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Despite Flaws, Expand Green Scheme Now

Updated on Jul 22, 2008 – SCMP

Trading in carbon credits between rich countries and the developing world has come in for a lot of flak recently, with China, as the world’s largest source of the credits, attracting much of the criticism.

The existing system certainly has flaws, and concerns that some of the credits being traded do not represent genuine reductions in greenhouse gas emissions are clearly justified. But the idea that polluters in the rich world can meet their emission targets by funding reduction projects in developing countries remains a good one. Despite its faults, the scheme should be strengthened and expanded.

Because it makes little difference to global warming where exactly on earth greenhouse gasses are pumped into the atmosphere, the 1997 Kyoto Protocol included an arrangement called the clean development mechanism, or CDM. Under this, rich country polluters can invest in projects to cut emissions in the developing world, crediting the reductions towards their own greenhouse gas targets.

In the last couple of years, the CDM market has really taken off. More than 150 projects have won approval in China, with another 850 or so in the pipeline, mostly developing wind or hydro-power, improving energy efficiency, or cutting emissions of industrial gasses like hydrofluorocarbons.

Earlier this month, for example, investment bank Lehman Brothers agreed to pay mainland power producer China Guodian a reported €52 million (HK$644 million) for 4.2 million tonnes of certified carbon dioxide reductions.

But even as the CDM market has approached critical mass, it has come in for some withering criticism. Doubters’ top concern is that many of the certified projects would have gone ahead anyway, even without the additional incentive of CDM funding, so the reductions being traded do not represent genuine cuts in emissions.

“The whole mechanism is in question,” says Simon Powell, head of power research at broker CLSA.

According to a new study commissioned by the conservation group WWF, however, CDM funding can play a critical role in boosting internal rates of return above the 8 per cent threshold at which renewable energy projects become attractive (see chart below). Without CDM investment, many Chinese wind and hydro power projects, as well as conversions from dirty coal to cleaner gas, wouldn’t have happened.

Where the CDM scheme has been less successful is in persuading wasteful industrial companies, especially in the steel and cement sectors, to increase their energy efficiency by using waste heat to generate electricity, even though rates of return can be much more attractive. With bank credit rationed, says Fulvio Bartolucci of Azure International, the Beijing consultancy which compiled the report, energy efficiency initiatives are getting crowded out by even more lucrative investments.

Even so, the CDM scheme has been instrumental in raising Chinese companies’ interest in cutting emissions, improving transparency and setting standards. For it to be really effective, says Liam Salter of WWF, it should now be expanded from individual projects to cover whole regulatory programmes and industry sectors.

The problem with that idea is that the current CDM scheme is due to expire in 2012 and uncertainty over what will replace it is already discouraging new investments. If the mechanism is to be effective in the longer term, policy-makers need to get working now to extend and tighten the scheme. Then we might begin to see some meaningful emission reductions coming out of it.

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