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Asia's int'l carbon trade cools as nations turn to building domestic markets

BANGKOK -- Hideki Sawano has attended many farewell parties recently. His team had 20 carbon traders in 2008; today, there are only seven.

Working with Japanese trade giant Sumitomo Corp., Sawano buys carbon credits from Asia and sells them to European emitters. But as the demand for the credits shrank, so did the size of his team.

Such market shrinkage can happen to businesses worldwide, but Asian traders like Sawano have felt this blow most sharply. They were the top traders in an international carbon emissions offset mechanism that once sustained a multibillion-dollar market, but lately, it seems to have lost its once-magical powers.

That magic was largely linked to the Kyoto Protocol, an international treaty to combat climate change. It gave birth to the Clean Development Mechanism (CDM), through which companies in developed countries can reduce their greenhouse gas emissions at a lower cost by sponsoring emissions-reduction projects in developing nations.

The CDM worked well for years. Over the past decade, it has prevented about 1 billion tons of climate-harmful gas from entering the air. It has helped developed nations meet mitigation targets in a manner that realized $3.6 billion in savings. It has also mobilized more than $215 billion in investments into the developing world, accelerating economic growth and boosting clean technology use.

But with the clock ticking toward the end of this year, when the first phase of the treaty is due to expire, carbon traders can't stop wondering who will be their next clients. The uncertain future has already eclipsed market demand and dropped carbon prices to as low as 10 percent of their peak in 2008.

The United Nations, which supervises the CDM, seems worried. In a recent report, it notes that although nations have introduced their own solutions to reduce emissions, those new tools will take years to bear fruit. So if the CDM collapses, the United Nations says, that will seriously rein in international success in using carbon markets to battle climate change.

Will 'Sleeping Beauty' arise again?

Ministers from all over the world agreed last year at the U.N. climate conference in Durban, South Africa, to work out a way for renewing the Kyoto Protocol by 2015, trying to create new momentum for the CDM. But carbon traders see a tough time ahead, regardless of how bright the long-term future might be.

"On the next stage, the CDM will be bigger, better and more efficient," said Ingo Puhl, managing partner at the Bangkok office of South Pole Carbon Asset Management Ltd. "But unfortunately, it is not happening right away.

"The CDM market is like the Sleeping Beauty. It is not dead, but it is sleeping," Puhl added. "We need to maintain heartbeat and pulse."

To remain alive until the "beauty" reawakens, Puhl's company and other CDM businesses are scrambling to diversify their revenue sources. While their methods vary, most have one in common: finding profits in Asia's growing desire to clean up its energy sources.

Back in 2005, when the CDM business began booming, carbon traders flooded into Asia for economic opportunities. Asian factories, particularly those in China, emitted a massive amount of greenhouse gases. And to carbon traders, that meant, sometimes, big money.

"Emissions reduction can only be made in places which have emissions," explained Shane Spurway, managing director at the Hong Kong office of Cadogan Capital Advisors Ltd., who set his foot in China during those early days of the CDM business.

"China has lots of [concentrated] emissions," Spurway said. "It is cheaper to send one team to China to do one project than sending five teams to South America to do five projects which will achieve the same amount of emissions reduction." In addition, Spurway said, he likes Beijing's supportive attitude toward the CDM as well as the few requirements needed for working with Chinese emitters.

The result: Asia topped the developing world in using the CDM, with two-thirds of carbon credits the mechanism generates originating from China and India. Other Asian countries, including South Korea, Indonesia and Vietnam, also earned places among the top 10 carbon credit producers under the CDM.

Asia's CDM boom generated billions of dollars of investment during the past years, despite a slow, dubious start. "When we invited Chinese for our CDM trading courses in 2002, not many people were interested," recalled Lu Xuedu, a former Chinese official who now works at the Asian Development Bank.

"I had to beg them to come and paid for their flight tickets, hotels and everything," Lu continued, with a laugh. "But as the CDM started to pick up, the number of our trainees went up. After 2005, the demand became so big that we couldn't handle it ourselves." As a result, Lu said, almost every Chinese province established study centers to turn local businesspeople into CDM professionals.

