Two Chinese companies today signed emission reductions purchase agreements with the World Bank's Umbrella Carbon Facility for the largest emission reductions project on record.

Through the 775 million Euro (US$930 million) contract, the two private chemical companies, Jiangsu Meilan Chemical Co. Ltd., and Changshu 3F Zhonghao New Chemicals Material Co. Ltd, in Jiangsu Province, are expected to reduce emissions of about 19 million tons of carbon dioxide equivalent annually.

The World Bank also signed a Memorandum of Understanding with the Chinese Ministry of Finance for collaborating in the design and development of a Clean Development Fund (CDF), through which revenues accruing to the government of China as a result of the sale of emission reductions will be used to support sustainable development activities.

The government of China will retain 65 percent of all HFC-23 revenues for investing in projects and activities related to climate change through the newly established CDF.

The CDF is expected to finance climate mitigation projects in priority sectors such as energy efficiency, renewable energy, coal mine methane recovery and use.

According to Mr. Ju Kuilin, deputy director general of the International Department at the Ministry of Finance, "The government of China attaches a high priority to participation in global efforts under the Kyoto Protocol. We are glad that it has been possible to bring forward this project, which we expect will make a significant contribution to these efforts, with two companies from Jiangsu Province. China has also set up a Clean Development Fund to use Clean Development Mechanism (CDM) revenues for projects and capacity building for managing the effects of climate change."

The World Bank, on behalf of a partnership between public and private sector buyers will purchase the emission reductions of HFC-23 (trifluoromethane), one of the most potent greenhouse gases responsible for climate change through global warming.

HFC-23 has a global warming potential that is 11,700 times that of carbon dioxide. It is generated as a waste gas in the manufacturing process of HCFC-22 which is a gas used as a refrigerant and as a feedstock, a raw material for other products.

HFCs are among the six greenhouse gases covered under the Kyoto Protocol. (See annex)

The project will capture and destroy the HFC-23 that would otherwise be released into the atmosphere in the course of HCFC-22 production.

The companies involved will sell the HFC-23 emission reductions to various buyers through the Umbrella Carbon Facility of the World Bank. Both companies are well established chemical manufacturers in China, and have ISO9000 certification.

Issued by the International Organization for Standardization, ISO 9000 has become an international reference for quality standards in the industry.

According to Teresa Serra, the World Bank's East Asia sector director for Environment and Social Development, "With this project, China will move to the forefront of countries making contributions to global efforts to mitigate the effects of climate change. The creation by the Government of China of a Clean Development Fund from the Government's share of revenues also provides a unique opportunity to redirect carbon finance towards capacity building and sustainable development activities in China."

The project provides a developing country like China significant resources for sustainable development activities. China's CDF will receive revenue shares from all Clean Development Mechanism (CDM, see annex) projects in China from 2005 onwards and will be governed by China's CDM rules regarding approval procedures for project proposals.

The World Bank is providing support to the government of China in the design of the CDF including areas to be covered, project selection criteria, institutional arrangements and operating rules. The government has announced its intention to focus CDF activities on capacity building and actions related to the country's priorities in fighting climate change.

"China is setting an example for the world with this project" said Warren Evans, director of Environment at the World Bank. "With 65 percent of the revenue going to sustainable development with the Clean Development Facility, China is demonstrating its commitment to tackling climate change and to sustainable development for its people. At the same time the carbon market is benefiting from this huge expansion of the CDM and the private sector is fully involved through the innovative Umbrella Carbon Facility managed by the World Bank."

The Umbrella Carbon Facility was recently established to handle large emission reduction purchases. The Umbrella Carbon Facility will pull together multiple sources of funding, including from the Bank's existing carbon funds, to purchase large volumes of carbon emissions from pre-identified projects, on behalf of governments and private firms. More than 75 percent of the money in the facility represents private capital.

The bank already administers eight carbon funds, including the Community Development Carbon Fund (CDCF) and the BioCarbon Fund (BioCF) which help poor countries and communities to benefit from carbon trade.

Including the China HFC-23 window of the Umbrella Carbon Fund, the total carbon funds being managed by the World Bank will exceed US$1.8 billion.

With the signature of the two emission reductions purchase contracts in China, the World Bank has signed 36 emission reductions purchase contracts for over US$1.1 billion.

ANNEXES:

The Kyoto Protocol and the Clean Development Mechanism (CDM)

The Kyoto Protocol provides an unprecedented opportunity for the Organization for Economic Cooperation and Development (OECD) countries to reduce greenhouse gas emissions and at the same time help developing countries and economies in transition invest in climate friendly technologies and infrastructure.

The Protocol's Clean Development Mechanism (CDM) and Joint Implementation (JI) provide an element of flexibility for the industrialized countries to meet their obligations under the Protocol to reduce greenhouse gas emissions by on average 5.2 percent below their 1990 levels by 2010.

In so doing, the Protocol provides an unprecedented incentive for those seeking lower cost emission reductions, to leverage the flow of private capital and privately held clean technology from North to South.

Carbon Finance

Carbon finance is the general term applied to financing seeking to purchase greenhouse gas emission reductions ("carbon" for short) to offset emissions in the OECD.

Commitments of carbon finance for the purchase of carbon have grown rapidly since the first carbon purchases began less than a decade ago.

The global market for greenhouse gas emission reductions is estimated at a cumulative 200 million tons of carbon dioxide equivalent since its inception in 1996 Volumes are expected to continue to grow as countries that have ratified the Kyoto Protocol work to meet their commitments, and as national and regional markets for emission reductions are put into place, notably in Canada and the European Union (where trading started formally in January 2005).

(China.org.cn December 19, 2005)