East Asia Clean Development Mechanism: Engaging East Asian Countries in Sustainable Development and Climate Regulation Through the CDM

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 the United Nations Framework Convention on Climate Change (UNFCCC) is intended to provide ﬁnancial incentives that support the adoption of technology in developing countries to reduce carbon dioxide and other greenhouse gas emissions. In addition to encouraging sustainable development in developing countries and reducing overall greenhouse gas emissions, CDM is also widely recognized as an important means through which developing countries can engage in the international climate change regime. This article evaluates CDM’s success with three distinct goals: encouraging sustainable development in developing countries, providing an entry point for developing countries to participate in the international efforts to combat climate change, and reducing global greenhouse gas emissions. To appraise its accomplish- ments in these areas, the article presents three case studies of East Asian countries, 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 South Korea were selected for study as a group because of their importance to the region’s economic development, their potential to form cooperative relation-

* J.D., University of California at Berkeley; Ph.D., Massachusetts Institute of Technology; Counsel, Energy Infrastructure, Climate Change & Technology Practice, Alston & Bird, LLP; former Director, Climate Change Program, Center for International Environmental Law. Portions of this paper will appear in C. Hart, Climate Change 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; Center for International Environmental Law, Intern, Summer 2007. **** LL.B., China University of Politics and Law, Beijing; LL.M., American University, Washington College of Law; Center for International Environmental Law, Intern, Summer 2007. † This study was prepared for the Climate Change Program of the Center for International Environmental Law in Washington, DC. The authors are grateful to Ms. Lauren Inouye of Sindicatum Carbon Capital for her comments and suggestion on a prior version of this draft.

645 646 THE GEORGETOWN INT’L ENVTL.LAW REVIEW [Vol. 20:645 ships, and their ability to inﬂuence countries within and outside East Asia. With respect to their ability to form cooperative relationships, it is also important to note they play distinct roles within the CDM. Japan is a fully developed country that accepted commitments to reduce emissions under Annex I to the UNFCCC and the Kyoto Protocol and is a leader in technology research, development, and investment in CDM. China is the largest host country for CDM projects based on the volume of CDM emissions reductions. South Korea is both a host country for CDM 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 I status in the post-2012 arrangements that are to be negotiated to replace the Kyoto Protocol after its expiration. In looking at these countries, we elected to examine the role of CDM in the steel sector in each country. We selected the steel industry because it is an important industry to the manufacturing bases of all three countries and is one of the largest emitters of greenhouse gases. The steel industry accounts for 6-7% of 1 total global anthropogenic CO2 emissions, and accounts for over 10% of China’s 2 anthropogenic CO2 emissions. Over 90% of steel industry emissions come from iron 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’s promotion of sustainable development in developing countries, (c) reviews the CDM’s success in involving developing countries in an international climate change regime, (d) considers CDM as a means of reducing global greenhouse gas emissions, (e) evaluates CDM’s achievement of its primary goals, (f) examines CDM activities in China, Japan, and South Korea, especially in the steel industry, and (g) concludes by offering recommendations for the improvement of the CDM in a post-2012 greenhouse gas regime.

I. OVERVIEW OF CDM The CDM of the Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC) is intended to support developing countries in their efforts to develop sustainable practices and to reduce greenhouse gas emissions in Annex I countries through the creation and trade of credits for emissions reductions known as “certified emissions reductions certificates” (CERs). Under the CDM, emission reduction projects that undertake a rigorous and 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 steel industry,30ENERGY POL’Y 827, 827-838 (2002). 2. L. Price et al., Energy Use and Carbon Dioxide Emissions from Steel Production in China,5ENERGY 429, 429-446 (2002). 3. Id. 2008] CDM IN EAST ASIA 647 obligated to reduce their emissions. Project developers may either sell CERs to a third party to raise additional project revenues or use the CERs themselves to fulfill their own obligations to meet carbon emissions limits under domestic laws implemented pursuant to the Kyoto Protocol. Projects need to be approved by the Annex-I non-host country in order to be sold to an Annex-I buyer or the CERs need to be transferred to an Annex-I buyer through the International Transaction Log, which also requires a letter from the transferor’s government. Purchased CERs can be counted as emissions reductions by companies in developed countries against their greenhouse gas emissions reduction obligations under their respective national laws pursuant to the Kyoto Protocol. CERs prices are quoted in per ton of carbon dioxide (CO2) equivalent. The CDM project cycle is a multi-step process. First, parties prepare a project proposal, which explains the design of the project in a document called the Project Design Document. The Project Design Document is then evaluated by a Designated Operational Entity (DOE), a private third party certified by the CDM Executive Board, which validates the project’s design and estimates the project’s expected emissions reductions. During this phase, the project parties procure an environmental impact assessment (EIA), obtain the approval of the host government, and circulate the Project Design Document for public comment. The Project Design Document is then submitted to the CDM Executive Board, which reviews it for compliance with CDM requirements. Projects involving new methodologies must also obtain approval of the specific methodology being introduced. If approved, the project is registered with the CDM. Sponsors of registered projects must implement a monitoring plan approved by the CDM Executive Board. Pursuant to the monitoring plan, a DOE periodically verifies the actual emissions reductions recorded during each particular verification period. Based on the DOE’s written certification of the emissions reductions, the CDM Executive Board instructs the CDM Registry Administrator to issue the appropriate number of CERs to the project for each verification period.4 Although the issuance and sale of CERs potentially provides an additional source of revenue for qualifying projects, the CDM aspects of a project also involve their own subset of risks. The evaluation of CDM from a developing country’s perspective should be considered in light of the viability of CDM from the investor and regulator viewpoint, as these issues are critical to the long-term success of CDM. The market for CERs is highly uncertain beyond 2012 and subject to political agreement among the various nations that are party to the Kyoto Protocol. The analysis below takes these issues into consideration. A fuller analysis 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:AHANDBOOK OF EMISSIONS REDUCTION MECHANISMS 1, 33 (F. Yamin ed., 2005). 648 THE GEORGETOWN INT’L ENVTL.LAW REVIEW [Vol. 20:645

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 ing issues relating to the estimation and delivery of CERs, CERs price and volatility, and uncertainty concerning the future of the Kyoto Protocol arrangements and the CDM.5 China accounts for approximately 41% of the CERs produced under the CDM and 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 developing countries. One way to evaluate the CDM is in terms of its ability to promote the application of renewable energy technologies in these countries. We examine this criterion based on summary statistics and evaluate some of the incentives created by the CDM in relation to sustainable development.6 Based on the 212 CDM projects that had produced verified CERs as of July 2007, a majority of CDM projects are renewable energy projects; however, the majority of the resulting CERs are produced by the non-renewable projects. While most of the financial incentives of CDM go to non-renewable projects, the CDM has catalyzed investment flows towards renewable energy projects and has developed a set of methodologies for evaluating these projects in terms of their contributions to

