Download Probe into the Financing Mechanism for Chinese Forestry Carbon Sequestration Market

EASTERN ACADEMIC FORUM
Probe into the Financing Mechanism for Chinese Forestry Carbon
Sequestration Market
GAO Jiahua
School of Economic Management, Beijing Jiaotong University, China
[email protected]
Abstract: Under the clean development mechanism, carbon sequestration service provided by forest has
become tradable commodity, which makes possible the market-oriented financing for forestry carbon
sequestration. More and more countries have participated in the transactions on forestry carbon
sequestration. China has likewise started its pilot projects in Guangxi, Liaoning and other places. This
paper first makes an introduction to the financing situation in the international forestry carbon
sequestration market, and then elaborates the efforts made by Chinese government to establish the
financing mechanism for domestic forestry carbon sequestration market and the overview of China’s
implementation of forestry carbon sequestration projects. Through imaging what is coming from the
small clue by using case analysis method, it draws conclusion on the problems existing in China’s
establishment of the financing mechanism for forestry carbon sequestration market, and finally puts
forward improvement suggestions on the existing weaknesses, so as to make theoretical preparation for
China’s establishment of the financing mechanism for forestry carbon sequestration market.
Keywords: forestry carbon sequestration, market, financing mechanism
1 Introduction
As forest is the biggest “carbon reservoir” and the most economical “carbon absorber”, afforestation
means carbon sequestration while greening symbolizes emissions reduction. Establishment of the
financing mechanism for carbon sequestration market is a new way to realize marketization and
monetization of forest eco-efficiency compensation. Chinese government has made heavy investment in
the construction of ecological forestry, but it is relatively lack in market mechanisms, which resulted in
the situation where China’s construction of ecological forestry severely depends on governmental
investment. Chinese government is now confronted with such problems as deficient capital supply,
excessively narrow supply channel and defective supply mechanism. Accordingly, China’s
establishment of the financing mechanism for forestry carbon sequestration market is of great realistic
significance. The current worldwide research on the financing mechanism for carbon sequestration
market is still fairly sporadic rather than systematic, which has induced the appearance of some
evaluating theories on the economic value of forestry carbon sequestration. Such theories can help us to
perform quantitative investigation on the economic value of forestry carbon sequestration as an
ecological product and thus to give certain guidance on the market price of forestry carbon sequestration.
However, we can not draw conclusion completely from such theories in the practice. This paper makes
deep probe into the financing mechanism for Chinese forestry carbon sequestration market by adopting
the research approach with combination of theories and practice, so as to help decision makers to master
the operating rule of carbon sequestration transactions and to improve relevant systems and mechanisms
as soon as possible, so that the abundant carbon sequestration resources of our country can be utilized
effectively.
2 Current Financing
Sequestration Market
Situation
of the International
2.1 History of the international forestry carbon sequestration market
2.1.1 Embryonic stage
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AES is the first company that engages in forestry carbon sequestration projects in the world. It invested
USD 2 million in an agricultural forestry project in Guatemala in the late 1980s with the help of an
international poverty alleviation organization, for the purpose of offsetting the emission of greenhouse
gases from its thermal power plant in Connecticut. This project aimed to plant 41 million trees on
186,000-heactare woodland within 10 years, so as to attain the goal of absorbing 16 million tons of CO2.
The company then invested USD 5 million in two projects related to forestry carbon sequestration in
South America.
2.1.2 Rudimental stage
Between 1992 when UNFCCC was signed and 1997 when Kyoto Protocol was adopted, some
governments and enterprises throughout the world, especially those in developing countries, began to
consciously use forestry carbon sequestration credit to offset and compensate their obligation of
emissions reduction in line with the provisions of UNFCCC, with the aim of realizing cost efficiency in
the reduction of greenhouse gases emission, for the reason that the production cost of forestry carbon
sequestration credit was possibly far lower than the cost needed by energy substitution, technical
modification and other forms of carbon-emission reduction.
