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China holds key to carbon trading success

Attention at the Copenhagen summit on climate change this month will mostly be focused on the US. But in terms of emissions trading the most influential place, and the one most likely to be affected by any change in a global framework for climate change, is Asia, and especially China.

The most important vehicle in carbon trading is the clean development mechanism, or CDM. This is the deal struck under the Kyoto protocol which 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), and according to that group’s data, the vast majority of eligible projects so far have come from Asia: 1398 out of 1890 registered projects, the bulk of them in China.

It’s 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 come out of Copenhagen will be closely watched in markets like China and India that have to date been the greatest beneficiaries of westerners hoping to offset their own pollution.