EastAsia Clean Development Mechanism: Engaging …...EastAsia Clean Development Mechanism: Engaging EastAsian Countries in Sustainable Development and Climate Regulation Through the

East Asia Clean Development Mechanism:Engaging East Asian Countries in SustainableDevelopment and Climate Regulation Through theCDM

CRAIG HART*, KENJI WATANABE**, KA JOON SONG***, AND XIAOLIN LI****,CENTER FOR INTERNATIONAL ENVIRONMENTAL LAW†

The Clean Development Mechanism (CDM) of the Kyoto Protocol to theUnited Nations Framework Convention on Climate Change (UNFCCC) isintended to provide financial incentives that support the adoption of technologyin developing countries to reduce carbon dioxide and other greenhouse gasemissions. In addition to encouraging sustainable development in developingcountries and reducing overall greenhouse gas emissions, CDM is also widelyrecognized as an important means through which developing countries canengage in the international climate change regime.

This article evaluates CDM’s success with three distinct goals: encouragingsustainable development in developing countries, providing an entry point fordeveloping countries to participate in the international efforts to combat climatechange, and reducing global greenhouse gas emissions. To appraise its accomplish-ments in these areas, the article presents three case studies of East Asiancountries, examining CDM activity in China, Japan, and South Korea.

East Asia is home to some of the world’s largest and fastest-growing econo-mies, as well as over a quarter of the global population. China, Japan, and SouthKorea were selected for study as a group because of their importance to theregion’s economic development, their potential to form cooperative relation-

* J.D., University of California at Berkeley; Ph.D., Massachusetts Institute of Technology; Counsel, EnergyInfrastructure, Climate Change & Technology Practice, Alston & Bird, LLP; former Director, Climate ChangeProgram, Center for International Environmental Law. Portions of this paper will appear in C. Hart, ClimateChange and the Private Sector (Routledge, forthcoming 2008). Corresponding author’s contact:[email protected].

** LL.B., Nihon University; LL.M., The George Washington University Law School; Center for Interna-tional Environmental Law, Intern, Summer 2007.

*** LL.B., College of Law, Seoul National University; LL.M., New York University School of Law; Centerfor International Environmental Law, Intern, Summer 2007.

**** LL.B., China University of Politics and Law, Beijing; LL.M., American University, WashingtonCollege of Law; Center for International Environmental Law, Intern, Summer 2007.

† This study was prepared for the Climate Change Program of the Center for International EnvironmentalLaw in Washington, DC. The authors are grateful to Ms. Lauren Inouye of Sindicatum Carbon Capital for hercomments and suggestion on a prior version of this draft.

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ships, and their ability to influence countries within and outside East Asia. Withrespect to their ability to form cooperative relationships, it is also important tonote they play distinct roles within the CDM. Japan is a fully developed countrythat accepted commitments to reduce emissions under Annex I to the UNFCCCand the Kyoto Protocol and is a leader in technology research, development, andinvestment in CDM. China is the largest host country for CDM projects based onthe volume of CDM emissions reductions. South Korea is both a host country forCDM projects and a potential technology-developer and investor in CDM. Also,South Korea is a unique example of a country planning to transition to Annex Istatus in the post-2012 arrangements that are to be negotiated to replace theKyoto Protocol after its expiration.

In looking at these countries, we elected to examine the role of CDM in thesteel sector in each country. We selected the steel industry because it is animportant industry to the manufacturing bases of all three countries and is one ofthe largest emitters of greenhouse gases. The steel industry accounts for 6-7% oftotal global anthropogenic CO2 emissions,1 and accounts for over 10% of China’santhropogenic CO2 emissions.2 Over 90% of steel industry emissions come fromiron production in nine countries and/or regions: Brazil, China, EU-27, India,Japan, Korea, Russia, Ukraine, and the United States.3

The article (a) provides a brief overview of the CDM, (b) evaluates CDM’spromotion of sustainable development in developing countries, (c) reviews theCDM’s success in involving developing countries in an international climatechange regime, (d) considers CDM as a means of reducing global greenhouse gasemissions, (e) evaluates CDM’s achievement of its primary goals, (f) examinesCDM activities in China, Japan, and South Korea, especially in the steel industry,and (g) concludes by offering recommendations for the improvement of the CDMin a post-2012 greenhouse gas regime.

I. OVERVIEW OF CDM

The CDM of the Kyoto Protocol to the United Nations Framework Conventionon Climate Change (UNFCCC) is intended to support developing countries intheir efforts to develop sustainable practices and to reduce greenhouse gasemissions in Annex I countries through the creation and trade of credits foremissions reductions known as “certified emissions reductions certificates”(CERs). Under the CDM, emission reduction projects that undertake a rigorousand expensive certification process can sell credits to foreign companies that are

1. Yeonbae Kim & Ernst Worrell, International comparison of CO2 emissions trends in the iron and steelindustry, 30 ENERGY POL’Y 827, 827-838 (2002).

2. L. Price et al., Energy Use and Carbon Dioxide Emissions from Steel Production in China, 5 ENERGY 429,429-446 (2002).

3. Id.

646 THE GEORGETOWN INT’L ENVTL. LAW REVIEW [Vol. 20:645

obligated to reduce their emissions. Project developers may either sell CERs to athird party to raise additional project revenues or use the CERs themselves tofulfill their own obligations to meet carbon emissions limits under domestic lawsimplemented pursuant to the Kyoto Protocol. Projects need to be approved by theAnnex-I non-host country in order to be sold to an Annex-I buyer or the CERsneed to be transferred to an Annex-I buyer through the International TransactionLog, which also requires a letter from the transferor’s government. PurchasedCERs can be counted as emissions reductions by companies in developedcountries against their greenhouse gas emissions reduction obligations undertheir respective national laws pursuant to the Kyoto Protocol. CERs prices arequoted in per ton of carbon dioxide (CO2) equivalent.

The CDM project cycle is a multi-step process. First, parties prepare a projectproposal, which explains the design of the project in a document called theProject Design Document. The Project Design Document is then evaluated by aDesignated Operational Entity (DOE), a private third party certified by the CDMExecutive Board, which validates the project’s design and estimates the project’sexpected emissions reductions. During this phase, the project parties procure anenvironmental impact assessment (EIA), obtain the approval of the host govern-ment, and circulate the Project Design Document for public comment. TheProject Design Document is then submitted to the CDM Executive Board, whichreviews it for compliance with CDM requirements. Projects involving newmethodologies must also obtain approval of the specific methodology beingintroduced. If approved, the project is registered with the CDM. Sponsors ofregistered projects must implement a monitoring plan approved by the CDMExecutive Board.

Pursuant to the monitoring plan, a DOE periodically verifies the actualemissions reductions recorded during each particular verification period. Basedon the DOE’s written certification of the emissions reductions, the CDMExecutive Board instructs the CDM Registry Administrator to issue the appropri-ate number of CERs to the project for each verification period.4

Although the issuance and sale of CERs potentially provides an additionalsource of revenue for qualifying projects, the CDM aspects of a project alsoinvolve their own subset of risks. The evaluation of CDM from a developingcountry’s perspective should be considered in light of the viability of CDM fromthe investor and regulator viewpoint, as these issues are critical to the long-termsuccess of CDM. The market for CERs is highly uncertain beyond 2012 andsubject to political agreement among the various nations that are party to theKyoto Protocol. The analysis below takes these issues into consideration. A fulleranalysis evaluates CDM project risks from the perspective of investors, examin-

4. Farhana Yamin, Part I: The International Rules on the Kyoto Mechanisms, in CLIMATE CHANGE AND

CARBON MARKETS: A HANDBOOK OF EMISSIONS REDUCTION MECHANISMS 1, 33 (F. Yamin ed., 2005).

2008] CDM IN EAST ASIA 647

ing issues relating to the estimation and delivery of CERs, CERs price andvolatility, and uncertainty concerning the future of the Kyoto Protocol arrange-ments and the CDM.5

China accounts for approximately 41% of the CERs produced under the CDMand South Korea another 11%, making East Asia the largest producer of CERs.

II. EVALUATING CDM IN PROMOTING SUSTAINABLE DEVELOPMENT IN

DEVELOPING COUNTRIES

A primary purpose of CDM is to promote sustainable growth in developingcountries. One way to evaluate the CDM is in terms of its ability to promote theapplication of renewable energy technologies in these countries. We examine thiscriterion based on summary statistics and evaluate some of the incentives createdby the CDM in relation to sustainable development.6 Based on the 212 CDMprojects that had produced verified CERs as of July 2007, a majority of CDMprojects are renewable energy projects; however, the majority of the resultingCERs are produced by the non-renewable projects. While most of the financialincentives of CDM go to non-renewable projects, the CDM has catalyzedinvestment flows towards renewable energy projects and has developed a set ofmethodologies for evaluating these projects in terms of their contributions to

5. See Craig Hart, The Clean Development Mechanism: Considerations for Investors and Policymakers, 7SUSTAINABLE DEV. L. & POL’Y 41, 46 (2006-2007).

6. The data for our analysis in the remainder of this section can be found at UNEP Risoe Centre, CDMPipeline Overview (2007), http://cdmpipeline.org/publications/CDMpipeline.xls (Excel spreadsheet file) [here-inafter UNEP Risoe Centre (2007)]. The transfer of renewable energy technology, commonly taken to meantransferring the technological know-how to produce these technologies, is a criterion related to applyingrenewable energy technologies in developing countries. We will address this issue in the three case studies infra.

FIGURE 1. CERs by Country

Source: This is a public domain image available at http://en.wikipedia.org.wiki/Image:CDM_CERs_distribution_by_country.png


greenhouse gas emissions reductions.The majority of CERs produced to date are from eleven N2O and HFC-23

CDM projects, which together represent almost 90% of all CDM CERs issued asof July 2007. Three N2O projects constitute nearly 30% of all CERs issued, whilethe eight HFC-23 projects compromise 57% of total CERs issued. These projectsproduce vastly more CERs on an annual basis than any other type of project.Further, the reliability of these projects in terms of producing CERs is high, asindicated by our calculations that show relatively low average error and standarddeviations of the validated (estimated) versus verified (actual) number of CERsproduced. Notably, N2O projects were the only projects that consistently pro-duced more CERs than originally estimated.

HFC-23 and N2O projects are subject to criticism because they are veryinexpensive to implement, and thus could be handled outside the CDM throughregulation at little burden to the private sector, which is fundamentally inconsis-tent with the principle of additionality. The availability of CDM credit for theseprojects may discourage legislative action to phase out these gases.

Landfill methane recovery (for the purpose of flaring) projects are similarly notsustainable, as these projects waste the recovered gas. Estimates for about sixtycountries using satellite data reveal that gas flaring during the last twelve yearshas ranged from 150-170 billion cubic meters annually. In 2006, the flaring ofapproximately 170 billion cubic meters of natural gas was approximately 27% oftotal United States natural gas consumption or 5.5% of total global production ofnatural gas. Although flaring prevents methane from entering the atmosphere,combustion of methane emits an estimated 400 million tons of carbon dioxideemissions every year.7

In contrast, the 135 renewable energy projects account for only 7.14% of totalCERs issued as of July 2007. These projects produced CERs representing, onaverage, only 34.62 Kt CO2 per project per year, in contrast to the average 6427Kt CO2 per project per year produced by the three N2O projects, or the 4700 KtCO

2per project per year produced by the 8 HFC-23 projects. The average number

of CERs produced by N2O and HFC-23 projects is far greater than that of therenewable projects below, as well as far more reliable of a number, due to theirnature.