2.1.3 Growing stage
Enterprises became increasingly familiar with transactions on forestry carbon sequestration between
1997 when Kyoto Protocol was signed and February 2005 when it came into effect. Particularly, the
reaching of consensus on forestry carbon sequestration project and formulation of operating rules at
COP9 in December 2003 substantially activated the transactions on forestry carbon sequestration. Some
governments or enterprises began to realize the possible tremendous commercial opportunities in the
forestry carbon sequestration market. They hoped to acquire CERs from a third party in advance through
executing carbon sequestration projects such as afforestation, reafforestation and forest management &
protection, and then convert CERs into ERU which can be sold to make profit.
2.1.4 Normalizing stage
After the rules for forestry carbon sequestration projects were stipulated successively, especially after
February 2005 when Kyoto Protocol took effect, the rules for forestry carbon sequestration projects that
were compromised by the international community with different opinions substantially narrowed down
the applicable scope of forestry carbon sequestration projects. Rigid and inflexible rules on the quantity
of utilization were also formulated. For this reason, most of the new forestry carbon sequestration
projects appearing in this period aimed not merely to acquire CERs, but also to obtain commonweal
effect such as species protection and vegetation restoration. Nevertheless, the effectiveness of Kyoto
Protocol in 2005 did remarkably inspire the forestry carbon sequestration market.
2.2 Support by the World Bank
As a transnational financial institution, the World Bank has been positively supporting carbon
sequestration projects that are beneficial to afforestation. It gradually realized the bright outlook of the
international carbon transaction market. Early in the period when transactions on forestry carbon
sequestration emerged, the World Bank began to design and operate three carbon funds— PCF, CDCF
and BCF. It tried to promote the global campaigns for slowing down CO2 emission and enhancing
forestry carbon sequestration via some appropriate projects. Forestry projects are included in the
supporting scope of CDCF and BCF.
3 Current Financing Situation of Chinese Forestry Carbon Sequestration Market
3.1 Efforts made by Chinese government to establish the financing mechanism for forestry carbon
sequestration market
3.1.1 Establishment of administrative organization
To respond to climate change, the State Council established Office of National Coordination Committee
on Climate Change which is affiliated to the National Development and Reform Commission. The
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Office is in charge of the management and coordination of domestic and overseas matters regarding
climate change. At the end of 2003, the National Forestry Bureau of China established Carbon
Sequestration Management Office which is in charge of the management and coordination of forestry
carbon sequestration activities. On October 12, 2005, the National Development and Reform
Commission promulgated the first national rule on the execution of clean development
mechanism—Measures for the Operation and Management of Clean Development Mechanism Projects
together with the Ministry of Foreign Affairs and Ministry of Finance.
3.1.2 Establishment of information platform
Chinese government has made lots of efforts to popularize climate change and forestry carbon
sequestration which appeared as new things in the past. In addition to personnel training, visit &
exchange and special report, the Office of National Coordination Committee on Climate Change, the
Ministry of Science and Technology, the Carbon Sequestration Management Office of National Forestry
Bureau and the State Meteorological Administration, etc. have established network information
platforms according to their own fields, including China Clean Development Mechanism Net, China
Climate Change Info-Net, China Carbon Sequestration Net and China Climate Change Net, which
provide rapid and convenient channels and platforms for timely information release and mutual
communication.
3.1.3 Determination of regions with priority of development according to the national situation
After Kyoto Protocol came into effect, the competent national organ in charge of climate proposed the
regions enjoying preferential development according to the stage and level of the overall economic
development in China. It also gradually advocated and encouraged the execution of forestry carbon
sequestration projects and gave positive support to the operation of pilot projects. Along with the
execution of pilot projects, afforestation, reafforestation and carbon sequestration projects have drawn
increasingly closer attention at home and abroad. Accordingly, the Carbon Sequestration Management
Office of National Forestry Bureau endorsed the research on preferential regions for implementing
afforestation, reafforestation and carbon sequestration projects according to Chinese national situation.
