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Patrick McCully

Patrick McCully

Posted: August 25, 2010 03:42 PM

The Kyoto Protocol's Clean Development Mechanism (CDM) has long been known to be a honey pot of carbon credit income for cheating project developers. But a recent investigation commissioned by German NGO CDMWatch shows that the problem is even worse than many critics had feared.

The investigation, carried out by carbon market expert Lambert Schneider, strongly suggests that chemical companies, mostly in China, are ramping up production of a climate-destroying waste gas purely to make money from its destruction. The companies are currently earning billions of dollars (yes that's billions with a "b") by selling UN-certified carbon offsets known as Carbon Emission Reductions (CERs). Each CER supposedly represents one metric tonne of carbon dioxide not emitted to the atmosphere.

Carbon traders and power utilities in Europe, US and Japan are buying the CERs from the chemical companies. The utilities can comply with the emission cuts mandated by the Kyoto Protocol by handing CERs over to their governments, instead of actually cutting their emissions. The carbon traders, including many of the world's biggest banks and Wall Street firms, make their money by buying and selling the CERs like they would any other financial derivative (although significantly in this case the derivative is not based on a real commodity or financial obligation like a pork belly or a mortgage, but on the strange fictional construct of an emission that didn't happen).

The chemical companies are producers of a refrigerant gas known as HCFC-22. This is an alternative to the notorious ozone-layer destroying CFCs. Making HCFC-22 creates a by-product known as HFC-23, which is a highly potent greenhouse gas. Each tonne of HFC-23 traps as much heat as 11,700 tonnes of carbon dioxide. Because the waste gases are so potent, carbon offset buyers will pay around $140,000 for the destruction of a tonne of HFC-23 - 70 times more than the cost to the chemical companies of incinerating the gases.

Analysts have long feared that the massive profits from destroying the waste HFC-23 would lead to companies boosting their production of HCFC-22 simply to incinerate their waste stream. Schneider's analysis appears to confirm these fears. According to CDMWatch, refrigerant plants registered with the CDM "are intentionally operated in a manner to maximize the production of offset credits. The analysis indicates that because of the extra CDM revenue more HCFC-22 is produced and far more HFC-23 generated that would occur without the CDM."

While the HFC projects are a small minority of all CDM projects, they are the predominant offset type as each project generates so many CERs. More than half of the offsets issued so far by the CDM have come from HFC destruction. These 214 million HFC offsets have allowed European companies to emit 214 million tonnes of carbon dioxide above their Kyoto limit -- by comparison more than the annual emissions from all the coal and natural gas power stations in the UK.

The first problem here is obviously that this scam is increasing global greenhouse gas emissions in the name of reducing them: European polluters are able to avoid cutting their emissions by buying certificates from Chinese chemical companies that represent emission reductions in the same way that Sarah Palin's views on climate change represent intelligence.

But it gets worse. HCFCs, although less bad than CFCs, are still ozone destroyers, and potent greenhouse gases themselves. So higher HCFC production means more ozone destruction and more global warming.

The Montreal Protocol, the international treaty to protect the ozone layer, is now turning its sights on HCFCs. Some countries will soon be in a position to receive international funds under the Montreal Protocol to stop producing HCFCs at some plants -- while receiving payments under the Kyoto Protocol that increase their production at others.

Investigations of other CDM projects - destructive big hydro dams, tree plantations, and heavily polluting factories -- had already shown the scheme to be a tragedy of good intentions gone awry. The refrigerant gas scam turns it into a farce.

As noted by CDMWatch and the Environment Investigation Agency, by far the cheapest way of getting rid of HFC emissions, and the best solution for the atmosphere, would be to pay for their incineration via the Montreal Protocol fund.

But HFC destruction under the CDM is a nice little earner (not just for chemical companies, carbon traders and investors including the World Bank, and the polluters who can buy the cheap fake credits, but also the Chinese government which levies a huge tax on its chemical companies' CER sales). There are therefore powerful vested interests that oppose a Montreal Protocol fund to destroy all HFC-23.

CDMWatch has proposed a new rule to the CDM that would end this farce by cutting the number of credits issued for HFC destruction by more than 90%. The Executive Board, the CDM's UN-selected governing body, did not accept CDMWatch's proposal at their last board meeting at the end of July, but did announce an internal investigation of CDMWatch's claims. The board has also delayed the periodic issuance of CERs to several HFC projects pending further review, sending a signal to the carbon markets that the volume of HFC credits could be sharply cut back. These board actions led to an immediate jump in CER prices.

The HFC decisions by the board show that they are trying to stop the worst abuses of the system (while under considerable pressure from governments and carbon traders to open the floodgates to all sorts of sub-prime "emission reduction" dreck). The board has also been increasing the number of projects it rejects, and sanctioning the private certification companies that have proven incompetent and biased in their role as project evaluators. But the board has not gone back and cancelled any of the hundreds of millions of offset credits it has already issued - even though a large proportion of these credits are now known to likely be fake "rip-offsets."

The CDM's Executive Board ultimately has an impossible task - to try to make work a system that is inherently unworkable due to conceptual flaws in its design. The CDM works reasonably well as a generator of profits for carbon traders, consultants and project developers, and a generator of get-out-of-jail-for-cheap cards for big polluters. But it has failed miserably as an efficient tool for cutting climate pollution and promoting sustainable development, the twin purposes that it was set up to achieve.

[Any time I write anything critical of the CDM it gets used by the wingnuts as proof that the Kyoto Protocol is a socialist plot, Al Gore is the anti-Christ, and global warming is the biggest hoax since the Holy Prepuce. The denialists will presumably do this again this time. But fear of provoking the conspiracy nuts is not reason to keep quiet about the CDM's failures, but rather a lesson that measures to deal with global warming must be transparent, fair and effective to avoid giving the nutjobs ammunition (and boy do they love their ammo!)].