Another example of the CDM producing perverse incentives and unintendedconsequences in East Asia involves projects developing palm oil plantations tosupport biofuel production, which disrupt indigenous agricultural patterns andlead to deforestation. In East Asia and other regions, these issues have includeddisplacement of and even violence against indigenous peoples due to large-scaleafforestation projects, transfer of communal lands to private owners for develop-

7. Jeremy Elton Jacquot, Global Gas Flaring Satellite Survey Reveals Oil’s Hidden Costs, TREEHUGGER,Sept. 2, 2007, http://www.treehugger.com/files/2007/09/gas_flaring_satellite.php (last visited Aug. 15, 2008).


ment of CDM projects without compensation to local groups, and projects thathave continued the operation of unsafe or unhealthy conditions such as methanerecovery from garbage disposal areas.8

CERs issued from HFC-23 and N2O projects are eclipsing better projectsinvolving renewable energy and energy efficiency and driving down the price ofcarbon credits in the European Union’s Emissions Trading System, furtherreducing investment in needed energy reform. Because project developers willseek to exhaust the cheapest and easiest means of reducing emissions first,

8. See generally CARBON TRADING: A CRITICAL CONVERSATION ON CLIMATE CHANGE, PRIVATISATION, AND

POWER (Larry Lohman ed., The Dag Hammarskjold Centre Development Dialogue No. 48, Sept. 2006); CENTRE

FOR CIVIL SOCIETY & TRANSNAT’L INST., TROUBLE IN THE AIR: GLOBAL WARMING AND THE PRIVATIZED

ATMOSPHERE (Patrick Bond & Rehana Dada eds., 2006), http://www.thecornerhouse.org.uk/pdf/document/trouble.pdf (last visited Aug. 15, 2008).

FIGURE 2. Non-Renewable CDM Project by Technology

Type

Number ofCDMProjects

AverageError

AverageAbsoluteError

StandardDeviationof Error

CERsIssued/TotalValidated

Number ofProjects/TotalValidated

AverageverifiedKt CO2/year perproject

N2O 3 23.40% 23.40% 8.63% 29.44% 1.41% 6,426.99HFC-23 8 �11.39% 23.63% 32.23% 57.43% 3.76% 4,700.28Landfill Gas Flaring 4 �69.00% 69.00% 30.03% 0.40% 1.88% 66.00Agriculture Flaring 29 �72.23% 72.58% 25.74% 1.23% 13.62% 27.67Fugitive Gas 1 �20.15% 20.15% N/A 0.27% 0.47% 176.02Cement 4 �46.62% 46.62% 22.36% 0.17% 1.88% 27.54Fuel Switch 6 �24.84% 24.84% 13.46% 0.27% 2.82% 29.33Energy Efficiency 23 �11.86% 25.16% 32.30% 3.66% 10.80% 104.07Total 78 �38.72% 45.83% 40.48% 92.86% 34.74% 779.52

Source: Authors’ analysis of UNEP Risoe Centre, CDM Pipeline Overview, supra note 6.

FIGURE 3. Renewable Energy CDM Projects by Technology

Type

NumberCDMProjects

AverageError

AverageAbsoluteError

StandardDeviationof Error

CERsIssued/TotalValidated

Number ofProjects/TotalValidated

AverageverifiedKt CO2/year perproject

Wind 24 �29.86% 30.83% 20.62% 1.11% 11.27% 30.37

Biomass 67 �10.47% 27.14% 36.49% 3.13% 31.46% 30.57

Biogas 3 �8.18% 8.18% 11.83% 0.14% 1.41% 30.98

Geothermal 2 �65.07% 65.07% 33.48% 0.30% 0.94% 97.52

Hydro 34 �6.56% 39.72% 62.17% 1.28% 15.96% 24.57

Landfill Gas Power 5 �67.69% 67.69% 19.84% 1.18% 2.35% 154.67

Total 135 �15.81% 32.61% 43.73% 7.14% 63.38% 34.62

Source: Authors’ analysis of UNEP Risoe Centre, CDM Pipeline Overview, supra note 6.


renewable energy projects with higher investment costs and higher developmentbenefits will be less economically viable under the CDM than HFC-23 and N2Oprojects.9

To a large degree, the difficulty in financing renewable energy technology isinherent in the complexity of the technology and financial markets. However, thehigh number of non-renewable CERs suggests granting CERs for clearly unsus-tainable activities can be curtailed and better coordinated with other approaches,such as policies and measures. The low number of CERs for renewable energysuggests that greater efforts to overcome transaction costs and institutionalbarriers must be examined.

While the CDM has produced mixed results in verified projects to date, it isimportant to bear in mind that these are early projects in a process best describedas “learning by doing.” The CDM has been successful in catalyzing investmenttowards renewable or emissions reductions projects. CDM has mobilized commit-ments of $26.4 billion for projects that entered the CDM pipeline in 2006, over$24 billion of which was for renewable and energy efficiency projects.10 A totalof $7 billion was invested in CDM projects registered in 2006, of whichapproximately $5.7 billion was for renewable energy and energy efficiencyprojects.11 In addition, the CDM has developed a set of methodologies forapproving and evaluating projects in terms of their contributions to greenhousegas emissions reductions. These methodologies provide a foundation for evaluat-ing future investment under non-CDM mechanisms such as Joint Implementation(JI) or under a modified CDM in a post-2012 arrangement. Significantly, JIprojects entering the pipeline in 2006 attracted investment of over $6 billion,certainly assisted by the methodologies developed under CDM.12

III. REVIEWING THE CDM’S SUCCESS IN ENGAGING DEVELOPING COUNTRIES IN

THE INTERNATIONAL CLIMATE CHANGE REGIME

Another purpose of CDM is to engage developing countries in internationalclimate management efforts, consistent with the principle of “common butdifferentiated responsibility” (CBDR) adopted in the UNFCCC and KyotoProtocol. CBDR recognizes that developing countries do not have the financialresources and technology, and have not contributed to the climate problem to theextent that developed countries have, and therefore should have different obliga-tions, with sustainable development remaining a goal.

9. KAREN HOLM OLSEN, THE CLEAN DEVELOPMENT MECHANISM’S CONTRIBUTION TO SUSTAINABLE DEVELOP-MENT - REVIEW OF THE LITERATURE 13 (2005), http://www.cd4cdm.org/Publications/CDM&SustainDevelop_literature.pdf (last visited Aug. 15, 2008).

10. U.N. FRAMEWORK CONVENTION ON CLIMATE CHANGE (UNFCCC), INVESTMENT AND FINANCIAL FLOWS TO

ADDRESS CLIMATE CHANGE, ¶557-563 (2007).11. Id. ¶ 559-561.12. Id. ¶ 574.


In principle, the CDM fits well within the twin goals of CBDR of providingfinancial and technological resources and supporting sustainable development.While developing countries do not have binding commitments to reduce emis-sions, CDM permits these countries to participate in the Kyoto regime whilesupporting economic development. This participation has shifted greater atten-tion to institution building in developing countries, a practice necessary tosupport sustainable market mechanisms. One expert notes that CDM successfullyaddresses critical concerns that developing countries have expressed in relationto the fairness of international negotiations: sovereignty in terms of developmentand policy planning, trust, sustainable development, transfer of resources, andequity.13

In practice, CDM has proven effective in engaging East Asian countries ininternational climate mitigation efforts, as over two-thirds of CDM CERs areproduced in Asia.14 However, CDM has been less successful in engaging otherregions, notably throughout Africa, which accounts for only 2% of CERs.15 Thedearth of projects in Africa may reflect a lack of capacity to perform theseprojects or simply that, except for mining and some other industrial operations,Africans generally use comparatively little energy and what they do use ishydropower or biomass collected by households.16 Countries that are likely to berecipients of large-scale CDM investment have both the institutional frameworkin place to support CDM and dirty preexisting technologies that result in higherlevels of CERs under the CDM baseline rules than if they had cleaner technolo-gies. For example, in China, early adoption of approved methodologies in theHFC area and a large number of preexisting, highly polluting HFCs bothcontributed to China’s becoming the largest producer of CERs by volume.

CDM is increasing awareness of climate change problems in developingcountries, including governments, business stakeholders, and NGOs, and maycreate important political momentum toward much more ambitious mitigationactions by developing countries. At the 2007 Thirteenth Conference of the Partiesto the UN Framework Convention on Climate Change, developing countries forthe first time committed to taking “nationally appropriate mitigation actions” toaddress climate change, provided that they receive sufficient financial, technical,and capacity building support to do so; both the mitigation actions and theprovision of support would be “measurable, reportable and verifiable.”17 Thismarks an important evolution of thinking among the G-77 and China, reflecting

13. AGUS P. SARI & STEPHEN MEYERS, CLEAN DEVELOPMENT MECHANISM: PERSPECTIVES FROM DEVELOPING

COUNTRIES 10 (1999), available at http://repositories.cdlib.org/lbnl/LBNL-43418/.14. UNEP Risoe Centre (2007), supra note 6, analysis tab, tbl. 5,15. Id.16. Letter from Lauren Inouye to Craig Hart (Jan. 15, 2008) (on file with author).17. U.N. Framework Convention on Climate Change, Conference of the Parties, Thirteenth Session, Bali

Action Plan para. (1)(b)(i), Decision 1/CP.13, U.N. Doc. FCCC/CP/2007/6/Add.1 (Mar. 14, 2008), available athttp://unfccc.int/resource/docs/2007/cop13/eng/06a01.pdf.


the urgency of climate change and the understanding that the UNFCCC principleof common but differentiated responsibility should define not only the relation-ship between Annex I and non-Annex countries, but also the relationships amongnon-Annex I countries with different social, economic, and other relevantcharacteristics.

CDM can be employed within a dynamic international climate framework thatultimately engages developing countries in emissions reduction. For rapidlydeveloping countries, proposals to “graduate” to Annex I include the gradualphase-out of CDM participation and the eventual acceptance of a binding capregime.18 It will be extraordinarily difficult to use CDM as a means to forcedeveloping countries into binding commitments. Developing countries becomeincreasingly invested in CDM activities as they earn more credits and moregovernmental bodies become dependent upon CDM revenue.19 The inherentcontradiction between graduating to commitments and foregoing CDM creditshas raised concerns about the CDM’s viability in engaging in emissions reduc-tions.20 The parties to the UNFCCC must overcome this contradiction innegotiating a future regime.

IV. CDM AS A MEANS TO REDUCE GLOBAL GREENHOUSE GAS EMISSIONS

As currently constituted, the CDM permits developed countries to continueemitting over and above their caps, provided they either purchase offsets fromother Annex I emitters (that have made actual reductions) or they purchase CDMCERs from developing countries. Because developing countries do not have anycap under the Kyoto Protocol, the ability to purchase CDM CERs provides anoffset for Annex I country emissions without actual reductions in the developingcountry or the imposition of limits on the number of CERs that can be producedand sold. To address this problem, the European Union and Japan have imposed alimit on the use of CERs in their respective supplementarity rules, which ispermitted by the Kyoto Protocol at the discretion of Annex I countries.21 Further,the CDM may reinforce the traditional development pattern—that developedcountries continue to rely on energy intensive industrial infrastructure—whiledeveloping countries are encouraged to adopt technologies that, though cleaner,may not be optimal from a purely commercial viewpoint.

Addressing the emissions limit problem posed by the CDM is a matter of

18. BASIC PROJECT, THE SAO PAULO PROPOSAL FOR AN AGREEMENT ON FUTURE INTERNATIONAL CLIMATE

POLICY 16 (2007), available at http://www.basic-project.net/ (follow “Results and documents” hyperlink, thenclick on report title).

