The system has been a mainstay of support for China, which has generated more than half of the CDM carbon credits - known as certified emission reduction certificates (CERs) - that are sold to developed countries looking to offset carbon emissions.
Over the past year, the executive board overseeing the CDM scheme has rejected 20 Chinese wind farms for carbon financing on suspicion that the Chinese government deliberately lowered the on-grid tariffs for wind power to ensure the projects qualified for CDM financing (windpowermonthly.com, September 10, 2010). The tariffs are a key factor in whether projects pass the CDM criterion known as additionality - meaning that projects such as wind farms must make additional cuts to greenhouse gas emissions over and above what would have been achieved without them. This concept has been notoriously hard to define and measure, which has led to a wide range of interpretations and distrust about the validity of some CDM projects.
The executive board's accusations have dealt a painful blow to the Chinese wind industry, according to the 2010 China Wind Power Outlook released last month by Greenpeace, the Chinese Renewable Energy Industries Association (Creia) and the Global Wind Energy Council.
In March, 37 Chinese projects were registered with the executive board, down 32% from the previous year, and in April the number fell 45% year-on-year, according to the report. It speculates that the executive board's scrutiny may frighten investors away from wind-related CERs altogether. "Following the uncertain results of the Copenhagen conference at the end of last year, some people have become perplexed and lost interest in the CDM," the reports states. Creia and the Danish-Chinese Wind Energy Development Programme office have responded to the executive board's accusations by denying that the Chinese government had manipulated wind power rates.
The issue came to a head in June when, under pressure and criticism from project participants, the CDM executive board asked its secretariat to publish a database of the highest applicable wind tariffs in China. For many projects, this data is used to support the assessment of a project's additionality.
The board then published a list of the highest tariffs in 13 regions that it used to judge Chinese wind projects. These range from CNY 0.487/kWh ($0.07/kWh) in Jiangsu province to CNY 0.80/kWh ($0.12/kWh) in Hubei, when tax is included. Excluding tax, the same regions occupy the ends of the spectrum. For roughly half the life of a project, the developer receives the full tariff; this includes the amount paid by the buyer in tax, which the developer uses to offset a value-added tax (VAT) on the plant's turbines. After that, it receives the lower amount.
In July 2009, the government set up four benchmark prices for wind farms sending power to the grid at CNY 0.51, CNY 0.54, CNY 0.58 and CNY 0.61 ($0.077, $0.081, $0.087 and $0.092) per kilowatt hour, levied according to wind power resources in respective regions. The first three types, with stronger winds, are primarily located in the north, north-east and north-west of the country. The fourth type is mainly located in the inland areas between these zones - a vast, unexplored region.
On one hand, some in the wind sector welcomed the glimpse inside the workings of the executive board. Susanne Haefeli-Hestvik, who directs the technical department at Swedish carbon certificate firm Tricorona, is confident that Chinese wind will continue to thrive. "China wants to grow wind and the CDM should pick up part of the bill, with the main costs still laid on the taxpayer," she says.
Other stakeholders are not so sanguine. The 2010 China Wind Power Outlook lambasts the executive board's use of each region's highest tariff figures to judge individual projects. "This harsh requirement, without considering the actual conditions in the country, has placed many wind power CDM projects in a difficult dilemma," says the report. "At the heart of the issue appears to be a series of misunderstandings resulting from the different historical backgrounds, economies and politics of different countries. It has also demonstrated that the CDM is lagging behind and becoming deficient."
Liming Qiao, policy director of the Global Wind Energy Council, disapproves of the new rule the executive board introduced when rejecting ten projects last year. The rule demands that the historically highest tariff paid in each Chinese province is applied to proposed projects to establish whether additionality is evident. "This has no legal basis and is not scientific because it does not take into account China's learning process in deciding how to set wind feed-in tariffs," she says.
Critics argue that China's system of setting power prices is more nuanced than the executive board acknowledges. Since 2003, China has experimented with a concession tender process and finally arrived at the four nationwide feed-in tariffs last year.
According to the Chinese Wind Energy Association, between 80% and 90% of all wind projects in China are CDM, meaning that at least 20GW of the country's roughly 25GW of installed capacity at the end of 2009 was supported by the CDM. Globally, China accounts for 481 CDM projects - worth 27.5GW - more than half of the total 945.
It does not help that the CDM itself is faltering as a mechanism, which could also hamper developments in China. CER trading fell in 2009 to just 211 million tonnes CO2 equivalent with a value of $2.7 billion, 48% less than the 404 million CERs traded in 2008 with a value of $6.5 billion, according to the World Bank's State and Trends of the Carbon Market report, published in May.
This fall was, in part, due to a lack of demand in the European carbon market. Thanks to the economic crisis and lower industrial activity, CO2 reduction targets could be met mainly through European Union allowances. More seriously, the number of new CER certificates issued in 2009 fell to 132 million tonnes, 10% less than in 2008, while only 30 million tonnes were issued during the first quarter of 2010. A total of 400 million tonnes of CERs has been issued to date, well below the 700 million tonnes of CERs the market forecast in 2007, says the World Bank study.
The Chinese wind sector is keeping a close watch on the board, but the prognosis for CDM projects is dour. According to the China Wind Power Outlook, the challenges of a more difficult application process, due to technology barriers and other factors, put the development of CDM wind projects in question. So even if the executive board changes its stance, market realities may dictate the golden days are over.
WHAT HAPPENS NEXT? UNCERTAINTY OVER FUTURE RULES AND SUPPORT OUTSIDE EUROPE
The Kyoto Protocol committed industrialised countries to reducing greenhouse gas emissions by at least an average of 5.2% over the 2008-2012 period when compared with 1990 levels. The Clean Development Mechanism (CDM) was intended to help countries achieve this through the use of certified emission reductions (CERs). One CER corresponds to reduction of greenhouse gas emissions equivalent to one tonne of carbon dioxide.
To some extent it has achieved its aim. But a problem is looming - what happens after 2012? The United Nations COP 15 meeting in Copenhagen, Denmark, last December failed to secure a binding post-2012 international climate change agreement, as did a follow-up conference in Bonn, Germany, last June. There is no clear idea of how the rules for CDM projects beyond 2012 might change, although CERs generated by projects commissioned before the end of 2012 can be offset in the European Union Emission Trading System until 2020.
Experts are worried about the future. "Europe is currently the only source of demand for so-called carbon offsets such as CERs," Guy Turner, director at Bloomberg New Energy Finance, said at the Carbon Expo event in Cologne, Germany, earlier this year. "I take my hat off to Europe for keeping the market going," he said. "But how much further can Europe go on its own?"