Financial viability and its analysis of CDM projects for mitigation of methane emissions from paddy fields in Indonesia: A cost-benefit sumulation study

The study aims to demonstrate financial viability of model Clean Development Mechanism (CDM) projects to mitigate methane emissions from paddy fields in rural parts of Indonesia and to identify issues in developing CDM projects. The projects were designed to phase the implementation into three stages over 10 years adopting a step-by-step process to ensure that implementing entities gradually gain confidence and later embark on a much wider and thorough application. The internal rate of return (IRR) of the projects starting with an irrigation block, a water user's association (WUA) and a WUA Federation were -1.8, 19 and 52%, respectively for Bantimurung Irrigation Area. The risks associated with recurrent El Nino were judged as primary challenges to the project. Unlike major CDM projects in the country such as methane avoidance from wastewater treatment systems and biogas utilization types, an intrinsic nature of the project is its use of an annual plant so that the project benefit is more susceptible to short-term climatic variability. The wage increase at an annual 8% pushed the IRR of the project starting with one WUA down to 7.7% from 19%. Bottlenecks in scaling up the project were transaction costs including those for negotiating with the participating farmers, as it increases proportionally to the number of farmers. The project is further designed to provide incentive to the farmers by sharing the revenue generated by sales of the carbon credit. The analysis indicated that 1) the provision of 50 and 10 USD/ha/year to a head of irrigation block and an ordinary farmer respectively functioned as an incentive motivation to the farmers to undertake intermittent drainage; 2) a head of block is more motivated to undertake intermittent drainage with the proportional remuneration; and 3) the incentives were robust against climatic variability under said assumption.