Posted by: Bruce Einhorn on December 2, 2009
Usually when foreigners take issue with China’s policy of subsidizing key industries, the gripe is Beijing’s being too generous with its handouts to local companies. Now the United Nations and China are squabbling over subsidies for alternative energy, and UN is complaining that Beijing is being too stingy. The Financial Times reports today that the UN’s Clean Development Mechanism (CDM) board, which is in charge of allocating carbon credits, “has suspended approvals for dozens of Chinese wind farms” because the board believes the government has cut back on subsidies to developers in order to qualify for carbon credits.
The concern is the Chinese are gaming the system, earning valuable carbon credits for wind-farm developers (credits that developers can sell on the open market) who don’t need the UN’s help because Beijing would have been giving them subsidies anyway to make sure the projects get built. “There’s suspicions in the UN about whether some projects need carbon credits,” Bloomberg News reports, quoting Liam Salter, business development director at carbon consultancy RESET. “Projects have to prove they need to have carbon credits to make them viable, and this is where they run into problems because there are already such favorable policies towards wind power in China.”
The FT quotes unnamed industry officials saying the CDM board has rejected “about 50” wind projects in China, although Lex de Jonge, head of the UN board, disputed that figure, telling the FT only “a handful” of Chinese projects were affected.
Any policy that denies developers carbon credits could undermine China’s effort to use wind to supply a big chunk of its electricity needs. China aims to spend some $16 billion on wind power over the next decade, with the goal of having 100 gigawatts of wind-generated power by 2020, compared to just 12 gigawatts last year.
Reaching that target without CDM-approved carbon credits won’t be easy. Steve Lyons, general counsel for China Wind and Energy, a Hong Kong company that helps develop wind-farm projects in China (and which we featured recently in a BusinessWeek special report on intriguing startups around the world) says foreign investors in Chinese wind projects depend on being able to sell carbon credits outside the country. Revenue from carbon credits can be up to 20% of a project’s revenues, says Lyons. “Without those revenues, a lot of investors would pull out, unquestionably,” he says. “For international developers, the return absolutely would not be high enough without the carbon credits.”
Lyons also disputes the CDM’s contention that Beijing is cutting back on subsidies in order to allow developers to qualify for carbon credits. In August, he argues, the Chinese government standardized subsidies across the industry for wind – “at a high level” – and maintained tax breaks, too. “The subsidies are at the same level they’ve been for years,” says Lyons. “They’re high enough that they bring people to the market.” For instance, the government-approved tariffs for wind-generated power are 25 fen (3.6 cents) above the price of power from coal-burning plants. That wind price can be nearly 100% higher than the coal price.
So what comes next? “China is unlikely to change its wind-power pricing formula to get the UN certification,” reports Bloomberg News, citing a Chinese official who requested to remain anonymous, adding “the economic planning body is working on an official response to the UN decision.” With some of the world’s most polluted cities, though, China is determined to reduce its reliance on coal, and having foreign investors picking up some of the tab for wind farms helps make that goal more achievable. If the UN holds fast and foreign investors become more skittish, China’s leaders will need to come up with a face-saving way to back down.