China Dams Reveal Flaws in Climate-Change Weapon

Carbon Credits

JOE McDONALD & CHARLES J. HANLEY / AP 25jan2009

XIAOXI, China – The hydroelectric dam, a low wall of concrete slicing across an old farming valley, is supposed to help a power company in distant Germany contribute to saving the climate — while putting lucrative "carbon credits" into the pockets of Chinese developers.

But in the end the new Xiaoxi dam may do nothing to lower global-warming emissions as advertised. And many of the 7,500 people displaced by the project still seethe over losing their homes and farmland.

"Nobody asked if we wanted to move," said a 38-year-old man whose family lost a small brick house. "The government just posted a notice that said, 'Your home will be demolished.'"

The dam will shortchange German consumers, Chinese villagers and the climate itself, if critics are right. And Xiaoxi is not alone.

Similar stories are repeated across China and elsewhere around the world, as hundreds of hydro projects line up for carbon credits, at a potential cost of billions to Europeans, Japanese and soon perhaps Americans, in a trading system a new U.S. government review concludes has "uncertain effects" on greenhouse-gas emissions.

One American expert is more blunt.

"The CDM" — the 4-year-old, U.N.-managed Clean Development Mechanism — "is an excessive subsidy that represents a massive waste of developed world resources," says Stanford University's Michael Wara.

Forced relocations have become common in China as people in hundreds of communities are moved to clear land for factories and other projects, provoking anger and occasionally violent protests. But what happened here is unusual in highlighting not just the human costs, but also the awkward fit between China's authoritarian system, in which complaints of official abuse abound, and Western environmental ideals.

Those ideals produced the Clean Development Mechanism as a market-based tool under the Kyoto Protocol, the 1997 agreement to combat climate change. The CDM allows industrial nations, required by Kyoto to reduce emissions of gases blamed for global warming, to comply by paying developing nations to cut their emissions instead.

Companies thousands of miles away, such as Germany's coal-burning, carbon dioxide-spewing RWE electric utility, accomplish this by buying carbon credits the U.N. issues to clean-energy projects like Xiaoxi's. The proceeds are meant to make such projects more financially feasible.

As critics point out, however, if those projects were going to be built anyway, the climate doesn't gain, but loses.

Such projects "may allow covered entities" — such as RWE — "to increase their emissions without a corresponding reduction in a developing country," the U.S. Government Accountability Office (GAO) said in its December review.

The system's defenders call it essential for hard-pressed industrialized nations to meet their Kyoto quotas, and say the CDM's standards are being tightened.

"It's not as if we're printing money in a garage," Yvo de Boer, U.N. climate chief, said of the credits. "Lots of legitimate questions are being asked," he acknowledged to The Associated Press, but "that's why I'm happy we have a transparent process."

That transparency — online project documents and a U.N. database — allowed the AP to analyze in detail this exploding market, which attracts projects ranging from small solar-power efforts in Africa, to emissions controls on giant chemical plants in India and China.

The AP has found that hydroelectric projects, whose climate impact is most widely questioned, have quickly become the No. 1 technology in the CDM, and China in particular is rushing in to capitalize.

The Chinese now have at least 763 hydro projects in the CDM approval pipeline and are adding an average of 25 a month. By 2012, those projects alone are expected to generate more than 300 million "certified emission reductions," each supposedly representing reduction of one ton of carbon dioxide. Even at recent depressed market prices, those credits would be worth $4 billion.

If the United States enters the Kyoto system, as proposed by President-elect Barack Obama, it would be the biggest player in a market expected to be worth hundreds of billions a year by 2030.

Here in central China's mist-shrouded Zishui River valley, evicted farmers worry not about carbon-market billions, but about the thousands of Chinese yuan doled out to compensate them for lost homes and farmland.

Xiaoxi residents said that when they were evicted in 2005 to make way for the dam and its 4-square-mile reservoir, officials paid too little for condemned homes and forcibly removed owners who held out for more.

They said payments for losing their rights to state-owned land, where they grew beans and squash, were far below China's legally required minimum, which they said requires payment of the value of at least five years' harvests.

Residents spoke with the AP on condition their names not be used, to avoid trouble with authorities.

The dam's state-owned builder, Hunan Xinshao Xiaoxi Hydropower Development Co., defended its dealings with the people of Xiaoxi.

