Mongolia - Global market in emission rights could change competition with coal-fired generators

In recent years, several wind farms have sprung up on the gusty hills of the north eastern province of Mongolia, with hundreds of turbines toiling in the wind dotting the horizon. At the Huitengxile windfarm, located 90 minutes east of the Inner Mongolian capital of Hohhot, 98 wind turbines, some as high as 65 meters, tower over the landscape. Their 20-meter long blades make a gentle "whop whop" sound as they slice through the air against an azure sky dotted with puffy white clouds. The elegant towers look distinctly futuristic in contrast with the squat cylindrical cement white gers [or yurts], the modern equivalent of the traditional felt tents still used by the nomads.

Run by state-owned power company Long Yuan Wind Power Development Company, the wind farm operates turbines made by GE Power (GE ), Micron of Denmark, and even one made by a local company. The farm has a capacity of 68 megawatts, and there are plans to invest in an additional 163.1 megawatts by 2010. That capacity doesn't come cheap, however. For example, a 1.5 megawatt turbine costs about $60,000, and after adding the cost of cables and power lines hooked up to the grid, the cost is upward of $100,000. But conversion to cleaner power is complicated by the low cost of coal in China. In Inner Mongolian, for example wind-produced power costs about six cents per kilowatt hour, more than twice that of conventional coal power. More than two-thirds of China's energy needs are met by coal, oil 25%, hydro 4%-5%, and natural gas 3%.

Although the government has ambitious targets to increase its usage of renewable energy sources and cleaner burning fuels, it will remain dependent on dirty coal for many years to come. "Whatever you do in the next 15 years, coal will be the primary source of energy," says Zhao Jian Ping, senior energy specialist in Beijing at the World Bank. "So that's why we are saying we have no objection to develop other energies," says Ping, "but we still need a major effort to improve the efficiency and environmental performance of coal, where the potential for improvement is huge."

But thanks to the Kyoto Protocol on carbon emissions reduction, renewable energy projects like Huitengxile can still be economical. The accord allows developed countries can purchase greenhouse gas-emission reduction credits from less developing countries thereby subsidizing them to engage greener technologies. For example, Chinese companies will receive $4-$5 dollars per ton of CO2 reduction, enough to encourage green investments that would otherwise be uneconomical.

And as the second-largest producer of greenhouse gases in the world after the U.S., which did not sign the Kyoto Accord, China could reap huge benefits from the trade in emission rights. "This is the beginning of a market that has vast potential," says Andreas Leibenthal, head of Environment & Social Development for China at the World Bank in Beijing. That could mean that Inner Mongolians like Dong can expect to see a lot more wind turbines.