Isramart : China wary of a shift in carbon trade

Isramart news:
After doing so well in a $6.5 billion U.N. carbon trading program, developers and investors circling China’s energy-intensive industries are filled with doubt.

China has captured much of the investment in clean energy projects under the program, called the Clean Development Mechanism, or C.D.M. It has built wind farms and hydropower dams and captured waste heat in industrial operations.

But concerns about the future of the U.N. program beyond 2012 have drained much of the remaining investment interest from the sector. The global financial crisis has also done a great deal of damage by curbing access to cash and appetites for investment risk.

Established under the Kyoto Protocol, the C.D.M. allows rich countries to cut emissions by investing in clean-energy projects in the developing world.

The investments are granted valuable credits known as ‘‘certified emission reductions,’’ which can be traded or used to meet national targets. Each credit, or C.E.R., represents a ton of carbon dioxide equivalent saved from being emitted and currently trades for about ¤12, or $18, on the European Climate Exchange, well belowtheir peak last year.

The mechanism will be high on the agenda when negotiators from 192 countries gather in the Danish capital in little more than a week to discuss a new global climate deal beginning in 2013.

The European Union wants China and others to switch to another mechanism entirely. But as the biggest beneficiary of the C.D.M., China wants evolution, not revolution.

‘‘We are hoping for more technology transfers, and the process should also be made simpler so we can approve more projects than at present,’’ said Wang Shu, an official at the climate change office of the National Development and Reform Commission.

China—responsible for about a third of all registered C.D.M. projects and 46 percent of total C.E.R. credits issued by the end of October—stands to lose the most if the system is radically overhauled.

Over all, however, the C.D.M. has been a mere drop in the ocean as far as carbon cuts are concerned, and Chinese negotiators agree that the mechanism needs to be ‘‘scaled up.’’ The question is how.

As the biggest C.E.R. buyer, the European Union believes it has the clout to push through a sector-by-sector approach that would reward entire Chinese industries with C.E.R.’s if they manage to beat negotiable emissions targets. China, officially, is hostile to the idea because it does not want to accept binding targets.

By strengthening the role played by governments and industry associations, the sector approach could be bad news for middlemen—the consultants, financiers and developers who have made most of their profits in China.

‘‘The sectoral mechanisms will be done on a national level and will require much more participation by the host government,’’ said John Romankiewicz, carbon market analyst with New Energy Finance in Beijing.

‘‘Right now the intermediaries find themselves in between buyers and the sellers, whereas the host governments will find themselves between the buyers and the sellers post-2012 in a sectoral mechanism,’’ he said.

The future market will also depend on what sort of credits China and other developing countries are allowed to generate. Europe and the United States are pushing for greater levels of ‘‘environmental integrity.’’ Critics claim the system has been vulnerable to abuse, with environmentalists pointing to the use of the C.D.M.

by Chinese hydropower developers.

For instance, the C.D.M. was designed to offer a stream of carbon offsets to projects that would not be financially viable without them. But in violation of this principle, many of the hydro projects would have been profitable without C.E.R. sales.
Still, it should not expect conditions to be quite as favorable in any future system, said Allan Zhang, who runs the carbon market department of PricewaterhouseCoopers in Beijing.

The companies involved in the sector in China are calling for clarity. Several China-based project developers said that projects were ready to be developed, but no one was willing to gamble funds on C.E.R.’s beyond 2012.

‘‘Operating in the Chinese market, the lack of certainty beyond 2012 is a big problem,’’ said Andrew Aldridge of Climate Change Capital, a Londonbased clean energy fund, at a European Union-organized conference last week.