Chinese renewables power ahead without CDM

China CDM Uncertainty is steering investors toward renewable energy, carbon trading alternatives, and bilateral offsets as CER prices, UN approval delays, and post-2012 Kyoto Protocol risks complicate clean energy finance and risk management.

Green investment in China will forge ahead even without a United Nations carbon offset scheme, eventually shriveling the country's dominant role in a program that has underpinned billions of dollars in investment.

Investors are sidestepping the Clean Development Mechanism in China because of uncertainties over its future, a Citibank carbon executive told Reuters in an interview in Singapore.

"CDM investment in China has pretty much dried up," said Nan Li, head of Asian environmental markets for Citi, who sources carbon offsets for trading products to manage price risk. "People are betting on the future of renewable energy without CDM."

China is the largest player in the $2.7 billion UN scheme, which rewards clean energy investors in developing nations with valuable carbon credits that make the projects viable.

The scheme is part of the Kyoto Protocol framework whose first phase ends in 2012, leaving the CDM's shape unclear after that in the absence of a broader climate pact. Long delays in project approvals have also deterred investors.

China took top spot in global clean energy finance and investments in 2009, with $34.6 billion, ahead of the United States at $18.6 billion, the Pew Charitable Trusts said.

Globally, clean energy investments are expected to grow 25 percent to $200 billion in 2010, the U.S.-based trust said.

China is also the top supplier of CDM offsets called certified emissions reductions, generating half the 428.6 million CERs issued to date.

CERs now trade on the European Climate Exchange at around 13.30 euros each and have surged this week on supply fears.

But new CDM investments in China were stalling because of policy uncertainties post-2012, including questions over financing for Chinese wind farms that depend on upcoming rulings, and growing awareness of how tough it was to manage the risks associated with such investments, Li said.

Key issues include the current and future prices of CERs, the UN process and whether or not companies should adopt new transacting methods on carbon assets.

Asian firms needed to mirror European companies by wrapping carbon into their commodity risk management plans instead of treating it almost as an afterthought.

But many Asian companies were still trading the way they were a couple of years ago, Li said. This meant limited evolution for the market if it did not change.

China has 925 CDM projects registered of a global total of 2,326 with more than 1,000 awaiting approval, while no.2 ranked India has 520 registered projects and Brazil 175.

Li saw few opportunities in the Asia market now, but pointed to the probable development of bilateral offset projects between rich and developing nations, such as Japan is exploring.

He also said China might set up a domestic trading scheme in the medium term, reflecting renewed efforts to clean up across the sector. "My guess is within the next 5 years, rather toward the end of 2015, the end of the 12th 5-year plan."

The CDM's governing panel has been seen to be increasingly tough on Chinese projects, last month rejecting 19 wind farm and hydro projects for not meeting a key benchmark by showing they needed the additional CERs to be viable.

"I actually think the panel is quite keen to increase the total number of projects," Li said, although red tape and the board's limited resources conspired to lengthen the queue of Chinese projects awaiting approval.

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