China Dams Reveal Flaws in Climate-Change Weapon

Joe McDonald and Charles J. Hanley
Sunday, January 25, 2009

Originally published in multiple news outlets; reporting by the Associated Press

XIAOXI, China - The hydroelectric dam, a low wall of concrete slicing across an old farming valley, is supposed to help a power company in distant Germany contribute to saving the climate - while putting lucrative "carbon credits" into the pockets of Chinese developers.

But in the end the new Xiaoxi dam may do nothing to lower global-warming emissions as advertised. And many of the 7,500 people displaced by the project still seethe over losing their homes and farmland.

"Nobody asked if we wanted to move," said a 38-year-old man whose family lost a small brick house. "The government just posted a notice that said, 'Your home will be demolished.'"

The dam will shortchange German consumers, Chinese villagers and the climate itself, if critics are right. And Xiaoxi is not alone.

Similar stories are repeated across China and elsewhere around the world, as hundreds of hydro projects line up for carbon credits, at a potential cost of billions to Europeans, Japanese and soon perhaps Americans, in a trading system a new U.S. government review concludes has "uncertain effects" on greenhouse-gas emissions.

One American expert is more blunt.

"The CDM" - the 4-year-old, U.N.-managed Clean Development Mechanism - "is an excessive subsidy that represents a massive waste of developed world resources," says Stanford University's Michael Wara.

Forced relocations have become common in China as people in hundreds of communities are moved to clear land for factories and other projects, provoking anger and occasionally violent protests. But what happened here is unusual in highlighting not just the human costs, but also the awkward fit between China's authoritarian system, in which complaints of official abuse abound, and Western environmental ideals.

Those ideals produced the Clean Development Mechanism as a market-based tool under the Kyoto Protocol, the 1997 agreement to combat climate change. The CDM allows industrial nations, required by Kyoto to reduce emissions of gases blamed for global warming, to comply by paying developing nations to cut their emissions instead.

Companies thousands of miles away, such as Germany's coal-burning, carbon dioxide-spewing RWE electric utility, accomplish this by buying carbon credits the U.N. issues to clean-energy projects like Xiaoxi's. The proceeds are meant to make such projects more financially feasible.

As critics point out, however, if those projects were going to be built anyway, the climate doesn't gain, but loses.

Such projects "may allow covered entities" - such as RWE - "to increase their emissions without a corresponding reduction in a developing country," the U.S. Government Accountability Office (GAO) said in its December review.

The system's defenders call it essential for hard-pressed industrialized nations to meet their Kyoto quotas, and say the CDM's standards are being tightened.

"It's not as if we're printing money in a garage," Yvo de Boer, U.N. climate chief, said of the credits. "Lots of legitimate questions are being asked," he acknowledged to The Associated Press, but "that's why I'm happy we have a transparent process."

That transparency - online project documents and a U.N. database - allowed the AP to analyze in detail this exploding market, which attracts projects ranging from small solar-power efforts in Africa, to emissions controls on giant chemical plants in India and China.

The AP has found that hydroelectric projects, whose climate impact is most widely questioned, have quickly become the No. 1 technology in the CDM, and China in particular is rushing in to capitalize.

The Chinese now have at least 763 hydro projects in the CDM approval pipeline and are adding an average of 25 a month. By 2012, those projects alone are expected to generate more than 300 million "certified emission reductions," each supposedly representing reduction of one ton of carbon dioxide. Even at recent depressed market prices, those credits would be worth $4 billion.

If the United States enters the Kyoto system, as proposed by President-elect Barack Obama, it would be the biggest player in a market expected to be worth hundreds of billions a year by 2030.

Here in central China's mist-shrouded Zishui River valley, evicted farmers worry not about carbon-market billions, but about the thousands of Chinese yuan doled out to compensate them for lost homes and farmland.

Xiaoxi residents said that when they were evicted in 2005 to make way for the dam and its 4-square-mile reservoir, officials paid too little for condemned homes and forcibly removed owners who held out for more.

They said payments for losing their rights to state-owned land, where they grew beans and squash, were far below China's legally required minimum, which they said requires payment of the value of at least five years' harvests.

Residents spoke with the AP on condition their names not be used, to avoid trouble with authorities.

The dam's state-owned builder, Hunan Xinshao Xiaoxi Hydropower Development Co., defended its dealings with the people of Xiaoxi.

"The compensation standard we adopted was relatively high compared with similar projects and was in accord with government regulations," said Wang Yi, assistant to the company's general manager.

For their homes, people said they were paid government-set prices of $4.60 to $5.70 per square foot. But such payments didn't go far, even in this remote town surrounded by small tin mines and steep, wooded hills.

"What I got certainly was not enough to buy a new place. We had to borrow more," said a man who stood holding his 1-year-old grandson in a street lined with new apartment buildings where some relocated families have moved.

He said officials refused to discuss compensation for thousands of yuan he had spent to fix up his family's house. "I refused their offer, but they forced us out and demolished it," he said.

The dam company says local surveys found overwhelming support for the project, with 97 percent of 212 respondents saying they were satisfied with their compensation. But people interviewed in Xiaoxi said they were not contacted for such surveys.

The CDM money has spawned an industry of consultants who help Chinese companies assemble bids for emissions credits, and of U.N.-certified "validators," firms that then attest that projects meet U.N. standards.

