Two weeks ago, China announced the establishment of a Clean Development Mechanism (CDM) fund that will use money from emissions reductions projects to pay for climate change prevention. With China generating $15 billion in credits to date -- translating into emissions reductions equivalent to 1.5 billion tons of carbon dioxide -- the fund could contain as much as $3 billion.
So what exactly does this mean? That money from the CDM is going to help the environment? Hasn't that always been the point?
The CDM is a facet of the Kyoto Protocol that allows developed countries some leeway in meeting emissions targets. The countries bound by the treaty -- European nations and Japan -- can invest in carbon-neutral or carbon-capturing projects in developing nations, such as wind farms or landfill gas recovery plants, thereby earning credits that offset their own emissions.
If that sounds a bit like outsourcing environmental constraints, the economics behind it are solid. That money goes further in the developing world, and makes a big difference in heavily polluted countries like China. But like any emerging market, the scheme has seen some growing pains. So while CDM has always been green, the countries who benefit from it are finally starting to iron out some of the kinks.
CDM took a blow early on when the US, under President Bush, refused to sign on to Kyoto emissions caps. One investor at a major Indian bank told me that the value of carbon credits fell practically overnight.
Still, plans for a CDM market continued. India was ready with a portfolio of projects when Kyoto entered into force in 2005. It quickly became the world leader in total number of projects. But the CDM is meant to encourage projects that are "additional" -- meaning they wouldn't happen without the purchase of carbon credits by developed countries. So India gained a reputation for submitting "non-additional" projects.
China, meanwhile, became the world leader in total number of carbon credits. But it did so through reductions in the industrial gas HFC-23 -- a methodology that's eligible for a large number of carbon credits because a ton of HFC-23 is estimated to have the same effect as 11,700 tons of carbon dioxide. But reducing HFC-23 under the CDM actually encourages the production of another greenhouse gas. It could also be done through much cheaper means. Using CDM to do it, many say, distorts the spirit of Kyoto.
Despite these early hiccups, the CDM market is now strong. The International Emissions Trading Association estimates that in 2007 the CDM could be worth $60 billion. Moreover, it's becoming increasingly green and true to the intentions of Kyoto's creators.
The Chinese fund is an important step. To discourage industrial gas projects, the Chinese government has been levying a 65 percent tax on HFC-23 credits. Now, it seems, that money will be put to good use. India, meanwhile, is striving to turn out more useful CDM projects. On a recent trip to Mumbai, I was told that there are now several major public-sector energy efficiency projects in the works. At the same time, the Indian government is considering further regulating the market -- which would mean less chance that non-additional projects slip through.
All of these spell improvement. But here's the catch: Kyoto lays out targets to 2012. Because negotiating international treaties can take years, people are already starting to ask what will happen after that. UN delegates will begin discussing post-Kyoto possibilities at the UN Framework Convention on Climate Change conference in Bali next month. But meanwhile, as in any market, the major players are reluctant to act until they know what the future will hold.
On the project end, the challenge will be to get less-savvy countries on board. Along with China and India, Brazil is a major provider of CDM credits; but smaller countries need green projects, too. Nepal, for example, wants a piece of the CDM pie.
Last, but certainly not least: on the emissions caps end, the U.S. and Australia, leading greenhouse gas emitters, need to sign on.
Image credit: NASA
Let's see what happens in Australia after the election on Nov 24.
I went to a talk recently by the Director of "The Gold Standard" Michael Schlup (http://www.cdmgoldstandard.org/). He expressed continuing concern regards the accreditation and regulation of projects within the CDM and the voluntary credits system.
In summary, it is not enough to state that it's working because there's much cash involved. If the Chinese fund includes rigorous vetting of projects and the management of the resultant carbon credits then all well and good - if it doesn't, then we're wasting our time.