19. TAISHI SUGIYAMA ET AL, CDM IN THE POST KYOTO REGIME: INCENTIVE MECHANISM FOR DEVELOPING

COUNTRIES TO PROMOTE ENERGY CONSERVATION AND RENEWABLE ENERGIES, at 20, available at http://www.meti.go.jp/policy/global_environment/kyomecha/050531FutureCDM/Workshop/WIP_final050407.pdf.

20. Id.21. Letter from Lauren Inouye, supra note 16.


intense debate within climate negotiations. One proposed solution is to discon-tinue the CDM in the post-2012 greenhouse gas arrangements. Another optioninvolves discounting CDM CERs, so that they count as an offset for carbonemissions on less than a one-to-one ratio. Under this proposal, a CDM CER ofone ton of verified carbon reductions could be purchased and applied as an offsetagainst a smaller amount of Annex I emissions, such as half a ton (e.g., a ratio ofone-to-one-half).22 This proposal harms the interests of developing countries as itreduces their potential CERs income and undermines support for their sustain-able development, one of the two goals of the CDM.

A 2005 decision of the CDM Executive Board was intended to address theperverse incentive of chilling regulations as suggested by the N2O and HFC-23projects. That decision permits determination of the baseline scenario withoutregard to national and/or sectoral policies or regulations enacted after 2001.23

One of the implications of this rule is that the baseline scenario may be calculatedbased on technologies that are worse than those regulated by the nationalpolicies, potentially rewarding those who do not update their technology untilthey engage in a CDM project.

Many of these perverse incentives can be addressed by more restrictiveapproval of projects and methodologies, including assessment of a broadercategory of social impacts. Several organizations have proposed “best practices”which set a higher standard for projects than that adopted by the CDM methodol-ogy board. These best practices are generally more restrictive of the type ofprojects accepted (focusing on renewable energy), include an evaluation of thesustainability of projects from a social impacts perspective, and feature morerigorous review and monitoring.24 While these groups make an importantcontribution by evaluating projects, action at the level of the CDM ExecutiveBoard and Methodology Panel is necessary to address these issues.

V. EVALUATION OF CLEAN DEVELOPMENT MECHANISM IN ACHIEVING ITS

PRIMARY GOALS

This brief review of CDM in terms of encouraging clean energy technology,engagement of developing countries in the international climate mitigationregime, and reducing global greenhouse gases produces a mixed picture of theCDM. On the positive side, it has enhanced investment flows in this sector,creating a potentially important financial mechanism for developing countries. Ithas clear “learning by doing” value and has produced a number of methodologies

22. Environmental Defense, The Future of CDM Within a Post-2012 Framework Discussion Paper (July 25,2007) (unpublished manuscript on file with the authors). See also Andrew Schatz, Note, Discounting the CleanDevelopment Mechanism, 20 GEO. INT’L ENVTL. L. REV. 703 (2008).

23. UNFCCC, EXEC. BD. OF THE CLEAN DEV. MECHANISM, TWENTY-SECOND MEETING REPORT Annex 3(2005), available at http://cdm.unfccc.int/EB/022/eb22_repan3.pdf.

24. See, e.g., Gold Standard, http://www.cdmgoldstandard.org/ (last visited Aug. 15, 2008).


and procedures for implementing and monitoring renewable energy.At the same time, CDM has been sidetracked by non-renewable projects where

the focus should be on sustainable development. The CDM market’s engagementof developing countries has been uneven, primarily focusing on Asia whileneglecting Africa. Finally, the current CDM’s potential to permit developedcountries to emit beyond their caps calls into question whether it is effective inactually producing emissions reductions.

This brief review suggests that a post-2012 arrangement that incorporatesCDM should include several improvements: (a) revising the criteria for eligibilityto focus on renewable projects, (b) revisiting additionality criteria as a gatekeeperfor ensuring emissions reductions, (c) considering discounting CERs as asubstitute or additional requirement, and (d) increasing capacity building effortsfocused on Africa and other countries presently ignored by CDM.

VI. EAST ASIA CASE STUDIES

This section examines CDM activities in the steel industry in China, Japan, andSouth Korea. The analysis examines each country’s domestic laws and regula-tions relating to CDM and assesses each country’s CDM activity in the steelindustry.

A. CHINA

1. Policies and Regulations Related to CDM

China’s national CDM policies include non-binding plans or programs andbinding regulations. Non-binding plans or programs include the Eleventh Five-Year Plan,25 the National Climate Change Programs,26 and the Scientific &

25. The Five-Year Plan for National Economic and Social Development, or the Five-Year Plan, mainly aimsto arrange national key construction projects, manage the distribution of productive forces and individualsectors’ contributions to the national economy, map the direction of future development, and set targets. From1949 to 1952, the economy was in its so-called “recovery period.” In 1953, the central government implementedits first five-year plan. Except for a period of economic adjustment between 1963 and 1965, a total of tenfive-year plans have been made and implemented to date. P.R.C., The 11th Five-Year Plan, http://www.gov.cn/english/special/115y_index.htm (last visited Aug. 15, 2008). The Eleventh Five-Year Plan calls for thefollowing: building new socialist rural areas, optimizing and upgrading industrial structures, promotingconcordant development of regions, building a conservation-minded and environment-friendly society, further-ing system reform and enhancing opening-up, efficiently practicing strategies to invigorate China throughscience and education and through human resource development, and giving impetus to constructing a socialistharmonious society. Id.

26. China’s National Climate Change Program, issued on June 4, 2007, addressed climate change andshowed China’s determination to reduce total greenhouse gas (GHG) emissions. In this plan, China pledged torestructure its economy, promote clean technologies, and improve energy efficiency. However, the plan did notinclude any quantified targets for carbon dioxide emission. NAT’L DEV. & REFORM COMM’N, P.R.C., CHINA’SNATIONAL CLIMATE CHANGE PROGRAM 25 (2007), available at http://en.ndrc.gov.cn/newsrelease/P020070604561191006823.pdf.


Technology Actions on Climate Change.27 According to the Eleventh Five-YearPlan, China is to identify the top-1000 energy-intensive enterprises, introducemanagement systems to monitor and cut their energy consumption, expand theapplication of energy efficiency voluntary agreements based on a pilot projectused in the steel industry, and develop plans for introducing an energy tax.

The central government’s energy reduction plan sets ambitious targets in everyregion for the Eleventh Five-Year Plan period. According to the plan, by 2010,Jilin province is expected to reduce energy consumption per unit GDP by 30%lower than that of 2005, Shanxi and Inner Mongolia by 25%, Shandong by 22%,Yunnan and Qinghai by 17%, Hainan and Tibet by 12%, and other provinces by20%.28

China has incorporated CDM into its plans to meet its national energy andenvironmental goals. It has passed binding procedural and substantive regula-tions governing CDM. The procedural regulations are represented by the Mea-sures for Operation and Management of Clean Development Mechanism Projectsin China (“the CDM Regulation”), issued on October 12, 2005.29 The CDMregulation provides the rules and procedures for project application, approval,and management, as well as admission requirements. For the investors, the CDMregulation states that only Chinese funded or Chinese-held enterprises within theterritory of China are eligible to conduct CDM projects with foreign partners. TheMinistry of Science and Technology later clarified that an enterprise must be atleast 51% owned by Chinese nationals to qualify as Chinese-held.30 In addition,China’s government reportedly set an informal price floor for CDM CERs ofUS$10 per ton (about 80 RMB).31

In terms of substantive regulations, China has passed a number of laws andrelated legislative frameworks that require the government to develop specialfinancial incentives, market-based as well as command and control approaches,to promote sustainable development in China. These laws include the PRC-Energy Conservation Law, PRC-Renewable Energy Law, the Law on Cleaner

27. MINISTRY OF SCI. & TECH. ET AL., P.R.C., CHINA’S SCIENTIFIC & TECHNOLOGICAL ACTIONS ON CLIMATE

CHANGE 1 (2007), available at http://www.ccchina.gov.cn/WebSite/CCChina/UpFile/File199.pdf.28. China’s Energy Efficiency Target Has Applied to Provincial Level, XINHUA NET, Nov. 7, 2006,

http://news.xinhuanet.com/fortune/2006-11/07/content_5301456.htm (last visited Apr. 1, 2008) (translation byauthor).

29. OFFICE OF NAT’L COORD. COMM. ON CLIMATE CHANGE, P.R.C., MEASURES FOR OPERATION AND

MANAGEMENT OF CLEAN DEVELOPMENT MECHANISM PROJECTS IN CHINA, available at http://cdm.ccchina.gov.cn/english/NewsInfo.asp?NewsId�905 (revising the Interim Measures for Operation and Management of CleanDevelopment Mechanism Projects in China, issued on May 31, 2004 by the Chinese National Development andReform Commission (NDRC), jointly with the Ministry of Science and Technology (MOST) and Ministry ofForeign Affairs (MFA)).

30. Ministry of Sci. & Tech., P.R.C., The Notice for the Recommendation for the Candidate CDM Projectsno. 81 (2005), available at http://www.most.gov.cn/tztg/200503/t20050329_20240.htm (translation by author).

31. Xiang lei, United Nations Help Enterprises in HeNan Province to Sell CO2 and Acquire Green Credits,XINHUA NEWS, Apr. 19, 2007, available at http://cdm.ccchina.gov.cn/web/NewsInfo.asp?NewsId�1650 (trans-lation by author).


Production, and the Law on Environmental Protection. Even though these lawsdo not regulate CDM directly, they constitute the major authorities governing thepractice of CDM in China.

For example, the PRC-Renewable Energy Law (REL) provides for (a) prefer-ential electricity sales prices, (b) no-interest or low-interest loans, (c) funding forsite surveys, studies, and pilot projects, (d) tax benefits, and (e) preferential heatsales prices. The law requires that distributors purchase all available electricity,gas, heat, and liquid fuels produced by renewable energy. Under the REL, adistributor violating the purchase stipulation must reimburse the government forthe resulting lost energy and may also face fines of up to the same amount as therequired compensation.32 All the above provisions will impact the identificationof baseline scenarios for the relevant CDM projects, and, in turn, will incentivizethe investment tropism.

In October 2007, China enacted a revised PRC-Energy Conservation Law,effective April 1, 2008. The new Energy Conservation Law introduces a competi-tive market in electricity production and energy efficiency services. This model—advocated by the World Bank and adopted with local variations in jurisdictions asdiverse as the United Kingdom, Argentina, and California—usually assumes aninstitutional context that includes liberalized financial markets, corporate gover-nance, and competent, autonomous courts and agencies.33

Under the new law, the Chinese government will strengthen the managementof energy conservation among energy-intensive enterprises. The new law pro-vides that the key energy-intensive enterprises include those ventures thatconsume over 10,000 tons of standard coal per year, as well as enterprisesidentified by the State Council and the provincial governments that consume5000 to 10,000 tons of standard coal annually. Targeted industries include steel,metallurgy, building materials, and chemicals. These businesses will be subject todifferentiated resource price policies, limits on expansion and potential phase-out, and incentives to adopt more energy efficient technologies. Enforcement willbe conducted on a sectoral basis through a combination of reporting and energyaudits.34

CDM projects in China must also conform to local law, which includes a localapproval process. The revised Energy Conservation Law strengthens the localgovernments’ power to implement sustainable development policies, requiring

32. Renewable Energy Law (promulgated by the Standing Comm. Nat’l People’s Cong., Feb. 28, 2005,effective Jan. 1, 2006), available at http://www.ccchina.gov.cn/en/NewsInfo.asp?NewsId�5371 (providing theeconomic incentives and supervision measures for the research and development as well as the application ofrenewable energy technologies and projects in chapter six).

