CDM trades almost US$1bn in Q1: China grabs 66%

HONG KONG, June 9 — Over US$900 million of CO2 has been registered by clean development mechanism (CDM) projects in the first quarter of 2006 alone, according to a report by the World Bank’s Carbon Finance Unit, with 66% of that registered to China CDM projects.

The report, published in May, is presented by the World Bank’s Umbrella Carbon Finance fund, which completed registration of its second Chinese CDM project on Sunday.

Its two China projects and a third in the pipeline are both HFC23 reduction projects; the first was in Shandong, approved in March and at 10,110,117 tonnes CO2e reduction per year, China’s largest CDM project to date.

The Umbrella Fund’s most recent successful application is an 8,411,432 million tonnes CO2e per year HFC23 reduction project in Jiangsu Province: the buyers are listed as the Netherlands, Italy and Spain, the seller Jiangsu Meilan Chemical Company (JMC), a manufacturer of HFC22 refrigerant.

HFC23 reduction projects destroy HFC23 (a greenhouse gas) formed in the manufacture of HFC22 by chemical companies.

“In China, there are currently no compulsory regulations on emissions of HFC23, thus the HFC23 generated… is typically vented directly to the atmosphere,” says Enel’s registration document.

“This project is to install an incineration system to collect and decompose the HFC23 generated from HCFC 22 production at JMC. Currently, JMC has not ever recovered or sold the HFC 23 which is a byproduct of HCFC22 production to the market, the project then contributes to reducing emissions of HFC 23 as GHG, which would otherwise be released into the atmosphere if the project were not implemented,” states the document, and summarising the spirit of the CDM.

JMC has already begun storing HFC23 generated from the factory, with the completed registering of its proposal on Sunday. It is using technology from French firm Vichem, a firm engaged in providing continuous process technology for the decomposition of HFCs and other fluorocarbons by thermal oxidation worldwide.

The project will save 176.6 million tonnes CO2e over its 21-year life span.

HFC23 reduction will be big news in China. European utilities are even getting in on the act.

On Thursday, Italian utility Enel told a Reuters journalist the energy company was net short in the market and planned to buy “credits worth several million tonnes CO2e emissions (per year), at a double-digit level, which we will generate in China and India in 2007,” Fabrizio Barderi, head of Enel’s strategies and sales analysis department said.

“In India we are just buyers of credits. In China we are taking an active part in developing industrial projects,” he told Reuters.

In China, the projects were pending authorisations from the United Nations CDM board, but Enel told Reuters it aims to start earning CDM credits already in 2007 and has signed long-term emission reduction purchase agreements with Chinese partners, he said.

Enel Trade may be part of the World Bank Umbrella group’s Italy representation (a question to ask it) – but one project it is executing on its own is a solo CDM deal with Zhonghao Chenguang Research Institute of Chemical Industry. “Version 1.0” of the proposal was submitted to the United Nations on April 26, 2006.

In 2005, Enel emitted 56.2 million tonnes of CO2, above its 48.2 million tonnes quota – its Zhonghao Chenguang HFC23 deal would yield it a total of 2.1 tonnes CO2e per year average, for a total of 43.4 million tonnes CO2e over the 21.5 years of the project.

“Enel is surely a short operator on the CO2 market. That is why we want to do not only trading operations on the market, but also operations of the industrial character,” Barderi told Reuters.

Enel’s involvement with industrial operations of a Chinese CO2 reduction plant will give its emissions trading portfolio far more flexibility – much as investment banks may own physical power projects to hedge financial power trading books, Enel’s active role in HFC reduction in China shows it aims to be a major carbon trader, not a mere once-a-year purchaser of credits.

Obviously combining physical and financial assets – be they electricity generating plant and uptake agreements; or emissions reduction plant and carbon certificate trades – is nothing new to a utility such as Enel. Perhaps in emissions markets, traditional utilities will be able to use the energy trading experience they have picked up over the last few years, coupled with their expertise in all things physical, to conquer the emissions markets before the investment banks get a firm foothold. CDM is an excellent vehicle for them to do that.

Interestingly, JI has not taken off with nearly so much gusto. Its projects account for only US$4 million in the first quarter of 2006 – the pricing mechanism is seen as risky. CDM, on the other hand, has already proved its fit well with the European Emissions Trading Scheme, with many of the established ETS players such as Enel and Endesa becoming very active.

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