Clean Development Mechanism in China: Seeking Synergies to Achieve Sustainable Development

Clean Development Mechanism in China: Seeking Synergies to Achieve Sustainable Development

4
4.3.1 Institutional Actors for CDM Activities
49
4.3.2 Approval Procedures and Management Rules
51
4.4

CDM

P
RACTICE IN
C
HINA
53
4.4.1 Capacity Building Projects
53
4.4.2 CDM Projects in the National Pipeline
56
4.5

C
ONCLUSIONS
58
5 CDM PERFORMANCE IN CHINA 59
5.1

P
ERFORMANCE IN
S
YNERGIZING WITH THE
P
OLICY
G
OALS
60
5.1.1 Three CDM Priority Areas
61
5.1.2 Sustainable Development Merits
63
5.1.3 Technology Transfer Merits
65
5.2

CER

G
ENERATION FOR THE
C
ARBON
M
ARKET
68
5.2.1 Four P Market Performance Model
68
5.2.2 Price
69
5.2.3 Product
70
5.2.4 Promotion
71
5.2.5 Placement
73
5.3

C
APACITY
B
UILDING IN THE
P
ROCESS
75
5.3.1 Policy Maker’s Capacities
75
5.3.2 Project Administration Performance
77
5.4

C
ONCLUSIONS
80
6 CHINA’S CDM POTENTIAL AND ECONOMIC IMPACT 82
6.1

E
MISSION
R
EDUCTION
P
OTENTIAL IN
C
HINA
83
6.1.1 Energy Efficiency
84
6.1.2 Renewable Energy
85
6.1.3 Methane Gas from Coal Mines
87
6.1.4 Power Generation and Forestry
88
6.1.5 Summary of CDM Reserve Project Potential
89
6.2

A
NALYSIS OF
C
HINA
’
S
CDM

P
OTENTIAL
89
6.3

E
CONOMIC
I
MPACT OF
CDM

I
MPLEMENTATION
92
6.4

C
ONCLUSIONS
93
7 POLICY RECOMMENDATIONS 95
7.1

S
TRENGTHEN THE
P
OLICY
S
YNERGY
96
7.1.1 Establishing Long-term Perspective
96
7.1.2 Promoting the Climate-friendly Technologies
97
7.1.3 Creating a Stimulating Policy Framework
98
7.1.4 Promoting the Market-based Mechanism
99
7.2

I
MPROVE THE
M
ARKET
C
OMPETENCE
99
7.2.1 Establishing CER Indicator Set
100
7.2.2 Setting up Reliable GHG Emission Inventory
101
7.2.3 Implementing Marketing Management
102
7.3

I
NDUCE
C
APACITY
D
EVELOPMENT IN A
L
ARGE
S
CALE
103
Clean Development Mechanism in China: Seeking Synergies to Achieve Sustainable Development

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7.3.1 Restructuring the Existing DNA
104
7.3.2 Intensifying the Capacity Development
105
7.3.3 Long-term Considerations
105
8 PERSPECTIVES 107
APPENDIX A CONTACT LIST OF THE INTERVIEWS 108
APPENDIX B COMPARISON OF CDM AND JI 109
REFERENCES: 111


Clean Development Mechanism in China: Seeking Synergies to Achieve Sustainable Development

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Acronyms and Abbreviations
AAUs
ADB
AIJ
AIM
AP6
A/R
BAU
CBM
CCPO
CCX
CDM
CER
CERT
CERUPT
CH
4

CIA
CO
2

CoP
CMM
DA
DNA
DOE
DSM
DTI
EEA
EIA
EIT
ERs
ERPA
ERUs
ET
ETS
EU
EUA
FSU
GDP
GEF
GGAS
GHG
GWP
HFCs
Assigned Amount Units
Asian Development Bank
Activities Implemented Jointly
Asia-pacific Integrated Model
Asia-Pacific Partnership for Clean Development and Climate
Afforestation and Reforestation
Business as usual
Coal Bed Methane
Climate Change Projects Office
Chicago Climate Exchange
Clean Development Mechanism
Certified Emission Reduction
Carbon Emission Reduction Trading Model
Certified Emission Reduction Unit Procurement Tender
Methane
Central Intelligence Agency
Carbon Dioxide
Conference of Parties
Coal Mine Methane
Domestic Action
Designated National Authority
Designated Operational Entity
Demand Side Management
Department of Trade and Industry
European Environmental Agency
Energy Information Agency
Economies in Transition
Emission Reductions
Emission Reduction Purchase Agreement
Emission Reduction Units
Emission Trading
Emission Trading Scheme
European Union
EU emission Allowances
Former Soviet Union
Gross Domestic Product
Global Environment Facility
Greenhouse Gas Abatement Scheme
Greenhouse gas
Global Warming Potential
Hydrofluorocarbons
Clean Development Mechanism in China: Seeking Synergies to Achieve Sustainable Development