33. See Chi Zhang et al., Baselines for Carbon Emissions in the Indian and Chinese Power Sectors:Implications for International Carbon Trading, 34 ENERGY POL’Y 14 (Jan. 2005).

34. See Energy Conservation Law (promulgated by the Standing Comm. Nat’l People’s Cong., Oct. 28,2007), arts. 52, 54, available at http://www.china.com.cn/policy/txt/2007-10/29/content_9139273.htm (transla-tion by author).


that work carried out by local government officials in energy conservation shouldbe integrated into the assessment of their political performance.35

China’s laws and regulations can affect both the baseline of a project and whatis permitted in a CDM project, as the CDM project’s emissions reductions mustbe (1) additional to the baseline emissions in the absence of CDM and (2)compliant with law, thereby representing actual emissions reductions over andabove legal requirements. Some Chinese laws set minimum requirements; otherscreate demand for CDM projects. For example, both the new PRC-EnergyConservation Law and the PRC-Renewable Energy Law should generate greaterdemand for CDM in the areas of energy efficiency, because they encourageapplication of renewable energy and energy efficiency technologies.36 Even inthe absence of CDM projects, the Chinese government will still provide nationalfinancial subsidies to relevant technologies that can improve energy efficiency.

2. Sectoral Policies and Regulations Focused on Iron and Steel Industry

Manufacturing accounts for 85% of China’s total industrial energy consump-tion.37 Iron and steel comprise the fastest-growing energy-intensive manufactur-ing sector.38 As of 2007, China had maintained its position as the world’s largeststeel producer for twelve years, with annual output at 420 million tons, account-ing for 34% of world production. China’s steel industry consumes 0.3 billion tonsof standard coal per year, accounting for 15% of national industrial consumption,which is 21% less efficient than global standards.39 Further, China’s CO2

emissions from the steel industry accounts for approximately 50% of globalsteelmaking CO2 emissions.40

35. Id. art. 6 ¶ 2 (“The people’s government of each province, autonomous region or municipality directlyunder the Central Government shall report its fulfillment of energy conservation target responsibility to the StateCouncil every year.”) (translation by author).

36. Chapter VI of the PRC-Renewable Energy Law regulates economic incentives, including that: nationalfinance shall establish renewable energy development funds to support the research and development project ofapplying renewable energy technology, financial institutes shall provide preferential loans to renewable energydevelopment or application projects listed in the National Renewable Energy Industry Directory, and that thegovernment shall provide preferential tax subsidies to such projects. Renewable Energy Law, supra note 32, ch.VI (translation by author). Similarly, Chapter V of the PRC-Energy Conservation Law regulates economicincentives applying to energy efficiency technologies. Energy Conservation Law, supra note 34, ch. V(translation by author).

37. NAT’L BUREAU OF STATISTICS, P.R.C., CHINA STATISTICAL YEARBOOK 119 (2005), available at http://www.stats.gov.cn/tjsj/ndsj/2005/indexeh.htm (translation by author).

38. The Steel Industry, Gathering Effort Fighting Outdated Capacity, PEOPLE’S DAILY, June 11, 2007,available at http://news.sohu.com/20070611/n250491942.shtml (translation by author).

39. See Circular on Controlling Output, Eliminating Outdated, and Accelerating Structural Adjustment in theIron & Steel Industry (Fa Gai Gong Ye [2006] No. 1084 NDRC, MOFCOM, MLR, SEPA, GAC, AQSIQ,CBRC, CSRC), available at http://www.gov.cn/zwgk/2006-07/17/content_337825.htm (translation by author)[hereinafter Circular on Controlling Output].

40. INT’L IRON & STEEL INST. (IISI), A GLOBAL SECTOR APPROACH TO CO2 EMISSIONS REDUCTION FOR THE

STEEL INDUSTRY (2007), available at http://www.worldsteel.org/index.php?action�storypages&id�226.


In July 2005, the National Development and Reform Commission (NDRC)issued the Steel Industry Development Policy,41 a directive to guide investmentand improve the steel industry’s development. This policy provides specificrequirements for controlling total investment, phasing out older plants, andpromoting structural adjustment in the steel industry. Regarding energy effi-ciency, this policy requires iron and steel enterprises to generate electricity byusing waste heat and energy recovery, while encouraging large scale plants—those exceeding five million tons—to supply surplus electricity to the grid.

An important provision of this policy is that the government bans the buildingof new steel plants, but will encourage merger and acquisition activity thatpromotes retrofit and effective use of water, energy resources, and other materi-als. Big steel enterprises should be located in the eastern coastal areas where portfacilities provide the optimal means of transportation from a competitive andresource perspective.42

The policy also increases the threshold of investment by foreign steel compa-nies in the Chinese steel industry, allowing foreign investors to own a non-controlling interest less than 50%. To qualify, foreign investors must own andcontribute intellectual property and are generally limited to investing in theretrofit of existing operations. This regulation is difficult to enforce because HongKong-based corporations may not be subject to these restrictions. Recently,however, the world’s largest steel maker, ArcelorMittal, made a bid to take overChina Oriental Group Company Limited (“China Oriental”) by acquiring a 45%stake of China Oriental in the Hong Kong stock exchange and later raising itsstake to 73.13%, but the deal was not approved by Chinese regulators and had tobe scaled back substantially.43

For those iron and steel enterprises that violate environmental laws andregulations, the policy prohibits financial institutions from providing loans andforces government departments to deny applications for such requests as leases,environmental impact assessments, foreign investment and contracts, licenses,issuance of securities including initial public offerings or raising funds overseas,customs, and tax documents. Electricity and water supply departments aredirected to set up differentiated prices, with higher prices for energy-intensive,heavy pollution and low-technology steel enterprises, and to introduce time ofuse pricing to encourage energy efficiency during peak periods.44

In order to improve energy efficiency, the Chinese government requires thesteel industry to comply with specific laws and regulations, such as the PRC-

41. NAT’L DEV. & REFORM COMM’N, P.R.C., IRON & STEEL INDUSTRY DEVELOPMENT POLICY (2005),available at http://finance.sina.com.cn/g/20050720/11451816905.shtml (translation by author).

42. See id. ch. III, art. 10.43. See ArcelorMittal’s Takeover of China Oriental Suspended, CHINA KNOWLEDGE PRESS, Aug. 5, 2008,

2008 WLNR 14582364.44. Circular on Controlling Output, supra note 39.


Energy Conservation Law, the PRC-Clean Production Promotion Law, thePRC-Environmental Impact Assessment Law, as well as various specific energy-consuming equipment design standards. The government also encourages theChinese steel industry to participate in voluntary agreements on energy effi-ciency. The Chinese medium- and long-term energy conservation plan supportsresearch and development activities for key energy efficiency technologies.45

In addition to instituting these polices, China closed down 18.4 million tons ofoutmoded iron and steel production capacity in the first half of 2007.46 By 2010,China plans to phase out 100 million tons of obsolete iron capacity and 55 milliontons of steel capacity in order to improve energy efficiency and reduce pollu-tion.47 According to the NDRC and the Ministry of Commerce, China has startedimposing export tariffs, ranging from 5-10%, on 142 items, mainly steel prod-ucts. China also has lifted or reduced export tariff rebates for about 800 highpolluting and energy consuming products, including steel.48

While the Steel Industry Policy is not formally national climate change policy,the Chinese government has indicated in several official circulars, notices, andopinions that these policies and measures are intended as mitigation efforts.Rather than setting an emissions target, these measures are primarily for sustain-able development, co-benefiting climate mitigation through several specificapproaches such as accelerating the restructuring of energy-inefficient and highlypolluting sectors, implementing different electricity prices, adjusting steel exportrebate rates, implementing an export license system for some steel materials, andimplementing environmental protection policies.49

45. Huang Dao & Zhang Yan, Investigation on Voluntary Agreement of Energy Saving in Steel Industry, in CHINA

METALLURGY (2004), available at http://scholar.ilib.cn/A-zgyj200407010.html (translation by author).46. China Economic Information Network, China Shuts Down 18.4 Mln Tons of Iron, Steel Capacity in First

Half, Sept. 11, 2007, http://www1.cei.gov.cn/ce/doc/ceni/200709111937.htm (last visited Aug. 15, 2008).47. Id.48. Shuaihua Cheng, Address at International Centre for Trade and Sustainable Development Lunch Event:

Trade, Climate Change and Competitiveness: China Perspective (Oct. 4, 2007), available at http://www.ictsd.org/dlogue/2007-10-04/2007-10-04doc.htm (follow “Trade, Climate change and competitiveness: China Perspec-tive” hyperlink).

49. These policies include: Circular on Controlling Output, supra note 39, which is based on the Circular ofthe State Council on Accelerating the Restructuring of the Sectors with Production Capacity Redundancy, (GuoFa [2006] No. 11, the State Council); the Opinions of NDRC on Completion of Policies of Different ElectricityPrices, Guo Ban Fa [2006] No. 77 (September 17, 2006); the Circular of NDRC and State Electricity RegulatoryCommission (SERC) on Implementing Firmly Policies of Different Electricity Prices and Prohibiting IssuingPreferential Electricity Price Policies without State’s Approval, Fa Gai Jia Ge [2007] No. 773 (April 9, 2007);the Notice of the Ministry of Finance (MOF) and State Administration of Taxation (SAT) on Adjusting SteelExport Rebate Rates, Cai Shui [2007] No. 64 (April 10, 2007); the Notice of MOF and GAC on Implementationof an Export License System for Some Steel Materials, Gong Gao [2007] No. 41 (April 30, 2007); the Notice ofthe MOF and SAT on Lowering the Export Rebate Rates for Some Commodities, Cai Shui [2007] No. 90 (June19, 2007); and the Notice of MOF and GAT on Supplementary Notice of the MOF and SAT on Lowering theExport Rebate Rates for Some Commodities, Cai Shui [2007] No. 97 (July 10, 2007); and Opinions of CBRC,SEPA, and PBC on Implementing Environmental Protection Policies and Rules and Preventing Credit Risks,Huan Fa [2007] No. 108 (July 12, 2007).


3. China Iron and Steel CDM Projects

The Chinese government has incorporated CDM into its set of polices foraddressing energy consumption and pollution in the steel and iron industry. CDMprojects in this sector can reduce greenhouse gases (GHGs) and thereby help tomitigate the impacts of climate change, as well as significantly reduce harmfulemissions, including sulphur oxides (SOx), nitrous oxides (NOx), and particu-lates. These projects are also intended to enhance China’s energy security andimprove the Chinese steel industry’s international competitiveness.

The CDM pipeline indicates that at the time of writing, China had approved 44CDM projects in the steel industry, currently accounting for 5.1% of China’s totalnumber of CDM projects and projected to account for carbon reductions of15,712 Kt CO2 per year. If that number comes to fruition, it will comprise 7% ofthe total Chinese emissions reduction, as well as account for 3.8% of the totalworld emissions reduction through CDM projects.50

On average, 1.7 tons of CO2 are emitted for each ton of steel producedglobally.51 In comparison, China emits 2.162 tons of CO2 per ton of steelproduced, which is 27% greater than the world average. China’s steel industryprimarily uses the blast furnace method of steel production, which produces 2.5tons of CO2 for each ton of steel produced. In contrast, approximately 17% ofChina’s steel is produced using the electric arc furnace process,52 which emits 0.5tons of CO2 for 1 ton of steel produced.53 These data reveal that China’s CO2

emissions exceed world averages on a per ton basis and indicate the hugepotential for China’s steel industry to affect carbon emissions.

