As world leaders meet in Copenhagen to talk about cutting carbon dioxide emissions, much of the focus is on placating China, because without significant action by the Chinese, the entire effort is a farce. Thus, many leaders have agreed to subsidize China’s alternative energy industry and the Chinese are all too willing to play along. And nothing reveals how China has been gaming the system than the wind sector.

In 2005, China’s wind power capacity was 1.26 gigawatts (GW). By the end of 2008, that number had jumped to 12.21 GW, a 1,000% increase in just three years. But about 30% of the wind capacity now sits idle, waiting for connections to the transmission grid. And it gets worse: more wind farms have been coming on line. In the first half of 2009, another 4 GW of capacity was added, bringing the total to 16.61 GW. But even at that level of capacity, wind power still represents just 2% of China’s total power generation capacity, which now stands at about 800 GW. And given the intermittency of wind, even that 2% figure overstates wind’s overall contribution to China’s overall electricity needs.

For promoters of “green” energy, the growth of China’s wind sector was supposed to be an example of what could be done, an example that China was working hard to build a low-emission energy industry. The reality is quite different.

In July, the United Nations’ Clean Development Mechanism (CDM) stopped approving subsidies to China’s wind power projects. CDM is a carbon trading system designed to direct funds from developed countries to developing countries to cut greenhouse gases. The tradable carbon credit funds are awarded to applicants who can prove they cannot build the low-emission projects without the CDM subsidies. This feature is called “additionality.”

Here’s how China gamed the CDM system: The Chinese government reduced the price paid for electricity generated by wind farms so that they could meet the additionality requirement. Furthermore, the Chinese government pre-approved all of the proposed wind projects for CDM subsidies. Those actions made the Chinese wind projects appear more attractive to the CDM officials. But those same officials have started to realize that they’ve been had. At the end of October, Lex de Jonge, the president of CDM executive board expressed his dissatisfaction toward China’s subsidized projects and declared that CDM will investigate China’s wind power price.

As a result, about 90% of the Chinese wind projects that have been submitted in recent months under CDM have been rejected. Most of the rejected projects are managed by the big five, state-owned power companies, Huaneng Group, Guodian Corp., China Datang Corp., China Huadian Corp. and China Power Investment Corp.

From the time the Kyoto Protocol become effective in 2005 to August 2009, there have been about 2,000 global carbon trading projects and the UN has issued a total of 354.9 million tons of CDM credits. China has been the biggest beneficiary in the global war against carbon emissions, garnering some 153 million tons of carbon credits. Each carbon credit is worth $10 to $15. According to the CDM agreement, an emission reduction-certified CDM wind farm with 500 MW capacity has yearly carbon credits worth $1.47 million. By the end of October 2009, China had 663 projects with CDM subsidies amounting to 58% of the global CDM total. And about two-thirds of China’s CDM projects were wind power projects.

On November 26, the Chinese government responded to the CDM rejections with a report which said that Chinese electricity prices had nothing to do with the CDM subsidies. The report also said that without CDM subsidies, China’s wind power industry would be drastically slowed. That appears to be true. Without CDM subsidies, foreign and domestic investors are unlikely to invest in Chinese wind projects. “Most wind power projects will see deficits,” said one wind power project manager recently.

In other words, China’s wind power sector was healthy as long as it could rely on other peoples’ money. When that money dries up, the story changes.