Carbon Market Watch

For fair and effective climate protection.

National appropriate mitigation actions to tackle additionality concerns of wind power in China (Newsletter #5)

01 Dec 2009

While eyes are set on the design of a flexible mechanism post-2012 during the upcoming COP-15, the Board could already give a spin to the upcoming discussions by eliminating technologies where additionality is highly unlikely from the CDM. In addition to Chinese wind power projects, this would be the case for Chinese and Indian large hydro power, gas and supercritical coal projects.

The Global Wind Energy Council (GWEC), the Chinese Wind Energy Industries Association (CREIA) and the Chinese Wind Energy Association (CWEA) lobby jointly for a target of more than 100 GW wind power in China by 2020, with a focus on electricity production rather than installed capacity, which would encourage maximum efficiency of wind farm development. Moreover, they want to ensure that “carbon markets will continue to play a role for the wind industry in China in a post-2012 climate agreement”. However, recent concerns about the additionality of wind projects in China have added serious uncertainties to this flourishing market.

Over the past few months, a large number of Chinese wind power projects were put on hold because the Executive Board fears that China may have lowered subsidies to the technology to ensure the projects qualify for the CDM and are using the CDM as a substitute for domestic action. Although investors and buyers are protesting heavily against this development, the Board is not yet convinced. During this meeting 7 out of 15 projects under review and almost half of the projects where review is requested are Chinese wind power projects.

According to a recent article in the New York Times, Chinese wind power production doubled in each of the past four years because of heavy pressure by regulators on the state-owned power companies to build more wind turbines. Moreover, the Chinese government also requires the country’s two state-owned electricity grid companies to pay more for wind energy than they do for electricity generated from coal, which still accounts for four-fifths of China’s electricity.

Most market players are heavily praising the rise of wind power but these strict regulations did not always achieve the desired results: The NYT article also suggests that power generation companies have responded to the regulations by building wind turbines in remote locations that have lots of wind but are not close to large users of electricity, like big cities or heavy industry, such as smelters or steel mills. The grid companies have been slow to build costly high-power lines to these remote locations, with the result that energy economists estimate that up to a quarter of China’s wind turbines are not actually producing electricity that anyone can use.

Industry is battling with the EB over reasons whether profitability of wind power in China and a lower tariff would impact the additionality of wind power projects. Many market players argue that the development of wind power tariffs since 2002 in China is the result of government policy and project proponents cannot be held responsible on grounds of the regulatory framework of the CDM.

However, going beyond regulatory discussions, CDM Watch is taking a step back to view the bigger picture of the present discussion.

CDM projects should be additional and avoid perverse incentives for governments (i.e. introducing policies which provide disincentives for low GHG technologies). But there is an inherent conflict between these two objectives. By ignoring E- policies (policies favouring low GHG emitting technologies), perverse incentives are avoided but many projects get registered which would be implemented anyhow and are therefore non-additional. Considering E+ policies would avoid the registration of non-additional projects but create perverse incentives. This dilemma was already extensively discussed by the Board in the past but the issue remains yet to be resolved.

Discussion on a new post-2012 flexible mechanism and in particular financing of national appropriate mitigation actions (NAMAs) could offer the way out of this essential dilemma. Unilateral NAMAs are supposed to be the contribution a developing country makes from its own resources. The point of MRV- financed NAMAs would be that the MRV financing covers the incremental costs of NAMAs. Therefore, once the NAMA system gets up and running, all unilateral and MRV-financed NAMAs should be taken into account when determining the baseline and additionality of CDM projects. In a robust NAMA financing system, new policies can be co- financed by developed countries without the trade-off of having to accept non-additional CDM projects.

In light of China’s recent announcement of its emission target, it is worth taking a look at the potential of wind in the CDM that currently accounts for over a third of newly approved projects, despite doubts over their eligibility. According to Point Carbon, seventeen of 48 CDM projects approved by China between 15 October and 13 November were wind projects. The full batch of projects approved by the Chinese government is expected to generate 12.17 million CERs annually. Of those, wind projects accounted for 4.27 million, more than any other project type.

It is difficult to argue that it is up to the project proponents to disprove that a project would rise above the benchmark if a tariff decrease would not have occurred based on the hypothetical assumption that this was possibly done as a direct result of the influx of CDM revenue. It is also true that there is no basis for the issue in the additionality tool, the VVM, or previous EB guidance for the determination of the additionality. However, given that there are political certainties confirming the deliberate adjustment of the tariffs to keep CDM money flowing, the Board must take action despite the lack of procedural support. An improved situation where developing countries are encouraged to explore their potential to the maximum must be envisaged. This development must under no circumstances hinder the development of renewable energy to replace domestic action for the sake of using benefits from the CDM.

Approving CDM credits to wind in China (or similar, mostly non-additional technologies) does damage in two ways: it creates CERs which do not represent real emissions reductions, and it creates a perverse incentive for China (and other countries) to reduce their support for these technologies. Not awarding such credits creates no such penalty; it arguably reduces the likelihood of a country supporting such technologies in the future, but this has yet to be demonstrated.

Action to be taken by the Board: The potential for the CDM to create perverse incentives for governments to weaken policies that lower emissions was one of the earliest criticisms of the CDM. We are finally seeing hints of perverse incentives in the wind sector in China. Avoiding perverse incentives must be one of the key drivers for reform of the CDM post-2012, since we need to be encouraging, not discouraging, climate-friendly policies. Renewable energies that need additional support would be better supported through financing for NAMAs.

Second, because additionality testing is inherently inaccurate, technologies with a high likelihood of being non-additional should be categorically excluded from the CDM. These technologies could possibly be supported in other ways such as through financing for NAMAs.

Technologies with a high likelihood of being non-additional include wind power in China (as per evidence provided in the latest rejections of Chinese wind power projects by the EB as well as by various news agencies, including the above-mentioned NYT and Point Carbon articles), gas and supercritical coal projects in China (Wara and Victor 2008) and large hydropower in India and China (Haya 2009).