BIZCHINA> Review & Analysis
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BIZCHINA> Review & Analysis
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Going up in smoke
By Li Jing (China Daily)
Updated: 2009-11-12 08:50 Although the fate of the clean development mechanism is yet to be decided, industry insiders predict world leaders will eventually opt for a similar system but with stricter rules to expand the global market, bringing in the US, the only developed nation that refused to sign the Kyoto Protocol. "If China does not want to be left out of this burgeoning market, then it has to start building carbon trading-related tools, services and institutions before it is too late," warned Mei.
To prevent falling further behind, China has been testing the waters with a voluntary carbon market, aiming to develop the necessary financial systems and policy tools to secure a place in the global market. For the past two years, CBEEX has been piloting new platforms and mechanisms to enable trade between domestic credit developers and potential buyers. Voluntary markets, such as the Chicago Climate Exchange launched in 2003, allow parties to set self-imposed, legally binding emissions reduction targets. China's first voluntary carbon trade was sealed through CBEEX on Aug 8 when Tianping Auto Insurance Co, based in Shanghai, bought more than 8,000 tons of carbon credits generated through a green commuting campaign aimed at increasing the use of public transport during the Beijing Olympics last summer. The credits were put up for auction at the exchange last December and sold for almost 280,000 yuan ($40,000). The transaction was based on the "verified emission reductions" price at the Chicago exchange because China has no clear pricing mechanism, said Zhang Jianyu, head of the China program for the US-based Environmental Defense Fund, developer of the carbon credits purchased by Tianping. At the UN climate summit in New York in September, CBEEX officials announced the scheme had teamed up with BlueNext, a French emissions exchange, to develop the "panda standard", China's first voluntary trade system. The standard will cover domestic environmental projects across various industries, including forestry and agriculture, officials said. "The attempt to set up a voluntary market is crucial to the future of the carbon-based economy in China because the country cannot afford to lose out in the huge global market," said CBEEX general manager Mei. But Mei's project is not the only one trying to fill the gap.
The country has seen several environment and climate exchanges spring up during the past 12 months, and not just in major cities. Second-tier cities like Kunming in Yunnan province, Wuhan in Hubei and Taiyuan in Shanxi are also getting in on the action, with foreign programs lining up to forge links ahead of a potential market explosion. Tianjin Climate Exchange, a joint venture between the municipal government, Chicago exchange and the asset management unit of PetroChina, the country's largest oil and gas producer, announced in September it would also launch a voluntary trade scheme within 12 months. Policymakers have also sent out strong signals for fostering a carbon market. Xie Zhenhua, top climate official and vice-minister of the National Development and Reform Commission, said China "will carry out pilot carbon trade projects in certain areas and in certain sectors" in a work report to the Standing Committee of National People's Congress in August. He did not elaborate on which areas or sectors would see projects. President Hu Jintao also reiterated the country's strong commitment in fighting global warming in his speech to the UN in New York and promised significant cuts in carbon emissions by 2020. Experts say the announcement indicates China will include carbon targets into its economic development plans, paving the way for a domestic carbon trading market. The country will "definitely" set carbon-intensity targets, comparable to the energy efficiency goal, in its 12th and 13th five-year plans, said Yang Fuqiang, director of global climate change solutions at World Wildlife Fund. The central government has already set an energy efficiency goal of 20 percent above 2005 levels in its 11th Five-Year Plan (2006-10). "With a carbon intensity target, carbon-related economic policies will be possible, such as levying a carbon tax, and trade can be carried out within the country," said Yang. "China doesn't need a national greenhouse gas cap to initiate a domestic carbon market." However, an eco-protection group in Britain this week warned against an expansion of global carbon trading markets as it threatens to destabilize the world's economy. In a report released on Thursday, Friends of the Earth says that "cap and trade" carbon markets have done almost nothing to reduce emissions, and are plagued by inefficiency and corruption. "The majority of the trade is carried out not between polluting industries and factories covered by carbon trading schemes but by banks and investors who profit from speculation on the carbon markets - packaging carbon credits into increasingly complex financial products similar to the 'shadow finance' around sub-prime mortgages which triggered the recent economic crash," Sarah-Jayne Clifton, the author of the report, told the London-based Guardian newspaper. While President Hu was making his historical commitment in New York, Lincoln Lau and his boss Thomas Russmuson were busy seeking potential deals in Beijing. Being a latecomer to China's sizzling carbon market does not bother Russmuson, partner of London-based environment advisory and investment firm CF Partners. "We have one of the largest distribution teams (compared to other intermediaries), giving Chinese carbon credit producers direct access to the complete global spectrum of compliance buyers, ranging from small emitters to the largest industrial groups," he said. The firm has specialized in trading credits from large Chinese hydro projects, and has completed deals worth more than 10 million tons of carbon, he said. Foreign banks, brokers and investment funds have also established themselves in China, making the country the largest carbon credit issuer under the clean development mechanism since 2007.
"The driving force behind carbon trading is not regulation and politics, but two fundamental factors: population growth and limited resources," he said, adding that cap and trade, where the government imposes a limit for carbon emissions and then creates a market to trade allowances, may not be perfect but it has many advantages in terms of correctly matching demand and supply and creating a clear price. Calven Luo, a Chinese clean development project developer, said: "There may be no more clean development mechanism but there will be other, improved mechanisms. The rules of the game may be changed but the fundamentals remain the same. "The global carbon market will still be there and become even larger with the participation of the US."
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