5. See Craig Hart, The Clean Development Mechanism: Considerations for Investors and Policymakers,7 SUSTAINABLE 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, CDM Pipeline Overview (2007), http://cdmpipeline.org/publications/CDMpipeline.xls (Excel spreadsheet file) [hereinafter UNEP Risoe Centre (2007)]. The transfer of renewable energy technology, commonly taken to mean transferring the technological know-how to produce these technologies, is a criterion related to applying renewable energy technologies in developing countries. We will address this issue in the three case studies infra. 2008] CDM IN EAST ASIA 649 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 as of July 2007. Three N2O projects constitute nearly 30% of all CERs issued, while the eight HFC-23 projects compromise 57% of total CERs issued. These projects produce 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, as indicated by our calculations that show relatively low average error and standard deviations of the validated (estimated) versus verified (actual) number of CERs produced. Notably, N2O projects were the only projects that consistently produced more CERs than originally estimated. HFC-23 and N2O projects are subject to criticism because they are very inexpensive to implement, and thus could be handled outside the CDM through regulation at little burden to the private sector, which is fundamentally inconsis- tent with the principle of additionality. The availability of CDM credit for these projects may discourage legislative action to phase out these gases. Landfill methane recovery (for the purpose of flaring) projects are similarly not sustainable, as these projects waste the recovered gas. Estimates for about sixty countries using satellite data reveal that gas flaring during the last twelve years has ranged from 150-170 billion cubic meters annually. In 2006, the flaring of approximately 170 billion cubic meters of natural gas was approximately 27% of total United States natural gas consumption or 5.5% of total global production of natural gas. Although flaring prevents methane from entering the atmosphere, combustion of methane emits an estimated 400 million tons of carbon dioxide emissions every year.7 In contrast, the 135 renewable energy projects account for only 7.14% of total CERs issued as of July 2007. These projects produced CERs representing, on average, only 34.62 Kt CO2 per project per year, in contrast to the average 6427 Kt CO2 per project per year produced by the three N2O projects, or the 4700 Kt CO per project per year produced by the 8 HFC-23 projects. The average number 2 of CERs produced by N2O and HFC-23 projects is far greater than that of the renewable projects below, as well as far more reliable of a number, due to their nature. Another example of the CDM producing perverse incentives and unintended consequences in East Asia involves projects developing palm oil plantations to support biofuel production, which disrupt indigenous agricultural patterns and lead to deforestation. In East Asia and other regions, these issues have included displacement of and even violence against indigenous peoples due to large-scale afforestation 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). 650 THE GEORGETOWN INT’L ENVTL.LAW REVIEW [Vol. 20:645

FIGURE 2. Non-Renewable CDM Project by Technology

Average CERs Number of veriﬁed Number of Average Standard Issued/ Projects/ Kt CO2/ CDM Average Absolute Deviation Total Total year per Type Projects Error Error of Error Validated Validated project

N2O 3 23.40% 23.40% 8.63% 29.44% 1.41% 6,426.99 HFC-23 8 Ϫ11.39% 23.63% 32.23% 57.43% 3.76% 4,700.28 Landﬁll Gas Flaring 4 Ϫ69.00% 69.00% 30.03% 0.40% 1.88% 66.00 Agriculture Flaring 29 Ϫ72.23% 72.58% 25.74% 1.23% 13.62% 27.67 Fugitive Gas 1 Ϫ20.15% 20.15% N/A 0.27% 0.47% 176.02 Cement 4 Ϫ46.62% 46.62% 22.36% 0.17% 1.88% 27.54 Fuel Switch 6 Ϫ24.84% 24.84% 13.46% 0.27% 2.82% 29.33 Energy Efﬁciency 23 Ϫ11.86% 25.16% 32.30% 3.66% 10.80% 104.07 Total 78 Ϫ38.72% 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

Average CERs Number of veriﬁed Number Average Standard Issued/ Projects/ Kt CO2/ CDM Average Absolute Deviation Total Total year per Type Projects Error Error of Error Validated Validated project

Wind 24 Ϫ29.86% 30.83% 20.62% 1.11% 11.27% 30.37 Biomass 67 Ϫ10.47% 27.14% 36.49% 3.13% 31.46% 30.57 Biogas 3 Ϫ8.18% 8.18% 11.83% 0.14% 1.41% 30.98 Geothermal 2 Ϫ65.07% 65.07% 33.48% 0.30% 0.94% 97.52 Hydro 34 Ϫ6.56% 39.72% 62.17% 1.28% 15.96% 24.57 Landﬁll Gas Power 5 Ϫ67.69% 67.69% 19.84% 1.18% 2.35% 154.67 Total 135 Ϫ15.81% 32.61% 43.73% 7.14% 63.38% 34.62

Source: Authors’ analysis of UNEP Risoe Centre, CDM Pipeline Overview, supra note 6. ment of CDM projects without compensation to local groups, and projects that have continued the operation of unsafe or unhealthy conditions such as methane recovery from garbage disposal areas.8 CERs issued from HFC-23 and N2O projects are eclipsing better projects involving renewable energy and energy efﬁciency and driving down the price of carbon credits in the European Union’s Emissions Trading System, further reducing investment in needed energy reform. Because project developers will seek to exhaust the cheapest and easiest means of reducing emissions ﬁrst,

8. See generally CARBON TRADING:ACRITICAL CONVERSATION ON CLIMATE CHANGE,PRIVATISATION, AND POWER (Larry Lohman ed., The Dag Hammarskjo¨ld 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). 2008] CDM IN EAST ASIA 651 renewable energy projects with higher investment costs and higher development benefits will be less economically viable under the CDM than HFC-23 and N2O projects.9 To a large degree, the difficulty in financing renewable energy technology is inherent in the complexity of the technology and financial markets. However, the high number of non-renewable CERs suggests granting CERs for clearly unsustainable activities can be curtailed and better coordinated with other approaches, such as policies and measures. The low number of CERs for renewable energy suggests that greater efforts to overcome transaction costs and institutional barriers must be examined. While the CDM has produced mixed results in verified projects to date, it is important to bear in mind that these are early projects in a process best described as “learning by doing.” The CDM has been successful in catalyzing investment towards renewable or emissions reductions projects. CDM has mobilized commitments 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 total of $7 billion was invested in CDM projects registered in 2006, of which approximately $5.7 billion was for renewable energy and energy efficiency projects.11 In addition, the CDM has developed a set of methodologies for approving and evaluating projects in terms of their contributions to greenhouse gas emissions reductions. These methodologies provide a foundation for evaluating future investment under non-CDM mechanisms such as Joint Implementation (JI) or under a modified CDM in a post-2012 arrangement. Significantly, JI projects 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 international climate management efforts, consistent with the principle of “common but differentiated responsibility” (CBDR) adopted in the UNFCCC and Kyoto Protocol. CBDR recognizes that developing countries do not have the ﬁnancial resources and technology, and have not contributed to the climate problem to the extent that developed countries have, and therefore should have different obligations, 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. 652 THE GEORGETOWN INT’L ENVTL.LAW REVIEW [Vol. 20:645

