Harnessing market mechanisms to promote sustainable development: Lessons from China

Case Summary: 

The effects of climate change and pollution threaten major Chinese industries and could reverse years of growth in their economy. As one way to combat climate change China signed the Kyoto protocol in 1997. The Kyoto protocol established emissions goals for each country and an emissions trading market. Countries that failed to meet their emissions goals could purchase Certified Emissions Reductions (CERs) from other countries. CERs could also be awarded by the United Nations Framework on Climate Change (UNFCC) to countries through a Clean Development Mechanism (CDM). In this way, countries could invest capital in reducing emissions anywhere in the world it was cheapest to do so, while also providing capital investment to under developed economies.

Initially, China received only a small portion of CDM contracts. But beginning in 2006, and every year since, they have received the majority. This meteoric rise has produced hundreds of clean energy projects and been a great boon to China’s economy. In order to capture this market China had several novel approaches not undertaken by other countries, but valuable to consider for clean project administrators moving forward. These include:

  • A “hands-on” process by national gatekeeper organizations. All of China’s CDM projects are authorized by a national body called the National Development and Reform Commission (NDRC). By having one organization understand and certify all projects internally China was able to coordinate its planning and develop a broad range of projects in many sectors of clean energy and energy efficiency to qualify for CDM funding and CER awards.
  • Setting restrictions on CDMs. China established rules about the types of CDM projects it would pursue and was the only country to do so. One example was that China limited the number of CERs that any CDM could pursue, limiting the size of CDMs. This seems counter-intuitive, but it allowed China to more equitably spread CDM projects among developers and regions.
  • Establish diversity in CDM projects through non-overlapping capacity building. Early on, China strictly required CDMs to not overlap in project scopes. China instead built a broad capacity for applying and successfully constructing qualifying CDM projects that gave it a broad portfolio in later years.
  • Mainstreaming climate change and energy in policy. Starting in 2006 reducing emissions and climate change mitigation policies have been included in all of China’s five-year plans, making them a central and important consideration for all of their policies at the national and local levels.
East Asia and Pacific
Action Area 
Planning and Implementation Activity 
Developing Strategies and Plans, Developing and Implementing Policies and Measures, Monitoring and Evaluation, Financing Implementation, Low Emission Development Strategies, Long-Term Strategies
Climate and Development Knowledge Network (CDKN)
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