Rise fast, fall faster

And China isn't alone on that trend. Jay Mariyappan, who developed CDM projects in India, said that India's CDM sector also expanded rapidly since 2005, fueled by a high market demand.

"When I was there, I was working for a brokerage firm which had no presence in India at that time," Mariyappan recalled. "We certainly within a year went from nothing to three offices in New Delhi, Mumbai and Hyderabad. With project portfolio, we had 120 projects."

The bloom came off the CDM market in late 2009, after the U.N. climate change talks in Copenhagen, Denmark, failed to guarantee the future of the mechanism. Growing economic problems worldwide and a decline in the amount of greenhouse gases that factories emitted also cut the demand for carbon offsets.

In January 2011, the European Union -- the dominant buyer of Certified Emission Reductions (CERs), or credits approved under the CDM -- decided to ban a certain type of CER that Chinese and Indian companies specialized in, projects that involved the destruction of a byproduct from the manufacture of an industrial refrigerant called hydrofluorocarbon-23 (HFC-23) (ClimateWire, Jan. 24, 2011).

Because HFC-23 is 11,700 times more powerful as a global warmer than carbon dioxide, its CDM projects to destroy the gas were extremely lucrative. Some groups complained that more HFC-23 was being produced, just to create offsets by eliminating it. Since then, the European Union has focused on buying simpler CERs from poorer countries.

Nowadays, Mariyappan said, the CDM boom exists only in memory. In fact, many CDM businesses that had offices in almost every Asian country have shut down their operations and retain only one office for the whole region.

According to the U.N. report, carbon prices in the CDM market have declined 70 percent in the past year alone. And even after the price slump, selling carbon credits isn't an easy mission.

The other day, a group of Chinese CDM project developers were walking out from a carbon trading conference in Bangkok, complaining that they would go back home empty-handed.

"This year's conference is smaller than that of last year," a man said. "Last year's is smaller than two years ago," a second man added. A third man continued, "A room full of sellers, but no buyers, you can imagine how bad the market is."

A refocus on domestic trading

Many agree it is time to change. Among them is Edwin Aalders, CDM specialist at Norway-based risk management firm Det Norske Veritas.

"We had plenty years of the CDM that everything went well and moved forward," Aalders said. "Now we are in the state of repositioning ourselves."

Recently, Aalders suggested that a CDM project developer in Thailand continue in the business of installing solar panels for houses. But instead of touting carbon credits to Western emitters, Aalders said, this time the developer could target local utilities for selling solar power-generated electricity.

According to a government plan, one-quarter of Thailand's electricity consumption should come from renewable energy sources by 2021.

Milo Sjardin, head of Asia-Pacific at Bloomberg New Energy Finance, said that not only Thailand but also its neighbors have an appetite for renewables. Thanks to strong political backup this year, clean energy investment in the Asia-Pacific region will break into $100 billion for the first time, according to the institute's forecast.

"For 2012, Asia Pacific will continue to be the world's manufacturing powerhouse with respect to clean energy but will also be the biggest clean energy deployment market in the world," Sjardin said. Traditionally, that market has been Europe.

Made Hariyantha, managing director at Agrinergy, wants his company to cash in on this growth. Hariyantha's company, which previously focused on the CDM business, now aims at developing biogas projects in Indonesia.

But the company won't give up on the carbon business, either. Hariyantha, lined up with other CDM businesses in Indonesia, have been lobbying the government there to launch a domestic carbon trading system -- similar to the one in the European Union.

The proposal is currently under discussion. But Hariyantha said the government's commitment to carbon emissions reduction, combined with the nation's relatively healthy economy and the large amount of money local companies spend annually on social responsibility, is likely to turn the proposal into a reality.

"For CDM companies, this will save their business," Hariyantha said. "And for the nation, it will be an opportunity to show the world how Indonesia as a developing country is going to save the planet."

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