CDM Market Takes Off; China Gearing Up

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May 16, 2006
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Little more than a year after the Kyoto Protocol entered into force, a key element of the agreement, the Clean Development Mechanism (CDM), has begun to take shape. Under this market-based instrument, industrial-country polluters can offset their emissions of carbon dioxide and other greenhouse gases (GHGs) by supporting emissions-reducing projects in the developing world. Although China has no specific obligations to cut its emissions under the Kyoto agreement, as the world’s second largest producer of GHGs and the country with the largest potential for future releases, it is actively involved in the CDM market.

As of May 12, as many as 46 Chinese projects had received CDM approval, according to Shu Wang, project officer with the National Climate Change Coordination Committee of the National Development and Reform Commission. So far only seven of these have been registered with the CDM Executive Board, out of a total of 150 registered projects worldwide; however, they represent more than 30 percent of the expected certified emission reductions (CERs) from CDM initiatives this year.

The international carbon dioxide (CO2) trading market got off the ground in 2004 and has seen dramatic growth in the past two years, spurred by the launch of the European Union’s Emissions Trading System (EU-ETS) in January 2005. According to Point Carbon, a Norwegian firm that monitors the rapidly growing emissions business, the global CO2 trade reached 800 million metric tons in 2005, up from 94 million tons in 2004. Around 362 million tons of CO2 were traded in the EU-ETS alone last year. It is estimated that the market will be worth as much as 34 billion euros (US $40.2 billion) annually by the end of the decade.

The surging carbon market has provided an important platform for Chinese participants. Statistics from the United Nations Framework Convention on Climate Change show that China is emerging as a major player by volume, overtaking India and Brazil as the largest supplier of CERs to the market. Most of the country’s CDM projects are conducted bilaterally with an industrialized country partner via the broker market. However, seven of the projects are unilateral, being undertaken solely by Chinese enterprises, which allows China to retain and trade all the carbon credits itself.

In 2005, the State Council, China’s parliament, issued a new set of guidelines to streamline the CDM project approval process. The country’s current portfolio of projects covers a wide range of areas, including renewable energy, energy efficiency, waste handling and disposal, methane recovery and utilization, and reduction of trifluoromethane (HFC-23) emissions. Construction of wind power infrastructure alone accounts for 45 percent of all projects.

Domestic experts believe renewable energy and energy efficiency initiatives have the greatest room for expansion in China’s carbon market, given favorable government policies and international technical support. Their CDM status is also expected to boost sectoral growth. “Renewable energy projects are currently not as profitable as traditional power projects. The CDM will generate extra benefit for these projects, making new energy more attractive,” notes Tang Renhu, director of the CDM Department at China National Water Resources & Electric Power Materials & Equipment Company.

Energy efficiency is also a significant growth area. According to Tang, on average it takes 220 grams of standard coal to generate 1 degree of electricity in industrialized countries, while in China the figure is as high as 350 grams. “Chinese authorities have demonstrated a willingness to work with the international community to enhance energy efficiency in the rapidly growing power sector,” Tang says, noting that the European Union has funded Chinese research and development on the “ultra-super-critical” (USC) methodology, which is key to the deployment of energy efficiency technologies. Tang’s company and Beijing-based Tsinghua University have formed a development group that will take on two initial USC efforts as CDM projects.

Three major international entities are currently responsible for validating China’s CDM activities: Norway’s Det Norske Veritas Certification Ltd., SGS United Kingdom Ltd., and TUV Süddeutschland. A growing number of domestic consulting firms are also participating in the burgeoning CDM market, most of them focusing on commercial services and streaming of CDM products.

With more and more investors considering projects in China, domestic enterprises face both challenges and opportunities. Establishing a CDM project is a multi-stage process—from identification and formulation of the activity to obtaining certification—and has proved taxing for project developers. Some domestic experts worry about China’s lack of strong CDM expertise, and are concerned there is too much focus on selling CDM products and services, rather than on cultivating local expert groups to help with project development. “In the power sector, local players have advantages over foreign consulting firms because of the complexity of China’s power network and the lack of availability of key data,” says Tang Renhu.