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t was once seen as the Klondike of the global carbon
offset market, but China’s position as a major supplier of
desirable carbon credits after 2012 is looking much less
certain in the aftermath of the Copenhagen UN climate
change meeting.
Last December’s conference in Denmark’s capital failed to
map out a future role for the Kyoto protocol, which expires at
the end of 2012, amid increasingly strained relations between
industrialised and developing countries.
In the short term, investors in clean development
mechanism (CDM) projects in China have become nervous
about a growing trend for projects to be judged ineligible by
the UN-appointed executive board – which oversees the
CDM process.
This has been especially apparent in wind and hydro, two
sectors that have dominated investment in cleaner energy in
China (see Trading Carbon, March 2010, pages 38–39).
And the prospects for big demand for Chinese carbon
credits have weakened since the early days of the CDM, as the
EU is likely to place restrictions on the use of offsets from
China and other large developing countries after 2012 for
compliance use in its emissions trading scheme (ETS).
Meanwhile, a US trading scheme, should one ever emerge
on a federal basis, is unlikely to allow imports from its
primary economic rival, while other potential mandatory
schemes in Australia, Japan and South Korea are still at a
nascent stage, and are subject to the whims of politicians and
powerful domestic lobby groups.
Only a few years ago, some buyers were only too happy to

April 2010


source most, if not all, of their CDM credits in China, but

with the current commitment period of the Kyoto protocol
(2008–2012) drawing to a close, many developers and investors
are looking to other parts of Asia and further afield in the
expectation that these regions are more likely to generate
eligible credits in the future.
“There are fewer projects and less activity from the buyers,”
said Bjorn Odenbro, a buyer of CDM credits with Tricorona, a
Sweden-based company that is one of the largest investors in
Chinese clean energy projects.
“Some buyers and funds have withdrawn. Those that
are still here are looking at new ways to buy CDM credits.
Our direct competitors are less visible,” he said, adding that
Tricorona was committed to finding new projects in China.
Investors are concentrating on getting existing projects
further along the CDM approval pipeline, and breaking
through bottlenecks at key stages of the lengthy, complex
process involved to get credits issued by the UN, he added.
That trend is scarcely surprising as there is little window
of opportunity for new or immature projects as 2012 draws
closer, investors pointed out.
“People are looking increasingly at other areas of carbon
finance,” said Michael van der Meer, who heads up the Beijing
operation of EEA Fund Management, an advisor to UK-listed
carbon fund Trading Emissions plc.
Besides attempting to get more access to the underlying
returns from cleaner energy projects in China, companies are
looking at diversifying more into voluntary carbon markets,
analysis, consulting and carbon footprinting.
For instance, some verification companies and project
developers may do more work in consulting and auditing the
carbon footprint of China’s larger companies in the telecoms, CDM are mulling how to restructure the way cleaner energy
electronics, financial, retail and manufacturing sectors. But projects are financed.
demand for voluntary credits in China could be at least a year “Companies are looking at new business, such as
away, said Liam Salter, managing director of Reset Online, a (investment in) clean technology and technology transfer.
Hong Kong-based consultancy. They are more willing to take a risk on that side to mitigate
However, for those companies still keen to invest in post- risk on the carbon side,” said Tricorona’s Odenbro.
2012 CDM projects, or take stakes in Chinese cleaner energy Furthermore, prices for primary CERs – credits bought
projects, there are two problems specific to the country, said directly from a project – have weakened over the last 18
Wilson Tang, vice president of the China office at Climate months, as demand for compliance carbon credits has waned
Change Capital (CCC), a carbon investment manager and in the wake of the global economic downturn and lack of
advisory firm. certainty about what role the CDM will play in the future.
“(For post-2012 credits), only the Asia Development Bank Few buyers are willing to pay much more than the ¤8 floor
(ADB) has been willing to pay near China’s floor price,” Tang price, unless the project has already been registered by the UN
said, referring to the minimum ¤8 ($10.85) a tonne of carbon and has a low level of risk, investors say.
dioxide equivalent (CO2e) that investors must promise to pay – Secondary CERs – which have been issued by the UN and
before or after 2012 – if CDM projects are to get the go ahead are guaranteed to be delivered by the seller – have averaged
from China’s government. ¤11.55/t for the December 2010 delivery contract in the
With the future of the CDM remaining uncertain cleared brokered market since the start of the year.
following Copenhagen, investors are more unwilling to pay This means that, for many, it’s not really worth buying
high prices for credits generated after Kyoto expires. primary CERs from China, market participants say.
The other problem is that China’s laws on foreign “The only big margins from Chinese CDM projects were
ownership mandate that domestic companies retain a in HFC (destruction) or early start projects,” said CCC’s Tang,
majority stake in a joint venture. adding that, at present, buyers are saddled with much higher
This restricts the role of investors in renewable energy fixed costs to service providers – such as lawyers, auditors and
projects, which are also vulnerable to frequent changes in consultants – than the early days of the CDM.
government policy, Tang said. And UN decisions on CDM projects have compounded the
With post-2012 investment effectively closed off to buyers difficulties for investors in the sector in China.
of certified emissions reductions (CERs – CDM carbon credits) The CDM executive board’s decision to reject or increase its
in China, banks, funds, utilities and developers active in the scrutiny on a growing number of wind and hydro projects in