According to the analysis of the International Iron and Steel Institute, ifChina’s average energy efficiency is improved to match Japan’s efficiency level,potential CO2 reductions in China’s steel industry could exceed 180,000 Kt CO2

per year, compared to current steel CDM projects producing reductions of 15,712Kt CO2 per year.54 This shows a valuable opportunity for China to increase its

50. See UNEP Risoe Centre (2007), supra note 6.51. INT’L IRON & STEEL INST. (IISI), STEEL: THE FOUNDATION OF A SUSTAINABLE FUTURE 23 (2005)

(sustainability report), available at http://www.worldsteel.org/pictures/publicationfiles/SR2005.pdf.52. See China Iron and Steel News Net, Reducing CO2 emission in Iron and Steel Sector and Achieving the

Target of Green House Gas Reduction, http://www.cbcsd.org.cn/themes/Clean_Development_Machanism/4752.shtml (last visited Sept. 20, 2008) (translation by author).

53. China Iron and Steel News Net, supra note 52. Blast furnace is a type of metallurgical furnace used forsmelting to produce metals, generally iron. One of the biggest drawbacks of the blast furnaces is the inevitableCO2 production as iron is reduced from iron oxides by carbon; there is no economical substitute. See AmericanIron and Steel Institute, How a Blast Furnace Works, http://www.steel.org/AM/Template.cfm?Section�Home&template�/CM/HTMLDisplay.cfm&ContentID�5433 (last visited Oct. 12, 2008). However,generally, an electric arc furnace carries out cooking operations using a heat source produced by convertingelectricity into heat. See American Iron and Steel Institute, Electric Arc Furnace Steelmaking. http://www.steel.org/AM/Template.cfm?Section�Home&Template�1CM/HTMLDisplay.cfm&contentID�2117 (lastvisited Oct. 12, 2008).

54. Toshi Sakamoto, Exec. Chair, Climate Technology Initiative, Powerpoint presentation: Case Study of


energy efficiency through CDM projects and the potential for Japanese compa-nies to introduce enhanced technology to China in exchange for CDM CERs.

Several technological barriers will likely hamper the ability of China’s steelindustry to fully exploit this opportunity for reductions. A national survey by theGeneral Administration of Quality Supervision, Inspection and Quarantine of thePeople’s Republic of China (AQSIQ) showed that technical barriers, includingenergy efficiency standards, cost Chinese exporters US$36 billion directly, plusan additional US$19 billion in indirect compliance expenditures.55 One majorbarrier is lack of transparent, symmetrical information, which in turns restrictsthe free flow of best available sustainable and suitable technologies. ChineseCDM project owners are often unclear about both projects’ technologicalrequirements and what technologies are urgently needed. The CDM could bemuch more effective with better information flow, such as lists of varioustechnologies that are needed by different sectors, which would improve techno-logical transparency and cooperation.

Current practice shows that in most CDM projects, despite the import ofphysical equipment, no related knowledge about producing that advanced energyefficiency technology transfers. Since the existing CDM is project-based, anytechnology transfer takes place only incrementally, on a project-by-project basis.As a result, the technology diffuses within the host country slowly.

Existing CDM does not provide enough incentive to private investors whohold advanced technologies to transfer their expertise. Only 10% of technologiestransferred to address climate change in 2005 were patented.56 This implies an

Technology Transfer between Japan and China in Iron/Steel Industry (May 19, 2005), http://www.resourcesaver.com/file/toolmanager/O105UF1311.pdf (last visited Sept. 20, 2008).

55. Cheng, supra note 48.56. Id.

FIGURE 4. China’s Steel Sector and Global Steel Production

China’s steelproduction asa percentageof worldproduction

China’scarbonemission insteel sector asa percentageof world steelemissions

China’semission insteel sector asa percentageof world’stotal emission(all sectors)

China’semissionreduction insteel sectorthrough CDMas apercentage ofworldreductions

Ratio ofChina’s CO2

emission forevery ton ofsteelproductionover worldaverage

34% 50% 1.5-2% 3.8% 2.162 / 1.7 � 1.27

Source: Authors’ analysis of UNEP Risoe Center, CDM Pipeline Overview supra note 6.


incompatibility between implementation of international technology transfercommitment under the UNFCCC, intellectual property protections, and therealities of the market in the international technology trade.

B. JAPAN

1. Kyoto Protocol Target Achievement Plan

Pursuant to the Kyoto Protocol, Japan must reduce greenhouse gas emissionsby 6% below the 1990 level by 2012. The government of Japan’s summarizedKyoto Protocol Achievement Plan sets out Japan’s basic measures and legislationwith which to achieve this objective. Japan’s total greenhouse gas emissions were1.237 billion tons of CO2 equivalents in 1990.57 Under the 6% reductioncommitment, Japan must lower its total annual emissions to 1.163 billion tons ofCO2 equivalents by 2012.58 According to the Japanese government’s estimates,by 2010 Japan’s total emissions will increase to 1.311 billion tons, 6% over thebase year.59 Therefore, Japan is required to reduce approximately 13.6% of CO2

emissions during the first commitment period from 2008 to 2012.60

Japan now must address how it will achieve this 13.6% reduction goal.According to the Kyoto Protocol Target Achievement Plan, 3.9% of reductionswill come from forest sinks, 6.5% from domestic policies, and 1.6% from flexiblefinancial instruments such as CDM.61 In order to fully utilize flexible mecha-nisms, the government budgeted 5.7 billion yen (US$54 million) in 2005 tosupport GHG mitigation projects,62 developed international transaction logs formonitoring and recording emission credits transactions in 2007,63 and announcedits intention to invest upwards of 1 trillion yen (US$10 billion) over five years indeveloping countries for climate change mitigation and adaptation in 2008.64

Industry accounts for 38% of Japan’s total CO2 emission, followed bytransportation (21%) and other sectors including offices, business facilities, and

57. KYOTO PROTOCOL TARGET ACHIEVEMENT PLAN 10 (2005) (produced by the Global Warming PreventionHeadquarters in the Prime Minister of Japan’s cabinet), available at http://www.kantei.go.jp/foreign/policy/kyoto/050428plan_e.pdf [hereinafter KPTAP].

58. Id.59. Id.60. Id.61. Inst. for Global Env’t & Soc’y (IGES), Foreign Carbon Credits Purchasing Option Open for Japan at 1, Dec.

2006, http://www.iges.or.jp/en/pub/pdf/policybrief/005.pdf (last visited Sept. 20, 2008).62. Id.63. The International Transaction Log System Begins Operation and Effectuates Transfer of Emission

Credits Internationally, NIHON KEIZAI SHINBUN [THE JAPAN ECONOMIC JOURNAL] (Tokyo), Nov. 11, 2007, at 1(translation by author).

64. Japan To Give Y1tln in Aid To Cut Developing Nations’ Emissions, NIKKEI (Tokyo), Jan. 10, 2008;Takahiro Shinyo, Ambassador Deputy Permanent Representative of Japan to the United Nations, Cool EarthPromotion Programme: Japan’s Initiative on Climate Change 7 (Mar. 17, 2008), available at http://www.un.int/japan/jp/events/Cool%20Earth%20Promotion%20Programme.pdf.


household sectors (29%).65 (See Figure 5) According to a 2005 METI survey, the ironand steel industry was the largest CO2 emitting industry, accounting for 53.2% of allindustrial emissions66 or 20% of national emissions.67 (See Figure 6) We analyzeJapan’s iron and steel sector below.

2. Supplementary Uses of CDM and other Kyoto Mechanism in Japan

The Government of Japan regards Kyoto Mechanisms as supplementary todomestic measures.68 Nevertheless, it justified reliance on these mechanisms as acost effective means to meet reduction commitments and to prevent globalwarming.69 The government also recognizes the risks and limitations associatedwith Joint Implementation / Clean Development Mechanism (JI/CDM) projects,in particular the long period required to obtain credits.70 Starting in 2002, thegovernment has approved reliance on JI/CDM projects in order to fully utilizethese methods.71

65. KPTAP, supra note 57, at 11.66. JOINT SUBCOMM. FOR FOLLOW-UP TO THE VOLUNTARY ACTION PLAN ON THE ENV’T, INDUS. STRUCTURE

COUNCIL & ADVISORY COMM. FOR NATURAL RES. & ENERGY, RESULTS AND FUTURE ISSUES PERTAINING TO THE

FISCAL 2007 FOLLOW-UP TO THE VOLUNTARY ACTION PLAN ON THE ENVIRONMENT 3 (2007), available athttp://www.meti.go.jp/english/policy/071226Environment_VoluntaryActionPlan.pdf.

67. Id.68. KPTAP, supra note 57, at 55.69. Id.70. Id. at 56.71. Press Release, Ministry of Env’t & Tech., Japan, Results of Government Approval of CDM/JI Projects,

FIGURE 5. Japan’s Carbon Dioxide Emissions by Sector (FY2002)

Source: KYOTO PROTOCOL TARGET ACHIEVEMENT PLAN, supra note 57.


As of November 2007, the Government of Japan had approved 255 JI/CDMprojects in which it will be an investing country.72 In order to obtain approval,private investors must submit applications to the Japanese government, describ-ing seven factors: (1) the name of the project developer, (2) the sponsor in thehost country, (3) an abstract of the project, (4) the estimated amount of CO2

reductions per year, (5) the period of acquiring emission credits, (6) proof ofvalidation by host country, and (7) the location of the project.73 The governmentestimates that Japan can obtain 101.93 million tons of CO2 emission credits basedon current levels of JI/CDM activity.74 Therefore, Japanese CDM can achieveabout two-thirds of the targeted 13.6% reductions in GHGs (equivalent to 148million tons of CO2 emission in 2010) through JI/CDM projects.75

These estimates, however, may be too optimistic given the extensive adminis-trative procedures of validation, approval, registration, monitoring, verification,and certification. As noted above, high risks of delay in obtaining certifiedemission credits could frustrate Japan’s ability to meet its reductions targetsthrough CDM. These interruptions are partly due to delays at the CDM Executive

Nov. 30, 2007, at 24 available at http://www.meti.go.jp/press/20071130002/cdm.pdf (translation by author).72. Id. at 12.73. Id. at 4.74. Id. at 24.75. Id. (stating that CO2 emission reductions by CDM represents 68.24% (101.93/148.00) of the required

reductions in Japan).

FIGURE 6. Carbon Dioxide Emission of Domestic Industry

Source: Ministry of Envt. & Tech., Japan, Results and Future Issues Pertaining to the Fiscal 2007 Follow-upto the Voluntary Action Plan on the Environment 3 (Dec. 14, 2007), available at http://www.meti.go.jp/english/policy/071226 Environment-VoluntaryActionPlan.pdf.


