Emissions control: China awaits the carbon trading revolution

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By:
Chris Wright
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CDM set to encompass sectoral approach; China likely to corner chunk of trading revenues

The Copenhagen summit failed to deliver the binding multilateral commitment many had hoped for. But the minutiae of carbon markets continue to be debated on a smaller scale, where – as with so much regarding climate change – the key country will be China.

The most important vehicle in carbon trading is the clean development mechanism (CDM). This is the deal struck under the Kyoto Protocol that allows industrialized countries with commitments to reduce their greenhouse gas emissions to invest in projects that reduce emissions in the developing world. This is the foundation of carbon trading: approved CDM projects generate credits, which can then be traded. The whole arrangement is overseen by a branch of the United Nations Framework Convention on Climate Change (UNFCCC). According to that group’s data, the vast majority of eligible projects so far have come from Asia: 1,398 out of 1,890 registered projects, the bulk of them in China.

Registered projects by region

Total 1,890

Source: United Nations Framework Convention on Climate Change



Beneficiaries

It has been clear from the outset that this has been an imperfect process that needs streamlining, as Lex de Jonge, chair of the CDM executive board at the UNFCCC, readily admits to Euromoney: "The entire CDM development has been a massive learning-by-doing process, to be frank about it, and we are still not there yet." So any changes that follow from Copenhagen will be closely watched in markets such as China and India that have been the greatest beneficiaries to date of westerners hoping to offset their own pollution.

Lex de Jonge, chair of the CDM executive board at the UNFCCC

"The entire CDM development has been a massive learning-by-doing process, to be frank about it, and we are still not there yet"

Lex de Jonge, UNFCCC

For de Jonge, the biggest challenge is capacity. Already the UNFCCC doesn’t have as many staff as it needs: they are frequently poached by the private sector once trained. Getting a project from the drawing board to approval is a laborious process, and indeed has to be, in order to preserve the environmental sanctity of the whole market. De Jonge is confident, with his agency handling 500 projects a year. But if countries commit themselves to bigger emission reductions and so create a much greater demand for carbon credits, and the requirement moves to 2,000 projects a year or so, "it’s too much", de Jonge says.

Anticipating this, there are moves towards shifting CDM approvals to a sectoral approach in certain countries big enough to organize themselves: power sector projects in China and India, for example. If those projects could then be evaluated in bulk, the UNFCCC would be free to devote more time and attention to one-off projects in smaller states. Although no agreement was struck on this theme in Copenhagen, it is one of the issues that will be ironed out in the year ahead, and again it has a big impact in Asia: a sectoral approach ought, logically, to increase still further the dominance of China in particular as a source of tradable carbon credits, as it will be able to get still more projects through the approval process.

Future-proof

Another group that will have watched Copenhagen closely is the Asian Development Bank, which to date is one of only a handful of institutions to have launched carbon trading funds that deal in credits post-2012, which is when the Kyoto Protocol expires.

The ADB, which already launched a more mainstream $150 million carbon credit fund in 2007, noticed that uncertainty about the future of carbon credits was stopping development, so launched the new fund with a flexible clause allowing it to take into account future changes in the CDM, "as a price signal", says Toru Kobu, senior clean energy and climate change specialist at the Asian Development Bank. "It’s basically an assumption by the investors, as well as ADB as a trustee, that the parties negotiating would not change any rules to have a retroactive effect," he says.

No fear

Alongside this, emissions trading exchanges are approaching readiness in Asia, from Singapore and Australia to two separate Chinese ventures, in Beijing and Tianjin. "It’s only natural," says Harry Derwent, president of the International Emissions Trading Association in Geneva, "that when you have a major production line you start seeing points where people can buy or sell closer to the point of origin."

Derwent is unapologetic about speaking in terms of industry. "This is essentially a production process, I don’t think anybody should be frightened of that perspective," he says. And his line of thinking is bound to strike a pragmatic chord in China – which, having long enjoyed the benefit of foreigners paying to build up its renewable energy resources, might yet go a step further and corner the consequent trading revenues too.