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IEA
IET
IGCC
IGES
IPAC
IPCC
IPR
JI
LoE
LULUCF
MAC
MFA
MoA
MoP
MoF
MOST
MtCO
2
e
MtC
NAP
NCCCC
NCDMA
NDRC
NGO
N
2
O
NO
x

ODA
OECD
PCF
PDD
PFBC
PFCs
PIN
PPP
R&D
RMUs
SEPA
SF
6

SGM
SMA
UNDP
UNEP
UNFCCC
VER
WB
International Energy Agency
International Emission Trading
Integrated Gasification Combined Cycle
Institute for Global Environmental Strategies
Integrated Policy Analysis Model for China
Intergovernmental Panel on Climate Change
Intellectual Property Right
Joint Implementation
Letter of Endorsement
Land Use, Land Use Change and Forestry
Marginal Abatement Cost
Ministry of Foreign Affairs
Ministry of Agriculture
Meeting of the Parties
Ministry of Finance
Ministry of Science and Technology
Million tons of Carbon Dioxide equivalent
Million tons of Carbon
National Allocation Plan
National Coordination Committee on Climate Change
National Clean Development Mechanism Authority
National Development and Reform Commission
Non-governmental Organization
Nitrous Oxide
Nitrogen Oxides
Official Development Assistance
Organization for Economic Cooperation and Development
Prototype Carbon Fund
Project Design Document
Pressurized Fluidized Bed Combustion
Perfluorocarbons
Project Idea Note
Purchasing Power Parity
Research and Development
Removal Units
State Environmental Protection Administration
Sulfur Hexafluoride
Second Generation Model
State Meteorological Administration
United Nations Development Program
United Nations Environment Program
United Nations Framework Convention on Climate Change
Verified Emission Reductions
World Bank
Clean Development Mechanism in China: Seeking Synergies to Achieve Sustainable Development

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1 Introduction
The Kyoto Protocol’s final entry into force in February 2005 marked a shift from
negotiation to concrete action. According to the Protocol, Annex-I parties have the
binding quantified reduction commitments to reduce their greenhouse gas (GHG)
emissions by 5.2% below their 1990 level during the period 2008 to 2012.
Besides through the concrete domestic actions to achieve the emission reduction
targets, Kyoto protocol also creates three flexible mechanisms to assist Annex I
countries in reaching the obligations with lower cost, i.e. International Emission
Trading, Joint Implementation, and Clean Development Mechanism (CDM).
According to Article 12 of the Kyoto Protocol, the CDM allows Annex I countries to
invest emission reduction projects in developing countries and receive credits in the
form of Certified Emission Reductions (CERs), which they may count against their
obligatory reduction targets. The implementation of CDM projects shall also be to
assist hosting countries in achieving sustainable development.
The global carbon trading market is emerging and more practitioners and stakeholders
are involved in the carbon trading business. Since January 2005, European Union
Emission Trading Scheme (EU ETS) has commenced operation across the 25 member
states of the EU. Although the credit transaction in the EU market is segmented with
the transaction in other areas, the commodity traded is the same: emission reduction
credit. In addition, regardless of the differentiated pricing system, the existing
emission trading system in EU provides linkage of the credits from different
mechanisms, which contributes CDM to gain greater momentum. Within only two
years’ time (April 2004 till May 3, 2006), more than 40 countries have about 744
CDM projects in the pipeline, including 157 projects have been registered and 13
projects received the CERs from the Executive Board (CD4CDM).
China is the largest developing country and the second largest Greenhouse Gas (GHG)
emitter in the world. With its rapid economic development, the GHG emission will
continue to grow and it is estimated that after 2025, China will surpass the US as the
world’s largest GHG emitting country (EIA 2005).
China ratified the Kyoto Protocol in 2002, which means that China can participate in
international emission trading as credit supplier during the years till 2012 without
shouldering any emission reduction liabilities. The CDM provides additional profits
for selling the additional emission reductions and it is supposed to be a good
opportunity for China to integrate market, technology and capital with environmental
protection industry. However, China’s attitude towards initiating CDM activity has
changed gradually. From the initially ‘negative’ for a long time, to the later ‘wait and
see’ attitude and, and now feverish activity is underway. On the other hand,
institutional preparation and capacity building measures provided forceful support for
Clean Development Mechanism in China: Seeking Synergies to Achieve Sustainable Development