In principle, the CDM fits well within the twin goals of CBDR of providing financial and technological resources and supporting sustainable development. While developing countries do not have binding commitments to reduce emissions, CDM permits these countries to participate in the Kyoto regime while supporting economic development. This participation has shifted greater atten- tion to institution building in developing countries, a practice necessary to support sustainable market mechanisms. One expert notes that CDM successfully addresses critical concerns that developing countries have expressed in relation to the fairness of international negotiations: sovereignty in terms of development and policy planning, trust, sustainable development, transfer of resources, and equity.13 In practice, CDM has proven effective in engaging East Asian countries in international climate mitigation efforts, as over two-thirds of CDM CERs are produced in Asia.14 However, CDM has been less successful in engaging other regions, notably throughout Africa, which accounts for only 2% of CERs.15 The dearth of projects in Africa may reflect a lack of capacity to perform these projects or simply that, except for mining and some other industrial operations, Africans generally use comparatively little energy and what they do use is hydropower or biomass collected by households.16 Countries that are likely to be recipients of large-scale CDM investment have both the institutional framework in place to support CDM and dirty preexisting technologies that result in higher levels of CERs under the CDM baseline rules than if they had cleaner technologies. For example, in China, early adoption of approved methodologies in the HFC area and a large number of preexisting, highly polluting HFCs both contributed to China’s becoming the largest producer of CERs by volume. CDM is increasing awareness of climate change problems in developing countries, including governments, business stakeholders, and NGOs, and may create important political momentum toward much more ambitious mitigation actions by developing countries. At the 2007 Thirteenth Conference of the Parties to the UN Framework Convention on Climate Change, developing countries for the first time committed to taking “nationally appropriate mitigation actions” to address climate change, provided that they receive sufficient financial, technical, and capacity building support to do so; both the mitigation actions and the provision of support would be “measurable, reportable and verifiable.”17 This marks an important evolution of thinking among the G-77 and China, reflecting

13. AGUS P. S ARI &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 at http://unfccc.int/resource/docs/2007/cop13/eng/06a01.pdf. 2008] CDM IN EAST ASIA 653 the urgency of climate change and the understanding that the UNFCCC principle of common but differentiated responsibility should define not only the relationship between Annex I and non-Annex countries, but also the relationships among non-Annex I countries with different social, economic, and other relevant characteristics. CDM can be employed within a dynamic international climate framework that ultimately engages developing countries in emissions reduction. For rapidly developing countries, proposals to “graduate” to Annex I include the gradual phase-out of CDM participation and the eventual acceptance of a binding cap regime.18 It will be extraordinarily difficult to use CDM as a means to force developing countries into binding commitments. Developing countries become increasingly invested in CDM activities as they earn more credits and more governmental bodies become dependent upon CDM revenue.19 The inherent contradiction between graduating to commitments and foregoing CDM credits has raised concerns about the CDM’s viability in engaging in emissions reductions.20 The parties to the UNFCCC must overcome this contradiction in negotiating a future regime.

IV. CDM AS A MEANS TO REDUCE GLOBAL GREENHOUSE GAS EMISSIONS As currently constituted, the CDM permits developed countries to continue emitting over and above their caps, provided they either purchase offsets from other Annex I emitters (that have made actual reductions) or they purchase CDM CERs from developing countries. Because developing countries do not have any cap under the Kyoto Protocol, the ability to purchase CDM CERs provides an offset for Annex I country emissions without actual reductions in the developing country or the imposition of limits on the number of CERs that can be produced and sold. To address this problem, the European Union and Japan have imposed a limit on the use of CERs in their respective supplementarity rules, which is permitted by the Kyoto Protocol at the discretion of Annex I countries.21 Further, the CDM may reinforce the traditional development pattern—that developed countries continue to rely on energy intensive industrial infrastructure—while developing 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, then click 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,at20,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. 654 THE GEORGETOWN INT’L ENVTL.LAW REVIEW [Vol. 20:645 intense debate within climate negotiations. One proposed solution is to discon- tinue the CDM in the post-2012 greenhouse gas arrangements. Another option involves discounting CDM CERs, so that they count as an offset for carbon emissions on less than a one-to-one ratio. Under this proposal, a CDM CER of one ton of veriﬁed carbon reductions could be purchased and applied as an offset against a smaller amount of Annex I emissions, such as half a ton (e.g., a ratio of one-to-one-half).22 This proposal harms the interests of developing countries as it reduces their potential CERs income and undermines support for their sustainable development, one of the two goals of the CDM. A 2005 decision of the CDM Executive Board was intended to address the perverse incentive of chilling regulations as suggested by the N2O and HFC-23 projects. That decision permits determination of the baseline scenario without regard 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 calculated based on technologies that are worse than those regulated by the national policies, potentially rewarding those who do not update their technology until they engage in a CDM project. Many of these perverse incentives can be addressed by more restrictive approval of projects and methodologies, including assessment of a broader category of social impacts. Several organizations have proposed “best practices” which set a higher standard for projects than that adopted by the CDM methodology board. These best practices are generally more restrictive of the type of projects accepted (focusing on renewable energy), include an evaluation of the sustainability of projects from a social impacts perspective, and feature more rigorous review and monitoring.24 While these groups make an important contribution by evaluating projects, action at the level of the CDM Executive Board and Methodology Panel is necessary to address these issues.

V. E VALUATION 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 mitigation regime, and reducing global greenhouse gases produces a mixed picture of the CDM. On the positive side, it has enhanced investment ﬂows in this sector, creating a potentially important ﬁnancial mechanism for developing countries. It has 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 Clean Development Mechanism,20GEO.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). 2008] CDM IN EAST ASIA 655 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 engagement of developing countries has been uneven, primarily focusing on Asia while neglecting Africa. Finally, the current CDM’s potential to permit developed countries to emit beyond their caps calls into question whether it is effective in actually producing emissions reductions. This brief review suggests that a post-2012 arrangement that incorporates CDM should include several improvements: (a) revising the criteria for eligibility to focus on renewable projects, (b) revisiting additionality criteria as a gatekeeper for ensuring emissions reductions, (c) considering discounting CERs as a substitute or additional requirement, and (d) increasing capacity building efforts focused 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, and South Korea. The analysis examines each country’s domestic laws and regulations relating to CDM and assesses each country’s CDM activity in the steel industry.

A. CHINA 1. Policies and Regulations Related to CDM China’s national CDM policies include non-binding plans or programs and binding 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 aims to arrange national key construction projects, manage the distribution of productive forces and individual sectors’ contributions to the national economy, map the direction of future development, and set targets. From 1949 to 1952, the economy was in its so-called “recovery period.” In 1953, the central government implemented its first five-year plan. Except for a period of economic adjustment between 1963 and 1965, a total of ten five-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 the following: building new socialist rural areas, optimizing and upgrading industrial structures, promoting concordant 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 through science and education and through human resource development, and giving impetus to constructing a socialist harmonious society. Id. 26. China’s National Climate Change Program, issued on June 4, 2007, addressed climate change and showed China’s determination to reduce total greenhouse gas (GHG) emissions. In this plan, China pledged to restructure its economy, promote clean technologies, and improve energy efficiency. However, the plan did not include any quantified targets for carbon dioxide emission. NAT’L DEV.&REFORM COMM’N, P.R.C., CHINA’S NATIONAL CLIMATE CHANGE PROGRAM 25 (2007), available at http://en.ndrc.gov.cn/newsrelease/ P020070604561191006823.pdf. 656 THE GEORGETOWN INT’L ENVTL.LAW REVIEW [Vol. 20:645

