China Environmental Law

The Guardian ran an article yesterday reporting on a new study of the Clean Development Mechanism (CDM) program under the Kyoto process which will certainly increase debate about the efficacy of the program.

On one side of the debate are

Leading academics and watchdog groups [who] allege that the UN’s main offset fund is being routinely abused by chemical, wind, gas and hydro companies who are claiming emission reduction credits for projects that should not qualify. The result is that no genuine pollution cuts are being made, undermining assurances by the UK government and others that carbon markets are dramatically reducing greenhouse gases, the researchers say.

The new study, “[a] working paper from two senior Stanford University academics examined more than 3,000 projects applying for or already granted up to $10bn of credits from the UN’s CDM funds over the next four years,” bolsters the claims of these CDM dissidents. The study concluded that

the majority [of the projects] should not be considered for assistance. “They would be built anyway,” says David Victor, law professor at the Californian university. “It looks like between one and two thirds of all the total CDM offsets do not represent actual emission cuts.”

Expressed in terms of the CDM implementing rules, the study determined that these projects failed to meet the CDM “additionality” criterion. That is, it could not be concluded that ”but for” the CDM funding the projects would not have been built; they were not demonstrably “in addition to” carbon reductions that would have been achieved without the CDM program.

The Stanford paper takes special aim at China. It found

that nearly every new hydro, wind and natural gas-fired plant expected to be built in China in the next four years is applying for CDM credits, even though it is Chinese policy to encourage these industries.

This finding is probably true as far as it goes, but at least for wind, the government’s encouragement is not yet enough. The Green Leap Forwards’ recent post on a Renewable Energy Finance Forum, Wind Chill Factors concludes that “The CDM is crucial in making wind projects in China financially viable.” Should China change the pricing rules for wind power away from the current tender system (which by the way does not apply to wind projects below 50MW approved at the provincial level, which may in fact have better economics) to something more akin to a preferential feed-in tariff, then I think the anti-CDM forces may have a more persuasive argument.

If you’re interested in seeing a CDM Validation Report by a  DOE for a wind project in China, click here (the “additionality” discussion begins at section 3.4).

The Guardian also notes that

A separate study published this week by US watchdog group International Rivers argues that nearly three quarters of all registered CDM projects were complete at the time of approval, suggesting that CDM money was not needed to finance them.

“It would seem clear that a project that is already built cannot need extra income in order to be built,” said Patrick McCully, director of the thinktank in California. “Judging additionality has turned out to be unknowable and unworkable. It can never be proved definitively that if a developer or factory owner did not get offset income they would not build their project.”

This point is also literally true I suppose, but what has happened is that the developer has taken the risk of a huge financial bath on the assumption, based on the conclusions of its Designated Operational Entity (DOE) (an independent entity accredited by CDM Executive Board that can validate proposed CDM Projects and verify and certify Greenhouse Gas emission reductions) and how similar projects have been treated in the past, that the project will obtain CDM registration. I don’t find anything devious in this and, in fact, since presumably carbon reductions start earlier than they would have had the developer waited for CDM approval, this course of action actually helps the environment.

The future of the CDM program may be hotly debated in the next several months, but I would not anticipate any changes at this point (the credits are only good through 2012 in any event). I think consideration of the whole concept will get wrapped into the new round of climate change negotiations currently under way; while there may be changes to the program, those changes will be based primarily on the form of the overall deal struck with developing nations.