Is the clean development mechanism (CDM) a success or a failure? China environment watchers are divided.
The theory behind CDM is immaculate: A European company meets the increasingly stringent limits on the amount of greenhouse gases it can emit by purchasing carbon emissions reduction credits (CERs) generated by a UN-approved cleantech project in a developing country like China. The firm is taking responsibility for its emissions and, in doing so, creating a commercial opportunity in China. Cleantech players then transfer much-needed capital and technology to China to take advantage of further opportunities.
The reality is somewhat different. Critics point to a system dominated by professional carbon traders more interested in price than technology transfer. The CDM projects they target are therefore the low-hanging fruit – low-end wind turbine and solar panel manufacturing, and the disposal of HFC-23, a gas generated by refrigerant-producing factories that isn’t costly to destroy. In some cases it is questionable whether the UN’s "additionality" requirement – CDM is supposed to bring capital and technology to projects that wouldn’t otherwise exist – is being met.
The truth lies somewhere between these two poles. Certainly, it would be wrong to cast CDM’s role as negative: The World Bank estimates that it will bring an additional US$475.2 million in foreign direct investment to China by 2010.
Yet many in China are unconvinced by its contribution on a more fundamental level. "I don’t think CDM is playing a substantial role in technology transfer. The most significant contribution has been to encourage potential investors," said Dr Zhang Xiliang, deputy director of the Institute of Energy, Environment and Economy at Tsinghua University.
Andrew Aldridge, director for Greater China at Climate Change Capital, which operates the world’s largest private carbon fund, says the government doesn’t believe CDM has worked because it hasn’t leveraged as much technology as expected. But it is a market mechanism, and low-hanging fruit is necessary to show people that money can be made. The fact that technology transfer hasn’t subsequently evolved as quickly as was hoped could be blamed on circumstance.
"The challenge when bringing in technology is you don’t have any visibility post-2012 [when the Kyoto Protocol, in which CDM is enshrined, expires]," Aldridge said. "So if your piece of technology won’t pay back within two or three years, there is a reluctance to invest."
Uncertainty over intellectual property (IP) is another obstacle. To qualify for CDM in China, a project must be under majority Chinese ownership. Some foreign technology holders are uncomfortable transferring their IP to an entity they don’t control. Finally, there is the sheer weight of CDM bureaucracy. John Romankiewicz, a carbon markets analyst at New Energy Finance, says there is a two- to three-year lag between registering a CDM project and getting the first credits.
With the Copenhagen summit on climate change approaching, CDM is at a crossroads. As long as the EU has a cap-and-trade policy, carbon traders see a market for CDM. Their best possible scenario for Copenhagen is the wider adoption of cap-and-trade. US participation has the potential to expand the market hugely – although it’s uncertain what form a Washington-backed mechanism might take. Romankiewicz notes that it might focus on domestic, rather than international, offsets.
Either way, Yu Jie, head of China policy for the Climate Group, believes CDM is a project worthy of perseverence.
"CDM has a lot of flaws, but we are learning," she said. "It is a politically created market and mistakes are made – but you can’t just say, ‘It’s a bad baby, let’s throw it out’."