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Dirty job of clearing waste grows green money

Pu Shigui used to pile up truckloads of household rubbish at his Nanjing landfill and then forget about it, letting methane gas leak into the atmosphere as the stinking refuse decomposed. These days, shiny pipes and equipment cover the site, capturing the gas and turning it into electricity while delivering a steady stream of cash to Mr Pu's company.

Mr Pu is the general manager of Green Waste Recovery Engineering, the first landfill in China to have a gas-to-energy project that receives carbon credits under a United Nations programme that brings new technology and cash to developing countries by cleaning up their industries.

'It prevents the gas from hurting grass and trees around,' Mr Pu said. 'It's a good thing for the firm as well. We didn't have the money before, now we can get compensation. It's a good support and, of course, the more money the better.'

More and more Chinese entrepreneurs are following Mr Pu's example, cleaning up their factories with the help of European technology and funding and selling the carbon credits to European buyers, creating extra income for their companies.

The Clean Development Mechanism (CDM) is a programme under the Kyoto Protocol that allows companies in developed countries that are subject to emission quotas to reduce emissions in developing countries that are not and use the credits this generates to help them meet their own greenhouse gas reduction commitments. The credits produced under the CDM programme, called certified emission reductions, can be traded on the international market.

For those in developed countries, the mechanism is an economical way to meet emission quotas, as making a relatively efficient factory in Europe is much more expensive than improving an outdated factory in China. So far, 15 developed countries have registered such projects where they act as the investor. Britain and the Netherlands account for 57 per cent of all projects.

'The driver for that is primarily the European Union emissions trading scheme started last year that gives reduction targets to about 20,000 firms in Europe which account for about 40 per cent of Europe's carbon dioxide emissions,' said Jonathan Thomas, manager of the climate change projects office in Britain's Department of Trade and Industry.

Reducing carbon dioxide emissions in an industrialised country costs US$50 to US$200 per tonne but only US$3 to US$20 per tonne in a developing country, said Charlotte Streck, the director of Brussels-based Climate Focus and a legal expert on environmental issues.

China is becoming an increasingly popular destination for companies looking to expiate their carbon sins. Before the end of the year, Britain's Climate Change Capital will close subscriptions to its US$1 billion carbon fund, the largest such private sector fund to date; it expects to invest 30 to 50 per cent of the money in China.

Rapid economic expansion and growing energy demand create plenty of potential projects while a clear and favourable regulatory regime helps make China an attractive CDM sponsor country.

The programme can help China reach some of its environmental goals, such as cutting air pollution by 10 per cent over the next five years and reducing energy consumption per unit of gross domestic product by 20 per cent by 2020.

A study by China's State Environmental Protection Administration recently estimated the cost of pollution at about 3 per cent of GDP in 2004 or 511.8 billion yuan.

Those concerns and goals created fertile ground for Mr Thomas when he led 15 British firms on a recent mission to southern China to find opportunities for generating carbon credits under the scheme. The group toured potential projects in Guangzhou, Chengdu, Guiyang, Chongqing and Beijing.

'What typically will happen is a British company will come in and say we'll put all the equipment on top of your landfill, extract the methane, generate all the power, prepare the documentation at the UN and get the project approved in exchange for a share of the credits,' Mr Thomas said.

While carbon dioxide is the global warming culprit most often talked about, other gases are more destructive and therefore reducing their emissions generates more credits. Methane, for example, is about 20 times as detrimental as carbon dioxide. Accordingly, methane reduction schemes generate 20 times more credit than carbon dioxide.

China sets a minimum price for the carbon credits sold by its factories and landfills. It is US$10 per tonne, up from about US$7 at the beginning of the year. The spot price for credits in Europe is volatile; as of Thursday it stood at US$11.25 per tonne after plunging in recent months.

Beijing charges the sponsor, to whom the US$10 is paid, a tax which varies from 2 to 65 per cent, depending on what kind of greenhouse gas is being captured or reduced. And companies that improve their energy efficiency and generate income from carbon credits are sure to enhance their appeal among investors.

'I think this is a very interesting investment avenue to pursue and more and more investment managers are going to have to take this into account when looking at a company,' said Jeremy Higgs, a managing director at Bowen Capital Management.

Bowen manages the Green Dragon Fund, which invests in environmentally friendly companies. 'These credits ... are not just a one-off. They are awarded over a period of years and this contributes to the bottom line,' Mr Higgs said.

Hong Kong's Noble Group has been making use of its extensive network of contacts around the world in many of the dirtiest industries - energy, steel and commodities - and generating extra income from them by helping them clean up their operations in return for carbon credits.

Noble recently closed a deal with Jinan Iron and Steel Group to buy 12.3 million tonnes of emission reduction credits in one of the largest projects seen so far under the Kyoto Protocol. At current spot prices, the deal is worth about US$138 million. The firm generates credits by capturing and using waste gases from the steelworks. The project is predicted to run from next year to 2012.

China has only 32 registered CDM projects, accounting for less than 8 per cent of the global total. But the UN expects China to make up more than 44 per cent of annual carbon credits that are registered in the world, with Brazil, India and South Korea as distant followers. Sources estimate China's share could be as large as 60 per cent and Noble says it is aware of 285 projects under way in the country.

Thorsten Ansorg, managing director of the carbon credit unit of Noble, said China and India have both created regulatory structures favourable to the CDM programme, attracting international carbon credit brokers and buyers. However, the UN approval process can be daunting. Mr Ansorg estimates 30 to 50 per cent of firms that apply to the UN are turned down.

'A lot of companies do a sloppy job of that. They smell easy money but then they are bitterly disappointed when they are turned down by the UN,' Mr Ansorg said.

Setting up a CDM project with the help of someone who has done it before takes from 18 to 24 months if all goes smoothly, he said.

After finding an inefficient factory or industrial site with the potential for energy savings and clean-up, a buyer must also convince the local sponsor that the CDM programme will offer long-term gains.

While profits from selling carbon credits may grab headlines, the firms can also reap savings from reduced energy use, an improved corporate image and less environmental liability.

'The rate of return is great because the firm's efficiency improves and there's a long domino chain reaction of additional benefits,' said Mr Ansorg. 'These companies are run by ordinary businessmen, they want to see value. And they're traders, so they bite the penny.'

Additional reporting by Nevin Nie

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