The Clean Development Mechanism (CDM) is the leading international carbon market and a driving force for sustainable development globally. But the eruption of controversy over offsets from Chinese wind power has exposed cracks at the core of how carbon credits are verified in developing economies. It has become almost impossible to determine whether offsets from Chinese wind are "additional" and that they in fact represent "real" reductions beyond business as usual. Unless this problem can be resolved, it threatens to spread beyond wind in China and could threaten the ability of carbon markets to deliver the mitigation demanded by international climate policy.

In 2009 the CDM Executive Board (EB) shocked the carbon market by forcing an unprecedented review of whether multiple Chinese wind projects satisfied UNFCCC additionality requirements. CDM investors reeled as the safest CDM bet became the riskiest; the Chinese government publicly criticized the UN's oversight of carbon markets; and the CDM EB prepared itself for an unprecedented fight over how carbon offsets could be verified in the world's largest CDM market.

At the center of the controversy is the Chinese power tariff for wind.

When the EB observed decreases over time in power tariffs granted by China's National Development and Reform Commission (NDRC) to wind projects, it became concerned that China might be manipulating power tariffs in order to guarantee additionality and subsidize its domestic wind development with international finance. If the Chinese government were controlling additionality, then the CDM's ability to validate carbon offsets would be dealt a near‐lethal blow because the problems posed by Chinese wind extend to nearly all power sector projects in almost every developing country. If offsets cannot be credibly verified, then the integrity of emissions caps set by the Kyoto Protocol is directly threatened.

The Chinese wind controversy therefore has direct implications for the design and negotiation of any successor to the Kyoto Protocol. Despite largely failed negotiations in Copenhagen, the design of reliable, efficient carbon markets remains the world's most serious prospect for international cooperation. The developed world has committed USD 30 billion in climate aid by 2012, but the majority of these funds will likely have to be private capital delivered through markets. In order for carbon markets to avoid controversy and function effectively, the lessons from the Chinese wind controversy must be used to implement key reforms.

This report examines the application of additionality in the Chinese wind power market and draws implications for the design of effective global carbon offset policy. It demonstrates the causes of the wind power controversy, highlights underlying structural flaws in how additionality is applied in China, and charts a reform path that can strengthen the credibility of global carbon markets.

(Excerpt) According to climate scientists, averting the worst consequences of climate change requires that the increase in global temperature should be limited to 2°C (or 3.6°F). to achieve that objective, global emissions of green house gases (GHGs)—the main human cause of global warming—must be reduced to 50 percent of 1990 levels by 2050.

The key to successful climate change abatement at those scales lies in leveraging the collective actions of developed and developing countries. Cumulatively, developed countries have been responsible for most human emissions of GHGs. that picture will be quite different in the future as emissions from the developing world take over the top mantle. Given this dynamic, there is a general agreement internationally that developed countries will lead emissions reductions efforts and that developing countries will follow with “nationally ap- propriate mitigation actions.” turning that agreement into environmentally beneficial action requires close international coordination between the developed and developing countries in allocating the responsibility for the necessary reductions and following up with credible actions. However, the instruments employed so far to promote the necessary collective action have proved to be insufficient, unscalable, and questionable in terms of environmental benefit and economic efficiency.

Currently, the most important and visible link be- tween developed and developing countries’ efforts on climate change is the Clean development Mechanism (CdM). the CdM uses market mechanisms—the “carbon markets”—to direct funding from developed countries to those projects in developing countries that lead to reductions in emissions of warming gases. In reality, the experience with the CdM has been mixed at best since its inception in 2006. while the CdM has successfully channeled funding to many worthy projects that reduce emissions of warming gasses, it has also spawned myriad projects with little environmental benefits. overall, the CdM has led to a significant overpayment by developed countries for largely dubious emissions reductions in developing countries.

Programs to distribute improved biomass stoves have traditionally been unsuccessful, despite enormous potential health and climate benefits. This research note helps explain the reasons for this by considering three main prerequisites for technology adoption by the poor. The first success factor is motivation on the part of customers to adopt the new product. When motivation does not exist initially, it must be created through education, social marketing, or improved design. The second essential component is that the product be affordable, be it through disposable income, financing, or subsidies. Finally, the success of a product is dependent on the level of user engagement necessary to take advantage of it.

Improved cookstoves rank poorly on all three dimensions: their benefits are rarely valued highly by customers at the outset, they are expensive, and they require a significant change in lifestyle to be put into use.

These three potential barriers to adoption are relevant to any product aimed at consumers at the "bottom of the pyramid" in income. They help explain why some products (for example, Coca-Cola and cell phones) have penetrated markets rapidly while others such as cookstoves have achieved very limited penetration.

The capture and permanent storage of CO₂ emissions from coal combustion is now widely viewed as imperative for stabilization of the global climate.  Coal is the world’s fastest growing fossil fuel.  This trend presents a forceful case for the development and wide dissemination of technologies that can decouple coal consumption from CO₂ emissions—the leading candidate technology to do this is carbon capture and storage (CCS). 

China simultaneously presents the most challenging and critical test for CCS deployment at scale.   While China has begun an handful of marquee CCS demonstration projects, the stark reality to be explored in this paper is that China’s incentives for keeping on the forefront of CCS technology learning do not translate into incentives to massively deploy CCS in power plant applications as CO₂ mitigation would have it.  In fact, fundamental and interrelated Chinese interests—in energy security, economic growth and development, and macroeconomic stability—directly argue against large-scale implementation of CCS in China unless such an implementation can be almost entirely supported by outside funding.  This paper considers how these core Chinese goals play out in the specific context of the country’s coal and power markets, and uses this analysis to draw conclusions about the path of CCS implementation in China’s energy sector. 

Finally, the paper argues that effective climate change policy will require both the vigorous promotion and careful calculation of CCS’s role in Chinese power generation.  As the world approaches the end of the Kyoto Protocol in 2012 and crafts a new policy architecture for a global climate deal, international offset policy and potential US offset standards need to create methodologies that directly address CCS funding at scale.  The more closely these policies are aligned with China’s own incentives and the unique context of its coal and power markets, the better chance they have of realizing the optimal role for CCS in global climate efforts.