<Chapter 4> China-Japan CDM: Realizing Regional Environmental Benefit?

Abstract

Recently, the Japanese government and entities have become more active in locating profitable CDM projects all over the world. China has revised its skeptical attitude toward the CDM and has become more active. This change has prompted Japanese entities to invest in several CDM projects in China. However, few CDM projects have been implemented at thermal power plants in China despite the large mitigation potential for local and transboundary environmental damage. This chapter explores how financial aspects discourage investment in such CDM projects. The main findings are as follows: (a) Japanese entities exclusively pursue the cost-effective acquisition of certified emission reductions (CERs) through the CDM, and they take sustainable development impacts into consideration only as far as to get local people to accept the project; (b) CDM-specific risks, additionality and non-commercialized requirements, and China’s CDM rules raise perceived credit risks to lenders which makes it difficult for project developers to secure a financial package for large-scale, long-term CDM projects such as thermal power CDM projects; (c) China’s restrictive foreign direct investment (FDI) policy in the power sector, coupled with a less transparent approval process for project finance, forces foreign developers to finance by equity or private commercial loans with less favorable terms of conditions, which leads to investment in small-scale coal-fired thermal power plants that are banned under the recent SO2 emissions control policy in China; and (d) recent SO2 emissions control policy on flue-gas desulfurization (FGD) installation discourages energy-efficiency and fuel conversion at coal-fired power plants, which have large mitigation impacts on transboundary acid rain.