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the expeditious project development. Till April 6, 2006, 25 projects have already been
approved by the national government (CCChina). In terms of the amount of CERs
supposed to be generated, China has become the leading CDM host country.
There are a number of literatures addressing China’s CDM development from
different perspectives. Early projects specifically focused on methodologies research,
emission model development, capacity building in the initial phase, necessary at that
time for gaining attention and validating the potential of CDM scheme. Later research
began to discuss issues of sustainable development criteria, post-Kyoto climate
policies in developing countries, CDM legal assessment, carbon market progress, etc.
The project integrates the findings from the previous studies and imparts new skills
and tools to understand the evolving environmental factors and evaluate the CDM
project performance. It provides a holistic perspective towards Chinese CDM
activities by building an analytical framework which combines the considerations of
the policy linkage, capacity development and carbon market factors. Based on the
performance evaluation of the current project activities and the potential analysis, the
project provides insight on how Chinese government could synergize the emission
reduction projects with the development policy and promote the CDM activities in a
sustainable way.
The report consists of 7 chapters beginning with an introduction to the project. The
second chapter describes the methodologies used for conducting the project. Chapter
3 provides the background information about the global carbon market and CDM
scheme. The fourth chapter focuses on China’s conduct, including the related policy
instruments, institutional building and project practices. In Chapter 5, China’s CDM
current activity performance is evaluated from three dimensions created in the
analytical framework. Chapter 6 analyzes China’s CDM potential and the imposed
impact on economic development. Finally, chapter 7 provides policy options from
diverse and complementary aspects.
Clean Development Mechanism in China: Seeking Synergies to Achieve Sustainable Development

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2 Methodologies
2.1 Problem Formulation
The host country will decide whether the project activity helps to meet the sustainable
development requirement and whether to approve the project. However, given the
ambiguousness of the concept of sustainable development and lack of consensus
regarding an operational definition, evaluating the linkage between the national
development goals and the potential CDM activities is not an easy thing. The host
government needs to develop national criteria which could conform to the national
development priorities; it also needs the persistent capacity development to monitor
and effectively implement the emission reduction activities (the CDM sustainable
development criteria will be later discussed in chapter 5.1).
On the other hand, CDM is a market-based mechanism. The project developers are
more concerned with their commercial profits earned from the credit trading. The
roles that the government will play thus become vitally important. The national
government needs to create synergies between the development goals and specific
CDM projects.
The overall research question the report intends to answer is: How may China create
policy synergies to achieve the sustainable development through implementing
CDM projects?
The chosen problem formulation addresses the situation that China has made rapid
progress in capacity development and CDM project implementation and starts leading
the credit generation, but the projects were largely valued low in quality due to the
projects mostly bypassing the sustainable development goals. To contribute solutions
to the problem, the following sub-questions are further developed: To what extent has
the global carbon market been developed? What’s the progress of the CDM activities
in the world? What has China been doing in promoting the CDM activities? What
could conclude from current China’s CDM performance? What are the potential and
impacts of implementing CDM in China? What kind of policies could recommend for
Chinese government?
In recognition of this situation, three specific tasks are highlighted. Figure 2-1 shows
the correlations between these tasks:
 The first task is to make an integrative review and analysis of China’s CDM
project activities under the context of international climate policy regime and
carbon market development.
 The second task is to evaluate the current activity performance and analyze the
Clean Development Mechanism in China: Seeking Synergies to Achieve Sustainable Development

11
China’s CDM potential.
 The third task is to provide policy recommendations that can be accessible to
practitioners and can facilitate the implementation of CDM in a sustainable way.
Figure 2-1 Correlations of Research Tasks in the Project