Board level and the lack of implementation capacity in many host countries,76

and are therefore beyond the control of Japanese CER purchasers.Delays may be increasingly common as the Executive Board has lately

become more cautious in approving new verification methodologies.77 TheBoard explained in an interview that “this year 2007 there were more than 500CDM projects seeking verification, 5% of these projects were denied. Last year in2006, the denial rate was 3%. This is mainly due to the increasing number ofCDM projects this year.”78

In October 2007, the Executive Board rejected a total of ten CDM projects,three of which were proposed by the Japanese Tokyo Electric Power Companyand Mitsui & Corp.79 These three projects were the first Executive Boardrejections of CDM projects proposed by Japanese companies.80 Although thethird party validator, DOE, approved the projects, the Executive Board rejectedthem due to perceived technological problems.81 The Board explained that “Indiaand South American countries have lax validation processes and the projectsvalidated in there were more likely rejected by the United Nations than thosevalidated in China who has more stringent process.”82 In fact, the three JapaneseCDM projects in question were validated in Honduras.83 Tokyo Electric PowerCompany and Mitsui & Corp are planning to resubmit the three ventures to theExecutive Board after adjusting technological aspects of each project.84 In lightof Japan’s attaining the highest level of clean and energy efficient technology, andthe Executive Board’s subsequent rejections of CDM projects due to technologyissues, it appears that Japan fails to transfer its best technology via CDM(assuming that if the best technology were transferred, those projects would havebeen readily accepted). The next section analyzes Japan’s CDM strategy byexamining its actual practices in developing countries.

3. Japan’s Two Hundred and Fifty-Five CDM Projects

Our analysis now turns to the 255 CDM projects that Japanese companies hadlaunched as of November 2007. The Government of Japan calculates thatJI/CDM projects can deliver approximately 101.93 million tons of annual carbon

76. IGES, supra note 61, at 4 (CDM is rated as negative in terms of administrative costs, uncertainty over thelong terms impacts on reduction, and realization of the potential).

77. Interview with Mr. Kuroki, a committee of the CDM Executive Board, NIHON KEIZAI SHINBUN [JAPAN

ECONOMIC JOURNAL] (Tokyo), Nov. 14, 2007, at 9.78. Id.79. Id.80. Id. (stating that the United Nations rejected forty-six CDM projects so far but thirty-six of them were

rejected in 2007 alone).81. UN Denies Carbon Emission Credits to Japan Firms for 1st Time, NIKKEI (Tokyo), Oct. 25, 2007.82. Interview with Mr. Kuroki, supra note 77, at 9.83. Procedure to acquire CERS, NIKKEI (Tokyo), Nov. 23, 2007, at 10.84. UN Denies Carbon Emission Credits, supra note 81.


dioxide reductions.85 Analysis presented in this section is based on governmentdocuments reporting on Japanese CDM projects.

All of the CDM projects are assisted by Ministry of Economy, Technology, andIndustry (METI), except one assisted exclusively by the Ministry of ForeignAffairs (MOFA). Of these, fifty-five projects are assisted by the Ministry of Environ-ment (MOE), four with the Ministry of Land, Infrastructure, and Transport (MLIT),and two with METI. One landfill project to collect and burn methane was sponsored byMOE, MLIT, and METI collaboratively. Japanese governmental assistance facilitateshost countries and Japanese stockholders undertaking Kyoto Mechanism activities,86

and includes financial assistance for feasibility study, which covers preliminary costs(pre- and validation cost, PDD development) up to ten million yen and entire feasibilitystudy costs up to forty million yen.87

In all cases, the major investors are primarily large trading companies andelectric power companies. Trading companies expect to sell emission credits tocompanies that cannot achieve their emission reduction targets (e.g., steelcompanies).88 Electric companies plan to partly meet their emission reductiontargets by using the credits themselves because domestic investments in furtherenergy efficient facilities will not be economically justified.89

Trading companies invested in a combined 106 projects (3832.1 m/t CERs).(See Figure 7) The major purchasers are the government,90 large corporations inJapan, and Japan Carbon Finance,91 which is a subsidiary of two governmentbanks, Japan Bank For International Cooperation and Development Bank ofJapan.

Electric power companies, as a whole, invested in 82 projects (3234.77 m/tCERs). (See Figure 8) Consequently, these two major industries together in-vested in 188 CDM projects (7036.77 m/t CERs), or 74% of the total 255 CDMprojects, accounting for 69% of total CERs produced by Japanese-sponsoredprojects.

85. Press Release, Ministry of Env’t & Tech., supta note 71, at 24.86. Japan Kyoto Mechanism Acceleration Program, Japan’s Policies and Measures to Combat Climate

Change 3 (2005), available at http://www.kyomecha.org/pdf/JKAP051207.pdf.87. Id. at 7.88. Trading Companies Run on Emission Trade, ASAHI SHIMBUN INT’L (Tokyo), Oct. 1, 2007 (translation by

author).89. 18 Industries’Additional Reduction Target, NIHON KEIZAI SHINBUN [JAPAN ECONOMIC JOURNAL] (Tokyo),

Oct. 24, 2007 (translation by author).90. The Government of Japan Plans To Spend 40 billion yen This Year To Purchase Approximately 20 m/t

Emission Credits, NIKKEI ECOLOMY, Oct. 18, 2007, http://eco.nikkei.co.jp/news/article.aspx?id�2007101805988n1 (translation by author); The Government Plans To Spend Over 80 Billion Yen To PurchaseEmission Credits From Trading Companies, NIKKEI ECOLOMY, Oct. 2, 2007, http://eco.nikkei.co.jp/news/article.aspx?id�2007100302065n2 (translation by author).

91. Japan Carbon Finance, Ltd., General Outline, Presentation at the Dehli GHG Forum 5 (Jan. 31, 2006),http://www.ieta.org/ieta/www/pages/getfile.php?docID�1445 (last visited Oct 11, 2008); Japan Carbon Fi-nance Submits Application to the Government of Japan for Approval to Sell Emission Credits, NIKKEI ECOLOMY,Nov. 16, 2007, http://eco.nikkei.co.jp/news/article.aspx?id�2007111901761n2 (translation by author).


The two largest Japanese CDM investors, Kyusyu Electric Power Co. (2352.6m/t CERs) and Mitsubishi Corp. (1780.32 m/t CERs), invested in a total ofthirty-seven CDM projects (14.51% out of 255) and acquired 4132.9 m/t CERs(40.55%). These CERs mainly originated from HFC-23 and N2O projects.Kyusyu Electric Co. invested in two HFC-23 projects, which together providedover 2000 m/t CERs, and one mining methane electricity generation project.Mitsubishi invested in one HFC-23 destruction technology, which produced overhalf its CERs (1011 m/t CERs), and six N2O destruction projects.

Further, Mitsubishi Corp. and Tokyo Electric Power Co. jointly launched anew energy service company (ESCO) in order to earn emission credits.92 AnESCO arranges energy management solutions for its clients by identifying andevaluating energy saving opportunities and implementing improvements to befunded through savings.93 Typically, the clients earn the savings, while the ESCOand the client split the generated emission reductions credits. The ESCO providesemission credits for free to the client if it does not meet its emission reductionstargets based on the plan proposed by the ESCO.94

92. New Emission Credits Business, NIKKEI ECOLOMY, Dec. 13, 2007, http://eco.nikkei.co.jp/news/article.aspx?id�2007121211236n1 (translation by author).

93. Id.94. Id.

FIGURE 7. Analysis of Japan CDM by Trading Company

Source: Authors analysis of approved JI/CDM projects from Press Release, Ministry of Envt. & Tech., Japan,Results of Government Approval of CDM/JI Projects, supra note 71.


4. Japan CDM by Technology

Analysis of Japan’s CDM projects by technology reveals that it follows thepattern prevailing in the larger market; in other words, Japan deals with onlysmall numbers of the HFC-23, N2O, and methane projects. These three types ofprojects account for 74.12% of Japanese CERs, while large numbers of renew-able energy projects account for 13.99% of Japanese CERs. (See Figure 9) GivenJapan’s leadership in energy efficiency technology, the similarity between Ja-pan’s CDM activities and the general trend further reinforces the generalconclusion that the current CDM systems lack adequate incentives to promoterenewable energy.

5. Japan CDM by Country

Analysis of Japan’s CDM activity by country is consistent with our expecta-tion that there is a high degree of cooperation among Asian countries in CDM. OfJapan’s 255 CDM projects, 97 projects are in China, accounting for 56.25% of its

FIGURE 8. Analysis of Japan CDM by Electric Power Company



total CERs. South Korea accounted for the second largest volume of CERs,12.22% of Japan’s total CERs. (See Figure 10)

However, it is difficult to determine whether the activity among Asiancountries reflects the development of institutional cooperative relationships ormerely larger market trends. While Japan and China have publicly agreed tocooperate in the environment and energy efficiency fields,95 this political deci-sion has not yet been fully implemented in the practice of CDM. Further, Japan’ssourcing of CERs is consistent with the general level of CDM activity.

6. Japan CDM in Iron and Steel Industry

Japan’s iron and steel industries emit the largest amount of CO2 of any of itsindustrial sectors (181.9 m/t per year), accounting for 13% of total nationalemissions.96 Japanese iron and steel producers are engaged in a Voluntary Action

95. Environmental Cooperation is a Pillar of Japan-China Relationship, NIKKEI ECOLOMY (Tokyo), Dec. 12007, at 2, http://eco.nikkei.co.jp/news/article.aspx?id�2007113008925n1 (last visited May 10, 2008); see alsoDialogue Between Japan and China about Environmental Cooperation and Economic Co-Benefits, NIKKEI

ECOLOMY, http://eco.nikkei.co.jp/news/article.aspx?id�2007120103479n1 (last visited Apr. 1, 2008) (transla-tion by author).

96. Hydrogen Blast Furnace Will Substitute Koks and Reduce 30% of Carbon Emission in 2020, NIHON

KEIZAI SHIMBUN (Tokyo), Oct. 29, 2007 at 1 (translation by author) [hereinafter Hydrogen Blast Furnace].

FIGURE 9. Analysis of Japan CDM by Technology



Program97 which promotes a range of policies, including international technicalcooperation, research and development, and technological innovation.98 Theindustry has set a goal of 10% reduction in energy consumption and associatedcarbon emissions below 1990 levels by the year 2010.99 However, in October2006, the industry reported its failure to meet voluntary targets due to increasing

97. The Japan Iron and Steel Federation, Voluntary Action Plan, Oct. 2007, http://www.jisf.or.jp/business/ondanka/sinchoku/docs/WG071011.pdf (last visited Apr. 1, 2008) (translation by author).

98. See Hiroshi Kagechika, Production and Technology of Iron and Steel in Japan During 2005, 46ISIJ INT’L 939, 941 (2006).

99. IISI, supra note 40.

FIGURE 10. Analysis of Japan CDM by Country



production.100

To assist the iron and steel industries, METI provided to JFE Steel and NipponSteel Corp. two billion yen as seed investment to develop new blast furnacesutilizing hydrogen energy.101 This new technology seeks to reduce carbonemissions by 30% compared to existing facilities.102 The government estimatesthat this program will require twenty-five billion yen in new investment over fiveyears and actively seeks private sector investment.103 The goal is to commercial-ize the technology in ten years and to replace existing furnaces starting in the late2010s.104 Investors will be able to earn license fees and CDM credits fromprojects adopting this technology.

In order to achieve carbon emissions, the industry has purchased 4400 m/tequivalent of CERs over five years (880 m/t annually).105 Japanese iron and steelcompanies have also been active investors in CDM projects, participating in fiveJapanese CDM projects in their sector, all of which are physically located inChina. The iron and steel companies invest in the CDM projects in collaborationwith trading companies and electric power companies. The five iron and steelCDM projects collect waste heat to generate electricity.

To place Japan’s iron and steel industry CDM activity into perspective, thetotal amount of carbon emission reductions obtained are approximately 98.7 m/tper year, representing less than 1% of total carbon emission reductions byJapanese CDM. (See Figure 11) As one of the largest industry emitters of carbondioxide, Japan’s iron and steel CDM need a significant volume of reductionscredits.