Technology Actions on Climate Change.27 According to the Eleventh Five-Year Plan, China is to identify the top-1000 energy-intensive enterprises, introduce management systems to monitor and cut their energy consumption, expand the application of energy efficiency voluntary agreements based on a pilot project used in the steel industry, and develop plans for introducing an energy tax. The central government’s energy reduction plan sets ambitious targets in every region 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 by 20%.28 China has incorporated CDM into its plans to meet its national energy and environmental goals. It has passed binding procedural and substantive regulations governing CDM. The procedural regulations are represented by the Mea- sures for Operation and Management of Clean Development Mechanism Projects in China (“the CDM Regulation”), issued on October 12, 2005.29 The CDM regulation provides the rules and procedures for project application, approval, and management, as well as admission requirements. For the investors, the CDM regulation states that only Chinese funded or Chinese-held enterprises within the territory of China are eligible to conduct CDM projects with foreign partners. The Ministry of Science and Technology later clarified that an enterprise must be at least 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 of US$10 per ton (about 80 RMB).31 In terms of substantive regulations, China has passed a number of laws and related legislative frameworks that require the government to develop special financial 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 by author). 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?NewsIdϭ905 (revising the Interim Measures for Operation and Management of Clean Development Mechanism Projects in China, issued on May 31, 2004 by the Chinese National Development and Reform Commission (NDRC), jointly with the Ministry of Science and Technology (MOST) and Ministry of Foreign Affairs (MFA)). 30. Ministry of Sci. & Tech., P.R.C., The Notice for the Recommendation for the Candidate CDM Projects no. 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?NewsIdϭ1650 (translation by author). 2008] CDM IN EAST ASIA 657

Production, and the Law on Environmental Protection. Even though these laws do not regulate CDM directly, they constitute the major authorities governing the practice of CDM in China. For example, the PRC-Renewable Energy Law (REL) provides for (a) preferential electricity sales prices, (b) no-interest or low-interest loans, (c) funding for site surveys, studies, and pilot projects, (d) tax benefits, and (e) preferential heat sales prices. The law requires that distributors purchase all available electricity, gas, heat, and liquid fuels produced by renewable energy. Under the REL, a distributor violating the purchase stipulation must reimburse the government for the resulting lost energy and may also face fines of up to the same amount as the required compensation.32 All the above provisions will impact the identification of baseline scenarios for the relevant CDM projects, and, in turn, will incentivize the investment tropism. In October 2007, China enacted a revised PRC-Energy Conservation Law, effective April 1, 2008. The new Energy Conservation Law introduces a competitive market in electricity production and energy efficiency services. This model— advocated by the World Bank and adopted with local variations in jurisdictions as diverse as the United Kingdom, Argentina, and California—usually assumes an institutional 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 management of energy conservation among energy-intensive enterprises. The new law provides that the key energy-intensive enterprises include those ventures that consume over 10,000 tons of standard coal per year, as well as enterprises identified by the State Council and the provincial governments that consume 5000 to 10,000 tons of standard coal annually. Targeted industries include steel, metallurgy, building materials, and chemicals. These businesses will be subject to differentiated resource price policies, limits on expansion and potential phase- out, and incentives to adopt more energy efficient technologies. Enforcement will be conducted on a sectoral basis through a combination of reporting and energy audits.34 CDM projects in China must also conform to local law, which includes a local approval process. The revised Energy Conservation Law strengthens the local governments’ 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?NewsIdϭ5371 (providing the economic incentives and supervision measures for the research and development as well as the application of renewable 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,34ENERGY 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 (translation by author). 658 THE GEORGETOWN INT’L ENVTL.LAW REVIEW [Vol. 20:645 that work carried out by local government officials in energy conservation should be integrated into the assessment of their political performance.35 China’s laws and regulations can affect both the baseline of a project and what is permitted in a CDM project, as the CDM project’s emissions reductions must be (1) additional to the baseline emissions in the absence of CDM and (2) compliant with law, thereby representing actual emissions reductions over and above legal requirements. Some Chinese laws set minimum requirements; others create demand for CDM projects. For example, both the new PRC-Energy Conservation Law and the PRC-Renewable Energy Law should generate greater demand for CDM in the areas of energy efficiency, because they encourage application of renewable energy and energy efficiency technologies.36 Even in the absence of CDM projects, the Chinese government will still provide national financial 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 consumption.37 Iron and steel comprise the fastest-growing energy-intensive manufacturing sector.38 As of 2007, China had maintained its position as the world’s largest steel producer for twelve years, with annual output at 420 million tons, accounting for 34% of world production. China’s steel industry consumes 0.3 billion tons of standard coal per year, accounting for 15% of national industrial consumption, 39 which is 21% less efﬁcient than global standards. Further, China’s CO2 emissions from the steel industry accounts for approximately 50% of global 40 steelmaking CO2 emissions.

35. Id. art.6¶2(“The people’s government of each province, autonomous region or municipality directly under the Central Government shall report its fulfillment of energy conservation target responsibility to the State Council every year.”) (translation by author). 36. Chapter VI of the PRC-Renewable Energy Law regulates economic incentives, including that: national finance shall establish renewable energy development funds to support the research and development project of applying renewable energy technology, financial institutes shall provide preferential loans to renewable energy development or application projects listed in the National Renewable Energy Industry Directory, and that the government 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 economic incentives 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 the Iron & 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?actionϭstorypages&idϭ226. 2008] CDM IN EAST ASIA 659

In July 2005, the National Development and Reform Commission (NDRC) issued the Steel Industry Development Policy,41 a directive to guide investment and improve the steel industry’s development. This policy provides specific requirements for controlling total investment, phasing out older plants, and promoting structural adjustment in the steel industry. Regarding energy efficiency, this policy requires iron and steel enterprises to generate electricity by using 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 building of new steel plants, but will encourage merger and acquisition activity that promotes retrofit and effective use of water, energy resources, and other materials. Big steel enterprises should be located in the eastern coastal areas where port facilities provide the optimal means of transportation from a competitive and resource perspective.42 The policy also increases the threshold of investment by foreign steel companies in the Chinese steel industry, allowing foreign investors to own a non- controlling interest less than 50%. To qualify, foreign investors must own and contribute intellectual property and are generally limited to investing in the retrofit of existing operations. This regulation is difficult to enforce because Hong Kong-based corporations may not be subject to these restrictions. Recently, however, the world’s largest steel maker, ArcelorMittal, made a bid to take over China Oriental Group Company Limited (“China Oriental”) by acquiring a 45% stake of China Oriental in the Hong Kong stock exchange and later raising its stake to 73.13%, but the deal was not approved by Chinese regulators and had to be scaled back substantially.43 For those iron and steel enterprises that violate environmental laws and regulations, the policy prohibits financial institutions from providing loans and forces 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 are directed to set up differentiated prices, with higher prices for energy-intensive, heavy pollution and low-technology steel enterprises, and to introduce time of use pricing to encourage energy efficiency during peak periods.44 In order to improve energy efficiency, the Chinese government requires the steel 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. 660 THE GEORGETOWN INT’L ENVTL.LAW REVIEW [Vol. 20:645

