The 1997 UN meetings in Japan about climate issues did more than give birth to the term “Kyoto Protocol” they also created the concept of “carbon capital.” And over the past few years, no other country has capitalized on that concept more than China, which is collecting major subsidies from the international community for its energy projects.

Here’s how it works: The amount of the carbon capital is determined by using a new alphabet soup of UN bureaucratese, specifically, the Clean Development Mechanism (CDM) which issues Certified Emissions Reductions (CERs). The idea behind the CDM is fairly simple: industrialized countries who need to reduce their greenhouse gas emissions can invest in projects that lower emissions in developing countries rather than cut emissions in their own. In theory, this allows overall global emissions to be reduced at a lower cost.

The CDM is part of what some forecasters expect could be a booming international market in carbon trading and offsets. The World Bank has projected that the global carbon trading market could be worth $150 billion by 2012.

Does the CDM process work? If it does, there’s no evidence of it from the numbers. Between 2000 and 2007, according to the IEA, global carbon dioxide emissions jumped by 23%. Regardless of the global carbon dioxide numbers, China has been the biggest beneficiary of the CDM scheme. In 2009, it had 730 projects with CDM subsidies, and those projects make up about 60% of all global CDM projects. But in mid-2009, the UN governing body that oversees CDM projects stopped approving subsidies for Chinese wind power projects due to concerns that the Chinese government had deliberately cut subsidies for wind projects so that they could qualify for CDM funding.

When CDM programs were first introduced into China, enterprises were incredulous to find out that their hydroelectric power plants and wind farms not only could generate electricity, but also could sell the carbon reductions for a profit. Immediately, Chinese companies began applying for CDM subsidies though they doubted that anything would come out of it. When, to their amazement, the applications were granted, they felt like the sky was raining pies and they sold carbon credits at whatever prices the brokers set.

But while Chinese were busy selling carbon credits, which earlier they thought was practically a crazy foreigner thing, one they could not or even care to understand, they found out that their carbon was being sold for 4 to 5 per ton. Meanwhile, the international market was over €10 per ton meaning that the CDM program brokers were making enormous profits. In response, China’s powerful National Reform and Development Commission mandated that the lowest price for China’s CERs would be €8 per ton.

In applying for CDM subsidies, a Chinese enterprise has little to risk. The procedure is simple. The enterprise finds a carbon broker and signs a contract. The broker pays for the CDM registration fee. If the project is granted, the seller pays back a portion of the fee and sells the carbon to the broker according to the contract.

But after the recent collapse of the climate talks in Copenhagen, which, at least in theory, could have propelled carbon prices to the stratosphere, another mechanism, the Voluntary Emissions Reduction or VER, has surfaced as a means of making money out of carbon trading. Since the VER is voluntary, the VER carbon credits are outside the scope of the UN framework. The projects only need to apply for the credits through a UN-designated third party certification body, while CERs have to be permitted by the UN Executive Board. However, the downside is that the VERs are only garnering €1 to 2 per ton.

Although the price of VERs is low, it is a zero-cost business. As one broker for both CERs and VERs recently put it, “there is no risk for the enterprises, no registration fees are needed. The only thing they need to do is to promise to sell carbon credits to us, then they can get some money. The VERs projects are mainly in economically backward areas, any money is important.”

Since the Kyoto Protocol will expire in 2012 and the Copenhagen talks did not reach any genuine agreement on emission reductions, the future of CERs and VERs is unknown. But if and when the market does stabilize, rest assured that China will maneuver quickly to capitalize on it.