"China, Not UN, Controls Supply for CO2 Offsets, Stanford Says" by Jim Efstathiou Jr. and Mathew Carr
Appeared in Bloomberg News, March 15, 2010
March 15 (Bloomberg) -- China's power to set prices for electricity from windfarms is dictating the supply of tradable emission credits in the UN carbon market, the world's second biggest, according to a report from Stanford University.
The regulatory board for the United Nations carbon market is forced to rely on data from China to judge when windfarms qualify for emissions credits, said Richard Morse, a Stanford University research associate and co-author of the report. The board, established to channel funds to greenhouse-gas projects in developing nations, rejected 16 Chinese windfarms since November, including proposals backed by EDF SA,Essent NV and Goldman Sachs Group Inc.
Only submissions that can show they need outside funds to be economically viable are eligible for credits under UN rules designed to weed out projects that don't add to overall emission reduction. Questions in China and India, where governments set prices and data can't be independently verified, threaten investments in sustainable energy, Morse said.
"This can become a real cancer on the integrity of the market if not addressed properly," Morse said in a March 10 interview. "Uncertainty will undermine sustainable investment and undermine the carbon market."
Rate of Return
Chinese wind projects qualify for emissions credits if their projected rate of return is less than 8 percent, Morse said. Changes in prices for wind power can lower returns below the 8 percent threshold, he said.
It's almost impossible to independently verify what would have occurred without the credits in China, where transparency is limited, according to the research from Palo Alto, California-based Stanford.
"The Chinese government is basically determining the outcomes," Morse said. "We can't prove manipulation, but you can prove they control it."
The regulatory board of the UN Clean Development Mechanism is embroiled in an internal struggle that will influence the number of credits issued. Chairman Clifford Mahlung is pressing colleagues to ease registrations and increase supply of its Certified Emission Reduction credits. Other members say that would allow projects that won't deliver genuine emission cuts. The board meets on March 22 to consider policies.
Easing requirements for windfarms in China would add credits for about 100 million metric tons through 2012, the Stanford report estimated. That's about 10 percent of expected supply of 1.04 billion tons of CERs through that year, according to an estimate by the UN's Risoe Centre on Energy, Climate & Sustainable Development in Roskilde, Denmark.
The CDM needs to finds a "simpler and more streamlined approach" for project approvals, said Martin Berg, vice president for carbon-market origination at Bank of America Merrill Lynch. "We do not believe that the CDM can be scaled-up in its current form," he said March 11 by e-mail. Merrill Lynch was a participant in one of the rejected Chinese windfarms.
Shafqat Kakakhel, who serves on the CDM executive board, forecast the board would issue CER credits for about 151 million tons of carbon this year. That's less than the median estimate of 170 million from five analysts surveyed by Bloomberg News.
"While trying to streamline and improve the procedure, you have to make sure that those who are paying for the credits are not taken for a ride," Kakakhel said last week. "The board is seized with this in earnest and we will find a solution."