When the Clean Development Mechanism was first tabled in 1997 as part of the Kyoto Protocol, it seemed a simple and effective way to reduce global carbon emissions.
The idea was that developed countries would fund carbon-cutting projects in developing countries to ease their burden in mitigating climate change and allow developed countries to offset their emissions or earn credits to sell on carbon markets.
But the mechanism has proven anything but simple and effective, and to green investors’ dismay, a flustered CDM executive board at the international climate change talks in Cancun showed the mechanism was shrouded in uncertainty.
The executive board is reviewing its own methodology of awarding credits to industrial gas projects amid controversy over CDM projects that destroy the pollutant trifluoromethane (HFC-23), a byproduct of the refrigerant gas chlorodifluoromethane (HCFC-22), to mitigate climate change.
HFC-23 has a global warming potential 11,700 times that of carbon, and therefore yields 11,700 times more credits per ton under the CDM. Destroying HFC-23 under CDM projects in countries like India, China, Brazil and Mexico has proven to be around five times more profitable than selling the HCFC-22 refrigerant in the first place, pushing the incentive to overproduce.
HFC-23 can be destroyed for about 22 cents per ton. It can easily yield as much as $16, around 70 times more than it costs to destroy the gas.
There are currently 19 HFC-23 projects, which account for half the CDM credits, known as Certified Emissions Reduction credits (CERs), on the UN carbon market.
The dangers of HCFC-22 and its byproduct were officially recognized in 1987 in the Montreal Protocol, which outlined commitments to phase out HCFC-22 production by 2030. HCFC-22 itself has strong global warming potential, at 1,810 times that of carbon.
The Swiss NGO Noe21 submitted in 2007 a request to review the methodology to approve such projects, claiming the mechanism created perverse incentives to emit more of the pollutant and profit from it.
Bonn-based NGO CDM-Watch has also lobbied for the board to review its methodology. It carried out a study and analyzed data on a number of CDM projects to destroy HFC-23.
“Our analysis showed that the project participants actually increased their production of the refrigerant gas so that they could create more waste gas, which they were then paid to destroy,” said Eva Maria Filzmoser, CDM-Watch program director.
In a recent report, the CDM executive board admitted that emission levels of the gas might have been lower in the absence of the CDM. Despite acknowledging this possibility, the board on Monday issued 17.8 million CERs for 12 new projects to destroy HFC-23.
As the market got swamped with these controversial credits, UN emissions offsets fell to a four-month low to 11.75 euros ($16) a ton. It was the largest drop on the UN market for a single day since issuance began in October 2005, Bloomberg reported.
“The mechanism could result in overissuance [of HFC-23 credits], but we had to act as a board, based on what was before us and based on our procedures,” said Clifford Anthony Mahlung, chairman of the CDM executive board. “The potential is there, that’s what the finding is, but we couldn’t conclude that any of the projects actually did overproduce.”
In light of the CDM executive board’s uncertainty over its own methodology, the European Union has proposed to ban beginning in 2013 all credits for projects to destroy HFC-23, as well as nitrous oxide from adipic acid production.
Green investors are concerned the move will destabilize the UN carbon market by potentially removing half the credits expected for 2013. This would in turn push other CER credit prices up.
Mahlung argues against the EU ban. “The other side of the coin is that without CDM, all of that HFC-23 will go into the atmosphere,” he said. “So at least CDM, which covers up to 50 percent of the plants, is actually preventing that. So we’re actually doing a good job.”
Dietram Oppelt, senior adviser to the German government-funded organization Proklima, said effective projects were missing out on potential CDM credits because of poor design.
He suggested better integration between the Montreal and Kyoto protocols.
“The Montreal Protocol forbids all those gases that are harmful to the ozone layer, but is replacing them with gases that are harmful to the climate. So what you should have is a joint approach between Kyoto, which deals with climate change, and Montreal,” Oppelt said.
Proklima runs a project collecting old refrigerators for recycling in countries like Brazil and recovers the harmful HCFCs from the cooling systems.
The group then provides the low-income participants with new greener refrigerators. It would like to set up the project in Indonesia and is hoping for CDM credits to support it.
“We have asked for funds from the German government, and if that works out, we will approach Indonesia with the proj ect,” Oppelt said.
