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China to pace trade in carbon credits

Foreign investors to pay mainland firms to cut back on greenhouse gases output

China's faltering efforts to clean up the environment stand to get a big boost from foreign investors eager to pay mainland power plants and factories to reduce pollution in lieu of spending far more to cut emissions at home.

Over the next six years, China is expected to become world's biggest supplier of greenhouse gas emission rights under the terms of the Kyoto Protocol to the UN treaty on climate change. Since these rights are transferable, traders predict a large market for this unusual kind of security will develop.

According to the United Nations Framework Convention on Climate Change website, China is expected to generate 16.61 million carbon emission reduction units annually up to 2012, or 30.67 per cent of the global total from registered projects. One unit equals one tonne of carbon dioxide emissions.

Since only seven projects have been registered so far, or just 3.83 per cent of the global total, many more are clearly in the pipeline.

Indeed, 46 mainland projects have been approved, involving 50.94 million carbon emission reduction units, according to data from the National Development and Reform Commission which must sign off on the projects before they can be submitted to a third party and registered with the UN.

They include hydro, wind and biomass power generation as well as waste heat and gas recycling projects.

Developers of registered projects that reduce pollution or produce clean energy earn so-called carbon credits that they can then sell to polluters faced with mandatory emission-reduction targets in other countries. Often it is far cheaper to achieve a given amount of pollution reduction by investing in projects in more polluted emerging market countries such as China than by cutting emissions at facilities in more advanced economies where stricter controls are already in place.

Since the US has refused to accede to the terms of the UN pact, most of the potential buyers of credits are in rich European countries, which have committed themselves to cutting emissions by at least 8 per cent to 10 per cent from 1990 levels by 2012. The goal is to slow down, if not avert, global warming.

Many European power companies have installed scrubbers to filter out easier to control pollutants and the cost of achieving the next level of pollution reduction would be far higher, said Thorsten Ansorg, managing director of Noble Carbon Credits, a unit of energy, agriculture and industrial products trading and logistics firm Noble Group.

Despite China's late entry into the carbon credit market, the government has caught up fast. Beijing has clarified its regulatory regime and is considering imposing a pollution tax in a bid to give polluters more incentive to invest in emission controls.

'The Chinese market could become the main supplier of certified emission rights by 2012 but it still has a long way to go,' Mr Ansorg said. 'The potential is there, the willingness is there as well as political support and readiness of the companies to [supply].'

However, financing is a key hurdle. 'You see many projects being proposed but the majority do not have financing,' said Toru Kabo, the Asia Development Bank's clean development mechanism specialist. 'So one may enter into a contract with a [credit] buyer and the project may never happen.'

Last November, the bank provided US$15.8 million for a project in Liaoning province that collects methane from coal mines and channels it to households and industry for use as fuel. It is also seeking credit buyers for other projects.

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