Ju Kuilin, a senior official with the Ministry of Finance, said the fund has been approved by the State Council, or China's cabinet.

A group formed by seven authorities including the National Development and Reform Commission and ministries of finance, and science and technology will be responsible for managing the fund.

The fund will collect some 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.-dollar loan from the World Bank, and Europe will pour in loans worth a further 500 million euros.

The Chinese government had approved nearly 300 CDM projects by the end of January this year, including wind power, hydropower and landfill gas power generation. With all these projects kicking off, the fund will absorb around two billion U.S. 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 the 1990 levels, during the period 2008 to 2012.

The CDM is a market-based mechanism that allows these countries to fulfill their emission reduction obligations at much lower cost, by investing in clean energy projects in developing countries such as China.

China and the United Nations plan to set up a carbon trading exchange in Beijing, making the city an important center for 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, covering 41 percent of the global market.