ANALYSIS - China's Fierce Kyoto Rules Irk Foreign Investors
Date: 25-Sep-06
Country: CHINA
Author: Emma Graham-Harrison
The manager of China's largest wind farm is winding up negotiations on his first deal to sell credits for reducing emissions of carbon dioxide, which he expects to rake in up to US$500,000 a year in extra revenue from 2007.
"It's important for us but I'm not relying on it when we do our budgets, because it's like food from heaven. It suddenly comes down one day but you don't know when it will stop," Lu told Reuters on a windswept plain in northwestern Xinjiang region where turbines have been spinning for well over a decade.
Foreign investors seeking new projects under the UN Clean Development Mechanism (CDM) say they understand his caution, as Beijing's curbs on foreign ownership and government-set price floors threaten China's lead in a market that could be worth up to US$100 billion a year by 2050 for poor countries.
Under the CDM scheme, projects to cut emissions of greenhouse gases in developing nations can sell credits for the reductions on specialised exchanges in richer nations or directly to firms that overshoot government emissions targets.
Beijing currently accounts for 42 percent of expected annual reduction credits, with around 80 mostly large-scale projects already set to stave off the equivalent of over 70 million tonnes of carbon dioxide emissions a year.
It has secured pole position in the booming global CDM market -- despite the strict controls -- because of better engineering skills than India and a faster developing energy sector than Brazil, its two main rivals, investors say.
NATIONAL RESOURCE
Beijing has called for developed countries to take more responsibility for cutting carbon dioxide belched out as they grow their economies, and was initially sceptical about the CDM system, worrying it let them pay their way out of obligations.
Although it has now come round to the system, the government has insisted that the main benefits of projects -- both financial and technological -- should be reaped by China.
Uniquely among the main competitors for the cash, Beijing considers emissions reductions a national resource like oil or gas and accordingly limits overseas investment in projects to under 50 percent, frustrating foreigners who want total control.
The government also effectively sets a floor price for the credits -- although this is not laid out explicitly -- which has been rising even as the European market for them stumbles.
Funds warn they need healthy returns to justify putting cash into a fledgling market currently set to wind up in six years.
"They should be careful not to kill the goose that lays the golden eggs, by trying to outsmart long-term investors," said Laurent Segalen, at the European Carbon Fund in Paris, which aims to have US$100 million invested in China at the end of the year.
"Six months ago, China was way ahead in terms of attractiveness. Now it's still ahead but Brazil and especially India are catching up, and we foresee China losing market share," he added.
WIND POWER FRUSTRATIONS
Unhappiest of all are the wind power producers, who under Chinese law can set up wholly foreign-owned wind farms but say they are forced into joint ventures because the power tariff systems make them unprofitable without an emissions sideline.
"If you want a project you need a Chinese partner, which means you are handing over control, putting risk in the hands of someone who doesn't have the experience you need," said one frustrated industry insider who declined to be named.
"I've been to hills with a northerly prevailing wind and the turbines are clustered around the bottom of the southern slope."
China argues that both the nature of the emissions and the system that gives them value, or certified emission reductions (CER), mean its insistence on public ownership is justified.
"A CER (is) a kind of public-owned resource of the host country, similar to other natural resources," Lu Xuedu, Deputy Dire