"The compensation standard we adopted was relatively high compared with similar projects and was in accord with government regulations," said Wang Yi, assistant to the company's general manager.

For their homes, people said they were paid government-set prices of $4.60 to $5.70 per square foot. But such payments didn't go far, even in this remote town surrounded by small tin mines and steep, wooded hills.

"What I got certainly was not enough to buy a new place. We had to borrow more," said a man who stood holding his 1-year-old grandson in a street lined with new apartment buildings where some relocated families have moved.

He said officials refused to discuss compensation for thousands of yuan he had spent to fix up his family's house. "I refused their offer, but they forced us out and demolished it," he said.

The dam company says local surveys found overwhelming support for the project, with 97 percent of 212 respondents saying they were satisfied with their compensation. But people interviewed in Xiaoxi said they were not contacted for such surveys.

The CDM money has spawned an industry of consultants who help Chinese companies assemble bids for emissions credits, and of U.N.-certified "validators," firms that then attest that projects meet U.N. standards.

For Xiaoxi, the developer hired Germany's TUEV-SUED as validator, and then commissioned it again later to confirm that the project complied with European Union and German government requirements on "stakeholder consultation" — that local people approve of the project beforehand.

The TUEV-SUED report acknowledged that "the concerned villagers and their leaders were not involved in the decision process." But it contended the guidelines' "essence" was fulfilled because those affected "have improved their living environment."

The German Emissions Trading Authority approved Xiaoxi credits early last year, but that government agency's Wolfgang Seidel now tells the AP it is investigating questions newly raised about Xiaoxi. Julia Scharlemann, spokeswoman for beneficiary utility RWE, said it also was "making our own inquiries" regarding Xiaoxi.

A key question from environmentalists, led by the U.S.-based group International Rivers, is whether projects meet the CDM test of "additionality" — that they contribute to making real reductions of greenhouses gases rather than be business-as-usual projects capitalizing belatedly on the CDM bonanza.

At Xiaoxi, where the dam should be operating by 2010, construction began in 2004, two years before the developers applied for CDM credits, suggesting it would have been built without CDM money.

Company official Wang counters that CDM money will help pay retroactively for expensive Italian technology needed to cope with the site's complex geology. "Without the money from trading emissions credits, the project would be unprofitable," he said.

Environmentalists also point out that hydro power has long been a national priority in China. Since the 1990s — long before the CDM — the Chinese have added an average 7.7 gigawatts a year of hydro power, equivalent to six Hoover Dams annually, International Rivers reports.

In other words, Chinese planners aren't suddenly replacing emissions-heavy coal-fired power plants with emissions-free dams.

The Xiaoxi project design document, in fact, says Chinese regulations would block the building of such a relatively low-output coal plant here. But that's how planners determined the "emissions reductions" from the $183-million, 135-megawatt dam — by calculating how much carbon dioxide a 135-megawatt conventional power plant would produce instead.

That bottom line — some 450,000 tons of global-warming gases each year — would be added to RWE's permitted emissions if it buys the Xiaoxi credits, at a current annual cost of $8 million. And such calculations will be repeated at 37 other Chinese hydro projects where RWE will buy credits.

All told, the 38 are expected to produce more than 16 million CDM credits by 2012, legitimizing 16 million tons of emissions in Germany, equivalent to more than 1 percent of annual German emissions.

At today's low market prices, those credits would be worth some $300 million, paid to Chinese developers and presumably billed to German electricity customers, who by 2007 were already paying more than double the U.S. average rate per kilowatt-hour.

Utilities from Italy's Edison to Tokyo Electric are making similar deals for hydro-project credits in a dozen other countries, from Peru to India to Vietnam.

Rather than reduce their own emissions, "firms in developed countries are buying offsets that don't represent real behavioral change, real reductions in emissions," said Wara, the environmental law professor.

The U.S. GAO investigators said they learned that middlemen sometimes manipulate project paperwork to show a need for CDM financing, and they believe "a substantial number" of projects have undeservedly received credits.

The CDM system "can be 'gamed' fairly easily," said German expert Axel Michaelowa, both a critic and a CDM insider, as a member of the U.N. team that registers CDM projects.

But Michaelowa said the CDM remains "a crucial bridge between industrialized and developing countries." It has problems but they can be solved, he said.

