kyoto Protocol flexible mechanisms generally, given that the as–yet unformed carbon market will for the foreseeable future be at more or less constant risk of rapid collapse as long as the viability of the commodity to be traded remains in question. Crucial here is the well–canvassed "Lemons Market" problem (for the exploration of which, among other things, the Berkeley economist George Akerlof won the Nobel Prize last year). Where buyers as well as sellers have a less than overwhelming concern with product quality, as with the CDM, there is also the winner–loser gap argument. In an anonymous market, there exists a still further tendency toward market collapse under conditions of indirect reciprocity described in the altruist–defector argument.

In addition, it is well to remember that in the wake of the ENRON, WorldCom and other recent scandals, the public and the markets have become increasingly sensitized to accounting fraud. The matter is all the more critical in the present case in that while the ENRON fraud is complex in some of its details, the non–additionality of Bujagali, and the spuriousness and multiplicity of the baselines in question, are obvious and can be easily understood by anyone. For those looking forward to a functioning carbon offset market perhaps more than anyone else, it is critical that the Bujagali scheme not be validated as a CDM project.

Larry Lohmann
The Corner House
Dorset, England