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This kind of carbon finance mechanism acts as a trade-off for countries that have ratified the Kyoto Protocol and can get carbon credits toward their own emission targets by investing in developing economies like China whose greenhouse emissions are extremely high due to their reliance on coal as a cheap source of energy.
The report, titled, “The Value of Carbon in China,” shines new light on the growing value of carbon finance to the Chinese sustainable energy market by analyzing the market from the perspective of the Chinese energy system rather than the carbon-trading desk. According to the study, CDM has generated over 1,000 projects across 15 project types in China, raking in an estimated US$2.5 billion in annual revenues.
As much as this helps the sponsor country, it also benefits other stakeholders, local businesses and institutional investors involved in the projects. Besides, the biggest advantage goes to the country implementing the project, which otherwise could not have afforded the costs of technology and infrastructure required to set up the project.
“Carbon finance is now bringing substantial new revenues to sustainable energy in China,” said Liam Salter, Head of WWF Hong Kong’s climate program. “China’s carbon entrepreneurs are rapidly expanding the market’s sphere of influence.”
However, renewable energy as a meaningful player in the Chinese energy portfolio faces significant challenges. Although it has made spectacular progress toward achieving policy targets for 2010, published last year, total domestic energy consumption increased four times faster than predicted in 2006, putting greater dependence on fossil fuels to fulfill rising energy demand.
The report strongly points out that, “as long as production costs for renewable solutions remain higher than coal, it will be difficult to make an impact on an energy mix which currently relies on meeting 70 percent of its demand through the use of coal.”
While the rising number of projects in China is good news for CDM, viewed in the context of overall energy related investments, the size of the market in terms of carbon-emission reduction revenue is only approximately 5 percent compared with investment in new power plants, energy infrastructure and fuel imports.
“Project-based mechanisms have little capacity to make wide-ranging impact on the structural issues of the Chinese energy market,” the report finds.
The good news is that analyzing the CDM market growth based on the diversity of project types has highlighted the role of policymakers to steer project activities toward fulfilling national policy based on the renewable energy law.
While sourcing accurate and reliable data can be a daunting task, CDM has improved market transparency and the provision of reliable data in the relevant sectors. This has resulted in both industry stakeholders and policymakers making policy and investment decisions with greater confidence.
With CER revenue contingent on efficient technologies displacing more coal-fired electricity, there is greater inclination by project owners toward investing in new and rewarding technologies than just considering the capital cost.
The data in the new report also addresses a crucial but debatable feature of an approved CDM carbon project – the project is required to demonstrate greater reduced emissions than would have occurred in the absence of the project. Known as the “additionality” criterion, it avoids giving credits for reductions that would have taken place anyway.
In order to prove real permanent verifiable reductions in greenhouse gases, proof in the form of a project design document and activity reports validated by an approved third party is required. While earlier research by WWF has suggested that as many as 20 percent of CDM carbon offsets worldwide are questionable from the additionality perspective, this report highlights the problems in demonstrating the additionality of some projects in China, such as windpower and small hydropower.
According to Salter, “The problem of demonstrating additionality with the CDM is real and action is required by CDM regulators such as the Chinese national CDM authorities to ensure that future projects are developed using the highest additionality standards if the credibility of the CDM is to be maintained.”
“Local companies (in China) have a hard time getting loans from banks as they (owners) have little collateral security to offer against CDM,” said Fulvio Bartolucci, who co-authored the report.
Despite China’s strong inclination to embrace the CDM initiative, local financing of projects and institutional capabilities to sustain projects remain critical to the renewal of the CDM, which runs out in 2012. Besides, it is difficult to compute the carbon value of projects, particularly biomass, biogas, and coalmine methane. In addition, a lack of institutional capacity at all levels of project approvals impacts market efficiency, leading to long delays in the registration process and the economic benefit endowed on project owners, the report said.
Given the scope of CDM, the question remains – how much carbon reduction is the world really seeing through this initiative? Bartolucci believes that costly new technology in the energy sector needs to stand on its own feet to be viable from a public-funding standpoint.
“CDM as a tool should be viewed more as a developmental activity than a business venture. That perhaps may make CDM more acceptable when putting a price on carbon efficiency is concerned,” he said.