Energy Conservation Law, the PRC-Clean Production Promotion Law, the PRC-Environmental Impact Assessment Law, as well as various specific energy- consuming equipment design standards. The government also encourages the Chinese steel industry to participate in voluntary agreements on energy efficiency. The Chinese medium- and long-term energy conservation plan supports research and development activities for key energy efficiency technologies.45 In addition to instituting these polices, China closed down 18.4 million tons of outmoded 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 million tons of steel capacity in order to improve energy efficiency and reduce pollution.47 According to the NDRC and the Ministry of Commerce, China has started imposing export tariffs, ranging from 5-10%, on 142 items, mainly steel products. China also has lifted or reduced export tariff rebates for about 800 high polluting 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, and opinions that these policies and measures are intended as mitigation efforts. Rather than setting an emissions target, these measures are primarily for sustainable development, co-benefiting climate mitigation through several specific approaches such as accelerating the restructuring of energy-inefficient and highly polluting sectors, implementing different electricity prices, adjusting steel export rebate rates, implementing an export license system for some steel materials, and implementing 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 of the State Council on Accelerating the Restructuring of the Sectors with Production Capacity Redundancy, (Guo Fa [2006] No. 11, the State Council); the Opinions of NDRC on Completion of Policies of Different Electricity Prices, Guo Ban Fa [2006] No. 77 (September 17, 2006); the Circular of NDRC and State Electricity Regulatory Commission (SERC) on Implementing Firmly Policies of Different Electricity Prices and Prohibiting Issuing Preferential 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 Steel Export Rebate Rates, Cai Shui [2007] No. 64 (April 10, 2007); the Notice of MOF and GAC on Implementation of an Export License System for Some Steel Materials, Gong Gao [2007] No. 41 (April 30, 2007); the Notice of the MOF and SAT on Lowering the Export Rebate Rates for Some Commodities, Cai Shui [2007] No. 90 (June 19, 2007); and the Notice of MOF and GAT on Supplementary Notice of the MOF and SAT on Lowering the Export 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). 2008] CDM IN EAST ASIA 661

3. China Iron and Steel CDM Projects The Chinese government has incorporated CDM into its set of polices for addressing energy consumption and pollution in the steel and iron industry. CDM projects in this sector can reduce greenhouse gases (GHGs) and thereby help to mitigate the impacts of climate change, as well as significantly reduce harmful emissions, including sulphur oxides (SOx), nitrous oxides (NOx), and particu- lates. These projects are also intended to enhance China’s energy security and improve the Chinese steel industry’s international competitiveness. The CDM pipeline indicates that at the time of writing, China had approved 44 CDM projects in the steel industry, currently accounting for 5.1% of China’s total number of CDM projects and projected to account for carbon reductions of 15,712 Kt CO2 per year. If that number comes to fruition, it will comprise 7% of the total Chinese emissions reduction, as well as account for 3.8% of the total world emissions reduction through CDM projects.50 On average, 1.7 tons of CO2 are emitted for each ton of steel produced 51 globally. In comparison, China emits 2.162 tons of CO2 per ton of steel produced, which is 27% greater than the world average. China’s steel industry primarily uses the blast furnace method of steel production, which produces 2.5 tons of CO2 for each ton of steel produced. In contrast, approximately 17% of China’s steel is produced using the electric arc furnace process,52 which emits 0.5 53 tons of CO2 for 1 ton of steel produced. These data reveal that China’s CO2 emissions exceed world averages on a per ton basis and indicate the huge potential for China’s steel industry to affect carbon emissions. According to the analysis of the International Iron and Steel Institute, if China’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 15,712 54 Kt CO2 per year. 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 for smelting to produce metals, generally iron. One of the biggest drawbacks of the blast furnaces is the inevitable CO2 production as iron is reduced from iron oxides by carbon; there is no economical substitute. See American Iron and Steel Institute, How a Blast Furnace Works, http://www.steel.org/AM/Template.cfm? SectionϭHome&templateϭ/CM/HTMLDisplay.cfm&ContentIDϭ5433 (last visited Oct. 12, 2008). However, generally, an electric arc furnace carries out cooking operations using a heat source produced by converting electricity into heat. See American Iron and Steel Institute, Electric Arc Furnace Steelmaking. http:// www.steel.org/AM/Template.cfm?SectionϭHome&Templateϭ1CM/HTMLDisplay.cfm&contentIDϭ2117 (last visited Oct. 12, 2008). 54. Toshi Sakamoto, Exec. Chair, Climate Technology Initiative, Powerpoint presentation: Case Study of 662 THE GEORGETOWN INT’L ENVTL.LAW REVIEW [Vol. 20:645

FIGURE 4. China’s Steel Sector and Global Steel Production China’s steel China’s China’s China’s Ratio of production as carbon emission in emission China’s CO2 a percentage emission in steel sector as reduction in emission for of world steel sector as a percentage steel sector every ton of production a percentage of world’s through CDM steel of world steel total emission as a production emissions (all sectors) percentage of over world world average reductions

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

Source: Authors’ analysis of UNEP Risoe Center, CDM Pipeline Overview supra note 6. energy efficiency through CDM projects and the potential for Japanese companies to introduce enhanced technology to China in exchange for CDM CERs. Several technological barriers will likely hamper the ability of China’s steel industry to fully exploit this opportunity for reductions. A national survey by the General Administration of Quality Supervision, Inspection and Quarantine of the People’s Republic of China (AQSIQ) showed that technical barriers, including energy efficiency standards, cost Chinese exporters US$36 billion directly, plus an additional US$19 billion in indirect compliance expenditures.55 One major barrier is lack of transparent, symmetrical information, which in turns restricts the free flow of best available sustainable and suitable technologies. Chinese CDM project owners are often unclear about both projects’ technological requirements and what technologies are urgently needed. The CDM could be much more effective with better information flow, such as lists of various technologies that are needed by different sectors, which would improve technological transparency and cooperation. Current practice shows that in most CDM projects, despite the import of physical equipment, no related knowledge about producing that advanced energy efficiency technology transfers. Since the existing CDM is project-based, any technology 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 who hold advanced technologies to transfer their expertise. Only 10% of technologies transferred 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. 2008] CDM IN EAST ASIA 663 incompatibility between implementation of international technology transfer commitment under the UNFCCC, intellectual property protections, and the realities 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 emissions by 6% below the 1990 level by 2012. The government of Japan’s summarized Kyoto Protocol Achievement Plan sets out Japan’s basic measures and legislation with which to achieve this objective. Japan’s total greenhouse gas emissions were 57 1.237 billion tons of CO2 equivalents in 1990. Under the 6% reduction commitment, Japan must lower its total annual emissions to 1.163 billion tons of 58 CO2 equivalents by 2012. According to the Japanese government’s estimates, by 2010 Japan’s total emissions will increase to 1.311 billion tons, 6% over the 59 base year. 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 reductions will come from forest sinks, 6.5% from domestic policies, and 1.6% from flexible financial instruments such as CDM.61 In order to fully utilize flexible mechanisms, the government budgeted 5.7 billion yen (US$54 million) in 2005 to support GHG mitigation projects,62 developed international transaction logs for monitoring and recording emission credits transactions in 2007,63 and announced its intention to invest upwards of 1 trillion yen (US$10 billion) over five years in developing countries for climate change mitigation and adaptation in 2008.64 Industry accounts for 38% of Japan’s total CO2 emission, followed by transportation (21%) and other sectors including offices, business facilities, and

57. KYOTO PROTOCOL TARGET ACHIEVEMENT PLAN 10 (2005) (produced by the Global Warming Prevention Headquarters 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 Earth Promotion 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. 664 THE GEORGETOWN INT’L ENVTL.LAW REVIEW [Vol. 20:645