2.2 Analytical Framework
Since the operation of the carbon market, credit generation and transaction activities
have become competitive. The CDM management will be more effective when
informed by intensive and comprehensive policy analysis; on the other hand, the
policies can keep vitality only if the solutions defined are operational in their
implementation and management. Appropriate CDM strategy should be developed to
promote steps towards sustainable development based on the objective and in-depth
review of the regime context and specific practices.
Currently, CDM activities contributed to the Annex I countries’ achieving obligatory
commitment goals by providing tradable and relatively cheap CERs; however, besides
some revenues from selling the credits, developing countries gained few sustainable
development benefits. Furthermore, CDM is developing on a fast track particularly
after the countries have been equipped with CDM knowledge and some capabilities.
But within the first Kyoto period, limited credit demand may affect the CDM
development, intensifying the credit market competition. Thus it is important for the
host countries to examine their past CDM activities and seek solutions to complement
the CDM activities with development goals.
If generating emission reductions to meet the Kyoto goals and assisting sustainable
development goals can be seen as two driving forces for CDM scheme, then the
evolving carbon offset market can be viewed as a newly-added “pulling force” for the
CDM scheme, because the carbon transaction indicates the commercialization of the
generated CERs and the completion of a project cycle. Synthesizing the above
analysis, the CDM and its external influencing forces can be exhibited in Figure 2-2.

Task 1
Research on Global Carbon
Market and China CDM
Activities
Task 2
Evaluation of China’s CDM
Activities and Analysis of
Potential and Impacts
Task 3
Policy Recommendations
for the Future CDM
Activities
Clean Development Mechanism in China: Seeking Synergies to Achieve Sustainable Development

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Figure 2-2 The CDM and External Influencing Forces

Globally, the legal nature of the emission reductions is still a matter of debate (IGES
2005b). However, since the CERs are produced by the project developers from host
countries and are used for trading in carbon market, CERs can then be regarded as an
additional commodity which can bring carbon benefits for the developers aside from
the conventional project output. In the current practice, it may be appropriate to
consider them as ‘intangible’ commodity assets that are capable of being transferred,
bought and sold. In this regard, we can draw an analogy between CERs and other
commodity assets and analyze the correspondent strategies (The features of CERs will
be further developed in chapter 5.2).
The whole CER generating process is under the supervision and approval of the host
government and the Executive Board with a view of safeguarding the emission
reductions and sustainable development goals. However, the effectiveness of
implementing CDM projects highly relies on the institutional and human capacity
development, which is of vital importance in performing the CDM regulations and
achieving the development goals. Capacities for promoting CDM activities are
developed by actors from three hierarchies: level 1 is the national policy maker, who
promulgates the CDM operation measures and takes charge of synergizing CDM
activities with relevant development policies. Level 2 is the CDM executive office,
responsible for information dissemination, project supervision and other
administration issues. Level 3 is the project developers who acts as proponents and
cooperate with foreign partners to implement CDM projects and sell the CERs
produced.
An analytical framework was developed herein to take all these considerations into
account (Figure 2-3). It combines the concerns of real, measurable and additional
emission reductions with a better supplying performance in the carbon market, as well
links the CDM implementation capacity with national sustainable development
considerations.


International
Climate Change
Regime
National Energy/
Environment
Policy
CDM Scheme
in Developing Countries


Carbon Market

Clean Development Mechanism in China: Seeking Synergies to Achieve Sustainable Development

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Figure 2-3 Analytical Framework of the CDM Implementation Process

It should be noted that the framework does not mean the projects discussed are
unilateral which excludes the foreign investment. As a matter of fact, it is just used to
highlight the CER generation process from developing countries’ dimension. It thus
suits all types of CDM activities, including unilateral, bilateral and multilateral.
The target group of the research is the policymakers working at climate change and
development issues, both at national and local levels. The project is also aimed at
project practitioners and other stakeholders involved in CDM activities in China, such
as project developers, foreign partners, NGOs, civil society, and academic and
research communities. The universal inclusiveness of the model guarantees the
research modality could be adopted in a larger scale.
2.3 Methodological Approach of the Study
Most of the previous research on China’s climate change policy and CDM scheme
ignored the impacts of the carbon market. As a matter of fact, the better understanding
of the current CDM activities necessitates and requires the inclusion of the market
considerations. Taken China as a case, the project conceptualizes the influencing
forces of the CDM scheme into global climate policy regime, national sustainable
development policy and global carbon market and takes all these factors into
consideration when evaluating the CDM performance and strategizing further actions.
Scope of CDM Implementation
International Climate Policy
Regime
National Sustainable
Development Policies

Capacity
Building

Project
Development
Level 1
Level 2
Level 3
CERs

Carbon Market

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