April 2010

China has prompted consternation among investors. Moreover, China’s central government may strengthen the
At a meeting in February, the board undertook a review or rewards and penalties for officials to meet targets in order to
asked for further corrections for 74 China-based projects – 36 bolster compliance, said Deborah Seligsohn, a China-based
wind power and 38 hydro power. consultant with NGO the World Resources Institute (WRI).
Of the projects registered, so far, in China, hydro accounts Perhaps conscious of the well worn adage “the mountains
for 48 per cent, wind 22 per cent, energy efficiency projects are high and the emperor is far away,” China announced
about 10 per cent, with landfill gas, coal-mine methane, N2O in early March it will set up a “statistical monitoring
and HFC destruction making up most of the remainder. and assessment system” to ensure greenhouse gas (GHG)
Developers and investors argue that the UN-appointed emissions goals are met.
panel has misinterpreted its own rules, but the board claims While developed countries have voiced scepticism that this
projects have failed to supply the evidence required to show non-binding target amounts to little more than business-as-
that projects are surplus to business-as-usual. usual, the 2006–2010 energy intensity target outlined under
Since Copenhagen, Chinese officials have been the 11th five-year plan, if met, would result in the avoidance
circumspect about the UN’s tough line against wind and of a billion tons of CO2 emissions, said Barbara Finamore,
hydro projects following the submission of evidence last year. China program director at the Natural Resources Defense
Beijing says the data they have submitted proves that the UN Council, a US-based environmental group.
has got it wrong. “Meeting national targets and building up expertise in
But in private, the officials are angry at what they see as clean technology industries will always trump the income
excessive scrutiny by the board, said project developers. from the CDM, which has only been the icing on the cake for
“China is hurt by the deep level of distrust and could lose many companies in China,” said Nick Mabey, chief executive
its interest in participating in the CDM,” said Susanne Hafeli- of climate policy consultants E3G.
Hestvik, vice president at Tricorona, at the Carbon China’s leaders are increasingly keen to diversify
Market Insights conference in Amsterdam on 2 away from heavily-polluting coal, which
March. is taking a heavy toll on human health
China is by far the biggest supplier and air quality. And the world’s fastest
of CERs – around half of the 390 growing economy wants to further
million credits issued, so far, are develop its wind and hydro power,
from the country – reflecting its and become a world leader in other
diverse industrial base, surging technologies, such as solar.
economic growth and relatively But progress in meeting its
straightforward host country energy intensity target slowed in
approval process. 2009. As a result, China this year
However, investors may have to needs to cut energy efficiency per
look elsewhere for credits to make unit of GDP by 5.6 percentage points
up for those CERs that will fail to to meet an overall 20 percentage point
materialise because of UN decisions, improvement over 2005–2010.
investors point out. Meeting energy efficiency targets can
“We are focusing on investing what be done without the CDM, and, in any case,
remaining funds we have on non-China, non-India Kyoto’s current rules on additionality would
projects in Asia,” said Josh Carmody, manager of the ADB’s render many projects ineligible, said Benjamin Sovacool,
Asia Pacific Carbon Fund. an assistant professor at the Lee Kuan Yew School of Public
In any case, China looks likely to increasingly disengage Policy at the National University of Singapore.
from international market-based approaches and focus “It makes clear economic sense to develop energy efficiency
instead on its voluntary pledge to cut carbon intensity projects. A recent McKinsey (& Co) study worked out that
40–45 per cent by 2020 compared with 2005 levels, which it with some energy efficiency projects, for every $1 you put in
announced before the Copenhagen meeting. you get $7 back. It’s even better than a free lunch, it’s like you
In early March, the National People’s Congress, a largely get paid to eat,” he said.
ceremonial annual assembly of senior figures and delegates But some of China’s provinces are already testing the
from China’s Communist Party, gathered in Beijing to hear waters for schemes that could serve as a model for mandatory
the country’s leaders outline upcoming policies, including systems in particular sectors or in other areas of the country.
future five-year plans. In February, the northern city of Tianjin launched
They reiterated the importance of meeting existing energy an emissions intensity-based scheme that will apply on a
efficiency targets and the 2020 carbon intensity goal that mandatory basis to local heat suppliers and the building
would involve speeding up the use of renewables, and making
provinces and specific industries more accountable in moving
away from fossil fuels.
We are focussing on investing
Crucially, China’s carbon intensity target will be enshrined remaining funds in non-China
in the country’s next two five-year plans “as a binding index,”
according to Su Wei, a chief negotiator for China at UN
and non-India projects in Asia
climate talks. Josh Carmody, Asia Development Bank