Christiana Figueres, a Costa Rican ex-member of the board overseeing the CDM, echoed Michaelowa's view. She said it's crucial to encourage China in particular, whose coal power plants make it the world's biggest emitter of carbon dioxide, to build clean-energy facilities. And she counters critics who oppose dams in general because of their environmental impact.

"We cannot continue to demonize hydro," Figueres told the AP.

She and R.K. Sethi, the CDM Executive Board's Indian chairman, both pointed to reforms since 2007: A reinforced U.N. oversight staff, a validators' manual with stringent standards, and a growing number of board reappraisals of validator findings.

In two recent dramatic steps, the board suspended the CDM's most active validator, the Norwegian firm DNV, questioning its project assessments, and it rejected its first Chinese hydro project — after registering 139 others for credits. The project wasn't "additional," the board said, rejecting DNV's validation that it was.

But environmentalists say a total overhaul is needed, shifting from project-by-project assessments that invite "gaming," to a negotiated regime whereby the developed world, through aid funds, subsidizes emissions cuts in the developing world more broadly, industrial sector by sector.

As atmospheric carbon dioxide continues to reach record levels, threatening disruptive warming this century, the CDM pipeline continues to swell, with 4,364 projects worldwide approved or awaiting approval, one-quarter of them hydroelectric.

Here in Xiaoxi, meanwhile, where project credits await U.N. approval, dam construction jobs have produced an economic boomlet, but it's only temporary and people's grievances are not.

One group, hopeful still for a hearing, has written to authorities with their plea for more yuan for farmers' lost way of life.

"We strongly request that they give us an explanation and a satisfactory resolution," they wrote.

Joe McDonald reported from China, and Charles J. Hanley from New York. Associated Press Writer Patrick McGroarty in Berlin contributed.

On the Net:

• U.N. CDM program
• UNEP CDM pipeline

source: 25jan2009

Clean Development Mechanism Must Change

The New Nation (Bangladesh) 5jan2009

The Clean Development Mechanism (CDM) is up for review and there are several proposals to reform the process. The mechanism has always been under severe criticism, since its inception, on various accounts, ranging from its philosophical principles to its administration.

The mechanism was created to help the developing nations to access finance required to implement projects that would reduce emissions below a certain defined level. On the other hand, the same process is also expected to help developed nations to reach their emission reduction targets by paying for emissions avoided in the developing nations. But, over a period, the practice has turned out to be a process that has hardly helped avoid emission in the developing countries; moreover, it has provided emissions credits to the rich countries at a cheap rate.

>From its inception, the operations to promote 'clean' development through CDM have remained questionable. The most controversial operative in the game remains the Designated Operational Entity (doe), or consultants accredited to the CDM Executive Board. These consultants are paid by project proponents even as they work for the board to validate a proposed project. This conflict of interest makes CDM an opaque process. It is no wonder these consultants figure pretty high in the reform agenda. It is obvious in the climate negotiation parties acknowledge this faulty system and so are looking for changes.

Suggestions range from ensuring quality work 'through, for example, the accreditation process and frequent, in-depth spot checks of their work', to eliminating them by employing trained staff within the secretariat to validate the projects.

Stories abound on how these consultants lie in proposals to make projects look fit for certified emission reductions (CERS). The deception has resulted in approval of projects that hardly avoid unclean processes, are unsustainable in nature and get falsely tagged with additionality. Consideration of paying these consultants directly by the CDM board has also been suggested in the reform agenda. There is also a hint of changing the composition of the Executive Board by creating better representation of various parties involved in negotiations.

The mechanism is predicated on a list of activities for which credits are accepted. There is a growing demand to enlarge the list to include methodologies that can help avoid emission. Some of them are new technologies like Carbon Capture and Storage, that came much after the list was drawn up in 2001. But there are others, like the demand to include nuclear power in the CDM stable, that are seen to be just an easier way to earn credit for the developed world, which has failed to reach anywhere near its reduction targets.

