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Industry Outlook
China and the Clean Development Mechanism
a report by
John Romankiewicz
Senior Analyst, Bloomberg New Energy Finance
China is a country of superlatives: the most people, the largest cheap compared with the revenues received from CER sales. Some
hydroelectric dam and the world’s biggest exporter (having overtaken projects continued to produce chemicals (and thus CERs) even when
Germany in 2009). To this list can be added the most Clean there was no demand for the chemicals since the revenue from the CER
Development Mechanism (CDM) projects – that is, offset projects sale was significant enough to keep the factory running. Critics often cite
delivering low-cost abatement options to Annex 1 countries that have this example as one of the main abuses in CDM – the production of
emissions reductions targets under the Kyoto Protocol. Under the illegitimate offsets. The CDM Executive Board (EB), which oversees the
UN-administered CDM, since its entry into the scheme in 2004 China development of rules and regulations as well as the registration of CDM
has put 1,916 projects into the pipeline, which could reduce projects, has since tightened the rules for these projects, so the market is
greenhouse gases (GHG) by up to 373 million tons per year. As of unlikely to see any more similar opportunities. It is much more common
the end of 2009, €1.7 billion in sales of certified emission reductions for project developers to prove project additionality during registration
(CERs) – or ‘offsets’ – produced from such projects have already flowed processes using certain investment criteria. Here, internal rate of return
into the country as a result.
1
Critics have claimed that most of the (IRR) benchmarks are set by sector: commonly 8% for the power sector
offsets are produced from projects that are not additional (i.e. they (wind farms and hydro dams) and 11–12% for the industry sector
would have happened anyway) and therefore that the overall goal of (efficiency projects at steel and cement plants). If the project’s IRR is lower
mitigation is not being met. A switch to a sectoral mechanism, which than the benchmark before CER sales, the project is additional – that is,
would provide a greater level of additionality, will take time. By the it would likely not have been built had it not been for the extra revenue
time that switch is complete, China may have already chosen to pursue from the CDM. The question of project additionality has recently become
its own path and domestic carbon markets, given the latest indications more central in the debate on CDM and offset mechanisms as China has
in the nation’s policy and its position at Copenhagen. developed so many CDM projects. Before delving into that question, let
us analyse how China came to develop so many projects.
The Purpose of the Clean Development Mechanism
The National Development and and the Additionality Clause
The purpose of the CDM is two-fold: Reform Commission Machine
As a developing country under the Kyoto Protocol, China does not have
to provide low-cost offsets to Annex 1 countries (in particular the EU any emissions reductions obligations, but is eligible to receive funding
Emissions Trading Scheme [ETS]), thereby introducing some level of through the CDM. The first step in receiving that funding is setting up
price control for carbon-strained industries; and a designated national authority (DNA) for domestic approval of projects
to provide funding to developing countries for emissions abatement before they are reviewed by the EB. China set the National
projects, as well as side benefits of technology transfer and Development and Reform Commission (NDRC) – one of the country’s
sustainable development. most efficient bureaucracy tanks and the overseer of all energy-related
policy – as its DNA. Before long, China was entering dozens of projects
Both purposes are currently being fulfilled, so it might seem as if the into the CDM pipeline. The majority of projects can be broken down
scheme has so far been a huge success. Closer examination of the latter into the following types:
of the two purposes reveals another clause that has been the cause of
much controversy: the additionality clause. Yes, the CDM should provide renewable energy generation, including hydropower plants, wind
funding to developing countries, but it must be ensured that the project farms, biomass power plants and, recently, photovoltaic (PV) solar
reduces emissions more than would have occurred in the absence of the farms (accounting for 71% of all projects in the pipeline);
project. For instance, China’s emissions intensity has dropped
tremendously since 1990 (for economic and energy security reasons), so
John Romankiewicz is a Senior Analyst at Bloomberg
how can we be sure that a factory would not have installed some level of
New Energy Finance, where he is in charge of
emissions abatement equipment even without the CDM project funding? modelling existing and future supply of certified
emission reductions (CERs) from China and South-
East Asia as a key component of the company’s CER
In the early years of the CDM, project developers simply had to prove
price forecast. He also covers China’s renewable
environmental additionality to get certain projects registered to produce
energy markets, having performed research on these
and sell CERs. The emissions from the project simply had to be lower than
topics as a US Department of State Fulbright Scholar
at Tsinghua University. He holds a degree in
baseline. This led to a significant amount of controversy because materials science and engineering from
industrial gas (gases with high global warming potential, such as
Northwestern University.
hydrofluorocarbon 23 [HFC-23]) destruction projects registered and E: john.romankiewicz@newenergyfinance.com
recorded huge profits, as the cost of the abatement equipment was very
© TOUCH BRIEFINGS 2010
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