Through analyzing the data on land use and investigation on forest resources that were collected in 1990,
the research aimed to set up indicators and methods of comprehensive evaluation. It proposed the
referential regions for implementing afforestation, reafforestation and carbon sequestration projects
under the clean development mechanism in the first promised period and initially confirmed that the
preferential and sub-preferential regions for developing Chinese carbon sequestration projects under the
clean development mechanism are mainly distributed in middle south subtropical evergreen
broad-leaved forest belt, south subtropical belt, tropical rain forest belt, rain forest belt, Tibet Plateau
coniferous forest belt, warm belt and deciduous forest broad-leaved forest belt.
3.1.4 Establishment of the special carbon sequestration fund——China Green Carbon Fund
China Green Carbon Fund was established in July 2007 by the National Forestry Bureau of China with
the joint efforts of China Petrochemical Corporation, China Green Foundation, Sino-Forest (China)
Investments Limited, Nature Conservancy, Conservation International and other units and organizations.
China Green Carbon Fund is a special fund under China Green Foundation, belonging to national public
fund. China Petrochemical Corporation donated RMB 0.3 billion Yuan to the fund at the initial period
for the activities of afforestation, forest management and construction of energy forest base that are
aimed at absorbing CO2 in the atmosphere. It is estimated that 5 million to 10 million tons of fixed CO2
will be absorbed within ten years if such donation is used in afforestation. This fund provides a platform
for the voluntary participation of enterprises, groups and individuals in afforestation and forest operation
& protection activities as well as the increase of carbon sequestration.
3.2 Current practice of chinese forestry carbon sequestration projects
In 2004, the Carbon Sequestration Management Office of National Forestry Bureau started pilot projects
of forestry carbon sequestration in six provinces (regions) in China: Guangxi Zhuang Autonomous
Region, Inner Mongolia Autonomous Region, Yunnan Province, Sichuan Province, Shanxi Province and
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Liaoning Province.
3.2.1 Forestry carbon sequestration project in Guangxi
3.2.1.1 Project overview
The forestry carbon sequestration project in Guangxi is a part of the World Bank’s “Comprehensive
Forestry Development & Protection Project in Guangxi”. It is composed of three sub-projects, including
the pilot project of forestry carbon sequestration which is the first project of afforestation, reafforestation
and carbon sequestration in the world that was planned according to the clean development mechanism
provided in Kyoto Protocol. On April 6, 2004, Guangxi submitted its application to the World Bank’s
BCF for afforestation and reafforestation project. Its project proposal was selected as one of the first
projects. On June 30, 2006, Guangxi entered into purchase agreement for carbon emission reduction on
“Reafforestation Project in Pearl River Drainage Area in Guangxi, China” with the trustee of
BCF—International Bank for Reconstruction and Development. In November 2006, the Executive
Council of Clean Development Mechanism approved this project, which was hereby successfully
registered as the first forestry carbon sequestration project in the world and put into execution. This
project is aimed at probing and demonstrating techniques and methods regarding forestry carbon
sequestration through promoting reafforestation activities in the drainage area of Pearl River.
The executive subjects of this project include Kangyuan Forest Farm in Cangwu County, Fuyuan Forest
Farm in Cangwu County, GreenRing Forestry Development Co., Ltd. in Huangjiang County, Xinghuan
Forestry Development Co., Ltd. in Huangjiang County as well as 18 farmer family teams and 12 farmer
families. There are three major operating modes: afforestation by single farmer family, afforestation by
farmer family team, and joint-stock afforestation by farmers (village collectivity) and forest farm
(company).
3.2.1.2 Total investment and financing of the project
The total investment in this project is USD 22.7 million, of which USD 3.02 million is used for
construction and USD 19.68 million is used as operating cost. The financing channels are as follows: (1)
USD 1.13 million came from long-term loan granted by local commercial bank in Guangxi; (2) USD
1.13 million came from the government of Guangxi Zhuang Autonomous Region as supporting fund; (3)
USD 4.7 million came from the capital stocks of local farmer families and forest farms (companies) that
participated in the project; (4) USD 15.74 million came from short-term loan granted by local bank in
Guangxi as current capital for timber harvesting and transportation.
3.2.1.3 Accomplishments
4815 farmer families have benefited from Forestry Carbon Sequestration Project in Guangxi.