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

Source: KYOTO PROTOCOL TARGET ACHIEVEMENT PLAN, supra note 57. household sectors (29%).65 (See Figure 5) According to a 2005 METI survey, the iron and steel industry was the largest CO2 emitting industry, accounting for 53.2% of all industrial emissions66 or 20% of national emissions.67 (See Figure 6) We analyze Japan’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 to domestic measures.68 Nevertheless, it justiﬁed reliance on these mechanisms as a cost effective means to meet reduction commitments and to prevent global warming.69 The government also recognizes the risks and limitations associated with Joint Implementation / Clean Development Mechanism (JI/CDM) projects, in particular the long period required to obtain credits.70 Starting in 2002, the government has approved reliance on JI/CDM projects in order to fully utilize these 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 at http://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, 2008] CDM IN EAST ASIA 665

FIGURE 6. Carbon Dioxide Emission of Domestic Industry

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

As of November 2007, the Government of Japan had approved 255 JI/CDM projects in which it will be an investing country.72 In order to obtain approval, private investors must submit applications to the Japanese government, describing seven factors: (1) the name of the project developer, (2) the sponsor in the host 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 of validation by host country, and (7) the location of the project.73 The government estimates that Japan can obtain 101.93 million tons of CO2 emission credits based on current levels of JI/CDM activity.74 Therefore, Japanese CDM can achieve about two-thirds of the targeted 13.6% reductions in GHGs (equivalent to 148 75 million tons of CO2 emission in 2010) through JI/CDM projects. These estimates, however, may be too optimistic given the extensive administrative procedures of validation, approval, registration, monitoring, verification, and certification. As noted above, high risks of delay in obtaining certified emission credits could frustrate Japan’s ability to meet its reductions targets through 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). 666 THE GEORGETOWN INT’L ENVTL.LAW REVIEW [Vol. 20:645

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 The Board explained in an interview that “this year 2007 there were more than 500 CDM projects seeking verification, 5% of these projects were denied. Last year in 2006, the denial rate was 3%. This is mainly due to the increasing number of CDM 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 Company and Mitsui & Corp.79 These three projects were the first Executive Board rejections of CDM projects proposed by Japanese companies.80 Although the third party validator, DOE, approved the projects, the Executive Board rejected them due to perceived technological problems.81 The Board explained that “India and South American countries have lax validation processes and the projects validated in there were more likely rejected by the United Nations than those validated in China who has more stringent process.”82 In fact, the three Japanese CDM projects in question were validated in Honduras.83 Tokyo Electric Power Company and Mitsui & Corp are planning to resubmit the three ventures to the Executive Board after adjusting technological aspects of each project.84 In light of Japan’s attaining the highest level of clean and energy efficient technology, and the Executive Board’s subsequent rejections of CDM projects due to technology issues, it appears that Japan fails to transfer its best technology via CDM (assuming that if the best technology were transferred, those projects would have been readily accepted). The next section analyzes Japan’s CDM strategy by examining 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 had launched as of November 2007. The Government of Japan calculates that JI/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 the long 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. 2008] CDM IN EAST ASIA 667 dioxide reductions.85 Analysis presented in this section is based on government documents reporting on Japanese CDM projects. All of the CDM projects are assisted by Ministry of Economy, Technology, and Industry (METI), except one assisted exclusively by the Ministry of Foreign Affairs (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 by MOE, MLIT, and METI collaboratively. Japanese governmental assistance facilitates host 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 feasibility study costs up to forty million yen.87 In all cases, the major investors are primarily large trading companies and electric power companies. Trading companies expect to sell emission credits to companies that cannot achieve their emission reduction targets (e.g., steel companies).88 Electric companies plan to partly meet their emission reduction targets by using the credits themselves because domestic investments in further energy 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 in Japan, and Japan Carbon Finance,91 which is a subsidiary of two government banks, Japan Bank For International Cooperation and Development Bank of Japan. Electric power companies, as a whole, invested in 82 projects (3234.77 m/t CERs). (See Figure 8) Consequently, these two major industries together invested in 188 CDM projects (7036.77 m/t CERs), or 74% of the total 255 CDM projects, accounting for 69% of total CERs produced by Japanese-sponsored projects.

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?idϭ 2007101805988n1 (translation by author); The Government Plans To Spend Over 80 Billion Yen To Purchase Emission Credits From Trading Companies,NIKKEI ECOLOMY, Oct. 2, 2007, http://eco.nikkei.co.jp/news/ article.aspx?idϭ2007100302065n2 (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?docIDϭ1445 (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?idϭ2007111901761n2 (translation by author). 668 THE GEORGETOWN INT’L ENVTL.LAW REVIEW [Vol. 20:645

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.

The two largest Japanese CDM investors, Kyusyu Electric Power Co. (2352.6 m/t CERs) and Mitsubishi Corp. (1780.32 m/t CERs), invested in a total of thirty-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 provided over 2000 m/t CERs, and one mining methane electricity generation project. Mitsubishi invested in one HFC-23 destruction technology, which produced over half its CERs (1011 m/t CERs), and six N2O destruction projects. Further, Mitsubishi Corp. and Tokyo Electric Power Co. jointly launched a new energy service company (ESCO) in order to earn emission credits.92 An ESCO arranges energy management solutions for its clients by identifying and evaluating energy saving opportunities and implementing improvements to be funded through savings.93 Typically, the clients earn the savings, while the ESCO and the client split the generated emission reductions credits. The ESCO provides emission credits for free to the client if it does not meet its emission reductions targets 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?idϭ2007121211236n1 (translation by author). 93. Id. 94. Id. 2008] CDM IN EAST ASIA 669

FIGURE 8. Analysis of Japan CDM by Electric Power 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 the pattern prevailing in the larger market; in other words, Japan deals with only small numbers of the HFC-23, N2O, and methane projects. These three types of projects account for 74.12% of Japanese CERs, while large numbers of renewable energy projects account for 13.99% of Japanese CERs. (See Figure 9) Given Japan’s leadership in energy efﬁciency technology, the similarity between Ja- pan’s CDM activities and the general trend further reinforces the general conclusion that the current CDM systems lack adequate incentives to promote renewable 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. Of Japan’s 255 CDM projects, 97 projects are in China, accounting for 56.25% of its 670 THE GEORGETOWN INT’L ENVTL.LAW REVIEW [Vol. 20:645

FIGURE 9. Analysis of Japan CDM by Technology

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. 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 Asian countries reflects the development of institutional cooperative relationships or merely larger market trends. While Japan and China have publicly agreed to cooperate in the environment and energy efficiency fields,95 this political decision has not yet been fully implemented in the practice of CDM. Further, Japan’s sourcing 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 its industrial sectors (181.9 m/t per year), accounting for 13% of total national emissions.96 Japanese iron and steel producers are engaged in a VoluntaryAction

95. Environmental Cooperation is a Pillar of Japan-China Relationship,NIKKEI ECOLOMY (Tokyo), Dec. 1 2007, at 2, http://eco.nikkei.co.jp/news/article.aspx?idϭ2007113008925n1 (last visited May 10, 2008); see also Dialogue Between Japan and China about Environmental Cooperation and Economic Co-Beneﬁts,NIKKEI ECOLOMY, http://eco.nikkei.co.jp/news/article.aspx?idϭ2007120103479n1 (last visited Apr. 1, 2008) (translation 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]. 2008] CDM IN EAST ASIA 671

FIGURE 10. Analysis of Japan CDM by Country

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.

