One of the main issues facing the international community as it tries to create a post-2012 climate policy is how to engage developing economies like China and India. But how is China addressing climate and energy within its own borders? During today's OnPoint, William Chandler, a senior associate at the Carnegie Endowment for International Peace explains the disparity that exists between local and national governments in China when it comes to enforcing clean energy standards. Chandler, author of the new report, "Financing Energy Efficiency in China," explains why the Clean Development Mechanism is not working in China and lays out clean energy priorities for both the Chinese government and the international community.

Transcript

Monica Trauzzi: Welcome to OnPoint. I'm Monica Trauzzi. Joining me today is William Chandler, a senior associate at the Carnegie Endowment for International Peace. Bill, thanks for coming on the show.

William Chandler: Thanks for having me.

Monica Trauzzi: Bill, you've written a report on financing energy efficiency in China and the report starts off by saying that there are barriers to financing energy efficiency. So tell me what the major barriers are for China in the field of efficiency.

William Chandler: The major barriers are getting money into projects. Many people find that hard to believe because China has so much money in savings and such a large foreign exchange reserve, but in fact, Chinese law, red tape, and even to some degree the Clean Development Mechanism get in the way of getting equity and debt into these clean energy projects.

Monica Trauzzi: Okay, let's talk about the Clean Development Mechanism then. You say that it doesn't promote technology transfer or investment in clean energy in China. So why is the CDM so bad there?

William Chandler: The CDM is a great idea. I supported Kyoto and the Clean Development Mechanism from the beginning. It's the implementation that hasn't been great. And part of the problem is the way the rules for who gets the credit within China itself have been written. There's a minimum price, a regulated price set per ton of CERs, certified emissions reductions, in China. And that means you cannot charge less than that and give an investor a discount in return for bringing money into the country to put the projects into place. So the people who are acquiring the credits are simply buying them once they have been produced and trading them and making their money on the trades as opposed to taking a risk on creating new projects and actually doing the purpose of the Kyoto Protocol, which was to promote technology transfer and to attract money to investment.

Monica Trauzzi: Are many of the barriers tied to local governments? Are they the ones that are sort of failing at this?

William Chandler: There's a big divide between the central government, which has really strong policies to promote efficiency, a goal that's really unmatched globally in terms of aggressiveness for promoting energy efficiency. China has a goal of reducing energy intensity, which is the amount of energy it takes to make things and to run the economy, by 20 percent by the year 2010. It's a very ambitious goal. The enforcement, the implementation of that policy and other very good sounding clean energy policies is left to the provincial level, to the local level. And at the provincial level they don't have the tools, the experience, or even the power to implement those policies. So there's a big disconnect between the admirable and laudable central government goals and the implementation on the ground at the provincial level.

Monica Trauzzi: So, even if we were to create an international policy that China agreed to as is being discussed now in Bali, might there still be an issue at the local level?

William Chandler: It might not work. It might not work. The CDM is attracting a lot of venturists, but it's surprisingly difficult to get money into real projects on the ground, especially in energy efficiency in China.

Monica Trauzzi: Okay, so I just mentioned Bali, the climate talks are wrapping up there. China hasn't caused quite the stir as some of the other countries have, like the U.S.

William Chandler: Like the U.S.

Monica Trauzzi: Give us your assessment of how China is doing in Bali, but also in general on the post-Kyoto track.

William Chandler: I've worked in China on clean energy for 20 years and for the first time, about the middle of this year, I heard the leadership within China begin to say that China was prepared to take a serious target, a goal for the emissions reduction, not just a cap, but actually a reduction on total emissions within the country. They generally indicate that what they're thinking about is a continuation of the emissions growth through say 2020, 2025. But then capping at that level and then reducing from that level by about 30 percent by 2050. That's a profound change in the tone that China has used. And Hu Jintao has actually been articulating the willingness to discuss those kinds of goals. This has gone unnoticed, but it's a profound change in the prospects for getting a global agreement into place.

Monica Trauzzi: But there's a lot of negative attention when it comes to China and climate change. Is that an unfair amount of attention?

William Chandler: Well, it's understandable to the extent that China is so very large, 20 percent of the world's population, and growing so fast and has such visible pollution. You can see it in the streets, as opposed to here where the CO2 is invisible. In China you get all the soot and all the ozone and all the smog. I think, to some degree though, people aren't paying attention to what China is actually trying to do. And I think China just doesn't tell a very good story about their actual policies.