One of the important proposals on the table, in terms of broadening the list of activities acceptable under CDM, is to introduce a sectoral approach in emissions reduction. The current mechanism allows only a programme of activities to be registered for generating CERS. More activities may be added to the programme if they meet the original methodology and criteria for approving the project. The new proposal will allow processing of CDM activities to be sector wide. If allowed, under the new CDM regime, the Indian cement industry as a sector can consider a project, including development, registration and ongoing verification, as an aggregate sectoral entity. There are variations in approaches by different parties on this proposal. But, whatever the approaches, sectoral CDM activities will generate a high volume of CERS and will lower the cost of administration and technical assessment. On the other hand, there is also a fear that these projects will probably lower the price of CERS, by increasing its supply, without steps being taken for deeper cuts in the industrialised world.

Similarly, an inclusion of new nuclear power stations as CDM activity will pump up the supply of CERS significantly. Like the sectoral approach, this too will decrease the price of CERS. Both these approaches will reduce the burden of domestic mitigation on the part of rich countries as they will have access to large volume of CERS at a lower rate. In practical terms, this boils down to global mitigation being shouldered by developing countries at a cheap rate. In the case of nuclear power being a CDM activity, the incentive to develop renewable options will minimise, say critics.

A sudden surge by developed countries to break down the developing nations as one entity has also left some marks in certain CDM proposals. Currently, according to the spirit of the UNFCCC, any non Annex I country could host a clean project and sell CERS to an Annex I country. A new idea has been mooted to approve projects based on a country's development index. It must be noted that, in recent months, developed nations have been arguing that there are various stages of development among the developing nations and, thus, they should not be treated as one. There are speculations to use either a country's GDP or GHG emission per capita to decide the nature of projects a country can derive CERS from. It will be difficult to get this idea ratified as developing countries, specially stronger economies within the bloc, are expected to oppose it tooth and nail. There are also other worries of incorporating the dynamic nature of the prescribed indices into the mechanism. It will be difficult to decide continuation of a project if a host country's GDP or GHG emissions per capita go up during the project period.

CDM has always been criticised as it does not push the rich countries to take a deep cut in their emission, badly needed to stay within a 2ºC rise in global temperature. On the other hand, it is not surprising developing countries like India and China have maintained a near-monopoly in the CDM market with projects that do not reduce emissions substantially. A market-driven corrupt practice has also taken toll on the nature of the projects that get validated. Most of the projects selling CERS are not necessarily environmentally sound practices.

The largest CDM reduction has taken place for HFCS, and that can be linked to the market. The biggest business possible in the CDM market remains avoiding hfc-23, a gas almost 12,000 times more potent than co2 to cause global warming, as this can earn higher number of CERS. It is argued the refrigerant industry can earn almost double from CERS through destroying hfc-23 than what they earn from selling refrigerant. A CDM possibility actually signals the producers to produce more refrigerant.

The condition of additionality is the biggest hit in such a market operation. Michael Wara and David Victor of Stanford University, in their publication "A Realistic Policy on International Carbon Offsets", clearly show all Chinese new hydroelectric, wind and natural gas-fired plants have applied for CDM, arguing they could not achieve these projects without additional funds. Wara and Victor find it impossible to believe China was not in a position to generate any hydro, wind and natural gas-fired power at all without credit money coming in.

Easy and corrupt practices within CDM lead developing countries to have relaxed efficiency norms of energy use, as it helps them to show avoidance in a CDM project. It would have been more effective if the mechanism had helped developing countries go for ambitious norms and then get help from credit money to implement those projects, such as public transport and rural electrification through renewables, that will allow these countries achieve higher efficiency and sustainability.

The biggest barrier to reinventing the world's energy system is the price of the low-carbon technologies. The Intergovernmental Panel on Climate Change's fourth assessment report has concluded that a carbon tax (or price) of us $50-100 on a tonne of co2 equivalent is needed to make deep cuts in emissions in the world.

It is for this reason that a new-look CDM must include a minimum floor price, which will ensure only high end or transition technologies will get into the system. To begin with, the entry level price could be pegged at us $30-50 to provide the incentives for structural change. Currently, only EU and Japan are large buyers of CERS. A few more countries will be joining in future. But the biggest demand for credit will come from the us if they join the market. This high demand may increase the price of carbon in the future.

But till then, carbon price, like most other goods and services in a market condition, simply externalises the real cost of climate change. Most tellingly, a lower price of carbon will never make the options of renewables attractive.

(CSE/Down To Earth Feature Service)

source: 25jan2009