Japanese iron and steel CDM projects are based on two types of technologies:Coke Dry Quenching (CDQ) and Top-Pressure Recovery Turbine (TRT). CDQtechnology reduces carbon dioxide emissions by generating electricity fromwaste heat, improving the strength and quality of cokes, and preventing airpollution such as SOx and dust. The initial cost of installation is expected to beUS$20-$40 million depending upon the size of the plant, which will be repaidwithin three to five years.106 TRT technology similarly conserves energy andreduces carbon dioxide emission through electric generation from otherwisewasted gases. Its initial cost of installation is approximately US$20-30 million

100. Additional CO2 Reduction Plan in 13 Industry, NIHON KEIZAI SHINBUN [JAPAN ECONOMIC JOURNAL](Tokyo), Oct. 12, 2007, at 3. See also Hydrogen Blast Furnace, supra note 96.

101. Hydrogen Blast Furnace, supra note 96.102. Id.103. Id. (stating that the new technology will be introduced in G8 Summit in Tokyo, Japan in 2008).104. Id. (claiming that it will be a revolution in steel industry if the technology is implemented successfully).105. Investment in Energy Saving and Swelling Burdens, NIHON KEIZAI SHINBUN [JAPAN ECONOMIC JOURNAL]

(Tokyo), Oct. 17, 2007.106. Mitsutune Yamaguchi, UNFCCC Workshop on Mitigation, Factors that Affect Innovation, Deployment

and Diffusion of Energy Efficient Technologies, Case Studies of Japan and Iron/Steel Industry (May 23, 2005),http://unfccc.int/files/meetings/sb22/in_session_workshops/application/vnd.ms-powerpoint/mitsutsune_yamaguchi.ppt (last visited May 7, 2008).


with a four to five year payback period.107 CDQ technology has a higher potentialto reduce CO2 emissions than TRT technology,108 as it reduces CO2 emissionsfour times more effectively than TRT.109 However, both technologies are economi-cally valuable from the point of view of earning emission credits.110

In response to increasing global steel demand and oil prices, Japan’s iron andsteel industries are shifting domestic production overseas to lower-cost produc-

107. Id.108. Id.109. Id.110. Id.

FIGURE 11. Iron and Steel CDM in China Invested by Japan

ID ApprovedDate

Investor ProjectType

Description MW CarbonEmissionReduction/per year

91 Dec-06 MarubeniCorp.

CDQ Waste GasCaptive PowerPlant

50 332

199 Jul-07 NEDO CDQ Comprehensiveutilization ofwaste coal gasfor electricitygenerationProject

50 270

65 Oct-06 NipponSteelCorp.

CDQ Captive powergenerationthrough wasteheat recoverysystem

25 159

120 Feb-07 MitsubishiCorp.

TRT Waste pressurerecoverysystem

30 145

165 Apr-07 NipponSteelCorp.

TRT 30 MW BF-TRTproject

30 80

Source: Authors’ analysis of UNEP Riscoe Center, CDM Pipeline Overview, supra note 6.


tion facilities, particularly within Asia.111 Investments in overseas productionfacilities were considered risky due to the high costs of construction, which oftenreached several hundred billion yen per project. However, since 2002, annualsteel requests have increased from 1-5%, primarily due to increasing demand bythe automobile industry.112 Overseas production and supply systems are nowmore effective and economical than domestic facilities, not to mention wellpositioned to supply the automobile industry that has since started full-scaleproduction in overseas plants.

C. SOUTH KOREA

1. Climate Change Policy

South Korea is a party to both the UNFCCC and the Kyoto Protocol, butpresently a non-Annex I party without an emission reduction target. However,with a relatively developed economy, South Korea is facing internationalpressure to make reduction commitments in a post-2012 arrangement.113

In 2004, South Korean emissions were 591 million tons of CO2, the tenthhighest rate in the world.114 In the absence of emissions reduction commitments,South Korean CO2 emissions are forecast to increase to 818 million tons of CO2

by 2030, a 2% annual increase, producing 60% more emissions than in 2005.115

The energy sector accounts for about 83% of total emissions while industryprocess accounts for 11.7%.116 Emissions contributions from the energy sectorare expected to be the primary source of this large increase. Notably, emissionsfrom electricity generation are expected to increase by 102% from 2005 to2030.117 South Korean emissions have been increasing, although the government

111. Iron and Steel Industry Transfer Blast Furnace in Asia, Increasing Demands of Blast Furnace in Asia,ASAHI SHIMBUN INTERNATIONAL (Tokyo), Dec. 28, 2007.

112. Id.113. See Jung Tae Young et al., Climate Policy in Republic of Korea, in ASIAN PERSPECTIVES ON CLIMATE

REGIME BEYOND 2012: CONCERNS, INTERESTS AND PRIORITIES 49, 52 (Institute for Global EnvironmentalStrategies ed., 2005), available at http://www.iges.or.jp/en/cp/pdf/report13/fulltext.pdf.

114. NAT’L ENERGY COMM. (THE REPUBLIC OF KOREA), KIHU BYEONHWA DAE-EUNG SHIN KUKKA JEONRYAK –ENERGY, SANUP BUMUN JUNGSIM [NEW NATIONAL STRATEGY AGAINST CLIMATE CHANGE – FOCUSING ON ENERGY

AND INDUSTRY SECTOR] 7 (2007), available at http://www.naenc.go.kr/sub_04/sub04_02_view.asp?page�1&bNo�69&keyfield�&key� (translation by author). See also Korea Energy Economics Institute,Onsil Gas Baechul Tonggye [Greenhouse gases emissions statistics], http://www.keei.re.kr/keei/esdb/e_g1_1.html.

115. NAT’L ENERGY COMM., supra note 114, at 8.116. Id. at 7. For the greenhouse gas inventory as of 2001, see generally Republic of Korea, Second National

Communication of the Republic of Korea Under the United Nations Framework Convention on ClimateChange, at 30-42 (Dec. 1, 2003), available at http://unfccc.int/resource/docs/natc/kornc02.pdf. See also KoreaEnergy Economics Institute, Onsil Gas Baechul Tonggye [Greenhouse gases emissions statistics], http://www.keei.re.kr/keei/esdb/e_g1_1.html. The agriculture sector and waste account for 2.7% and 2.6%, respec-tively.

117. NAT’L ENERGY COMM., supra note 114, at 8.


believes that its efforts have reduced the rate of increase from an average of 4.5%in the period from 1999 to 2001 to an average of 2.8% in 2005 to 2007, and plansto achieve further reductions.118

The South Korean government has been developing comprehensive climatechange policies since joining the UNFCCC.119 In 1998, it adopted the “Compre-hensive Action Plan” (CAP), which guides national policies and measures.120

The government reviews the CAP every three years; the fourth CAP, in whichnew policy goals are set to achieve actual emissions reduction, was published in2007.121 The government plans to establish mid- and long-term national reduc-tion targets and to prepare for a domestic emissions trading market. It regardstechnology development as vital to achieving its goals.122

2. South Korean CDM

South Korea has adopted the regulatory and institutional arrangements neces-sary to support CDM projects.123 The Korean government has promoted CDMprojects to induce technology transfer and foreign investment and to prepare forparticipation in the emissions trading market.124 In international negotiations, ithas advocated unilateral CDM for domestic projects (where a South Koreancompany or governmental entity develops CDM in South Korea).125 The govern-

118. Id. at 11.119. See also UNFCCC, Second National Communication, supra note 116, at 5–7. Even before adopting its

National Climate Change Policy Plan, Korea has long implemented various policies and measures for thepurpose of energy conservations and efficiency since the global oil crises of the 1970s, because its energysupply heavily relies on oil and gas imports. See Republic of Korea, First National Communication of theRepublic of Korea Under the United Nations Framework Convention on Climate Change, at 45-46 (Feb. 12,1998), available at http://unfccc.int/resource/docs/natc/kornc1.pdf.

120. Republic of Korea, Second National Communication, supra note 116, at 44-45. The government formedan inter-ministerial committee on climate change under the Prime Minister to produce national policies andplans in 1998. Id.

121. THE OFFICE FOR GOVERNMENT POLICY COORDINATION (THE REPUBLIC OF KOREA), KIHU BYEONHWA JE 4CHA JONGHAP DAECHAEK [THE FOURTH COMPREHENSIVE NATIONAL PLAN] 5 (2007) (showing that the first planimplemented from 1999 to 2001, the second plan from 2002 to 2004, and the third plan from 2005 to 2007)(translation by author).

122. NAT’L ENERGY COMM., supra note 114, at 42.123. As of July 2007, there is a Designated National Authority (DNA) in the Office for Government Policy

Coordination; there are two Designated Operational Entities (DOEs) (Korea Energy Management Company(KEMCO) and Korean Foundation for Quality (KFQ)) and more than five local CDM consulting companies.See Korea Energy Management Company (“KEMCO”), STATUS OF CDM IN KOREA AND CARBON FUND, at 4,available at www.unescap.org/esd/climatechange/workshop/2007_07_18/documents/Wed,18%20July/Session3/5_Young%20k.%20Joo.pdf. For information on DOEs, see also UNFCCC, List of DOEs, http://cdm.unfccc.int/DOE/list/index.html (last visited May 7, 2008).

124. See OFFICE FOR GOV’T POL’Y COORD. (THE REPUBLIC OF KOREA), KIHU BYUNHWA DAE-EUNG JE 3 CHA

CHONGHAP DAECHAEK [THE THIRD COMPREHENSIVE NATIONAL PLAN] 11 (2005).125. Unilateral CDM is the idea that non-Annex I countries initiate CDM projects with domestic financing

and technology support without participation of Annex I countries. Korea proposed unilateral CDM at the SixthConference of the Parties [hereinafter “COP”] to the UNFCCC in 2000. See Young, supra note 113, at 50. Theadvantages of unilateral CDM are that it is easier to implement than bi- or multi-lateral CDM projects because it


ment and industry have also considered participating in overseas CDM projects,even as a non-Annex I party.

As of December 2007, sixteen South Korean CDM projects were registered, ofwhich three have issued CERs. Twenty-two more are at the validation stage andthree others are under review for correction or requested registration. Based onthe project developer’s estimates, these ventures are expected to generate oversixteen million tons of CO2 of CERs per year.126 Currently, South Korea is thethird largest Asian provider of CERs, accounting for 5% of Asian CERs,following China (67%) and India (19%).127 The three South Korean projects thathave issued CERs include two N2O projects and one HFC project; together, theseaccount for 77% of the CERs expected through 2012 from the forty-one projectsthen in the pipeline.128

Of these forty-one projects, thirty-four are energy efficiency or renewableenergy projects, accounting for almost 20% of total expected CERs through2012.129 However, based on experience, expected CERs should be discounted toreflect validation or verification errors, which would reduce the amount toapproximately 16%. The government also plans to mitigate dependency on fossilfuels and to reduce emissions by increasing clean energy supply from a 2.26%share of total supply in 2006 to a 9% share by 2030.130

South Korean companies also participate in overseas CDM projects. KEPCO,an electric power company, for example, invested in two CDM projects inChina.131 Other South Korean companies similarly are preparing for investmentsin Chinese CDM projects, and South Korean CDM consulting firms currently areparticipating in projects in China.132

CDM projects have been widely criticized in South Korea. Because SouthKorean industries have already reached a high level of energy efficiency, furtheremission reductions through CDM projects might be more costly than in otherdeveloping countries.133 CDM projects that do not transfer the best available

does not require international negotiations, and it is suitable for small CDM projects that may not otherwise beattractive investments as CDM projects. Disadvantages include that it does not promote technology transfer, andhas higher delivery risk because the procedures are less clear. For general discussions on unilateral CDM, seealso MICHAEL JAHN ET AL., UNILATERAL CDM – CHANCES AND PITFALLS 6-10 (2003), available at regserver.unfccc.int/seors/file_storage/FS_442592919.