Afforestation of the 4000-hectare wild land can realize the absorption of 0.5 million tons of CO2 within
15 years and the consolidation of 0.77 million tons of CO2 by the year 2035. With the World Bank’s
arrangement, such absorption amount will create USD 2.2 million for Chinese project owners.
Consequently, this project is of great referential value and practice significance as a beneficial attempt at
China’s construction of forestry carbon sequestration market.
3.2.2 Liaoning project
3.2.2.1 Project overview
This project is jointly executed by Shenyang Forestry Bureau in Liaoning Province and Keio University
in Japan. It aims to foster experimental wind break and sand fixation forest in Kangping County,
Liaoning Province. The Japanese party offered capital in an amount of 23.5 million Yen; forest farmers
in Kangping County are in charge of afforestation, cultivation, management and protection of the
experimental woodland; Shenyang Farmer Afforestation Association is in charge of comprehensive
project management and data collection; Keio University takes charge of developing methodologies and
helping to contact Japanese enterprises that may purchase carbon sequestration produced by the project.
3.2.2.2 Existing problems
According to the original planning of Keio University, this project was defined as a CDM project which
was directed at exchanging for CO2 emission right in Japan; the capital received would be used for
reafforestation in Kangping County. However, this project was not operated as a CDM project at the
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beginning. It was lack in methodologies for design and submittal for approval and was not confirmed by
Chinese government. For this reason, the carbon sequestration produced by this project before 2006
could not offset the carbon dioxide emission in Japan. It was not regarded as a carbon sequestration and
afforestation project under the clean development mechanism, but only a voluntary forest carbon
sequestration project.
4 Problems Existing in China’s Establishment of the Financing Mechanism for
Forestry Carbon Sequestration Market and Corresponding Suggestions
4.1 Problems existing in China’s establishment of the financing mechanism for forestry carbon
sequestration market
4.1.1 The secondary market of carbon credit circulation has not come into existence.
Currently, the existing pilot projects of forestry carbon sequestration in China are all transactions at the
level of forestry carbon sequestration project within the territory of China. They are still at the level of
project. No markets allowing for the circulation of forestry carbon sequestration credit have come into
existence, which resulted in the lack of fluidity in Chinese transactions on forestry carbon sequestration.
Just like stock and futures market, secondary circulation market of carbon sequestration need to be
developed inevitably if we want to develop carbon sequestration market. In this case, some professional
investors and speculators will appear in the secondary market of carbon credit circulation, which, in a
positive sense, will activate the market as one of the relatively fixed transactional subjects in the market.
4.1.2 The market mechanism and system guarantee are not perfect enough.
Price competition mechanism has not taken shape in Chinese carbon sequestration market. Therefore,
the information on price and demand, etc. can not genuinely reflect the supply and demand in this
market, which imposed adverse influence on the market, such as excessively high financing cost for
Chinese transactions on forestry carbon sequestration and unbalanced information. They have restricted
the development of Chinese forestry carbon sequestration market to a certain extent. Meanwhile, China
is still lack in effective guarantee for normal and orderly transactions on forestry carbon sequestration
that is provided by laws and systems.
4.1.3 Immature techniques
A perfect forestry carbon sequestration market requires techniques for measuring and certifying forestry
carbon sequestration as well as techniques for forest planning and cultivation, etc. Such techniques in
China still have a long way to go before they catch up with the international advanced level. Particularly,
authoritative certifying and measuring organizations of forestry carbon sequestration are still only in
developed countries. Immaturity of techniques will not only prolong the period of each carbon
sequestration transaction in China, but also possibly make some carbon sequestration projects become
unaffordable in the excessively high transactional cost, thus hindering China’s acquisition of cost
advantages in the carbon sequestration market. China is an important member of developing countries
and one of the most potential carbon sequestration sellers. Such unbalance in technical level will
inevitably impair China’s interest in the international carbon sequestration transactions.
4.1.4 Poor popularity of knowledge about forestry carbon sequestration
At present, many Chinese enterprises are still lack in the knowledge about forestry carbon sequestration.
