Revenues for China’s biggest sellers of U.N.-issued carbon credits shrunk last year to a tenth of 2012 values, choking off billions of dollars flowing to clean energy projects in the world’s top carbon-emitter.
China will now have less money to put into a stepped-up campaign to cut greenhouse gas emissions, clean its air and raise the share of fossil-free energy in its total mix to 15 percent by the end of the decade, from a current 8 percent.
The U.N.’s Clean Development Mechanism (CDM) is part of the 1997 Kyoto Protocol, an international effort to limit global climate change. The CDM allows projects in developing countries that can prove they reduce greenhouse gas emissions to earn credits, known as Certified Emissions Reductions (CERs).
The projects then sell the CERs to governments and companies in rich nations to help them meet emissions targets. Many of the projects also help fight local air pollution, such as when wind, hydro or other renewable energy replaces coal-fired power.
Since 2006, Chinese companies have been issued 873 million carbon credits, nearly two-thirds of the total. These have been sold in Europe and Japan to bring in at least $8 billion in profits that can be reinvested in new projects.
“The CDM has played an extremely significant role in the development of China’s renewable energy and energy efficiency targets by helping kick-start the deployment of … projects across China,” said Jeff Swartz, policy director at investor group the International Emissions Trading Association (IETA).
The carbon offsets generated in China had offered lucrative low-cost compliance options for emitters when European Union allowances traded at above $25. But after the financial crisis a slowdown in EU industry caused emission levels to drop, creating a huge oversupply of tradable carbon permits.
As the EU allowances fell below $5 each, historical fixed-price contracts for Chinese credits in the $10-$20 range brought huge losses to European carbon buyers. CERs are now valued at just 23 cents versus contract values tens of times higher.
That price difference has led many European buyers to delay issuing carbon credits or to try to renegotiate contracts, and Chinese project owners are threatening lawsuits.
The exact number of Chinese projects on hold is unknown. Legal experts estimate it to be in the hundreds, with one lawyer saying 95 percent of the CDM contracts have been breached.