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Ju Kuilin, a senior official with the ministry, said the fund has been approved by the State Council, or China's Cabinet.
A group formed by seven authorities including theNational Development and Reform Commissionand ministries of finance, and science and technology will be responsible for managing the fund.
The fund will collect carbon credit transaction income, donations from international financial organizations and individuals as well as other sources approved by the State Council.
According to Ju, the fund has got a 6.4 million U.S.dollars loan from theWorld Bank, and Europe will lend a further 500 million euros (650 million dollars).
The Chinese government had approved nearly 300 CDM projects by the end of January, including wind power, hydropower and landfill gas power generation. With all these projects starting or to be started, the fund will absorb around 2 billion dollars.
Under the Kyoto Protocol that came into effect in 2005, 38 industrialized countries must reduce their greenhouse gas emissions by an average of 5.2 percent below 1990 levels, between 2008 and 2012.
The CDM is a market-based mechanism that allows these countries to use the credits to offset Kyoto obligations, by investing in clean and green energy projects in developing countries such as China.
China and the United Nations plan to set up a carbon trading exchange inBeijing, making the city an important center for a multi-billion-dollar trade in global carbon credits.
China now accounts for one-third of the global carbon credits market, behind India. The UN predicts that China will become the largest carbon credits provider by 2012, accounting for 41 percent of the global market.