China’s Once Red-hot CDM Market Cools, But Domestic Trading May Soon Fire Up

China wind turbineSHANGHAI — The year 2012 is viewed as a catastrophic time in several Mayan theories as well as by a Hindu sect in India. And now, some carbon emissions traders may harbor similar thoughts.

Consulting companies that profit from registering and selling carbon credits through an international carbon emission offset mechanism are running into a live-or-die situation this year, as the mechanism on which their business relies confronts an uncertain future.

The Kyoto Protocol, the international treaty to combat climate change, gave birth to the Clean Development Mechanism (CDM). It allows companies in industrialized countries to sponsor projects to reduce greenhouse gas emissions in the developing world.

It was conceived as a win-win-win idea. Developed countries would benefit by getting credit for reducing emissions but achieving them at a lower cost. Developing countries, such as China, earned cash as well as access to low-carbon technologies. And the planet benefited because reducing greenhouse gas emissions anywhere helps keep average temperatures from creeping too high.

China, by far, sold the most carbon credits through that mechanism. Carbon traders jokingly referred to the CDM as the “China Development Mechanism.” But with the clock ticking toward Dec. 31, 2012, when the first phase of the protocol is due to expire, the once biggest beneficiary of the program is watching business fade.

“Many Chinese CDM consulting companies now face tough times,” said Chen Hongbo, a carbon trading expert at the Chinese Academy of Social Sciences, a key think tank in Beijing. “Those companies have difficulties to find buyers for their new projects. And for projects that have been signed, many buyers broke the contracts.”

It is unclear how many CDM consulting companies in China have been forced out of the picture as the expiration of the Kyoto Protocol approaches, but there is evidence of shrinking activities. Yang Zhiliang, chairwoman of Accord Global Environment Technology Co., knows this well because her company is among many whose business turned south.

Fewer buyers, more broken deals

At its best time, in early 2008, Yang’s company on average signed one deal to develop CDM projects almost every three days. It expanded to having seven regional branches across China. The strong demand for CDM projects also pushed the company to seek help from “matchmakers,” which for a fee would introduce projects with emissions reduction potential.

Today, however, the landscape is markedly different. Those matchmakers she used to work with are out of business, Yang says. Although her company still has enough work to do this year, it is viewed merely as the last meal before fasting.

“If a project is successfully registered in the CDM program before Dec. 31, then carbon credits it generates can still be sold after 2012,” Yang said. “So we are now helping clients register as many projects as possible.”

But after 2012, Yang added, whether her service will still be in need remains a troubling question. Although ministers from all over the world agreed last year at the Durban, South Africa, U.N. climate conference to work out a way for renewing the Kyoto Protocol by 2015, it remains unclear which countries would be allowed to continue selling carbon credits under the renewed treaty.

“If carbon credits from China will no longer be accepted after 2012, whatever we do to generate credits will just be wasted,” Yang said. “It makes no sense to start new projects without a legally binding commitment in place.”

The absence of a legally binding commitment after 2012 caused one headache for CDM consulting businesses. Another came from collapsing prices in the carbon market in recent years. As companies emitted much less greenhouse gases in the recession and saw uncertain demand for future reduction amid little-progressed global climate talks, they lost appetites for carbon credits. As a result, traders that signed contracts a few years ago to buy carbon credits for about €8 per ton found out that now they could sell that credit for only half of the price.

A third headache for China’s traders came from a January 2011 decision by the European Union to ban a certain type of CDM that Chinese firms specialized in, projects that involved the destruction of a byproduct from the manufacture of an industrial refrigerant called hydrofluorocarbon-23 (HFC-23) (ClimateWire, Jan. 24, 2011).

Trade in a super-warmer collapses

The ban meant that HFC-23 offsets could no longer be traded in Europe after April 2013. Because HFC-23 is 11,700 times more powerful as a global warmer than carbon dioxide, its CDM projects to destroy the gas were extremely lucrative and trading was brisk, involving 60 percent of 3,300 CDM projects registered by July 2011. Some groups complained that more HFC-23 was being produced than necessary, just to produce more offsets by eliminating it.

Last July, U.N. regulators decided to de-emphasize such trades and authorize more projects that promoted cleaner cookstoves or that resulted in the reduction of methane leakage (ClimateWire, July 25, 2011).

All this created severe resistance among CDM project buyers to comply with purchasing contracts they signed earlier. In Yang’s company, for instance, nine out of 10 buyers refused to pay as much as they promised in the contract.

As cash flowing into Yang’s company decreased, so did the cash flowing out. Half of the company’s employees have left since 2009, when sluggish global climate talks began to dampen CDM demand, and Yang saved money by not hiring anyone to fill those positions.

“I am confident about the future of the carbon market,” she said. “But what I have to think about now is how to survive until the market recovers.”

Guan Yisong, vice president of Easy Carbon Consultancy Co., who witnessed similar business slowdown in the sector, also faces this question. His answer, however, is to hire more consultants and then send them abroad.

While climate change negotiators are fiercely arguing whether expanding economies like China’s and India’s should continue enjoying support from developed countries after 2012, practically everyone agrees that poorer countries should. That gave Chinese CDM consulting companies a reason to explore overseas markets.

Guan’s company has already sent workers looking for potential CDM projects in Pacific island nations, in a move to cope with the decision made by the European Commission to restrict its companies to buying carbon credits from the least developed countries only.

Still, such a move may not help prop up Guan’s business. The European carbon market is already being oversupplied by more than a billion tons of carbon credits until 2020, said Jeff Swartz, international policy director at the International Emissions Trading Association, a carbon market lobbying group based in Switzerland.

And as eurozone economic woes have shoved environmental concerns well down the list of priorities for politicians, the European Union has little intention to raise its 2020 target for cutting emissions, Swartz added.

“It is very, very unlikely that there will be additional European demand for carbon offset before 2020,” he said. “Chinese CDM consulting companies shouldn’t look at the U.N. or Europe for support. They should look for opportunities in China, Australia and [South] Korea.”

Can China’s traders strike gold at home?

Governments in Australia and South Korea have announced that they could link to carbon trading systems as soon as 2015. China, which emits more carbon dioxide than any other country, also pledged to reduce such climate-harmful gas through domestic emissions trading.

Starting from next year, five Chinese cities — Beijing, Tianjin, Shanghai, Shenzhen and Chongqing — together with two provinces, Guangdong and Hubei, will begin piloting a cap-and-trade system. And if all goes well, a nationwide system is scheduled to be in place by 2015.

Despite such an ambitious plan, there are questions about how much demand the upcoming Chinese carbon trading market might create, as it takes time for the market to mature. There are also doubts on whether such a market will pan out as planned, because the nation still lacks essential carbon trading mechanisms and enough professionals to run them.

This year, CDM consulting companies such as Sino Carbon Innovation & Investment Co. began teaching officials and executives carbon trading. After Sino Carbon’s first course rolled out in April, so many applications flooded in for the next course that the company had to put some requests on hold, according to Qian Guoqiang, its strategic director.

“We are transforming our business from simply developing CDM projects to providing all sorts of emissions-reducing service, including training carbon trading professionals, advising companies to restructure a low-carbon growth path as well as designing software that monitor emissions data,” Qian said.

This transformation may help the company avoid damage from the due-to-expire protocol. Last year, only 40 percent of the company’s revenue came from CDM-related business. When it started in 2010, CDM projects generated all of its cash flow.

“During the next few years, consulting companies are unlikely to see as big a need for carbon offsets in China as what they saw from the CDM,” Qian said. “But the Chinese government and companies do need help to prepare for carbon trading, and that’s where the buzz really is.”

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