They have no pressure of emissions reduction in the short run. This phenomenon resulted in such
enterprises’ lack of enthusiasm in the participation in transactions on forestry carbon sequestration. In
the forestry carbon sequestration projects that have been executed, most of the suppliers and demanders
are traditional enterprises; some of them are even farmers who know almost nothing about the carbon
sequestration market. Along with the further development of the carbon sequestration market, even the
common people will possibly participate in the transactions in this market. The potential participants in
this market— Chinese enterprises and common people are still lack in professional knowledge about
forestry carbon sequestration, which, in the long run, will be bound to restrict long-term development of
Chinese forestry carbon sequestration market.
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4.2 Suggestions on China’s establishment of the financing mechanism for forestry carbon
sequestration market
4.2.1 Establishment of domestic secondary market of carbon credit
Chicago Climate Exchange is a comparatively successful secondary market of carbon credit in the world.
China may design and establish its own secondary market of carbon credit through imitating the mode
of Chicago Climate Exchange in combination with its actual situations. It may release the trading price
of carbon every day, so that owners of carbon right can conclude transactions in the market according to
the market situations, just like the transactions of stock and futures. Due to the specialty of carbon
transactions, China should establish central and local carbon registration offices and credit records of
carbon transaction enterprises, so as to avoid repeated carbon transactions and enhance the transparency
and fairness of carbon transactions.
4.2.2 Improvement in market mechanism and system guarantee
Firstly, Chinese government should give positive guidance on the formation of perfect market
mechanism, property right mechanism and transactional mechanism. As the number of forestry carbon
sequestration projects is continuously growing and the structure of market participants is being enriched
constantly, it is likely that competitive price decided by supply and demand will be formed in Chinese
forestry carbon sequestration market.
Secondly, China must promote the formulation of department regulations, regional restriction rules and
state laws step by step in different phases, so that Chinese forestry carbon sequestration market can be
established in accordance with law and hereby become beneficial to the marketization and prosperity of
the construction of Chinese ecological forestry.
Lastly, relevant governmental departments and administrative organizations should intensify their
improvement in the systems for forestry carbon sequestration transactions, including identification of
the qualifications of transactional subjects and objects as well as improvement in transactional
procedures and other systems and regulations.
4.2.3 Improvement in technical level
Chinese relevant departments must enhance their cooperation with colleges/universities and scientific
research institutes, conduct research on such subjects as carbon sequestration measurement, monitoring
and evaluation, and improve the mechanism of forest eco-efficiency compensation. Chinese government
should play a crucial role in this course. As for foreign affairs, it should strive for interest for China in
international negotiations on forestry carbon sequestration transactions, enhance the communication
with developed countries, and introduce foreign advanced technology. As for domestic affairs, it should
stipulate relevant policies, make heavier investment to support relevant departments in their
improvement of technical level, and give top priority to the cultivation of technical talents.
4.2.4 Intensification of education and training
China should intensify the popularization of knowledge about forestry carbon sequestration among
enterprises and common people through vigorous education and training. It should assist in the
establishment of model projects, provide certain consultation services for buyers and sellers of forestry
carbon sequestration, and encourage enterprises and common people to positively participate in
transaction activities regarding forestry carbon sequestration, thus clearing the barriers induced by the
lack in professional knowledge for the future development of Chinese forestry carbon sequestration
market.
5 Conclusion
Firstly, China has made some efforts in the support of domestic forestry carbon sequestration projects,
including establishment of relevant administrative organs, setup of information platform, determination
of regions enjoying preferential development, and foundation of China Green Carbon Fund. Such efforts
have laid a solid foundation of system for its future construction of the financing mechanism for forestry
carbon sequestration market.
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Secondly, Chinese forestry carbon sequestration market has undergone development to a certain degree.
It can be seen from the implementation of the projects in Guangxi and Liaoning that China has made
some accomplishments in the forestry carbon sequestration market. However, it does have some
weaknesses in this regard.
Thirdly, the current Chinese forestry carbon sequestration market is still a market at project level which
has lots of weaknesses. This paper has put forward some improvement suggestions on such weaknesses.
China’s establishment of the financing mechanism for forestry carbon sequestration market not only
requires the government to take the major responsibility, but requires the potential market participants—
enterprises and common people to carry out cooperation and exert efforts.
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