Beijing races ahead of its peers to profit from fledgling trade

By Kathrin Hille in Beijing

Published: December 2 2009 02:00 | Last updated: December 2 2009 02:00

With a shy smile and a retiring manner, Liu Deshun has the slightly bedraggled appearance of an ageing professor. But make no mistake: this academic at Tsinghua University in Beijing is one of the world's most powerful players in the rapidly growing market for carbon credits.

As the deputy-head of the Global Climate Change Inst-itute at Tsinghua, often referred to as China's MIT, Prof Liu sits at the heart of an industry his country has come to dominate: the sale of carbon credits to developed countries under the United Nations scheme established under the Kyoto protocol.

Prof Liu not only knows how the carbon market ticks. Through the Tsinghua consultancy, he also helps wind the clock.

With close to a third of the world's 1,873 projects, China has raced ahead of its peers in exploiting a system intended to reduce carbon emissions by stimulating the use of cleaner technology that would not otherwise materialise.

Leading the domestic army of consultants servicing the Clean Development Mechanism, as the UN programme is called, is Tsinghua. It has registered 43 of China's 650 projects and helped conceive dozens of others.

According to analysis by the Financial Times, the sheer number of projects makes China's leading university for science and engineering the world's fifth largest CDM consultant and the world leader in terms of the number of carbon credits its projects promise to generate by 2012.

Its very success, however, exposes some serious flaws in a fledgling market.

"Getting a CDM project approved is really difficult because it is not easy to argue why a project is additional, why it would not happen without CDM," says Yang Zhiliang, general manager of Accord Global Environment Technology, one of China's leading private CDM consultants. "So we are always glad when Prof Liu looks at our projects, because he gives us valuable advice."

There is a good chance he will. For Tsinghua offers not only consulting services; Prof Liu is also a member of the expert group that reviews all those proposals for domestic approval.

Asked about potential conflicts of interests, Prof Liu laughs knowingly. "We should avoid it," he says in an interview.

"If our name is on the project documents, we have to keep our hands out of it. We have to do the projects that have nothing to do with us."

He maintains that his institute is not pursuing profit. "The revenues just cover our cost, and we take mainly projects that promise to be relatively easy, as they resemble others we've done before," he says.

This dominant position is partly an accident of history. Tsinghua has advised the government on climate change since the early days and Prof Liu helped design a large part of the framework with which China handles CDM projects.

Commercial peers have struggled to make money. The final CDM approval process can be lengthy and customers often draft contracts that require them to pay fees only if the project gets registered.

"The turnround time for one project is two to three years, and many firms just didn't survive that," says Ms Yang of Aget, which has registered five CDM projects.

Competition is further constrained by the fact that several provincial governments have set up CDM advisory services to push local projects. Many large state-owned companies use in-house consultants.

Nor do Chinese start-ups enjoy the global experience and connections of international consultants. Driven by strong foreign demand for Chinese carbon credits, Jersey-based Camco and some other international consultancies who advise potential buyers often take on projects in a very early phase, helping to steer them through the complicated approval process.

"Chinese projects are typically subscribed long before approval," says Anders Brend-strup, head of Camco's carbon credits business in China.

While Camco says that domestic approval in China is no more than a rubber stamp, many others struggle to secure even this first step.

"There are delays in the approval process, and there are problems with the performance of registered projects," says Ruth Dobson, a partner at PwC, the professional services firm, in Beijing.

But she sees these as teething problems rather than the result of manipulation. The most common problem is that projects do not produce the promised number of credits, known as certified emission reductions.

"One reason can be that utilisation rates of the equipment in question don't reach those envisioned in the proposal," says Ms Dobson at PwC, which in China conducts mainly due diligence on other consultants' proposals.

"That has to do with the overall quality of planning and that sometimes forecasts were just based on too optimistic assumptions. It is not very typical for companies here, especially smaller ones, to do comprehensive financial planning, so the learning curve is still going on as they have to do it for the CDM."

This is something not even Prof Liu can help with.

"My expertise is methodology," he says. "The young people will have to learn the commercial side of the business."