Isramart : China, Not UN, Controls Carbon Offsets, Stanford Says

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China’s control over the prices of power from wind is dictating the supply of tradable emission credits in the UN carbon market, the world’s second biggest, according to a report from Stanford University.

The board overseeing the United Nations carbon market is forced to rely on data from China to judge when windfarms qualify for emissions credits, said Richard Morse, a Stanford University research associate and co-author of the report. The board, established to channel funds to greenhouse-gas projects in developing nations, rejected 16 Chinese windfarms since November, including submissions backed by EDF SA, Essent NV and Goldman Sachs Group Inc.

To be eligible for UN credits, projects must show they aren’t economically viable without such assistance. The rules are designed to weed out projects that don’t add to overall emission reduction. Questions in China and India, where governments set prices and data can’t be independently verified, threaten investments in sustainable energy, Morse said.

“This can become a real cancer on the integrity of the market if not addressed properly,” Morse said in a March 10 interview. “Uncertainty will undermine sustainable investment and undermine the carbon market.”

Rate of Return

Chinese wind projects qualify for emissions credits if their projected rate of return is less than 8 percent, Morse said. Changes in prices for wind power can lower returns below the 8 percent threshold, he said.

It’s almost impossible to independently verify what would have occurred without the credits in China, where transparency is limited, according to the research from Palo Alto, California-based Stanford.

“The Chinese government is basically determining the outcomes,” Morse said. “We can’t prove manipulation, but you can prove they control it.”

The regulatory board of the UN Clean Development Mechanism is embroiled in an internal struggle that will influence the number of credits issued. Chairman Clifford Mahlung is pressing colleagues to ease registrations and increase supply of its Certified Emission Reduction credits. Other members say that would allow projects that won’t deliver genuine emission cuts. The board meets on March 22 to consider policies.

Easing requirements for windfarms in China would add credits for about 100 million metric tons through 2012, the Stanford report estimated. That’s about 10 percent of expected supply of 1.04 billion tons of CERs through that year, according to an estimate by the UN’s Risoe Centre on Energy, Climate & Sustainable Development in Roskilde, Denmark.

‘Streamlined Approach’

The CDM needs to finds a “simpler and more streamlined approach” for project approvals, said Martin Berg, vice president for carbon-market origination at Bank of America Merrill Lynch. “We do not believe that the CDM can be scaled-up in its current form,” he said March 11 by e-mail. Merrill Lynch was a participant in one of the rejected Chinese windfarms.

“While trying to streamline and improve the procedure, you have to make sure that those who are paying for the credits are not taken for a ride,” Kakakhel said last week. “The board is seized with this in earnest and we will find a solution.”

Emmanuel Fages, a Paris-based analyst at Orbeo, cut his estimate today for 2010 supply by 25 percent to 150 million tons. The regulatory board at the CDM is struggling to boost issuance, he said in an e-mailed research note. Orbeo is Societe Generale SA’s carbon-trading venture with Rhodia SA.

CERs for December rose 1.2 percent today to 11.44 euros ($15.63) a metric ton on the European Climate Exchange in London. They’ve fallen 7 percent in the past six months.