126. See UNEP Risoe Centre (2007), supra note 6.127. Id.128. See id. December 2007 figure. Id.129. See id.130. NAT’L ENERGY COMM., supra note 114, at 24.131. See KOREA ELEC. POWER CORP., 2007 ANNUAL REPORT at 39, available at http://www.kepco.co.kr/eng/

about/report/ar.html (follow link to 2007 Annual Report, “English Download”). See also Hanjeon. ChungNeimunggu-e Pungryok Baljeon 5 Gae Chuga Geonsoel [KEPCO to build 5 wind power plants in Neimenggu,China], YONHAP NEWS AGENCY, May 24, 2007.

132. See, e.g., Press Release, The Province of Gyeonggi, S. Korea, First Korean Company Advances intoChina’s N20 Emission Reduction Market, May 5, 2008 (describing contract won by Greenpla in Shandong).

133. “It is the Asian OECD countries, Japan and Korea, that have the highest level of manufacturing industry


technology reduce the potential for emissions reductions, making South Korea aless attractive place than China for foreign investors seeking to maximize theirreturns.

However, CDM is expected to work as South Korea’s primary method ofparticipating in an international trading market and of developing its domestictrading system.134 The government, anticipating emissions trading markets andCDM as tools through which to achieve its goals, stresses emissions reductionthrough market-based approaches.135 South Korean companies also want toaccumulate experience with CDM in preparation for a post-2012 regime whereSouth Korea might have emissions reduction obligations.136

3. South Korean Iron and Steel Industries

South Korea’s iron and steel industries produced 48.5 million metric tons ofcrude steel in 2006, making it the fifth largest steel producer in the world.137 Theiron and steel industries are critical sectors in which South Korea must reduceGHG emissions. These industries account for approximately 11% of the totalfinal energy consumption nationwide, 34% of CO2 emissions in the industrialsector, and 12% of the total CO2 emissions in 2000.138 The industries andgovernment have made efforts to enhance energy efficiency and reduce emis-sions. For instance, steel companies have entered into voluntary agreements withthe government to reduce energy consumption and GHG emissions. Variouscompanies also participate in a voluntary emissions reduction registration pro-gram.

As of December 2007, two CDM projects sponsored by South Korean steelcompanies were in the process of being validated.139 One is an energy efficiencyimprovement in a company’s own steel production facilities; the other is arenewable energy project.140 POSCO, a leading South Korean steel company, has

energy efficiency, followed by Europe and North America.” INT’L ENERGY AGENCY, TRACKING INDUSTRIAL

ENERGY EFFICIENCY AND CO2 EMISSIONS 20, available at http://www.iea.org/Textbase/npsum/tracking2007SUM.pdf.

134. See NAT’L ENERGY COMM., supra note 114, at 14.135. See id. at 14, 35–41.136. Chung Yeon Jin, CDM Cheongjung Kaebal Sa-eop Hae-oe Chujini Hyo-yul-jeok [Oversees CDM

Projects May be More Cost Efficient], ENERGY ECON. NEWS, Dec. 12, 2007, available at http://eenews.co.kr/sub/section_view.asp?section_num�6&news_num�51259&select�3.

137. IISI, Major steel-producing countries, 2005 and 2006, http://www.worldsteel.org/?action�storypages&id�195 (last visited May 7, 2008).

138. Heesung Shin et al., A Study on Carbon Dioxide Emission Reduction Potential in the Iron and SteelIndustry in Korea 1, available at http://www.etsap.org/worksh_6_2003/2003P_shin.pdf.

139. See UNEP Risoe Centre (2007), supra note 6.140. Id. For details on these two projects, see the following UNFCCC CDM project pages: Project 1447: Use

of FINEX Off Gas for power generation in Pohang Steel Works, http://cdm.unfccc.int/Projects/DB/TUEV-SUED1195748158.73/view (last visited Oct. 12, 2008); Project 1440, Small Hydroelectric Steelworks ofPOSCO Co., Ltd. (Gwangyang Steelworks), http://cdm.unfccc.int/Projects/DB/KEMCO1195540315.35/view


also been exploring ways to expand its CDM projects, both with reference to itsown production process and through reforestation initiatives.141 The companysees renewable energy and reforestation projects as important types of possibleCDM projects they can use and plans to participate in CDM projects in asia andelsewhere.142

South Korea’s steel industry is among the most energy efficient and technologi-cally advanced in the world.143 Industry analysts contend that further increases inenergy efficiency will be difficult without breakthrough technology development,because they believe there is little room for further emissions reduction usingcurrent technologies.144

Both the South Korean steel industry and the Ministry of Commerce, Industry,and Energy regard development of new technologies such as through CDMprojects as one of its key approaches to reducing GHG emissions. South Koreancompanies are actively developing new technology and investing in CDMprojects such as renewable energy development.

VII. CONCLUSIONS

Based on our three criteria for evaluating CDM, we conclude that CDM is:

● Not yet particularly effective in promoting renewable energy or sustainabledevelopment;

● Effective in promoting developing countries’ participation in the interna-tional climate regime; and

● Not yet able to significantly reduce emissions.

In terms of promoting renewable energy and sustainable development, we notethat the largest and most profitable CDM projects have been unsustainable HFCor N2O projects. At the same time, we recognize that CDM is still in an earlystage of its development and believe that its greatest contribution to date has beenone of practical experience, including a set of methodologies and procedures forevaluating emissions reductions projects. CDM also has been successful incatalyzing investment towards renewable energy and emissions reductionsprojects. CDM has led to investment in nearly 1500 qualified projects indeveloping countries and mobilized commitments of US$26.4 billion for projectsthat entered the CDM pipeline in 2006, over US$24 billion of which was for

(last visited Oct. 12, 2008).141. POSCO, SUSTAINABILITY REPORT 2007 at 24, 39, available at http://www.posco.com//homepage/docs/

eng/dn/sustain/report/2007_SR_en.zip.142. See id.; see also POSCO, SUSTAINABILITY REPORT 2006, at 39, available at http://www.posco.com/

homepage/docs/eng/dn/sustain/report/2006_POSCO_SR_EN.zip (stating that POSCO also announced its inten-tion to participate in reforestation projects).

143. Shin et al., supra note 138, at 1.144. ASIA PACIFIC P’SHIP ON CLEAN DEV. & CLIMATE, STEEL TASK FORCE ACTION PLAN 8, available at

http://www.asiapacificpartnership.org/SteelTF.htm (click on “Action Plan” link).


renewable energy and energy efficiency projects.145

Both China and South Korea have embraced CDM as a means to participate ininternational emissions trading markets and thereby reduce mitigation costs andrisks in the post-Kyoto regime. China hosts the largest number of CDM projectsand the Chinese government has developed an integrated approach to promotingCDM along with various policies and measures to reduce emissions. Simulta-neously, the South Korean government is moving towards developing domesticemissions trading markets, apparently in preparation for undertaking emissionsreduction commitments.

We also conclude that CDM is unlikely to significantly reduce GHG emissionsin its current form. The impact of CDM, in terms of reducing CO2 in China andSouth Korea, has so far been small. While CDM permits carbon emissions toincrease in Annex I countries, emissions are actually increasing at a faster rate inthe developing world. To place this in perspective, China’s estimated carbonemissions are around 5.6 billion tons per year, increasing by approximately 8.7%per year after 2006.146 As of November 2007, China had 859 CDM projects in itspipeline, the total effect of which it expected to help avoid 224,399 Kt of carbonequivalent output per year. Thus, on this course, China’s CDM activity wouldonly offset about 3.6% of its own emissions.147

If the scale of CDM increases to cover a significant portion of GHG emissions,it will be increasingly important to correct the design flaw in the internationallegal structure that also allows Annex I countries to rely on CDM whilecontinuing to emit GHGs, effectively undermining efforts to impose a global capon emissions. Without some limit, or discounting of CDM CERs to actualemissions, cap and trade systems coupled with CDM do not solve the fundamen-tal problem of reducing GHG emissions.

One of the most important shortcomings of CDM in East Asia is that it fails toaddress the problem of GHG leakage across national borders. As we have seen inthe case of steel manufacturing among East Asian countries, production isshifting out of Japan and South Korea and into China. While Japan, and, to anextent, South Korea, transfers technology and experience to developing countriesas part of this production shift, the newly built plants in China and other countriesgenerally do not introduce the most advanced clean technologies. Further,environmental regulation and standards are lower in developing countries.Finally, moving production overseas also reduces the demand for CDM projects

145. UNFCCC, INVESTMENT AND FINANCIAL FLOWS, supra note 10, ¶ 557-563.146. Press Release, Neth. Envt’l Assessment Agency, China Now No. 1 in CO2 emissions; USA in Second

Position, http://www.mnp.nl/en/dossiers/Climatechange/moreinfo/Chinanowno1inCO2emissionsUSAinsecondposition.html (last visited May 7, 2008); see also NAT’L DEV. & REFORM COMM., P.R.C., CHINA’S

NATIONAL CLIMATE CHANGE PROGRAMME 6-7 (2007), available at http://www.ccchina.gov.cn/WebSite/CCChina/UpFile/File188.pdf.

147. UNEP Risoe Centre (2007), supra note 6.


by eliminating the need for obtaining credits.Transfer of clean technology via CDM is superior to simply shifting produc-

tion and will require collaboration between Annex I countries and developingcountries. CDM programs need to provide greater incentives for the transfer ofenergy efficient technology in order to counter the current incentive to simplyshift production abroad, thereby moving the location of emissions to non-Annex Icountries.

Cooperation efforts between China, Japan, and South Korea have been mixed.These three countries work together to undertake many projects in China andthere is evidence of some intention to coordinate research and technologytransfer within the region. However, our steel industry case studies put intoperspective some of the limitations of both CDM and cooperation and provideevidence that the best technologies are still not being transferred. We believe thatcooperation and technology transfer will likely occur within the context of corporaterelationships, but these assessments will require further study at the company level.

Despite these issues, CDM is considered one of the key approaches that thesecountries will utilize in addressing climate change and upgrading technology.The reliance on market mechanisms is a critical issue for the international regimeto address climate change. Whether these systems are sufficient to addressclimate change remains to be seen. China is the leading global market for CDMprojects, which the Chinese government promotes along with various othermeasures to foster energy efficiency and pollution reductions. South Korea alsoactively engages in promoting policies and measures both to support andsupplement market mechanisms. Further, Japan relies heavily on CDM to provide itwith emissions reductions credits in order to meet its international commitments.

The evidence from our review of CDM in East Asia, the most active CDMmarket, preliminarily suggests that market mechanisms will prove insufficient toaddress climate change issues, and we therefore need to elevate the role of otherpolicies and measures both to support market mechanisms and to supplementthem. This view better accords with what CDM has been highly successful inachieving: jump-starting investment in clean energy in developing countries,developing expertise on new technologies, promoting awareness of the need tochange infrastructure, and revealing paths towards emissions reduction goals. Inaddition to reforming CDM to better achieve the goals of emissions reductionsand sustainability, it is clear that market approaches need to be supplemented andsupported by greater emphasis on government policies and measures if we are toaddress climate change successfully.


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