Carbon Credit Watch

Tale of two subsidies: Chinese government earns millions in carbon credit subsidies, while US trade officials cry foul

(December 17, 2010) The Chinese government is earning millions of dollars in tax revenue from the sale of carbon credits, while trade officials in the U.S. accuse it of unfairly subsidizing its clean energy industry.

China’s lack of transparency is now a cause for concern for the carbon credit market. While the trade dispute between China and the United States over clean energy subsidies intensifies, little attention has been paid to how China’s clean energy sector benefits from the United Nation’s carbon credit scheme that funds clean energy in the developing world and allows a government-run fund in China to allocate scheme earnings without public accountability.

The China CDM Fund, the government body in charge of investing funds earned from the U.N. carbon credit scheme, can tax the carbon credits and use the revenues to build environmentally and economically disastrous projects such as large-scale dams and nuclear plants—all under the guise of a national plan to address climate change. The fund simply applies a levy on projects within China that have earned revenue from the sale of carbon credits and then uses this money to fund other, supposedly “green” projects.

And because the money from the Fund is used according to the government’s plan to fight climate change, officials also say the funds could be directed to subsidies for the research and development of clean energy technologies such as wind and solar. Ironically, both the wind and solar industries are at the centre of the trade dispute being investigated by the Office of the United States Trade Representative, which alleges that China uses a range “of World Trade Organization (WTO)-inconsistent policies” to nurture its emerging “green” energy industry.

Trade officials take note.

Bloomberg reports that the China CDM Fund is expected to nearly double its holdings to 10 billion yuan ($1.5 billion) in 2012. To date, more than 229 million carbon credits, valued at approximately $3-billion have been issued to Chinese companies—accounting for around half of all credits issued to the developing world through the U.N’s Clean Development Mechanism (CDM).

Highlighting the absurdity of the carbon market, almost all of the money collected by the Fund comes from taxing the sale of carbon credits earned from contentious HFC-23 projects, which were recently accused of gaming the CDM and profiting from a perverse incentive to increase production of an environmentally-toxic substance known as HCFC-22. Many producers are earning more from “abating” HCFC-22’s by-product, the potent greenhouse gas HFC-23, than from producing the primary product, it is alleged.

China has also been previously accused of manipulating its policies to cash in on the CDM. Earlier this year the U.N. body in charge of regulating the CDM claimed that Chinese officials were manipulating the electricity market to ensure wind projects would receive carbon credits.

But arguably the biggest problem is that funds collected from taxing carbon credits and the government agencies that administer those funds are not accountable to the citizens of China.

“The officials could use that money for all manner of environmentally and economically disastrous manners—all in the name of climate change,” says Patricia Adams, Executive Director of Probe International. “And no one in the country would be able to stop them.”

According to the Asian Development Bank, which helped to finance start-up costs for the China CDM Fund, the Chinese government applies a levy of 65% on revenue for credits sold from HFC-23 projects, a levy of 30% from N20 project earnings and a levy of 2% from Renewable Energy and Energy Efficiency projects.

Jiao Xiaoping, deputy director general of the China CDM Fund, told Bloomberg that the fund is expected to be used for “low-carbon research and planning, equity investment, preferential loans to energy-saving and renewable projects.”

While U.S. officials accuse China of using a range of unfair practices to manipulate its green market, a U.N. run carbon credit program is openly subsidizing this very same clean energy industry. Meanwhile, the Chinese government is taxing this subsidy, placing the money in a fund that has no public accountability and then directing these funds to socially, environmentally and economically contentious energy projects like large dams and nuclear plants.

For a closer look at what projects are receiving funding through the CDM, see Probe International’s carbon credit database.

Brady Yauch, Probe International, December 17, 2010

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