China losing out in low-carbon economy bonanza

Carbon offsets are a brand-new commodity and China's clean energy sector has generated more than half of the total credits now being sold under a United Nations-backed trading scheme.

But the conservative instincts of China's bankers and policy makers have made it hard to develop the financial instruments capable of taking the market forward, said Mei Dewen, the general manager of the China Beijing Environmental Exchange (CBEEX).

"It is like a farmer selling eggs just after China began to 'reform and open up'," Mei said, referring to the country's decision to move away from the strictures of the command economy and free up market forces in 1978.

"He doesn't know who to sell to. He doesn't know at what price he should sell, or who, in fact, is the most reliable buyer."

China now admits to being the world's biggest CO2 emitter and says it will do its utmost to establish a "low-carbon economy," but its failure to set up a "low-carbon financing system" to go alongside it has proven costly, making it dependent on foreign traders and developers, he said.

The United Nations' clean development mechanism (CDM) allows industrialized countries to invest in projects in the developing world in exchange for "certified emission reductions" that can be traded or used to meet CO2 targets set out by the Kyoto Protocol.

The Chinese CDM sector is strongly regulated by the state, and the country's exchanges, brokerages and project developers are not yet permitted to buy or sell CERs on the local market.

Carbon offsets, described by traders as a "hypothetical commodity," might cease to exist by 2012 if global talks on a new climate change pact fail to result in an agreement in December, when leaders meet in the Danish capital of Copenhagen.

All eyes are on China, and the commitments it is prepared to make to cut its own greenhouse gases after 2012 will go a long way to convincing the United States to get on board.

While Beijing is not yet prepared to adopt mandatory CO2 emission cuts, its contribution has still been huge, Mei said.

While officials with the European Union complain China has created a glut of low-quality carbon, Mei insisted China's ability to produce large quantities of cheap credits could have saved the world more than $100 billion by the end of 2012.

"China has more carbon assets than any other country and because our CERs are much cheaper, we are saving the world hundreds of billions of dollars. U.S., European, Chinese and Japanese carbon emissions are all the same but the costs vary."

China is providing "wholesale" carbon offsets to a number of foreign developers and traders, but had little say on the prices, and was receiving considerably less for its CERs than India, where the financial services sector is more sophisticated.

He said there was not enough financial innovation or government encouragement to support the development of derivative carbon products or to push the carbon market to greater heights.

"When China didn't participate in oil futures, it suffered. When it sold, it sold cheaply and when it bought, it bought expensively."

He said the government had already rejected proposals to create a secondary CO2 market, saying it was not appropriate given China's role as a supplier rather than a buyer of CERs.

China does not permit CER trading within the country, but CBEEX has already sold the first batch of "voluntary emission reductions," a pioneering sale that attracted bids from home and overseas.

A "green commuting" campaign launched during the Beijing Olympic Games last year generated 8,026 tonnes of carbon credits, and they were bought by the Shanghai-based Tianping Auto Insurance at $5 per tonne on August 4.

It was the first of many "experiments" planned by CBEEX, with another auction of VERs scheduled for next month, Mei said.

"We are currently just exploring selling VERs in China. We are acting on the orders of the NDRC and doing experimental, exploratory, research work."