China carbon cash party over as U.N. credit stream dries up

Tue Apr 22, 2014 5:00pm EDT

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By Stian Reklev and Kathy Chen

BEIJING, April 23 (Reuters) - Revenues for China's biggest sellers of U.N.-issued carbon credits shrunk last year to a tenth of 2012 values, choking off billions of dollars flowing to clean energy projects in the world's top carbon-emitter.

China will now have less money to put into a stepped-up campaign to cut greenhouse gas emissions, clean its air and raise the share of fossil-free energy in its total mix to 15 percent by the end of the decade, from a current 8 percent.

The U.N.'s Clean Development Mechanism (CDM) is part of the 1997 Kyoto Protocol, an international effort to limit global climate change. The CDM allows projects in developing countries that can prove they reduce greenhouse gas emissions to earn credits, known as Certified Emissions Reductions (CERs).

The projects then sell the CERs to governments and companies in rich nations to help them meet emissions targets. Many of the projects also help fight local air pollution, such as when wind, hydro or other renewable energy replaces coal-fired power.

Since 2006, Chinese companies have been issued 873 million carbon credits, nearly two-thirds of the total. These have been sold in Europe and Japan to bring in at least $8 billion in profits that can be reinvested in new projects.

"The CDM has played an extremely significant role in the development of China's renewable energy and energy efficiency targets by helping kick-start the deployment of ... projects across China," said Jeff Swartz, policy director at investor group the International Emissions Trading Association (IETA).

The carbon offsets generated in China had offered lucrative low-cost compliance options for emitters when European Union allowances traded at above $25. But after the financial crisis a slowdown in EU industry caused emission levels to drop, creating a huge oversupply of tradable carbon permits.

As the EU allowances fell below $5 each, historical fixed-price contracts for Chinese credits in the $10-$20 range brought huge losses to European carbon buyers. CERs are now valued at just 23 cents versus contract values tens of times higher.

That price difference has led many European buyers to delay issuing carbon credits or to try to renegotiate contracts, and Chinese project owners are threatening lawsuits.

The exact number of Chinese projects on hold is unknown. Legal experts estimate it to be in the hundreds, with one lawyer saying 95 percent of the CDM contracts have been breached.

At the beginning of 2013, the European Union, host of the biggest carbon market, also banned new projects in China and elsewhere from supplying offsets.

China Longyuan Power Group Corp, Huaneng Renewables Corp and China Datang Corp Renewable Power - the top three listed carbon sellers in China - saw their carbon revenue drop to around $20 million last year, according to earnings reports released over the past four weeks, from over $150 million in 2012 and nearly $300 million in 2011.

"No fixed-price sales contracts were signed by the Group in 2013 and all the fixed-price contracts from previous years expired at the end of 2012," Longyuan said in its annual report, also noting a 93 percent drop in carbon revenue for 2013.

DOMESTIC FUNDING

Many Chinese project developers now hope that the country's emerging domestic emissions market can generate new funds.

China has become over the past few years the biggest investor in renewable energy, although growth relies primarily on government policy on tariffs and the grid's capacity to connect projects.

Carbon revenue from Europe had been a valuable additional source of funding, and without it some independent projects may not go ahead, although state-owned enterprises will likely be able to find funds elsewhere.

Official data shows that nearly 60 new projects are already seeking domestic carbon revenue. It remains uncertain if former CDM projects that are on hold because of contract disputes will be able to supply offsets domestically.

China has launched pilot carbon markets in seven cities and provinces, and plans to launch a national scheme later in the decade. A national Chinese emissions market spanning electricity generation and manufacturing would dwarf the EU Emissions Trading System in terms of tonnes of carbon covered.

But demand would depend on the government's willingness to impose strict emission caps on its biggest polluters, and whether other buyers emerge needing carbon offsets.

"The prospects of the Chinese domestic market depend on pricing and demand in new markets, including other Asian countries such as South Korea, Japan and Taiwan," said Jeff Huang, China director of the Intercontinental Exchange. (Editing by Tom Hogue)

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