Program97 which promotes a range of policies, including international technical cooperation, research and development, and technological innovation.98 The industry has set a goal of 10% reduction in energy consumption and associated carbon emissions below 1990 levels by the year 2010.99 However, in October 2006, 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, 46 ISIJ INT’L 939, 941 (2006). 99. IISI, supra note 40. 672 THE GEORGETOWN INT’L ENVTL.LAW REVIEW [Vol. 20:645 production.100 To assist the iron and steel industries, METI provided to JFE Steel and Nippon Steel Corp. two billion yen as seed investment to develop new blast furnaces utilizing hydrogen energy.101 This new technology seeks to reduce carbon emissions by 30% compared to existing facilities.102 The government estimates that this program will require twenty-five billion yen in new investment over five years 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 late 2010s.104 Investors will be able to earn license fees and CDM credits from projects adopting this technology. In order to achieve carbon emissions, the industry has purchased 4400 m/t equivalent of CERs over five years (880 m/t annually).105 Japanese iron and steel companies have also been active investors in CDM projects, participating in five Japanese CDM projects in their sector, all of which are physically located in China. The iron and steel companies invest in the CDM projects in collaboration with trading companies and electric power companies. The five iron and steel CDM projects collect waste heat to generate electricity. To place Japan’s iron and steel industry CDM activity into perspective, the total amount of carbon emission reductions obtained are approximately 98.7 m/t per year, representing less than 1% of total carbon emission reductions by Japanese CDM. (See Figure 11) As one of the largest industry emitters of carbon dioxide, Japan’s iron and steel CDM need a significant volume of reductions credits. Japanese iron and steel CDM projects are based on two types of technologies: Coke Dry Quenching (CDQ) and Top-Pressure Recovery Turbine (TRT). CDQ technology reduces carbon dioxide emissions by generating electricity from waste heat, improving the strength and quality of cokes, and preventing air pollution such as SOx and dust. The initial cost of installation is expected to be US$20-$40 million depending upon the size of the plant, which will be repaid within three to five years.106 TRT technology similarly conserves energy and reduces carbon dioxide emission through electric generation from otherwise wasted 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). 2008] CDM IN EAST ASIA 673

FIGURE 11. Iron and Steel CDM in China Invested by Japan ID Approved Investor Project Description MW Carbon Date Type Emission Reduction/ per year

91 Dec-06 Marubeni CDQ Waste Gas 50 332 Corp. Captive Power Plant

199 Jul-07 NEDO CDQ Comprehensive 50 270 utilization of waste coal gas for electricity generation Project

65 Oct-06 Nippon CDQ Captive power 25 159 Steel generation Corp. through waste heat recovery system

120 Feb-07 Mitsubishi TRT Waste pressure 30 145 Corp. recovery system

165 Apr-07 Nippon TRT 30 MW BF-TRT 30 80 Steel project Corp.

Source: Authors’ analysis of UNEP Riscoe Center, CDM Pipeline Overview, supra note 6. with a four to ﬁve year payback period.107 CDQ technology has a higher potential 108 to reduce CO2 emissions than TRT technology, as it reduces CO2 emissions four times more effectively than TRT.109 However, both technologies are economically valuable from the point of view of earning emission credits.110 In response to increasing global steel demand and oil prices, Japan’s iron and steel industries are shifting domestic production overseas to lower-cost produc-

107. Id. 108. Id. 109. Id. 110. Id. 674 THE GEORGETOWN INT’L ENVTL.LAW REVIEW [Vol. 20:645 tion facilities, particularly within Asia.111 Investments in overseas production facilities were considered risky due to the high costs of construction, which often reached several hundred billion yen per project. However, since 2002, annual steel requests have increased from 1-5%, primarily due to increasing demand by the automobile industry.112 Overseas production and supply systems are now more effective and economical than domestic facilities, not to mention well positioned to supply the automobile industry that has since started full-scale production in overseas plants.

C. SOUTH KOREA 1. Climate Change Policy South Korea is a party to both the UNFCCC and the Kyoto Protocol, but presently a non-Annex I party without an emission reduction target. However, with a relatively developed economy, South Korea is facing international pressure to make reduction commitments in a post-2012 arrangement.113 In 2004, South Korean emissions were 591 million tons of CO2, the tenth highest 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 industry process accounts for 11.7%.116 Emissions contributions from the energy sector are expected to be the primary source of this large increase. Notably, emissions from electricity generation are expected to increase by 102% from 2005 to 2030.117 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 Environmental Strategies 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? pageϭ1&bNoϭ69&keyﬁeldϭ&keyϭ (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 Climate Change, at 30-42 (Dec. 1, 2003), available at http://unfccc.int/resource/docs/natc/kornc02.pdf. 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. The agriculture sector and waste account for 2.7% and 2.6%, respec- tively. 117. NAT’L ENERGY COMM., supra note 114, at 8. 2008] CDM IN EAST ASIA 675 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 plans to achieve further reductions.118 The South Korean government has been developing comprehensive climate change 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 which new policy goals are set to achieve actual emissions reduction, was published in 2007.121 The government plans to establish mid- and long-term national reduction targets and to prepare for a domestic emissions trading market. It regards technology development as vital to achieving its goals.122

