So, what do you do?

Wrote this carbon market into for a British publication called China Dialogue. Hasn't been published yet, so I hope I don't get knocked for plagarism...

So, what do you do?

That inevitable question.

PR. Investment Banking. Consulting. Journalism. IT. My friend’s answers usually get a pleasant smile and nod.

My answer, “carbon trading,” rarely gets that reaction. I always wince a little before I throw it out there. Most people ask me what on earth carbon trading means. Others are horrified that I am paying Chinese companies to pollute. Once, a particularly pugnacious (and intoxicated) compatriot threw a fist at me. It’s not often that I hear, “Wow, carbon trading, that’s great.”

In a carbon market, an entity sets or is given a limit on how much greenhouse gas it can emit. If it isn’t able to meet this target in house, it can buy emission reduction credits from somewhere else. Carbon trading is the buying and selling of those reduction credits, known as carbon credits. Here in China, we develop emissions reducing projects that generate carbon credits used to offset emissions elsewhere.

Most of the time, I dig myself in deeper with that follow up. Buying and selling emissions reductions? Outsourcing to China? It just doesn’t go over well.

The scientific community has come to a consensus that climate change is real and its effects catastrophic. The carbon market is a very active response to the problem. According to Point Carbon, the leading carbon market news provider, the market traded 1.6 billions tonnes of CO₂ or equivalent in 2006, worth about 22.5 billion euro. That’s a lot of money in the name of climate change. So where is it going and how it is it making a difference?

Here in Beijing, day in and day out, I see firsthand what that carbon money is doing. China, with the world’s fastest growing economy and largest population, is poised to overtake the United States as the world’s greatest emitter of greenhouse gases. It is crucial that China build the infrastructure needed to curb its greenhouse gas emissions growth. Nonetheless, despite stellar year on year economic growth rates, China’s per capita GDP is still only one sixth that of the United States.

In 1997, when the Kyoto Protocol was being negotiated, parties were concerned that specific emissions caps would handicap economic growth for developing nations. Therefore, they did not give developing country signatories specific limits on their greenhouse emissions. To encourage the reduction of emissions in these developing countries, the Protocol established the Clean Development Mechanism, or CDM. This mechanism gives China, and all other developing countries, the practical assistance it needs to stop emissions without unfairly hindering economic growth.

The Clean Development Mechanism, and the carbon market in general, is based on the fact that the gases warming our planet are all being dumped into the same place, our atmosphere, regardless of where they come from. Abatement is abatement, regardless of where it happens. Therefore, under CDM, stakeholders from developed country signatories to the Kyoto Protocol, like the UK, invest in and transfer technology to greenhouse gas abatement projects implemented in developing country signatories like China. If these projects prove that they could not have been implemented without CDM support, they are issued carbon credits that can be used by developed countries to stay under their emissions caps.

CDM, simplified, works like this: I am a utilities company in the UK, a developed country signatory to the Kyoto Protocol, and am allowed to emit ten tonnes of CO₂ this year. I emit eleven. It costs me fifty euros to reduce a tonne of CO₂ at home. I pay a company in China, a developing country signatory, twenty euro to help build a wind power project. The project generates electricity that would have otherwise been generated by burning coal. Less coal is burned and the project reduces the amount of CO₂ that would have been emitted into the atmosphere by one tonne this year. The project would not have happened without my financing, so the worldwide net reduction in CO₂ emissions is still the same. This CDM funding gives China real incentives to develop the technology and training needed to get that wind project off the ground. Once it is up and running, companies gain valuable experience, which can be reapplied to more clean energy projects.

At the center of the mechanism is an intricate regulatory system that ensures project quality. Getting projects registered through the CDM process requires the support of both the developed and developing country host parties, verification by a certified third party standards body and the ultimate approval of the United Nations. Baseline emissions, what would have been emitted without CDM, must be clearly measurable and the project must be able to be strictly monitored. Finally, combinations of financial, investment, technological or common practice barriers must be strong enough to block the implementation of a project without CDM support.

So what is being done in China? One type of project far and away gets the most attention: the highly profitable HFC-23 destruction. Although the environmental benefits of destroying this highly potent refrigerant are unquestionable, the large amount of money HFC-23 factory owners make off CDM is highly controversial. Yet, because these projects are so profitable, they were developed first. HFC-23 is now the poster child for CDM.

Such a strong focus on HFC-23, however, presents a seriously skewed picture of CDM’s impact. China does hold a greater share of HFC-23 CDM projects than any other country in the world. Yet, of the eighty five projects in China that have passed through United Nations registration, only eight are HFC-23 destruction projects. HFC-23 project development has all but trickled to a halt. Four hundred and eighty eight new projects in China are preparing registration applications. Three of them are HFC-23 projects. Two hundred and sixty one are renewable energy projects.

Instead, the vast majority of CDM projects will make long term contributions to curbing China’s emissions growth. Many projects generate electricity through renewable sources, such as hydropower and wind power. The electricity generated by these sources displaces the electricity produced from fossil fuel burning power plants, which, in China, tend to burn coal. Less coal is burned and greenhouse gas emissions are thus reduced. Other projects generate electricity from waste heat recovered from industrial processes. Others capture methane gas emitted from working coal mines and utilize it to generate electricity. The owners of these projects, no matter how committed they are to the issue of climate change, aren’t able to practically implement them without financial support. The carbon market, through CDM, provides that. The fate of CDM after 2012 is unknown. Regardless of what happens, the infrastructure created by CDM projects will still be in place.

The impact of the carbon market extends beyond curbing Chinese emissions. The truth is, there just isn’t the space in a short article, or a dinner party introduction, to fully argue the merits and flaws of the carbon market. Nevertheless, just opening the conversation corrects misconceptions and starts a real discussion on how we can do it better. Let’s keep the dialogue going.