For Xiaoxi, the developer hired Germany's TUEV-SUED as validator, and then commissioned it again later to confirm that the project complied with European Union and German government requirements on "stakeholder consultation" - that local people approve of the project beforehand.

The TUEV-SUED report acknowledged that "the concerned villagers and their leaders were not involved in the decision process." But it contended the guidelines' "essence" was fulfilled because those affected "have improved their living environment."

The German Emissions Trading Authority approved Xiaoxi credits early last year, but that government agency's Wolfgang Seidel now tells the AP it is investigating questions newly raised about Xiaoxi. Julia Scharlemann, spokeswoman for beneficiary utility RWE, said it also was "making our own inquiries" regarding Xiaoxi.

A key question from environmentalists, led by the U.S.-based group International Rivers, is whether projects meet the CDM test of "additionality" - that they contribute to making real reductions of greenhouses gases rather than be business-as-usual projects capitalizing belatedly on the CDM bonanza.

At Xiaoxi, where the dam should be operating by 2010, construction began in 2004, two years before the developers applied for CDM credits, suggesting it would have been built without CDM money.

Company official Wang counters that CDM money will help pay retroactively for expensive Italian technology needed to cope with the site's complex geology. "Without the money from trading emissions credits, the project would be unprofitable," he said.

Environmentalists also point out that hydro power has long been a national priority in China. Since the 1990s - long before the CDM - the Chinese have added an average 7.7 gigawatts a year of hydro power, equivalent to six Hoover Dams annually, International Rivers reports.

In other words, Chinese planners aren't suddenly replacing emissions-heavy coal-fired power plants with emissions-free dams.

The Xiaoxi project design document, in fact, says Chinese regulations would block the building of such a relatively low-output coal plant here. But that's how planners determined the "emissions reductions" from the $183-million, 135-megawatt dam - by calculating how much carbon dioxide a 135-megawatt conventional power plant would produce instead.

That bottom line - some 450,000 tons of global-warming gases each year - would be added to RWE's permitted emissions if it buys the Xiaoxi credits, at a current annual cost of $8 million. And such calculations will be repeated at 37 other Chinese hydro projects where RWE will buy credits.

All told, the 38 are expected to produce more than 16 million CDM credits by 2012, legitimizing 16 million tons of emissions in Germany, equivalent to more than 1 percent of annual German emissions.

At today's low market prices, those credits would be worth some $300 million, paid to Chinese developers and presumably billed to German electricity customers, who by 2007 were already paying more than double the U.S. average rate per kilowatt-hour.

Utilities from Italy's Edison to Tokyo Electric are making similar deals for hydro-project credits in a dozen other countries, from Peru to India to Vietnam.

Rather than reduce their own emissions, "firms in developed countries are buying offsets that don't represent real behavioral change, real reductions in emissions," said Wara, the environmental law professor.

The U.S. GAO investigators said they learned that middlemen sometimes manipulate project paperwork to show a need for CDM financing, and they believe "a substantial number" of projects have undeservedly received credits.

The CDM system "can be 'gamed' fairly easily," said German expert Axel Michaelowa, both a critic and a CDM insider, as a member of the U.N. team that registers CDM projects.

But Michaelowa said the CDM remains "a crucial bridge between industrialized and developing countries." It has problems but they can be solved, he said.

Christiana Figueres, a Costa Rican ex-member of the board overseeing the CDM, echoed Michaelowa's view. She said it's crucial to encourage China in particular, whose coal power plants make it the world's biggest emitter of carbon dioxide, to build clean-energy facilities. And she counters critics who oppose dams in general because of their environmental impact.

"We cannot continue to demonize hydro," Figueres told the AP.

She and R.K. Sethi, the CDM Executive Board's Indian chairman, both pointed to reforms since 2007: A reinforced U.N. oversight staff, a validators' manual with stringent standards, and a growing number of board reappraisals of validator findings.

In two recent dramatic steps, the board suspended the CDM's most active validator, the Norwegian firm DNV, questioning its project assessments, and it rejected its first Chinese hydro project - after registering 139 others for credits. The project wasn't "additional," the board said, rejecting DNV's validation that it was.

But environmentalists say a total overhaul is needed, shifting from project-by-project assessments that invite "gaming," to a negotiated regime whereby the developed world, through aid funds, subsidizes emissions cuts in the developing world more broadly, industrial sector by sector.

As atmospheric carbon dioxide continues to reach record levels, threatening disruptive warming this century, the CDM pipeline continues to swell, with 4,364 projects worldwide approved or awaiting approval, one-quarter of them hydroelectric.

Here in Xiaoxi, meanwhile, where project credits await U.N. approval, dam construction jobs have produced an economic boomlet, but it's only temporary and people's grievances are not.

One group, hopeful still for a hearing, has written to authorities with their plea for more yuan for farmers' lost way of life.

"We strongly request that they give us an explanation and a satisfactory resolution," they wrote.


Joe McDonald reported from China, and Charles J. Hanley from New York. Associated Press Writer Patrick McGroarty in Berlin contributed.

More information: 

Read Ann-Kathrin Schneider's blog about this article.

Find out more about the Clean Development Mechanism's flaws.

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