2. South Korean CDM South Korea has adopted the regulatory and institutional arrangements necessary to support CDM projects.123 The Korean government has promoted CDM projects to induce technology transfer and foreign investment and to prepare for participation in the emissions trading market.124 In international negotiations, it has advocated unilateral CDM for domestic projects (where a South Korean company 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 the purpose of energy conservations and efficiency since the global oil crises of the 1970s, because its energy supply heavily relies on oil and gas imports. See Republic of Korea, First National Communication of the Republic 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 formed an inter-ministerial committee on climate change under the Prime Minister to produce national policies and plans in 1998. Id. 121. THE OFFICE FOR GOVERNMENT POLICY COORDINATION (THE REPUBLIC OF KOREA), KIHU BYEONHWA JE 4 CHA JONGHAP DAECHAEK [THE FOURTH COMPREHENSIVE NATIONAL PLAN] 5 (2007) (showing that the first plan implemented 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,at4, 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 3CHA 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 Sixth Conference of the Parties [hereinafter “COP”] to the UNFCCC in 2000. See Young, supra note 113, at 50. The advantages of unilateral CDM are that it is easier to implement than bi- or multi-lateral CDM projects because it 676 THE GEORGETOWN INT’L ENVTL.LAW REVIEW [Vol. 20:645 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, of which three have issued CERs. Twenty-two more are at the validation stage and three others are under review for correction or requested registration. Based on the project developer’s estimates, these ventures are expected to generate over 126 sixteen million tons of CO2 of CERs per year. Currently, South Korea is the third largest Asian provider of CERs, accounting for 5% of Asian CERs, following China (67%) and India (19%).127 The three South Korean projects that have issued CERs include two N2O projects and one HFC project; together, these account for 77% of the CERs expected through 2012 from the forty-one projects then in the pipeline.128 Of these forty-one projects, thirty-four are energy efficiency or renewable energy projects, accounting for almost 20% of total expected CERs through 2012.129 However, based on experience, expected CERs should be discounted to reflect validation or verification errors, which would reduce the amount to approximately 16%. The government also plans to mitigate dependency on fossil fuels 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 in China.131 Other South Korean companies similarly are preparing for investments in Chinese CDM projects, and South Korean CDM consulting firms currently are participating in projects in China.132 CDM projects have been widely criticized in South Korea. Because South Korean industries have already reached a high level of energy efficiency, further emission reductions through CDM projects might be more costly than in other developing 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 be attractive investments as CDM projects. Disadvantages include that it does not promote technology transfer, and has higher delivery risk because the procedures are less clear. For general discussions on unilateral CDM, see also 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. Chung Neimunggu-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 into China’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 2008] CDM IN EAST ASIA 677 technology reduce the potential for emissions reductions, making South Korea a less attractive place than China for foreign investors seeking to maximize their returns. However, CDM is expected to work as South Korea’s primary method of participating in an international trading market and of developing its domestic trading system.134 The government, anticipating emissions trading markets and CDM as tools through which to achieve its goals, stresses emissions reduction through market-based approaches.135 South Korean companies also want to accumulate experience with CDM in preparation for a post-2012 regime where South 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 of crude steel in 2006, making it the fifth largest steel producer in the world.137 The iron and steel industries are critical sectors in which South Korea must reduce GHG emissions. These industries account for approximately 11% of the total final energy consumption nationwide, 34% of CO2 emissions in the industrial 138 sector, and 12% of the total CO2 emissions in 2000. The industries and government have made efforts to enhance energy efficiency and reduce emissions. For instance, steel companies have entered into voluntary agreements with the government to reduce energy consumption and GHG emissions. Various companies also participate in a voluntary emissions reduction registration program. As of December 2007, two CDM projects sponsored by South Korean steel companies were in the process of being validated.139 One is an energy efficiency improvement in a company’s own steel production facilities; the other is a renewable 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_numϭ6&news_numϭ51259&selectϭ3. 137. IISI, Major steel-producing countries, 2005 and 2006, http://www.worldsteel.org/?actionϭ storypages&idϭ195 (last visited May 7, 2008). 138. Heesung Shin et al., A Study on Carbon Dioxide Emission Reduction Potential in the Iron and Steel Industry 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 of POSCO Co., Ltd. (Gwangyang Steelworks), http://cdm.unfccc.int/Projects/DB/KEMCO1195540315.35/view 678 THE GEORGETOWN INT’L ENVTL.LAW REVIEW [Vol. 20:645 also been exploring ways to expand its CDM projects, both with reference to its own production process and through reforestation initiatives.141 The company sees renewable energy and reforestation projects as important types of possible CDM projects they can use and plans to participate in CDM projects in asia and elsewhere.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 in energy efficiency will be difficult without breakthrough technology development, because they believe there is little room for further emissions reduction using current technologies.144 Both the South Korean steel industry and the Ministry of Commerce, Industry, and Energy regard development of new technologies such as through CDM projects as one of its key approaches to reducing GHG emissions. South Korean companies are actively developing new technology and investing in CDM projects 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 sustainable development; ● Effective in promoting developing countries’ participation in the international climate regime; and ● Not yet able to significantly reduce emissions. In terms of promoting renewable energy and sustainable development, we note that the largest and most profitable CDM projects have been unsustainable HFC or N2O projects. At the same time, we recognize that CDM is still in an early stage of its development and believe that its greatest contribution to date has been one of practical experience, including a set of methodologies and procedures for evaluating emissions reductions projects. CDM also has been successful in catalyzing investment towards renewable energy and emissions reductions projects. CDM has led to investment in nearly 1500 qualified projects in developing countries and mobilized commitments of US$26.4 billion for projects that 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 intention 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). 2008] CDM IN EAST ASIA 679 renewable energy and energy efficiency projects.145 Both China and South Korea have embraced CDM as a means to participate in international emissions trading markets and thereby reduce mitigation costs and risks in the post-Kyoto regime. China hosts the largest number of CDM projects and the Chinese government has developed an integrated approach to promoting CDM along with various policies and measures to reduce emissions. Simulta- neously, the South Korean government is moving towards developing domestic emissions trading markets, apparently in preparation for undertaking emissions reduction commitments. We also conclude that CDM is unlikely to significantly reduce GHG emissions in its current form. The impact of CDM, in terms of reducing CO2 in China and South Korea, has so far been small. While CDM permits carbon emissions to increase in Annex I countries, emissions are actually increasing at a faster rate in the developing world. To place this in perspective, China’s estimated carbon emissions 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 its pipeline, the total effect of which it expected to help avoid 224,399 Kt of carbon equivalent output per year. Thus, on this course, China’s CDM activity would only 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 international legal structure that also allows Annex I countries to rely on CDM while continuing to emit GHGs, effectively undermining efforts to impose a global cap on emissions. Without some limit, or discounting of CDM CERs to actual emissions, 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 to address the problem of GHG leakage across national borders. As we have seen in the case of steel manufacturing among East Asian countries, production is shifting out of Japan and South Korea and into China. While Japan, and, to an extent, South Korea, transfers technology and experience to developing countries as part of this production shift, the newly built plants in China and other countries generally 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/Chinanowno1inCO2emissionsUSA insecondposition.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. 680 THE GEORGETOWN INT’L ENVTL.LAW REVIEW [Vol. 20:645 by eliminating the need for obtaining credits. Transfer of clean technology via CDM is superior to simply shifting production and will require collaboration between Annex I countries and developing countries. CDM programs need to provide greater incentives for the transfer of energy efficient technology in order to counter the current incentive to simply shift production abroad, thereby moving the location of emissions to non-Annex I countries. Cooperation efforts between China, Japan, and South Korea have been mixed. These three countries work together to undertake many projects in China and there is evidence of some intention to coordinate research and technology transfer within the region. However, our steel industry case studies put into perspective some of the limitations of both CDM and cooperation and provide evidence that the best technologies are still not being transferred. We believe that cooperation and technology transfer will likely occur within the context of corporate relationships, but these assessments will require further study at the company level. Despite these issues, CDM is considered one of the key approaches that these countries will utilize in addressing climate change and upgrading technology. The reliance on market mechanisms is a critical issue for the international regime to address climate change. Whether these systems are sufficient to address climate change remains to be seen. China is the leading global market for CDM projects, which the Chinese government promotes along with various other measures to foster energy efficiency and pollution reductions. South Korea also actively engages in promoting policies and measures both to support and supplement market mechanisms. Further, Japan relies heavily on CDM to provide it with emissions reductions credits in order to meet its international commitments. The evidence from our review of CDM in East Asia, the most active CDM market, preliminarily suggests that market mechanisms will prove insufficient to address climate change issues, and we therefore need to elevate the role of other policies and measures both to support market mechanisms and to supplement them. This view better accords with what CDM has been highly successful in achieving: jump-starting investment in clean energy in developing countries, developing expertise on new technologies, promoting awareness of the need to change infrastructure, and revealing paths towards emissions reduction goals. In addition to reforming CDM to better achieve the goals of emissions reductions and sustainability, it is clear that market approaches need to be supplemented and supported by greater emphasis on government policies and measures if we are to address climate change successfully.