April 2010


sector. The scheme could be widened to other sectors in the “Perhaps China could negotiate bilateral agreements
city and its surrounds, which is home to around 12 million with developed countries to recognise these Nama credits,
people, and has already attracted the support of Citi, the US but you’d still have to consider whether they are also
banking giant, and Gazprom, Russia’s energy major. recognised at the international level post-2012,” said Baker
The companies have signed three deals with the Tianjin & McKenzie’s Curnow. “If they are, then, in effect, you
Climate Exchange – which operates the scheme – to buy have sectoral CDM where the Nama credits operate as
11,500 carbon emissions allowances (CEAs), the scheme’s compliance offsets,” he said.
currency. Although this is a tiny amount, Garth Edward, Whether China chooses to play an active role in
head of carbon trading at Citi in London, said it could be an international carbon markets will depend a great deal on
important first step for a new type of market in China. progress in global climate talks this year, which will aim to
Where caps are set in the Tianjin scheme will be critical to build bridges following a chaotic Copenhagen summit.
its success, said Sophie Chou, a Beijing-based consultant with “China is still feeling quite bruised,” said E3G’s Mabey,
ICF International. referring to accusations that the country’s negotiators tried
“I’m not sure how good the statistics are in (the building) to wreck the summit and had ordered the removal of a
sector,” she said, pointing out China’s – and Tianjin’s – rapid clause that would have compelled developed countries to cut
economic growth over the past few decades. emissions 80 per cent by 2050.
On a wider level, some industries, such as cement and steel, “(Negative press coverage) could mean that China will
are likely to calculate datasets in greater detail than before – try and look positive, and perhaps help break deadlocks on
which could be verified by third parties for the purposes of financing. But, ultimately, it will try and step back a bit to
any future sectoral-based trading scheme. avoid being singled out,” added Mabey.
Better collection of emissions data at the government level Other carbon stakeholders in China suggest that the
means that China may be able to gain the trust of a sceptical country is likely to play a waiting game until it’s clearer
US that its carbon intensity target will be measured accurately, whether the US will commit to a 2020 target or whether such
but for a market-based approach extra verification may be an undertaking would be binding in a future climate treaty.
required, said WRI’s Seligsohn. “I expect China to circle the wagons until its clearer what
Nonetheless, the central government is unlikely to be the other major emitters are prepared to sign up to,” said
persuaded to develop mandatory nationwide targets. Neeraj Prasad, a carbon finance expert at the World Bank.
“The central and regional governments may take a look But another problem is the extent to which China will
at trading on a localised level, but countrywide you’d expect negotiate as a developing country through the G77 or through
China to wait some time,” said Paul Curnow, a climate change the negotiating bloc forged late last year with other large
lawyer with Baker & McKenzie in Sydney. emitting developing countries Brazil, India and South Africa.
Other observers suggest that a carbon tax could be much This group, known as Basic, will meet several times this
more effective in helping China’s meet its targets. year to coordinate strategy ahead of UN climate meetings, the
“A pricing mechanism for coal is yet to be strengthened. Major Economies Forum and G8 and G20 summits, and are
We want the Chinese government to introduce a carbon tax likely to transform from a defensive partnership into a more
within the next five year plan (2011–2015),” said Ailun Yang, a coordinated bloc, observers suggest.
climate campaigner with Greenpeace China. And that could mean that these countries would fail to
China’s government is said to be discussing various back other mechanisms than the CDM, or improvements to
environmental tax measures and a proposal for a carbon levy the Kyoto mechanism, said Greenpeace’s Yang.
was one of the thousands of potential laws submitted to the “Without much substantive progress on the international
recent party congress. climate negotiations, it is difficult to imagine that China
A key question will be whether China’s national plan would be a proactive force in pushing for improvements in
to cut GHG emissions, known in UN jargon as nationally the CDM regulatory framework. It is also difficult to expect
appropriate mitigation actions (Namas), could ever play a role that China would be pushing for any other better market-
in a carbon credit market (see pages 30–31). based mechanism to replace the CDM,” he said. !

April 2010