COLOGNE, May 7 (Reuters) – For a third year running China was the dominant source of greenhouse gas emissions cuts under a U.N.-run offsetting scheme, while Africa started to emerge as a viable market in 2007, the World Bank said on Wednesday. China accounted for 73 percent of deals done under the Kyoto Protocol’s Clean Development Mechanism (CDM) in 2007 while Africa, which has largely been absent in the carbon trade, made up some 5 percent of offset sales last year.
The $13 billion CDM market allows rich nations to invest in clean energy projects in developing countries and in return receive offsets called CERs which they can sell for profit or use to meet emissions targets under the Kyoto Protocol. ”Countries in Africa … emerged in the carbon market and offered buyers an opportunity to diversify their China-overweight portfolios,” the World Bank report said, citing Kenya, Uganda and Nigeria as the main movers in 2007.
”African countries are arriving a bit later than other countries, but there are more and more projects,” said Joelle Chassard, manager for the World Bank’s Carbon Finance Unit, which runs several funds that invest in CDM projects. “At the moment, about 17 percent of our operations are in Africa.”
Although CDM activity in Africa grew significantly last year, investors still see more room for improvement. ”There will be more growth (in Africa) as soon as countries have established good, working DNA’s (governmental CDM project-approval agencies) ... and a corruption-free environment,” Michael Fubi, vice-president of climate proection for German utility RWE , told Reuters.
”We have not invested in (sub-Saharan) Africa due to capacity … We have invested in North Africa and most probably we will invest in South Africa.”
Some 140 million tonnes of CERs have been issued by the U.N. since 2005, with only around 1.6 million going to Africa. The vast majority of these have gone to a single industrial gas project in Egypt.
Without large scale industrial gas projects or big hydroelectric dams, the average size of African projects tend to be small compared to those registered in China or India.
Investors have historically pursued so-called ‘low-hanging fruit’, meaning large, CDM projects that yield millions of CERs over smaller projects, since the administration costs, often up to $200,000, tend to be unrelated to project size.
Africa is currently home to 25 out of a total 1,047 registered CDM projects.

CHINA
The lion’s share of issued CERs have so far gone to projects in China and India, both receiving around 30 percent of the total each.
Most CER recipients in China sold on their credits before receiving them, whereas sellers in India preferred to seek higher prices by holding on to CERs until these were officially produced or issued, the report said. This initial sale is considered to be the CER’s primary market.
As a result of offering reduced delivery risk, sellers in India expected spot prices in the primary market ranging between 15 euro and 16.50 euros ($23.20-$25.60), the report said. Primary market CER prices in China ranged between 8 euro and 11 euros in 2007, though the report’s authors noted prices edged up above 13 euro in early 2008.
“China is still the destination of choice for buyers of credits, who cite its large size, economies of scale in (project) origination, and its favourable investment climate,” the report said. To ensure price stability for project developers, the Chinese government has set a price floor of around nine euros on primary CERs.
The total value of the primary CDM market was $7.4 billion last year, up 28 percent from 2006. Greenhouse gas emissions cuts, in tonnes of carbon dioxide (CO2) equivalent, rose just 2.6 percent in 2007, said the report published on the sidelines of a carbon conference in Germany.
The secondary market, which encompasses all subsequent transactions following the primary sale, swelled by more than 11 times to $5.5 billion last year.
Secondary CERs closed at 16.78 euros ($26.00) a tonne on Tuesday, according to the Reuters CER Index .

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