Monica Trauzzi: What about their use of coal?

William Chandler: The use of coal is a big problem and one hears the excuse that China has to use coal because they have so much of it, as if that means that they really have no choice. But the fact of the matter is, the United States has a lot more coal in the ground than China does. And we find other ways to meet energy needs as opposed to relying so heavily on coal. China is beginning to think of other prospects and alternatives, but, frankly, they've still got a long way to go.

Monica Trauzzi: And is there a problem with technology transfer, the technologies exist, they're just not there?

William Chandler: There's a problem in getting them money to get those technologies into place. There's another kind of disconnect, and this is in the perception of -- not just in China, but in the leadership in developing countries in general and in developed countries, where on the one hand you have the attitude that the problem is that the developed countries have all these technologies in our laboratories and we just don't provide them and make them available. The developed countries always say in return, well, the problem is that the markets aren't developed well enough. The incentives aren't there to get the technologies into place. So that's a big disconnect.

Monica Trauzzi: So the technologies do exist though to do what needs to be done to reduce emissions there?

William Chandler: China could profoundly reduce its emissions, as we could in the United States, with existing technologies, no doubt about it.

Monica Trauzzi: Why is there a ban on loans for efficiency in energy intensive sectors?

William Chandler: There is effectively a ban on bank loans to large industries and it's an inadvertent consequence of a policy to reduce the growth of the economy. And what I mean by that is you have these large energy consuming sectors, like cement, like steel, like chemicals, and the Chinese government is trying to get them under control. They've been expanding so quickly. You know that China now produces 40 percent of the world's cement. So as a matter of industrial policy, the government basically said, OK, no more loans to the cement sector for expansion of the production of cement. Well, in return, at the same time, that effectively prohibits investments in technologies like waste heat recovery, more efficient cement production. So it shuts down all the more efficient means of cement and other energy intensive materials production as a consequence of this industrial policy.

Monica Trauzzi: So, what should be the priority for policymakers at this point? Let's start with domestic and then we'll talk international.

William Chandler: Domestic in the United States?

Monica Trauzzi: Domestic in China. What should they be doing?

William Chandler: Domestic in China, removing these inadvertent barriers on bank loans, making debt available to the large industries specifically for energy efficiency improvement, organizing and making it easier to bring foreign investment equities specifically into China. There's so many hurdles that one has to jump through, registering a company, even declaring how much money you're going to invest, not being able to offer say preferred stock to investors, many things that increase the risk and increase the cost of bringing money into China for investment. Getting those barriers out of the way would do a lot to open up the market to these clean technologies.

Monica Trauzzi: And on the international level, is it possible to find a way to please both the industrialized countries and these emerging economies? Is it possible to create this treaty that is good for everyone?

William Chandler: I think so. I think a global cap and trade system is probably going to be almost impossible to attain, but certainly you could have a clean development mechanism whereby the developed countries buy credits from developing countries who are investing in things like waste heat recovery and wind power. And to do that in a way that is cost effective. One of my criticisms about the Clean Development Mechanism is that it is skewed towards providing incentives to the more expensive measures. And that's a consequence of the so-called principle of additionality. The Kyoto treaty wanted to ensure that people weren't getting money, getting credits for doing things that would have happened anyway. It's an understandable motivation, but, in fact, that means that if something makes sense anyway, like in energy efficiency investment, you can't really easily get a credit for it. And I think that's a mistake because it drives up the total cost of cutting emissions, what is in fact what we really want to do.

Monica Trauzzi: We should mention that you're the cofounder of a company that builds waste heat recovery power plants in China. Did your work and your personal experiences with that influence this report at all?

William Chandler: Absolutely. I had worked in China on a policy level for 20 years and we thought we understood Chinese law and policy and we thought we understood the technology. But once we got into the nuts and bolts of actually trying to get investment into a company doing real business, we found that these barriers, these hurdles were much greater than we ever expected. It was a great education. We succeeded in getting the investment, so that's not my complaint. And it's too early to determine whether the investment will be a success or not. But we did learn that there are lots of things that the Chinese government could do and that the international community could do to make it a lot easier to accelerate the pace of investment in clean energy in China.

Monica Trauzzi: All right. We're going to end it right there. Thanks for coming on the show.

William Chandler: Thank you.

Monica Trauzzi: This is OnPoint. I'm Monica Trauzzi. Thanks for watching.

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