LONDON (Thomson Reuters Point Carbon) - A Chinese plan to set absolute caps on industrial CO2 emissions is unlikely to persuade the EU to continue paying for project-based emission reductions under the U.N.'s clean development mechanism (CDM), market observers say.
A high-level official in China's National Development and Reform Commission (NDRC) told a conference in Beijing last week that China is considering a plan to set absolute caps on greenhouse gas emissions from sectors such as iron, steel and cement production.
For China, the world's biggest emitter and supplier of U.N.-issued carbon offset credits, this would represent a significant policy change, as Beijing has previously only been willing to set relative carbon targets based on efficiency levels.
Analysts said the move would most likely fail to convince the EU to drop its plans to ban offset credits from new Chinese projects in its emissions trading scheme after 2012, according to analysts.
"I think the EU will look at this with a bit of skepticism," said David Lunsford of Hong Kong-based carbon consultancy Enecore.
In China there are substantial differences between policies set at the national level and what is being implemented locally, something the EU is aware of, he added.
CASH FLOW CUT-OFF
Since 2005, the U.N. has issued nearly 400 million certified emissions reductions (CERs) to Chinese CDM projects, of which EU companies have bought the majority to help meet caps under the EU emissions trading scheme (ETS).
This practice has resulted in several billion dollars have been paid to China to limit its spiraling carbon emissions over those six years.
But in a push to pressure big developing country emitters such as China and India to do more to fight climate change, the EU only plans to accept CERs from new projects in least developed countries (LDCs) from 2013.
More advanced developing countries must negotiate bilateral agreements with the EU if their CERs from new projects are to be eligible for use in Europe.
One senior EU source did not rule out the possibility of Chinese CERs being accepted for EU compliance from 2013, but he told Point Carbon News that last week's announcement about absolute caps lacked sufficient detail to be considered in terms of its effect on links with Europe's carbon market.
"A lot of these are just early ideas that are being looked into at a very technical and non-political level," he said, "(but) the EU is working very closely with the Chinese on seeing how we can provide technical support."
If China sets absolute caps on emissions in some sectors that could potentially be a first step toward a sectoral trading scheme, a policy favored by the EU for places like China, but still not enough to keep the CDM going beyond 2012, observers say.
"The EU commission and parliament have already formulated a lot of judgments about what China should be doing," said Lunsford, referring to ideas that advancing economies like China should resort to new market mechanisms to help limit emissions.
"(Europe) does not see China as a CER-generating country anymore," he added.
Any future CDM project origination activities in China would most likely be funded by Australian money, he said, as Canberra plans an emissions trading scheme from mid-2015.
"I don't see any particular implications for EU policy toward China from this," agreed a Beijing-based policy analyst who wished to remain anonymous.
"I see this purely as a domestic measure to test the waters, there is no step-up in commitments," he said.
He noted that absolute caps would be a deviation from China's twelfth five-year plan, adopted as recently as April this year, which set out a string of efficiency-based targets.
In recent months, a number of Beijing officials have publicly mentioned the possibility of setting a hard cap on energy consumption by 2015, and some observers say CO2 caps could be linked to this.
China intends to launch six regional pilot emissions trading schemes in 2013, although detailed scheme designs have yet to be finalized.
The central government has said it will reduce the carbon intensity of China's economy to 40-45 percent below 2005 levels by 2020, and has also set an energy intensity reduction target of 16 percent below 2010 levels by 2015.
(Reporting by Stian Reklev and Ben Garside)