Big step in carbon emission trading

cctv.com 12-20-2005 13:11

China's Ministry of Finance signed a Memorandum of Understanding with the World Bank today (Monday) in Beijing for collaboration in the design and development of a Clean Development Fund. In the meantime, the World Bank also signed emission reduction purchase agreements with two Chinese chemical companies. This marks an important step in China regarding the environmental protection and sustainable development.

The groundbreaking emission reductions purchase agreement with the World Bank is the largest emission reductions project on record. Through the 930 million US dollars contract, the two private chemical companies are expected to reduce emissions of about 19 million tons of carbon dioxide equivalent annually. Revenues resulting from the sale of emission reduction will be used to support sustainable development activities in China. The government will retain 65 percent of the revenues for investing in projects related to climate change through the newly established Clean Development Fund. And the Fund will finance climate mitigation projects in priority sectors such as energy efficiency, renewable energy and coal mine methane recovery and use.

The project provides a developing country like China with significant resources for sustainable development activities, and brings much needed liquidity to the global carbon market. The Clean Development Fund will receive revenue shares from all Clean Development Mechanism projects in the country from now on. With the project, China will move to the forefront of countries making contributions to global efforts to mitigate the effects of climate change.

background: Carbon finance

Carbon finance is the name given to the ingenious scheme of purchasing of greenhouse gas emission reductions in developing countries to offset emissions in the OECD countries. It helps the developed countries considerably lower their costs when lowering carbon emissions. In the meantime, it provides cash and business opportunities for developing countries. Now let's take a look at how this clever system works.

Climate change has prompted the world to deal with the challenge of collectively managing a global environmental issue with large but disparate economic consequences. The Kyoto Protocol attempted to bridge this gap between different economies and, for the first time, attempted to leverage the forces of the capital markets in solving the issue.

The Protocol defined reduction targets and a time frame for the signatory developed countries. As a result, the reduction of a ton of carbon, which was previously an unvalued and undefined entity, was transformed into a tradable commodity with an economic value. This led to the creation of a carbon asset and also signaled the birth of carbon finance. The opportunity resided in the fact that it was much cheaper to reduce carbon emissions in developing countries as compared with developed countries. At the same time, from an environmental perspective, it did not matter where or in which country these emission reductions occurred. The Kyoto Protocol thus incorporated three market instruments. They allow any country to finance the reduction of emissions in another country and get carbon credits which could be used to offset its own domestic emissions target. Moreover, this credit is totally tradable in an international commodity market.

Editor:Wang  Source:CCTV.com