China's Energy Future - Connected to Kyoto?

Posted on July 14, 2006
Posted By: Gordon Feller
 
A consensus seems to be quickly emerging: China will soon become the world’s largest energy consumer, and with the right actions could also become the world’s largest market for CDM investments.

While China currently relies heavily on Greenhouse Gas-intensive energy such as coal, she also plans to increase the share of renewable energy from 4% in 2005 to 16% by 2020, a major challenge requiring large-scale investments. Furthermore, China plans to quadruple GDP by 2020 while only doubling energy consumption, thus requiring a major leap in energy efficiency. The CDM serves as an innovative market based approach to reach these goals, helping to attract critical foreign investment and private partnerships for sustainable energy solutions.

The International Institute for Sustainable Development (IISD) forecasts that carbon credit demands in OECD countries up to 2012 stand at approximately 0.9-1.1 Billion Metric Tonnes of CO2 equivalent, the amount that will not met through domestic abatement actions within OECD countries. The China Council for International Cooperation on Environment and Development (CCICED) forecasts that China would likely be able to supply more than half of this global demand. However, as of today, China accounted for less than 5% of global CDM projects.

(Such as the CDM Capacity Development Programme which the UNDP has initiated with NDRC) international agencies are providing assistance to enhance coordination among CDM market participants, to increase partnerships with the private sector, and to develop China’s regulatory and policy frameworks for development and execution of CDM projects. A series of CDM trainings have also been provided for government, enterprises, consulting/validating bodies and financiers with certification provided in coal bed methane, renewable energy and energy efficiency sectors.

UNDP also supports CDM Market Assessments to identify and support the development and submission of priority projects. This included UNDP support to development of China’s first-ever CDM project, a Wind-Farm Project in Inner Mongolia Province registered by the CDM Executive Board 26 June, 2005. Another result of oUNDPur support has been the Huainan Coal Mine Methane Utilization project, the world’s first-ever CDM submission with methane baseline and monitoring methodology.

Through these activities, UNDP aims to facilitate a growth of CDM investment into China, for achieving global targets under the Kyoto Protocol, and for achieving the MDGs and China’s Xiaokang goals for a well-off society. As China emerges in the global CDM market, UNDP increasingly advocates for linkages between the introduction of new cleaner energy technologies, and the achievement of overall social development goals.

The Government of China now thinks that CDM provides an important opportunity to achieve links between achieving local development goals while also addressing the global climate change challenge.

To do this, pro-poor and people-centered development policies need to be fully integrated into CDM planning. Many CDM interventions are in areas that clearly demonstrate that environment and development can be mutually supportive. CDM brings with it the potential to channel funds into community-based initiatives that may be unattractive to traditional investors, but which may have significant beneficial impacts. CDM investments have strong potential to create tangible and important benefits that will increase quality of life in poor communities, through improved air quality, increased employment and income, increased access to household energy, etc.

China may well become the world’s largest CDM market in the coming years and this presents a historic opportunity to attract large amounts of foreign investment into sustainable energy initiatives to improve the structure and quality of growth, and improve the quality of life for millions of people.

Translation of ideas and concepts into concrete actions and results requires strong commitment and a clear vision - China lacks neither. A major challenge is to make China’s emergence in the CDM market a win-win situation for its partners in developed countries and for local communities in China that lack access to sustainable energy supplies.

How is China addressing their CDM opportunities? One of the best windows into Chinese government thinking is reflected in the design of one particular \ project. The Asian Development Bank backed a “Coal Mine Methane/Coal Bed Methane Utilization Project” in Fuxin. It is the first project under its Clean Development Mechanism (CDM) Facility to be presented to carbon buyers.

Between 2006 and 2012, more than 5 million carbon credits are expected to be generated from the Fuxin project, which is part of an Environmental Improvement Project in Liaoning, backed by an ADB loan of $70 million approved in November 2004.

ADB will help the project find a buyer for the credits and facilitate the transaction process during 2005.

The project will improve coalmine methane and coal bed methane extraction, distribution, and utilization, thus boosting coal mine safety, and supplying methane as a clean fuel to residents, industry, and electricity generation schemes.

It will reduce greenhouse gas emissions by capturing and using methane that would otherwise be released into the atmosphere during the mining process.

The CDM is a market-based financial instrument set up under the Kyoto Protocol that allows industrialized countries to invest in developing country projects and acquire greenhouse gas emission reduction credits, or carbon credits, that they can then use to meet their greenhouse gas reduction targets under the protocol.

The Kyoto Protocol sets binding targets for industrialized countries for the reduction of greenhouse gas emissions that would lower the risk of global climate change. As a greenhouse gas, methane is 21 times more potent than carbon dioxide.

ADB's CDM Facility was set up in September 2003 to provide technical and administrative assistance to eligible projects in parallel with project identification and loan processing.

"The goal of the CDM Facility is to support projects that will contribute to sustainable development, and benefit local communities. The Fuxin Project will reduce greenhouse emissions, as well as improving safety conditions and access to clean fuels for mining communities," says Ms Rita Nangia, ADB's Director responsible for the CDM Facility.

"ADB will also continue to provide underlying finance to projects that can produce tradable emission reduction credits, such as the Fuxin component of the Environmental Improvement Project in Liaoning."

 
 
Authored By:
Since 1979 Gordon Feller has been organizing high-level conferences with corporate sponsors (such as Citigroup) and providing independent consulting services to private companies (such as ChevronTexaco, Bechtel, Reuters, etc.), government agencies (State of Ohio), financial institutions (World Bank, etc.), universities and think tanks. Gordon's published more than 400 articles on international energy issues. Some of his writings can be found at www.UrbanAge.org, and at Pennwell, McGrawHill, Financial Times.
 

Other Posts by: Gordon Feller

Russia's Energy Strategy - August 14, 2006

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Comments

July, 15 2006

Ferdinand E. Banks says

I had no problem with this article until I reached the part about carbon credits. That brought back a conversation with a local know-nothing who assured me that carbon-credits/emissions-trading had been shown to work in theory and practice, which is patently untrue.

Consider an arrangement similar to the one cited in this paper. Somebody does some carbon suppression work somewhere, and as a result carbon credits are generated. These are directed into the financial market where they are sold at perhaps the 'scarcity' price mentioned in one of those unread economic journals that take up so much space in our academic librairies, or more likely some other price that makes no economic sense at all. The kind of price that they are constantly complaining about in the Financial Times.

In any event, the question has to be raised as to whether this is the optimal way to get rid of excess CO2. According to one of President Putin's advisers, this sort of manipulation has to do with employees of the financial markets making money and little or nothing with reducing greenhouse gases. And not just 29 year old traders in the brokerages and investment banks, but know-nothing academics and others who are able to use this scam to get over.

Let me put it this way: China and everybody else would be better off without emissions credits, and instead should think about a comprehensive system of taxes and subsidies.

July, 15 2006

Len Gould says

One of the things that make me nervous about CO2 credit's trading is the provisions for "underdeveloped countries" to develop "Capacity Credits" for activities such as community education programs or studies into local conditions etc. IMHO none of these "events" will ever contribute one whit to controlling global warming, and are designed for only two purposes 1) organizing wealth transfers from Kyoto signatory members to developing countries (a perhaps worthy goal but one which should be evaluated on it's own merits) and 2) keeping a lot of arts degree college graduates in employment. (a much less worthy objective overall)

I've come to having in viscerally negative reaction to any program which includes the word "capacity" in it's title.

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