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.

Norway has made a point of administering its petroleum resources using three distinct government bodies: a national oil company (NOC) engaged in commercial hydrocarbon operations; a government ministry to help set policy; and a regulatory body to provide oversight and technical expertise.  In Norway's case, this institutional design has provided useful checks and balances, helped minimize conflicts of interest, and allowed the NOC, Statoil, to focus on commercial activities while other government agencies regulate oil operators including Statoil itself.  Norway's relative success in managing its hydrocarbon resources has prompted development institutions to consider whether this "Norwegian Model" of separated government functions should be recommended to other oil-producing countries, particularly those whose oil sectors have underperformed. 

Seeking insight into this question, we study eight countries with different political and institutional characteristics, some of which have attempted to separate functions in oil in the manner of Norway and some of which have not.  We conclude that while the Norwegian Model may be a "best practice" of sorts, it is not the best prescription for every ailing oil sector.  The separation of functions approach is most useful and feasible in cases where political competition exists and institutional capacity is relatively strong.  Unchallenged leaders, on the other hand, are often able to adequately discharge commercial and policy/regulatory functions in the oil sector using the same entity, although this approach may not be robust against political changes (nor do we address in this paper any possible development or human welfare implications of this arrangement). 

When technical and regulatory talent is particularly lacking in a country, better outcomes may result from consolidating commercial, policy, and regulatory functions in a single body until institutional capacity has further developed.  Countries like Nigeria with vibrant political competition but limited institutional capacity pose the most significant challenge for oil sector reform: unitary control over the sector is impossible but separation of functions is often impossible to implement.  In such cases reformers are wise to focus on incremental but sustainable improvements in technical and institutional capacity.